H&E Equipment Services, Inc.
2019 Annual Report
To Our Stockholders:
Our Company delivered solid financial and operating results in 2019 as we capitalized on strong broad-
based demand in the wide-ranging non-residential construction markets in the 23 states we serve across the
country. As a result, net income increased to $87.2 million, or $2.42 per diluted share. Excluding a $12.2 million
non-cash goodwill impairment charge we incurred in the fourth quarter of 2019, net income grew to $96.4
million or $2.67 per diluted share. A few of our 2019 financial results (compared to 2018) and certain other
Company highlights include:
• Total revenues increased $109.4 million, or 8.8%, to $1.3 billion from $1.2 billion, mainly due the growth
of our rental business. Equipment rental revenues were $694.5 million compared to $592.2 million, a 17.3%
increase.
• Total gross profit increased $60.6 million, or 13.8%, to $499.2 million from $438.5 million, while gross
margin improved to 37.0% compared to 35.4%.
•
Income from operations increased 8.1% to $180.2 million, or 13.4% of revenues, compared to $166.6
million, or 13.5% of revenues, in 2018. Excluding the impairment charge, income from operations was
$192.3 million, or 14.3% of revenues.
• We completed the acquisition of We-Rent-It in the first quarter of 2019 and successfully integrated that
business into our operations.
• We paid total cash dividends of $1.10 per share in 2019 and have paid quarterly cash dividends for 22
consecutive quarters.
Our rental business continued to deliver impressive across-the-board results. Equipment rental revenues
grew significantly and we achieved rate growth with solid physical utilization levels, despite a larger fleet than a
year ago. During 2019, we grew our fleet by $179.3 million, or 10.2% of original equipment cost, and invested
approximately $221.5 million in total net capital expenditures. Our fleet age was only 36.3 months at year end,
compared to an industry average of approximately 46.8 months. We believe that the age and mix of our fleet is a
competitive strength in the diversified end-user markets across our geographic footprint.
Overall, I am pleased with our results for 2019. I want to thank our employees for being a critical
component of what we do every day. I thank our valued customers who continue to rely on us for their
equipment, parts and service needs. Finally, I thank our Board of Directors for their continued and valued
guidance and support.
As we turn our eyes to 2020, it is clear that the ongoing and evolving coronavirus (COVID-19) outbreak
will present new challenges for all of us. We remain focused on managing our business for long-term success and
driving value for our stockholders and are confident in the talent we have at all levels in our Company to see us
through any challenges. We appreciate your continued confidence in H&E Equipment Services, and hope that
you all stay safe and healthy.
Sincerely,
Bradley W. Barber
Chief Executive Officer and President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐ 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
(State or Other Jurisdiction of
Incorporation or Organization)
7500 Pecue Lane,
Baton Rouge, Louisiana 70809
(Address of Principal Executive Offices, including Zip Code)
81-0553291
(IRS Employer
Identification No.)
(225) 298-5200
(Registrant’s Telephone Number, Including Area Code)
Title of Each Class
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
HEES
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act:
Large Accelerated Filer
Non-Accelerated Filer
Emerging Growth Company
☒
☐
☐
Accelerated Filer
Smaller Reporting 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 Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1,040,727,942 (computed by reference to the closing sale
price of the registrant’s common stock on the Nasdaq Global Market on June 28, 2019, the last business day of the registrant’s most recently completed second fiscal
quarter).
As of February 18, 2020, there were 35,870,082 shares of common stock, par value $0.01 per share, of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the document listed below have been incorporated by reference into the indicated parts of this Form 10-K, as specified in the responses to the item numbers
involved.
Part III The registrant’s definitive proxy statement, for use in connection with the Annual Meeting of Stockholders, to be filed within 120 days after the
registrant’s fiscal year ended December 31, 2019.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business ..............................................................................................................................................................
Risk Factors ........................................................................................................................................................
Unresolved Staff Comments...............................................................................................................................
Properties ............................................................................................................................................................
Legal Proceedings...............................................................................................................................................
Mine Safety Disclosures .....................................................................................................................................
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities..........................................................................................................................................................
Selected Financial Data ......................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.............................
Quantitative and Qualitative Disclosures About Market Risk ...........................................................................
Financial Statements and Supplementary Data ..................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................
Controls and Procedures .....................................................................................................................................
Other Information ...............................................................................................................................................
Directors, Executive Officers and Corporate Governance .................................................................................
Executive Compensation ....................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..........
Certain Relationships and Related Transactions, and Director Independence ...................................................
Principal Accountant Fees and Services.............................................................................................................
PART IV
Item 15.
Exhibits and Financial Statement Schedules ......................................................................................................
Form 10-K Summary..........................................................................................................................................
Item 16.
SIGNATURES .................................................................................................................................................................................
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk
Factors” section of this Annual Report on Form 10-K. These factors should not be construed as exhaustive and should be read with the
other cautionary statements in this Annual Report on Form 10-K.
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 Annual
Report on Form 10-K, 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:
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general economic conditions and construction and industrial activity in the markets where we operate in North America;
our ability to forecast trends in our business accurately, and the impact of economic downturns and economic uncertainty
on the markets we serve;
the impact of conditions in the global credit and commodity markets and their effect on construction spending and the
economy in general;
relationships with equipment suppliers;
increased maintenance and repair costs as we age our fleet and decreases in our equipment’s residual value;
our indebtedness;
risks associated with the expansion of our business and any potential acquisitions we may make, including any related
capital expenditures, or our ability to consummate such acquisitions;
our possible inability to integrate any businesses we acquire;
competitive pressures;
security breaches and other disruptions in our information technology systems;
adverse weather events or natural disasters;
compliance with laws and regulations, including those relating to environmental matters, corporate governance matters
and tax matters, as well as any future changes to such laws and regulations; and
other factors discussed under Item 1A - Risk Factors or elsewhere in this Annual Report on Form 10-K.
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 Annual Report on Form 10-K, 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.
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Item 1.
Business
Our Company
PART I
We are 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. We engage in five principal
business activities in these equipment categories:
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equipment rentals;
new equipment sales;
used equipment sales;
parts sales; and
repair and maintenance services.
By providing rental, sales, parts, repair and maintenance functions under one roof, we offer our customers a one-stop solution for
their equipment needs. This full-service approach provides us with (1) multiple points of customer contact; (2) cross-selling
opportunities among our rental, new and used equipment sales, parts sales and services operations; (3) an effective method to manage
our rental fleet through efficient maintenance and profitable distribution of used equipment; and (4) a mix of business activities that
enables us to operate effectively throughout economic cycles. We believe that the operating experience and extensive infrastructure
we have developed throughout our history as an integrated equipment services company provide us with a competitive advantage over
rental-focused companies and equipment distributors. In addition, our focus on four core categories of heavy construction and
industrial equipment enables us to offer specialized knowledge and support to our customers.
We have operated, through our predecessor companies, as an integrated equipment services company for approximately 59 years
and have built an extensive infrastructure that as of February 18, 2020 includes 93 full-service facilities located throughout the West
Coast, Intermountain, Southwest, Gulf Coast, Southeast and Mid-Atlantic regions of the United States. Our management, from the
corporate level down to the branch store level, has extensive industry experience. We focus our rental and sales activities on, and
organize our personnel principally by, our four core equipment categories. We believe this allows us to provide specialized equipment
knowledge, improve the effectiveness of our rental and sales forces and strengthen our customer relationships. In addition, we operate
our day-to-day business on a branch basis, which we believe allows us to more closely service our customers, fosters management
accountability at local levels and strengthens our local and regional relationships.
Products and Services
Equipment Rentals. We rent our heavy construction and industrial equipment to our customers on a daily, weekly and monthly
basis. We have a well-maintained rental fleet that, at December 31, 2019, consisted of approximately 43,939 pieces of equipment
having an original acquisition cost (which we define as the cost originally paid to manufacturers or the original amount financed under
operating leases) of approximately $1.94 billion and an average age of approximately 36.3 months. Our rental business creates cross-
selling opportunities for us in sales and service support activities.
New Equipment Sales. We sell new heavy construction and industrial equipment in all four core equipment categories, and are a
leading U.S. distributor for nationally recognized suppliers including JLG Industries, Gehl, Genie Industries (Terex), Komatsu, and
JCB. In addition, we are the world’s largest distributor of Grove and Manitowoc crane equipment. Our new equipment sales operation
is a source of new customers for our parts sales and service support activities, as well as for used equipment sales.
Used Equipment Sales. We sell used equipment primarily from our rental fleet, as well as inventoried equipment that we acquire
through trade-ins from our customers and selective purchases of high-quality used equipment. For the year ended December 31, 2019,
approximately 91.5% of our used equipment sales revenues were derived from sales of rental fleet equipment. Used equipment sales,
like new equipment sales, generate parts and services business for us.
Parts Sales. We sell new and used parts to customers and also provide parts to our own rental fleet. We maintain an extensive in-
house parts inventory in order to provide timely parts and service support to our customers as well as to our own rental fleet. In
addition, our parts operations enable us to maintain a high-quality rental fleet and provide additional product support to our end users.
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Service Support. We provide maintenance and repair services for our customers’ owned equipment and to our own rental fleet. In
addition to repair and maintenance on an as-needed or scheduled basis, we provide ongoing preventative maintenance services and
warranty repairs for our customers. We devote significant resources to training our technical service employees and over time, we
have built a full-scale services infrastructure that we believe would be difficult for companies without the requisite resources and lead
time to effectively replicate.
In addition to our principal business activities mentioned above, we provide ancillary equipment support activities including
transportation, hauling, parts shipping and loss damage waivers.
