UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-51759
H&E Equipment Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
81-0553291
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
7500 Pecue Lane,
70809
Baton Rouge, Louisiana
(ZIP Code)
(Address of Principal Executive Offices)
Registrant’s Telephone Number, Including Area Code: (225) 298-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
HEES
Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer ☐
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of July 18, 2019, there were 35,777,804 shares of H&E Equipment Services, Inc. common stock, $0.01 par value, outstanding.
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
June 30, 2019
Page
PART I. FINANCIAL INFORMATION
4
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018
Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk
55
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
56
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
57
Signatures
58
2
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may”, “could”, “would”, “should”, “believe”, “expect”, “anticipate”, “plan”, “estimate”, “target”, “project”, “intend”, “foresee” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new marketing applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. In addition, even if our actual results are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative of results or developments in subsequent periods. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
•
general economic conditions and construction and industrial activity in the markets where we operate in North America;
our ability to forecast trends in our business accurately, and the impact of economic downturns and economic uncertainty on the markets we serve;
the impact of conditions in the global credit and commodity markets and their effect on construction spending and the economy in general;
relationships with equipment suppliers;
increased maintenance and repair costs as we age our fleet and decreases in our equipment’s residual value;
our indebtedness;
risks associated with the expansion of our business and any potential acquisitions we may make, including any related capital expenditures, or our ability to consummate such acquisitions;
our possible inability to integrate any businesses we acquire;
competitive pressures;
security breaches and other disruptions in our information technology systems;
adverse weather events or natural disasters;
compliance with laws and regulations, including those relating to environmental matters, corporate governance matters and tax matters, as well as any future changes to such laws and regulations; and
other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements after we file this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise. Investors, potential investors and other readers are urged to consider the above mentioned factors carefully in evaluating the forward‑looking statements and are cautioned not to place undue reliance on such forward‑looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as well as other reports and registration statements filed by us with the SEC. These factors should not be construed as exhaustive and should be read with other cautionary statements in this Quarterly Report on Form 10-Q and our other public filings. All of our annual, quarterly and current reports, and any amendments thereto, filed with or furnished to the SEC are available on our Internet website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our Internet website at www.he-equipment.com.
3
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
Balances at
June 30,
2019
December 31,
2018
(Unaudited)
ASSETS
Cash
$
6,701
16,677
Receivables, net of allowance for doubtful accounts of $4,188
and $4,094, respectively
199,975
201,556
Inventories, net of reserves for obsolescence of $314 and $368, respectively
127,762
104,598
Prepaid expenses and other assets
13,498
10,508
Rental equipment, net of accumulated depreciation of $629,451 and $582,520, respectively
1,244,499
1,141,498
Property and equipment, net of accumulated depreciation and amortization of $149,609 and $142,662, respectively
121,736
115,121
Operating lease right-of-use assets, net of accumulated amortization of $5,566 at June 30, 2019
163,764
—
Finance lease right-of-use assets, net of accumulated amortization of $1,970 at June 30, 2019
447
Deferred financing costs, net of accumulated amortization of $14,070 and $13,717, respectively
3,207
3,000
Intangible assets, net of accumulated amortization of $5,368 and $3,320, respectively
35,032
28,380
Goodwill
143,626
105,843
Total assets
2,060,247
1,727,181
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Amounts due on senior secured credit facility
282,710
170,761
Accounts payable
118,805
101,840
Manufacturer flooring plans payable
25,066
23,666
Accrued expenses payable and other liabilities
78,540
73,371
Dividends payable
112
132
Senior unsecured notes, net of unaccreted discount of $2,929 and $3,168 and
deferred financing costs of $1,898 and $2,052, respectively
945,173
944,780
Operating lease right-of-use liabilities
166,186
Finance lease right-of-use liabilities
668
Capital leases payable
726
Deferred income taxes
165,352
153,113
Deferred compensation payable
2,044
1,989
Total liabilities
1,784,656
1,470,378
Commitments and Contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued
Common stock, $0.01 par value, 175,000,000 shares authorized; 39,805,406 and 39,748,562 shares issued at June 30, 2019 and December 31, 2018, respectively, and 35,776,141 and 35,733,569 shares outstanding at June 30, 2019 and December 31, 2018, respectively
397
396
Additional paid-in capital
233,197
231,174
Treasury stock at cost, 4,029,265 and 4,014,993 shares of common stock
held at June 30, 2019 and December 31, 2018, respectively
(63,486
)
(63,099
Retained earnings
105,483
88,332
Total stockholders’ equity
275,591
256,803
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Revenues:
Equipment rentals
192,302
152,714
368,431
289,752
New equipment sales
53,596
68,539
112,699
115,032
Used equipment sales
36,128
32,140
65,762
56,993
Parts sales
31,871
30,281
62,299
58,432
Services revenues
16,725
16,788
32,293
31,824
Other
2,975
9,902
5,751
18,813
Total revenues
333,597
310,364
647,235
570,846
Cost of revenues:
Rental depreciation
61,434
51,171
118,582
97,640
Rental expense
27,019
22,073
51,787
43,345
Rental other
17,847
13,530
34,122
25,630
106,300
86,774
204,491
166,615
47,064
61,226
99,163
102,071
23,321
21,772
42,333
38,709
23,290
21,931
45,579
42,548
5,359
5,752
10,363
10,802
3,482
4,806
6,825
9,413
Total cost of revenues
208,816
202,261
408,754
370,158
Gross profit
124,781
108,103
238,481
200,688
Selling, general and administrative expenses
77,840
69,046
156,487
134,926
Merger costs
148
68
267
220
Gain on sales of property and equipment, net
880
4,114
1,621
4,887
Income from operations
47,673
43,103
83,348
70,429
Other income (expense):
Interest expense
(17,267
(15,693
(34,122
(30,346
Other, net
489
459
1,021
854
Total other expense, net
(16,778
(15,234
(33,101
(29,492
Income before provision for income taxes
30,895
27,869
50,247
40,937
Provision for income taxes
8,281
7,098
13,390
10,688
Net income
22,614
20,771
36,857
30,249
Net income per common share:
Basic
0.63
0.58
1.03
0.85
Diluted
1.02
0.84
Weighted average common shares outstanding:
35,826
35,634
35,807
35,613
36,016
35,906
35,994
35,893
Dividends declared per common share outstanding
0.275
0.55
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment
13,627
12,085
Depreciation of rental equipment
Amortization of finance lease right-of-use assets
81
Amortization of intangible assets
2,049
1,485
Amortization of deferred financing costs
504
557
Accretion of note discount, net of premium amortization
239
Operating right-of-use lease liabilities, net
282
Provision for losses on accounts receivable
2,480
1,679
Provision for inventory obsolescence
115
71
Change in deferred income taxes
12,239
10,743
Stock-based compensation expense
2,023
2,081
Gain from sales of property and equipment, net
(1,621
(4,887
Gain from sales of rental equipment, net
(23,239
(18,006
Changes in operating assets and liabilities, net of acquisitions:
Receivables
4,764
9,121
Inventories
(55,997
(103,631
(2,969
(128
16,592
59,705
1,400
6,758
6,889
(389
43
Net cash provided by operating activities
134,952
105,415
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
(106,746
(196,027
Purchases of property and equipment
(18,568
(19,561
Purchases of rental equipment
(174,674
(217,828
Proceeds from sales of property and equipment
2,173
6,687
Proceeds from sales of rental equipment
61,668
52,177
Net cash used in investing activities
(236,147
(374,552
Cash flows from financing activities:
Borrowings on senior secured credit facility
797,029
735,775
Payments on senior secured credit facility
(685,080
(603,112
Dividends paid
(19,670
(19,619
Purchases of treasury stock
(387
Payments of deferred financing costs
(559
(97
Payments of finance lease obligations
(114
Payments of capital lease obligations
(109
Net cash provided by financing activities
91,219
112,838
Net decrease in cash
(9,976
(156,299
Cash, beginning of period
165,878
Cash, end of period
9,579
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental schedule of noncash investing and financing activities:
Accrued acquisition purchase price consideration
3,432
Noncash asset purchases:
Assets transferred from new and used inventory to rental fleet
33,591
21,618
Purchases of property and equipment included in accrued expenses
payable and other liabilities
453
24
Operating lease right-of-use assets and lease liabilities recorded upon
adoption of ASC 842
162,814
Finance lease right-of-use assets and lease liabilities recorded upon
782
Operating lease assets obtained in exchange for new
operating lease liabilities
8,841
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
32,954
30,040
Income taxes paid, net of refunds received
1,765
1,254
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Operations
Basis of Presentation
Our condensed consolidated financial statements include the financial position and results of operations of H&E Equipment Services, Inc. and its wholly-owned subsidiaries H&E Finance Corp., GNE Investments, Inc., Great Northern Equipment, Inc., H&E California Holding, Inc., H&E Equipment Services (California), LLC and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we” or “us” or “our” or the “Company.”
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, and therefore, the results and trends in these interim condensed consolidated financial statements may not be the same for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2018, from which the consolidated balance sheet amounts as of December 31, 2018 were derived.
All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements. Business combinations accounted for as purchases are included in the condensed consolidated financial statements from their respective dates of acquisition.
The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, and consistent with industry practice, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.
Historically, we have presented hauling revenues and related cost of revenues associated with our equipment rental activities within Other Revenues and Other Cost of Revenues. This presentation did not change upon our adoption of Topic 606 on January 1, 2018 as hauling activities are deemed a separate performance obligation under Topic 606 and SEC Regulation S-X permitted flexibility in the presentation of such revenues. However, given the presentation changes of certain ancillary fees required by Topic 842 as described in note 2 to these condensed consolidated financial statements, we believe that including equipment rental hauling revenues and related costs of revenues within our Rental Revenues segment results in a more meaningful presentation and analysis of our equipment rental activities. In accordance with SEC Regulation S-X, the reclassification of equipment rental hauling revenues and related cost of revenues from Other Revenues and Other Cost of Revenues to Rental Revenues and Rental Other Cost of Revenues is presented on a retrospective basis, meaning our condensed consolidated statements of income for the three and six month periods ended June 30, 2019 and 2018 include hauling revenues and related costs of revenues presented within Equipment Rental Revenues and Rental Other Cost of Revenues. The tables below reconcile for the three and six month periods ended June 30, 2018, our Revenues, Cost of Revenues and Gross Profit as previously reported to the current period presentation in this Quarterly Report on Form 10-Q.
Three Month Period Ended June 30, 2018
Six Month Period Ended June 30, 2018
As Previously Reported
Hauling Fees
As Currently Reported
REVENUES
143,829
8,885
273,190
16,562
18,787
(8,885
35,375
(16,562
COST OF REVENUES
73,244
140,985
18,336
(13,530
35,043
(25,630
Gross Profit
Nature of Operations
As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross‑selling opportunities among our new and used equipment sales, rental, parts sales and services operations.
(2) Significant Accounting Policies
We describe our significant accounting policies in note 2 of the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018. During the three and six month periods ended June 30, 2019, there were no significant changes to those accounting policies, other than those policies impacted by our adoption of the new lease accounting standard, which is further described below in “Recently Adopted Accounting Pronouncements”.
Use of Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, which requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. These assumptions and estimates could have a material effect on our condensed consolidated financial statements. Actual results may differ materially from those estimates. We review our estimates on an ongoing basis based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.
