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 March 31, 2022, and its results of operations for the three months ended March 31, 2022, 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, 2021. 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, 2021.
The outbreak of the COVID-19 pandemic, first identified in late 2019, continues to affect the United States of America and the world. In response to the onset of the COVID-19 pandemic, we proactively implemented certain measures to strengthen cash flow, manage costs, strengthen liquidity and enhance employee safety. As the impact of COVID-19 became more widespread, our equipment rental utilization and sales volumes began to decline from February through mid-April 2020, where utilization and sales levels began to improve and stabilize for the remainder of 2020. We continued to see improvements with utilization levels beginning in March 2021 returning to approximate pre-COVID utilization levels. The timing and the extent of any subsequent contraction due to COVID-19 will depend on a number of factors, including widespread resurgence in COVID-19 infections, the rate of vaccinations, vaccine efficacy, a global supply chain disruption, the impact to capital and financial markets and the related impact on our customers. We remain focused on the safety and well-being of our employees, customers and communities as we maintain a high-level of service to our customers. For a discussion of liquidity, see Liquidity and Capital Resources below.
Overview
Background
Founded in 1961, H&E Equipment Services, Inc. is one of the largest rental equipment companies in the nation. The Company’s fleet is among the industry’s youngest and most versatile with a superior equipment mix comprised of aerial work platforms, earthmoving, material handling, and other general and specialty lines. H&E serves a diverse set of end markets in many high-growth geographies including branches throughout the Pacific Northwest, West Coast, Intermountain, Southwest, Gulf Coast States, Southeast, and Mid-Atlantic regions.
As of March 31, 2022, we operated 104 branch locations across 25 states throughout the United States. Our work force includes, among others, a professional sales force, drivers, and regional, district and branch managers. 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, our branch managers of each location 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 60 years. H&E L.L.C. was formed in June 2002 through the business combination of Head & Engquist, a wholly-owned subsidiary of Gulf Wide, and 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 connection with our initial public offering in February 2006, we converted H&E LLC into H&E Equipment Services, Inc., a Delaware corporation.
Effective October 1, 2021, the Company sold its crane business to a wholly-owned subsidiary of The Manitowoc Company, Inc. for $130 million in cash (“the Crane Sale”), subject to finalization of closing adjustments. The Crane Sale met the criteria for discontinued operations presentation and as such, the results of operations of the Crane Sale are reported in discontinued operations in the Consolidated Statements of Income for all periods presented. The financial results and information below are presented on a continuing operations basis and exclude the Crane Sale, unless otherwise noted specifically as discontinued operations.
Critical Accounting Policies
Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2021, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no significant changes to these critical accounting policies and estimates during the three months ended March 31, 2022. Our critical accounting policies include, among others, useful lives of rental equipment and property and equipment, acquisition accounting, goodwill, long-lived assets and income taxes.
19
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, 2021 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) used equipment sales; (3) new 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 core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as equipment usage based on: (1) a percentage of original equipment cost; and (2) the number of rental equipment units available for rent), rental rate trends and targets, rental equipment dollar utilization, and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.
•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. Used equipment is sold by our retail sales force. 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.
•New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-house retail sales force. 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.
•Parts Sales. Our parts business provides parts to our own rental fleet and sells parts for the equipment we sell. In order to provide timely parts and services support to our rental fleet as well as our customers, we maintain a parts inventory.
•Services. Our services operation provides maintenance and repair services to our own rental fleet and for our customers’ equipment at our facilities as well as at our customers’ locations. In addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance services to industrial customers.
Our non-segmented revenues and costs relate primarily to ancillary charges associated with equipment maintenance and repair services, and are not generally allocated to reportable segments.
For additional information about our business segments, see Note 11 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Revenue Sources
We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals account for more than half of our total revenues. For the three months ended March 31, 2022, of our total revenues, approximately 73% were attributable to equipment rentals, 8% were attributable to used equipment sales, 10% were attributable to new equipment sales, 6% were attributable to parts sales and 3% were attributable to our services revenues.
The equipment that we rent, sell and service is principally used in the construction industry, as well as by companies for commercial and industrial uses such as plant maintenance and turnarounds, and in the petrochemical and energy sectors. As a result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for used and new equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions, supply chain disruptions and general economic conditions.
