10-Q 1 hees-10q_20180930.htm 10-Q hees-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018

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

For the transition period from          to        

Commission file number: 000-51759

 

H&E Equipment Services, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

81-0553291

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

7500 Pecue Lane,

 

70809

Baton Rouge, Louisiana

 

(ZIP Code)

(Address of Principal Executive Offices)

 

 

(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      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      No  

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

 

Large Accelerated Filer

                         Accelerated Filer                  

Non-Accelerated Filer

 

 

 

 

 

Smaller Reporting Company  

                         Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

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

As of October 18, 2018, there were 35,734,421 shares of H&E Equipment Services, Inc. common stock, $0.01 par value, outstanding.

 

 

 

 


 

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

September 30, 2018

 

 

 

Page

PART I.  FINANCIAL INFORMATION

 

4

 

 

 

Item 1. Financial Statements:

 

4

Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017

 

4

Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

 

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

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

 

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4. Controls and Procedures

 

48

 

 

 

PART II.  OTHER INFORMATION

 

50

 

 

 

Item 1. Legal Proceedings

 

50

Item 1A. Risk Factors

 

50

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

 

50

Item 3. Defaults upon Senior Securities

 

50

Item 4. Mine Safety Disclosures

 

50

Item 5. Other Information

 

50

Item 6. Exhibits

 

51

 

 

 

Signatures

 

52

 

 

2


 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may”, “could”, “would”, “should”, “believe”, “expect”, “anticipate”, “plan”, “estimate”, “target”, “project”, “intend”, “foresee” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new marketing applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. In addition, even if our actual results are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative of results or developments in subsequent periods. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

 

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

 

our ability to forecast trends in our business accurately, and the impact of economic downturns and economic uncertainty on the markets we serve;

 

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

 

relationships with equipment suppliers;

 

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

 

our indebtedness;

 

risks associated with the expansion of our business and any potential acquisitions we may make, including any related capital expenditures, or our ability to consummate such acquisitions;

 

our possible inability to integrate any businesses we acquire;

 

competitive pressures;

 

security breaches and other disruptions in our information technology systems;

 

adverse weather events or natural disasters;

 

compliance with laws and regulations, including those relating to environmental matters 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, 2017.

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, 2017, as well as other reports and registration statements filed by us with the SEC. These factors should not be construed as exhaustive and should be read with other cautionary statements in this Quarterly Report on Form 10-Q and our other public filings. All of our annual, quarterly and current reports, and any amendments thereto, filed with or furnished to the SEC are available on our Internet website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our Internet website at www.he-equipment.com.

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

 

 

Balances at

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

5,088

 

 

$

165,878

 

Receivables, net of allowance for doubtful accounts of $3,692

   and $3,774, respectively

 

 

191,305

 

 

 

176,081

 

Inventories, net of reserves for obsolescence of $377 and $947, respectively

 

 

113,252

 

 

 

75,004

 

Prepaid expenses and other assets

 

 

9,368

 

 

 

9,172

 

Rental equipment, net of accumulated depreciation of

    $562,647 and $495,940, respectively

 

 

1,153,244

 

 

 

904,824

 

Property and equipment, net of accumulated depreciation and

   amortization of $142,316 and $131,500, respectively

 

 

113,403

 

 

 

101,789

 

Deferred financing costs, net of accumulated amortization

   of $13,530 and $12,946, respectively

 

 

3,188

 

 

 

3,772

 

Intangible assets, net

 

 

29,285

 

 

 

Goodwill

 

 

105,843

 

 

 

31,197

 

Total assets

 

$

1,723,976

 

 

$

1,467,717

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Amounts due on senior secured credit facility

 

$

219,018

 

 

$                      —

 

Accounts payable

 

 

84,765

 

 

 

89,781

 

Manufacturer flooring plans payable

 

 

26,472

 

 

 

22,002

 

Accrued expenses payable and other liabilities

 

 

61,591

 

 

 

65,095

 

Dividends payable

 

 

104

 

 

 

150

 

Senior unsecured notes, net of unaccreted discount of $3,287 and $3,644 and

   deferred financing costs of $2,129 and $2,267, respectively

 

 

944,584

 

 

 

944,088

 

Capital leases payable

 

 

778

 

 

 

1,486

 

Deferred income taxes

 

 

144,288

 

 

 

126,419

 

Deferred compensation payable

 

 

1,968

 

 

 

1,903

 

Total liabilities

 

 

1,483,568

 

 

 

1,250,924

 

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; 39,749,549 and

   39,623,773 shares issued at September 30, 2018 and December 31, 2017,

    respectively, and 35,735,432 and 35,646,585 shares outstanding at

    September 30, 2018 and December 31, 2017, respectively

 

 

396

 

 

 

395

 

Additional paid-in capital

 

 

229,958

 

 

 

227,070

 

Treasury stock at cost, 4,014,117 and 3,977,188 shares of common stock

   held at September 30, 2018 and December 31, 2017, respectively

 

 

(63,072

)

 

 

(61,749

)

Retained earnings

 

 

73,126

 

 

 

51,077

 

Total stockholders’ equity

 

 

240,408

 

 

 

216,793

 

Total liabilities and stockholders’ equity

 