9
Recent Accounting Pronouncements
Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard adds to U.S. GAAP an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard (Topic 842). Instead, entities would need to apply other U.S. GAAP, namely Topic 842 (Leases), to account for changes in the collectability assessment for operating leases. Other than operating lease receivables, our trade receivables include receivables from equipment sales, parts and service sales. Under Topic 606 (Revenue from Contracts with Customers), revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that these trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. While our review is ongoing, it is possible that the implementation of ASU 2016-13 will result in a significantly different methodology for estimating non-operating lease credit losses under Topic 326 when compared to our methodology for estimating credit losses on our operating lease receivables under Topic 842. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which amends and clarifies several provisions of Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the fair value option to be elected for certain financial instruments upon adoption. ASU 2016-13 will be effective for us as of January 1, 2020. We continue to evaluate whether the new guidance, including the subsequent updates to Topic 326, will have an impact on our consolidated financial statements and related disclosures or our existing internal controls.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 of the current goodwill impairment test, which was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the reporting unit’s goodwill. ASU 2017-04 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted and requires prospective adoption. Based upon our review of ASU 2017-04, we do not expect the guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other – Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update will be effective for us in the first quarter of 2020. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement - Disclosure Framework," or ASU 2018-13. ASU 2018-13 modifies the disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt the entire standard or only the provisions that eliminate or modify the requirements. We will adopt ASU 2018-13 when effective. We are currently evaluating the impact of ASU 2018-13 on our consolidated financial statements.
10
Recently Adopted Accounting Pronouncements
Leases
We adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019. Topic 842 is an update to Topic 840, which was the lease accounting standard in effect through December 31, 2018. Topic 842 applies to us from both a lessor and a lessee perspective, as further described below.
Lessor Accounting
Our equipment rental business involves rental contracts with customers whereby we are the lessor in the transaction and therefore, we believe that such transactions are subject to Topic 842. We account for such rental contracts as operating leases pursuant to Topic 842, as well as pursuant to previous lease accounting guidance (Topic 840) in effect for periods prior to the effective date of Topic 842.
In accordance with Topic 842, certain ancillary fees that we charge our equipment rental customers result in a different presentation within our consolidated statements of income compared to our historical presentation of those items under previous lease accounting guidance. Specifically, amounts we charge our customers for loss damage waiver fees, environmental fees, and fuel and other recovery fees, upon adoption of Topic 842, are to be included within our Equipment Rentals segment rather than included within non-segmented Other Revenues as we have historically presented those items under previous lease accounting guidance. Likewise, the related cost of revenues for these ancillary items under Topic 842 are to be presented within our Equipment Rentals segment rather than included in non-segmented Other Cost of Revenues as we have historically presented under previous lease accounting guidance.
We adopted Topic 842 on January 1, 2019 using the transition method that allowed us to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As such, Topic 842 will not be applied to periods prior to January 1, 2019. Therefore, the above changes as described are not reflected in our condensed consolidated statements of income for the three and six month periods ended June 30, 2018. While the above changes resulting from our adoption of Topic 842 do not impact total consolidated revenues or total consolidated gross profit, the change does impact the comparability of our total Rental Revenues gross profit and total Other Revenues gross profit and resulting gross margins for 2019 compared to our previously reported gross profit and resulting gross margins for periods prior to January 1, 2019.
Lessee Accounting
Topic 842 requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted Topic 842 using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Therefore, prior year financial statements were not recast under the new standard. We recognized an adjustment of less than $0.1 million to retained earnings upon adoption of Topic 842.
We elected the package of transition provisions available for expired or existing leases, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We did not elect the use-of-hindsight practical expedient or the practical expedient pertaining to land easements. We elected not to apply Topic 842 to arrangements with lease terms of 12 months or less.
The adoption of Topic 842 had a material impact on our consolidated balance sheet related to operating leases. Upon adoption of Topic 842, we recognized additional operating lease liabilities, net of deferred rent, of $162.8 million. We also recognized corresponding right-of-use operating lease assets of $162.8 million. Finance lease liabilities recognized upon adoption of Topic 842 were $0.8 million and finance right-of-use lease assets were $0.5 million.
Topic 842 significantly expanded the disclosure requirements related to our leasing activities. Additional information and disclosures required by Topic 842 are presented in note 10 to these condensed consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Entities may use a full retrospective approach or report on the cumulative effect as of the date of adoption. We adopted this standard effective January 1, 2018 using the full retrospective transition method. As described above and in note 10 to these condensed consolidated financial statements, we adopted Topic 842 on January 1, 2019. We recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 842. Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. Our contracts
11
with customers generally do not include multiple performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.
In the table below, revenues as presented in our condensed consolidated statements of income for the three and six month periods ended June 30, 2019 and 2018 are summarized by type and by the applicable accounting standard.
Three Month Period Ended June 30,
Topic 842
Topic 606
Total
Topic 840
Rental revenues
Owned equipment rentals
167,072
245
167,317
138,434
394
138,828
Re-rent revenue
6,520
5,001
Ancillary and other rental revenues:
Delivery and pick-up
10,313
8,152
Total ancillary rental revenues
18,465
Total equipment rental revenues
181,744
10,558
143,435
9,279
Service revenues
6,787
3,115
151,853
150,222
160,142
Six Month Period Ended June 30,
320,422
519
320,941
262,169
915
263,084
12,556
10,106
19,295
15,639
34,934
348,617
19,814
272,275
17,477
13,054
5,759
298,618
285,329
285,517
Revenues by reporting segment are presented in note 11 of our condensed consolidated financial statements, using the revenue captions reflected in our consolidated statements of income. We believe that the disaggregation of our revenues from contracts to customers as reflected above, coupled with further discussion below and the reporting segments in note 11, depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.
Lease revenues (Topic 842)
Owned Equipment Rentals: Owned equipment rentals represent revenues from renting equipment. We account for these rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the periods presented.
12
Re-rent revenue: Re-rent revenue reflects revenues from equipment that we rent from vendors and then rent to our customers. We account for such rentals as subleases. The accounting for re-rent revenue is the same as the accounting for owned equipment rentals described above.
“Other” equipment rental revenue is primarily comprised of (i) revenue from customers who purchase insurance to protect against potential damages or loss the equipment they rent, (ii) environmental charges associated with the rental of equipment, and (iii) fuel recovery fees charged to customers. Fuel consumption charges are recognized upon return of the rental equipment when fuel consumption by the customer, if any, can be measured. Income from environmental fees and damage waiver insurance policies are recognized when earned over the period the equipment is rented. Prior to our adoption of Topic 842 on January 1, 2019, these revenue items were included in other revenues as shown in the tables above for the three and six month periods ended June 30, 2018.
Revenues from contracts with customers (Topic 606)
The accounting for the types of revenues accounted for pursuant to Topic 606 are discussed below. Substantially all of our revenues under Topic 606 are recognized at a point-in-time rather than over time.
Rental revenues: An insignificant portion of our total equipment rental revenues are recognized pursuant to Topic 606 rather than pursuant to Topic 842. These revenues represent services performed by us in connection with the rental of equipment and are comprised of customer training fees on rented equipment and erection and dismantling services on rental equipment. Revenues for these services are recognized upon completion of such services. See discussion above regarding rental revenues recognized pursuant to Topic 842.
Delivery and pick-up: Delivery and pick-up revenue associated with renting equipment is recognized when the service is performed.
New equipment sales: Revenues from the sales of new equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.
Used equipment sales: Revenues from the sales of used equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.
Parts sales: Revenues from the sales of equipment parts are recognized at the time of pick-up by the customer for parts counter sales transactions. For parts that are shipped to a customer, we elected to use a practical expedient of Topic 606 and treat such shipping activities as fulfillment costs, thereby recognizing revenues at the time of shipment.
Services revenues: We derive our services primarily from maintenance and repair services to customers for their owned equipment. We recognize services revenues at the time such services are completed, which is when the customer obtains control of the promised service.
Other revenues: Other revenues relate primarily to hauling fees for transporting equipment sold to and from the customer and ancillary charges associated with equipment maintenance and repair services. Such revenues are recognized at the time the services are performed.
Receivables and contract assets and liabilities
We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and our allowance for doubtful accounts address our total revenues from Topic 606 and Topic 842.
We believe concentration of credit risk with respect to our receivables is limited because our customer base is comprised of a large number of geographically diverse customers. No single customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented in this Quarterly Report on Form 10-Q. We manage credit risk through credit approvals, credit limits and other monitoring procedures.
We maintain an allowance for doubtful accounts that reflects our estimate of the amount of our receivables that we will be unable to collect. We develop our estimate of this allowance based on our historical experience with specific customers, our understanding of our current economic circumstances and our own judgment as to the likelihood of ultimate payment. Our largest exposure to doubtful accounts is in our rental operations. We perform credit evaluations of customers and establish credit limits based on reviews of our customers’ current credit information and payment histories. We believe our credit risk is somewhat mitigated by our geographically diverse customer base and our credit evaluation procedures. During the year, we write-off customer account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. Such write-offs are charged against our allowance for doubtful accounts. Bad debt expense as a percentage of total revenues for the six month periods ended June 30,
13
2019 and 2018 were approximately 0.4% and 0.3%, respectively. The actual rate of future credit losses, however, may not be similar to past experience. Our estimate of doubtful accounts could change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance for doubtful accounts.
We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of recognizable revenue. We did not recognize material revenues during the three and six month periods ended June 30, 2019 or 2018 that were included in the contract liability balance as of the beginning of such periods.
Performance obligations
Most of our Topic 606 revenue is recognized at a point-in-time, rather than over time. Accordingly, in any particular period, we do not generally recognize a significant amount of revenue from performance obligations satisfied (or partially satisfied) in previous periods, and the amount of such revenues recognized during the three and six month periods ended June 30, 2019 and 2018 were not material. We also do not expect to recognize material revenues in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2019.
Payment terms
Our Topic 606 revenues do not include material amounts of variable consideration. Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. Our contracts do not generally include a significant financing component. Our contracts with customers do not generally result in significant obligations associated with returns, refunds or warranties. See above for a discussion of how we manage credit risk.
Sales tax amounts collected from customers are recorded on a net basis.
Contract costs
We do not recognize any assets associated with the incremental costs of obtaining a contract with a customer (for example, a sales commission) that we expect to recover. Most of our revenue is recognized at a point-in-time or over a period of one year or less, and we use the practical expedient that allows us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.
Contract estimates and judgments
Our revenues accounted for under Topic 606 generally do not require significant estimates or judgments as the transaction price is generally fixed and stated on our contracts. Our contracts generally do not include multiple performance obligations, and accordingly do not generally require estimates of the standalone selling price for each performance obligation. Also, our revenues do not include material amounts of variable consideration. Substantially all of our revenues are recognized at a point-in-time and the timing of the satisfaction of the applicable performance obligations is readily determinable. As noted above, our Topic 606 revenues are generally recognized at the time of delivery to, or pick-up by, the customer.
14
(3) Acquisitions
2018 Acquisitions
Contractors Equipment Center (“CEC”)
Effective January 1, 2018, we completed the acquisition of CEC, a non-residential construction focused equipment rental company with three branches located in the greater Denver, Colorado area. The acquisition significantly expands our presence in the Denver area and surrounding markets.
The aggregate consideration paid to the pre-acquisition owners of CEC was approximately $132.4 million. The acquisition and related fees and expenses were funded through available cash. The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date.
$’s in thousands
1,244
Accounts receivable
7,583
Inventory
324
Rental equipment
55,342
Property and equipment
2,700
Intangible assets (1)
21,500
Total identifiable assets acquired
89,197
(1,023
(876
Total liabilities assumed
(1,899
Net identifiable assets acquired
87,298
Goodwill (2)
45,092
Net assets acquired
132,390
(1)
The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:
Fair Value
(amounts in
thousands)
Life (years)
Customer relationships
21,000
Tradenames
300
1
Leasehold interests
200
(2)
We have allocated the $45.1 million goodwill among our six goodwill reporting units as follows (amounts in thousands):
Rental Component 1
25,233
Rental Component 2
18,391
New Equipment
217
Used Equipment
632
Parts
379
Service
240
The level of goodwill that resulted from the CEC acquisition is primarily reflective of CEC’s going-concern value, the value of CEC’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.
Total CEC acquisition costs were $1.0 million. Since our acquisition of CEC on January 1, 2018, significant amounts of equipment rental fleet have been moved between H&E locations and the acquired CEC locations, and it is impractical to reasonably estimate the amount of CEC revenues and earnings since the acquisition date.
15
Rental, LLC (dba “Rental Inc.”)