Equipment Rentals. Our rental operation primarily represents revenues from renting owned equipment of our core types of construction and industrial equipment (aerial work platforms, earthmoving equipment, material handling equipment and other general and specialty lines). We primarily account for these rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. We have a well-maintained rental fleet and we actively manage the size, quality, age and composition of our rental fleet.
20
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.
New Equipment Sales. Our new equipment sales operation sells new equipment across all of our core categories of equipment, primarily in our earthmoving product category.
Parts Sales. We primarily generate revenues from the sale of parts for equipment that we rent or sell.
Services. We primarily derive our services revenues from maintenance and repair services for equipment that we rent or sell and from customers' owned equipment.
Our non-segmented revenues for the periods presented in this Quarterly Report on Form 10-Q relate primarily to ancillary charges associated with equipment maintenance and repair services, and are not generally allocated to reportable segments.
Principal Costs and Expenses
Our largest expenses are rental expenses, rental depreciation, the costs associated with the used equipment we sell, the costs to purchase new equipment we sell, and costs associated with parts sales and services, all of which are included in cost of revenues. For the three months ended March 31, 2022, our total cost of revenues was $160.9 million. Our operating expenses consist principally of selling, general and administrative (“SG&A”) expenses. For the three months ended March 31, 2022, our SG&A expenses were $78.3 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 potential outcomes of such matters.
Cost of Revenues
Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and material handling equipment over a seven year estimated useful life. Attachments and other smaller type equipment are depreciated over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment.
Rental Expense. Rental expense represents the costs associated with rental equipment, including, among other things, the cost of repairing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of owning rental equipment.
Rental Other. Rental other expenses consist primarily of equipment support activities that we provide our customers in connection with renting equipment, such as hauling services, damage waiver policies, environmental fees and other recovery fees.
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.
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.
Parts Sales. Cost of parts sales represents costs attributable to the sale of parts used in the maintenance and repair of equipment on-rent by customers and directly to customers for their owned equipment.
Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of equipment on-rent by customers and of customer-owned equipment.
Our non-segmented other expenses include costs associated with ancillary charges associated with equipment maintenance and repair services.
Selling, General and Administrative Expenses
Our SG&A expenses include sales and marketing expenses, payroll and related benefit costs, including stock compensation expense, insurance expenses, 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.
21
Interest Expense
Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate amounts outstanding under our revolving $750.0 million senior secured credit facility (the “Credit Facility”), our $1.25 billion, 3.875% senior unsecured notes due 2028 (the “Senior Unsecured Notes”) and finance lease obligations, if applicable. Interest expense also includes interest on our outstanding manufacturer flooring plans payable, which are used to finance inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs and the accretion/amortization of note discount/premium are also included in interest expense.
Principal Cash Flows
We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities, manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital Resources” below). Our management of our working capital is closely tied to operating cash flows, as working capital can be significantly impacted by, among other things, our accounts receivable activities, the level of used and new 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 March 31, 2022 was $1.1 billion, or approximately 52.8% of our total assets. Our rental fleet as of March 31, 2022 consisted of 43,532 units having an original acquisition cost (which we define as the cost originally paid to manufacturers) of approximately $1.9 billion. As of March 31, 2022, our rental fleet composition was as follows (dollars in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
% of
Total
Units |
|
|
Original
Acquisition
Cost |
|
|
% of
Original
Acquisition
Cost |
|
|
Average
Age in
Months |
|
Hi-Lift or Aerial Work Platforms |
|
|
22,014 |
|
|
|
50.6 |
% |
|
$ |
714.1 |
|
|
|
37.6 |
% |
|
|
52.6 |
|
Earthmoving |
|
|
5,789 |
|
|
|
13.3 |
% |
|
|
508.5 |
|
|
|
26.7 |
% |
|
|
23.8 |
|
Material Handling |
|
|
6,868 |
|
|
|
15.8 |
% |
|
|
525.2 |
|
|
|
27.6 |
% |
|
|
41.4 |
|
Other |
|
|
8,861 |
|
|
|
20.3 |
% |
|
|
153.4 |
|
|
|
8.1 |
% |
|
|
25.6 |
|
Total |
|
|
43,532 |
|
|
|
100.0 |
% |
|
$ |
1,901.2 |
|
|
|
100.0 |
% |
|
|
41.5 |
|
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, the demand for our rental fleet 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, our rental fleet is well-maintained.