$

1,723,976

 

 

$

1,467,717

 

 

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

 

 

4


 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

156,037

 

 

$

125,616

 

 

$

429,227

 

 

$

351,303

 

New equipment sales

 

 

68,233

 

 

 

48,940

 

 

 

183,265

 

 

 

128,883

 

Used equipment sales

 

 

30,294

 

 

 

22,250

 

 

 

87,287

 

 

 

75,219

 

Parts sales

 

 

31,484

 

 

 

29,534

 

 

 

89,916

 

 

 

86,259

 

Services revenues

 

 

16,426

 

 

 

16,097

 

 

 

48,250

 

 

 

47,121

 

Other

 

 

19,667

 

 

 

16,725

 

 

 

55,042

 

 

 

46,568

 

Total revenues

 

 

322,141

 

 

 

259,162

 

 

 

892,987

 

 

 

735,353

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

55,060

 

 

 

43,255

 

 

 

152,700

 

 

 

125,996

 

Rental expense

 

 

22,936

 

 

 

19,988

 

 

 

66,281

 

 

 

58,524

 

New equipment sales

 

 

60,394

 

 

 

43,609

 

 

 

162,465

 

 

 

114,440

 

Used equipment sales

 

 

20,512

 

 

 

15,116

 

 

 

59,221

 

 

 

51,979

 

Parts sales

 

 

23,129

 

 

 

21,577

 

 

 

65,677

 

 

 

62,735

 

Services revenues

 

 

5,628

 

 

 

5,567

 

 

 

16,430

 

 

 

15,898

 

Other

 

 

19,752

 

 

 

16,024

 

 

 

54,795

 

 

 

46,743

 

Total cost of revenues

 

 

207,411

 

 

 

165,136

 

 

 

577,569

 

 

 

476,315

 

Gross profit

 

 

114,730

 

 

 

94,026

 

 

 

315,418

 

 

 

259,038

 

Selling, general and administrative expenses

 

 

70,346

 

 

 

55,203

 

 

 

205,272

 

 

 

172,328

 

Merger costs (net of merger breakup fee proceeds)

 

 

219

 

 

 

(6,506

)

 

 

439

 

 

 

(6,506

)

Gain on sales of property and equipment, net

 

 

1,153

 

 

 

2,325

 

 

 

6,040

 

 

 

4,431

 

Income from operations

 

 

45,318

 

 

 

47,654

 

 

 

115,747

 

 

 

97,647

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(16,715

)

 

 

(15,060

)

 

 

(47,061

)

 

 

(41,665

)

Loss on early extinguishment of debt

 

 

 

 

 

(25,363

)

 

 

 

 

 

(25,363

)

Other, net

 

 

368

 

 

 

346

 

 

 

1,222

 

 

 

1,156

 

Total other expense, net

 

 

(16,347

)

 

 

(40,077

)

 

 

(45,839

)

 

 

(65,872

)

Income before provision (benefit) for income taxes

 

 

28,971

 

 

 

7,577

 

 

 

69,908

 

 

 

31,775

 

Provision (benefit) for income taxes

 

 

7,657

 

 

 

(885

)

 

 

18,345

 

 

 

8,045

 

Net income

 

$

21,314

 

 

$

8,462

 

 

$

51,563

 

 

$

23,730

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.60

 

 

$

0.24

 

 

$

1.45

 

 

$

0.67

 

Diluted

 

$

0.59

 

 

$

0.24

 

 

$

1.44

 

 

$

0.67

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,719

 

 

 

35,543

 

 

 

35,649

 

 

 

35,494

 

Diluted

 

 

35,926

 

 

 

35,715

 

 

 

35,904

 

 

 

35,656

 

Dividends declared per common share outstanding

 

$

0.275

 

 

$

0.275

 

 

$

0.825

 

 

$

0.825

 

 

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

 

 

5


 

`H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

51,563

 

 

$

23,730

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

18,367

 

 

 

18,092

 

Depreciation of rental equipment

 

 

152,700

 

 

 

125,996

 

Amortization of intangible assets

 

 

2,415

 

 

 

 

Amortization of deferred financing costs

 

 

819

 

 

 

785

 

Accretion of note discount, net of premium amortization

 

 

357

 

 

 

239

 

Provision for losses on accounts receivable

 

 

2,056

 

 

 

3,048

 

Provision for inventory obsolescence

 

 

74

 

 

 

151

 

Change in deferred income taxes

 

 

17,869

 

 

 

7,752

 

Stock-based compensation expense

 

 

2,998

 

 

 

2,614

 

Loss on early extinguishment of debt

 

 

 

 

 

25,363

 

Gain from sales of property and equipment, net

 

 

(6,040

)

 

 

(4,431

)

Gain from sales of rental equipment, net

 

 

(27,641

)

 

 

(22,196

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Receivables

 

 

(6,825

)

 

 

(15,811

)

Inventories

 

 

(56,355

)

 

 

(38,930

)

Prepaid expenses and other assets

 

 

175

 

 

 

(1,606

)

Accounts payable

 

 

(10,081

)

 

 

42,122

 

Manufacturer flooring plans payable

 

 

4,470

 

 

 

(7,494

)