Effective April 1, 2018, we completed the acquisition of Rental Inc., a non-residential equipment rental and distribution company with five branches located in Alabama, Florida and Western Georgia. The acquisition expands our presence in the surrounding markets.
The aggregate consideration paid to the owners of Rental Inc. was approximately $68.6 million. The acquisition and related fees and expenses were funded through available cash and from borrowings under our Credit Facility (as defined below). The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date.
260
2,873
5,324
47
22,578
1,935
10,200
43,217
(439
(3,293
(469
(4,201
39,016
29,554
68,570
10,000
We have allocated the $29.6 million goodwill among our six goodwill reporting units as follows (amounts in thousands):
9,064
5,445
10,217
1,692
2,171
965
Included in the total goodwill amount of $29.6 million is approximately $3.4 million of accrued purchase price consideration that is to be paid to the sellers pursuant to the terms of the purchase agreement among the parties named thereto. The level of goodwill that resulted from the Rental Inc. acquisition is primarily reflective of Rental Inc.’s going-concern value, the value of Rental Inc.’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.
Total Rental Inc. acquisition costs were approximately $0.3 million. Since our acquisition of Rental Inc. on April 1, 2018, significant amounts of equipment rental fleet have been moved between H&E locations and the acquired Rental Inc. locations, and it is impractical to reasonably estimate the amount of Rental Inc. revenues and earnings since the acquisition date.
16
2019 Acquisition
Cobra Equipment Rentals LLC (dba “We-Rent-It”)
Effective February 1, 2019, we completed the acquisition of We-Rent-It (“WRI”), an equipment rental company with six branches located in central Texas. The acquisition expands our presence in the surrounding markets.
The aggregate consideration paid to the owners of WRI was approximately $108.5 million. The acquisition and related fees and expenses were funded from borrowings under our Credit Facility (defined below). The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date. The amounts presented below are not expected to change. As indicated in our quarterly reporting on Form 10-Q for the quarter ended March 31, 2019, the amounts previously presented therein were preliminary and subject to change, primarily as a result of the finalization of the fair values assigned to the acquired personal property and intangible assets.
1,745
5,119
731
544
51,747
Other assets
21
8,700
71,814
(115
(991
(1,106
70,708
37,783
108,491
8,500
The analysis of assigning the above $37.8 million goodwill among our six goodwill reporting units has not been finalized. The level of goodwill that resulted from the WRI acquisition is primarily reflective of WRI’s going-concern value, the value of WRI’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.
Total WRI acquisition costs were $0.4 million. Since our acquisition of WRI on February 1, 2019, significant amounts of equipment rental fleet have been moved between H&E locations and the acquired WRI locations, and it is impractical to reasonably estimate the amount of WRI revenues and earnings since the acquisition date.
Pro forma financial information
We completed the CEC acquisition on January 1, 2018. Therefore, the operating results of CEC are included in our reported condensed consolidated statements of income for the full three and six month periods ended June 30, 2019 and 2018. We completed the Rental Inc. acquisition on April 1, 2018. Therefore, our reported condensed consolidated statements of income for the six month period ended June 30, 2018 do not include Rental Inc. for the period January 1, 2018 through March 31, 2018. We completed the We-Rent-It acquisition on February 1, 2019. Therefore, our reported condensed consolidated statements for the six month period ended June 30, 2019 include We-Rent-It for the period of February 1, 2019 through June 30, 2019.
17
Pursuant to Accounting Standards Codification (“ASC”) 805, pro forma disclosures should be repeated whenever the year or interim period of the acquisition is presented. Since the CEC acquisition was completed in the first quarter of 2018 and the Rental Inc. acquisition was completed in the second quarter of 2018, the pro forma information below gives effect to the CEC and the Rental Inc. acquisitions as if the acquisitions occurred on January 1, 2017 (the CEC and Rental Inc. pro forma acquisition date) for the three and six month periods ended June 30, 2017.
(amounts in thousands)
Three Month Period Ended June 30, 2017
H&E
CEC
Rental Inc.
249,363
8,140
8,979
266,482
Pretax income
15,668
1,448
2,105
19,221
Pro forma adjustments to pretax income:
Impact of fair value mark-ups/useful life changes on
depreciation (1)
(809
(738
(1,547
Intangible asset amortization (2)
(705
(275
(980
Interest expense (3)
(475
Elimination of historic interest expense (4)
139
102
241
Pro forma pretax income
73
719
16,460
Income tax expense
5,790
27
262
6,079
9,878
46
457
10,381
Net income per share – basic
0.28
0.01
0.29
Net income per share – diluted
Six Month Period Ended June 30, 2017
476,191
16,529
17,225
509,945
24,198
2,889
4,158
31,245
(1,712
(1,381
(3,093
(1,410
(550
(1,960
(995
263
202
465
30
1,434
25,662
8,930
523
9,464
15,268
19
911
16,198
0.43
0.03
0.46
0.45
Depreciation of rental equipment and non-rental equipment were adjusted for the fair value markups, and the changes in useful lives and salvage values of the equipment acquired in the CEC and Rental Inc. acquisitions.
Represents the amortization of the intangible assets acquired in the CEC and Rental Inc. acquisitions.
(3)
A portion of the consideration paid for Rental Inc. was funded with borrowings from our senior secured credit facility. Interest expense was adjusted to reflect the additional debt resulting from the acquisitions.
(4)
Historic debt of CEC and Rental Inc. that is not part of the combined entity was eliminated.
18
The pro forma information below gives effect to the WRI acquisition as if it had been completed on January 1, 2018 (the WRI pro forma acquisition date). The pro forma information below is not necessarily indicative of our results of operations had the acquisitions been completed on the above date, nor is it necessarily indicative of our future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, nor does it reflect additional revenue opportunities following the acquisition. The pro forma adjustments reflected in the tables below are subject to change as additional analysis is performed. The tables below present unaudited pro forma consolidated statements of operations information for the three and six month periods ended June 30, 2018 as if WRI was included in our consolidated results for the entire periods presented.
(amounts in thousands, except per share data)
H&E(1)
We-Rent-It
9,640
320,004
2,432
30,301
depreciation (2)
(1,976
Intangible asset amortization (3)
(313
Interest expense (4)
(1,476
Elimination of historic interest expense (5)
126
Pro forma pretax income (loss)
(1,207
26,662
Income tax expense (benefit)
(301
6,797
Net income (loss)
(906
19,865
Net income (loss) per share – basic
(0.03
0.56
Net income (loss) per share – diluted
Rental Inc.(6)
7,408
17,227
595,481
1,020
3,216
45,173
(749
(2,226
(2,975
(435
(710
(480
(2,832
(3,312
82
206
288
(402
(2,071
38,464
(105
(536
10,047
(297
(1,535
28,417
(0.01
(0.04
0.80
0.79
Amounts presented above for “H&E” are derived from the Company’s consolidated statements of income in this Quarterly Report on Form 10-Q for the three and six month period ended June 30, 2018.
Depreciation of rental equipment and non-rental equipment were adjusted for the fair value markups, and the changes in useful lives and salvage values of the equipment acquired in the acquisition.
Represents the amortization of the intangible assets acquired in the acquisition.
Interest expense was adjusted to reflect the additional debt resulting from the acquisition.
(5)
Represents the elimination of historic debt of WRI that is not part of the combined entity.
(6)
Represents Rental Inc. pro forma operating results for the three month period ended March 31, 2018. We completed the Rental Inc. acquisition on April 1, 2018.
(4) Fair Value of Financial Instruments
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three broad levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
Level 3 – Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions
The carrying value of financial instruments reported in the accompanying condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity of these financial instruments. The fair value of our letter of credit is based on fees currently charged for similar agreements. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures as of June 30, 2019 and December 31, 2018 are presented in the table below (amounts in thousands) and have been calculated based upon market quotes and present value calculations based on market rates.
Carrying
Amount
Fair
Value
Manufacturer flooring plans payable with interest computed
at 5.50% (Level 3)
21,196
Senior unsecured notes with interest computed
at 5.625% (Level 2)
978,500
Letter of credit (Level 3)
97
December 31, 2018
19,870
871,625
Capital leases payable with interest computed
at 5.929% to 9.55% (Level 3)
330
116
During the three and six month periods ended June 30, 2019 and 2018, there were no transfers of financial assets or liabilities in or out of Level 1, Level 2 or Level 3 of the fair value hierarchy.
20
(5) Stockholders’ Equity
The following table summarizes the activity in Stockholders’ Equity for the three and six month periods ended June 30, 2019 and June 30, 2018, respectively (amounts in thousands, except share data):
Common Stock
Additional
Shares
Issued
Paid-in
Capital
Treasury
Stock
Retained Earnings
Stockholders’
Equity
Balances at December 31, 2018
39,748,562
Stock-based compensation
1,188
Cash dividends declared on common stock ($0.275 per share)
(9,793
Issuance of common stock, net of restricted stock forfeitures
59,510
Repurchase of 14,272 shares of restricted common stock
Cumulative effect adjustment pursuant to the
(56
14,243
Balances at March 31, 2019
39,808,072
232,362
92,726
261,999
835
(9,857
Restricted stock forfeitures
(2,666
Balances at June 30, 2019
39,805,406
Balances at December 31, 2017
39,623,773
395
227,070
(61,749
51,077
216,793
1,319
(9,845
9,534
9,478
Balances at March 31, 2018
39,633,307
228,389
50,710
217,745
762
(9,813
29,033
(110
Balances at June 30, 2018
39,662,340
229,041
229,356
(6) Stock-Based Compensation
We account for our stock-based compensation plans using the fair value recognition provisions of ASC 718, Stock Compensation (“ASC 718”). Under the provisions of ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Shares available for future stock-based payment awards under our 2016 Stock-Based Incentive Compensation Plan were 1,761,846 shares as of June 30, 2019.
Non-vested Stock
The following table summarizes our non-vested stock activity for the six months ended June 30, 2019:
Number of
Weighted
Average Grant
Date Fair Value
Non-vested stock at December 31, 2018
379,559
25.87
Granted
20,923
26.77
Vested
(57,296
21.60
Forfeited
(27,786
20.87
Non-vested stock at June 30, 2019
315,400
27.15
As of June 30, 2019, we had unrecognized compensation expense of approximately $3.5 million related to non-vested stock that we expect to be recognized over a weighted-average period of approximately 1.6 years. The following table summarizes compensation expense related to non-vested stock, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three and six month periods ended June 30, 2019 and 2018 (amounts in thousands):
For the Three Months Ended
For the Six Months Ended
Compensation expense
(7) Income per Share
Income per common share for the three and six month periods ended June 30, 2019 and 2018 are based on the weighted average number of common shares outstanding during the periods. The effects of potentially dilutive securities that are anti-dilutive are not included in the computation of dilutive income per share. We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic and diluted EPS calculations using the two-class method. All of our restricted common shares are currently participating securities.
22
Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period. The number of restricted common shares outstanding was approximately 0.7% of total outstanding shares for each of the three and six month periods ended June 30, 2019 and 2018, and, consequently, was immaterial to the basic and diluted EPS calculations. Therefore, use of the two-class method had no impact on our basic and diluted EPS calculations for the periods presented. The following table sets forth the computation of basic and diluted net income per common share for the three and six month periods ended June 30, 2019 and 2018 (amounts in thousands, except per share amounts):
Basic net income per share:
Weighted average number of common
shares outstanding
Net income per share of common stock –
basic
Diluted net income per share:
Weighted average number of common shares
outstanding
Effect of dilutive securities:
Effect of dilutive non-vested restricted
stock
190
272
187
280
outstanding – diluted
diluted
Common shares excluded from the
denominator as anti-dilutive:
Non-vested restricted stock
(8) Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC as administrative agent, and the lenders named therein (the “Credit Facility”).
On December 22, 2017, we amended, extended and restated the Credit Facility by entering into the Fifth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.