The original acquisition cost of our gross rental fleet increased by approximately $41.3 million, or 2.2%, for the three months ended March 31, 2022. The average age of our rental fleet equipment increased by approximately 1.2 months for the three months ended March 31, 2022. Our average rental rates for the three months ended March 31, 2022 were approximately 6.5% higher than last year (see further discussion on rental rates in “Results of Operations” below).
With the exception of the Crane Sale and our crane product line, the rental equipment mix among our core product lines for the three months ended March 31, 2022 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, 2021.
•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
22
in the construction and industrial markets, as well as adverse credit market conditions, can cause demand for our products to materially decrease.
•Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies constitute a significant portion of our total revenues. As a result, we depend upon customers in these businesses and their ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is impacted by fluctuations in customers’ spending levels on capital expenditures and by the availability of credit to those customers.
•Adverse weather. Adverse weather in a geographic region in which we operate may depress demand for equipment in that region. Our equipment is primarily used outdoors and, as a result, prolonged adverse weather conditions may prohibit our customers from continuing their work projects. Adverse weather also has a seasonal impact in parts of our Intermountain region, particularly in the winter months.
•Regional and Industry-Specific Activity and Trends. Expenditures by our customers may be impacted by the overall level of construction activity in the markets and regions in which they operate, the price of oil and other commodities and other general economic trends impacting the industries in which our customers and end users operate. As our customers adjust their activity and spending levels in response to these external factors, our rentals and sales of equipment to those customers will be impacted.
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 months ended March 31, 2022 and 2021. The period-to-period comparisons of our financial results are not necessarily indicative of future results. All financial results and metrics discussed below are on a continuing operations basis.
As discussed further in Note 1 and Note 3 to our Condensed Consolidated Financial Statements, on October 1, 2021, the Company sold its crane business. The results of operations of the Crane Sale are reported in discontinued operations in the Condensed Consolidated Statements of Income for all periods presented. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations and accordingly, cash flow amounts for discontinued operations are disclosed in Note 3 “Acquisitions and Dispositions”.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Revenues.
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Total |
|
|
Total |
|
|
|
March 31, |
|
|
Dollar |
|
|
Percentage |
|
|
|
2022 |
|
|
2021 |
|
|
Increase
(Decrease) |
|
|
Increase
(Decrease) |
|
|
|
(in thousands, except percentages) |
|
Segment Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
Rentals |
|
$ |
177,182 |
|
|
$ |
137,146 |
|
|
$ |
40,036 |
|
|
|
29.2 |
% |
Rentals other |
|
|
22,043 |
|
|
|
16,073 |
|
|
|
5,970 |
|
|
|
37.1 |
% |
Total equipment rentals |
|
|
199,225 |
|
|
|
153,219 |
|
|
|
46,006 |
|
|
|
30.0 |
% |
Used equipment sales |
|
|
21,526 |
|
|
|
38,854 |
|
|
|
(17,328 |
) |
|
|
(44.6 |
)% |
New equipment sales |
|
|
26,036 |
|
|
|
23,173 |
|
|
|
2,863 |
|
|
|
12.4 |
% |
Parts sales |
|
|
16,059 |
|
|
|
15,556 |
|
|
|
503 |
|
|
|
3.2 |
% |
Services revenues |
|
|
8,134 |
|
|
|
8,011 |
|
|
|
123 |
|
|
|
1.5 |
% |
Non-Segmented other revenues |
|
|
1,470 |
|
|
|
1,619 |
|
|
|
(149 |
) |
|
|
(9.2 |
)% |
Total revenues |
|
$ |
272,450 |
|
|
$ |
240,432 |
|
|
$ |
32,018 |
|
|
|
13.3 |
% |
Total Revenues. Our total revenues were approximately $272.5 million for the three months ended March 31, 2022 compared to $240.4 million for the three months ended March 31, 2021, an increase of $32.0 million, or 13.3%. Revenues for all reportable segments and non-segmented other revenues are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the three months ended March 31, 2022 increased approximately $46.0 million, or 30.0%, to $199.2 million from $153.2 million in the three months ended March 31, 2021. The increase in equipment rental revenues was largely due to increased demand and our larger fleet as compared to the prior year. See Rentals and Rentals Other below for additional information.