Accrued expenses payable and other liabilities

 

 

(8,961

)

 

 

(3,075

)

Deferred compensation payable

 

 

65

 

 

 

44

 

Net cash provided by operating activities

 

 

138,025

 

 

 

156,393

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

      Acquisition of businesses, net of cash acquired

 

 

(196,027

)

 

 

 

Purchases of property and equipment

 

 

(27,038

)

 

 

(16,002

)

Purchases of rental equipment

 

 

(350,646

)

 

 

(183,754

)

Proceeds from sales of property and equipment

 

 

7,958

 

 

 

6,765

 

Proceeds from sales of rental equipment

 

 

78,947

 

 

 

66,316

 

    Net cash used in investing activities

 

 

(486,806

)

 

 

(126,675

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

      Purchases of treasury stock

 

 

(1,323

)

 

 

(753

)

Borrowings on senior secured credit facility

 

 

1,142,811

 

 

 

732,840

 

Payments on senior secured credit facility

 

 

(923,793

)

 

 

(818,285

)

Dividends paid

 

 

(29,447

)

 

 

(29,369

)

Principal payments on senior unsecured notes due 2022

 

 

 

 

 

(630,000

)

Costs paid to tender and redeem senior unsecured notes due 2022

 

 

 

 

 

(23,336

)

Proceeds from issuance of senior unsecured notes due 2025

 

 

 

 

 

750,000

 

Payments of deferred financing costs

 

 

(97

)

 

 

(12,152

)

Payments of capital lease obligations

 

 

(160

)

 

 

(162

)

    Net cash provided by (used in) financing activities

 

 

187,991

 

 

 

(31,217

)

Net decrease in cash

 

 

(160,790

)

 

 

(1,499

)

Cash, beginning of period

 

 

165,878

 

 

 

7,683

 

Cash, end of period

 

$

5,088

 

 

$

6,184

 

 

6


 

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

      Accrued acquisition purchase price consideration

 

$

3,432

 

 

$

 

Noncash asset purchases:

 

 

 

 

 

 

 

 

Assets transferred from new and used inventory to rental fleet

 

$

23,860

 

 

$

9,621

 

Purchases of property and equipment included in accrued expenses

   payable and other liabilities

 

$

(226

)

 

$

(127

)

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

59,475

 

 

$

50,931

 

Income taxes paid, net of refunds received

 

$

1,949

 

 

$

453

 

 

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

 

 

7


 

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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, 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, 2017, from which the consolidated balance sheet amounts as of December 31, 2017 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 services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross‑selling opportunities among our new and used equipment sales, rental, parts sales and services operations.

 

 

(2) Significant Accounting Policies

We describe our significant accounting policies in note 2 of the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.  During the three and nine month periods ended September 30, 2018, there were no significant changes to those accounting policies, other than those policies impacted by the new revenue recognition guidance, which is further described below in “Recent Accounting Pronouncements Adopted in Fiscal 2018”.

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.

8


 

Recent Accounting Pronouncements

Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.  At inception, lessees must classify leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the classification of cash flows within the statement of cash flows, differs depending on the lease classification. Also, certain qualitative and quantitative disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.

We will adopt ASU 2016-02 as of January 1, 2019. Originally, Topic 842 required all entities to use a modified retrospective transition approach that is intended to maximize comparability and be less complex than a full retrospective approach. Under the modified retrospective approach, Topic 842 is effectively implemented as of the beginning of the earliest comparative period presented in an entity’s financial statements. ASU 2018-11 amends Topic 842 so that entities may elect not to recast their comparative periods in transition and allows entities to change their date of initial application to the beginning of the period of adoption. In doing so, the entity would (1) apply Topic 840 in the comparative periods; (2) provide the disclosures required by Topic 840 for all periods that continue to be presented in accordance with Topic 840; and (3) recognize the effects of applying Topic 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019. ASU 2018-11 also amends certain narrow-scope aspects of Topic 842.

 

Our operating leases under current guidance (Topic 840) include the real estate where all but 12 of our 89 branch locations are located as of September 30, 2018. Additionally, the Company leases various types of non-rental equipment. Given the size of our lease portfolio, we expect that the new standard will have a material effect on our consolidated balance sheets as a result of recognizing new right-of-use assets and lease liabilities for our existing operating leases. We have begun accumulating the information related to these leases but have not completed our comprehensive analysis of those leases and are unable to quantify the impact to our consolidated financial statements at this time. We are concurrently evaluating our internal processes and controls over financial reporting with respect to the impact that the new lease standard will have on our lease administration and financial reporting activities. We are also in the process of implementing a new software tool to help facilitate compliance with the new guidance.

