10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-51759

 

 

H&E Equipment Services, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   81-0553291
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)

7500 Pecue Lane,

Baton Rouge, Louisiana

  70809
(Address of Principal Executive Offices)   (ZIP Code)

(225) 298-5200

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 24, 2014, there were 35,233,553 shares of H&E Equipment Services, Inc. common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

September 30, 2014

 

     Page  

PART I. FINANCIAL INFORMATION

     4   

Item 1. Financial Statements:

  

Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013

     4   

Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September  30, 2014 and 2013

     5   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September  30, 2014 and 2013

     6   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4. Controls and Procedures

     38   

PART II. OTHER INFORMATION

     38   

Item 1. Legal Proceedings

     38   

Item 1A. Risk Factors

     38   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     38   

Item 3. Defaults upon Senior Securities

     39   

Item 4. Mine Safety Disclosures

     39   

Item 5. Other Information

     39   

Item 6. Exhibits

     39   

Signatures

     40   

 

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Table of Contents

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.

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. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

 

    general economic conditions and construction and industrial activity in the markets where we operate in North America;

 

    the pace of economic recovery in areas affecting our business (although we have experienced an upturn in our business activities from the most recent economic downturn and related decreases in construction and industrial activities, there is no certainty this trend will continue; if the pace of the recovery slows or construction and industrial activities decline, our revenues and operating results may be severely affected);

 

    the impact of conditions in the global credit markets and their effect on construction spending and the economy in general;

 

    relationships with equipment suppliers;

 

    increased maintenance and repair costs as we age our fleet and decreases in our equipment’s residual value;

 

    our indebtedness;

 

    risks associated with the expansion of our business;

 

    our possible inability to integrate any businesses we acquire;

 

    competitive pressures;

 

    compliance with laws and regulations, including those relating to environmental matters and corporate governance matters; and

 

    other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements after we file this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise. Investors, potential investors and other readers are urged to consider the above mentioned factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.

For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as well as other reports and registration statements filed by us with the SEC. 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.

 

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

     Balances at  
     September 30,
2014
    December 31,
2013
 
     (Unaudited)        
ASSETS     

Cash

   $ 5,287      $ 17,607   

Receivables, net of allowance for doubtful accounts of $3,070 and $3,651, respectively

     146,519        131,970   

Inventories, net of reserves for obsolescence of $716 and $647, respectively

     161,861        111,640   

Prepaid expenses and other assets

     7,886        6,024   

Rental equipment, net of accumulated depreciation of $342,132 and $309,944, respectively

     852,818        688,710   

Property and equipment, net of accumulated depreciation and amortization of $85,451 and $75,994, respectively

     108,336        98,503   

Deferred financing costs, net of accumulated amortization of $10,891 and $10,176, respectively

     4,884        4,689   

Goodwill

     31,197        31,197   
  

 

 

   

 

 

 

Total assets

   $ 1,318,788      $ 1,090,340   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Amounts due on senior secured credit facility

   $ 220,485      $ 102,460   

Accounts payable

     89,946        67,779   

Manufacturer flooring plans payable

     92,414        49,062   

Dividends payable

     —          633   

Accrued expenses payable and other liabilities

     45,492        54,439   

Senior unsecured notes (net of unaccreted discount of $1,328 and $1,454, respectively)

     628,672        628,546   

Capital leases payable

     2,145        2,278   

Deferred income taxes

     111,873        88,291   

Deferred compensation payable

     2,089        2,040   
  

 

 

   

 

 

 

Total liabilities

     1,193,116        995,528   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued

     —          —     

Common stock, $0.01 par value, 175,000,000 shares authorized; 39,100,021 and 39,023,594 shares issued at September 30, 2014 and December 31, 2013, respectively, and 35,236,466 and 35,200,398 shares outstanding at September 30, 2014 and December 31, 2013, respectively

     390        389   

Additional paid-in capital

     218,523        215,775   

Treasury stock at cost, 3,863,555 and 3,823,196 shares of common stock held at September 30, 2014 and December 31, 2013, respectively

     (59,935     (58,468

Retained deficit

     (33,306     (62,884
  

 

 

   

 

 

 

Total stockholders’ equity

     125,672        94,812   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,318,788      $ 1,090,340   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Revenues:

        

Equipment rentals

   $ 108,238      $ 89,420      $ 293,276      $ 248,518   

New equipment sales

     80,758        90,220        240,886        216,979   

Used equipment sales

     25,198        36,779        85,940        103,589   

Parts sales

     29,009        26,571        83,182        77,971   

Services revenues

     15,622        13,729        45,372        42,050   

Other

     16,219        13,730        43,995        39,070   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     275,044        270,449        792,651        728,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

        

Rental depreciation

     37,654        31,527        106,101        89,679   

Rental expense

     15,881        13,550        45,686        41,401   

New equipment sales

     71,630        80,659        212,777        193,453   

Used equipment sales

     17,350        27,086        58,824        74,006   

Parts sales

     20,705        19,123        59,028        56,660   

Services revenues

     5,356        4,943        15,864        15,743   

Other

     15,402        13,261        41,453        37,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     183,978        190,149        539,733        507,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     91,066        80,300        252,918        220,192   

Selling, general and administrative expenses

     51,585        46,977        152,324        140,347   

Gain on sales of property and equipment, net

     512        609        1,932        1,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     39,993        33,932        102,526        81,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (13,171     (13,193     (38,743     (38,550

Other, net

     293        237        943        945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (12,878     (12,956     (37,800     (37,605
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,115        20,976        64,726        43,955   

Provision for income taxes

     11,815        7,023        26,264        14,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,300      $ 13,953      $ 38,462      $ 29,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.43      $ 0.40      $ 1.09      $ 0.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.43      $ 0.40      $ 1.09      $ 0.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     35,206        35,099        35,142        35,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     35,266        35,169        35,240        35,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share outstanding

   $ 0.25      $ —        $ 0.25      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Nine Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 38,462      $ 29,539   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization on property and equipment

     14,913        12,355   

Depreciation on rental equipment

     106,101        89,679   

Amortization of deferred financing costs

     714        826   

Accretion of note discount, net of premium amortization

     126        189   

Provision for losses on accounts receivable

     2,137        2,348   

Provision for inventory obsolescence

     156        208   

Increase in deferred income taxes

     23,582        6,879   

Stock-based compensation expense

     2,192        2,109   

Gain on sales of property and equipment, net

     (1,932     (1,715

Gain on sales of rental equipment, net

     (25,450     (27,771

Writedown of goodwill for tax-deductible goodwill in excess of book goodwill

     —          657   

Changes in operating assets and liabilities:

    

Receivables

     (16,686     (2,150

Inventories

     (92,453     (72,897

Prepaid expenses and other assets

     (1,862     (1,249

Accounts payable

     22,168        16,504   

Manufacturer flooring plans payable

     43,352        (1,130

Accrued expenses payable and other liabilities

     (8,947     (4,644

Deferred compensation payable

     49        49   
  

 

 

   

 

 

 

Net cash provided by operating activities

     106,622        49,786   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (24,986     (20,734

Purchases of rental equipment

     (274,276     (197,763

Proceeds from sales of property and equipment

     2,172        1,812   

Proceeds from sales of rental equipment

     71,593        82,277   
  

 

 

   

 

 

 

Net cash used in investing activities

     (225,497     (134,408
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchases of treasury stock

     (1,467     (890

Excess tax benefit from stock-based awards

     556        387   

Borrowings on senior secured credit facility

     917,301        827,539   

Payments on senior secured credit facility

     (799,276     (850,178

Proceeds from issuance of senior unsecured notes

     —          107,250   

Payments of deferred financing costs

     (909     (733

Dividends paid

     (9,517     (855

Payments of capital lease obligations

     (133     (126
  

 

 

   

 

 

 

Net cash provided by financing activities

     106,555        82,394   
  

 

 

   

 

 

 

Net decrease in cash

     (12,320     (2,228

Cash, beginning of period

     17,607        8,894   
  

 

 

   

 

 

 

Cash, end of period

   $ 5,287      $ 6,666   
  

 

 

   

 

 

 

 

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Table of Contents

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Amounts in thousands)

 

     Nine Months Ended
September 30,
 
     2014      2013  

Supplemental schedule of noncash investing and financing activities:

     

Noncash asset purchases:

     

Assets transferred from new and used inventory to rental fleet

   $ 42,076       $ 35,130   
  

 

 

    

 

 

 

Supplemental disclosures of cash flow information:

     

Cash paid during the period for:

     

Interest

   $ 48,914       $ 47,616   
  

 

 

    

 

 

 

Income taxes paid, net of refunds received

   $ 4,546       $ 1,863   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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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 and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we” or “us” or “our” or the “Company.”

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, 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, 2013, from which the consolidated balance sheet amounts as of December 31, 2013 were derived.

All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements. Business combinations accounted for as purchases are included in the condensed consolidated financial statements from their respective dates of acquisition.

The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, and consistent with industry practice, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.

Nature of Operations

As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and service support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment sales, rental, on-site parts, and repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full-service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal, and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and service operations.

(2) Significant Accounting Policies

We describe our significant accounting policies in note 2 of the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013. During the nine month period ended September 30, 2014, 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.

 

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Table of Contents

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”) which amended the FASB’s guidance for reporting discontinued operations and disposals of components of an entity under Accounting Standards Codification Subtopic 250-20. The guidance as amended by ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation by requiring that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale be reported as such. The amendments also expand the disclosure requirements regarding the assets, liabilities, revenues and expenses of discontinued operations and add new disclosure requirements for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years beginning after December 15, 2014, and interim reporting periods within those years (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on the Company’s consolidated statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In doing so, entities will need to use more judgment and make more estimates than under current guidance. These judgments and estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires an entity to disclose sufficient qualitative and quantitative information surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification, and further permits the use of either a retrospective or cumulative effect transition method. This guidance will be effective for the Company for our 2017 fiscal year. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and have not yet determined the method by which we will adopt ASU 2014-09.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This ASU further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

(3) Fair Value of Financial Instruments

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three broad levels of the fair value hierarchy are as follows:

 

Level 1      Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2      Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
Level 3      Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions

The carrying value of financial instruments reported in the accompanying condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity of these financial instruments. The fair value of our letter of credit is based on fees currently charged for similar agreements. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures as of September 30, 2014 and December 31, 2013 are presented in the table below (amounts in thousands) and have been calculated based upon market quotes and present value calculations based on market rates.

 

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     September 30, 2014  
     Carrying
Amount
     Fair Value  

Manufacturer flooring plans payable with interest computed at 5.25% (Level 3)

   $ 92,414       $ 81,566   

Senior unsecured notes with interest computed at 7.0%(1) (Level 1)

     630,000         676,463   

Capital leases payable with interest computed at 5.929% to 9.55% (Level 3)

     2,145         1,545   

Letter of credit (Level 3)

     —           130   
     December 31, 2013  
     Carrying
Amount
     Fair
Value
 

Manufacturer flooring plans payable with interest computed at 5.25% (Level 3)

   $ 49,062       $ 42,686   

Senior unsecured notes with interest computed at 7.0%(1) (Level 1)

     630,000         686,700   

Capital leases payable with interest computed at 5.929% to 9.55% (Level 3)

     2,278         1,717   

Letter of credit (Level 3)

     —           146   

 

(1)  Amounts shown based on aggregate amounts outstanding for the periods presented.