23
Rentals: Rental revenues increased $40.0 million, or 29.2%, to $177.2 million for the three months ended March 31, 2022 compared to $137.1 million for the three months ended March 31, 2021. Rental revenues from earthmoving equipment increased $15.0 million, material handling equipment increased $10.5 million and aerial work platform equipment increased $9.6 million. Rental revenues on other equipment increased $5.0 million.
Our average rental rates for the three months ended March 31, 2022 increased 6.5% compared to the same three months last year and increased approximately 1.6% from the three months ended December 31, 2021. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three months ended March 31, 2022 was 37.6% compared to 32.6% in the three months ended March 31, 2021, an increase of 5.0%. The increase in comparative rental equipment dollar utilization was the result of the increase in equipment rental rates as noted above and an increase in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was approximately 70.4% for the three months ended March 31, 2022 compared to 64.1% in the three months ended March 31, 2021, an increase of 6.3%. The increase in rental equipment time utilization as a percentage of original equipment cost was largely due to increased demand in the current year.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues for the three months ended March 31, 2022 were $22.0 million compared to $16.1 million for the three months ended March 31, 2021, an increase of approximately $6.0 million, or 37.1%.
Used Equipment Sales Revenues. Our used equipment sales decreased $17.3 million, or 44.6%, to $21.5 million for the three months ended March 31, 2022, from approximately $38.9 million for the same three months in 2021. This decrease is reflective of the increased rental demand and our decision to capitalize on high equipment utilization during the quarter. Sales of used material handling equipment, used earthmoving equipment and used aerial work platform equipment decreased $7.9 million, $4.9 million and $4.3 million, respectively.
New Equipment Sales Revenues. Our new equipment sales for the three months ended March 31, 2022 increased $2.9 million, or 12.4%, to $26.0 million from $23.2 million for the three months ended March 31, 2021. Sales of new other equipment and new material handling equipment increased $2.9 million and $1.4 million, respectively. Partially offsetting these new equipment sales increases was a $1.2 million decrease in new aerial work platform equipment sales.
Parts Sales Revenues. Our parts sales revenues for the three months ended March 31, 2022 increased $0.5 million, or 3.2%, to $16.1 million from approximately $15.6 million for the same three months last year.
Services Revenues. Our services revenues for the three months ended March 31, 2022 increased $0.1 million, or 1.5%, to approximately $8.1 million from $8.0 million for the same three months last year.
Non-Segmented Other Revenues. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three months ended March 31, 2022, our other revenues were approximately $1.5 million, a decrease of $0.1 million, or 9.2%, from approximately $1.6 million in the same three months in 2021.