As mentioned in the Topic 606 discussion below, our equipment rental business involves rental agreements with customers whereby we are the lessor in the transaction and therefore, we believe that such transactions are subject to the pending lessor accounting guidance of Topic 842. Topic 842, as originally issued, required lessors to separate lease and nonlease components in all circumstances. Under this requirement, once separate components are identified, lessors are required to use the relative stand-alone selling price allocation method in Topic 606 to allocate the consideration in the contract to the separated components. ASU 2018-11  also amends Topic 842 to include a practical expedient under which lessors are not required to separate lease and nonlease components. While our evaluation of Topic 842 is ongoing with respect to our equipment rental activities, we have tentatively concluded that no significant changes are expected to the accounting for our rental equipment revenues, as substantially all of our rental agreements with customers will continue to be treated as operating leases under the new standard. Accordingly, we do not expect material changes to our related rental agreement accounting processes or internal controls upon adoption of Topic 842. 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard adds to U.S. GAAP an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption. ASU 2016-13 will be effective for us as of January 1, 2020. While our review is ongoing, we believe ASU 2016-13 will only have applicability to our receivables from revenue transactions, or trade receivables. Under Topic 606, revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. While we believe that our current methodology for estimating the allowance for doubtful

9


 

accounts on our trade accounts receivables is reasonable, we have not concluded whether the application of the CECL model, when compared to our current methodology, will have a material impact to our allowance for doubtful accounts.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 of the current goodwill impairment test, which was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the reporting unit’s goodwill.  ASU 2017-04 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted and requires prospective adoption.  Based upon our review of ASU 2017-04, we do not expect the guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other – Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update will be effective for us in the first quarter of 2020. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Adopted in Fiscal 2018

 

  In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which aims to eliminate the diversity in the presentation of certain cash receipts and cash payments presented and classified in the statement of cash flows. The guidance addresses the following specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transitions and (8) separately identifiable cash flows and application of predominance principle. We adopted this guidance effective January 1, 2018 and it had no impact to our condensed consolidated statement of cash flows for the periods presented in this Quarterly Report on Form 10-Q.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”).  ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The definition of a business affects several areas of accounting, including acquisitions, disposals, goodwill and consolidation. We adopted this guidance effective January 1, 2018 and it had no impact on our condensed consolidated financial statements for the periods presented in this Quarterly Report on Form 10-Q. The future impact of this guidance will depend on the nature of our future activities.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflect the consideration we expect to be entitled to in exchange for those goods or services. Entities may use a full retrospective approach or report on the cumulative effect as of the date of adoption. We adopted this standard using the full retrospective transition method effective January 1, 2018.

While the adoption of the new standard did not have an impact on our reported net income for the periods presented in this quarterly report on Form 10-Q, approximately $1.8 million and $5.2 million of revenues that were previously classified in Other Revenues have been reclassified to Parts Revenues for the three and nine month periods ended September 30, 2018, respectively. These revenues relate to freight income associated with our parts transactions, and such income was not deemed to be a separate performance obligation under the new guidance. Accordingly, we also reclassified $1.5 million and $4.0 million of associated freight costs related to these parts transactions from Other Cost of Revenues to Parts Costs of Revenues for the three and nine months ended September 30, 2018, respectively. We have recast our results for the prior year three and nine month periods ended September 30, 2017 as shown in the tables below (amounts in thousands).

 

 

 

 

10


 

 

 

 

 

Three Months Ended September 30, 2017

Statement of Income:

 

As Previously Reported

 

Adjustments

 

Current Presentation

Revenues:

 

 

 

   Equipment rentals

 

   $      125,616    

 

$           ─

 

$     125,616  

   New equipment sales

 

48,940

 

 

48,940

   Used equipment sales

 

22,250

 

 

22,250

   Parts sales

 

27,763

 

1,771

 

29,534

   Services revenues

 

16,097

 

 

16,097

   Other

 

18,496

 

(1,771)

 

16,725

        Total revenues

 

259,162

 

 

259,162

Cost of revenues:

 

 

 

 

 

 

   Rental depreciation

 

43,255

 

 

43,255

   Rental expense

 

19,988

 

 

19,988

   New equipment sales

 

43,609

 

 

43,609

   Used equipment sales

 

15,116

 

 

15,116

   Parts sales

 

20,125

 

1,452

 

21,577

   Services revenues

 

5,567

 

 

5,567

   Other

 

17,476

 

(1,452)

 

16,024

       Total cost of revenues

 

165,136

 

 

165,136

       Gross profit

 

$      94,026  

 

$          ─

 

$     94,026    

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

Statement of Income:

 

As Previously Reported

 

Adjustments

 

Current Presentation

Revenues:

 

 

 

   Equipment rentals

 

   $     351,303    

 

$           ─

 

$     351,303  

   New equipment sales

 

128,883

 

 

128,883

   Used equipment sales

 

75,219

 

 

75,219

   Parts sales

 

81,063

 

5,196

 

86,259

   Services revenues

 

47,121

 

 

47,121

   Other

 

51,764

 

(5,196)

 

46,568

        Total revenues

 

735,353

 

 

735,353

Cost of revenues:

 

 

 

 

 

 

   Rental depreciation

 

125,996

 

 

125,996

   Rental expense

 

58,524

 

 

58,524

11


 

   New equipment sales

 

114,440

 

 

114,440

   Used equipment sales

 

51,979

 

 

51,979

   Parts sales

 

58,696

 

4,039

 

62,735

   Services revenues

 

15,898

 

 

15,898

   Other

 

50,782

 

(4,039)

 

46,743

       Total cost of revenues

 

476,315

 

 

476,315

       Gross profit

 

$   259,038  

 

$          ─

 

$     259,038    

Revenue Recognition

As further discussed below, upon the adoption of Topic 606 on January 1, 2018, we recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 840 (which addresses lease accounting). As discussed above in “Pronouncements Not Yet Adopted”, Topic 842 will supersede Topic 840 upon our adoption of Topic 842 on January 1, 2019.

Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.

Nature of goods and services

The tables below summarize for the three and nine months ended September 30, 2018 our revenue by type and by the applicable accounting standard (amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

2017

 

Topic 840

 

Topic 606

 

Total

 

Topic 840

 

Topic 605

 

Total

Rental revenues

$ 155,840  

 

$      197

 

$   156,037

 

$  125,071

 

$         545

 

$  125,616

New equipment sales

           ─

 

            68,233

 

       68,233

 

 

48,940

 

48,940

Used equipment sales

           ─

 

        30,294

 

       30,294

 

 

22,250

 

22,250

Parts sales

           ─

 

        31,484

 

       31,484

 

 

27,763

 

27,763

Service revenues

           ─

 

        16,426

 

       16,426

 

 

16,097

 

16,097

Other

       5,623

 

        14,044

 

       19,667

 

4,800

 

13,696

 

18,496

Total revenues

$ 161,463  

 

     $160,678 

 

  $ 322,141 

 

$  129,871

 

$  129,291

 

$  259,162

 

 

 

Nine Months Ended September 30,

 

2018

 

2017

 

Topic 840

 

Topic 606

 

Total

 

Topic 840

 

Topic 605

 

Total

Rental revenues

    $  428,115 

 

         $     1,112 

 

$   429,227 

 

$  349,704

 

$      1,599

 

$  351,303

New equipment sales

              ─

 

          183,265

 

     183,265

 

 

128,883

 

128,883

Used equipment sales

              ─

 

            87,287

 

       87,287

 

 

75,219

 

75,219

Parts sales

              ─

 

            89,916

 

       89,916

 

 

81,063

 

81,063

Service revenues

              ─

 

            48,250

 

     48,250

 

 

47,121

 

47,121

Other

           15,565

 

            39,477    

 

       55,042

 

12,951

 

38,813

 

51,764

Total revenues

$  443,680  

 

        $ 449,307 

 

$   892,987 

 

$   362,655

 

$  372,698

 

$  735,353

12


 

Revenues by reporting segment are presented in note 10 of our condensed consolidated financial statements, using the revenue captions reflected in our condensed consolidated statements of income. We believe that the disaggregation of our revenues from contracts to customers as reflected above, coupled with further discussion below and the reporting segment in note 10, depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

Lease revenues (Topic 840)

As discussed above in “Pending Accounting Pronouncements Not Yet Adopted”, we expect to adopt Topic 842 on January 1, 2019. While our review of the revenue accounting under Topic 842 is ongoing, we have tentatively concluded that no significant changes are expected to our rental revenue accounting upon adoption of Topic 842.

Rental Revenues: Owned equipment rentals represent revenues from renting equipment. We account for these rentals as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the periods presented.

Other: Other rental revenues primarily represent services performed by us in connection with the rental of equipment to a customer, such as fuel consumption charges and damage waiver insurance. Fuel consumption charges are recognized upon return of the rental equipment when fuel consumption by the customer, if any, can be measured. Income from damage waiver insurance policies is recognized over the period the equipment is rented.

Revenues from contracts with customers (Topic 606)

The accounting for the types of revenues accounted for pursuant to Topic 606 are discussed below. Substantially all of our revenues under Topic 606 are recognized at a point-in-time rather than over time.

Rental revenues: These revenues represent revenues for services performed by us in connection with the rental of equipment and are comprised of customer training fees on rented equipment and erection and dismantling services on rental equipment. Revenues for these services are recognized upon completion of such services.

New equipment sales: Revenues from the sales of new equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.

Used equipment sales: Revenues from the sales of used equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.

Parts sales: Revenues from the sales of equipment parts are recognized at the time of pick-up by the customer for parts counter sales transactions. For parts that are shipped to a customer, we elected to use a practical expedient of Topic 606 and treat such shipping activities as fulfillment costs, thereby recognizing revenues at the time of shipment.

 

Services revenues: We derive our services primarily from maintenance and repair services to customers for their owned equipment. We recognize services revenues at the time such services are completed, which is when the customer obtains control of the promised service.

Other revenues: Other revenues relate primarily to hauling fees for transporting rental equipment to and from the customer and ancillary charges associated with maintenance and repair services. Such revenues are recognized at the time the services are completed.  

 

Receivables and contract assets and liabilities

 

We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically generate the revenues that are accounted for under both Topic 606 and Topic 840, the discussions below on credit risk and our allowances for doubtful accounts address our total revenues from Topic 606 (Topic 605 for 2017) and Topic 840.

 

We believe concentration of credit risk with respect to our receivables is limited because our customer base is comprised of a large number of geographically diverse customers. Our largest customer accounted for less than one percent of total revenues for the three and nine months ended September 30, 2018, and for each of the last three full years. No single customer accounted for more than 10%

13


 

of our revenues on an overall or segment basis for any of the periods presented in this Quarterly Report on Form 10-Q. We manage credit risk through credit approvals, credit limits and other monitoring procedures.