Industry Background
Although there has been some consolidation within the industry in recent years, including the acquisitions of Rental Services
Corporation, NES Rentals and Neff Corporation (“Neff”) by United Rentals, Inc. (“URI”), the U.S. construction equipment
distribution industry remains highly fragmented and consists mainly of a small number of multi-location regional or national operators
and a large number of relatively small, independent businesses serving discrete local markets. The industry is driven by a broad range
of economic factors including total U.S. non-residential construction trends, construction machinery demand, demand for rental
equipment and additional, region-specific factors. Construction equipment is largely distributed to end users through two channels:
equipment rental companies and equipment dealers. Examples of equipment rental companies include URI, Sunbelt Rentals, and Hertz
Equipment Rental. Examples of equipment dealers include Finning and Toromont. Unlike many of these companies, which principally
focus on one channel of distribution, we operate substantially in both channels. As an integrated equipment services company, we
rent, sell and provide parts and services support. Although many of the historically pure equipment rental companies also provide
parts and service support to customers, their service offerings are typically limited and may prove difficult to expand due to the
infrastructure, training and resources necessary to develop the breadth of offerings and depth of specialized equipment knowledge that
our services and sales staff provides.
Our Competitive Strengths
Integrated Platform of Products and Services. We believe that our operating experience and the extensive infrastructure we have
developed through years of operating as an integrated equipment services company provides us with a competitive advantage over
rental-focused companies and equipment distributors. Key strengths of our integrated equipment services platform include:
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ability to strengthen customer relationships by providing a full-range of products and services;
purchasing power gained through purchases for our new equipment sales and rental operations;
high quality rental fleet supported by our strong product support capabilities;
established retail sales network resulting in profitable disposal of our used equipment; and
mix of business activities that enables us to effectively operate through economic cycles.
Complementary, High Margin Parts and Services Operations. Our parts and services businesses allow us to maintain our rental
fleet in excellent condition and to offer our customers high-quality rental equipment. Our after-market parts and services businesses
together provide us with a high-margin revenue source that has proven to be relatively stable throughout a range of economic cycles.
High-Quality, Multipurpose Fleet. Our focus on four core types of heavy construction and industrial equipment allows us to better
provide the specialized knowledge and support that our customers demand when renting and purchasing equipment. These four types
of equipment are attractive because they have a long useful life, high residual value and generally strong industry demand.
Well-Developed Infrastructure. We have built an infrastructure that as of February 18, 2020 included a network of 93 full-service
facilities in 23 states. Our workforce included, as of December 31, 2019, a highly-skilled group of approximately 537 service
technicians and an aggregate of 287 sales people in our specialized rental and equipment sales forces. We believe that our well-
developed infrastructure helps us to better serve large multi-regional customers than our historically rental-focused competitors and
provides an advantage when competing for lucrative fleet and project management business as well as the ability to quickly capitalize
on new opportunities.
Leading Distributor for Suppliers. We are a leading U.S. distributor for nationally-recognized equipment suppliers, including JLG
Industries, Gehl, Genie Industries (Terex), Komatsu and JCB. In addition, we are the world’s largest distributor of Grove and
Manitowoc crane equipment. These relationships improve our ability to negotiate equipment acquisition pricing and allow us to
purchase parts at wholesale costs.
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Customized Information Technology Systems. Our information systems allow us to actively manage our business and our rental
fleet. We have a customer relationship management system that provides our sales force with real-time access to customer and sales
information. In addition, our enterprise resource planning system enhances our ability to provide more timely and meaningful
information to manage our business.
Strong Customer Relationships. We have a diverse base of approximately 45,700 customers as of December 31, 2019 who we
believe value our high level of service, knowledge and expertise. Our customer base includes a wide range of industrial and
commercial companies, construction contractors, manufacturers, public utilities, municipalities, maintenance contractors and
numerous and diverse other large industrial accounts. Our branches enable us to closely service local and regional customers, while
our well-developed full-service infrastructure enables us to effectively service multi-regional and national accounts. We believe that
our expansive presence and commitment to superior service at all levels of the organization is a key differentiator to many of our
competitors. As a result, we spend a significant amount of time and resources to train all key personnel to be responsive and deliver
high quality customer service and well-maintained equipment so that we can maintain and grow our customer relationships.
Experienced Management Team. Our senior management team is led by Bradley M. Barber, our Chief Executive Officer, who has
over 25 years of industry experience. Our senior and regional managers have approximately 24 years on average of industry
experience. Our branch managers have extensive knowledge and industry experience as well.
Our Business Strategy
Our business strategy includes, among other things, leveraging our integrated business model, managing the life cycle of our
rental equipment, further developing our parts and services operations and selectively entering new markets and pursuing acquisitions.
However, the timing and extent to which we implement these various aspects of our strategy depend on a variety of factors, many of
which are outside our control, such as general economic conditions and construction activity in the U.S.
Leverage Our Integrated Business Model. We intend to continue to actively leverage our integrated business model to offer a one-
stop solution to our customers’ varied needs with respect to the four categories of heavy construction and industrial equipment on
which we focus. We will continue to cross-sell our services to expand and deepen our customer relationships. We believe that our
integrated equipment services model provides us with a strong platform for growth and enables us to effectively operate through
economic cycles.
Managing the Life Cycle of Our Rental Equipment. We actively manage the size, quality, age and composition of our rental fleet,
employing a “cradle through grave” approach. During the life of our rental equipment, we (1) aggressively negotiate on purchase
price; (2) use our customized information technology systems to closely monitor and analyze, among other things, time utilization
(equipment usage based on customer demand), rental rate trends and pricing optimization and equipment demand; (3) continuously
adjust our fleet mix and pricing; (4) maintain fleet quality through regional quality control managers and our on-site parts and services
support; and (5) dispose of rental equipment through our retail sales force. This allows us to purchase our rental equipment at
competitive prices, optimally utilize our fleet, cost-effectively maintain our equipment quality and maximize the value of our
equipment at the end of its useful life.
Make Selective Acquisitions. We intend to continue to evaluate and pursue, on an opportunistic basis, acquisitions which meet our
selection criteria, including favorable financing terms, with the objective of increasing our revenues, improving our profitability,
entering additional attractive markets and strengthening our competitive position. We are focused on identifying and acquiring rental
companies to complement our existing business, broaden our geographic footprint, and increase our density in existing markets.
Effective January 1, 2018, we completed the acquisition of Contractors Equipment Center (“CEC”), an equipment rental company
serving the greater Denver, Colorado area with three branch locations, for approximately $132.4 million in cash. Effective April 1,
2018, we completed the acquisition of Rental, LLC (dba “Rental Inc.”), an equipment rental company with five branch locations in
Alabama and Florida, for approximately $68.6 million in cash. Effective February 1, 2019, we completed the acquisition of Cobra
Equipment Rentals, LLC (dba “We-Rent-It”), a central Texas based non-residential construction-focused equipment rental company
with six branch locations for approximately $108.5 million in cash.
Grow Our Parts and Services Operations. Our strong parts and services operations are keystones of our integrated equipment
services platform and together provide us with a relatively stable high-margin revenue source. Our parts and services operations help
us develop strong, ongoing customer relationships, attract new customers and maintain a high quality rental fleet. We intend to further
grow this product support side of our business and further penetrate our customer base.
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Enter Carefully Selected New Markets. We intend to continue our strategy of selectively expanding our network to solidify our
presence in attractive and contiguous regions where we operate. We look to add new locations in those markets that offer attractive
growth opportunities, high or increasing levels of demand for construction and heavy equipment, and contiguity to our existing
markets.
History
Through our predecessor companies, we have been in the equipment services business for approximately 59 years. H&E
Equipment Services L.L.C. was formed in June 2002 through the combination of Head & Engquist Equipment, LLC (“Head &
Engquist”), a wholly-owned subsidiary of Gulf Wide Industries, L.L.C. (“Gulf Wide”), and ICM Equipment Company L.L.C.
(“ICM”). Head & Engquist, founded in 1961, and ICM, founded in 1971, were two leading regional, integrated equipment service
companies operating in contiguous geographic markets. In the June 2002 transaction, Head & Engquist and ICM were merged with
and into Gulf Wide, which was renamed H&E Equipment Services L.L.C. (“H&E LLC”). Prior to the combination, Head & Engquist
operated 25 facilities in the Gulf Coast region, and ICM operated 16 facilities in the Intermountain region of the United States.
Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our
initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware
corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and
wholly-owned subsidiary of H&E Holdings L.L.C. (“H&E Holdings”), and immediately prior to the closing of our initial public
offering, on February 3, 2006, H&E LLC and H&E Holdings merged with and into us (H&E Equipment Services, Inc.), with us
surviving the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer
existed under operation of law pursuant to the reincorporation merger.
We completed, effective as of February 28, 2006, the acquisition of all the outstanding capital stock of Eagle High Reach
Equipment, Inc. (now known as H&E California Holding, Inc.) and all of the outstanding equity interests of its subsidiary, Eagle High
Reach Equipment, LLC (now known as H&E Equipment Services (California), LLC) (collectively, “Eagle” or the “Eagle
Acquisition”). Prior to the acquisition, Eagle was a privately-held construction and industrial equipment rental company serving the
southern California construction and industrial markets out of four branch locations.
We completed, effective as of September 1, 2007, the acquisition of all of the outstanding capital stock of J.W. Burress,
Incorporated (now known as H&E Equipment Services (Mid-Atlantic), Inc.) (“Burress” or the “Burress Acquisition”). Prior to the
acquisition, Burress was a privately-held company operating primarily as a distributor in the construction and industrial equipment
markets out of 12 locations in four states in the Mid-Atlantic region of the United States.
We completed, effective January 1, 2018, the acquisition of CEC. Prior to the acquisition, CEC was a privately-held company
focused on non-residential construction equipment rentals serving the greater Denver, Colorado area out of three branch locations.
We completed, effective April 1, 2018, the acquisition of Rental, Inc., an equipment rental company with five branch locations in
Alabama and Florida.
We completed, effective February 1, 2019, the acquisition of We-Rent-It (“WRI”), a central Texas based non-residential
construction-focused equipment rental company with six branch locations.