Gross Profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Total |
|
|
Total |
|
|
|
March 31, |
|
|
Dollar |
|
|
Percentage |
|
|
|
2022 |
|
|
2021 |
|
|
Increase
(Decrease) |
|
|
Increase
(Decrease) |
|
|
|
(in thousands, except percentages) |
|
Segment Gross Profit (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment rentals |
|
|
|
|
|
|
|
|
|
|
|
|
Rentals |
|
$ |
88,402 |
|
|
$ |
58,628 |
|
|
|
29,774 |
|
|
|
50.8 |
% |
Rentals other |
|
|
1,130 |
|
|
|
(421 |
) |
|
|
1,551 |
|
|
|
368.4 |
% |
Total equipment rentals |
|
|
89,532 |
|
|
|
58,207 |
|
|
|
31,325 |
|
|
|
53.8 |
% |
Used equipment sales |
|
|
8,978 |
|
|
|
12,494 |
|
|
|
(3,516 |
) |
|
|
(28.1 |
)% |
New equipment sales |
|
|
3,707 |
|
|
|
2,774 |
|
|
|
933 |
|
|
|
33.6 |
% |
Parts sales |
|
|
4,355 |
|
|
|
4,403 |
|
|
|
(48 |
) |
|
|
(1.1 |
)% |
Services revenues |
|
|
5,320 |
|
|
|
5,396 |
|
|
|
(76 |
) |
|
|
(1.4 |
)% |
Non-Segmented revenues gross profit (loss) |
|
|
(312 |
) |
|
|
138 |
|
|
|
(450 |
) |
|
|
(326.1 |
)% |
Total gross profit |
|
$ |
111,580 |
|
|
$ |
83,412 |
|
|
$ |
28,168 |
|
|
|
33.8 |
% |
24
Total Gross Profit. Our total gross profit was $111.6 million for the three months ended March 31, 2022 compared to $83.4 million for the same three months in 2021, an increase of $28.2 million, or 33.8%. Total gross profit margin for the three months ended March 31, 2022 was approximately 41.0%, an increase of 6.3% from the 34.7% gross profit margin for the same three months in 2021. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the three months ended March 31, 2022 increased approximately $31.3 million, or 53.8%, to $89.5 million from $58.2 million in the same three months in 2021. Total gross profit margin from equipment rentals for the three months ended March 31, 2022 was approximately 44.9% compared to 38.0% for the same period in 2021, an increase of approximately 6.9%. See Rentals and Rentals Other below for additional information.
Rentals: Rental revenues gross profit increased $29.8 million, or 50.8%, to $88.4 million for the three months ended March 31, 2022 compared to $58.6 million for the same three months in 2021. The gross profit increase was the result of a $40.0 million increase in rental revenues for the three months ended March 31, 2022 compared to the same period last year, partially offset by a $6.6 million increase in rental equipment depreciation expense and a $3.7 million increase in rental expenses. The increase in depreciation expense is primarily due to a larger fleet size in the current year as compared to the prior year. Our fleet size, based on original equipment cost, at March 31, 2022 was $218.8 million, or 13.0%, larger than our fleet size at March 31, 2021.
Gross profit margin on equipment rentals for the three months ended March 31, 2022 was approximately 49.9% compared to 42.7% for the same period in 2021, an increase of 7.2%. Depreciation expense was 33.9% of equipment rental revenues for the three months ended March 31, 2022 compared to 39.0% for the same period in 2021, a decrease of approximately 5.1%, resulting primarily from the increase in rental revenues. As a percentage of revenues, rental expenses were 16.2% for the three months ended March 31, 2022 compared to 18.3% for the same period last year, a decrease of 2.0%, resulting primarily from the increase in rental revenues.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues gross profit for the three months ended March 31, 2022 was $1.1 million compared to a gross loss of $0.4 million for the same period in 2021, an increase of $1.6 million. The gross margin was 5.1% for the three months ended March 31, 2022 compared to a gross loss margin of 2.6% for the same period last year.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three months ended March 31, 2022 decreased $3.5 million, or 28.1%, to $9.0 million from $12.5 million in the same period in 2021, as used equipment sales revenues decreased $17.3 million. Gross profit margin on used equipment sales for the three months ended March 31, 2022 was approximately 41.7%, up 9.5% from 32.2% for the same three months in 2021, primarily as a result of higher gross margins across all product lines. Our used equipment sales from the rental fleet, which comprised 91.6% and 94.5% of our used equipment sales for the three months ended March 31, 2022 and 2021, respectively, were approximately 182.3% and 150.9% of net book value for the three months ended March 31, 2022 and 2021, respectively.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three months ended March 31, 2022 increased $0.9 million, or 33.6%, to $3.7 million compared to $2.8 million for the same three months in 2021 on new equipment sales that increased $2.9 million. Gross profit margin on new equipment sales was 14.2% for the three months ended March 31, 2022, compared to 12.0% for the same period last year, an increase of 2.2%. The increase in gross profit was primarily due to increased gross profit in other equipment and earthmoving equipment sales.
