UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in Its Charter)
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Registrant’s Telephone Number, Including Area Code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
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.
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).
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.
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Accelerated Filer |
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Non-Accelerated Filer |
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Smaller Reporting Company |
Emerging Growth Company |
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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 23, 2024, there were
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
June 30, 2024
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:
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.
3
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, 2023, 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.
4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
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Balances at |
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June 30, |
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December 31, |
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2024 |
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2023 |
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(Unaudited) |
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ASSETS |
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Cash |
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$ |
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$ |
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Receivables, net of allowance for doubtful accounts of $ |
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Inventories, net of reserves for obsolescence of $ |
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Prepaid expenses and other assets |
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Rental equipment, net of accumulated depreciation of $ |
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Property and equipment, net of accumulated depreciation and amortization of $ |
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Operating lease right-of-use assets, net of accumulated amortization of $ |
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Finance lease right-of-use assets, net of accumulated amortization of $ |
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Deferred financing costs, net of accumulated amortization of $ |
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Intangible assets, net of accumulated amortization of $ |
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Goodwill |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities: |
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Senior secured credit facility |
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$ |
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$ |
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Accounts payable |
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Manufacturer flooring plans payable |
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Accrued expenses payable and other liabilities |
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Dividends payable |
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Senior unsecured notes, net of unaccreted discount of $ |
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Operating lease liabilities |
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Finance lease liabilities |
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Deferred income taxes |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock at cost, |
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( |
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Retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues: |
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Equipment rentals |
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$ |
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$ |
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$ |
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$ |
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Sales of rental equipment |
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Sales of new equipment |
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Parts, service and other |
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Total revenues |
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Cost of revenues: |
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Rental depreciation |
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Rental expense |
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Rental other |
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Sales of rental equipment |
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Sales of new equipment |
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Parts, service and other |
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Total cost of revenues |
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Gross profit |
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Selling, general and administrative expenses |
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Gain on sales of property and equipment, net |
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Income from operations |
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Other income (expense): |
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Interest expense |
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( |
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( |
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( |
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( |
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Other, net |
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Total other expense, net |
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( |
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( |
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( |
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( |
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Income from operations before provision for income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
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Six Months Ended |
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June 30, |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of property and equipment |
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Depreciation of rental equipment |
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Amortization of finance lease right-of-use assets |
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Amortization of intangible assets |
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Amortization of deferred financing costs |
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Accretion of note discount, net of premium amortization |
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Non-cash operating lease expense |
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Provision for losses on accounts receivable |
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Provision for inventory obsolescence |
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Change in deferred income taxes |
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Stock-based compensation expense |
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Gain from sales of property and equipment, net |
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( |
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( |
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Gain from sales of rental equipment, net |
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( |
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( |
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Changes in operating assets and liabilities: |
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Receivables |
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( |
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Inventories |
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( |
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Prepaid expenses and other assets |
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( |
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( |
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Accounts payable |
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( |
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Manufacturer flooring plans payable |
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( |
) |
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Accrued expenses payable and other liabilities |
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( |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Acquisition of businesses |
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( |
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Purchases of property and equipment |
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( |
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( |
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Purchases of rental equipment |
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( |
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( |
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Proceeds from sales of property and equipment |
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Proceeds from sales of rental equipment |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Borrowings on senior secured credit facility |
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Payments on senior secured credit facility |
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( |
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( |
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Dividends paid |
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( |
) |
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( |
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Purchases of treasury stock |
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( |
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( |
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Payments of deferred financing costs |
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( |
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Payments of finance lease obligations |
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( |
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( |
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Net cash provided by financing activities |
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Net increase (decrease) in cash |
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( |
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Cash, beginning of period |
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Cash, end of period |
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$ |
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$ |
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7
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Amounts in thousands)
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Six Months Ended |
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June 30, |
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2024 |
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2023 |
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Supplemental schedule of non-cash investing and financing activities: |
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Non-cash asset purchases: |
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Rental fleet in accounts payable and accrued expenses |
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$ |
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$ |
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Assets transferred from inventory to rental fleet |
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$ |
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$ |
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Purchases of property and equipment included in accrued expenses |
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$ |
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$ |
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Operating lease assets obtained in exchange for new |
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$ |
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$ |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
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$ |
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Income taxes paid (net of refunds received) |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
8
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, H&E Equipment Services (Midwest), Inc. and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we”, “us”, “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 months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, 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, 2023, from which the consolidated balance sheet amounts as of December 31, 2023 were derived. All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements.
The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.
Nature of Operations
Founded in 1961, H&E Equipment Services, Inc. is one of the largest rental equipment companies in the nation, serving customers at our
(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, 2023. During the three and six months ended June 30, 2024, there were no significant changes to those accounting policies.
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.
Reclassifications
Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of income to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.
Revenue Recognition
We recognize revenue in accordance with two different Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) standards: 1) Topic 606 and 2) Topic 842.
9
Under Topic 606, Revenue from Contracts with Customers, revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue 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. Our contracts 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.
Under Topic 842, Leases, we account for equipment 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.
In the table below, revenues as presented in our condensed consolidated statements of income for the three and six months ended June 30, 2024 and 2023 are summarized by type and by the applicable accounting standard.
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Three Months Ended June 30, |
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2024 |
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2023 |
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Topic 842 |
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Topic 606 |
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Total |
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Topic 842 |
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Topic 606 |
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Total |
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Revenues: |
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Rental revenues |
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Owned equipment rentals |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Re-rent revenue |
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— |
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— |
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Ancillary and other rental revenues: |
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Delivery and pick-up |
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— |
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— |
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Other |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total ancillary rental revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total equipment rental revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Sales of rental equipment |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Sales of new equipment |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Parts, service and other |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
|
Topic 842 |
|
|
Topic 606 |
|
|
Total |
|
|
Topic 842 |
|
|
Topic 606 |
|
|
Total |
|
||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Rental revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Owned equipment rentals |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Re-rent revenue |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Ancillary and other rental revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Delivery and pick-up |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total ancillary rental revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total equipment rental revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Sales of rental equipment |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Sales of new equipment |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Parts, service and other |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Revenues by reporting segment are presented in Note 11 of our condensed consolidated financial statements. 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. For further information related to our accounting for revenues pursuant to Topic 606 and Topic 842, see Significant Accounting Policies in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2023.
10
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.
Pursuant to Topic 842 and Topic 326 for rental and non-rental receivables, respectively, we maintain an allowance for doubtful accounts that reflects our estimate of our expected credit losses. Our allowance is estimated using a loss rate model based on delinquency. The estimated loss rate is based on our historical experience with specific customers, our understanding of our current economic circumstances, reasonable and supportable forecasts, and our own judgment as to the likelihood of ultimate payment based upon available data. Our largest exposure to doubtful accounts is our rental operations, which as discussed above is accounted for under Topic 842. For the six months ended June 30, 2024, revenue under ASC 842 represents
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 months ended June 30, 2024 and 2023 that were included in the contract liability balance as of the beginning of such periods.