 

We maintain an allowance for doubtful accounts that reflects our estimate of the amount of our receivables that we will be unable to collect. We develop our estimate of this allowance based on our historical experience with specific customers, our understanding of our current economic circumstances and our own judgment as to the likelihood of ultimate payment. Our largest exposure to doubtful accounts is in our rental operations. We perform credit evaluations of customers and establish credit limits based on reviews of our customers’ current credit information and payment histories. We believe our credit risk is somewhat mitigated by our geographically diverse customer base and our credit evaluation procedures. During the year, we write-off customer account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. Such write-offs are charged against our allowance for doubtful accounts. Bad debt expense as a percentage of total revenues for the nine month periods ended September 30, 2018 and 2017 were approximately 0.3% and 0.4%, respectively. The actual rate of future credit losses, however, may not be similar to past experience. Our estimate of doubtful accounts could change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance for doubtful accounts.

 

We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of recognizable revenue. We did not recognize material revenue during the three and nine months ended September 30, 2018 or 2017 that was included in the contract liability balance as of the beginning of such periods.

 

Performance obligations

 

Most of our Topic 606 revenue is recognized at a point-in-time, rather than over time. Accordingly, in any particular period, we do not generally recognize a significant amount of revenue from performance obligations satisfied (or partially satisfied) in previous periods, and the amount of such revenue recognized during the three and nine months ended September 30, 2018 and 2017 was not material. We also do not expect to recognize material revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018.

 

Payment terms

 

Our Topic 606 revenues do not include material amounts of variable consideration. Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. Our contracts do not generally include a significant financing component. Our contracts with customers do not generally result in significant obligations associated with returns, refunds or warranties. See above for a discussion of how we manage credit risk.

 

Sales tax amounts collected from customers are recorded on a net basis.

 

Contract costs

 

We do not recognize any assets associated with the incremental costs of obtaining a contract with a customer (for example, a sales commission) that we expect to recover. Most of our revenue is recognized at a point-in-time or over a period of one year or less, and we use the practical expedient that allows us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.

 

Contract estimates and judgments

 

Our revenues accounted for under Topic 606 generally do not require significant estimates or judgments as the transaction price is generally fixed and stated on our contracts. Our contracts generally do not include multiple performance obligations, and accordingly do not generally require estimates of the standalone selling price for each performance obligation. Also, our revenues do not include material amounts of variable consideration. Substantially all of our revenues are recognized at a point-in-time and the timing of the satisfaction of the applicable performance obligations is readily determinable. As noted above, our Topic 606 revenues are generally recognized at the time of delivery to, or pick-up by, the customer.

 

 

 

 


14


 

(3) Acquisitions

 

Contractors Equipment Center (“CEC”)

 

On January 1, 2018, we completed the acquisition of CEC, a non-residential construction focused equipment rental company with three branches located in the greater Denver, Colorado area. CEC had approximately 100 employees and approximately $84 million of rental assets at original equipment cost as of December 31, 2017. CEC also had total revenues of approximately $34 million in the year ended December 31, 2017. The acquisition significantly expands our presence in the Denver area and surrounding markets.

 

The aggregate consideration paid to the pre-acquisition owners of CEC was approximately $132.4 million. The acquisition and related fees and expenses were funded through available cash. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. We do not expect any further changes to these assigned values.

 

 

 

$’s in thousands

 

 

 

 

 

Cash

 

$      1,244

 

Accounts receivable, net of allowance for doubtful accounts (1)

 

            7,583

 

Inventory

 

             504

 

Prepaid expenses and other assets

 

             324

 

Rental equipment

 

         55,342

 

Property and equipment

 

           2,700

 

Intangible assets (2)

 

         21,500

 

     Total identifiable assets acquired

 

         89,197

 

Accounts payable

 

          (1,023)

 

Accrued expenses payable and other liabilities

 

(876)

 

     Total liabilities assumed

 

(1,899)

 

     Net identifiable assets acquired

 

          87,298

 

Goodwill (3)

 

          45,092

 

     Net assets acquired

 

   $   132,390

 

 

 

 

(1)

The fair value of accounts receivable acquired was approximately $7.6 million and the gross contractual amount was $7.7 million.  

 

 

(2)

The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:

 

 

 

Fair Value (amounts in thousands)

 

Life (years)

Customer relationships

 

$   21,000

 

10

Tradenames

 

300

 

1

Leasehold interests

 

200

 

10

 

 

$   21,500

 

 

 

 

 

 

 

 

 

(3)

We have allocated the $45.1 million goodwill among our six goodwill reporting units as follows (amounts in thousands):

 

Rental Component 1

$25,233

Rental Component 2

  18,391

New Equipment

       217

Used Equipment

       632

Parts  

       379

Service

       240

 

The level of goodwill that resulted from the CEC acquisition is primarily reflective of CEC’s going-concern value, the value of CEC’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.

15


 

 

Total CEC acquisition costs were $0.9 million, of which approximately $0.2 million was incurred in the nine month period ended September 30, 2018.