The Amended and Restated Credit Agreement, among other things, (i) extended the maturity date of the Credit Facility from May 21, 2019 to December 22, 2022, (ii) increased the commitments under the senior secured asset based revolver provided for therein from $602.5 million to $750 million, (iii) increased the uncommitted incremental revolving capacity from $150 million to $250 million, (iv) provided that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage (as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowered the interest rate (a) in the case of base rate revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowered the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and (vii) permitted, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).
23
On February 1, 2019, we further amended and extended the Amended and Restated Credit Agreement with the First Amendment to the Fifth Amended and Restated Credit Agreement (the “First Amendment”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, the other credit parties named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.
The First Amendment, among other things, (i) extended the maturity date of the credit facility from December 22, 2022 to January 31, 2024, and (ii) lowered the interest rate in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of 1.25% to 1.75%, depending on the Average Availability and (iii) lowered the interest rate in the case of Base Rate loans, to the Base Rate (as defined in the Amended and Restated Credit Agreement) plus an applicable margin of 0.25% to 0.75%, depending on the Average Availability.
The Amended and Restated Credit Agreement continues to provide for, among other things, a $30 million letter of credit sub-facility, and a guaranty by certain of the Company’s subsidiaries of the obligations under the Credit Facility. In addition, the Credit Facility remains secured by substantially all of the assets of the Company and certain of its subsidiaries.
As of June 30, 2019, we were in compliance with our financial covenants under the Amended and Restated Credit Agreement. At June 30, 2019, we had $282.7 million of borrowings outstanding under the Credit Facility and could borrow up to approximately $459.5 million and remain in compliance with the debt covenants under the Credit Facility. At July 18, 2019, we had $471.3 million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.
(9) Senior Unsecured Notes
On August 24, 2017, we completed an offering of $750 million aggregate principal amount of 5.6250% senior notes due 2025 (the “New Notes”) and the settlement of a cash tender offer (the “Tender Offer”) with respect to our 7% senior notes due 2022 (the “Old Notes”). Net proceeds, after deducting $10.3 million of estimated offering expenses, from the sale of the New Notes totaled approximately $739.7 million. We used a portion of the net proceeds from the sale of the New Notes to repurchase $329.7 million of aggregate principal amount of the Old Notes in early settlement of the Tender Offer, which the Company launched on August 17, 2017. Holders who tendered their Old Notes prior to the early tender deadline received $1,038.90 per $1,000 principal amount of Old Notes tendered, plus accrued and unpaid interest up to, but not including, the payment date of August 24, 2017. Effective as of August 24, 2017, we (i) provided notice of the redemption of all remaining Old Notes that were not validly tendered in the Tender Offer at the expiration time and (ii) satisfied and discharged the indenture governing the Old Notes in accordance with its terms. On September 25, 2017, we redeemed the remaining $300.3 million principal amount outstanding of the Old Notes at a redemption price equal to 103.50% of the principal amount thereof, plus accrued and unpaid interest up to, but not including, the date of redemption.
The New Notes were issued at par and require semiannual interest payments on March 1st and September 1st of each year, commencing on March 1, 2018. No principal payments are due until maturity (September 1, 2025).
The New Notes are redeemable, in whole or in part, at any time on or after September 1, 2020 at specified redemption prices plus accrued and unpaid interest to the date of redemption. We may redeem up to 40% of the aggregate principal amount of the New Notes before September 1, 2020 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to September 1, 2020 at a specified “make-whole” redemption price plus accrued and unpaid interest to the date of redemption.
The New Notes rank equally in right of payment to all of our existing and future senior indebtedness and rank senior to any of our subordinated indebtedness. The New Notes are unconditionally guaranteed on a senior unsecured basis by all of our current and future significant domestic restricted subsidiaries. In addition, the New Notes are effectively subordinated to all of our and the guarantors’ existing and future secured indebtedness, including the Credit Facility, to the extent of the assets securing such indebtedness, and are structurally subordinated to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the New Notes.
If we experience a change of control, we will be required to offer to purchase the New Notes at a repurchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase.
The indenture governing the New Notes contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (i) incur additional indebtedness, assume a guarantee or issue preferred stock; (ii) pay dividends or make other equity distributions or payments to or affecting our subsidiaries; (iii) purchase or redeem our capital stock; (iv) make certain investments; (v) create liens; (vi) sell or dispose of assets or engage in mergers or consolidations; (vii) engage in certain transactions with subsidiaries or affiliates; (viii) enter into sale-leaseback transactions; and (ix) engage in certain business activities. Each of the covenants is subject to exceptions and qualifications. As of June 30, 2019, we were in compliance with these covenants.
On November 22, 2017, we closed on an offering of $200 million aggregate principal amount of 5.625% senior notes due 2025 (the “Add-on Notes”) in an unregistered offering through a private placement. The Add-on Notes were priced at 104.25% of the principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 24, 2017 totaled approximately $209.2 million. The net proceeds of the offering, was used to repay indebtedness outstanding under the Credit Facility and for the payment of fees and expenses related to the offering. The remainder of the net proceeds will be used for general corporate purposes and to fund potential acquisitions in connection with our ongoing strategy of acquiring rental companies to complement our existing business and footprint.
The Add-on Notes were issued as additional notes under an indenture dated as of August 24, 2017, pursuant to which we previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally with and form a part of a single class of securities with the New Notes.
Pursuant to a registration rights agreement entered into between us, the guarantors of the New Notes and the initial purchasers of the New Notes, we agreed to make an offer to exchange (the “Exchange Offer”) the New Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New Notes (except that the exchange notes will not contain any transfer restrictions) within a certain period of time following the completion of the offering. On January 17, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the New and Add-on Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New and Add-on Notes (except that the exchange notes do not contain any transfer restrictions). This exchange offer closed on March 27, 2018.
The following table reconciles our Senior Unsecured Notes to our Condensed Consolidated Balance Sheets (amounts in thousands):
Balance at December 31, 2017
944,088
Accretion of discount through December 31, 2018
1,539
Amortization of note premium through December 31, 2018
(1,062
Additional deferred financing costs on New Notes
Amortization of deferred financing costs through
312
Balance at December 31, 2018
Accretion of discount through June 30, 2019
770
Amortization of note premium through June 30, 2019
(531
154
Balance at June 30, 2019
(10) Leases
We adopted Topic 842 on January 1, 2019. Because we adopted Topic 842 using the transition method that allowed us to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, prior year financial statements were not recast under the new standard and, therefore, those prior year amounts are not presented below.
Our lease portfolio is substantially comprised of operating leases related to leases of real estate and improvements at 84 of our 96 branch locations as of June 30, 2019. From time to time, we may also lease various types of small equipment and vehicles. Such leases are typically immaterial to our consolidated financial statements.
25
For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when such renewal options and/or termination options are reasonably certain of exercise. We do not separate lease and nonlease components of contracts.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.
At June 30, 2019, as disclosed in our condensed consolidated balance sheet, we had net operating lease right-of-use assets of $163.8 million and net finance lease right-of-use assets of $0.4 million. Our operating lease liabilities at June 30, 2019 were $166.2 million and finance lease liabilities were $0.7 million. The weighted average remaining lease term for operating leases was approximately 10.9 years and the weighted average remaining lease term for finance leases was approximately 2.75 years. The weighted average discount rate for operating and finance leases was approximately 6.9% and 5.9%, respectively.
The table below presents certain information related to lease costs for our operating and finance leases for the three and six month periods ended June 30, 2019 (in thousands).
Three Month
Six Month
Period Ended
Classification
Operating lease cost
SG&A expenses
5,680
11,255
Finance lease cost
Amortization of leased assets
40
Interest on lease liabilities
Variable lease cost
150
274
Sublease income
Other income
(130
(250
Total lease cost
5,750
11,381
The table below presents supplemental cash flow information related to leases for the three and six month periods ended June 30, 2019 (in thousands).
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
5,532
10,961
Operating cash flows for finance leases
Finance cash flows for finance leases
114
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on our condensed consolidated balance sheet as of June 30, 2019 (in thousands).
Operating
Finance
11,098
135
2020
22,126
270
2021
22,064
2022
21,899
45
2023
21,803
Thereafter
137,953
Total minimum lease payments
236,943
720
Less: amount of lease payments representing interest
(70,757
(52
Present value of future minimum lease payments
26
(11) Segment Information
We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and services revenues. These segments are based upon how management of the Company allocates resources and assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. There were no sales between segments for any of the periods presented. Selling, general and administrative expenses as well as all other income and expense items below gross profit are not generally allocated to reportable segments.
We do not compile discrete financial information by segments other than the information presented below. The following table presents information about our reportable segments (amounts in thousands):
Segment Revenues:
Total segmented revenues
330,622
300,462
641,484
552,033
Non-segmented revenues
Segment Gross Profit:
86,002
65,940
163,940
123,137
6,532
7,313
13,536
12,961
12,807
10,368
23,429
18,284
8,581
8,350
16,720
15,884
11,366
11,036
21,930
21,022
Total segmented gross profit
125,288
103,007
239,555
191,288
Non-segmented gross profit (loss)
(507
5,096
(1,074
9,400
Total gross profit
Segment identified assets:
Equipment sales
108,053
86,583
Parts and services
19,708
18,015
Total segment identified assets
1,372,260
1,246,096
Non-segment identified assets
687,987
481,085
The Company operates primarily in the United States and our sales to international customers for both the three month periods ended June 30, 2019 and 2018 were 0.1% of total revenues, and for both the six month periods ended June 30, 2019 and 2018 were 0.2%. No one customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented.
(12) Condensed Consolidating Financial Information of Guarantor Subsidiaries
All of the indebtedness of H&E Equipment Services, Inc. is guaranteed by GNE Investments, Inc. and its wholly‑owned subsidiary Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp. The guarantor subsidiaries are all wholly‑owned and the guarantees, made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s ability to obtain funds from the guarantor subsidiaries by dividend or loan.
The consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial statements for H&E Finance Corp. are not included within the consolidating financial statements because H&E Finance Corp. has no assets or operations.