Goodwill
Goodwill is recorded as the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.
|
|
Equipment Rentals |
|
|
Sales of Rental Eq. |
|
|
Parts Sales |
|
|
Total |
|
||||
Balance at December 31, 2022 (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Increase (2) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Decrease (3) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Decrease (4) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Increase (5) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at December 31, 2023 (1) |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Increase (6) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Decrease (7) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Increase (8) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Increase (9) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at June 30, 2024 (1) |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
11
Rental Equipment
The rental equipment we purchase is recorded in rental equipment on the condensed consolidated balance sheets and is stated at cost. Due to the Company’s shift to operate as a pure-play rental company, as of the quarter ended June 30, 2024 purchases of equipment are now disaggregated between inventory and rental equipment according to classification at the time of purchase as opposed to considering all generally available for sale. Purchases of equipment designated for fleet are now recorded as rental equipment while equipment designated for sale is recorded as inventory. Rental equipment is depreciated over the estimated useful life of the equipment upon placed in service using the straight-line method and is included in rental depreciation within our condensed consolidated statements of income. Estimated useful lives vary based upon type of equipment. Generally, we depreciate aerial work platforms over a
Ordinary repair and maintenance costs and property taxes are reflected in rental expenses in cost of revenues on the condensed consolidated statements of income. However, expenditures for additions or improvements that significantly extend the useful life of the asset are capitalized in the period incurred. When rental equipment is sold or disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gains or losses are included in gross profit in the condensed consolidated statements of income. We receive individual offers for fleet on a continual basis, at which time we perform an analysis on whether or not to accept the offer. The rental equipment is not transferred to inventory under the held for sale model as the equipment is used to generate revenues until the equipment is sold.
Recent Accounting Pronouncements
Pronouncements Not Yet Adopted
Segment Reporting
In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves the disclosures about a public entity’s reportable segments and addresses requests for additional, more detailed information about a reportable segment’s expenses. The amendments in this ASU require disclosure of incremental segment information on an annual and interim basis for all public entities. The amendments are effective for our Annual Report on Form 10-K for fiscal years beginning after December 15, 2023, and for the interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. became
Income Taxes
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which should improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The ASU requires that public entities on an annual basis disclose specific categories in the rate reconciliation, provide additional information for reconciling items that meet a quantitative threshold and the following information about income taxes paid: the amount of income taxes paid disaggregated by federal (national), state, and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions. Lastly, the amendments in this ASU require that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. ASU 2023-09 becomes effective January 1, 2025 and is not expected to have an impact on our financial statements, but will result in expanded tax disclosures.
(3) Acquisitions and Dispositions
2024 Acquisitions
Lewistown Rentals
Effective
12
The aggregate cash consideration paid was approximately $
|
|
$’s in thousands |
|
|
Accounts receivable |
|
$ |
|
|
Prepaid expenses and other assets |
|
|
|
|
Rental equipment |
|
|
|
|
Property and equipment |
|
|
|
|
Customer relationships intangible asset (1) |
|
|
|
|
Total identifiable assets acquired |
|
|
|
|
Accounts payable |
|
|
( |
) |
Accrued expenses payable and other liabilities |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Net identifiable assets acquired |
|
|
|
|
Goodwill (2) |
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
|
Fair Value |
|
|
Life (years) |
|
||
Customer relationships |
|
$ |
|
|
|
|
||
The level of goodwill that resulted from the Lewistown acquisition is primarily reflective of Lewistown’s going-concern value, the value of 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
Acquisition costs for three and six months ended June 30, 2024 were $
The assets and liabilities were recorded as of May 1, 2024 and the results of operations are included in the Company's consolidated results as of that date.
Precision Rentals
Effective
The aggregate cumulative cash consideration paid was approximately $
13
|
|
$’s in thousands |
|
|
Accounts receivable |
|
$ |
|
|
Prepaid expenses and other assets |
|
|
|
|
Rental equipment |
|
|
|
|
Property and equipment |
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
Customer relationships intangible asset (1) |
|
|
|
|
Total identifiable assets acquired |
|
|
|
|
Accounts payable |
|
|
( |
) |
Accrued expenses payable and other liabilities |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Net identifiable assets acquired |
|
|
|
|
Goodwill (2) |
|
|
|
|
Net assets acquired |
|
|
|
|
Noncompetition agreement intangible asset (1)(3) |
|
|
|
|
Total cumulative consideration |
|
$ |
|
|
|
|
Fair Value |
|
|
Life (years) |
|
||
Customer relationships |
|
$ |
|
|
|
|
||
Noncompetition agreements |
|
|
|
|
|
|
||
|
|
$ |
|
|
|
|
||
The level of goodwill that resulted from the Precision acquisition is primarily reflective of Precision’s going-concern value, the value of 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
Acquisition costs for three and six months ended June 30, 2024 were $
The assets and liabilities were recorded as of January 1, 2024 and the results of operations are included in the Company's consolidated results as of that date.
2023 Acquisition
Giffin Equipment
Effective
The aggregate cash consideration paid was approximately $
14
|
|
$’s in thousands |
|
|
Accounts receivable |
|
$ |
|
|
Prepaid expenses and other assets |
|
|
|
|
Rental equipment |
|
|
|
|
Property and equipment |
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
Intangible assets (1) |
|
|
|
|
Total identifiable assets acquired |
|
|
|
|
Accrued expenses payable and other liabilities |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Net identifiable assets acquired |
|
|
|
|
Goodwill (2) |
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
|
Fair Value |
|
|
Life (years) |
|
||
Customer relationships |
|
$ |
|
|
|
|
||
Noncompetition agreements |
|
|
|
|
|
|
||
|
|
$ |
|
|
|
|
||
The level of goodwill that resulted from the Giffin acquisition is primarily reflective of Giffin’s going-concern value, the value of 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
Acquisition costs for the six months ended June 30, 2024 were $
The assets and liabilities were recorded as of November 1, 2023 and the results of operations are included in the Company's consolidated results as of that date.
2022 Acquisition
One Source Equipment Rentals, Inc.
Effective
The aggregate cash consideration paid was approximately $
15
|
|
$'s in thousands |
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventory |
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
Rental equipment |
|
|
|
|
Property and equipment |
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
Intangible assets (1) |
|
|
|
|
Total identifiable assets acquired |
|
|
|
|
Accounts payable |
|
|
( |
) |
Tax payable |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
Deferred income taxes |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Net identifiable assets acquired |
|
|
|
|
Goodwill (2) |
|
|
|
|
Net assets acquired |
|
$ |
|
|
|
|
Fair Value |
|
|
Life (years) |
|
||
Customer relationships |
|
$ |
|
|
|
|
||
Noncompetition agreements |
|
|
|
|
|
|
||
|
|
$ |
|
|
|
|
||
Included in the total goodwill amount of $
Total acquisition costs were $
The assets and liabilities were recorded as of October 1, 2022 and the results of operations are included in the Company's consolidated results as of that date.
Pro forma financial information (unaudited)
We completed the Giffin acquisition effective November 1, 2023, the Precision acquisition effective January 1, 2024 and the Lewistown acquisition effective May 1, 2024; therefore, our reported condensed consolidated statements of income for the quarter ended June 30, 2023 does not include Giffin, Precision or Lewistown and the three and six months ended June 30, 2024 does not include Lewistown for the entire period.