Parts Sales Gross Profit. Our parts sales gross profit for the three months ended March 31, 2022 was approximately $4.4 million, a decrease of 1.1%, from gross profit of $4.4 million for the same period last year on parts sales that increased $0.5 million. Gross profit margin for the three months ended March 31, 2022 was 27.1% compared to 28.3% for the same three months last year, a decrease of 1.2%, resulting from the mix of parts sold.
Services Revenues Gross Profit. For the three months ended March 31, 2022, our services revenues gross profit decreased $0.1 million, or 1.4%, to $5.3 million from $5.4 million for the same three months in 2021 on service revenues that increased $0.1 million. Gross profit margin for the three months ended March 31, 2022 was 65.4%, a decrease of 2.0% from approximately 67.4% in the same three months in 2021, as a result of services revenues mix.
Non-Segmented Other Revenues Gross Profit (Loss). Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three months ended March 31, 2022, our other revenues gross loss was $0.3 million compared to a gross profit of $0.1 million, in the same period in 2021, a decrease of $0.5 million.
Selling, General and Administrative Expenses. SG&A expenses increased $10.1 million, or 14.9%, to $78.3 million for the three months ended March 31, 2022 compared to $68.1 million for the three months ended March 31, 2021. Employee salaries, wages, payroll taxes and other employee related expenses increased $6.1 million due to increased commissions, wages, headcount and
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overtime and incentive pay. Facility expenses increased $1.4 million, legal and professional fees increased $0.9 million and liability insurance costs increased $0.5 million. Approximately $3.6 million of comparative incremental SG&A expenses in the three months ended March 31, 2022 was attributable to branches opened since January 1, 2021 with less than three months of comparable operations in either or both of the three months ended March 31, 2022 and 2021. SG&A expenses as a percentage of total revenues for the three months ended March 31, 2022 and 2021 were 28.7% and 28.3%, respectively, an increase of 0.4%.
Gain on Sales of Property & Equipment (Net). We had net gains on sales of property and equipment of $1.4 million compared to $0.2 million for the same period last year, an increase of $1.2 million. This increase is due to gains on the sale of property and equipment in the normal course of business.
Other Income (Expense). For the three months ended March 31, 2022, our net other expenses decreased approximately $0.2 million to $12.6 million compared to $12.8 million for the same three months in 2021. Interest expense was $13.4 million for both of the three months ended March 31, 2022 and 2021.
Income Taxes. We recorded income tax expense of $5.8 million for the three months ended March 31, 2022 compared to an income tax expense of $0.7 million for the three months ended March 31, 2021. Our effective income tax rate for the three months ended March 31, 2022 was 26.3% compared to 26.9% for the same period in 2021. Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at March 31, 2022 are fully realizable through future reversals of existing taxable temporary differences and future taxable income.
Liquidity and Capital Resources
Cash Flow from Operating Activities. For the three months ended March 31, 2022, the cash provided by our operating activities was $38.5 million. Our reported net income of $16.3 million, when adjusted for non-cash income and expense items, such as depreciation and amortization (including net amortization (accretion) of note discount (premium)), deferred income taxes, non-cash operating lease expense, 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 $85.6 million. These cash flows from operating activities were also positively impacted by a $17.3 million increase in accounts payable and a $6.6 million increase in accrued expenses payable and other liabilities. Partially offsetting these positive cash flows were a $59.7 million increase in inventories due to increases in equipment purchases, a $4.5 million increase in receivables, a $5.4 million increase in prepaid expenses and other assets and a $1.4 million decrease in manufacturing flooring plans payable.
For both continuing and discontinued operations for the three months ended March 31, 2021, the cash provided by our operating activities was $46.9 million. Our reported net income for both continuing and discontinued operations of $4.2 million, when adjusted for non-cash income and expense items, such as depreciation and amortization (including net amortization (accretion) of note discount (premium)), deferred income taxes, non-cash operating lease expense, amortization of finance lease right-of-use assets, provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense, gain on sale of discontinued operations and net gains on the sale of long-lived assets, provided positive cash flows of $61.0 million. These cash flows from operating activities were also positively impacted by a $22.7 million decrease in receivables, a $62.4 million increase in accounts payable, a $6.2 million increase in accrued expenses payable and other liabilities and a $0.9 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $99.0 million increase in inventories, due to increases in capital expenditures for new equipment inventory, and a $7.2 million increase in prepaid expenses and other assets.