28
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2019
H&E Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
Assets:
Receivables, net
169,019
30,956
Inventories, net
116,215
11,547
13,290
208
Rental equipment, net
1,082,560
161,939
Property and equipment, net
104,221
17,515
Operating lease right-of-use assets, net
142,499
21,265
Finance lease right-of-use assets, net
Deferred financing costs, net
Investment in guarantor subsidiaries
247,927
(247,927
Intangible assets, net
114,100
29,526
2,034,771
273,403
Liabilities and Stockholders’ Equity:
113,021
5,784
81,220
(2,680
168
Senior unsecured notes, net
144,426
21,760
1,759,180
25,476
Stockholders’ equity
29
As of December 31, 2018
166,393
35,163
94,483
10,115
10,382
983,281
158,217
98,251
16,870
246,309
(246,309
76,317
1,723,473
250,017
Amounts due under senior secured credit facility
95,866
5,974
23,178
488
76,798
(3,427
185
(53
1,466,670
3,708
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2019
169,106
23,196
47,040
6,556
30,369
27,488
4,383
14,141
2,584
(291
3,266
287,853
45,744
53,361
8,073
23,143
3,876
94,351
11,949
41,179
5,885
19,622
3,699
20,220
3,070
4,558
801
361
3,121
180,291
28,525
Gross profit:
74,755
11,247
5,861
671
10,747
2,060
7,268
1,313
9,583
1,783
(652
145
107,562
17,219
67,858
9,982
Equity in earnings of guarantor subsidiaries
4,230
(4,230
556
44,342
7,561
(13,886
(3,381
439
50
(13,447
(3,331
Income before income taxes
31
Three Months Ended June 30, 2018
130,785
21,929
55,700
12,839
26,162
5,978
26,087
4,194
13,979
2,809
8,449
1,453
261,162
49,202
43,950
7,221
18,866
11,163
2,367
73,979
12,795
49,712
11,514
17,559
4,213
18,987
2,944
4,755
997
4,166
640
169,158
33,103
56,806
9,134
5,988
1,325
8,603
7,100
1,250
9,224
1,812
4,283
813
92,004
16,099
57,738
11,308
2,490
(2,490
4,023
91
40,711
4,882
(13,247
(2,446
405
54
(12,842
(2,392
Income tax benefit
32
Six Months Ended June 30, 2019
323,965
44,466
99,616
13,083
55,580
10,182
54,042
8,257
27,307
4,986
(224
5,975
560,286
86,949
102,623
15,959
44,295
7,492
181,040
23,451
87,639
11,524
35,833
6,500
39,812
5,767
1,522
860
5,965
354,025
54,729
Gross profit (loss):
142,925
21,015
11,977
1,559
19,747
3,682
14,230
18,466
3,464
(1,084
206,261
32,220
136,413
20,074
5,955
(5,955
1,263
358
76,799
12,504
(27,448
(6,674
896
125
(26,552
(6,549
33
Six Months Ended June 30, 2018
247,968
41,784
95,601
19,431
46,388
10,605
50,434
7,998
26,761
5,063
16,042
2,771
483,194
87,652
83,509
14,131
37,126
6,219
21,052
4,578
141,687
24,928
84,795
17,276
31,391
7,318
36,943
5,605
9,117
1,685
8,193
1,220
312,126
58,032
106,281
16,856
10,806
2,155
14,997
3,287
13,491
2,393
17,644
3,378
7,849
1,551
171,068
29,620
112,746
22,180
2,948
(2,948
4,737
65,787
7,590
(25,596
(4,750
746
108
(24,850
(4,642
34
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization on property and equipment
11,993
1,634
Operating lease right-of-use liabilities, net
215
67
2,197
283
(1,263
(358
(19,568
(3,671
Changes in operating assets and liabilities:
840
3,924
(49,636
(6,361
(2,887
(82
16,782
(190
1,888
(488
5,714
1,175
117,024
17,928
Acquisition of business, net of cash acquired
(15,723
(2,845
(153,724
(20,950
1,777
51,799
9,869
Investment in subsidiaries
4,337
(4,337
(218,280
(19,667
(3
Payment of deferred financing costs
Payments on finance lease obligations
(58
Capital contributions
Net cash provided by (used in) financing activities
91,280
(4,398
35
10,606
1,479
1,195
484
(4,737
(150
(14,717
(3,289
5,599
3,522
(90,519
(13,112
(95
(33
59,775
(70
7,551
(793
1,395
(1,784
102,082
3,333
(12,990
(6,571
(189,589
(28,239
6,537
41,946
10,231
(21,208
21,208
(371,331
(24,429
(19,616
Payments on capital lease obligations
112,950
21,096
36
ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the financial position of H&E Equipment Services, Inc. and its subsidiaries as of June 30, 2019, and its results of operations for the three and six month periods ended June 30, 2019, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the audited consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties (see discussion of “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.
Overview
Background
As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and services operations.
As of July 18, 2019, we operated 96 full-service facilities throughout the Intermountain, Southwest, Gulf Coast, West Coast, Southeast and Mid-Atlantic regions of the United States. Our work force includes distinct, focused sales forces for our new and used equipment sales and rental operations, highly skilled service technicians, product specialists and regional managers. We focus our sales and rental activities on, and organize our personnel principally by, our four core equipment categories. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our rental and sales force and strengthen our customer relationships. In addition, we have branch managers for each location who are responsible for managing their assets and financial results. We believe this fosters accountability in our business and strengthens our local and regional relationships.
Through our predecessor companies, we have been in the equipment services business for approximately 58 years. H&E Equipment Services L.L.C. (“H&E LLC”) was formed in June 2002 through the business combination of Head & Engquist Equipment, LLC (“Head & Engquist”), a wholly-owned subsidiary of Gulf Wide Industries, L.L.C. (“Gulf Wide”), and ICM Equipment Company L.L.C. (“ICM”). Head & Engquist, founded in 1961, and ICM, founded in 1971, were two leading regional, integrated equipment service companies operating in contiguous geographic markets. In the June 2002 transaction, Head & Engquist and ICM were merged with and into Gulf Wide, which was renamed H&E LLC. Prior to the combination, Head & Engquist operated 25 facilities in the Gulf Coast region, and ICM operated 16 facilities in the Intermountain region of the United States.
Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and wholly-owned subsidiary of H&E Holdings L.L.C. (“H&E Holdings”), and immediately prior to the closing of our initial public offering, on February 3, 2006, H&E LLC and H&E Holdings merged with and into H&E Equipment Services, Inc., which survived the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer existed under operation of law pursuant to the reincorporation merger.
Effective January 1, 2018, we completed the acquisition of Contractors Equipment Center (“CEC”), a privately-held company focused on non-residential construction equipment rentals serving the greater Denver, Colorado area out of three branch locations. Effective April 1, 2018, we completed the acquisition of Rental, Inc., a privately-held equipment rental and distribution company with five branch locations in Alabama and Florida. Effective February 1, 2019, we completed the acquisition of We-Rent-It, a privately-held equipment rental company with six branch locations in Central Texas.
Critical Accounting Policies
Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2018, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no significant changes to these critical accounting policies and estimates during the three and six month
periods ended June 30, 2019, except as disclosed in note 2 related to new lease accounting guidance adopted on January 1, 2019. Our critical accounting policies include, among others, revenue recognition, the adequacy of the allowance for doubtful accounts, the propriety of our estimated useful life of rental equipment and property and equipment, the potential impairment of long-lived assets including goodwill, intangible assets, rental equipment and right-of-use lease assets, obsolescence reserves on inventory, the allocation of purchase price related to business combinations, reserves for claims, including self-insurance reserves, and deferred income taxes, including the valuation of any related deferred tax assets.
Information regarding our other significant accounting policies is included in note 2 to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018 and in note 2 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Business Segments
We have five reportable segments because we derive our revenues from five principal business activities: (1) equipment rentals; (2) new equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based upon how we allocate resources and assess performance. In addition, we also have non-segmented revenues and costs that relate to equipment support activities.
Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as equipment usage based on: (1) a percentage of original equipment cost, and (2) the number of rental equipment units available for rent), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.
New Equipment Sales. Our new equipment sales operation sells new equipment in all of our four core product categories. We have a retail sales force focused by equipment type that is separate from our rental sales force. Manufacturer purchase terms and pricing are managed by our product specialists.
Used Equipment Sales. Our used equipment sales are generated primarily from sales of used equipment from our rental fleet, as well as from sales of inventoried equipment that we acquire through trade-ins from our equipment customers and through selective purchases of high quality used equipment. Used equipment is sold by our dedicated retail sales force. Our used equipment sales are an effective way for us to manage the size and composition of our rental fleet and provide a profitable distribution channel for disposal of rental equipment.
Parts Sales. Our parts business sells new and used parts for the equipment we sell and also provides parts to our own rental fleet. To a lesser degree, we also sell parts for equipment produced by manufacturers whose products we neither rent nor sell. In order to provide timely parts and services support to our customers as well as our own rental fleet, we maintain an extensive parts inventory.
Services. Our services operation provides maintenance and repair services for our customers’ equipment and to our own rental fleet at our facilities as well as at our customers’ locations. As the authorized distributor for numerous equipment manufacturers, we are able to provide service to that equipment that will be covered under the manufacturer’s warranty.
Our non-segmented revenues and costs relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments.
For additional information about our business segments, see note 11 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Revenue Sources
We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals and new equipment sales account for more than half of our total revenues. For the six month period ended June 30, 2019, approximately 56.9% of our total revenues were attributable to equipment rentals, 17.4% of our total revenues were attributable to new equipment sales, 10.2% were attributable to used equipment sales, 9.6% were attributable to parts sales, 5.0% were attributable to our services revenues and 0.9% were attributable to non-segmented other revenues.
38
The equipment that we sell, rent and service is principally used in the construction industry, as well as by companies for commercial and industrial uses such as plant maintenance and turnarounds, as well as in the petrochemical and energy sectors. As a result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for new and used equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions and general economic conditions. For a discussion of the impact of seasonality on our revenues, see “Seasonality” below.
New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-house retail sales force focused by product type. While sales of new equipment are impacted by the availability of equipment from the manufacturer, we believe our status as a leading distributor for some of our key suppliers improves our ability to obtain equipment. New equipment sales are an important component of our integrated model due to customer interaction and service contact and new equipment sales also lead to future parts and services revenues.
Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet. The remainder of our used equipment sales revenues comes from the sale of inventoried equipment that we acquire through trade-ins from our equipment customers and selective purchases of high-quality used equipment. Our policy is not to offer specified price trade-in arrangements on equipment for sale. Sales of our rental fleet equipment allow us to manage the size, quality, composition and age of our rental fleet, and provide us with a profitable distribution channel for the disposal of rental equipment.
Parts Sales. We generate revenues from the sale of new and used parts for equipment that we rent or sell, as well as for other makes of equipment. Our product support sales representatives are instrumental in generating our parts revenues. They are product specialists and receive performance incentives for achieving certain sales levels. Most of our parts sales come from our extensive in-house parts inventory. Our parts sales provide us with a relatively stable revenue stream that is generally less sensitive to the economic cycles that tend to affect our rental and equipment sales operations.
Services. We derive our services revenues from maintenance and repair services to customers for their owned equipment. In addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance services to industrial customers. Our after-market service provides a high-margin, relatively stable source of revenue through changing economic cycles.
Our non-segmented revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments.
Principal Costs and Expenses
Our largest expenses are the costs to purchase the new equipment we sell, the costs associated with the used equipment we sell, rental expenses, rental depreciation and costs associated with parts sales and services, all of which are included in cost of revenues. For the six month period ended June 30, 2019, our total cost of revenues was approximately $408.8 million. Our operating expenses consist principally of selling, general and administrative expenses. For the six month period ended June 30, 2019, our selling, general and administrative expenses were $156.5 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable segments.
We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result in additional income tax expense based on probable outcomes of such matters.
Cost of Revenues:
Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year estimated useful life, earthmoving over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a seven year estimated useful life. Attachments and other smaller type equipment are depreciated over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment.
Rental Expense. Rental expense represents the costs associated with rental equipment, including, among other things, the cost of servicing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of rental equipment.
39
New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net of any amount of credit given to the customer towards the equipment for trade-ins.
Used Equipment Sales. Cost of used equipment sold consists of the net book value of rental equipment for used equipment sold from our rental fleet, the equipment costs for used equipment we purchase for sale or the trade-in value of used equipment that we obtain from customers in equipment sales transactions.
Parts Sales. Cost of parts sales represents costs attributable to the sale of parts directly to customers.
Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.
Our non-segmented costs relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments.
Selling, General and Administrative Expenses:
Our selling, general and administrative (“SG&A”) expenses include sales and marketing expenses, payroll and related benefit costs, insurance expenses, legal and professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with capital leases and software. These expenses are not generally allocated to our reportable segments.
Interest Expense:
Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate amounts outstanding under our revolving senior secured credit facility (the “Credit Facility”), senior unsecured notes due 2025 and our capital lease obligations, as well as our extinguished senior unsecured notes due 2022 (the “Old Notes”) for the periods during which such Old Notes were outstanding. Interest expense also includes interest on our outstanding manufacturer flooring plans payable which are used to finance inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs and the accretion/amortization of note discount/premium are also included in interest expense.
Principal Cash Flows
We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities, manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital Resources” below). Our management of our working capital is closely tied to operating cash flows, as working capital can be significantly impacted by, among other things, our accounts receivable activities, the level of new and used equipment inventories, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.
Rental Fleet
A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at June 30, 2019 was $1.2 billion, or approximately 60.4% of our total assets. Our rental fleet as of June 30, 2019 consisted of 44,426 units having an original acquisition cost (which we define as the cost originally paid to manufacturers or the original amount financed under operating leases) of approximately $1.9 billion. As of June 30, 2019, our rental fleet composition was as follows (dollars in millions):
Units
% of
Original
Acquisition
Cost
Average
Age in
Months
Hi-Lift or Aerial Work Platforms
28,828
64.9
%
1,221.0
63.2
38.5
Cranes
238
0.5
87.2
4.5
58.5
Earthmoving
5,225
11.8
453.3
23.5
25.0
Industrial Lift Trucks
1,326
3.0
40.2
2.1
29.5
8,809
19.8
129.2
6.7
27.6
44,426
100.0
1,930.9
34.6
Determining the optimal age and mix for our rental fleet equipment is subjective and requires considerable estimates and judgments by management. We constantly evaluate the mix, age and quality of the equipment in our rental fleet in response to current economic
and market conditions, competition and customer demand. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary auction market levels, and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions, we evaluate current economic and market conditions, competition, manufacturers’ availability, pricing and return on investment over the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive maintenance program, we believe our rental fleet is well-maintained.