The unaudited pro forma information in the table below (amounts in thousands) is for informational purposes only and gives effect to the Giffin, Precision and Lewistown acquisitions had all been completed on January 1, 2023 (the “pro forma acquisition date”). The unaudited pro forma information is not necessarily indicative of our results of operations had the acquisition been completed on the pro forma acquisition date, nor is it necessarily indicative of our future results. The unaudited pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition, nor does it reflect additional revenue opportunities following the acquisition. The unaudited pro forma financial information includes adjustments primarily related to the incremental depreciation and amortization expense of the rental equipment and intangible assets acquired, the elimination of interest expense related to historical debt as well as other expenses that are not part of the combined entity and transaction expenses.
16
|
|
Pro Forma (unaudited) |
|
|||||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(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, Senior Secured Credit Facility (the “Credit Facility”), accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature, maturity or market interest rate of these financial instruments. The Company’s outstanding obligations on its Credit Facility are deemed to be at fair value as the interest rates are variable and consistent with prevailing rates, which are considered Level 2 inputs.
|
|
June 30, 2024 |
|
|||||
|
|
Carrying |
|
|
Fair |
|
||
Manufacturer flooring plans payable with interest computed at |
|
$ |
|
|
$ |
|
||
Senior Unsecured Notes due |
|
|
|
|
|
|
||
|
|
December 31, 2023 |
|
|||||
|
|
Carrying |
|
|
Fair |
|
||
Manufacturer flooring plans payable with interest computed at |
|
$ |
|
|
$ |
|
||
Senior Unsecured Notes due |
|
|
|
|
|
|
||
At June 30, 2024 and December 31, 2023, the fair value of our senior unsecured notes due
During the three and six months ended June 3
(5) Stockholders’ Equity
The following table summarizes the activity in Stockholders’ Equity for the three and six months ended June 30, 2024 and 2023, respectively (amounts in thousands, except share and per share data):
17
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
Total |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Paid-in |
|
|
Treasury |
|
|
Retained Earnings |
|
|
Stockholders’ |
|
||||||
Balances at December 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Cash dividends declared on common stock ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Repurchase of |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances at March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Cash dividends declared on common stock ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Restricted stock forfeitures |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances at June 30, 2024 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balances at December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Cash dividends declared on common stock ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Repurchase of |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances at March 31, 2023 |
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|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Cash dividends declared on common stock ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Restricted stock forfeitures |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances at June 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
(6) Stock-Based Compensation
Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, net of an estimated forfeiture rate, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The estimated forfeiture rate is based on historical experience and revised, if necessary, in subsequent periods for actual forfeitures.
Our Amended and Restated 2016 Stock-Based Incentive Compensation Plan (the “2016 Plan”) is administered by the Compensation Committee of our Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions, performance measures, if any, and other provisions of the award. Under the 2016 Plan, we may offer deferred shares or restricted shares of our common stock and grant options, including both incentive stock options and nonqualified stock options, to purchase shares of our common stock. Shares available for future stock-based payment awards under our 2016 Plan were
Non-vested Stock
The following table summarizes our non-vested stock activity for the six months ended June 30, 2024:
|
|
Number of |
|
|
Weighted |
|
||
Non-vested stock at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested stock at June 30, 2024 |
|
|
|
|
$ |
|
||
As of June 30, 2024, we had unrecognized compensation expense of approximately $
18
expense related to non-vested stock, which is included in SG&A expenses in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2024 and 2023 (amounts in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(7) Income per Share
Income per common share for the three and six months ended June 30, 2024 and 2023 is based on the weighted average number of common shares outstanding during the period. 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.
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 less than
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
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|
|
|
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|
||||
Weighted average number of common shares outstanding: |
|
|
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|
|
|
|
|
|
|
|
|
||||
Basic |
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|
||||
Effect of dilutive non-vested restricted stock |
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|
||||
Diluted |
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||||
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|
||||
Income per share: |
|
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|
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|
|
|
||||
Basic net income per share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted net income per share |
|
$ |
|
|
$ |
|
|
$ |
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|
$ |
|
||||
|
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|
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|
||||
Common shares excluded from the denominator as anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-vested restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
Dividends declared per common share outstanding |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(8) Senior Secured Credit Facility
We and our subsidiaries are parties to a $
At June 30, 2024, we had $
19
The aggregate amounts outstanding as of June 30, 2024 under both the Credit Facility and our Senior Secured Notes (Note 9) of $
(9) Senior Unsecured Notes
On December 14, 2020, we completed the offering of our $
The following table reconciles our Senior Unsecured Notes to our condensed consolidated balance sheets (amounts in thousands):
Balance at December 31, 2022 |
|
$ |
|
|
Accretion of discount through December 31, 2023 |
|
|
|
|
Amortization of deferred financing costs through December 31, 2023 |
|
|
|
|
Balance at December 31, 2023 |
|
$ |
|
|
Accretion of discount through June 30, 2024 |
|
|
|
|
Amortization of deferred financing costs through June 30, 2024 |
|
|
|
|
Balance at June 30, 2024 |
|
$ |
|
(10) Leases
At June 30, 2024, the weighted average remaining lease term for operating leases was approximately
The future minimum lease payments of operating leases executed but not commenced as of June 30, 2024 are estimated to be $
(11) Segment Information
We have identified
We revised our reportable segments by aggregating parts sales and service revenues into
20
We do not compile discrete financial information by segments other than the information presented below.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Segment Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Sales of rental equipment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales of new equipment |
|
|
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|
||||
Parts, service and other |
|
|
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|
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|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Segment Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Sales of rental equipment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales of new equipment |
|
|
|
|
|
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|
|
|
|
||||
Parts, service and other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total gross profit |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Balances at |
|
|||||
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Segment identified assets: |
|
|
|
|
|
|
|
|
Equipment rentals |
|
$ |
|
|
$ |
|
||
Equipment sales |
|
|
|
|
|
|
||
Parts, service and other |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
The Company operates primarily in the United States. Our sales to international customers for both the three months ended June 30, 2024 and 2023 and for both the six months ended June 30, 2024 and 2023 were
21
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, 2024, and its results of operations for the three and six months ended June 30, 2024, 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, 2023. 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, 2023.
Overview
Background
Founded in 1961 through our predecessor companies, we have been in the equipment services business for approximately 63 years and are one of the largest rental equipment companies in the nation. H&E Equipment Services L.L.C. (“ H&E L.L.C.”) was formed in June 2002 through the business combination of Head & Engquist, a wholly-owned subsidiary of Gulf Wide Industries, L.L.C., and ICM Equipment Company L.L.C. In connection with our initial public offering in February 2006, we converted H&E L.L.C. into H&E Equipment Services, Inc., a Delaware corporation.
H&E serves a diverse set of end markets in many high-growth geographies including branches throughout the Pacific Northwest, West Coast, Intermountain, Southwest, Gulf Coast, Southeast, Midwest and Mid-Atlantic regions. As of June 30, 2024, we operated 149 branch locations across 31 states throughout the United States.