Customers
We serve approximately 45,700 customers in the United States, primarily in the West Coast, Intermountain, Southwest, Gulf
Coast, Southeast and Mid-Atlantic regions. Our customers include a wide range of industrial and commercial companies, construction
contractors, manufacturers, public utilities, municipalities, maintenance contractors and numerous and diverse other large industrial
accounts. They vary from small, single machine owners to large contractors and industrial and commercial companies who typically
operate under equipment and maintenance budgets. Our branches enable us to closely service local and regional customers, while our
well-developed full-service infrastructure enables us to effectively service multi-regional and national accounts. Our integrated
strategy enables us to satisfy customer requirements and increase revenues from customers through cross-selling opportunities
presented by the various products and services that we offer. As a result, our five reporting segments generally derive their revenue
from the same customer base. In 2019, no single customer accounted for more than 0.7% of our total revenues, and no single customer
accounted for more than 10% of our revenue on a segmented basis. Our top ten customers combined accounted for approximately
5.2% of our total revenues in 2019.
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Sales and Marketing
We have two distinct, focused sales forces; one specializing in equipment rentals and one focused specifically on new and used
equipment sales. We believe maintaining separate sales forces for equipment rental and equipment sales is important to our customer
service, allowing us to effectively meet the demands of different types of customers.
Both our rental sales force and equipment sales force are divided into smaller, product focused teams which enhances the
development of in-depth product application and technical expertise. To further develop knowledge and experience, we provide our
sales forces with extensive training, including frequent factory and in-house training by manufacturer representatives regarding the
operational features, operator safety training and maintenance of new equipment. This training is essential, as our sales personnel
regularly call on customers’ job sites, often assisting customers in assessing their immediate and ongoing equipment needs. In
addition, we have a commission-based compensation program for our sales forces.
We maintain a company-wide customer relationship management system. We believe that this comprehensive customer and sales
management tool enhances our territory management program by increasing the productivity and efficiency of our sales
representatives and branch managers as they are provided real-time access to sales and customer information.
We have developed strategies to identify target customers for our equipment services in all markets. These strategies allow our
sales force to identify frequent rental users, function as advisors and problem solvers for our customers and accelerate the sales
process in new operations.
While our specialized, well-trained sales force strengthens our customer relationships and fosters customer loyalty, we also
promote our business through marketing and advertising, including industry publications, direct mail campaigns, television, the
Yellow Pages and our Company website at www.he-equipment.com.
Suppliers
We purchase a significant amount of equipment from the same manufacturers with whom we have distribution agreements. We
purchased approximately 54% of our new equipment and rental fleet from five manufacturers (Grove/Manitowoc, Komatsu, John
Deere, JCB, and Genie Industries (Terex)) during the year ended December 31, 2019. These relationships improve our ability to
negotiate equipment acquisition pricing. Additionally, we are also a leading U.S. distributor for nationally-recognized equipment
suppliers including JLG Industries, Gehl, Yanmar and Takeuchi. As an authorized distributor for a wide range of suppliers, we are
also able to provide our customers parts and services that in many cases are covered under the manufacturer’s warranty. While we
believe that we have alternative sources of supply for the equipment we purchase in each of our principal product categories,
termination of one or more of our relationships with any of our major suppliers of equipment could have a material adverse effect on
our business, financial condition or results of operations if we were unable to obtain adequate or timely rental and sales equipment.
Information Technology Systems
We have specialized information systems that track (1) rental inventory utilization statistics; (2) maintenance and repair costs;
(3) returns on investment for specific equipment types; and (4) detailed operational and financial information for each piece of
equipment. These systems enable us to closely monitor our performance and actively manage our business, and include features that
were custom designed to support our integrated services platform. The point-of-sale aspect of our systems enables us to link all of our
facilities, permitting universal access to real-time data concerning equipment located at the individual facility locations and the rental
status and maintenance history for each piece of equipment. In addition, our systems include, among other features, on-line contract
generation, automated billing, applicable sales tax computation and automated rental purchase option calculation. We customized our
customer relationship management system to enable us to more effectively manage our sales territories and sales representatives’
activity. This customer relationship management system provides sales and customer information, available rental fleet and inventory
information, a quote system and other organizational tools to assist our sales forces. We maintain an extensive customer database
which allows us to monitor the status and maintenance history of our customers’ owned-equipment and enables us to more effectively
provide parts and services to meet their needs. All of our critical systems run on servers and other equipment that is current technology
and available from major suppliers and serviceable through existing maintenance agreements.
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Seasonality
Although our business is not significantly impacted by seasonality, the demand for our rental equipment tends to be lower in the
winter months. The level of equipment rental activities is directly related to commercial and industrial construction and maintenance
activities. Therefore, equipment rental performance will be correlated to the levels of current construction activities. The severity of
weather conditions can have a temporary impact on the level of construction activities.
Equipment sales cycles are also subject to some seasonality with the peak selling period occurring during the spring season and
extending through the summer. Parts and services activities are less affected by changes in demand caused by seasonality.
Competition
The equipment industry is generally comprised of either pure rental equipment companies or manufacturer dealer/distributorship
companies. We are an integrated equipment services company and rent, sell and provide parts and services support. Although there
has been some consolidation within the equipment industry in recent years, including the recent acquisitions of Rental Services
Corporation, NES Rentals and Neff by URI, the equipment industry remains highly fragmented and consists mainly of a small number
of multi-location regional or national operators and a large number of relatively small, independent businesses serving discrete local
markets. Many of the markets in which we operate are served by numerous competitors, ranging from national and multi-regional
equipment rental companies (for example, URI, Sunbelt Rentals and Hertz Equipment Rental) or equipment dealers (for example,
Finning and Toromont) to small, independent businesses with a limited number of locations.
We believe that participants in the equipment rental industry generally compete on the basis of availability, quality, reliability,
delivery and price. In general, large operators enjoy substantial competitive advantages over small, independent rental businesses due
to a distinct price advantage. Many rental equipment companies’ parts and services offerings are limited and may prove difficult to
expand due to the training, infrastructure and management resources necessary to develop the breadth of service offerings and depth of
knowledge our service technicians are able to provide. Some of our competitors have significantly greater financial, marketing and
other resources than we do.
Traditionally, equipment manufacturers distributed their equipment and parts through a network of independent dealers with
distribution agreements. As a result of consolidation and competition, both manufacturers and distributors sought to streamline their
operations, improve their costs and gain market share. Our established, integrated infrastructure enables us to compete directly with
our competitors on either a local, regional or national basis. We believe customers place greater emphasis on value-added services,
teaming with equipment rental and sales companies who can meet all of their equipment, parts and services needs.
Environmental and Safety Regulations
Our facilities and operations are subject to comprehensive and frequently changing federal, state and local environmental and
occupational health and safety laws. These laws regulate (1) the handling, storage, use and disposal of hazardous materials and wastes
and, if any, the associated cleanup of properties affected by pollutants; (2) air quality (emissions); and (3) wastewater. We do not
currently anticipate any material adverse effect on our business or financial condition or competitive position as a result of our efforts
to comply with such requirements. Although we have made and will continue to make capital and other expenditures to comply with
environmental requirements, we do not expect to incur material capital expenditures for environmental controls or compliance.
In the future, federal, state or local governments could enact new or more stringent laws or issue new or more stringent
regulations concerning environmental and worker health and safety matters, or effect a change in their enforcement of existing laws or
regulations, that could affect our operations. Also, in the future, contamination may be found to exist at our facilities or off-site
locations where we have sent wastes. There can be no assurance that we, or various environmental regulatory agencies, will not
discover previously unknown environmental non-compliance or contamination. We could be held liable for such newly-discovered
non-compliance or contamination. It is possible that changes in environmental and worker health and safety laws or liabilities from
newly-discovered non-compliance or contamination could have a material adverse effect on our business, financial condition and
results of operations.
Employees
As of December 31, 2019, we had approximately 2,432 employees. Of these employees, 832 are salaried personnel and 1,600 are
hourly personnel. Our employees perform the following functions: sales operations, parts operations, rental operations, technical
services and office and administrative support. A collective bargaining agreement relating to two branch locations covers
approximately 69 of our employees. We believe our relations with our employees are good, and we have never experienced a work
stoppage.
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Generally, the total number of employees does not significantly fluctuate throughout the year. However, acquisition activity or the
opening of new branches may increase the number of our employees or fluctuations in the level of our business activity could require
some staffing level adjustments in response to actual or anticipated customer demand.
Available Information
We file electronically with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. Copies of these reports, proxy and information statements and other information may be
obtained by electronic request at the following e-mail address: publicinfo@sec.gov. Copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, ownership reports for insiders and any exhibits to and amendments to
these reports filed with or furnished to the SEC are available free of charge through our internet website (www.he-equipment.com) as
soon as reasonably practicable after filing with the SEC. We use the Investor Relations section of our website as a means of disclosing
material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors
should monitor the Investor Relations section of our website, in addition to following press releases, SEC filings and public
conference calls and webcasts.
Additionally, we make available free of charge on our internet website:
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our Code of Conduct and Ethics;
the charter of our Corporate Governance and Nominating Committee;
the charter of our Compensation Committee; and
the charter of our Audit Committee.
Item 1A.
Risk Factors
Investing in our securities involves a high degree of risk. You should consider carefully the following risk factors and the other
information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, before making any
investment decisions regarding our securities. If any of the following risks actually occur, our business, financial condition and
operating results could be adversely affected. As a result, the trading price of our securities could decline and you may lose part or all
of your investment.
Our business could be adversely affected by declines in construction and industrial activities, or a downturn in the economy in
general, which could lead to decreased demand for equipment, depressed equipment rental rates and lower sales prices, resulting
in a decline in our revenues, gross margins and operating results.
Our equipment is principally used in connection with construction and industrial activities. Consequently, a downturn in
construction or industrial activities, or the economy in general, may lead to a decrease in the demand for equipment or depress rental
rates and the sales prices for our equipment. Our business may also be negatively impacted, either temporarily or long-term, by:
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a reduction in spending levels by customers;
unfavorable credit markets affecting end-user access to capital;
adverse changes in federal, state and local government infrastructure spending;
an increase in the cost of construction materials;
adverse weather conditions or natural disasters which may affect a particular region;
a prolonged shutdown of the U.S. government;
an increase in interest rates; or
terrorism or hostilities involving the United States.