(4) Stockholders’ Equity

The following table summarizes the activity in Stockholders’ Equity for the nine month period ended September 30, 2014 (amounts in thousands, except share data):

 

     Common Stock                            
     Shares
Issued
     Amount      Additional
Paid-in
Capital
     Treasury
Stock
    Retained
Deficit
    Total
Stockholders’
Equity
 

Balances at December 31, 2013

     39,023,594       $ 389       $ 215,775       $ (58,468   $ (62,884   $ 94,812   

Stock-based compensation

     —           —           2,192         —          —          2,192   

Cash dividend on common stock ($7.00 per share)

     —           —           —           —          (75     (75

Cash dividend on common stock ($0.25 per share)

     —           —           —           —          (8,809     (8,809

Excess tax benefit associated with stock-based awards

     —           —           556         —          —          556   

Issuance of common stock

     76,427         1         —           —          —          1   

Repurchases of 38,134 shares of restricted common stock

     —           —           —           (1,467     —          (1,467

Net income

     —           —           —           —          38,462        38,462   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at September 30, 2014

     39,100,021       $ 390       $ 218,523       $ (59,935   $ (33,306   $ 125,672   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

(5) Stock-Based Compensation

We account for our stock-based compensation plan using the fair value recognition provisions of Accounting Standards Codification 718, Stock Compensation (“ASC 718”). Under the provisions of ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Shares available for future stock-based payment awards under our 2006 Stock-Based Incentive Compensation Plan were 3,537,999 shares as of September 30, 2014.

 

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Non-vested Stock

The following table summarizes our non-vested stock activity for the nine month period ended September 30, 2014:

 

     Number of
Shares
    Weighted
Average Grant
Date Fair Value
 

Non-vested stock at December 31, 2013

     187,867      $ 18.21   

Granted

     76,427      $ 36.69   

Vested

     (109,237   $ 18.70   

Forfeited

     (2,225   $ 21.42   
  

 

 

   

Non-vested stock at September 30, 2014

     152,832      $ 27.05   
  

 

 

   

As of September 30, 2014, we had unrecognized compensation expense of approximately $3.5 million related to non-vested stock that we expect to be recognized over a weighted-average period of 2.4 years. The following table summarizes compensation expense related to non-vested stock, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Compensation expense

   $ 573       $ 505       $ 2,192       $ 2,109   

Stock Options

At September 30, 2014, there is no unrecognized compensation expense as all stock option awards have fully vested. The following table represents stock option activity for the nine month period ended September 30, 2014:

 

     Number of
Shares
     Weighted Average
Exercise Price
     Weighted Average
Contractual Life

In Years
 

Outstanding options at December 31, 2013

     51,000       $ 17.80      

Granted

     —           —        

Exercised

     —           —        

Canceled, forfeited or expired

     —           —        
  

 

 

       

Outstanding options at September 30, 2014

     51,000       $ 17.80         1.8   
  

 

 

       

Options exercisable at September 30, 2014

     51,000       $ 17.80         1.8   
  

 

 

       

The aggregate intrinsic value of our outstanding and exercisable options at September 30, 2014 was approximately $2.1 million.

 

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(6) Income per Share

Income per common share for the three and nine months ended September 30, 2014 and 2013 are 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. As the number of restricted common shares outstanding during the period was immaterial to the basic and diluted EPS calculations, use of the two-class method had no impact on our basic and diluted EPS calculations for the three and nine month periods ended September 30, 2014 and 2013.

The following table sets forth the computation of basic and diluted net income per common share for the three and nine month periods ended September 30, 2014 and 2013 (amounts in thousands, except per share amounts):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Basic net income per share:

           

Net income

   $ 15,300       $ 13,953       $ 38,462       $ 29,539   

Weighted average number of shares of common stock outstanding

     35,206         35,099         35,142         35,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share of common stock – basic

   $ 0.43       $ 0.40       $ 1.09       $ 0.84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share:

           

Net income

   $ 15,300       $ 13,953       $ 38,462       $ 29,539   

Weighted average number of shares of common stock outstanding

     35,206         35,099         35,142         35,022   

Effect of dilutive securities:

           

Effect of dilutive stock options

     24         —           24         —     

Effect of dilutive non-vested restricted stock

     36         70         74         108   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares of common stock outstanding – diluted

     35,266         35,169         35,240         35,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share of common stock – diluted

   $ 0.43       $ 0.40       $ 1.09       $ 0.84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common shares excluded from the denominator as anti-dilutive:

           

Stock options

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-vested restricted stock

     —           1         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

(7) Senior Unsecured Notes

The following table reconciles our Senior Secured Notes to our condensed consolidated balance sheets (amounts in thousands):

 

Balance at December 31, 2012

   $ 521,065   

Aggregate principal amount issued on February 4, 2013

     100,000   

Premium on notes issued

     8,500   

Initial purchaser’s discount

     (1,250

Accretion of discount through December 31, 2013

     1,044   

Amortization of note premium through December 31, 2013

     (813
  

 

 

 

Balance at December 31, 2013

   $ 628,546   

Accretion of discount through September 30, 2014

     791   

Amortization of note premium through September 30, 2014

     (665
  

 

 

 

Balance at September 30, 2014

   $ 628,672   
  

 

 

 

(8) Senior Secured Credit Facility

We and our subsidiaries are parties to a senior secured credit facility (the “Credit Facility”) with General Electric Capital Corporation as agent, and the lenders named therein.

On May 21, 2014, we amended, extended and restated our existing $402.5 million senior secured credit facility with General Electric Capital Corporation by entering into the Fourth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, General Electric Capital Corporation, as administrative agent, Bank of America, N.A. as co-syndication agent and documentation agent, Wells Fargo Capital Finance, LLC, as co-syndication agent and Deutsche Bank Securities Inc. as joint lead arranger and joint bookrunner.

 

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The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the credit facility from February 29, 2017 to May 21, 2019, (ii) increases the uncommitted incremental revolving capacity from $130 million to $150 million, (iii) permits a like-kind exchange program under Section 1031 of the Internal Revenue Code of 1986, as amended, (iv) provides that the unused commitment fee margin will be either 0.50%, 0.375% or 0.25%, depending on the ratio of the average of the daily closing balances of the aggregate revolving loans, swing line loans and letters of credit outstanding during each month to the aggregate commitments for the revolving loans, swing line loans and letters of credit, (v) lowers the interest rate (a) in the case of index rate revolving loans, to the index rate plus an applicable margin of 0.75% to 1.25% depending on the leverage ratio and (b) in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of 1.75% to 2.25%, depending on the leverage ratio, (vi) lowers the margin applicable to the letter of credit fee to between 1.75% and 2.25%, depending on the leverage ratio, and (vii) permits, under certain conditions, for the payment of dividends and/or stock repurchases or redemptions on the capital stock of the Company of up to $75 million per calendar year and further additionally permits the payment of the special cash dividend of $7.00 per share previously declared by the Company on August 20, 2012 to the holders of outstanding restricted stock of the Company following the declared payment date with such permission not tied to the vesting of such restricted stock (which includes the Company’s payment in June 2014 of all amounts that remained payable to the holders of the restricted stock of the Company with respect to such special dividend that was otherwise payable following the applicable vesting dates in May and July 2014 and 2015).

At September 30, 2014, the interest rate on the Credit Facility was based on LIBOR plus 200 basis points. The weighted average interest rate at September 30, 2014 was approximately 2.6%. At September 30, 2014, we had $175.5 million of available borrowings under our Credit Facility, net of $6.5 million of outstanding letters of credit.

(9) Segment Information

We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and services revenues. These segments are based upon how management of the Company allocates resources and assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. There were no sales between segments for any of the periods presented. Selling, general and administrative expenses as well as all other income and expense items below gross profit are not generally allocated to reportable segments.

We do not compile discrete financial information by segments other than the information presented below. The following table presents information about our reportable segments (amounts in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Revenues:

           

Equipment rentals

   $ 108,238       $ 89,420       $ 293,276       $ 248,518   

New equipment sales

     80,758         90,220         240,886         216,979   

Used equipment sales

     25,198         36,779         85,940         103,589   

Parts sales

     29,009         26,571         83,182         77,971   

Services revenues

     15,622         13,729         45,372         42,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segmented revenues

     258,825         256,719         748,656         689,107   

Non-segmented revenues

     16,219         13,730         43,995         39,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 275,044       $ 270,449       $ 792,651       $ 728,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit:

           

Equipment rentals

   $ 54,703       $ 44,343       $ 141,489       $ 117,438   

New equipment sales

     9,128         9,561         28,109         23,526   

Used equipment sales

     7,848         9,693         27,116         29,583   

Parts sales

     8,304         7,448         24,154         21,311   

Services revenues

     10,266         8,786         29,508         26,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segmented gross profit

     90,249         79,831         250,376         218,165   

Non-segmented gross profit

     817         469         2,542         2,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross profit

   $ 91,066       $ 80,300       $ 252,918       $ 220,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Balances at  
     September 30,
2014
     December 31,
2013
 

Segment identified assets:

     

Equipment sales

   $ 140,726       $ 95,392   

Equipment rentals

     852,818         688,710   

Parts and services

     21,135         16,248   
  

 

 

    

 

 

 

Total segment identified assets

     1,014,679         800,350   

Non-segment identified assets

     304,109         289,990   
  

 

 

    

 

 

 

Total assets

   $ 1,318,788       $ 1,090,340   
  

 

 

    

 

 

 

The Company operates primarily in the United States and our sales to international customers for the three and nine month periods ended September 30, 2014 were approximately 1.6% of total revenues for each of the periods compared to 1.7% and 1.4% for the three and nine month periods ended September 30, 2013, respectively. No one customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented.

(10) Condensed Consolidating Financial Information of Guarantor Subsidiaries

All of the indebtedness of H&E Equipment Services, Inc. is guaranteed by GNE Investments, Inc. and its wholly-owned subsidiary Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp. The guarantor subsidiaries are all wholly-owned and the guarantees, made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s ability to obtain funds from the guarantor subsidiaries by dividend or loan.

The consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial statements for H&E Finance Corp. are not included within the consolidating financial statements because H&E Finance Corp. has no assets or operations.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

 

     As of September 30, 2014  
     H&E Equipment
Services
     Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Assets:

  

Cash

   $ 5,287       $ —        $ —        $ 5,287   

Receivables, net

     123,984         22,535        —          146,519   

Inventories, net

     136,673         25,188        —          161,861   

Prepaid expenses and other assets

     7,694         192        —          7,886   

Rental equipment, net

     718,407         134,411        —          852,818   

Property and equipment, net

     95,836         12,500        —          108,336   

Deferred financing costs, net

     4,884         —          —          4,884   

Investment in guarantor subsidiaries

     203,818         —          (203,818     —     

Goodwill

     1,671         29,526        —          31,197   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,298,254       $ 224,352      $ (203,818   $ 1,318,788   
  

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

       

Amounts due on senior secured credit facility

   $ 220,485       $ —        $ —        $ 220,485   

Accounts payable

     72,003         17,943        —          89,946   

Manufacturer flooring plans payable

     92,414         —          —          92,414   

Accrued expenses payable and other liabilities

     45,023         469        —          45,492   

Dividends payable

     23         (23     —          —     

Senior unsecured notes

     628,672         —          —          628,672   

Capital lease payable

     —           2,145        —          2,145   

Deferred income taxes

     111,873         —          —          111,873   

Deferred compensation payable

     2,089         —          —          2,089   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     1,172,582         20,534        —          1,193,116   

Stockholders’ equity

     125,672         203,818        (203,818     125,672   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,298,254       $ 224,352      $ (203,818   $ 1,318,788   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

 

     As of December 31, 2013  
     H&E Equipment
Services
     Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Assets:

         

Cash

   $ 17,607       $ —        $ —        $ 17,607   

Receivables, net

     114,525         17,445        —          131,970   

Inventories, net

     102,125         9,515        —          111,640   

Prepaid expenses and other assets

     5,853         171        —          6,024   

Rental equipment, net

     582,721         105,989        —          688,710   

Property and equipment, net

     85,826         12,677        —          98,503   

Deferred financing costs, net

     4,689         —          —          4,689   

Investment in guarantor subsidiaries

     165,703         —          (165,703     —     

Goodwill

     1,671         29,526        —          31,197   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,080,720       $ 175,323      $ (165,703   $ 1,090,340   
  

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

         

Amount due on senior secured credit facility

   $ 102,460       $ —        $ —        $ 102,460   

Accounts payable

     60,787         6,992        —          67,779   

Manufacturer flooring plans payable

     49,062         —          —          49,062   

Dividends payable

     656         (23     —          633   

Accrued expenses payable and other liabilities

     54,066         373        —          54,439   

Senior unsecured notes

     628,546         —          —          628,546   

Capital leases payable

     —           2,278        —          2,278   

Deferred income taxes

     88,291         —          —          88,291   

Deferred compensation payable

     2,040         —          —          2,040   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     985,908         9,620        —          995,528   

Stockholders’ equity

     94,812         165,703        (165,703     94,812   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,080,720       $ 175,323      $ (165,703   $ 1,090,340   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

     Three Months Ended September 30, 2014  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Revenues:

      

Equipment rentals

   $ 89,965      $ 18,273      $ —        $ 108,238   

New equipment sales

     67,626        13,132        —          80,758   

Used equipment sales

     21,010        4,188        —          25,198   

Parts sales

     25,394        3,615        —          29,009   

Services revenues

     13,273        2,349        —          15,622   

Other

     13,231        2,988        —          16,219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     230,499        44,545        —          275,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Rental depreciation

     31,578        6,076        —          37,654   

Rental expense

     12,761        3,120        —          15,881   

New equipment sales

     59,904        11,726        —          71,630   

Used equipment sales

     14,751        2,599        —          17,350   

Parts sales

     18,167        2,538        —          20,705   

Services revenues

     4,477        879        —          5,356   

Other

     12,475        2,927        —          15,402   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     154,113        29,865        —          183,978   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

      

Equipment rentals

     45,626        9,077        —          54,703   

New equipment sales

     7,722        1,406        —          9,128   

Used equipment sales

     6,259        1,589        —          7,848   

Parts sales

     7,227        1,077        —          8,304   

Services revenues

     8,796        1,470        —          10,266   

Other

     756        61        —          817   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     76,386        14,680        —          91,066   
        

Selling, general and administrative expenses

     42,274        9,311        —          51,585   

Equity in earnings of guarantor subsidiaries

     2,304        —          (2,304     —     

Gain on sales of property and equipment, net

     381        131        —          512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     36,797        5,500        (2,304     39,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (9,936     (3,235     —          (13,171

Other, net

     254        39        —          293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (9,682     (3,196     —          (12,878
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,115        2,304        (2,304     27,115   

Income tax expense

     11,815        —          —          11,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,300      $ 2,304      $ (2,304   $ 15,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

     Three Months Ended September 30, 2013  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Revenues:

      

Equipment rentals

   $ 73,537      $ 15,883      $ —        $ 89,420   

New equipment sales

     81,547        8,673        —          90,220   

Used equipment sales

     31,934        4,845        —          36,779   

Parts sales

     23,111        3,460        —          26,571   

Services revenues

     11,692        2,037        —          13,729   

Other

     11,300        2,430        —          13,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     233,121        37,328        —          270,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Rental depreciation

     26,079        5,448        —          31,527   

Rental expense

     10,995        2,555        —          13,550   

New equipment sales

     72,790        7,869        —          80,659   

Used equipment sales

     23,712        3,374        —          27,086   

Parts sales

     16,681        2,442        —          19,123   

Services revenues

     4,177        766        —          4,943   

Other

     10,739        2,522        —          13,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     165,173        24,976        —          190,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss):

      

Equipment rentals

     36,463        7,880        —          44,343   

New equipment sales

     8,757        804        —          9,561   

Used equipment sales

     8,222        1,471        —          9,693   

Parts sales

     6,430        1,018        —          7,448   

Services revenues

     7,515        1,271        —          8,786   

Other

     561        (92     —          469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     67,948        12,352        —          80,300   
        

Selling, general and administrative expenses

     38,525        8,452        —          46,977   

Equity in earnings of guarantor subsidiaries

     1,328        —          (1,328     —     

Gain on sales of property and equipment, net

     457        152        —          609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     31,208        4,052        (1,328     33,932   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (10,457     (2,736     —          (13,193

Other, net

     225        12        —          237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (10,232     (2,724     —          (12,956
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,976        1,328        (1,328     20,976   

Income tax expense

     7,023        —          —          7,023   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 13,953      $ 1,328      $ (1,328   $ 13,953   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

     Nine Months Ended September 30, 2014  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Revenues:

      

Equipment rentals

   $ 247,138      $ 46,138      $ —        $ 293,276   

New equipment sales

     209,437        31,449        —          240,886   

Used equipment sales

     68,645        17,295        —          85,940   

Parts sales

     72,341        10,841        —          83,182   

Services revenues

     38,701        6,671        —          45,372   

Other

     36,368        7,627        —          43,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     672,630        120,021        —          792,651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Rental depreciation

     89,401        16,700        —          106,101   

Rental expense

     37,712        7,974        —          45,686   

New equipment sales

     184,663        28,114        —          212,777   

Used equipment sales

     46,719        12,105        —          58,824   

Parts sales

     51,455        7,573        —          59,028   

Services revenues

     13,395        2,469        —          15,864   

Other

     33,854        7,599        —          41,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     457,199        82,534        —          539,733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

      

Equipment rentals

     120,025        21,464        —          141,489   

New equipment sales

     24,774        3,335        —          28,109   

Used equipment sales

     21,926        5,190        —          27,116   

Parts sales

     20,886        3,268        —          24,154   

Services revenues

     25,306        4,202        —          29,508   

Other

     2,514        28        —          2,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     215,431        37,487        —          252,918   
        

Selling, general and administrative expenses

     127,244        25,080        —          152,324   

Equity in earnings of guarantor subsidiaries

     4,116        —          (4,116     —     

Gain on sales of property and equipment, net

     1,535        397        —          1,932   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     93,838        12,804        (4,116     102,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (29,920     (8,823     —          (38,743

Other, net

     808        135        —          943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (29,112     (8,688     —          (37,800
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     64,726        4,116        (4,116     64,726   

Income tax expense

     26,264        —          —          26,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 38,462      $ 4,116      $ (4,116   $ 38,462   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

     Nine Months Ended September 30, 2013  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Revenues:

      

Equipment rentals

   $ 205,816      $ 42,702      $ —        $ 248,518   

New equipment sales

     195,300        21,679        —          216,979   

Used equipment sales

     87,687        15,902        —          103,589   

Parts sales

     67,057        10,914        —          77,971   

Services revenues

     36,305        5,745        —          42,050   

Other

     32,232        6,838        —          39,070   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     624,397        103,780        —          728,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Rental depreciation

     73,785        15,894        —          89,679   

Rental expense

     33,886        7,515        —          41,401   

New equipment sales

     173,964        19,489        —          193,453   

Used equipment sales

     62,533        11,473        —          74,006   

Parts sales

     48,840        7,820        —          56,660   

Services revenues

     13,683        2,060        —          15,743   

Other

     29,996        7,047        —          37,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     436,687        71,298        —          507,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss):

      

Equipment rentals

     98,145        19,293        —          117,438   

New equipment sales

     21,336        2,190        —          23,526   

Used equipment sales

     25,154        4,429        —          29,583   

Parts sales

     18,217        3,094        —          21,311   

Services revenues

     22,622        3,685        —          26,307   

Other

     2,236        (209     —          2,027   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     187,710        32,482        —          220,192   
        

Selling, general and administrative expenses

     116,306        24,041        —          140,347   

Equity in earnings of guarantor subsidiaries

     929        —          (929     —     

Gain on sales of property and equipment, net

     1,404        311        —          1,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     73,737        8,752        (929     81,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (30,674     (7,876     —          (38,550

Other, net

     892        53        —          945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (29,782     (7,823     —          (37,605
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     43,955        929        (929     43,955   

Income tax expense

     14,416        —          —          14,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29,539      $ 929      $ (929   $ 29,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

     Nine Months Ended September 30, 2014  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Cash flows from operating activities:

        

Net income

   $ 38,462      $ 4,116      $ (4,116   $ 38,462   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization on property and equipment

     13,122        1,791        —          14,913   

Depreciation on rental equipment

     89,401        16,700        —          106,101   

Amortization of deferred financing costs

     714        —          —          714   

Accretion of note discount, net of premium amortization

     126        —          —          126   

Provision for losses on accounts receivable

     1,794        343        —          2,137   

Provision for inventory obsolescence

     156        —          —          156   

Increase in deferred income taxes

     23,582        —          —          23,582   

Stock-based compensation expense

     2,192        —          —          2,192   

Gain on sales of property and equipment, net

     (1,535     (397     —          (1,932

Gain on sales of rental equipment, net

     (20,379     (5,071     —          (25,450

Equity in earnings of guarantor subsidiaries

     (4,116     —          4,116        —     

Changes in operating assets and liabilities:

        

Receivables

     (11,253     (5,433     —          (16,686

Inventories

     (72,018     (20,435     —          (92,453

Prepaid expenses and other assets

     (1,841     (21     —          (1,862

Accounts payable

     11,217        10,951        —          22,168   

Manufacturer flooring plans payable

     43,352        —          —          43,352   

Accrued expenses payable and other liabilities

     (9,043     96        —          (8,947

Deferred compensation payable

     49        —          —          49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     103,982        2,640        —          106,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Purchases of property and equipment

     (23,372     (1,614     —          (24,986

Purchases of rental equipment

     (223,174     (51,102     —          (274,276

Proceeds from sales of property and equipment

     1,775        397        —          2,172   

Proceeds from sales of rental equipment

     55,780        15,813        —          71,593   

Investment in subsidiaries

     (33,999     —          33,999        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities .

     (222,990     (36,506     33,999        (225,497
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Purchases of treasury stock

     (1,467     —          —          (1,467

Excess tax benefit from stock-based awards

     556        —          —          556   

Borrowings on senior secured credit facility

     917,301        —          —          917,301   

Payments on senior secured credit facility

     (799,276     —          —          (799,276

Payments of deferred financing costs

     (909     —          —          (909

Dividends paid

     (9,517     —          —          (9,517

Payments on capital lease obligations

     —          (133     —          (133

Capital contributions

     —          33,999        (33,999     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     106,688        33,866        (33,999     106,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     (12,320     —          —          (12,320

Cash, beginning of period

     17,607        —          —          17,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 5,287      $ —        $ —        $ 5,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

     Nine Months Ended September 30, 2013  
     H&E Equipment
Services
    Guarantor
Subsidiaries
    Elimination     Consolidated  
     (Amounts in thousands)  

Cash flows from operating activities:

        

Net income

   $ 29,539      $ 929      $ (929   $ 29,539   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization on property and equipment

     10,840        1,515        —          12,355   

Depreciation on rental equipment

     73,785        15,894        —          89,679   

Amortization of deferred financing costs

     826        —          —          826   

Accretion of note discount, net of premium amortization

     189        —          —          189   

Provision for losses on accounts receivable

     1,884        464        —          2,348   

Provision for inventory obsolescence

     208        —          —          208   

Increase in deferred income taxes

     6,879        —          —          6,879   

Stock-based compensation expense

     2,109        —          —          2,109   

Gain on sales of property and equipment, net

     (1,404     (311     —          (1,715

Gain on sales of rental equipment, net

     (23,383     (4,388     —          (27,771

Writedown of goodwill for tax-deductible goodwill in excess of book goodwill

     657        —          —          657   

Equity in earnings of guarantor subsidiaries

     (929     —          929        —     

Changes in operating assets and liabilities:

        

Receivables

     397        (2,547     —          (2,150

Inventories

     (68,876     (4,021     —          (72,897

Prepaid expenses and other assets

     (1,190     (59     —          (1,249

Accounts payable

     14,880        1,624        —          16,504   

Manufacturer flooring plans payable

     (682     (448     —          (1,130

Accrued expenses payable and other liabilities

     (5,558     914        —          (4,644

Deferred compensation payable

     49        —          —          49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     40,220        9,566        —          49,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Purchases of property and equipment

     (19,093     (1,641     —          (20,734

Purchases of rental equipment

     (168,466     (29,297     —          (197,763

Proceeds from sales of property and equipment

     1,441        371        —          1,812   

Proceeds from sales of rental equipment

     68,891        13,386        —          82,277   

Investment in subsidiaries

     (7,764     —          7,764        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (124,991     (17,181     7,764        (134,408
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Purchases of treasury stock

     (890     —          —          (890

Excess tax benefit from stock-based awards

     387        —          —          387   

Borrowings on senior secured credit facility

     827,539        —          —          827,539   

Payments on senior secured credit facility

     (850,178     —          —          (850,178

Proceeds from issuance of unsecured notes

     107,250        —          —          107,250   

Payments of deferred financing costs

     (733     —          —          (733

Dividends paid

     (832     (23     —          (855

Payments on capital lease obligations

     —          (126     —          (126

Capital contributions

     —          7,764        (7,764     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     82,543        7,615        (7,764     82,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     (2,228     —          —          (2,228

Cash, beginning of period

     8,894        —          —          8,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

   $ 6,666      $ —        $ —        $ 6,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

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 September 30, 2014, and its results of operations for the three and nine month periods ended September 30, 2014, 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, 2013. 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, 2013.

Overview

Background

As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and services operations.

As of October 24, 2014, we operated 69 full-service facilities throughout the Intermountain, Southwest, Gulf Coast, West Coast, Southeast and Mid-Atlantic regions of the United States. Our work force includes distinct, focused sales forces for our new and used equipment sales and rental operations, highly skilled service technicians, product specialists and regional managers. We focus our sales and rental activities on, and organize our personnel principally by, our four core equipment categories. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our rental and sales force and strengthen our customer relationships. In addition, we have branch managers for each location who are responsible for managing their assets and financial results. We believe this fosters accountability in our business and strengthens our local and regional relationships.

Through our predecessor companies, we have been in the equipment services business for approximately 53 years. H&E Equipment Services L.L.C. (“H&E LLC”) was formed in June 2002 through the business combination of Head & Engquist Equipment, LLC (“Head & Engquist”), a wholly-owned subsidiary of Gulf Wide Industries, L.L.C. (“Gulf Wide”), and ICM Equipment Company L.L.C. (“ICM”). Head & Engquist, founded in 1961, and ICM, founded in 1971, were two leading regional, integrated equipment service companies operating in contiguous geographic markets. In the June 2002 transaction, Head & Engquist and ICM were merged with and into Gulf Wide, which was renamed H&E LLC. Prior to the combination, Head & Engquist operated 25 facilities in the Gulf Coast region, and ICM operated 16 facilities in the Intermountain region of the United States.

Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and wholly-owned subsidiary of H&E Holdings L.L.C. (“H&E Holdings”), and immediately prior to the closing of our initial public offering, on February 3, 2006, H&E LLC and H&E Holdings merged with and into us (H&E Equipment Services, Inc.), with us surviving the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer existed under operation of law pursuant to the reincorporation merger.

Critical Accounting Policies

Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2013, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no changes to these critical accounting policies and estimates during the quarter ended September 30, 2014. These policies include, among others, revenue recognition, the adequacy of the allowance for doubtful accounts, the propriety of our estimated useful life of rental equipment and property and equipment, the potential impairment of long-lived assets including goodwill and intangible assets, obsolescence reserves on inventory, the allocation of purchase price related to business combinations, reserves for claims, including self-insurance reserves, and deferred income taxes, including the valuation of any related deferred tax assets.

 

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Information regarding our other significant accounting policies is included in note 2 to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2013 and in note 2 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Business Segments

We have five reportable segments because we derive our revenues from five principal business activities: (1) equipment rentals; (2) new equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based upon how we allocate resources and assess performance. In addition, we also have non-segmented revenues and costs that relate to equipment support activities.

 

    Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as equipment usage based on: (1) the number of rental equipment units available for rent, and (2) as a percentage of original equipment cost), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.

 

    New Equipment Sales. Our new equipment sales operation sells new equipment in all of our four core product categories. We have a retail sales force focused by equipment type that is separate from our rental sales force. Manufacturer purchase terms and pricing are managed by our product specialists.

 

    Used Equipment Sales. Our used equipment sales are generated primarily from sales of used equipment from our rental fleet, as well as from sales of inventoried equipment that we acquire through trade-ins from our equipment customers and through selective purchases of high quality used equipment. Used equipment is sold by our dedicated retail sales force. Our used equipment sales are an effective way for us to manage the size and composition of our rental fleet and provide a profitable distribution channel for disposal of rental equipment.

 

    Parts Sales. Our parts business sells new and used parts for the equipment we sell and also provides parts to our own rental fleet. To a lesser degree, we also sell parts for equipment produced by manufacturers whose products we neither rent nor sell. In order to provide timely parts and services support to our customers as well as our own rental fleet, we maintain an extensive parts inventory.

 

    Services. Our services operation provides maintenance and repair services for our customers’ equipment and to our own rental fleet at our facilities as well as at our customers’ locations. As the authorized distributor for numerous equipment manufacturers, we are able to provide service to that equipment that will be covered under the manufacturer’s warranty.

Our non-segmented revenues and costs relate to equipment support activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to reportable segments.

For additional information about our business segments, see note 8 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Revenue Sources

We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals and new equipment sales account for more than half of our total revenues. For the nine month period ended September 30, 2014, approximately 37.0% of our total revenues were attributable to equipment rentals, 30.4% of our total revenues were attributable to new equipment sales, 10.8% were attributable to used equipment sales, 10.5% were attributable to parts sales, 5.7% were attributable to our services revenues and 5.6% were attributable to non-segmented other revenues.

 

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The equipment that we sell, rent and service is principally used in the construction industry, as well as by companies for commercial and industrial uses such as plant maintenance and turnarounds, as well as in the petrochemical and energy sectors. As a result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for new and used equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions and general economic conditions. For a discussion of the impact of seasonality on our revenues, see “Seasonality” below.

Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze: (1) as equipment usage based on the number of rental equipment units available for rent and (2) as a percentage of original equipment cost), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations. We recognize revenue from equipment rentals in the period earned on a straight-line basis, over the contract term, regardless of the timing of the billing to customers.

New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-house retail sales force focused by product type. While sales of new equipment are impacted by the availability of equipment from the manufacturer, we believe our status as a leading distributor for some of our key suppliers improves our ability to obtain equipment. New equipment sales are an important component of our integrated model due to customer interaction and service contact and new equipment sales also lead to future parts and services revenues. We recognize revenue from the sale of new equipment at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured.

Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet. The remainder of our used equipment sales revenues comes from the sale of inventoried equipment that we acquire through trade-ins from our equipment customers and selective purchases of high-quality used equipment. Our policy is not to offer specified price trade-in arrangements on equipment for sale. Sales of our rental fleet equipment allow us to manage the size, quality, composition and age of our rental fleet, and provide us with a profitable distribution channel for the disposal of rental equipment. We recognize revenue for the sale of used equipment at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured.

Parts Sales. We generate revenues from the sale of new and used parts for equipment that we rent or sell, as well as for other makes of equipment. Our product support sales representatives are instrumental in generating our parts revenues. They are product specialists and receive performance incentives for achieving certain sales levels. Most of our parts sales come from our extensive in-house parts inventory. Our parts sales provide us with a relatively stable revenue stream that is generally less sensitive to the economic cycles that tend to affect our rental and equipment sales operations. We recognize revenues from parts sales at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured.

Services. We derive our services revenues from maintenance and repair services to customers for their owned equipment. In addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance services to industrial customers. Our after-market service provides a high-margin, relatively stable source of revenue through changing economic cycles. We recognize services revenues at the time services are rendered and collectibility is reasonably assured.

Our non-segmented revenues relate to equipment support activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to reportable segments. We recognize non-segmented other revenues at the time of billing and after the related services have been provided.