While focusing primarily on equipment rentals, we additionally engage in sales of rental equipment, sales of new equipment, parts sales and repair and maintenance services. The Company’s construction rental fleet is among the industry’s youngest with an equipment mix comprised of aerial work platforms, earthmoving, material handling, and other general and specialty lines. We are confident our operating experience and extensive infrastructure developed throughout our history as an integrated equipment services company qualified us to successfully transition to a pure-play rental company. This experience and infrastructure continues to provide us with a competitive advantage enabling us to broaden our industry expansion. Our workforce includes an outside and inside sales force for our rental operations and equipment sales, highly skilled service technicians, transportation drivers and regional and district managers. Our management, from the corporate level down to the branch store level, has extensive industry experience. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our sales force and strengthen our customer relationships. In addition, we operate our day-to-day business on a branch basis, which allows us to more closely service our customers, fosters management accountability at local levels and strengthens our local and regional relationships.
Effective November 1, 2023, the Company completed the acquisition of Giffin Equipment (“Giffin”), a privately-held equipment rentals company with three branch locations in California.
Effective January 1, 2024, the Company completed the acquisition of Precision Rentals (“Precision”), a privately-held equipment rentals company with a branch location in each of Arizona and Colorado.
Effective May 1, 2024, the Company completed the acquisition of Lewistown Rentals (“Lewistown”), a privately-held equipment rentals company with four branch locations in Montana.
Critical Accounting Policies
Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2023, presents the accounting 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 estimates during the three and six months ended June 30, 2024. Our critical accounting estimates include, among others, useful lives of rental equipment and property and equipment, acquisition accounting, goodwill, and income taxes.
Information regarding our other significant accounting estimates 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, 2023 and in Note 2 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
22
Business Segments
We have four reportable segments because we derive our revenues from four business activities: (1) equipment rentals; (2) sales of rental equipment; (3) sales of new equipment; (4) parts, service and other revenues. Our primary segment is equipment rentals. These segments are based upon how we allocate resources and assess performance. We revised our reportable segments by aggregating parts sales and service revenues into one segment during the quarter ended June 30, 2024 due to revised internal reporting provided to our Chief Operating Decision Maker. 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 our total revenues from our four business activities and our other equipment support activities. Equipment rentals accounts for the majority of our total revenues. For the six months ended June 30, 2024, of our total revenues, approximately 81.0% were attributable to equipment rentals, 11.0% were attributable to sales of rental equipment, 3.0% were attributable to sales of new equipment, 5.0% were attributable to parts, service and other revenues.
The equipment that we rent, sell 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, and 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 used and new equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions, supply chain disruptions, the price of oil and other commodities and general economic conditions.
Equipment Rentals. Our rental operation primarily represents revenues from renting owned equipment of our core types of construction and industrial equipment (aerial work platforms, earthmoving equipment, material handling equipment and other general and specialty lines). We primarily 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. We have a well-maintained rental fleet and we actively manage the size, quality, age and composition of our rental fleet.
Sales of Rental Equipment. We generate the majority of our rental equipment sales revenues by selling equipment from our rental fleet.
Sales of New Equipment. Our sales of new equipment operation sells equipment across all of our core categories of equipment.
Parts, Service and Other. We primarily generate revenues from the sale of parts for equipment that we rent or sell. We primarily derive our services revenues from maintenance and repair services for equipment that we rent or sell and from customers' owned equipment. Our other revenues relate primarily to ancillary charges associated with equipment maintenance and repair services.
23
Principal Costs and Expenses
Our largest expenses are rental expenses, rental depreciation, rental other expenses, the costs associated with the rental equipment we sell, the costs to purchase new equipment and costs associated with parts sales and services, all of which are included in cost of revenues. For the six months ended June 30, 2024, our total cost of revenues was $411.5 million. Our operating expenses consist principally of selling, general and administrative expenses (“SG&A”). For the six months ended June 30, 2024, our SG&A expenses were $226.1 million. In addition, we have interest expense primarily related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our Condensed 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 potential 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 aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and material handling equipment 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 repairing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of owning rental equipment.
Rental Other. Rental other expenses consist primarily of equipment support activities that we provide our customers in connection with renting equipment, such as hauling services, damage waiver policies, environmental fees and other recovery fees.
Sales of Rental Equipment. Cost of rental equipment sold primarily consists of the net book value of rental equipment sold from our rental fleet.
Sales of New Equipment. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold.
Parts, Service and Other. Cost of parts sales represents costs attributable to the sale of parts used in the maintenance and repair of equipment on-rent by customers and directly to customers for their owned equipment. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of equipment on-rent by customers and of customer-owned equipment. Our other expenses include costs associated with ancillary charges associated with equipment maintenance and repair services.
Selling, General and Administrative Expenses
Our SG&A expenses include sales and marketing expenses, payroll and related benefit costs, including stock compensation expense, insurance expenses, professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, acquisition costs, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with intangible assets. 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 $750.0 million senior secured credit facility (the “Credit Facility”), our $1.25 billion, 3.875% senior unsecured notes due 2028 (the “Senior Unsecured Notes”) and finance lease obligations. 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 and available borrowings under the Credit Facility as the primary sources of funds to purchase new equipment and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital Resources” below). The management of our working capital is closely tied to operating cash flows, as working capital can be impacted by, among other things, our accounts receivable activities, the level of equipment inventory, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.
24
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, 2024 was $1.9 billion, or approximately 67.0% of our total assets. Our rental fleet as of June 30, 2024 consisted of 61,543 units having an original acquisition cost (which we define as the cost originally paid to manufacturers) of $2.9 billion. As of June 30, 2024, our rental fleet composition was as follows (dollars in millions):
|
|
Units |
|
|
% of |
|
|
Original |
|
|
% of |
|
|
Average |
|
|||||
Aerial Work Platforms |
|
|
28,130 |
|
|
|
45.7 |
% |
|
$ |
957.7 |
|
|
|
33.2 |
% |
|
|
52.0 |
|
Earthmoving |
|
|
8,494 |
|
|
|
13.8 |
% |
|
|
738.7 |
|
|
|
25.6 |
% |
|
|
27.4 |
|
Material Handling Equipment |
|
|
10,466 |
|
|
|
17.0 |
% |
|
|
856.3 |
|
|
|
29.6 |
% |
|
|
40.8 |
|
Other |
|
|
14,453 |
|
|
|
23.5 |
% |
|
|
335.5 |
|
|
|
11.6 |
% |
|
|
23.5 |
|
Total |
|
|
61,543 |
|
|
|
100.0 |
% |
|
$ |
2,888.2 |
|
|
|
100.0 |
% |
|
|
40.0 |
|
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 as part of our fleet management strategy. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of rental equipment, which are influenced by used equipment pricing at the retail and secondary auction market levels, the demand for our rental fleet, the availability of new equipment and the capital expenditures to acquire fleet. 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, our rental fleet is well-maintained.