 

Total revenues attributable to CEC since the acquisition were $8.9 million and $30.3 million for the three and nine month periods ended September 30 2018, respectively. Estimated net income attributable to CEC since the acquisition was $1.2 million, or $0.03 per share, for the three month period ended September 30, 2018 and $3.9 million, or $0.11 per share, for the nine month period ended September 30, 2018. It should be noted that since our acquisition of CEC, significant amounts of equipment rental fleet have been moved between H&E locations and the acquired CEC locations, the impact of which is included in these CEC operating results above, as it is impractical to report CEC operating results on a pure stand-alone basis post-acquisition.

 

 

Rental, LLC (dba “Rental Inc.”)

 

On April 1, 2018, we completed the acquisition of Rental Inc., a non-residential equipment rental and distribution company with five branches located in Alabama, Florida and Western Georgia. Rental Inc. had approximately 65 employees and approximately $35 million of rental assets at original equipment costs as of March 31, 2018, immediately prior to the acquisition. The acquisition expands our presence in the surrounding market.

 

The aggregate consideration paid to the owners of Rental Inc. was approximately $68.6 million. The acquisition and related fees and expenses were funded through available cash and from borrowings under our Credit Facility (as defined below). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date. The amounts presented here are preliminary and are subject to change. However, we do not expect material changes to these assigned values.

 

 

 

$’s in thousands

 

 

 

Cash

 

$         260

Accounts receivable, net of allowance for doubtful accounts (1)

 

    2,873    

Inventory

 

    5,324

Prepaid expenses and other assets

 

         47

Rental equipment

 

   22,578

Property and equipment

 

     1,935

Intangible assets (2)

 

     10,200

     Total identifiable assets acquired

 

   43,217

Accounts payable

 

        (439)

Manufacturer flooring plans payable

 

      (3,293)

Accrued expenses payable and other liabilities

 

        (469)

     Total liabilities assumed

 

      (4,201)

     Net identifiable assets acquired

 

     39,016

Goodwill (3)

 

      29,554

     Net assets acquired

 

$    68,570

 

 

 

(1)

The fair value of accounts receivables acquired was approximately $2.9 million and the gross contractual amount was $3.1 million.  

 

 

(2)

The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:

 

 

 

Fair Value (amounts in thousands)

 

Life (years)

Customer relationships

 

$     10,000  

 

10

Tradenames

 

          200

 

  1

 

 

$     10,200  

 

 

 

 

 

 

 

 

 

(3)

We have allocated the $29.6 million goodwill among our six goodwill reporting units as follows (amounts in thousands):

16


 

 

Rental Component 1

$9,064

Rental Component 2

  5,445

New Equipment

10,217

Used Equipment

   1,692

Parts  

   2,171

Service

      964

 

  The level of goodwill that resulted from the Rental Inc. acquisition is primarily reflective of Rental Inc.’s going-concern value, the value of Rental Inc.’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.

 

Total Rental Inc. acquisition costs were $0.2 million, substantially all of which was incurred in the nine month period ended September 30, 2018.

 

Total revenues attributable to Rental Inc. since the April 1, 2018 acquisition were $7.0 million and $14.7 million for the three and nine month periods ended September 30 2018, respectively. Estimated net loss attributable to Rental Inc. since the acquisition was $0.8 million, or $0.02 per share, for the three month period ended September 30, 2018 and $0.9 million, or $0.02 per share, for the nine month period ended September 30, 2018. It should be noted that since our acquisition of Rental Inc., significant amounts of rental fleet have been moved between H&E locations and the acquired Rental Inc. locations, the impact of which is included in these Rental Inc. operating results above, as it is impractical to report Rental Inc. operating results on a pure stand-alone basis post-acquisition.

 

 

Pro forma financial information

 

We completed the CEC acquisition on January 1, 2018. Therefore, the operating results of CEC are included in our reported condensed consolidated statements of income for the full three and nine month periods ended September 30, 2018. We completed the Rental Inc. acquisition on April 1, 2018. Therefore, our reported condensed consolidated statements of income for the nine month period ended September 30, 2018 do not include Rental Inc. for the period January 1, 2018 through March 31, 2018.  

 

The pro forma information below gives effect to the CEC and Rental Inc. acquisitions as if they had been completed on January 1, 2017 (the “pro forma acquisition date”). The pro forma information is not necessarily indicative of our results of operations had the acquisitions been completed on the above date, nor is it necessarily indicative of our future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, nor does it reflect additional revenue opportunities following the acquisition. The pro forma adjustments reflected in the table below are subject to change as additional analysis is performed. The tables below present unaudited pro forma consolidated statements of income information for the three and nine month periods ended September 30, 2017 and the nine month period ended September 30, 2018 as if CEC and Rental Inc. were included in our consolidated results for the entire periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

(amounts in thousands, except per share data)

 

 

Three Month Period Ended September 30, 2017

 

 

H&E

 

CEC

 

Rental Inc.