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Weakness or deterioration in the non-residential construction and industrial sectors caused by these or other factors could have a
material adverse effect on our financial position, results of operations and cash flows in the future and may also have a material
adverse effect on residual values realized on the disposition of our rental fleet. For example, during fiscal years 2009 and 2010, the
economic downturn and related economic uncertainty, combined with weakness in the construction industry and a decrease in
industrial activity, resulted in a significant decrease in the demand for our new and used equipment and depressed equipment rental
rates, which resulted in decreased revenues and lower gross margins realized on our equipment rentals and on the sale of our new and
used inventory during those periods. More recently, the decline in oil prices and the related downturn in oil industry activities during
fiscal years 2014, 2015 and 2016 resulted in a significant decrease in our new equipment sales, primarily the sale of new cranes, due to
lower demand. Although oil prices have subsequently stabilized and improved from their low point in 2016, prices decreased
significantly at the end of 2018 into early 2019 and we believe the uncertainty regarding future oil prices continues to impact customer
capital expenditure decisions.
The inability to forecast trends accurately may have an adverse impact on our business and financial condition.
An economic downturn or economic uncertainty makes it difficult for us to forecast trends, which may have an adverse impact on
our business and financial condition. For example, the economic downturn of 2009 and 2010 — which included, among other things,
significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or
fluctuations in equity and currency values worldwide and concerns that the worldwide economy may enter into a prolonged
recessionary period — limited our ability, as well as the ability of our customers and our suppliers, to accurately forecast future
product demand trends. More recently, declines in oil and natural gas prices, and uncertainty regarding future price levels, have
negatively impacted the exploration, production and construction activity of our customers in those markets. Uncertainty regarding
future equipment product demand could cause us to maintain excess equipment inventory and increase our equipment inventory
carrying costs. Alternatively, this forecasting difficulty could cause a shortage of equipment for sale or rental that could result in an
inability to satisfy demand for our products and a loss of market shares.
Unfavorable conditions or disruptions in the capital and credit markets may adversely impact business conditions and the
availability of credit.
Disruptions in the global capital and credit markets as a result of an economic downturn, economic uncertainty, changing or
increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our customers’ ability
to access capital and could adversely affect our access to liquidity needed for business in the future. Additionally, unfavorable market
conditions may depress demand for our products and services or make it difficult for our customers to obtain financing and credit on
reasonable terms. Unfavorable market conditions also may cause more of our customers to be unable to meet their payment
obligations to us, increasing delinquencies and credit losses. If we are unable to manage credit risk adequately, or if a large number of
customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our operating
results would be adversely affected. Delinquencies and credit losses generally can be expected to increase during economic
slowdowns or recessions. Moreover, our suppliers may be adversely impacted by unfavorable capital and credit markets, causing
disruption or delay of product availability. These events could negatively impact our business, financial position, results of operations
and cash flows.
Our substantial indebtedness could adversely affect our financial condition.
We have a significant amount of indebtedness outstanding. As of December 31, 2019, we had total outstanding indebtedness of
approximately $1.2 billion, consisting of the $950.0 million aggregate amounts outstanding under our senior unsecured notes, $216.9
million outstanding under our senior secured credit facility (the “Credit Facility”) and approximately $0.6 million of finance lease
obligations. As of February 18, 2020, we had borrowing availability under the Credit Facility of $559.4 million, net of a $7.7 million
outstanding letter of credit.
Our substantial indebtedness could have important consequences. For example, it could:
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increase our vulnerability to general adverse economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general
corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate
purposes.
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We expect to use cash flow from operations and borrowings under our Credit Facility to meet our current and future financial
obligations, including funding our operations, debt service and capital expenditures. Our ability to make these payments depends on
our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control.
Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to repay
indebtedness, or to fund other liquidity needs. If we do not have enough capital, we may be forced to reduce or delay our business
activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our
debt, including the senior unsecured notes and our Credit Facility, on or before maturity. We cannot make any assurances that we will
be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future
indebtedness, including the agreements governing the senior unsecured notes and the Credit Facility may limit our ability to pursue
any of these alternatives.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance,
which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our
control. We cannot make assurances that we will maintain a level of cash flows from operating activities sufficient to permit us to pay
the principal, premium, if any, and interest on our indebtedness. In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other
obligations. The Credit Facility and the indenture governing the senior unsecured notes restrict our ability to dispose of assets and use
the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could
realize from such dispositions. Any proceeds we do receive from a disposition may not be adequate to meet any debt service
obligations then due.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure
you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled
debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including
the Credit Facility or the indenture governing the senior unsecured notes.
If we cannot make scheduled payments on our debt, we will be in default and, as a result:
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our debt holders could declare all outstanding principal and interest to be due and payable;
the lenders under our credit facilities, including the Credit Facility, could terminate their commitments to lend us money
and foreclose against the assets securing our borrowings; and
we could be forced into bankruptcy or liquidation.
Despite current indebtedness levels, we may still be able to incur more indebtedness, which could further exacerbate the risks
described above.
Under the terms of the agreements governing the Credit Facility and the senior unsecured notes, we and our subsidiaries may be
able to incur substantial indebtedness in the future.
Additionally, our Credit Facility provides revolving commitments of up to $750.0 million in the aggregate. As of February 18,
2020, we had $559.4 million of availability under the Credit Facility, net of a $7.7 million outstanding letter of credit. If new debt is
added to our current debt levels, the risks that we now face relating to our substantial indebtedness could intensify.
The agreements governing the Credit Facility and our senior unsecured notes restrict our business and our ability to engage in
certain corporate and financial transactions.
The agreements governing the Credit Facility and the senior unsecured notes contain certain covenants that, among other things,
restrict or limit our and our restricted subsidiaries’ ability to:
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incur more debt;
pay dividends and make distributions;
issue preferred stock of subsidiaries;
make investments;
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repurchase stock;
create liens;
enter into transactions with affiliates;
enter into sale and lease-back transactions;
merge or consolidate; and
transfer and sell assets.
Our ability to borrow under the Credit Facility depends upon compliance with the restrictions contained in the Credit Facility.
Events beyond our control could affect our ability to meet these covenants. In addition, the Credit Facility requires us to meet certain
financial conditions tests and availability thereunder is subject to borrowing base availability.
Events beyond our control can affect our ability to meet these financial conditions tests and to comply with other provisions
governing the Credit Facility and the senior unsecured notes. Our failure to comply with obligations under the agreements governing
the Credit Facility and the senior unsecured notes may result in an event of default under the agreements governing the Credit Facility
and the senior unsecured notes, respectively. A default, if not cured or waived, may permit acceleration of this indebtedness and our
other indebtedness. We may not be able to remedy these defaults. If our indebtedness is accelerated, we may not have sufficient funds
available to pay the accelerated indebtedness and may not have the ability to refinance the accelerated indebtedness on terms favorable
to us or at all.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Credit Facility are at variable rates of interest and expose us to interest rate risk. As such, our results of
operations are sensitive to movements in interest rates. There are many economic factors outside our control that have in the past and
may, in the future, impact rates of interest including publicly announced indices that underlie the interest obligations related to a
certain portion of our debt. Currently, a portion of our outstanding borrowings under our Credit Facility are borrowed at LIBOR plus
an applicable margin and it is unclear how increased regulatory oversight and changes in the method for determining LIBOR may
affect our results of operations or financial conditions. LIBOR is an interest rate benchmark used as a reference rate for a wide range
of financial transactions, including derivatives and loans. In July 2017, the United Kingdom’s Financial Conduct Authority, which
regulates LIBOR, announced that it intends to stop compelling banks to submit LIBOR rates after 2021. It is unclear whether or not
LIBOR will cease to exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be
established such that it continues to exist after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the
Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in financial
contracts that are currently indexed to United States dollar LIBOR. ARRC has proposed a paced market transition plan to SOFR from
LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to financial
derivative contracts exposed to LIBOR. Uncertainty exists as to the transition process and broad acceptance of SOFR as the primary
alternative to LIBOR. At this time, we cannot predict the future impact of a departure from LIBOR as a reference rate. The expected
discontinuation of LIBOR may require us to amend our senior secured credit facility. Also, factors that impact interest rates include
governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and
instability in domestic and foreign financial markets. If interest rates increase, our debt service obligations on the variable rate
indebtedness would increase even though the amount borrowed remained the same, and our results of operations would be adversely
impacted. Such increases in interest rates could have a material adverse effect on our financial conditions and results of operations.
Our business could be hurt if we are unable to obtain additional capital as required, resulting in a decrease in our revenues and
profitability. In addition, our inability to refinance our indebtedness on favorable terms, or at all, could materially and adversely
affect our liquidity and our ongoing results of operations.
The cash that we generate from our business, together with cash that we may borrow under our Credit Facility, if available, may
not be sufficient to fund our capital requirements. We may require additional financing to obtain capital for, among other purposes,
purchasing equipment, completing acquisitions, establishing new locations and refinancing existing indebtedness. Any additional
indebtedness that we incur will make us more vulnerable to economic downturns and limit our ability to withstand competitive
pressures. Moreover, we may not be able to obtain additional capital on acceptable terms, if at all. If we are unable to obtain sufficient
additional financing in the future, our business could be adversely affected by reducing our ability to increase revenues and
profitability.
In addition, our ability to refinance indebtedness will depend in part on our operating and financial performance, which, in turn, is
subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In
addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our
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indebtedness could also require us to comply with more onerous covenants and further restrict our business operations. Our inability to
refinance our indebtedness or to do so upon attractive terms could materially and adversely affect our business, prospects, results of
operations, financial condition and cash flows, and make us vulnerable to adverse industry and general economic conditions.
Our revenue and operating results may fluctuate, which could result in a decline in our profitability and make it more difficult for
us to grow our business.