The original acquisition cost of our gross rental fleet increased by approximately $97.3 million, or 3.5%, for the six months ended June 30, 2024. The average age of our rental fleet equipment increased by approximately 0.3 months for the six months ended June 30, 2024. Our average rental rates for the six months ended June 30, 2024 were approximately 2.4% higher than last year (see further discussion on rental rates in “Results of Operations” below).
The rental equipment mix among our core product lines for the six months ended June 30, 2024 was largely consistent with that of the prior year comparable period as a percentage of total units available for rent and 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, 2023.
25
Results of Operations
The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for the three and six months ended June 30, 2024 and 2023. The period-to-period comparisons of our financial results are not necessarily indicative of future results.
Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
Revenues.
|
|
Three Months Ended |
|
|
Total |
|
|
Total |
|
|||||||
|
|
June 30, |
|
|
Dollar |
|
|
Percentage |
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Increase |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rentals |
|
$ |
275,473 |
|
|
$ |
258,723 |
|
|
$ |
16,750 |
|
|
|
6.5 |
% |
Rentals other |
|
|
36,883 |
|
|
|
32,736 |
|
|
|
4,147 |
|
|
|
12.7 |
% |
Total equipment rentals |
|
|
312,356 |
|
|
|
291,459 |
|
|
|
20,897 |
|
|
|
7.2 |
% |
Sales of rental equipment |
|
|
34,937 |
|
|
|
39,653 |
|
|
|
(4,716 |
) |
|
|
(11.9 |
)% |
Sales of new equipment |
|
|
10,670 |
|
|
|
8,857 |
|
|
|
1,813 |
|
|
|
20.5 |
% |
Parts, service and other |
|
|
18,319 |
|
|
|
20,263 |
|
|
|
(1,944 |
) |
|
|
(9.6 |
)% |
Total revenues |
|
$ |
376,282 |
|
|
$ |
360,232 |
|
|
$ |
16,050 |
|
|
|
4.5 |
% |
Total Revenues. Our total revenues were $376.3 million for the three months ended June 30, 2024 compared to $360.2 million for the three months ended June 30, 2023, an increase of $16.1 million, or 4.5%. Revenues of our business activities are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the three months ended June 30, 2024 increased $20.9 million, or 7.2%, to $312.4 million from $291.5 million in the three months ended June 30, 2023. The increased equipment rental revenues was primarily due to our larger fleet as compared to the prior year. See Rentals and Rentals Other below for additional information.
Rentals: Rental revenues increased $16.8 million, or 6.5%, to $275.5 million for the three months ended June 30, 2024 compared to $258.7 million for the three months ended June 30, 2023. Rental revenues from aerial work platform equipment increased $7.4 million, other rentals increased $6.4 million and material handling equipment increased $3.7 million. Partially offsetting these increases, rental revenues from our earthmoving equipment decreased $3.0 million. Our average rental rates for the three months ended June 30, 2024 increased 1.9% compared to the same three months last year and decreased 0.1% from the three months ended March 31, 2024. Our average rental rates do not include the impact of acquisitions completed within the last twelve months. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three months ended June 30, 2024 was 38.6% compared to 40.6% in the three months ended June 30, 2023, a decrease of 2.0%. The decrease in comparative rental equipment dollar utilization was the net result of a decrease in rental equipment time utilization and an increase in equipment rental rates. Rental equipment time utilization as a percentage of original equipment cost was 66.4% for the three months ended June 30, 2024 compared to 69.3% in the three months ended June 30, 2023, a decrease of 2.9%. The decrease in rental equipment time utilization as a percentage of original equipment cost was largely reflective of the increase in fleet size.
26
Rentals Other: Our rentals other revenues consist 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 months ended June 30, 2024 were $36.9 million compared to $32.7 million for the three months ended June 30, 2023, an increase of approximately $4.1 million, or 12.7%. This increase was primarily related to increased rental revenues discussed above.
Sales of Rental Equipment Revenues. Our sales of rental equipment decreased $4.7 million, or 11.9%, to $34.9 million for the three months ended June 30, 2024, from $39.7 million for the same three months in 2023. This decrease is reflective of our ongoing fleet management strategy. Sales of earthmoving rental equipment decreased $9.4 million. Offsetting this decrease, sales of material handling rental equipment and aerial work platform rental equipment increased $2.3 million and $1.7 million, respectively.
Sales of New Equipment Revenues. Our sales of new equipment for the three months ended June 30, 2024 increased $1.8 million, or 20.5%, to $10.7 million from $8.9 million for the three months ended June 30, 2023. Sales of new aerial work platform equipment and material handling equipment increased $1.5 million and $1.3 million, respectively.
Parts, Service and Other Revenues. Our parts, service and other revenues for the three months ended June 30, 2024 decreased $1.9 million, or 9.6%, to $18.3 million from $20.3 million for the same three months last year.
Gross Profit.
|
|
Three Months Ended |
|
|
Total |
|
|
Total |
|
|||||||
|
|
June 30, |
|
|
Dollar |
|
|
Percentage |
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Increase |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rentals |
|
$ |
140,553 |
|
|
$ |
134,053 |
|
|
$ |
6,500 |
|
|
|
4.8 |
% |
Rentals other |
|
|
1,694 |
|
|
|
2,386 |
|
|
|
(692 |
) |
|
|
(29.0 |
)% |
Total equipment rentals |
|
|
142,247 |
|
|
|
136,439 |
|
|
|
5,808 |
|
|
|
4.3 |
% |
Sales of rental equipment |
|
|
21,817 |
|
|
|
23,438 |
|
|
|
(1,621 |
) |
|
|
(6.9 |
)% |
Sales of new equipment |
|
|
1,798 |
|
|
|
1,322 |
|
|
|
476 |
|
|
|
36.0 |
% |
Parts, service and other |
|
|
5,418 |
|
|
|
7,162 |
|
|
|
(1,744 |
) |
|
|
(24.4 |
)% |
Total gross profit |
|
$ |
171,280 |
|
|
$ |
168,361 |
|
|
$ |
2,919 |
|
|
|
1.7 |
% |
Total Gross Profit. Our total gross profit was $171.3 million for the three months ended June 30, 2024 compared to $168.4 million for the same three months in 2023, an increase of $2.9 million, or 1.7%. Total gross profit margin for the three months ended June 30, 2024 was approximately 45.5%, a decrease of 1.2% from the 46.7% gross profit margin for the same three months in 2023. Gross profits and gross margins of our business activities are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the three months ended June 30, 2024 increased $5.8 million, or 4.3%, to $142.2 million from $136.4 million in the same three months in 2023. Total gross profit margin from equipment rentals for the three months ended June 30, 2024 was 45.5% compared to 46.8% for the same period in 2023, a decrease of approximately 1.3%. See Rentals and Rentals Other below for additional information.