Principal Costs and Expenses

Our largest expenses are the costs to purchase the new equipment we sell, the costs associated with the used equipment we sell, rental expenses, rental depreciation and costs associated with parts sales and services, all of which are included in cost of revenues. For the nine month period ended September 30, 2014, our total cost of revenues was approximately $539.7 million. Our operating expenses consist principally of selling, general and administrative expenses. For the nine month period ended September 30, 2014, our

 

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selling, general and administrative expenses were $152.3 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable segments.

We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result in additional income tax expense based on probable outcomes of such matters.

Cost of Revenues:

Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a seven year estimated useful life. Attachments and other smaller types of 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 (excluding depreciation) associated with rental equipment, including, among other things, the cost of servicing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of rental equipment.

New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net of any amount of credit given to the customer towards the equipment for trade-ins.

Used Equipment Sales. Cost of used equipment sold consists of the net book value of rental equipment for used equipment sold from our rental fleet, the equipment costs for used equipment we purchase for sale or the trade-in value of used equipment that we obtain from customers in equipment sales transactions.

Parts Sales. Cost of parts sales represents costs attributable to the sale of parts directly to customers.

Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.

Non-Segmented Other. These expenses include costs associated with providing transportation, hauling, parts freight, and damage waiver including, among other items, drivers’ wages, fuel costs, shipping costs, and our costs related to damage waiver policies.

Selling, General and Administrative Expenses:

Our selling, general and administrative (“SG&A”) expenses include sales and marketing expenses, payroll and related benefit costs, insurance expenses, legal and professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with 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 senior secured credit facility (the “Credit Facility”), senior unsecured notes due 2022 and our capital lease obligations, as well as our extinguished senior unsecured notes due 2016 (the “Old Notes”) for the periods during which such Old Notes were outstanding. Interest expense also includes interest on our outstanding manufacturer flooring plans payable which are used to finance inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs is also included in interest expense.

Principal Cash Flows

We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities, manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital

 

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Resources” below). Our management of our working capital is closely tied to operating cash flows, as working capital can be significantly impacted by, among other things, our accounts receivable activities, the level of new and used equipment inventories, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.

Rental Fleet

A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at September 30, 2014 was $852.8 million, or approximately 64.7% of our total assets. Our rental fleet as of September 30, 2014 consisted of 25,302 units having an original acquisition cost (which we define as the cost originally paid to manufacturers or the original amount financed under operating leases) of approximately $1.2 billion. As of September 30, 2014, our rental fleet composition was as follows (dollars in millions):

 

     Units      % of
Total
Units
    Original
Acquisition
Cost
     % of Original
Acquisition
Cost
    Average
Age in
Months
 

Hi-Lift or Aerial Work Platforms

     16,796         66.4   $ 735.9         61.5     36.8   

Cranes

     437         1.7     139.3         11.6     36.3   

Earthmoving

     2,536         10.0     231.5         19.3     19.0   

Industrial Lift Trucks

     784         3.1     30.7         2.6     25.8   

Other

     4,749         18.8     59.6         5.0     21.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     25,302         100.0   $ 1,197.0         100.0     31.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Determining the optimal age and mix for our rental fleet equipment is subjective and requires considerable estimates and judgments by management. We constantly evaluate the mix, age and quality of the equipment in our rental fleet in response to current economic and market conditions, competition and customer demand. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary auction market levels, and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions, we evaluate current economic and market conditions, competition, manufacturers’ availability, pricing and return on investment over the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive maintenance program, we believe our rental fleet is well-maintained.

The original acquisition cost of our gross rental fleet increased by approximately $196.2 million, or 19.6%, for the nine month period ended September 30, 2014. The average age of our rental fleet equipment decreased by approximately 3.1 months for the nine months ended September 30, 2014.

Our average rental rates for the nine month period ended September 30, 2014 were 2.5% higher than in the nine month period ended September 30, 2013. Our average rental rates for the three month period ended September 30, 2014 were 2.9% higher than in the three month period ended September 30, 2013 and 1.3% higher than the three month period ended June 30, 2014 (see further discussion on rental rates in “Results of Operations” below).

The rental equipment mix among our four core product lines for the nine months ended September 30, 2014 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, 2013.

 

    Economic downturns. The demand for our products is dependent on the general economy, the stability of the global credit markets, the industries in which our customers operate or serve, and other factors. Downturns in the general economy or in the construction and manufacturing industries, as well as adverse credit market conditions, can cause demand for our products to materially decrease.

 

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    Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies constitute a significant portion of our total revenues. As a result, we depend upon customers in these businesses and their ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is impacted by fluctuations in customers’ spending levels on capital expenditures and by the availability of credit to those customers.

 

    Adverse weather. Adverse weather in a geographic region in which we operate may depress demand for equipment in that region. Our equipment is primarily used outdoors and, as a result, prolonged adverse weather conditions may prohibit our customers from continuing their work projects. Adverse weather also has a seasonal impact in parts of our Intermountain region, particularly in the winter months.

We believe that our integrated business tempers the effects of downturns in a particular segment. For a discussion of seasonality, see “Seasonality” on page 37 of this Quarterly Report on Form 10-Q.

Results of Operations

The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for our business segments and non-segmented revenues for the three and nine months ended September 30, 2014 and 2013. The period-to-period comparisons of our financial results are not necessarily indicative of future results.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Revenues.

 

     Three Months Ended
September 30,
     Total
Dollar
Increase
(Decrease)
    Total
Percentage
Increase
(Decrease)
 
     2014      2013       
     (in thousands, except percentages)  

Segment Revenues:

          

Equipment rentals

   $ 108,238       $ 89,420       $ 18,818        21.0

New equipment sales

     80,758         90,220         (9,462     (10.5 )% 

Used equipment sales

     25,198         36,779         (11,581     (31.5 )% 

Parts sales

     29,009         26,571         2,438        9.2

Services revenues

     15,622         13,729         1,893        13.8

Non-Segmented revenues

     16,219         13,730         2,489        18.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 275,044       $ 270,449       $ 4,595        1.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues. Our total revenues were $275.0 million for the three month period ended September 30, 2014 compared to $270.4 million for the three month period ended September 30, 2013, an increase of $4.6 million, or 1.7%. Revenues for all reportable segments are further discussed below.

Equipment Rental Revenues. Our revenues from equipment rentals for the three month period ended September 30, 2014 increased $18.8 million, or 21.0%, to $108.2 million from $89.4 million in the three month period ended September 30, 2013. Rental revenues from aerial work platforms increased $11.3 million, while rental revenues from earthmoving equipment increased $3.8 million. Other equipment rental revenues increased $2.4 million. Rental revenues from cranes increased $1.2 million and rental revenues from lift trucks increased $0.1 million. Our average rental rates for the three month period ended September 30, 2014 increased 2.9% compared to the same three month period last year and increased 1.3% from the quarter ended June 30, 2014.

Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three month period ended September 30, 2014 was 36.9% compared to 36.7% in the three month period ended September 30, 2013, an increase of 0.2%. The increase in comparative rental equipment dollar utilization was primarily driven by a 2.9% increase in average rental rates and the mix of equipment rented, combined with an improvement in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was 74.1% for the three month period ended September 30, 2014 compared to 72.3% in the three month period ended September 30, 2013, an increase of 1.8%. Rental equipment time utilization based on the number of rental equipment units available for rent was 68.3% for the three month period ended September 30, 2014 compared to 66.6% in the same period last year, an increase of 1.7%. The increase in equipment rental time utilization based on original equipment cost and based on the number of units available for rent is largely reflective of increased demand for rental equipment.

 

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New Equipment Sales Revenues. Our new equipment sales for the three month period ended September 30, 2014 decreased $9.5 million, or 10.5%, to approximately $80.8 million from $90.2 million for the three month period ended September 30, 2013. Sales of new earthmoving equipment decreased approximately $4.8 million and sales of new cranes decreased $3.4 million. Sales of new lift trucks and sales of new aerial work platform equipment decreased $0.8 million and $0.4 million, respectively. We experienced a significant decrease in our third quarter new equipment sales on a year over year basis, which we believe was driven by exceptionally strong 2013 results.

Used Equipment Sales Revenues. Our used equipment sales decreased $11.6 million, or 31.5%, to $25.2 million for the three month period ended September 30, 2014, from $36.8 million for the same three month period in 2013. Sales of used aerial work platform equipment decreased $6.2 million and sales of used crane equipment decreased $3.8 million. Sales of used earthmoving equipment decreased $2.1 million. Partially offsetting these decreases were increases in used lift truck revenues of $0.4 million and an increase in used other equipment of $0.1 million. The decrease in used equipment sales is largely due to the Company having a younger fleet, resulting in less equipment being at an age at which it is typically sold in the normal fleet life cycle.

Parts Sales Revenues. Our parts sales increased approximately $2.4 million, or 9.2%, to $29.0 million for the three month period ended September 30, 2014 from approximately $26.6 million for the same three month period in 2013. The increase in parts revenues was due to higher demand for parts compared to last year.

Services Revenues. Our services revenues for the three month period ended September 30, 2014 increased $1.9 million, or 13.8%, to $15.6 million from $13.7 million for the same three month period last year. The increase in services revenues was due to higher demand for services compared to last year.

Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including transportation, hauling, parts freight and damage waiver charges. For the three month period ended September30, 2014, our other revenues were approximately $16.2 million, an increase of $2.5 million, or 18.1%, from $13.7 million in the same three month period in 2013. The increase was primarily due to an increase in hauling revenues and higher damage waiver income associated with our increased equipment rental activity.

Gross Profit.

 

     Three Months Ended
September 30,
     Total
Dollar
Change

Increase
(Decrease)
    Total
Percentage
Change

Increase
(Decrease)
 
     2014      2013       
     (in thousands, except percentages)  

Segment Gross Profit:

          

Equipment rentals

   $ 54,703       $ 44,343       $ 10,360        23.4

New equipment sales

     9,128         9,561         (433     (4.5 )% 

Used equipment sales

     7,848         9,693         (1,845     (19.0 )% 

Parts sales

     8,304         7,448         856        11.5

Services revenues

     10,266         8,786         1,480        16.8

Non-Segmented revenues

     817         469         348        74.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total gross profit

   $ 91,066       $ 80,300       $ 10,766        13.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Gross Profit. Our total gross profit was $91.1 million for the three month period ended September 30, 2014 compared to $80.3 million for the same three month period in 2013, an increase of $10.8 million, or 13.4%. Total gross profit margin for the three month periods ended September 30, 2014 was 33.1%, an increase of 3.4% from 29.7% during the same three month period last year. Comparative gross margins were impacted by revenue mix with a significant increase in new equipment sales for the three month period ended September 30, 2013 compared to the three month period ended September 30, 2014. Gross profit and gross margin for all reportable segments are further described below:

Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the three month period ended September 30, 2014 increased $10.4 million, or 23.4%, to $54.7 million from $44.3 million in the same three month period in 2013. The increase in equipment rentals gross profit was the result of an $18.8 million increase in rental revenues, which was partially offset by a $2.3

 

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million increase in rental expenses and a $6.1 million increase in rental equipment depreciation expense. The increase in rental expenses and rental equipment depreciation expense was due to a larger fleet size in 2014 compared to 2013. As a percentage of equipment rental revenues, rental expenses were 14.7% for the three month period ended September 30, 2014 compared to 15.2% for the same period last year. Depreciation expense was 34.8% of equipment rental revenues for the three month period ended September 30, 2014 compared to 35.3% for the same period last year. The percentage decreases in rental expenses and depreciation as a percentage of equipment rental revenues was primarily attributable to the increase in comparative rental revenues.