The original acquisition cost of our gross rental fleet increased by approximately $167.4 million, or 9.5%, for the six month period ended June 30, 2019, largely reflective of an increase in rental fleet capital expenditures and the We-Rent-It acquired fleet. The average age of our rental fleet equipment increased by approximately 0.1 months for the six month period ended June 30, 2019.
Our average rental rates for the six month period ended June 30, 2019 were 2.2% higher than in the six month period ended June 30, 2018 (see further discussion on rental rates in “Results of Operations” below). Our average rental rates for the six month period ended June 30, 2018 do not include rental rate data for legacy We-Rent-It operations for February through April 2019 or the rental rate data for legacy CEC and Rental Inc. operations for the three month period ended March 31, 2018 and three month period ended June 30, 2018.
The rental equipment mix among our four core product lines for the six month period ended June 30, 2019 was largely consistent with that of the prior year comparable period as a percentage of original acquisition cost.
Principal External Factors that Affect our Businesses
We are subject to a number of external factors that may adversely affect our businesses. These factors, and other factors, are discussed below and under the heading “Forward-Looking Statements,” and in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
Economic downturns. The demand for our products is dependent on the general economy, the stability of the global credit markets, the industries in which our customers operate or serve, and other factors. Downturns in the general economy or in the construction and manufacturing industries, as well as adverse credit market conditions, can cause demand for our products to materially decrease.
Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies constitute a significant portion of our total revenues. As a result, we depend upon customers in these businesses and their ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is impacted by fluctuations in customers’ spending levels on capital expenditures and by the availability of credit to those customers.
Adverse weather. Adverse weather in a geographic region in which we operate may depress demand for equipment in that region. Our equipment is primarily used outdoors and, as a result, prolonged adverse weather conditions may prohibit our customers from continuing their work projects. Adverse weather also has a seasonal impact in parts of our Intermountain region, particularly in the winter months.
Regional and Industry-Specific Activity and Trends. Expenditures by our customers may be impacted by the overall level of construction activity in the markets and regions in which they operate, the price of oil and other commodities and other general economic trends impacting the industries in which our customers and end users operate. As our customers adjust their activity and spending levels in response to these external factors, our rentals and sales of equipment to those customers will be impacted. For example, high levels of industrial activity in our Gulf Coast and Intermountain regions have been a meaningful driver of recent growth in our revenues. However, the decline in oil and natural gas prices and the related downturn in oil industry activities during fiscal years 2014, 2015 and 2016 resulted in a significant decrease in our new equipment sales, primarily the sale of new cranes, due to lower demand. Although oil prices have subsequently stabilized and improved in 2017 and into 2018, prices decreased significantly at the end of 2018 into 2019 and we believe the uncertainty regarding future oil prices continues to impact customer capital expenditure decisions.
We believe that our integrated business tempers the effects of downturns in a particular segment. For a discussion of seasonality, see “Seasonality” on page 54 of this Quarterly Report on Form 10-Q.
Results of Operations
The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for our business segments and non-segmented revenues for the three and six month periods ended June 30, 2019 and 2018. The period-to-period comparisons of our financial results are not necessarily indicative of future results.
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As discussed further in note 2 to these condensed consolidated financial statements, upon our adoption of Topic 842 as of January 1, 2019 using a transition method that allowed us not to recast prior periods, certain ancillary revenues and related cost of revenues associated with our rental activities, such as damage waiver income, environmental fees and other recovery fees, that have been historically presented within Other Revenues and Other Cost of Revenues, are presented within Rental Revenues and Rental Other Cost of Revenues beginning January 1, 2019. As a result, Rental Revenues, as presented in our condensed consolidated statements of income in this Report on Form 10-Q for the three and six month periods ended June 30, 2018, do not include these revenues and related cost of revenues, as they are included within Other Revenues and Other Cost of Revenues.
As disclosed in note 1 to these condensed consolidated financial statements, we have historically presented hauling revenues and related costs of revenues associated with our equipment rental activities within Other Revenues and Other Cost of Revenues. This presentation did not change upon our adoption of Topic 606 on January 1, 2018 as hauling activities are deemed a separate performance obligation under Topic 606 and SEC Regulation S-X permitted flexibility in the presentation of such revenues. However, given the presentation changes required by Topic 842 as described above and in note 2 to these condensed consolidated financial statements, we believe that including equipment rental hauling revenues and related costs of revenues within Rental Other Revenues and Rental Other Cost of Revenues results in a more meaningful presentation and analysis of our equipment rental activities. In accordance with SEC Regulation S-X, the reclassification of equipment rental hauling revenues and related costs of revenues from Other Revenues and Other Cost of Revenues to Rental Revenues and Rental Other Cost of Revenues are presented on a retrospective basis, meaning our condensed consolidated statements of income for the three and six month periods ended June 30, 2019 and 2018 include hauling revenues and related costs of revenues presented within Equipment Rental Revenues and Rental Other Cost of Revenues.
The following tables (1) reconcile our Revenues, Cost of Revenues, Gross Profit and resulting gross margin for our historical condensed consolidated statements of income for the three and six month periods ended June 30, 2018 to the presentation in this Quarterly Report on Form 10-Q, reflecting the retrospective presentation of rental hauling fees and related costs of revenues, and (2) reconcile our Revenues, Cost of Revenues, Gross Profit and resulting gross margin for the three and six month periods ended June 30, 2018 as presented in this Quarterly Report on Form 10-Q to an “As Adjusted” basis to conform the prior year presentation to the current year presentation of Revenues, Cost of Revenues, and resulting gross profit and gross margin for the three and six month periods ended June 30, 2019 as presented in this Quarterly Report on Form 10-Q, reflecting the line item presentation changes required by Topic 842.
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$'s in thousands
Three Months Period Ended June 30, 2018
Other Rental Fees
As Adjusted
Equipment rentals (1)
Rentals
Rentals other
6,788
15,673
Total equipment rentals
159,502
(6,788
3,114
1,402
14,932
88,176
(1,402
3,404
GROSS PROFIT (LOSS)
70,585
(4,645
5,386
741
71,326
451
4,645
(5,386
(290
GROSS MARGIN
49.1
-52.3
79.3
4.7
43.2
44.7
10.7
32.3
65.7
2.4
52.3
51.5
-79.3
-9.3
34.8
__________
Pursuant to SEC Regulation S-X, our equipment rental revenues, as presented in our condensed consolidated statements of income in this Quarterly Report on Form 10-Q, are aggregated and presented in a single line item, “Equipment Rentals”. The above table disaggregates our equipment rental revenues for discussion and analysis purposes only.
Six Months Period Ended June 30, 2018
13,055
29,617
302,807
(13,055
5,758
2,967
28,597
169,582
(2,967
6,446
132,205
(9,068
10,088
133,225
332
9,068
(10,088
(688
48.4
-54.8
77.3
3.4
42.5
44.0
11.3
32.1
27.2
66.1
0.9
54.8
50.0
-77.3
-11.9
35.2
44
Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
To enhance period-to-period comparability of our revenues and gross profit, the tabular information below is derived from the table above. Our revenues and gross profit for the three month period ended June 30, 2018 are presented on an “As Adjusted” basis.
Revenues.
Dollar
Percentage
Increase
(Decrease)
(in thousands, except percentages)
173,837
30,008
20.9
2,792
17.8
32,800
20.6
(14,943
(21.8
)%
3,988
12.4
1,590
5.3
(63
(0.4
Non-Segmented revenues
(139
(4.5
23,233
7.5
Total Revenues. Our total revenues were approximately $333.6 million for the three month period ended June 30, 2019 compared to $310.4 million for the three month period ended June 30, 2018, an increase of $23.2 million, or 7.5%. Revenues for all reportable segments and non-segmented other revenues are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the three month period ended June 30, 2019 increased approximately $32.8 million, or 20.6%, to $192.3 million from $159.5 million in the three month period ended June 30, 2018, as adjusted. The increase in equipment rental revenues was largely due to increased demand, combined with the impact of the WRI locations acquired on February 1, 2019.
Rentals: Rental revenues increased $30.0 million, or 20.9%, to $173.8 million for the three month period ended June 30, 2019 compared to $143.8 million for the three month period ended June 30, 2018. Rental revenues from aerial work platform equipment increased $19.6 million while earthmoving equipment rental revenues increased $8.0 million. Other equipment rental revenues increased $4.5 million. Lift truck equipment rental revenues and crane rental revenues increased $0.8 million and $0.6 million, respectively. These product line equipment rental revenue fluctuations do not include the impact of legacy WRI equipment rental revenues for April 2019 or Rental Inc. equipment rental revenues for the entire 2018 period.
Our average rental rates for the three month period ended June 30, 2019 increased 2.2% compared to the same three month period last year and increased approximately 0.6% from the three month period ended March 31, 2019. Our average rental rates for the three month period ended June 30, 2019 do not include April 2019 rental rate data for legacy WRI operations and our average rental rates for the three month period ended June 30, 2018 do not include rental rate data for legacy Rental Inc. operations for the entire 2018 period.
Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three month period ended June 30, 2019 was 36.5% compared to 35.4% in the three month period ended June 30, 2018, an increase of 1.1%. The increase in comparative rental equipment dollar utilization was the net result of the increase in equipment rental rates as noted above, which was partially offset by a decrease in rental equipment time utilization, and a favorable shift in the mix of equipment rental revenues. Rental equipment time utilization as a percentage of original equipment cost was approximately 71.2% for the three month period ended June 30, 2019 compared to 72.0% in the three month period ended June 30, 2018, a decrease of 0.8%.
The decrease in rental equipment time utilization as a percentage of original equipment cost was largely due to a $260.2 million increase, or 15.6%, in our equipment rental fleet since June 30, 2018.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues for the three month period ended June 30, 2019 were $18.5 million compared to $15.7 million for the three month period ended June 30, 2018, as adjusted, an increase of $2.8 million, or 17.8%, primarily due to the increase in equipment rental revenues as described above.
New Equipment Sales Revenues. Our new equipment sales for the three month period ended June 30, 2019 decreased $14.9 million, or 21.8%, to $53.6 million from $68.5 million for the three month period ended June 30, 2018. This decrease was largely due to a $9.7 million decrease in new crane sales and a $4.1 million decrease in new earthmoving equipment sales.
Used Equipment Sales Revenues. Our used equipment sales increased $4.0 million, or 12.4%, to $36.1 million for the three month period ended June 30, 2019, from $32.1 million for the same three month period in 2018. This increase was driven primarily by a $4.9 million increase in used aerial work platform equipment sales, a $2.0 million increase in used earthmoving equipment sales and a $0.8 million increase in used other equipment sales, which was partially offset by a $3.6 million decrease in used crane sales.
Parts Sales Revenues. Our parts sales revenues for the three month period ended June 30, 2019 increased $1.6 million, or 5.3%, to $31.9 million from approximately $30.3 million for the same three month period last year. The increase in parts sales was attributable to increases in crane and earthmoving equipment parts sales.
Services Revenues. Our services revenues for the three month period ended June 30, 2019 decreased $0.1 million, or 0.4%, to $16.7 million from $16.8 million for the same three month period last year. The decrease is due to a decrease in crane services revenues, which were substantially offset by increases in aerial work platform services revenues and earthmoving equipment revenues.
Non-Segmented Other Revenues. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three month period ended June 30, 2019, our other revenues were approximately $3.0 million, a decrease of $0.1 million, or 4.5%, from $3.1 million in the same three month period in 2018, as adjusted.