Rentals: Rental revenues gross profit increased $6.5 million, or 4.8%, to $140.6 million for the three months ended June 30, 2024 compared to $134.1 million for the same three months in 2023. The increased gross profit was due to increased rental revenues of $16.8 million for the three months ended June 30, 2024 compared to the same period last year, partially offset by a $6.5 million increase in rental equipment depreciation expense and a $3.8 million increase in rental expenses. The increase in depreciation expense is primarily due to a larger fleet size in the current year as compared to the prior period. Our fleet size, based on original equipment cost, at June 30, 2024 was $279.0 million, or 10.7%, larger than our fleet at June 30, 2023. Gross profit margin on equipment rentals for the three months ended June 30, 2024 was 51.0% compared to 51.8% for the same period in 2023, a decrease of 0.8%. Depreciation expense was 33.5% of equipment rental revenues for the three months ended June 30, 2024 compared to 33.2% for the same period in 2023, an increase of approximately 0.3%. As a percentage of revenues, rental expenses were 15.4% for the three months ended June 30, 2024 compared to 15.0% for the same period last year, an increase of 0.4%.
27
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 months ended June 30, 2024 was $1.7 million, a decrease of $0.7 million as compared to the same period in 2023. The gross margin was 4.6% for the three months ended June 30, 2024 compared to a gross margin of 7.3% for the same period last year.
Sales of Rental Equipment Gross Profit. Our sales of rental equipment gross profit for the three months ended June 30, 2024 decreased $1.6 million, or 6.9%, to $21.8 million from $23.4 million in the same period in 2023, as sales of rental equipment decreased $4.7 million. Gross profit margin on sales of rental equipment for the three months ended June 30, 2024 was approximately 62.4%, up 3.3% from 59.1% for the same three months in 2023, primarily as a result of higher gross margins in aerial work platform sales. Our sales from rental fleet were approximately 266.7% and 245.8% of net book value for the three months ended June 30, 2024 and 2023, respectively.
Sales of New Equipment Gross Profit. Our sales of new equipment gross profit for the three months ended June 30, 2024 increased $0.5 million, or 36.0%, to $1.8 million compared to $1.3 million for the same three months in 2023 on sales of new equipment which increased $1.8 million. Gross profit margin on sales of new equipment was 16.9% for the three months ended June 30, 2024, compared to 14.9% for the same period last year, an increase of 2.0%.
Parts, Service and Other Gross Profit. Our parts, service and other revenues gross profit for the three months ended June 30, 2024 was $5.4 million, a decrease of 24.4%, from gross profit of $7.2 million for the same period last year on parts, service and other revenues that decreased $1.9 million. Gross profit margin for the three months ended June 30, 2024 and 2023 was 29.6% and 35.3%, respectively.
Selling, General and Administrative Expenses. SG&A expenses increased $12.6 million, or 12.7%, to $111.8 million for the three months ended June 30, 2024 compared to $99.3 million for the three months ended June 30, 2023. Employee salaries, wages, payroll taxes and other employee related expenses increased $6.0 million due to increased wages, commissions, headcount and health insurance. Depreciation and amortization expenses increased $2.5 million, facility expenses increased $1.9 million, liability insurance costs increased $0.8 million and professional fees increased $0.5 million. Approximately $10.8 million of comparative incremental SG&A expenses in the three months ended June 30, 2024 was attributable to expansion efforts since January 1, 2023 with less than three months of comparable operations in either or both of the three months ended June 30, 2024 and 2023. SG&A expenses as a percentage of total revenues for the three months ended June 30, 2024 and 2023 were 29.7% and 27.6%, respectively, an increase of 2.1%.
Gain on Sales of Property & Equipment (Net). We had net gains on sales of property and equipment of $3.4 million for the three months ended June 30, 2024 compared to $0.4 million for the same period last year, an increase of $2.9 million. This increase is due to fluctuations in the normal course of business.
Other Income (Expense). For the three months ended June 30, 2024, our net other expenses increased approximately $3.1 million to $16.7 million compared to $13.6 million for the same three months in 2023. Interest expense was $18.2 million for the three months ended June 30, 2024 and $14.7 million for the three months ended June 30, 2023. The increase in interest expense is largely due to higher borrowings on our Credit Facility.
Income Taxes. We recorded income tax expense of $12.8 million for the three months ended June 30, 2024 compared to an income tax expense of $14.7 million for the three months ended June 30, 2023. Our effective income tax rate for the three months ended June 30, 2024 was 27.8% compared to 26.3% for the same period in 2023. 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, 2024 are fully realizable through future reversals of existing taxable temporary differences and future taxable income. As of June 30, 2024, we have a valuation allowance of $3.0 million for certain state tax credits that may not be realized.
28
Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023
Revenues.
|
|
Six Months Ended |
|
|
Total |
|
|
Total |
|
|||||||
|
|
June 30, |
|
|
Dollar |
|
|
Percentage |
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Increase |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rentals |
|
$ |
537,214 |
|
|
$ |
490,799 |
|
|
$ |
46,415 |
|
|
|
9.5 |
% |
Rentals other |
|
|
70,467 |
|
|
|
62,668 |
|
|
|
7,799 |
|
|
|
12.4 |
% |
Total equipment rentals |
|
|
607,681 |
|
|
|
553,467 |
|
|
|
54,214 |
|
|
|
9.8 |
% |
Sales of rental equipment |
|
|
83,052 |
|
|
|
71,768 |
|
|
|
11,284 |
|
|
|
15.7 |
% |
Sales of new equipment |
|
|
21,082 |
|
|
|
16,675 |
|
|
|
4,407 |
|
|
|
26.4 |
% |
Parts, service and other |
|
|
35,824 |
|
|
|
40,804 |
|
|
|
(4,980 |
) |
|
|
(12.2 |
)% |
Total revenues |
|
$ |
747,639 |
|
|
$ |
682,714 |
|
|
$ |
64,925 |
|
|
|
9.5 |
% |
Total Revenues. Our total revenues were $747.6 million for the six months ended June 30, 2024 compared to $682.7 million for the six months ended June 30, 2023, an increase of $64.9 million, or 9.5%. Revenues of our business activities are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the six months ended June 30, 2024 increased $54.2 million, or 9.8%, to $607.7 million from $553.5 million in the six months ended June 30, 2023. The increase in equipment rental revenues was primarily due to our larger fleet as compared to the prior year.
Rentals. Rental revenues increased $46.4 million, or 9.5%, to $537.2 million for the six months ended June 30, 2024 compared to $490.8 million for the six months ended June 30, 2023. Rental revenues from other equipment increased $14.7 million, aerial work platform equipment increased $14.6 million and material handling equipment increased $10.1 million. Our average rental rates for the six months ended June 30, 2024 increased 2.4% compared to the same period last year. Our average rental rates do not include the impact of acquisitions completed within the last twelve months. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the six months ended June 30, 2024 was 37.8% compared to 39.6% in the six months ended June 30, 2023, a decrease of 1.8%. The decrease in comparative rental equipment dollar utilization was the net result of a decrease in rental equipment time utilization and an increase in equipment rental rates. Rental equipment time utilization as a percentage of original equipment cost was 65.0% for the six months ended June 30, 2024 compared to 68.3% in the six months ended June 30, 2023, a decrease of 3.3%. The decrease in rental equipment time utilization as a percentage of original equipment cost was largely reflective of the increase in fleet size.