Gross profit margin on equipment rentals for the three month period ended September 30, 2014 was approximately 50.5%, a 0.9% increase compared to a gross profit margin of 49.6% for the same period in 2013. This increase in gross profit margin was primarily due to the increase in equipment rental revenues resulting from higher average rental rates and an increase in time utilization for the three month period ended September 30, 2014 compared to the three month period ended September 30, 2013, combined with the decrease in rental expenses and depreciation as a percentage of equipment rental revenues.

New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three month period ended September 30, 2014 decreased $0.4 million, or 4.5%, to $9.1 million compared to approximately $9.6 million for the same three month period in 2013 on a total new equipment sales decrease of $9.5 million. Gross profit margin on new equipment sales for the three month period ended September 30, 2014 was 11.3%, an increase of 0.7% from 10.6% in the same three month period in 2013, reflecting higher margins on sales of new earthmoving equipment, cranes and aerial work platform equipment in the current year period.

Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three month period ended September 30, 2014 decreased approximately $1.8 million, or 19.0%, to $7.8 million from $9.7 million in the same period in 2013 on a used equipment sales decrease of $11.6 million. Gross profit margin on used equipment sales for the three month period ended September 30, 2014 was 31.1%, up 4.8% from 26.3% for the same three month period in 2013, primarily as a result of higher margins on sales of used aerial work platform equipment and earthmoving equipment. Our used equipment sales from the rental fleet, which comprised approximately 75.6% and 87.8% of our used equipment sales for the three month periods ended September 30, 2014 and 2013, respectively, were approximately 161.8% and 142.3% of net book value for the three month periods ended September 30, 2014 and 2013, respectively.

Parts Sales Gross Profit. For the three month period ended September 30, 2014, our parts sales revenue gross profit increased $0.9 million, or 11.5%, to $8.3 million from $7.4 million for the same three month period in 2013 on a $2.4 million increase in parts sales revenues. Gross profit margin for the three month period ended September 30, 2014 was 28.6%, an increase of 0.6% from 28.0% in the same three month period in 2013, as a result of the mix of parts sold.

Services Revenues Gross Profit. For the three month period ended September 30, 2014, our services revenues gross profit increased $1.5 million, or 16.8%, to $10.3 million from $8.8 million for the same three month period in 2013 on a $1.9 million increase in services revenues. Gross profit margin for the three month period ended September 30, 2014 was 65.7%, up 1.7% from 64.0% in the same three month period in 2013, as a result of services revenues mix.

Non-Segmented Other Revenues Gross Profit. Our non-segmented other revenues gross profit increased approximately $0.3 million, or 74.2%, to $0.8 million for the three month period ended September 30, 2014 from $0.5 million for the same period in 2013 on a $2.5 million increase in non-segmented other revenues. Gross margin for the three month period ended September 30, 2014 was 5.0% compared to a gross margin of 3.4% in the same three month period last year, an increase of 1.6%, primarily reflective of improved margins on hauling revenues.

Selling, General and Administrative Expenses. SG&A expenses increased $4.6 million, or 9.8%, to $51.6 million for the three month period ended September 30, 2014 compared to $47.0 million for the three month period ended September 30, 2013. The net increase in SG&A expenses was attributable to several factors. Employee wages, incentives and benefits increased approximately $2.7 million as a result of higher salaries, wages and payroll taxes stemming primarily from a larger work force and an increase in commission and incentive pay that resulted from higher profits. Legal and professional fees increased $0.6 million. Liability insurance costs increased $0.4 million and utility related expenses increased $0.2 million. Depreciation expense increased $0.3 million. Stock-based compensation expense was $0.6 million and $0.5 million for the three month periods ended September 30, 2014 and 2013, respectively. Of the $4.6 million increase in SG&A expenses, approximately $0.3 million was attributable to branches opened since December 31, 2012 with less than three full months of operations (or no operations) in the third quarter of 2013. As a percentage of total revenues, SG&A expenses were 18.8% for the three month period ended September 30, 2014, an increase of 1.4% from 17.4% for the same three month period in 2013, largely as a result of the decline in new equipment sales revenues in the three month period ended September 30, 2014 compared to the same period last year.

 

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Other Income (Expense). For the three month period ended September 30, 2014, our net other expenses decreased approximately $0.1 million to $12.9 million compared to $13.0 million for the same three month period in 2013. Interest expense was approximately $13.2 million in each of the three month periods ended September 30, 2014 and 2013. Miscellaneous other income increased $0.1 million to $0.3 million for the three month period ended September 30, 2014 compared to $0.2 million for the three month period ended September 30, 2013.

Income Taxes. We recorded income tax expense of $11.8 million for the three month period ended September 30, 2014 compared to income tax expense of $7.0 million for the three month period ended September 30, 2013. Our effective income tax rate was 43.6% for the three month period ended September 30, 2014 compared to 33.5% for the same three month period last year. The increase in our effective tax rate is primarily due to a decrease in permanent differences in the relation to current year pre-tax income. We also recorded a reduction of book goodwill of approximately $0.2 million for the three month period ended September 30, 2013 for tax benefits realized from tax-deductible goodwill in excess of book goodwill. Based on available evidence, both positive and negative, we believe it is more likely than not that our deferred tax assets at September 30, 2014 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Revenues.

 

     Nine Months Ended
September 30,
     Total
Dollar
Increase
(Decrease)
    Total
Percentage
Increase
(Decrease)
 
     2014      2013       
     (in thousands, except percentages)  

Segment Revenues:

          

Equipment rentals

   $ 293,276       $ 248,518       $ 44,758        18.0

New equipment sales

     240,886         216,979         23,907        11.0

Used equipment sales

     85,940         103,589         (17,649     (17.0 )% 

Parts sales

     83,182         77,971         5,211        6.7

Services revenues

     45,372         42,050         3,322        7.9

Non-Segmented revenues

     43,995         39,070         4,925        12.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 792,651       $ 728,177       $ 64,474        8.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues. Our total revenues were $792.7 million for the nine month period ended September 30, 2014 compared to $728.2 million for the nine month period ended September 30, 2013, an increase of $64.5 million, or 8.9%. Revenues for all reportable segments are further discussed below.

Equipment Rental Revenues. Our revenues from equipment rentals for the nine month period ended September 30, 2014 increased $44.8 million, or 18.0%, to $293.3 million from $248.5 million in the nine month period ended September 30, 2013. Rental revenues from aerial work platforms increased $26.9 million, while rental revenues from earthmoving equipment increased $8.4 million. Rental revenues from other equipment increased approximately $5.9 million and rental revenues from cranes increased $2.9 million. Lift truck rental revenues increased $0.7 million. Our average rental rates for the nine month period ended September 30, 2014 increased 2.5% compared to the same nine month period last year.

Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the nine month period ended September 30, 2014 improved to 35.9% from 35.5% in the nine month period ended September 30, 2013, an increase of approximately 0.4%. The increase in comparative rental equipment dollar utilization was primarily driven by an increase in rental equipment time utilization combined with a 2.5% increase in average rental rates. Rental equipment time utilization as a percentage of original equipment cost was approximately 72.1% for the nine month period ended September 30, 2014 compared to 70.4% in the nine month period ended September 30, 2013, an increase of appromimately1.7%. Rental equipment time utilization based on the number of rental equipment units available for rent was 66.7% for the nine month period ended September 30, 2014 compared to 65.5% in the same period last year, an increase of approximately 1.2%. The increase in equipment rental time utilization based on original equipment cost and based on the number of units available for rent is reflective of increased equipment rental demand.

New Equipment Sales Revenues. Our new equipment sales for the nine month period ended September 30, 2014 increased approximately $23.9 million, or 11.0%, to $240.9 million from $217.0 million for the nine month period ended September 30, 2013. Sales of new cranes increased $17.2 million and sales of sales of new aerial work platform equipment increased $6.2 million. Sales of new earthmoving equipment increased $2.1 million. New other equipment sales decreased $0.7 million and sales of new lift trucks decreased $0.9 million.

 

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Used Equipment Sales Revenues. Our used equipment sales decreased approximately $17.6 million, or 17.0%, to $85.9 million for the nine month period ended September 30, 2014, from $103.6 million for the same nine month period in 2013. The decrease in used equipment sales was primarily driven by a $14.4 million decrease in used crane sales. Used aerial work platform equipment sales decreased $6.4 million. Partially offsetting these decreases were an increase in sales of used earthmoving equipment of $2.5 million and a $0.6 million increase in used lift truck sales. The decrease in used equipment sales is largely due to the Company having a younger fleet, resulting in less equipment being at an age at which it is typically sold in the normal fleet life cycle.

Parts Sales Revenues. Our parts sales increased $5.2 million, or 6.7%, to $83.2 million for the nine month period ended September 30, 2014 from approximately $78.0 million for the same nine month period in 2013. The increase in parts revenues was due to higher demand for parts compared to the same period last year.

Services Revenues. Our services revenues for the nine month period ended September 30, 2014 increased $3.3 million, or 7.9%, to approximately $45.4 million from $42.1 million for the same nine month period last year. The increase in services revenues was primarily due to higher demand for services compared to last year.

Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including transportation, hauling, parts freight and damage waiver charges. For the nine month period ended September 30, 2014, our non-segmented other revenues were $44.0 million, an increase of approximately $4.9 million, or 12.6%, from $39.1 million in the same nine month period in 2013. The increase was primarily due to an increase in hauling revenues and higher damage waiver income associated with our increased equipment rental activity.

Gross Profit.