Gross Profit.
85,384
14,799
21.0
618
(123
(16.6
14,676
(781
(10.7
2,439
231
2.8
Non-Segmented revenues gross loss
(217
74.8
16,678
15.4
Total Gross Profit. Our total gross profit was $124.8 million for the three month period ended June 30, 2019 compared to $108.1 million for the same three month period in 2018, an increase of $16.7 million, or 15.4%. Total gross profit margin for the three month period ended June 30, 2019 was approximately 37.4%, an increase of 2.6% from the 34.8% gross profit margin for the same three month period in 2018. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below:
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the three month period ended June 30, 2019 increased approximately $14.7 million, or 20.6%, to $86.0 million from $71.3 million in the same three month period in 2018. Total gross profit margin from equipment rentals for the three month periods ended June 30, 2019 and 2018 was approximately 44.7%, as adjusted.
Rentals: Rental revenues gross profit increased $14.8 million to $85.4 million for the three month period ended June 30, 2019 compared to $70.6 million for the same three month period in 2018. The gross profit increase was the result of a $30.0 million increase in equipment rental revenues for the three month period ended June 30, 2019 compared to the same period last year, which was partially offset by a $10.3 million increase in rental equipment depreciation expense and a $4.9 million increase in rental expenses. The increases in both depreciation expense and rental expenses are primarily due to a larger fleet size in 2019 compared to 2018.
Gross profit margin on equipment rentals for the three month periods ended June 30, 2019 and June 30, 2018 was approximately 49.1%. Depreciation expense was 35.3% of equipment rental revenues for the three month period ended June 30, 2019 compared to 35.6% for the same period in 2018, a decrease of 0.3%. As a percentage of revenues, rental expenses were 15.5% for the three month period ended June 30, 2019 compared to 15.3% for the same period last year, an increase of 0.2%.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues gross profit for the three month period ended June 30, 2019 was $0.6 million compared to $0.7 million, as adjusted, for the same period in 2018, a decrease of $0.1 million. Gross profit margin was 3.4% for the three month period ended June 30, 2019 compared to 4.7%, as adjusted, for the same period last year, a decrease of 1.3%.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three month period ended June 30, 2019 decreased $0.8 million, or 10.7%, to $6.5 million compared to $7.3 million for the same three month period in 2018 on a total new equipment sales decrease of $14.9 million. Gross profit margin on new equipment sales was 12.2% for the three month period ended June 30, 2019, compared to 10.7% for the same period last year, an increase of 1.5%. The increase in gross profit margin was primarily due to the mix of new equipment sold combined with higher margins on new crane and new earthmoving equipment gross margins.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three month period ended June 30, 2019 increased $2.4 million, or 23.5%, to $12.8 million from $10.4 million in the same period in 2018 on a used equipment sales increase of $4.0 million.
Gross profit margin on used equipment sales for the three month period ended June 30, 2019 was approximately 35.4%, up 3.2% from 32.3% for the same three month period in 2018, primarily as a result of the mix of used equipment sold and higher used earthmoving equipment and used crane sales gross margins. Our used equipment sales from the rental fleet, which comprised 92.4% and 89.4% of our used equipment sales for the three month periods ended June 30, 2019 and 2018, respectively, were approximately 160.8% and 155.5% of net book value for the three month periods ended June 30, 2019 and 2018, respectively.
Parts Sales Gross Profit. Our parts sales gross profit for the three month period ended June 30, 2019 was approximately $8.6 million, an increase of $0.2 million, or 2.8%, from gross profit of $8.4 million for the same period last year on a parts sales increase of $1.6 million. Gross profit margin for the three month period ended June 30, 2019 was 26.9%, a decrease of 0.7%, compared to a gross margin of 27.6% for the three month period ended June 30, 2018. The decrease in parts sales gross margin is due to the mix of parts sold and lower parts sales gross margins on aerial work platform equipment.
Services Revenues Gross Profit. For the three month period ended June 30, 2019, our services revenues gross profit increased $0.3 million, or 3.0%, to approximately $11.4 million from $11.0 million for the same three month period in 2018 on a $0.1 million decrease in services revenues. Gross profit margin for the three month period ended June 30, 2019 was 68.0%, an increase of 2.3% from approximately 65.7% in the same three month period in 2018, as a result of services revenues mix.
Non-Segmented Other Revenues Gross Loss. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three month period ended June 30, 2019, our other revenues gross loss was $0.5 million compared to a gross loss of $0.3 million, as adjusted, in the same period in 2018, a decrease of $0.2 million.
Selling, General and Administrative Expenses (“SG&A”). SG&A expenses increased $8.8 million, or 12.7%, to $77.8 million for the three month period ended June 30, 2019 compared to $69.0 million for the three month period ended June 30, 2018. Employee salaries, wages, payroll taxes and related employee benefit and other employee related expenses increased $4.8 million, primarily as a result of our acquisition since June 30, 2018, and a larger workforce and higher incentive compensation related to improved
profitability. Professional service costs increased $0.5 million. Facility rent expenses and repairs and maintenance costs increased $1.9 million and supplies costs increased $0.4 million. Depreciation and amortization expenses increased $0.5 million. Promotional expenses increased $0.4 million and bad debt expense increased $0.4 million. Approximately $0.8 million of the total increase in SG&A expenses was attributable to branches opened since January 1, 2018 (but excluding for this purpose branches acquired as a result of our CEC, Rental Inc. and WRI acquisitions) with less than three months of comparable operations in either or both of the three month periods ended June 30, 2019 and 2018. SG&A expenses as a percentage of total revenues for the three month periods ended June 30, 2019 and 2018 were 23.3% and 22.3%, respectively.
Merger Costs. Merger costs incurred in the three month period ended June 30, 2019 were approximately $0.1 million compared to $0.2 million in the same period in 2018.
Other Income (Expense). For the three month period ended June 30, 2019, our net other expenses increased approximately $1.5 million to $16.8 million compared to $15.2 million for the same three month period in 2018, primarily as a result of higher interest expense. Interest expense increased $1.6 million to $17.3 million for the three month period ended June 30, 2019 compared to $15.7 million for the same period last year. The increase in interest expense was due primarily to an increase in our average borrowings under the Credit Facility for the three month period ended June 30, 2019 compared to the same period last year, combined with higher interest rates in the current year period.
Income Taxes. We recorded income tax expense of $8.3 million for the three month period ended June 30, 2019 compared to income tax expense of $7.1 million for the three month period ended June 30, 2018. Our effective income tax rate for the three month period ended June 30, 2019 was 26.8% compared to 25.5% for the same period in 2018. The increase in our effective tax rate is primarily due to the net change in permanent differences in relation to profit before tax. Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2019 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
To enhance period-to-period comparability of our revenues and gross profit, the tabular information below is derived from the table above. Our revenues and gross profit for the six month period ended June 30, 2018 are presented on an “As Adjusted” basis.
333,497
60,307
22.1
5,317
18.0
65,624
21.7
(2,333
(2.0
8,769
3,867
6.6
469
1.5
(7
(0.1
76,389
13.4
Total Revenues. Our total revenues were approximately $647.2 million for the six month period ended June 30, 2019 compared to $570.8 million for the six month period ended June 30, 2018, an increase of $76.4 million, or 13.4%. Revenues for all reportable segments and non-segmented other revenues are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the six month period ended June 30, 2019 increased $65.6 million, or 21.7%, to $368.4 million from $302.8 million in the six month period ended June 30, 2018, as adjusted. The increase in equipment rental revenues was largely due to increased demand, combined with the impact of the WRI locations acquired on February 1, 2019.
48
Rentals: Rental revenues increased $60.3 million, or 22.1%, to $333.5 million for the six month period ended June 30, 2019 compared to $273.2 million for the six month period ended June 30, 2018. Rental revenues from aerial work platform equipment increased $40.9 million while earthmoving equipment rental revenues increased $16.1 million. Other equipment rental revenues increased $7.7 million. Lift truck equipment rental revenues and crane rental revenues increased $1.9 million and $0.7 million, respectively. These product line equipment rental revenue fluctuations do not include the impact of legacy WRI equipment rental revenues for February through April 2019 or legacy CEC and Rental Inc. equipment rental revenues for January through March 2018 and April through June 2018, respectively.
Our average rental rates for the six month period ended June 30, 2019 increased 2.2% compared to the same six month period last year. Our average rental rates do not include the impact of legacy WRI equipment rental revenues for February through April 2019 or legacy CEC and Rental Inc. equipment rental revenues for January through March 2018 and April through June 2018, respectively.
Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the six month period ended June 30, 2019 was 35.9% compared to 35.1% in the six month period ended June 30, 2018, an increase of 0.8%. The increase in comparative rental equipment dollar utilization was the net result of the increase in equipment rental rates as noted above and a decrease in rental equipment time utilization, and a favorable shift in the mix of equipment rental revenues. Rental equipment time utilization as a percentage of original equipment cost was approximately 70.6% for the six month period ended June 30, 2019 compared to 71.2% in the six month period ended June 30, 2018, a decrease of 0.6%. The decrease in rental equipment time utilization as a percentage of original equipment cost was largely due to a $260.2 million increase, or 15.6%, in our equipment rental fleet since June 30, 2018.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues for the six month period ended June 30, 2019 were $34.9 million compared to $29.6 million for the six month period ended June 30, 2018, as adjusted, an increase of $5.3 million, or 18.0%, primarily due to the increase in equipment rental revenues as described above.
New Equipment Sales Revenues. Our new equipment sales for the six month period ended June 30, 2019 decreased $2.3 million, or 2.0%, to $112.7 million from $115.0 million for the six month period ended June 30, 2018. This decrease, as noted below, was driven primarily by decreased sales of new cranes of $11.6 million, which was partially offset by increases of new earthmoving equipment sales, new other equipment sales and new aerial work platform equipment sales of $5.6 million, $3.4 million and $2.5 million, respectively.
Used Equipment Sales Revenues. Our used equipment sales increased $8.8 million, or 15.4%, to $65.8 million for the six month period ended June 30, 2019, from approximately $57.0 million for the same six month period in 2018. Sales of used aerial work platform equipment and used earthmoving equipment increased $4.4 million and $3.9 million, respectively. Sales of used lift trucks and used other equipment increased $0.8 million and $0.4 million, respectively. These increases were partially offset by a $0.3 million decrease in used crane sales.
Parts Sales Revenues. Our parts sales revenues for the six month period ended June 30, 2019 increased $3.9 million, or 6.6%, to $62.3 million from $58.4 million for the same six month period last year. The increase in parts sales was primarily attributable to increases in crane, aerial work platform equipment and earthmoving equipment parts sales.
Services Revenues. Our services revenues for the six month period ended June 30, 2019 increased $0.5 million, or 1.5%, to approximately $32.3 million from $31.8 million for the same six month period last year. The increase in services revenues is the primarily the net result of increases in services revenues related to aerial work platform equipment and earthmoving equipment and a decrease in crane services revenues.
Non-Segmented Other Revenues. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the six month periods ended June 30, 2019 and 2018 (as adjusted), our non-segmented other revenues were approximately $5.8 million.
49
163,128
30,923
23.4
812
(208
(20.4
30,715
23.1
575
4.4
5,145
28.1
836
908
4.3
(386
56.1
37,793
18.8
Total Gross Profit. Our total gross profit was $238.5 million for the six month period ended June 30, 2019 compared to $200.7 million for the same six month period in 2018, an increase of $37.8 million, or 18.8%. Total gross profit margin for the six month period ended June 30, 2019 was approximately 36.8%, an increase of 1.6% from the 35.2% gross profit margin for the same six month period in 2018. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below:
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the six month period ended June 30, 2019 increased $30.7 million, or 23.1%, to $163.9 million from $133.2 million in the same six month period in 2018. Total gross profit margin from equipment rentals for the six month period ended June 30, 2019 was approximately 44.5% compared to 44.0% for the same period in 2018, an increase of 0.5%.