Our revenue and operating results have historically varied from quarter to quarter. Periods of decline could result in an overall
decline in profitability and make it more difficult for us to make payments on our indebtedness and grow our business. We expect our
quarterly results to continue to fluctuate in the future due to a number of factors, including:
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general economic conditions in the markets where we operate;
the cyclical nature of our customers’ business, particularly our construction customers and customers in the oil and gas
industry;
sales and rental patterns of our construction customers, with sales and rental activity tending to be lower in the winter
months;
changes in the size of our rental fleet and/or in the rate at which we sell our used equipment from the fleet;
an overcapacity of fleet in the equipment rental industry;
severe weather and seismic conditions temporarily affecting the regions where we operate;
changes in corporate spending for plants and facilities or changes in government spending for infrastructure projects;
changes in interest rates and related changes in our interest expense and our debt service obligations;
the possible need, from time to time, to record goodwill impairment charges or other write-offs or charges due to a variety
of occurrences, such as the adoption of new accounting standards, the impairment of assets, rental location divestitures,
dislocation in the equity and/or credit markets, consolidations or closings, restructurings, or the refinancing of existing
indebtedness;
the effectiveness of integrating acquired businesses and new start-up locations; and
timing of acquisitions and new location openings and related costs.
In addition, we incur various costs when integrating newly acquired businesses or opening new start-up locations, and the
profitability of a new location is generally expected to be lower in the initial months of operation.
We may not be able to facilitate our growth strategy by identifying or completing transactions with attractive acquisition
candidates, which could limit our revenues and profitability. Future acquisitions may result in significant transaction expenses
and we may involve significant costs. We may experience integration and consolidation risks associated with future acquisitions.
An element of our growth strategy is to selectively pursue on an opportunistic basis acquisitions of additional businesses, in
particular rental companies that complement our existing business and footprint, such as our acquisitions of CEC and Rental Inc. in
January 2018 and April 2018, respectively, and WRI in February 2019. The success of this element of our growth strategy depends, in
part, on selecting strategic acquisition candidates at attractive prices and effectively integrating their businesses into our own,
including with respect to financial reporting and regulatory matters. We cannot assure you that we will be able to identify attractive
acquisition candidates or complete the acquisition of any identified candidates at favorable prices and upon advantageous terms and
conditions, including financing alternatives. We expect to face competition for acquisition candidates, which may limit the number of
acquisition opportunities and lead to higher acquisition costs. We may not have the financial resources necessary to consummate any
acquisitions or the ability to obtain the necessary funds on satisfactory terms. Any future acquisitions may result in significant
transaction expenses and risks associated with entering new markets. We may also be subject to claims by third parties related to the
operations of these businesses prior to our acquisition and by sellers under the terms of our acquisition agreements The Company also
regularly reviews other potential strategic transactions, including dispositions.
We may not have sufficient management, financial and other resources to integrate and consolidate any future acquisitions. Any
significant diversion of management’s attention or any major difficulties encountered in the integration of the businesses we acquire
could have a material adverse effect on our business, financial condition or results of operations, which could decrease our
profitability and make it more difficult for us to grow our business. Among other things, these integration risks could include:
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the loss of key employees;
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the disruption of operations and business;
the retention of the existing clients and the retention or transition of customers and vendors;
the integration of corporate cultures and maintenance of employee morale;
inability to maintain and increase competitive presence;
customer loss and revenue loss;
possible inconsistencies in standards, control procedures and policies;
unexpected problems with costs, operations, personnel, technology and credit;
problems with the assimilation of new operations, sites or personnel, which could divert resources from our regular
operations;
integration of financial reporting and regulatory reporting functions, including with the Securities & Exchange
Commission and pursuant to the Sarbanes-Oxley Act of 2002; and/or
potential unknown liabilities.
Furthermore, general economic conditions or unfavorable global capital and credit markets could affect the timing and extent to
which we successfully acquire or integrate new businesses, which could limit our revenues and profitability.
Fluctuations in the stock market, as well as general economic and market conditions, may impact the market price of our common
stock.
The market price of our common stock has been and may continue to be subject to significant fluctuations in response to general
economic changes and other factors including, but not limited to:
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variations in our quarterly operating results or results that vary from investor expectations;
changes in the strategy and actions taken by our competitors, including pricing changes;
securities analysts’ elections to discontinue coverage of our common stock, changes in financial estimates by analysts or a
downgrade of our common stock or of our sector by analysts;
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
changes in the price of oil and other commodities;
investor perceptions of us and the equipment rental and distribution industry; and
national or regional catastrophes or circumstances and natural disasters, hostilities and acts of terrorism.
Broad market and industry factors may materially reduce the market price of our common stock, regardless of or in a manner that
is disproportionate to any related impact on our operating performance. As an example, in the latter half of 2014 the price of oil fell
significantly and the price further declined and remained depressed throughout 2015 and 2016, compared to pre-2014 price levels.
We believe that this prolonged decline in oil prices and its impact on oil related economic activities was a significant factor in the
price decline of our stock during the same period, even though other industrial and construction activities that are also primary drivers
of our business generally remained at or above historic levels. Although oil prices have subsequently stabilized and improved from
their low point in 2016, prices decreased significantly at the end of 2018 into early 2019 and we believe the uncertainty regarding
future oil prices has an impact on the price of our stock and customer capital expenditure decisions. In addition, the stock market
historically has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating
performance of companies. These fluctuations, as well as general economic and market conditions, including those listed above and
others, may harm the market price of our common stock.
We are subject to competition, which may have a material adverse effect on our business by reducing our ability to increase or
maintain revenues or profitability.
The equipment rental and retail distribution industries are highly competitive and the equipment rental industry is highly
fragmented. Many of the markets in which we operate are served by numerous competitors, ranging from national and multi-regional
equipment rental companies to small, independent businesses with a limited number of locations. We generally compete on the basis
of availability, quality, reliability, delivery and price. Some of our competitors have significantly greater financial, marketing and
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other resources than we do, and may be able to reduce rental rates or sales prices. We may encounter increased competition from
existing competitors or new market entrants in the future, which could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to facilitate our growth strategy by identifying and opening attractive start-up locations, which could limit our
revenues and profitability.
An element of our growth strategy is to selectively identify and implement start-up locations in order to add new customers. The
success of this element of our growth strategy depends, in part, on identifying strategic start-up locations.
We also cannot assure you that we will be able to identify attractive start-up locations. Opening start-up locations may involve
significant costs and limit our ability to expand our operations. Start-up locations may involve risks associated with entering new
markets and we may face significant competition.
We may not have sufficient management, financial and other resources to successfully operate new locations. Any significant
diversion of management’s attention or any major difficulties encountered in the locations that we open in the future could have a
material adverse effect on our business, financial condition or results of operations, which could decrease our profitability and make it
more difficult for us to grow our business. Furthermore, general economic conditions or unfavorable global capital and credit markets
could affect the timing and extent to which we open new start-up locations, which could limit our revenues and profitability.
The continued payment of our quarterly dividend is subject to, among other things, the availability of funds and the discretion of
our board of directors.
The payment of future dividends and the amount thereof is uncertain, at the sole discretion of our board of directors and
considered by the board of directors each quarter. The payment of dividends is dependent upon, among other things, operating cash
flow generated by our business, financial requirements for our operations, the execution of our growth strategy, the restrictions and
covenants pursuant to our Credit Facility and senior unsecured notes, and the satisfaction of solvency tests imposed by the Delaware
General Corporation Law and other applicable law for the declaration and payment of dividends.
We purchase a significant amount of our equipment from a limited number of manufacturers. Termination of one or more of our
relationships with any of those manufacturers could have a material adverse effect on our business, as we may be unable to obtain
adequate or timely rental and sales equipment.
We purchase most of our rental and sales equipment from leading, nationally-known original equipment manufacturers
(“OEMs”). For the year ended December 31, 2019, we purchased approximately 54% of our rental and sales equipment from five
manufacturers (Grove/Manitowoc, Komatsu, John Deere, JCB, and Genie Industries (Terex)). Although we believe that we have
alternative sources of supply for the rental and sales equipment we purchase in each of our core product categories, termination of one
or more of our relationships with any of these major suppliers could have a material adverse effect on our business, financial condition
or results of operations if we were unable to obtain adequate or timely rental and sales equipment.
Our suppliers of new equipment may appoint additional distributors, sell directly or unilaterally terminate our distribution
agreements, which could have a material adverse effect on our business due to a reduction of, or inability to increase, our
revenues.
We are a distributor of new equipment and parts supplied by leading, nationally-known OEMs. Under our distribution agreements
with these OEMs, manufacturers retain the right to appoint additional dealers and sell directly to national accounts and government
agencies. We have both written and oral distribution agreements with our new equipment suppliers. Under our oral agreements with
the OEMs, we operate under our established course of dealing with the supplier and are subject to the applicable state law regarding
such relationship. In most instances, the OEMs may appoint additional distributors, elect to sell to customers directly or unilaterally
terminate their distribution agreements with us at any time without cause. Any such actions could have a material adverse effect on
our business, financial condition and results of operations due to a reduction of, or an inability to increase, our revenues.
The cost of new equipment that we sell or purchase for use in our rental fleet may increase and therefore we may spend more for
such equipment. In some cases, we may not be able to procure new equipment on a timely basis due to supplier constraints.
The cost of new equipment from manufacturers that we sell or purchase for use in our rental fleet may increase as a result of
increased raw material costs, including increases in the cost of steel, which is a primary material used in most of the equipment we
use, or due to increased regulatory requirements, such as those related to emissions. These increases could materially impact our
financial condition or results of operations in future periods if we are not able to pass such cost increases through to our customers.
16
Our rental fleet is subject to residual value risk upon disposition.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market
value of used rental equipment depends on several factors, including:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the market price for new equipment of a like kind;
wear and tear on the equipment relative to its age;
the time of year that it is sold (prices are generally higher during the construction season);
worldwide and domestic demands for used equipment;
the supply of used equipment on the market; and
general economic conditions.