 

     Nine Months Ended
September 30,
     Total
Dollar
Change

Increase
(Decrease)
    Total
Percentage
Change

Increase
(Decrease)
 
     2014      2013       
     (in thousands, except percentages)  

Segment Gross Profit:

          

Equipment rentals

   $ 141,489       $ 117,438       $ 24,051        20.5

New equipment sales

     28,109         23,526         4,583        19.5

Used equipment sales

     27,116         29,583         (2,467     (8.3 )% 

Parts sales

     24,154         21,311         2,843        13.3

Services revenues

     29,508         26,307         3,201        12.2

Non-Segmented revenues

     2,542         2,027         515        25.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total gross profit

   $ 252,918       $ 220,192       $ 32,726        14.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Gross Profit. Our total gross profit was $252.9 million for the nine month period ended September 30, 2014 compared to $220.2 million for the same nine month period in 2013, an increase of $32.7 million, or 14.9%. Total gross profit margin for the nine month period ended September 30, 2014 was 31.9%, an increase of 1.7% from the 30.2% gross profit margin for the same nine month period in 2013. Gross profit and gross margin for all reportable segments are further described below:

Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the nine month period ended September 30, 2014 increased $24.1 million, or 20.5%, to $141.5 million from $117.4 million in the same nine month period in 2013. The increase in equipment rentals gross profit was the result of a $44.8 million increase in rental revenues for the nine month period ended September 30, 2014, which was partially offset by a $4.3 million increase in rental expenses and a $16.4 million increase in rental equipment depreciation expense. The increase in rental expenses and rental equipment depreciation expense was due to a larger fleet size in 2014 compared to 2013. As a percentage of equipment rental revenues, rental expenses were 15.6% for the nine month period ended September 30, 2014 compared to 16.7% for the same period last year. This percentage decrease was primarily attributable to the increase in comparative rental revenues. Depreciation expense was 36.2% of equipment rental revenues for the nine month period ended September 30, 2014 compared to 36.1% for the same period in 2013, up 0.1% as a result of an increase in the volume of rental purchase option agreements.

Gross profit margin on equipment rentals for the nine month period ended September 30, 2014 was 48.2%, up approximately 0.9% from 47.3% for the same period in 2013. This gross profit margin improvement was primarily due to the increase in comparative

 

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rental revenues resulting from higher average rental rates and the increase in time utilization for the nine month period ended September 30, 2014 compared to the nine month period ended September 30, 2013, combined with the decrease in rental expenses as a percentage of equipment rental revenues.

New Equipment Sales Gross Profit. Our new equipment sales gross profit for the nine month period ended September 30, 2014 increased $4.6 million, or 19.5%, to $28.1 million compared to $23.5 million for the same nine month period in 2013 on a total new equipment sales increase of $23.9 million. Gross profit margin on new equipment sales for the nine month period ended September 30, 2014 was 11.7%, an increase of 0.9% from 10.8% in the same nine month period in 2013, primarily reflecting higher margins on new crane and earthmoving equipment sales.

Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the nine month period ended September 30, 2014 decreased $2.5 million, or 8.3%, to $27.1 million from $29.6 million in the same period in 2013 on a used equipment sales decrease of $17.6 million. Gross profit margin on used equipment sales for the nine month period ended September 30, 2014 was 31.6%, up approximately 3.0% from 28.6% for the same nine month period in 2013, primarily as a result of higher margins on sales of used earthmoving equipment and aerial work platform equipment. Our used equipment sales from the rental fleet, which comprised approximately 83.3% and 79.4% of our used equipment sales for the nine month periods ended September 30, 2014 and 2013, respectively, were approximately155.2% and 151.0% of net book value for the nine month periods ended September 30, 2014 and 2013, respectively.

Parts Sales Gross Profit. For the nine month period ended September 30, 2014, our parts sales revenue gross profit increased $2.8 million, or 13.3%, to approximately $24.2 million from $21.3 million for the same nine month period in 2013 on a $5.2 million increase in parts sales revenues. Gross profit margin for the nine month period ended September 30, 2014 was 29.0%, an increase of 1.7% from 27.3% in the same nine month period in 2013, as a result of the mix of parts sold and pricing on other equipment parts.

Services Revenues Gross Profit. For the nine month period ended September 30, 2014, our services revenues gross profit increased $3.2 million, or 12.2%, to $29.5 million from $26.3 million for the same nine month period in 2013 on a $3.3 million increase in services revenues. Gross profit margin for the nine month period ended September 30, 2014 was 65.0%, up approximately 2.4% from 62.6% in the same nine month period in 2013, as a result of services revenues mix.

Non-Segmented Other Revenues Gross Profit. Our non-segmented other revenues gross profit increased $0.5 million, or 25.4%, to $2.5 million for the nine month period ended September 30, 2014 from approximately $2.0 million for the same period in 2013. Gross margin for the nine month period ended September 30, 2014 was 5.8% compared to a gross margin of 5.2% in the same nine month period last year, an increase of 0.6%, primarily reflective of improvement in damage waiver income margins and other miscellaneous income margins.

Selling, General and Administrative Expenses. SG&A expenses increased approximately $12.0 million, or 8.5%, to $152.3 million for the nine month period ended September 30, 2014 compared to $140.3 million for the nine month period ended September 30, 2013. The net increase in SG&A expenses was attributable to several factors. Employee wages, incentives and benefits increased approximately $6.5 million as a result of higher salaries, wages and payroll taxes stemming primarily from a larger work force and an increase in commission and incentive pay that resulted from higher revenues and profits. Legal and professional fees increased $1.2 million and liability insurance costs increased $1.1 million. Depreciation expense increased $0.8 million. Facility and utility related expenses increased [Illegible] million. Stock-based compensation expense was $2.2 million for the nine month periods ended September 30, 2014 compared to $2.1 million for the same period in 2013. Of the $12.0 million increase in SG&A expenses, approximately $1.7 million was attributable to branches opened since December 31, 2012 with less than nine full months of operations (or no operations) in the first nine months of 2013. As a percentage of total revenues, SG&A expenses were 19.2% for the nine month period ended September 30, 2014, a decrease of 0.1% from 19.3% for the same nine month period in 2013.

Other Income (Expense). For the nine month period ended September 30, 2014, our net other expenses increased approximately $0.2 million to $37.8 million compared to $37.6 million for the same nine month period in 2013. The increase was the result of a $0.2 million increase in interest expense to $38.8 million for the nine month period ended September 30, 2014 compared to $38.6 million for the same nine month period in 2013. The increase in interest expense is the net result of an approximately $0.7 million increase in expense related to our senior unsecured notes due to the increase in the aggregate principal amount of these notes from $530 million to $630 million on February 4, 2013 and a $0.5 million decrease in interest expense related to lower average borrowing rates on manufacturing flooring plans used to finance inventory purchases. While our average borrowings under the senior secured credit facility for the nine months ended September 30, 2014 increased, interest expense increased less than $0.1 million as our average borrowing rate decreased for the nine months ended September 30, 2014 compared to the same period last year.

 

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Income Taxes. We recorded income tax expense of approximately $26.3 million for the nine month period ended September 30, 2014 compared to income tax expense of $14.4 million for the nine month period ended September 30, 2013. Our effective income tax rate was 40.6% for the nine month period ended September 30, 2014 compared to 32.8% for the same nine month period last year. The increase in our effective tax rate is primarily due to a decrease in permanent differences in the relation to current year pre-tax income. We also recorded a reduction of book goodwill of approximately $0.7 million for the nine month period ended September 30, 2013 for tax benefits realized from tax-deductible goodwill in excess of book goodwill. Based on available evidence, both positive and negative, we believe it is more likely than not that our deferred tax assets at September 30, 2014 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.

Liquidity and Capital Resources

Cash flow from operating activities. For the nine month period ended September 30, 2014, the cash provided by our operating activities was $106.6 million. Our reported net income of $38.5 million, which, 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 $161.0 million. These cash flows from operating activities were also positively impacted by a $43.4 million increase in manufacturing flooring plans payable and a $22.2 million increase in accounts payable. Partially offsetting these positive cash flows was an increase of $92.5 million in inventories as a result of increasing demand and improving sales of new equipment as compared to last year and a $16.7 million increase in receivables. Also decreasing our operating cash flows were a $8.9 million decrease in accrued expenses payable and other liabilities and a $1.9 million increase in prepaid expenses and other assets.

For the nine month period ended September 30, 2013, the cash provided by our operating activities was $49.8 million. Our reported net income of approximately $29.5 million, which, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense, writedown of goodwill for tax-deductible goodwill in excess of book goodwill, and net gains on the sale of long-lived assets, provided positive cash flows of $115.3 million. These cash flows from operating activities were also positively impacted by a $16.5 million increase in accounts payable. Offsetting these positive cash flows was an increase of $72.9 million in inventories as a result of increasing demand and improving sales of new and used equipment. Also decreasing our operating cash flows were a $2.2 million increase in accounts receivable, a $1.2 million increase in prepaid expenses and other assets, a $1.1 million decrease in manufacturing flooring plans payable and a $4.6 million decrease in accrued expenses payable and other liabilities.

Cash flow from investing activities. For the nine month period ended September 30, 2014, cash provided by our investing activities was exceeded by cash used in our investing activities, resulting in net cash used in our investing activities of $225.5 million. This was a result of purchases of rental and non-rental equipment totaling $299.3 million, which was partially offset by proceeds from the sale of rental and non-rental equipment of approximately $73.8 million.

For the nine month period ended September 30, 2013, cash provided by our investing activities was exceeded by cash used in our investing activities, resulting in net cash used in our investing activities of approximately $134.4 million. This was a result of purchases of rental and non-rental equipment totaling $218.5 million, which was partially offset by proceeds from the sale of rental and non-rental equipment of $84.1 million.

Cash flow from financing activities. For the nine month period ended September 30, 2014, cash provided by our financing activities was approximately $106.6 million. Net borrowings under the Credit Facility totaled $118.0 million. We also realized a $0.6 million excess tax benefit from stock-based awards. Partially offsetting these positive cash flows were deferred financing costs of $0.9 million and capital lease payments of $0.1 million. Purchases of treasury stock totaled $1.5 million. We also paid dividends totaling $9.5 million. As more fully described in our Quarterly Report on Form 10-Q for the three months ended September 30, 2012, the Company on September 19, 2012 paid a one-time special dividend of $7.00 per share on the then-outstanding common stock and dividends on nonvested stock at that time were to be paid upon vesting of those shares. On June 6, 2014, the Company paid all remaining dividends on those shares of common stock totaling $0.7 million. On July 28, 2014, the Company announced a quarterly cash dividend of $0.25 per share of common stock to stockholders of record as of the close of business on August 25, 2014. On September 9, 2014, the Company paid the announced dividend totaling approximately $8.8 million.

For the nine month period ended September 30, 2013, cash provided by our financing activities was $82.4 million. Net proceeds from our 7% senior notes due 2022 issued on February 4, 2013 (the “Add-on Notes”) were approximately $107.3 million. Excess tax benefits realized from stock-based awards totaled $0.4 million. Partially offsetting these positive cash flows were net payments under the Credit Facility of $22.6 million, payments of deferred financing costs of $0.7 million and dividends paid of $0.9 million. Additionally, purchases of treasury stock totaled $0.9 million and payments on capital leases were $0.1 million.

 

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Senior Secured Credit Facility

We and our subsidiaries are parties to a senior secured Credit Facility with General Electric Capital Corporation as agent, and the lenders named therein.

On May 21, 2014, we amended, extended and restated its existing $402.5 million senior secured credit facility with General Electric Capital Corporation by entering into the Fourth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, General Electric Capital Corporation, as administrative agent, Bank of America, N.A. as co-syndication agent and documentation agent, Wells Fargo Capital Finance, LLC, as co-syndication agent and Deutsche Bank Securities Inc. as joint lead arranger and joint bookrunner.