Rentals: Rental revenues gross profit increased $30.9 million, or 23.4%, to $163.1 million for the six month period ended June 30, 2019 compared to $132.2 million for the same three month period in 2018. The gross profit increase was the result of a $60.3 million increase in equipment rental revenues for the six month period ended June 30, 2019 compared to the same period last year, which was partially offset by a $20.9 million increase in rental equipment depreciation expense and an $8.4 million increase in rental expenses. The increases in both depreciation expense and rental expenses are primarily due to a larger fleet size in 2019 compared to 2018.
Gross profit margin on equipment rentals for the six month period ended June 30, 2019 was approximately 48.9% compared to 48.4% for the same period in 2018, an increase of 0.5%. Depreciation expense was 35.6% of equipment rental revenues for the six month period ended June 30, 2019 compared to 35.7% for the same period in 2018, a decrease of approximately 0.1%. As a percentage of revenues, rental expenses were 15.5% for the six month period ended June 30, 2019 compared to 15.9% for the same period last year, a decrease of approximately 0.4%, resulting primarily from the increase in rental revenues.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues gross profit for the six month period ended June 30, 2019 was $0.8 million compared to $1.0 million, as adjusted, for the same period in 2018, a decrease of $0.2 million. Gross profit margin was 2.3% for the six month period ended June 30, 2019 compared to 3.4%, as adjusted, for the same period last year, a decrease of 1.1%.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the six month period ended June 30, 2019 increased $0.6 million, or 4.4%, to $13.5 million compared to approximately $13.0 million for the same six month period in 2018 on a total new equipment sales decrease of $2.3 million. Gross profit margin on new equipment sales was 12.0% for the six month period ended June 30, 2019, compared to 11.3% for the same period last year, an increase of 0.7%. The increase in gross profit margin was primarily due to the mix of new equipment sold combined with higher gross margins on new crane sales and new earthmoving equipment sales.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the six month period ended June 30, 2019 increased $5.1 million, or 28.1%, to $23.4 million from $18.3 million in the same period in 2018 on a used equipment sales increase of $8.8 million.
Gross profit margin on used equipment sales for the six month period ended June 30, 2019 was approximately 35.6%, up 3.5% from 32.1% for the same six month period in 2018, primarily as a result of the mix of used equipment sold and higher used earthmoving equipment and used crane sales gross margins. Our used equipment sales from the rental fleet, which comprised 93.8% and 91.5% of our used equipment sales for the six month periods ended June 30, 2019 and 2018, respectively, were approximately 160.5% and 152.7% of net book value for the six month periods ended June 30, 2019 and 2018, respectively.
Parts Sales Gross Profit. Our parts sales gross profit for the six month period ended June 30, 2019 was $16.7 million, an increase of $0.8 million, or 5.3%, from gross profit of $15.9 million for the same period last year on a parts sales increase of $3.9 million. Gross profit margin for the six month period ended June 30, 2019 was 26.8% compared to 27.2% for the same period in 2018, a decrease of 0.4%, resulting from the mix of parts sold.
Services Revenues Gross Profit. For the six month period ended June 30, 2019, our services revenues gross profit increased $0.9 million, or 4.3%, to $21.9 million from $21.0 million for the same six month period in 2018 on a $0.5 million increase in services revenues. Gross profit margin for the six month period ended June 30, 2019 was 67.9%, an increase of 1.8% from approximately 66.1% in the same six month period in 2018, as a result of services revenues mix.
Non-Segmented Other Revenues Gross Loss. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the six month period ended June 30, 2019, our other revenues gross loss was $1.0 million compared to a gross loss of $0.7 million, as adjusted, in the same period in 2018.
Selling, General and Administrative Expenses (“SG&A”). SG&A expenses increased $21.6 million, or 16.0%, to $156.5 million for the six month period ended June 30, 2019 compared to $134.9 million for the six month period ended June 30, 2018.
Employee salaries, wages, payroll taxes and related employee benefit and other employee related expenses increased $12.7 million, primarily as a result of our acquisition since June 30, 2018, and a larger workforce and higher incentive compensation related to improved profitability. Legal and professional fees increased $1.1 million. Facility rent expenses and repairs and maintenance costs increased $3.3 million and supplies costs increased $1.0 million. Liability insurance costs increased $0.9 million. Depreciation and amortization increased $1.2 million. Promotional expenses increased $0.8 million and bad debt expense increased $0.8 million. Approximately $1.8 million of the total increase in SG&A expenses was attributable to branches opened since January 1, 2018 (but excluding for this purpose branches acquired as a result of our CEC, Rental Inc. and WRI acquisitions) with less than six months of comparable operations in either or both of the six month periods ended June 30, 2019 and 2018. SG&A expenses as a percentage of total revenues for the six month periods ended June 30, 2019 and 2018 were 24.2% and 23.6%, respectively.
Merger Costs. Merger costs incurred in the six month period ended June 30, 2019 were approximately $0.3 million compared to $0.2 million in the same six month period in 2018.
Other Income (Expense). For the six month period ended June 30, 2019, our net other expenses increased approximately $3.6 million to $33.1 million compared to $29.5 million for the same six month period in 2018, primarily as a result of higher interest expense. Interest expense increased approximately $3.8 million to $34.1 million for the six month period ended June 30, 2019 compared to $30.3 million for the same period last year. The increase in interest expense was due primarily to an increase in our average borrowings under the Credit Facility for the six month period ended June 30, 2019 compared to the same period last year, combined with higher interest rates in the current year period.
Income Taxes. We recorded income tax expense of 13.4 million for the six month period ended June 30, 2019 compared to income tax expense of $10.7 million for the six month period ended June 30, 2018. Our effective income tax rate for the six month period ended June 30, 2019 was 26.6% compared to 26.1% for the same period in 2018. The increase in our effective tax rate is primarily due to the net change in permanent differences in relation to profit before tax. Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2019 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.
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Liquidity and Capital Resources
Cash flow from operating activities. For the six month period ended June 30, 2019, the net cash provided by our operating activities was approximately $135.0 million. Our reported net income of $36.9 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of $164.2 million. These cash flows from operating activities were also positively impacted by a $16.6 million increase in accounts payable, a $6.9 million increase in accrued expense payable and other liabilities, a $4.8 million decrease in accounts receivable and a $1.4 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $56.0 million increase in inventories, and a $3.0 million increase in prepaid expenses and other assets.
For the six month period ended June 30, 2018, the cash provided by our operating activities was $105.4 million. Our reported net income of $30.2 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of $133.9 million. These cash flows from operating activities were also positively impacted by a $59.7 million increase in accounts payable, a $9.1 million decrease in receivables and a $6.8 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $103.6 million increase in inventories, a $0.4 million decrease in accrued expenses payable and other liabilities and a $0.1 million increase in prepaid expenses and other assets.
Cash flow from investing activities. For the six month period ended June 30, 2019, our net cash provided by our investing activities was exceeded by our cash used in our investing activities, resulting in net cash used in our investing activities of approximately $236.1 million. The acquisition of WRI totaled $106.7 million (net of cash acquired). Purchases of rental and non-rental equipment were $193.2 million and proceeds from the sale of rental and non-rental equipment were $63.8 million.
For the six month period ended June 30, 2018, our cash provided by our investing activities was exceeded by our cash used in our investing activities, resulting in net cash used in our investing activities of approximately $374.6 million. The acquisitions of CEC and Rental Inc. totaled $196.0 (net of cash acquired). Purchases of rental and non-rental equipment totaled $237.4 million and proceeds from the sale of rental and non-rental equipment were $58.9 million.
Cash flow from financing activities. For the six month period ended June 30, 2019, net cash provided by our financing activities was $91.2 million. Net borrowings under our Credit Facility for the three month period ended June 30, 2019 were $111.9 million, which was partially offset by dividends paid totaling $19.7 million, or $0.55 per common share. Payments of deferred financing costs were $0.6 million. Treasury stock purchases totaled $0.4 million and finance lease principal payments were $0.1 million.
For the six month period ended June 30, 2018, cash provided by our financing activities was $112.8 million. Net borrowings under our Credit Facility for the six month period ended June 30, 2018 were $132.7 million, which was partially offset by dividends paid totaling $19.6 million, or $0.55 per common share. Payments on capital lease obligations were $0.1 million and payments of deferred financing costs were $0.1 million.
Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC as administrative agent, and the lenders named therein.
The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the Credit Facility from May 21, 2019 to December 22, 2022, (ii) increases the commitments under the senior secured asset based revolver provided for therein from $602.5 million to $750 million, (iii) increases the uncommitted incremental revolving capacity from $150 million to $250 million, (iv) provides that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage (as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowers the interest rate (a) in the case of base rate revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended
52
and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowers the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and (vii) permits, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).
At June 30, 2019, we had total borrowings under the Credit Facility of $282.7 million and we could borrow up to $459.5 million and remain in compliance with the debt covenants under the Credit Facility. At July 18, 2019, we had $471.3 million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the sales of new, used and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the above described uses will be the principal demands on our cash in the future.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the six month period ended June 30, 2019 were approximately $208.3 million, including $33.6 million of non-cash transfers from new and used equipment to rental fleet inventory. Our gross property and equipment capital expenditures for the six month period ended June 30, 2019 were $18.6 million. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our actual performance.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the Credit Facility, the Senior Notes and our other indebtedness), will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. As of July 18, 2019, we had $471.3 million of available borrowings under the Credit Facility, net of $7.7 million of outstanding letters of credit.
We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. Given current economic and market conditions, including the significant disruptions in the global capital markets, we cannot assure investors that any of these actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Credit Facility and the indenture governing the Senior Notes, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
53
Quarterly Dividend
On May 10, 2019, the Company announced a quarterly dividend of $0.275 per share to stockholders of record, which was paid on June 14, 2019, totaling approximately $9.8 million. The Company intends to continue to pay regular quarterly cash dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other things, business and market conditions.
Seasonality
Although we believe our business is not materially impacted by seasonality, the demand for our rental equipment tends to be lower in the winter months. The level of equipment rental activities is directly related to commercial and industrial construction and maintenance activities. Therefore, equipment rental performance will be correlated to the levels of current construction activities. The severity of weather conditions can have a temporary impact on the level of construction activities. Adverse weather has a seasonal impact in parts of the markets we serve, including our Intermountain region, particularly in the winter months.
Equipment sales cycles are also subject to some seasonality with the peak selling period during the spring season and extending through the summer. Parts and services activities are typically less affected by changes in demand caused by seasonality.
Contractual and Commercial Commitments
There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
Our earnings may be affected by changes in interest rates since interest expense on the Credit Facility is currently calculated based upon the index rate plus an applicable margin of 0.25% to 0.75%, depending on the Average Availability (as defined in the Credit Facility), in the case of index rate revolving loans and LIBOR plus an applicable margin of 1.25% to 1.75%, depending on the Average Availability (as defined in the Credit Facility), in the case of LIBOR revolving loans. At June 30, 2019, we had outstanding borrowings under the Credit Facility totaling $459.5 million. A 1.0% increase in the interest rate on the Credit Facility would result in an increase of approximately $4.6 million in interest expense on an annualized basis. At July 18, 2019, we had borrowings outstanding totaling approximately $270.9 million, with $471.3 million of available borrowings, net of $7.7 million of outstanding letters of credit. We did not have significant exposure to changing interest rates as of June 30, 2019 on the fixed-rate senior unsecured notes. Historically, we have not engaged in derivatives or other financial instruments for trading, speculative or hedging purposes, though we may do so from time to time if such instruments are available to us on acceptable terms and prevailing market conditions are accommodating.
Management’s Quarterly Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2019, our current disclosure controls and procedures were effective.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the three month period ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings.
From time to time, we are involved in various claims and legal actions arising in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to the Company’s risk factors previously disclosed on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H&E EQUIPMENT SERVICES, INC.
Dated: July 25, 2019
By:
/s/ Bradley W. Barber
Bradley W. Barber
Chief Executive Officer & President
(Principal Executive Officer)
/s/ Leslie S. Magee
Leslie S. Magee
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)