We include in operating income the difference between the sales price and the depreciated value of an item of equipment sold.
Although for the year ended December 31, 2019, we sold used equipment from our rental fleet at an average selling price of
approximately 157.6% of net book value, we cannot assure you that used equipment selling prices will not decline. Any significant
decline in the selling prices for used equipment could have a material adverse effect on our business, financial condition, results of
operations or cash flows.
We incur maintenance and repair costs associated with our rental fleet equipment that could have a material adverse effect on our
business in the event these costs are greater than anticipated.
As our fleet of rental equipment ages, the cost of maintaining such equipment, if not replaced within a certain period of time,
generally increases. Determining the optimal age for our rental fleet equipment is subjective and requires considerable estimates by
management. We have made estimates regarding the relationship between the age of our rental fleet equipment, and the maintenance
and repair costs, and the market value of used equipment. Our future operating results could be adversely affected because our
maintenance and repair costs may be higher than estimated and market values of used equipment may fluctuate.
Security breaches and other disruptions in our information technology systems, including our customer relationship management
system, could limit our capacity to effectively monitor and control our operations, compromise our or our customers’ and
suppliers’ confidential information or otherwise adversely affect our operating results or business reputation.
Our information technology systems, some of which are managed by third parties, facilitate our ability to monitor and control our
operations and adjust to changing market conditions, including processing, transmitting, storing, managing and supporting a variety of
business processes, activities and information. Further, as we pursue our strategy to grow through acquisitions and to pursue new
initiatives that improve our operations, we are also expanding and improving our information technologies, resulting in a larger
technological presence and corresponding exposure to cybersecurity risk. Any disruption in any of these systems, including our
customer management system, or the failure of any of these systems to operate as expected could, depending on the magnitude of the
problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to
changing market conditions.
Additionally, we collect and store sensitive data, including proprietary business information and the proprietary business
information of our customers and suppliers, in data centers and on information technology networks, including cloud-based networks.
The secure operation of these information technology networks and the processing and maintenance of this information is critical to
our business operations and strategy. Despite security measures and business continuity plans, our information technology networks
and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by cyber criminals or breaches due to
employee error or malfeasance or other disruptions during the process of upgrading or replacing computer software or hardware,
power outages, computer viruses, telecommunication or utility failures, terrorist acts or natural disasters or other catastrophic events.
Further, the growing use and rapid evolution of technology, including mobile devices, has heightened the risk of unintentional data
breaches or leaks. The occurrence of any of these events could compromise our networks, and the information stored there could be
accessed, publicly disclosed, lost or stolen. In addition, as security threats continue to evolve we may need to invest additional
resources to protect the security of our systems or to comply with privacy, data security, cybersecurity and data protection laws
applicable to our business.
Any failure to effectively prevent, detect and/or recover from any such access, disclosure or other loss of information, or to
comply with any such current or future law related thereto, could result in legal claims or proceedings, liability or regulatory penalties
under laws protecting the privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect
our business.
17
Fluctuations in fuel costs or reduced supplies of fuel could harm our business.
We could be adversely affected by limitations on fuel supplies or significant increases in fuel prices that result in higher costs to
us for transporting equipment from one branch to another branch or one region to another region. A significant or protracted
disruption of fuel supplies could have an adverse effect on our financial condition and results of operations.
We are dependent on key personnel. A loss of key personnel could have a material adverse effect on our business, which could
result in a decline in our revenues and profitability.
Our senior and regional managers have an average of approximately 24 years of industry experience. Our branch managers have
extensive knowledge and industry experience as well. Our success is dependent, in part, on the experience and skills of our
management team. Competition for top management talent within our industry is generally significant. If we are unable to fill and
keep filled all of our senior management positions, or if we lose the services of any key member of our senior management team and
are unable to find a suitable replacement in a timely manner, we may be challenged to effectively manage our business and execute
our strategy.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent
fraud.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any
inability to provide reliable financial reports or prevent fraud could harm our business. We must annually evaluate our internal
procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management and auditors to
assess the effectiveness of our internal controls. If we fail to remedy or maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal
penalties or stockholder litigation.
In addition, failure to maintain effective internal controls could result in financial statements that do not accurately reflect our
financial condition or results of operations. There can be no assurance that we will be able to maintain a system of internal controls
that fully complies with the requirements of the Sarbanes-Oxley Act of 2002 or that our management and independent registered
public accounting firm will continue to conclude that our internal controls are effective.
We are exposed to various risks related to legal proceedings or claims that could adversely affect our operating results. The nature
of our business exposes us to various liability claims, which may exceed the level of our insurance coverage resulting in us not
being fully protected.
We are a party to lawsuits in the normal course of our business. Litigation in general can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits
brought against us, or legal actions that we may initiate, can often be expensive and time-consuming. Unfavorable outcomes from
these claims and/or lawsuits could adversely affect our business, results of operations, or financial condition, and we could incur
substantial monetary liability and/or be required to change our business practices.
Our business exposes us to claims for personal injury, death or property damage resulting from the use of the equipment we rent
or sell and from injuries caused in motor vehicle accidents in which our delivery and service personnel are involved and other
employee related matters. Additionally, we could be subject to potential litigation associated with compliance with various laws and
governmental regulations at the federal, state or local levels, such as those relating to the protection of persons with disabilities,
employment, health, safety, security and other regulations under which we operate.
18
We carry comprehensive insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims
made during the respective policy periods. However, we may be exposed to multiple claims, and, as a result, we could incur
significant out-of-pocket costs before reaching the deductible amount which could adversely affect our financial condition and results
of operations. In addition, the cost of such insurance policies may increase significantly upon renewal of those policies as a result of
general rate increases for the type of insurance we carry as well as our historical experience and experience in our industry. Although
we have not experienced any material losses that were not covered by insurance, our existing or future claims may exceed the
coverage level of our insurance, and such insurance may not continue to be available on economically reasonable terms, or at all. If we
are required to pay significantly higher premiums for insurance, are not able to maintain insurance coverage at affordable rates or if
we must pay amounts in excess of claims covered by our insurance, we could experience higher costs that could adversely affect our
financial condition and results of operations.
Labor disputes could disrupt our ability to serve our customers and/or lead to higher labor costs.
As of December 31, 2019, we have approximately 69 employees in Utah, a significant territory in our geographic footprint, who
are covered by a collective bargaining agreement and approximately 2,363 employees who are not represented by unions or covered
by collective bargaining agreements. Various unions periodically seek to organize certain of our nonunion employees. Union
organizing efforts or collective bargaining negotiations could potentially lead to work stoppages and/or slowdowns or strikes by
certain of our employees, which could adversely affect our ability to serve our customers. Further, settlement of actual or threatened
labor disputes or an increase in the number of our employees covered by collective bargaining agreements can have unknown effects
on our labor costs, productivity and flexibility.
We have operations throughout the United States, which exposes us to multiple federal, state and local regulations. Changes in
applicable law, regulations or requirements, or our material failure to comply with any of them, can increase our costs and have
other negative impacts on our business.
Our 93 branch locations, as of February 18, 2020, in the United States are located in 23 different states, which exposes us to a
host of different federal, state and local regulations. These laws and requirements address multiple aspects of our operations, such as
worker safety, consumer rights, privacy, employee benefits and more, and can often have different requirements in different
jurisdictions. Changes in these requirements, or any material failure by our branches to comply with them, could increase our costs,
affect our reputation, limit our business, drain management’s time and attention or otherwise, generally impact our operations in
adverse ways.
We could be adversely affected by environmental and safety requirements, which could force us to increase significant capital and
other operational costs and may subject us to unanticipated liabilities.
Our operations, like those of other companies engaged in similar businesses, require the handling, use, storage and disposal of
certain regulated materials. As a result, we are subject to the requirements of federal, state and local environmental and occupational
health and safety laws and regulations. We may not be in complete compliance with all such requirements at all times. We are subject
to potentially significant civil or criminal fines or penalties if we fail to comply with any of these requirements. We have made and
will continue to make capital and other expenditures in order to comply with these laws and regulations. However, the requirements of
these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these
requirements will change or that liabilities will arise in the future in a manner that could have a material adverse effect on our
business, financial condition and results of operations.
Environmental laws also impose obligations and liability for the cleanup of properties affected by hazardous substance spills or
releases. These liabilities can be imposed on the parties generating or disposing of such substances or the operator of the affected
property, often without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances.
Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if a contaminated property
is not currently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or
operation of the property. Given the nature of our operations (which involve the use of petroleum products, solvents and other
hazardous substances for fueling and maintaining our equipment and vehicles), there can be no assurance that prior site assessments or
investigations have identified all potential instances of soil or groundwater contamination. Future events, such as changes in existing
laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to additional remediation
liabilities, which may be material.
19
Our business may be materially affected by changes to fiscal and tax policies. Negative or unexpected tax consequences could
adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations or future changes in tax law could lead to
changes in the value of tax assets or liabilities that we currently or in the future may hold, which could materially affect our results of
operations.
Item 1B.
Unresolved Staff Comments
None.
20
Item 2.