Cash Flow from Investing Activities. For the three months ended March 31, 2022, our net cash used in our investing activities was approximately $33.7 million. Purchases of rental and non-rental equipment were $55.0 million and proceeds from the sale of rental and non-rental equipment were $21.3 million.
For both continuing and discontinued operations for the three months ended March 31, 2021, our net cash used in our investing activities was approximately $24.7 million. Purchases of rental and non-rental equipment were $63.6 million and proceeds from the sale of rental and non-rental equipment were $39.0 million.
Cash Flow from Financing Activities. For the three months ended March 31, 2022, net cash used in our financing activities was $10.3 million. Dividends paid totaled $9.9 million, or $0.275 per common share, and treasury stock purchases totaled $0.3 million.
For both continuing and discontinued operations for the three months ended March 31, 2021, net cash used in our financing activities was $10.6 million. Dividends paid totaled $9.9 million, or $0.275 per common share. Treasury stock purchases totaled $0.4 million, payments of deferred financing costs were $0.1 million and finance lease principal payments were $0.1 million.
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Senior Unsecured Notes
On December 14, 2020, we completed the offering of our Senior Unsecured Notes of $1.25 billion. No principal payments on the Senior Unsecured Notes are due until their scheduled maturity date of December 15, 2028.
The Senior Unsecured Notes were issued by H&E Equipment Services, Inc. (the parent company) and are guaranteed by GNE Investments, Inc. and its wholly-owned subsidiaries Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp (collectively, the guarantor subsidiaries). The guarantees, made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s ability to obtain funds from the guarantor subsidiaries by dividend or loan. There are no registration rights associated with the notes or the subsidiary guarantees.
Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC as administrative agent, and the lenders named therein. At March 31, 2022, we had no outstanding borrowings under the Credit Facility and we could borrow up to $740.3 million, which with cash on hand amounted to a liquidity position of $1.1 billion. On October 1, 2021, we sold our crane business and the disposition had no impact on our borrowing availability. For further information on the Crane Sale, see Note 3 to our Condensed Consolidated Financial Statements. We did not have any negative impacts to our liquidity position under the Credit Facility as a result of discontinued operations or the COVID-19 pandemic, nor do we have any covenant violations related to the Credit Facility. At April 20, 2022, we had $740.3 million of available borrowings under our Credit Facility, net of a $9.7 million outstanding letter of credit.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the sales of used, new and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash historically have been to fund operating activities and working capital (including used and new equipment inventories), purchases of rental fleet equipment and property and equipment, open new branch locations, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our actual performance. Our gross rental fleet capital expenditures for the three months ended March 31, 2022 and for both continuing and discontinued operations for the three months ended March 31, 2021 were approximately $76.0 million and $71.7 million, respectively, including $31.6 million and $15.4 million, respectively, of non-cash transfers from used and new equipment to rental fleet inventory. This increase in rental fleet capital expenditures reflects our response to improved rental demand. Our gross property and equipment capital expenditures for the three months ended March 31, 2022 and for both continuing and discontinued operations for the three months ended March 31, 2021 were $10.7 million and $7.3 million, respectively.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the Credit Facility, the Senior Unsecured Notes and our other indebtedness) will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. At March 31, 2022, we had cash on hand of approximately $351.8 million. At March 31, 2022, we had available borrowings of $740.3 million, net of $9.7 million of outstanding letters of credit, compared to $741.3 million at March 31, 2021, net of $8.7 million of outstanding letters of credit. At April 20, 2022, we had $740.3 million of available borrowings under the Credit Facility, net of a $9.7 million of outstanding letters of credit. We do not expect our liquidity to be materially negatively impacted by the ongoing effects of the COVID-19 pandemic.
Quarterly Dividend
On February 11, 2022, the Company announced a quarterly dividend of $0.275 per share to stockholders of record, which was paid on March 18, 2022, totaling approximately $9.9 million. The Company intends to continue to pay regular quarterly cash
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dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other things, business and market conditions.
Contractual and Commercial Commitments
There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2021.