Rentals Other. Our rentals other revenue consist 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 months ended June 30, 2024 were $70.5 million compared to $62.7 million for the six months ended June 30, 2023, an increase of $7.8 million, or 12.4%. The increase was primarily related to increased rental revenues discussed above.
Sales of Rental Equipment Revenues. Our sales of rental equipment increased $11.3 million, or 15.7%, to $83.1 million for the six months ended June 30, 2024 from $71.8 million for the six months ended June 30, 2023. This increase is reflective of our fleet management strategy and our decision to capitalize on the high demand for used equipment during the first quarter. Sales of aerial work platform rental equipment increased $9.4 million, sales of material handling rental equipment increased $5.7 million and sales of other equipment increased $4.9 million. Offsetting these increases, sales of earthmoving equipment rental decreased $8.7 million.
Sales of New Equipment Revenues. Our sales of new equipment for the six months ended June 30, 2024 increased $4.4 million, or 26.4%, to $21.1 million from $16.7 million for the six months ended June 30, 2023. Sales of new material handling equipment and new aerial work platform equipment increased $3.9 million and $3.3 million, respectively. Partially offsetting these increases, sales of other equipment decreased $2.3 million.
Parts, Service and Other Revenues. Our parts, service and other revenues for the six months ended June 30, 2024 decreased $5.0 million, or 12.2%, to $35.8 million from $40.8 million for the six months ended June 30, 2023.
29
Gross Profit.
|
|
Six Months Ended |
|
|
Total |
|
|
Total |
|
|||||||
|
|
June 30, |
|
|
Dollar |
|
|
Percentage |
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Increase |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rentals |
|
$ |
267,489 |
|
|
$ |
246,390 |
|
|
$ |
21,099 |
|
|
|
8.6 |
% |
Rentals other |
|
|
2,655 |
|
|
|
4,343 |
|
|
|
(1,688 |
) |
|
|
(38.9 |
)% |
Total equipment rentals |
|
|
270,144 |
|
|
|
250,733 |
|
|
|
19,411 |
|
|
|
7.7 |
% |
Sales of rental equipment |
|
|
52,103 |
|
|
|
42,265 |
|
|
|
9,838 |
|
|
|
23.3 |
% |
Sales of new equipment |
|
|
3,571 |
|
|
|
2,359 |
|
|
|
1,212 |
|
|
|
51.4 |
% |
Parts, service and other |
|
|
10,327 |
|
|
|
14,382 |
|
|
|
(4,055 |
) |
|
|
(28.2 |
)% |
Total gross profit |
|
$ |
336,145 |
|
|
$ |
309,739 |
|
|
$ |
26,406 |
|
|
|
8.5 |
% |
Total Gross Profit. Our total gross profit was $336.1 million for the six months ended June 30, 2024 compared to $309.7 million for the six months ended June 30, 2023, an increase of $26.4 million, or 8.5%. Total gross profit margin for the six months ended June 30, 2024 was 45.0%, a decrease of 0.4% from the 45.4% gross profit margin for the six months ended June 30, 2023. Gross profits and gross margins of our business activities are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the six months ended June 30, 2024 increased $19.4 million, or 7.7%, to $270.1 million from $250.7 million in the six months ended June 30, 2023. Total gross profit margin from equipment rentals for the six months ended June 30, 2024 was 44.5% compared to 45.3% for the same period in 2023, a decrease of 0.8%.
Rentals: Rental revenues gross profit increased $21.1 million, or 8.6%, to $267.5 million for the six months ended June 30, 2024 compared to $246.4 million for the six months ended June 30, 2023. The increased gross profit was the result of increased rental revenues of $46.4 million for the six months ended June 30, 2024 compared to the same period last year, which was partially offset by a $16.0 million increase in rental depreciation and a $9.3 million increase in rental expenses. The increase in depreciation expense is primarily due to a larger fleet size in the current period as compared to the prior period. Gross profit margin on rentals for the six months ended June 30, 2024 was 49.8% compared to 50.2% for the six months ended June 30, 2023, a decrease of 0.4%. Depreciation expense was 34.2% of rental revenues for both the six months ended June 30, 2024 and 2023. As a percentage of revenues, rental expenses were 16.0% for the six months ended June 30, 2024 compared to 15.6% for the same period last year, an increase of 0.4%.
Rentals Other: Our rentals other revenue 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 months ended June 30, 2024 was $2.7 million compared to $4.3 million for the same period in 2023, a decrease of $1.7 million. Gross profit margin was 3.8% for the six months ended June 30, 2024 compared to 6.9% for the same period last year, a decrease of 3.1%.
Sales of Rental Equipment Gross Profit. Our sales of rental equipment gross profit for the six months ended June 30, 2024 increased $9.8 million, or 23.3%, to $52.1 million from $42.3 million in the same period in 2023 on increased sales of rental equipment of $11.3 million. Gross profit margin on sales of rental equipment for the six months ended June 30, 2024 was approximately 62.7%, up 3.8% from 58.9% for the six months ended June 30, 2023, primarily as a result of higher used equipment gross margins on aerial work platform equipment. Our sales from rental fleet were approximately 270.0% and 245.1% of net book value for the six months ended June 30, 2024 and 2023, respectively.
Sales of New Equipment Gross Profit. Our sales of new equipment gross profit for the six months ended June 30, 2024 increased $1.2 million, or 51.4%, to $3.6 million compared to $2.4 million for the six months ended June 30, 2023 on increased sales of new equipment of $4.4 million. Gross profit margin on sales of new equipment was 16.9% for the six months ended June 30, 2024, compared to 14.1% for the same period last year, an increase of 2.8%.
Parts, Service and Other Gross Profit. Our parts, service and other revenues gross profit for the six months ended June 30, 2024 was $10.3 million, a decrease of $4.1 million, or 28.2%, from a gross profit of $14.4 million for the same period last year on decreased parts, service and other revenues of $5.0 million. Gross profit margin for the six months ended June 30, 2024 and 2023 was 28.8% and 35.2%, respectively.
Selling, General and Administrative Expenses. SG&A expenses increased $31.5 million, or 16.2%, to $226.1 million for the six months ended June 30, 2024 compared to $194.6 million for the six months ended June 30, 2023. Employee salaries, wages, payroll
30
taxes and other employee related expenses increased $15.0 million due to increased wages, commissions, headcount and health insurance. Depreciation and amortization expenses increased $4.7 million, facility expenses increased $4.2 million, professional fees increased $2.1 million and liability insurance costs increased $1.9 million. Approximately $20.8 million of the total increase in SG&A expenses was attributable to branches opened or acquired since January 1, 2023 with less than six months of comparable operations in either or both of the six months ended June 30, 2024 and 2023. SG&A expenses as a percentage of total revenues for the six months ended June 30, 2024 and 2023 were 30.2% and 28.5%, respectively.
Gain on Sales of Property & Equipment (Net). We had net gains on sales of property and equipment of $4.8 million for the six months ended June 30, 2024 compared to $1.1 million for the same period last year, an increase of $3.7 million. This increase is due to fluctuations in the normal course of business.