The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the credit facility from February 29, 2017 to May 21, 2019, (ii) increases the uncommitted incremental revolving capacity from $130 million to $150 million, (iii) permits a like-kind exchange program under Section 1031 of the Internal Revenue Code of 1986, as amended, (iv) provides that the unused commitment fee margin will be either 0.50%, 0.375% or 0.25%, depending on the ratio of the average of the daily closing balances of the aggregate revolving loans, swing line loans and letters of credit outstanding during each month to the aggregate commitments for the revolving loans, swing line loans and letters of credit, (v) lowers the interest rate (a) in the case of index rate revolving loans, to the index rate plus an applicable margin of 0.75% to 1.25% depending on the leverage ratio and (b) in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of 1.75% to 2.25%, depending on the leverage ratio, (vi) lowers the margin applicable to the letter of credit fee to between 1.75% and 2.25%, depending on the leverage ratio, and (vii) permits, under certain conditions, for the payment of dividends and/or stock repurchases or redemptions on the capital stock of the Company of up to $75 million per calendar year and further additionally permits the payment of the special cash dividend of $7.00 per share previously declared by the Company on August 20, 2012 to the holders of outstanding restricted stock of the Company following the declared payment date with such permission not tied to the vesting of such restricted stock (which includes the Company’s payment in June 2014 of all amounts that remained payable to the holders of the restricted stock of the Company with respect to such special dividend that was otherwise payable following the applicable vesting dates in May and July 2014 and 2015).

At September 30, 2014, the interest rate on the Credit Facility was based on LIBOR plus 200 basis points. The weighted average interest rate at September 30, 2014 was approximately 2.6%. At October 24, 2014, we had $155.7 million of available borrowings under our Credit Facility, net of $6.5 million of outstanding letters of credit.

Senior Unsecured Notes

On August 20, 2012, the Company closed on its offering of $530 million aggregate principal amount of its 7% senior notes due 2022 (the “New Notes”) in an unregistered offering. The New Notes and related guarantees were offered in a private placement solely to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or outside the United States to persons other than “U.S. persons” in compliance with Regulation S under the Securities Act.

Net proceeds to the Company from the sale of the New Notes totaled approximately $520.7 million. The Company used a portion of the net proceeds from the sale of the New Notes to repurchase $158.7 million of the $250 million aggregate principal amount of its 8 3/8% senior notes due 2016 (the “Old Notes”) in early settlement of a tender offer and consent solicitation (the “Tender Offer”) that the Company launched on August 6, 2012. Holders who tendered their Old Notes prior to the early tender deadline received $1,031.67 per $1,000 principal amount of Old Notes tendered, plus accrued and unpaid interest to the date of repurchase. Having received the requisite consents from the holders of the Old Notes in the Tender Offer, the Company, certain of its subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee, executed a supplemental indenture amending the indenture relating to the Old Notes. Also on August 20, 2012, the Company satisfied and discharged its obligations under the indenture relating to the Old Notes and issued a notice of redemption for the remaining outstanding principal amount of the Old Notes. On September 19, 2012, the Company redeemed the remaining $91.3 million principal amount outstanding of the Old Notes at a redemption price equal to 102.792% of the aggregate principal amount of the Old Notes being redeemed, plus accrued and unpaid interest on the Old Notes to the redemption date.

The Company used the remaining net proceeds of the offering of the New Notes to pay on September 19, 2012 a special, one-time cash dividend. Actual dividends paid totaled approximately $244.4 million, representing $7.00 per share paid on 34,911,455 outstanding shares of Common Stock of the Company. Dividends on 232,431 outstanding shares of non-vested common stock totaling approximately $1.5 million, net of estimated forfeitures, are to be paid upon vesting of those shares pursuant to their respective stock awards’ terms and conditions.

 

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In connection with the above transactions, the Company recorded a one-time loss on the early extinguishment of debt of approximately $10.2 million, or approximately $6.6 million after-tax, reflecting payment of $5.0 million of tender premiums and $2.6 million to redeem the Old Notes that remained outstanding following completion of the Tender Offer, combined with the write-off of approximately $2.6 million of unamortized deferred financing costs related to the Old Notes. Transaction costs incurred in connection with the offering of the New Notes totaled approximately $1.7 million.

The New Notes were issued at par and require semiannual interest payments on March 1 and September 1 of each year, commencing on March 1, 2013. No principal payments are due until maturity (September 1, 2022).

The New Notes are redeemable, in whole or in part, at any time on or after September 1, 2017 at specified redemption prices plus accrued and unpaid interest to the date of redemption. We may redeem up to 35% of the aggregate principal amount of the New Notes before September 1, 2015 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to September 1, 2017 at a specified “make-whole” redemption price plus accrued and unpaid interest to the date of redemption.

The New Notes rank equally in right of payment to all of our existing and future senior indebtedness and rank senior to any of our subordinated indebtedness. The New Notes are unconditionally guaranteed on a senior unsecured basis by all of our current and future significant domestic restricted subsidiaries. In addition, the New Notes are effectively subordinated to all of our and the guarantors’ existing and future secured indebtedness, including the Credit Facility, to the extent of the assets securing such indebtedness, and are structurally subordinated to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the New Notes.

If we experience a change of control, we will be required to offer to purchase the New Notes at a repurchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase.

On February 4, 2013, the Company closed on its offering of $100 million aggregate principal amount of Add-on Notes in an unregistered offering through a private placement. The Add-on Notes were priced at 108.5% of the principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 20, 2012 totaled approximately $110.4 million. The Company used the proceeds from the offering to repay indebtedness outstanding under its Credit Facility and for the payment of fees and expenses related to the offering.

The Add-on Notes were issued as additional notes under an indenture dated as of August 20, 2012, pursuant to which the Company previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally with and form a part of a single class of securities with the New Notes.

In order to satisfy our obligations under two separate registration rights agreements, one entered into between the Company, the guarantors of the New Notes and the initial purchasers of the New Notes, and the other entered into between the Company, the guarantors of the Add-on Notes and the initial purchaser of the Add-on Notes, we commenced an offering on April 1, 2013 to exchange the New Notes and guarantees and the Add-on Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New Notes and the Add-on Notes (except that the exchange notes will not contain any transfer restrictions). This exchange offer closed on April 30, 2013.

Cash Requirements Related to Operations

Our principal sources of liquidity have been from cash provided by operating activities and the sales of new, used and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the above described uses will be the principal demands on our cash in the future.

The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the nine month period ended September 30, 2014 were approximately $316.4 million, including $42.1 million of non-cash transfers from new and used equipment to rental fleet inventory. Our gross property and equipment capital expenditures for the nine month period ended September 30, 2014 were $25.0 million. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our actual performance.

 

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To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the New Notes and the Add-on Notes, the Credit Facility and our other indebtedness), will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. As of October 24, 2014, we had $155.7 million of available borrowings under the Credit Facility, net of $6.5 million of outstanding letters of credit.

We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. Given current economic and market conditions, including the significant disruptions in the global capital markets, we cannot assure investors that any of these actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Credit Facility and the indenture governing the New Notes and the Add-on Notes, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Quarterly Dividend

On July 28, 2014, the Company announced a quarterly dividend of $0.25 per share to stockholders of record as of the close of business on August 25, 2014, which was paid on September 9, 2014.

Seasonality

Although we believe our business is not materially impacted by seasonality, the demand for our rental equipment tends to be lower in the winter months. The level of equipment rental activities is directly related to commercial and industrial construction and maintenance activities. Therefore, equipment rental performance will be correlated to the levels of current construction activities. The severity of weather conditions can have a temporary impact on the level of construction activities. Adverse weather has a seasonal impact in parts of the markets we serve, including our Intermountain region, particularly in the winter months.

Equipment sales cycles are also subject to some seasonality with the peak selling period during the spring season and extending through the summer. Parts and services activities are typically less affected by changes in demand caused by seasonality.

Contractual and Commercial Commitments

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet Arrangements

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 the index rate plus an applicable margin of 0.75% to 1.25%, depending on the leverage ratio, in the case of index rate revolving loans and LIBOR plus an applicable margin of 1.75% to 2.25%, depending on the leverage ratio, in the case of LIBOR revolving loans. At September 30, 2014, we had total borrowings outstanding under the Credit Facility of approximately $220.5

 

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million. A 1.0% increase in the interest rate on the Credit Facility would result in approximately a $2.2 million increase in interest expense on an annualized basis. At October 24, 2014, we had $155.7 million of available borrowings under the Credit Facility, net of $6.5 million of outstanding letters of credit. We did not have significant exposure to changing interest rates as of September 30, 2014 on the fixed-rate New Notes and Add-on Notes. Historically, we have not engaged in derivatives or other financial instruments for trading, speculative or hedging purposes, though we may do so from time to time if such instruments are available to us on acceptable terms and prevailing market conditions are accommodating.

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 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2014, 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 quarter ended September 30, 2014 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.

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, 2013, which could materially affect our business, financial condition or future results.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to the Company’s risk factors previously disclosed on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On July 1, 2014, 30,767 shares of non-vested stock that were issued in 2011 vested at $38.46 per share. Certain holders of those vested shares returned an aggregate of 13,148 shares of common stock to the Company during the quarter ended September 30, 2014 as payment for their respective employee withholding taxes. This resulted in an addition of 13,148 shares to treasury stock.

 

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On July 1, 2014, 32,197 shares of non-vested stock that were issued in 2012 vested at $38.46 per share. Certain holders of those vested shares returned an aggregate of 13,414 shares of common stock to the Company during the quarter ended September 30, 2014 as payment for their respective employee withholding taxes. This resulted in an addition of 13,414 shares to treasury stock.

On July 1, 2014, 27,499 shares of non-vested stock that were issued in 2013 vested at $38.46 per share. Certain holders of those vested shares returned an aggregate of 11,260 shares of common stock to the Company during the quarter ended September 30, 2014 as payment for their respective employee withholding taxes. This resulted in an addition of 11,260 shares to treasury stock.

On September 13, 2014, 767 shares of non-vested stock that were issued in 2013 vested at $40.00 per share. The holder of those vested shares returned 312 shares of common stock to the Company during the quarter ended September 30, 2014 as payment of their employee withholding taxes. This resulted in an addition of 312 shares to treasury stock.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

 

  31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
  31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS    XBRL Instance Document (filed herewith).
101.SCH    XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB    XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

 

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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.

 

  H&E EQUIPMENT SERVICES, INC.
Dated: October 30, 2014   By:  

 /s/ John M. Engquist

   

John M. Engquist

Chief Executive Officer

(Principal Executive Officer)

Dated: October 30, 2014   By:  

 /s/ Leslie S. Magee

   

Leslie S. Magee

Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

  31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
  31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS    XBRL Instance Document (filed herewith).
101.SCH    XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB    XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

 

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