Properties
As of February 18, 2020, we had a network of 93 full-service facilities in 23 states in the West Coast, Intermountain, Southwest,
Gulf Coast, Southeast and Mid-Atlantic regions of the United States. In our facilities, we rent, display and sell equipment, including
tools and supplies, and provide maintenance and basic repair work. Of the 93 total facilities, we own 11 of our locations and lease 82
locations. Our leases typically provide for varying terms and renewal options. The following table provides data on our locations and
the number of multiple branch locations in each city is indicated by parentheses:
City/State
Leased/Owned
City/State
Leased/Owned
Alabama (4)
Birmingham
Dothan
Huntsville
Opelika
Arizona (3)
Phoenix (2)
Tucson
Arkansas (2)
Little Rock
Springdale
California (8)
Bakersfield
Benicia
Fontana
La Mirada
Sacramento
San Diego
San Francisco
San Jose
Colorado (5)
Colorado Springs
Denver
Erie
Fort Collins
Greeley
Florida (8)
Fort Myers
Ft. Walton Beach
Jacksonville
Orlando
Panama City
Pompano Beach
Tallahassee
Tampa
Georgia (3)
Atlanta
Savannah
Suwannee
Idaho (2)
Boise
Coeur d’Alene
Louisiana (9)
Alexandria
Baton Rouge
Belle Chasse
Kenner
Lafayette
Lake Charles
New Orleans
Shreveport(2)
Maryland (2)
Baltimore
Forestville
Mississippi (1)
Jackson
Leased
Leased
Leased
Leased
Leased (1) Owned (1)
Owned
Owned
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased(2)
Leased
Leased
Leased
Montana (2)
Belgrade
Billings
New Mexico (1)
Albuquerque
Nevada (2)
Las Vegas
Reno
North Carolina (5)
Arden
Charlotte
Durham
Raleigh
Winston-Salem
Oklahoma (2)
Oklahoma City
Tulsa
Oregon (1)
Prineville
South Carolina (3)
Charleston
Columbia
Greenville
Tennessee (3)
Chattanooga
Memphis
Nashville
Texas (20)
Aledo
Austin
Beaumont
Bryan
Buda
Corpus Christi
Dallas(2)
Fort Worth
Freeport
Georgetown
Houston(2)
Katy
Lubbock
Mesquite
Midland
Pasadena
San Antonio
Schertz
Utah (2)
Salt Lake City
St. George
Virginia (3)
Ashland
Norfolk
Warrenton
Washington(2)
Seattle
Lynwood
21
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased(1) Owned(1)
Leased
Leased
Leased
Leased(2)
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Each facility location has a branch manager who is responsible for day-to-day operations. In addition, branch operating facilities
are typically staffed with approximately 10 to over 100 people, who may include technicians, salespeople, rental operations staff and
parts specialists. While facility offices are typically open five days a week, we provide 24 hour, seven day per week service.
Our corporate headquarters employs approximately 337 people. Our corporate headquarters facility is on 3.1 acres of company-
owned land where we occupy a total of approximately 42,550 square feet.
Item 3.
Legal Proceedings
From time to time, we are involved in various claims and legal actions arising in the ordinary course of our business. In the
opinion of management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material
adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Item 4.
Mine Safety Disclosures
Not applicable.
22
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, par value $0.01 per share, trades on the Nasdaq Global Market (“Nasdaq”) under the symbol “HEES.”
Holders
As of December 31, 2019, there were 68 stockholders of record of our common stock. This does not include beneficial owners of
our common stock whose stock is held in nominee or “street name”.
Dividends
During the years ended December 31, 2019 and 2018, the Company paid quarterly cash dividends totaling $1.10 per share in each
year, or approximately $39.4 million and $39.3 million, respectively. The Company intends to continue to pay regular quarterly cash
dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the
Board of Directors each quarter after its review of, among other things, business and market conditions.
Securities Authorized for Issuance Under Equity Compensation Plans
For certain information concerning securities authorized for issuance under our equity compensation plan, see Item 12 — Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Performance Graph
The Performance Graph below compares the cumulative total stockholder return on H&E Equipment Services, Inc.’s common
stock beginning on December 31, 2014 and for each subsequent quarter period end through and including December 31, 2019, with
the cumulative returns of the Russell 2000 Index and an industry peer group selected by us. The peer group we selected is comprised
of the following companies: URI, Toromont Industries, Ltd., Finning International, Inc., and The Ashtead Group, PLC. In our Annual
Reports on Form 10-K for the years ended December 31, 2014 and 2015, we included within our peer group, Hertz Global Holdings,
which previously owned Herc Holdings Inc., the then parent company of Herc Rentals Inc., Hertz’s equipment rental business. On
July 1, 2016, Herc Holdings Inc. was separated from Hertz Global Holdings, Inc. and became an independent, publicly-traded
corporation. Accordingly, we have excluded Herc Holdings Inc. and Hertz Global Holdings, Inc. from our industry peer group in the
five-year Performance Graph below.
The Performance Graph comparison assumes $100 was invested in our common stock and in each of the other indices described
above on December 31, 2014. Dividend reinvestment has been assumed and returns have been weighted to reflect relative stock
market capitalization. The stock performance shown on the graph below is not necessarily indicative of future price performance.
23
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among H&E Equipment Services, Inc., the Russell 2000 Index,
and a Peer Group
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/14 3/15 6/15 9/15 12/15 3/16 6/16 9/16 12/16 3/17 6/17 9/17 12/17 3/18 6/18 9/18 12/18 3/19 6/19 9/19 12/19
H&E Equipment Services, Inc.
Russell 2000
Peer Group
*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
H&E Equipment Services, Inc. ..................................... $
Russell 2000 Index........................................................
Peer Group ....................................................................
100.00 $
100.00
100.00
65.64 $
95.59
79.92
93.52 $
115.95
107.66
170.96 $
132.94
158.90
88.99 $
118.30
113.25
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
151.60
148.49
171.48
This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall not be deemed “filed” for purposes of Section 18 of the
Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Annual Report on
Form 10-K and irrespective of any general incorporation by reference language in any such filing, except to the extent that we
specifically incorporate this information by reference.
Issuer Purchases of Equity Securities
On October 12, 2019, 2,982 shares of non-vested stock that were issued in 2015 vested at $28.19 per share. The holder of those
vested shares returned 1,562 shares of common stock to the Company during the quarter ended December 31, 2019 as payment for
their withholding taxes. This resulted in an addition of 1,562 shares to treasury stock.
Item 6.
Selected Financial Data
The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The
selected historical consolidated statement of income data and other financial data for the years ended December 31, 2019, 2018 and
2017 and balance sheet data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statement of income data and other
financial data for the years ended December 31, 2016 and 2015 and balance sheet data as of December 31, 2017, 2016 and 2015 have
been derived from our audited consolidated financial information not included herein. Our historical results are not necessarily
indicative of future performance or results of operations. You should read the consolidated historical financial data together with our
consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K and with Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
Statement of income data(1):
Revenues(2):
2019
For the Year Ended December 31,
2017
(Amounts in thousands, except per share amounts)
2016
2018
2015
Equipment rentals.............................................................. $
New equipment sales.........................................................
Used equipment sales........................................................
Parts sales ..........................................................................
Services revenues ..............................................................
Other..................................................................................
Total revenues .............................................................
766,354 $
239,091
139,349
123,855
67,941
11,775
1,348,365
627,181 $
262,948
125,125
120,454
63,488
39,765
1,238,961
508,121 $
203,301
107,329
114,253
62,873
34,142
1,030,019
472,086 $
196,688
96,910
115,989
64,673
31,791
978,137
468,918
238,172
118,338
118,152
63,954
32,297
1,039,831
Cost of revenues(2):
Rental depreciation............................................................
Rental expense ..................................................................
Rental other .......................................................................
New equipment sales.........................................................
Used equipment sales........................................................
Parts sales ..........................................................................
Services revenues ..............................................................
Other..................................................................................
Total cost of revenues .................................................
Gross profit (loss):
Equipment rentals..............................................................
New equipment sales.........................................................
Used equipment sales........................................................
Parts sales ..........................................................................
Services revenues ..............................................................
Other..................................................................................
Total gross profit .........................................................
Selling, general and administrative expenses(3).......................
Impairment of goodwill(4)........................................................
Merger costs (net of merger breakup fee proceeds)(5).............
Gain from sales of property and equipment, net .....................
Income from operations ....................................................
Other income (expense):
Interest expense(6)..............................................................
Loss on early extinguishment of debt(7) ............................
Other, net...........................................................................
Total other expense, net ..............................................
Income before provision (benefit) for income taxes ...............
Income tax provision (benefit)(8) .............................................
Net income .................................................................. $
Net income per common share:
243,780
105,079
70,613
419,472
211,372
92,021
90,963
21,946
13,421
849,195
346,882
27,719
47,328
32,892
45,995
(1,646)
499,170
311,026
12,184
416
4,617
180,161
(68,277)
—
3,977
(64,300)
115,861
28,650
87,211 $
208,453
89,520
55,449
353,422
232,057
86,052
88,263
21,328
19,305
800,427
273,759
30,891
39,073
32,191
42,160
20,460
438,534
278,298
—
708
7,118
166,646
(63,707)
—
1,724
(61,983)
104,663
28,040
76,623 $
169,455
77,706
47,438
294,599
180,702
74,132
83,135
21,111
16,432
670,111
213,522
22,599
33,197
31,118
41,762
17,710
359,908
232,784
—
(5,782)
5,009
137,915
(54,958)
(25,363)
1,750
(78,571)
59,344
(50,314)
109,658 $
162,415
71,694
44,758
278,867
175,556
66,738
84,327
21,839
15,199
642,526
193,219
21,132
30,172
31,662
42,834
16,592
335,611
228,129
—
—
3,285
110,767
(53,604)
—
1,867
(51,737)
59,030
21,858
37,172 $
Basic............................................................................ $
Diluted......................................................................... $
2.43 $
2.42 $
2.15 $
2.13 $
3.09 $
3.07 $
1.05 $
1.05 $
Weighted average common shares outstanding:
Basic............................................................................
Diluted.........................................................................
Dividends declared per common share outstanding................ $
35,859
36,033
1.10 $
35,677
35,903
1.10 $
35,516
35,699
1.10 $
35,393
35,480
1.10 $
162,089
71,950
42,335
276,374
212,235
81,338
86,255
21,693
16,204
694,099
192,544
25,937
37,000
31,897
42,261
16,093
345,732
220,226
—
—
2,737
128,243
(54,030)
—
1,463
(52,567)
75,676
31,371
44,305
1.26
1.25
35,272
35,343
1.05
25
2019
2018
For the Year Ended December 31,
2017
(Amounts in thousands)
2016
2015
Other financial data:
Depreciation and amortization(9) ............................................ $
Statement of cash flows:
276,337
$
236,366
$
193,245
$
189,697
$
186,457
Net cash provided by operating activities.........................