 

Total

Total revenues

 

$259,162

 

$9,186

 

$9,247

 

$277,595

 

 

 

 

 

 

 

 

 

Pretax income

 

7,577

 

2,133

 

2,153

 

11,863

Pro forma adjustments to pretax income:

 

 

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

     —

 

(823)

 

(713)

 

(1,536)

Intangible asset amortization (2)

 

     —

 

(605)

 

(300)

 

(905)

Interest expense (3)

 

     —

 

     —

 

(451)

 

(451)

Elimination of historic interest expense (4)

 

     —

 

425

 

   90

 

      515

Pro forma pretax income

 

7,577

 

1,130

 

    779

 

   9,486

Income tax benefit

 

(885)

 

  (127)

 

    (87)

 

   (1,099)

Net income

 

$   8,462

 

$1,257

 

$ 866

 

$10,585

Net income per share – basic

 

$     0.24

 

$  0.04

 

  $0.02

 

$    0.30

Net income per share - diluted

 

$     0.24

 

$  0.04

 

  $0.02

 

$    0.30

17


 

 

 

 

 

 

 

 

 

 

 

 

 

 

(amounts in thousands, except per share data)

 

 

Nine Month Period Ended September 30, 2017

 

 

H&E

 

CEC

 

Rental Inc.

 

Total

Total revenues

 

$735,353

 

$25,715

 

$26,472

 

$787,540

 

 

 

 

 

 

 

 

 

Pretax income

 

31,775

 

5,022

 

6,311

 

43,108

Pro forma adjustments to pretax income:

 

 

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

     —

 

(2,535)

 

(2,094)

 

(4,629)

Intangible asset amortization (2)

 

     —

 

(1,815)

 

(600)

 

(2,415)

Interest expense (3)

 

     —

 

     —

 

(1,226)

 

(1,226)

Elimination of historic interest expense (4)

 

     —

 

    1,225

 

     292

 

     1,517

Pro forma pretax income

 

    31,775

 

    1,897

 

  2,683

 

   36,355

Income tax expense

 

8,045

 

       484

 

      684

 

     9,213

Net income

 

$ 23,730

 

  $1,413

 

$1,999

 

$27,142

Net income per share – basic

 

$     0.67

 

    $0.04

 

    $0.06

 

$    0.76

Net income per share - diluted

 

$     0.67

 

    $0.04

 

    $0.06

 

$    0.76

 

 

 

 

 

 

(amounts in thousands, except per share data)

 

 

Nine Month Period Ended September 30, 2018

 

 

H&E(5)

 

Rental Inc.(6)

 

Total

Total revenues

 

$  892,987

 

$7,408

 

  $900,395

 

 

 

 

 

 

 

Pretax income

 

69,908

 

1,020

 

70,928

Pro forma adjustments to pretax income:

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

 

(749)

 

(749)

Intangible asset amortization (2)

 

 

(250)

 

(250)

Interest expense (3)

 

 

(480)

 

(480)

Elimination of historic interest expense (4)

 

 

     82

 

                    82  

Pro forma pretax income (loss)

 

69,908

 

(377)

 

69,531

Income tax expense (benefit)

 

18,345

 

(100)

 

18,245

Net income (loss)

 

$    51,563  

 

$ (277)

 

$ 51,286

Net income (loss) per share – basic

 

$        1.45    

 

$(0.01)

 

$     1.44

Net income (loss) per share - diluted

 

$        1.44    

 

$(0.01)

 

$     1.43

 

 

 

(1)

Depreciation of rental equipment and non-rental equipment were adjusted for the fair value markups, and the changes in useful lives and salvage values of the equipment acquired in the acquisitions.

 

 

(2)

Represents the amortization of the intangible assets acquired in the acquisitions.

 

 

(3)

A portion of the consideration paid for Rental Inc. was funded with borrowings from our Credit Facility. Interest expense was adjusted to reflect the additional debt resulting from such acquisition.

 

 

(4)

Represents historic debt of CEC and Rental Inc. that is not part of the combined entity was eliminated.

 

 

(5)

H&E represents consolidated operating results as presented in this Quarterly Report on Form 10-Q for the nine month period ended September 30, 2018 and includes actual results for CEC for the nine months ended September 30, 2018 and actual results for Rental Inc. for the April 1, 2018 through September 30, 2018.

 

 

(6)

Represents Rental Inc. pro forma operating results for the three month period ended March 31, 2018. We completed the Rental Inc. acquisition on April 1, 2018.

18


 

 

 

(4) Fair Value of Financial Instruments

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

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly

Level 3 – Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions

The carrying value of financial instruments reported in the accompanying condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity of these financial instruments. The fair value of our letter of credit is based on fees currently charged for similar agreements. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures as of September 30, 2018 and December 31, 2017 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.

 

 

 

September 30, 2018

 

 

 

Carrying

Amount

 

 

Fair

Value

 

Manufacturer flooring plans payable with interest computed

   at 4.50% (Level 3)

 

$

26,472

 

 

$

22,544

 

Senior unsecured notes with interest computed

   at 5.625% (Level 1)

 

 

950,000

 

 

 

947,625

 

Capital leases payable with interest computed

   at 5.929% (Level 3)

 

 

778

 

 

 

651

 

Letter of credit (Level 3)

 

 

 

 

 

116

 

 

 

 

December 31, 2017

 

 

 

Carrying

Amount

 

 

Fair

Value

 

Manufacturer flooring plans payable with interest computed

   at 4.50% (Level 3)

 

$

22,002