Other Income (Expense). For the six months ended June 30, 2024, our net other expenses were $33.6 million compared to $25.6 million for the six months ended June 30, 2023. Interest expense was $36.6 million for the six months ended June 30, 2024 compared to $28.4 million for the six months ended June 30, 2023. The increase in interest expense is largely due to higher borrowings on our Credit Facility.
Income Taxes. We recorded an income tax expense of $22.1 million for the six months ended June 30, 2024 compared to an income tax expense of $23.7 million for the six months ended June 30, 2023. Our effective income tax rate for the six months ended June 30, 2024 was 27.2% compared to 26.2% for the same period in 2023. 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, 2024 are fully realizable through future reversals of existing taxable temporary differences and future taxable income. As of June 30, 2024, we have a valuation allowance of $3.0 million for certain state tax credits that may not be realized.
Liquidity and Capital Resources
Cash Flow From Operating Activities. For the six months ended June 30, 2024, the net cash provided by our operating activities was $216.4 million. Our reported net income of $59.2 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 $250.0 million. These cash flows from operating activities were also positively impacted by a $3.0 million decrease in inventories driven by the classification of rental equipment at the time of purchase and a $1.8 million decrease in receivables. Partially offsetting these positive cash flows were a $22.1 million decrease in accounts payable, a $9.3 million increase in prepaid expenses and other assets, a $7.0 million decrease in accrued expenses payable and other liabilities and an $0.1 million decrease in manufacturing flooring plans payable.
For the six months ended June 30, 2023, the net cash provided by our operating activities was $134.9 million. Our reported net income of $66.9 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, impairment of goodwill, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of $248.5 million. These cash flows from operating activities were also positively impacted by a $61.7 million increase in accounts payable and a $2.1 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $154.7 million increase in inventories, a $3.2 million increase in accounts receivables, a $13.3 million increase in prepaid expenses and other assets and a $6.2 million decrease in accrued expenses payable and other liabilities.
Cash Flow From Investing Activities. For the six months ended June 30, 2024, our net cash used in our investing activities was $298.3 million. The aggregate cumulative cash consideration paid for the acquisitions of Lewistown and Precision was approximately $157.7 million; see additional information on the acquisition in Note 3 to our Condensed Consolidated Financial Statements. Purchases of rental and non-rental equipment were $228.9 million and proceeds from the sale of rental and non-rental equipment were $88.2 million.
For the six months ended June 30, 2023, our net cash used in our investing activities was $268.9 million. Purchases of rental and non-rental equipment were $341.5 million and proceeds from the sale of rental and non-rental equipment were $72.6 million.
Cash Flow From Financing Activities. For the six months ended June 30, 2024, our net cash provided by our financing activities was $82.1 million. Borrowings on our senior secured credit facility amounted to $1.0 billion while payments on the facility amounted to $918.2 million for the six months ended June 30, 2024. Dividends paid totaled $20.1 million, or $0.55 per common share, and treasury stock purchases totaled $3.4 million.
For the six months ended June 30, 2023, our net cash provided by our financing activities was $99.6 million. Borrowings on our senior secured credit facility amounted to $876.4 million while payments on the facility amounted to $748.7 million for the six months
31
ended June 30, 2023. Dividends paid totaled $20.0 million, or $0.55 per common share, and treasury stock purchases totaled $3.2 million. Payments on deferred financing costs related to the amended and restated credit facility totaled $4.9 million.
Senior Unsecured Notes
On December 14, 2020, we completed the offering of our Senior Unsecured Notes of $1.25 billion. No principal payments on the Senior Unsecured Notes are due until their scheduled maturity date of December 15, 2028.
The Senior Unsecured Notes were issued by H&E Equipment Services, Inc. (the parent company) and are guaranteed by GNE Investments, Inc. and its wholly-owned subsidiaries Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Midwest), Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp (collectively, the guarantor subsidiaries). 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. There are no registration rights associated with the notes or the subsidiary guarantees.
Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million senior secured credit facility (our “Credit Facility”) with Wells Fargo Bank, National Association as administrative agent, and the lenders named therein. At June 30, 2024, we had $287.3 million borrowed under the Credit Facility and we could borrow up to $450.4 million, which with cash on hand amounted to a liquidity position of $459.0 million. We did not have any covenant violations related to the Credit Facility. At July 23, 2024, we had we had borrowings of $300.4 million outstanding under our Credit Facility leaving us with borrowing availability of $437.3 million, as a result of $12.3 million letters of credit outstanding under the facility.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the revenue from our rental operations and sales of rental fleet and new equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. As of June 30, 2024, the Company held balances of cash totaling $8.6 million. As of December 31, 2023, the Company held balances of cash totaling $8.5 million. Our principal uses of cash historically have been to fund operating activities and working capital, purchases of rental fleet equipment, inventory and property and equipment, opening new branch locations, 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 branch locations.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. 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. The condensed consolidated statements of cash flows include the payments for purchases of rental fleet, but does not reflect gross rental fleet capital expenditures which include items such as non-cash components. Our gross rental fleet capital expenditures for the six months ended June 30, 2024 and 2023 were approximately $196.5 million and $375.1 million, respectively. This decrease in rental fleet capital expenditures reflects the normalization of fleet purchasing in the current quarter as compared to the prior year. Our gross property and equipment capital expenditures for the six months ended June 30, 2024 and 2023 were $77.1 million and $33.4 million, respectively.
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 Unsecured 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, both in the short-term (over the next 12 months) and beyond. As noted earlier, at June 30, 2024, we had cash on hand of $8.6 million. At June 30, 2024, we had available borrowings of $450.4 million, net of $12.3 million of outstanding letters of credit. At July 23, 2024, we had $437.3 million of available borrowings under the Credit Facility, net of $12.3 million of outstanding letters of credit.
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Quarterly Dividend
On May 16, 2024, the Company announced a quarterly dividend of $0.275 per share to stockholders of record, which was paid on June 14, 2024, totaling approximately $10.0 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.
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, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings may be affected by changes in interest rates since interest expense on the Credit Facility is currently calculated based upon (a) the Base 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 (b) SOFR plus a credit spread adjustment and an applicable margin of 1.25% to 1.75%, depending on the Average Availability (as defined in the Credit Facility), in the case of SOFR revolving loans.
With the exception of the above, there have been no significant changes in our exposure to market risk during the three and six months ended June 30, 2024. For an additional discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 4. Controls and Procedures
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, as amended (the “Exchange Act”), 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 Exchange Act) 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, 2024, 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 months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
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. We are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and
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self-insured retentions, or self-insurance. Losses that exceed our deductibles and self-insured retentions are insured through various commercial lines of insurance policies.
We are also involved in various other claims and legal actions arising in the ordinary course of 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, 2023, 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 in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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31.2 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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32.1 |
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101.INS |
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Inline XBRL Instance Document (filed herewith). |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents (filed herewith). |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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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.
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H&E EQUIPMENT SERVICES, INC. |
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Dated: July 30, 2024 |
By: |
/s/ Bradley W. Barber |
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Bradley W. Barber Chief Executive Officer and Director (Principal Executive Officer) |
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Dated: July 30, 2024 |
By: |
/s/ Leslie S. Magee |
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Leslie S. Magee Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |
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