Net cash used in investing activities .................................
Net cash provided by (used in) financing activities..........
319,218
(325,903)
4,255
247,211
(526,240)
129,828
226,199
(153,075)
85,071
176,979
(114,410)
(62,045)
206,620
(101,759)
(113,563)
2019
2018
As of December 31,
2017
(Amounts in thousands)
2016
2015
14,247 $
Balance sheet data:
Cash........................................................................................ $
16,677 $
Rental equipment, net............................................................. 1,217,673 1,141,498
Property and equipment, net...................................................
115,121
Operating lease right-of-use assets, net(10) .................................
Goodwill.................................................................................
Deferred financing costs, net(11)...................................................
Intangible assets, net ..............................................................
Total assets(11) ................................................................................. 1,974,610 1,727,181 1,467,717 1,241,611 1,299,511
Total debt(11) .................................................................................... 1,162,995 1,116,267
814,070
Operating lease right-of-use liabilities, net(10) ...........................
Total liabilities........................................................................ 1,667,091 1,470,378 1,250,924 1,098,846 1,156,923
142,588
Stockholders’ equity...............................................................
130,564
156,570
131,442
2,857
32,948
165,878 $
904,824
101,789
7,683 $
893,816
105,492
7,159
893,393
110,785
105,843
3,000
31,197
3,772
31,197
1,964
31,197
2,777
142,765
792,057
256,803
216,793
945,574
307,519
159,265
28,380
(1)
(2)
(3)
(4)
See note 18 to the consolidated financial statements discussing segment information.
As more fully discussed in note 2 to the consolidated financial statements, we reclassified certain revenues pursuant to SEC
Regulation S-X on a retrospective basis related to our equipment rental hauling revenue activities. Additionally, as detailed in
our 2018 Annual Report on Form 10-K, we reclassified certain revenues in connection with our January 1, 2018 adoption of the
Revenue from Contracts with Customers (“Topic 606”) guidance on a full retrospective transition basis. The amounts presented
herein reflect these reclassifications for all periods presented. Revenues as presented in the above statement of income data for
the years ended December 31, 2016 and 2015 related to our adoption of Topic 606 are unaudited.
Stock-based compensation expense included in selling, general and administrative expenses for the years ended December 31,
2019, 2018, 2017, 2016 and 2015 totaled $4.7 million, $4.2 million, $3.5 million, $3.0 million and $2.7 million, respectively.
During the quarter ended December 31, 2019, we recorded a non-cash impairment charge totaling $12.2 million. The
impairment related to two of our six reporting units, New Equipment Sales and Service Revenues. See note 2 to the consolidated
financial statements for additional information.
(5) Merger costs incurred in 2019 and 2018 related to the Company’s acquisition activities were $0.4 million and $0.7 million,
respectively. For the year ended December 31, 2017, pursuant to the terms of our merger agreement with Neff, we received a
$13.2 million breakup fee concurrently with Neff’s termination of the merger agreement. Related merger transaction fees totaled
$6.5 million. Estimated merger transaction fees in 2017 related to our acquisition of CEC totaled $0.8 million, resulting in net
proceeds of approximately $5.8 million for the year ended December 31, 2017.
Interest expense for the periods presented is comprised of cash-pay interest (interest recorded on debt and other obligations
requiring periodic cash payments) and non-cash pay interest (comprised of amortization of deferred financing costs and
accretion (amortization) of note discount (premium)).
(6)
(7) As more fully discussed in note 9 to the consolidated financial statements, we recorded a one-time loss on the early
extinguishment of debt in the three month period ended September 30, 2017 of approximately $25.4 million, reflecting payment
of $12.8 million of tender premiums associated with our repurchase of the Old Notes (as defined below) and $10.5 million of
premiums in accordance with the indenture governing the Old Notes to redeem the remaining untendered Old Notes, combined
with the write off of approximately $2.0 million of unamortized deferred financing costs, related to the Old Notes.
(8) On December 22, 2017, the Act was signed into law and we recorded in the fourth quarter of 2017 a one-time decrease in
income tax expense of $66.9 million. The decrease in income tax expense is the result of the re-measurement of our deferred tax
assets and liabilities, resulting from the decrease in the corporate statutory federal income tax rate from 35% to 21% under the
Act.
Excludes amortization of deferred financing costs and accretion (amortization) of note discount (premium), which are included
in interest expense.
(9)
26
(10) As discussed in “Recent Accounting Pronouncements” in note 2 to the consolidated financial statements, we adopted Topic 842,
on January 1, 2019.
(11) The line items for Total debt, Total assets, and Deferred financing costs, net, have been retrospectively adjusted for 2015 to
reflect the Company’s adoption of Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance
Costs, which we adopted on January 1, 2016. Total debt represents the carrying amounts for the periods presented, under the
Credit Facility, senior unsecured notes and finance (capital) leases.
27
Item 7.
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
December 31, 2019, and its results of operations for the year ended December 31, 2019, and should be read in conjunction with the
Selected Financial Data and our consolidated financial statements and the accompanying notes thereto included elsewhere in this
Annual Report on Form 10-K. 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 Annual Report on
Form 10-K). 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 this Annual Report on Form 10-K.
Background
As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial
equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial
work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales,
on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs.
This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as
well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment
sales, rental, parts sales and services operations.
As of February 18, 2020, we operated 93 full-service facilities throughout the Intermountain, Southwest, Gulf Coast, West Coast,
Southeast and Mid-Atlantic regions of the United States. Our work force includes distinct, focused sales forces for our new and used
equipment sales and rental operations, highly skilled service technicians, product specialists and regional managers. We focus our
sales and rental activities on, and organize our personnel principally by, our four core equipment categories. We believe this allows us
to provide specialized equipment knowledge, improve the effectiveness of our rental and sales force and strengthen our customer
relationships. In addition, we have branch managers for each location who are responsible for managing their assets and financial
results. We believe this fosters accountability in our business and strengthens our local and regional relationships.
Through our predecessor companies, we have been in the equipment services business for approximately 59 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 the June 2002 transaction, Head & Engquist and ICM were merged with and into Gulf
Wide, which was renamed H&E LLC. Prior to the combination, Head & Engquist operated 25 facilities in the Gulf Coast region, and
ICM operated 16 facilities in the Intermountain region of the United States.
Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our
initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware
corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and
wholly-owned subsidiary of H&E Holdings, and immediately prior to the closing of our initial public offering, on February 3, 2006,
H&E LLC and H&E Holdings merged with and into H&E Equipment Services, Inc., which survived the reincorporation merger as the
operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer existed under operation of law pursuant to
the reincorporation merger.
Effective January 1, 2018, we completed the acquisition of CEC, a privately-held company focused on non-residential
construction equipment rentals serving the greater Denver, Colorado area out of three branch locations. Effective April 1, 2018, we
completed the acquisition of Rental, Inc., a privately-held equipment rental and distribution company with five branch locations in
Alabama and Florida. Effective February 1, 2019, we completed the acquisition of WRI, a privately-held equipment rental company
with six branch locations in Central Texas.
28
Business Segments
We have five reportable segments because we derive our revenues from five principal business activities: (1) equipment rentals;
(2) new equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based
upon how we allocate resources and assess performance. In addition, we also have non-segmented revenues and costs that relate to
equipment support activities.
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Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We
have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage
the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization
(which we analyze as equipment usage based on: (1) a percentage of original equipment cost, and (2) the number of rental
equipment units available for rent), rental rate trends and targets, rental equipment dollar utilization and maintenance and
repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts
and services operations.
New Equipment Sales. Our new equipment sales operation sells new equipment in all of our four core product categories.
We have a retail sales force focused by equipment type that is separate from our rental sales force. Manufacturer purchase
terms and pricing are managed by our product specialists.
Used Equipment Sales. Our used equipment sales are generated primarily from sales of used equipment from our rental
fleet, as well as from sales of inventoried equipment that we acquire through trade-ins from our equipment customers and
through selective purchases of high quality used equipment. Used equipment is sold by our dedicated retail sales force.
Our used equipment sales are an effective way for us to manage the size and composition of our rental fleet and provide a
profitable distribution channel for disposal of rental equipment.
Parts Sales. Our parts business sells new and used parts for the equipment we sell and also provides parts to our own
rental fleet. To a lesser degree, we also sell parts for equipment produced by manufacturers whose products we neither
rent nor sell. In order to provide timely parts and services support to our customers as well as our own rental fleet, we
maintain an extensive parts inventory.
Services. Our services operation provides maintenance and repair services for our customers’ equipment and to our own
rental fleet at our facilities as well as at our customers’ locations. As the authorized distributor for numerous equipment
manufacturers, we are able to provide service to that equipment that will be covered under the manufacturer’s warranty.
Our non-segmented revenues and costs for the periods presented in the Annual Report on Form 10-K relate to equipment support
activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to
reportable segments.
You can read more about our business segments in note 18 of the consolidated financial statements in this Annual Report on Form
10-K.
Revenue Sources
We generate all of our total revenues from our five business segments and our non-segmented equipment support activities.
Equipment rentals and new equipment sales account for more than half of our total revenues.
29
The pie charts below illustrate a breakdown of our revenues and gross profit for the year ended December 31, 2019 by business
segment (see note 18 to our consolidated financial statements for further information regarding our business segments):
Revenue by Segment
($ in millions)
Gross Profit in Segments
($ in millions)
Parts
$123.9
Service
$67.9
Other
$11.8
0.9%
5.1%
9.2%
Used
Equipm ent
$139.3
New
Equipm ent
$239.1
56.8
10.3
17.7%
Equipm ent
Rentals
$766.4
Service
$46.0
Parts
$32.9
Other
$-1.6
-0.3%
9.2%
6.6%
9.5%
5.5%
Used
Equipm ent
$47.3
New
Equipm ent
$27.7
69.5
Equipm ent
Rentals
$346.9
The equipment that we sell, rent and service is principally used in the construction industry, as well as by companies for
commercial and industrial uses such as plant maintenance and turnarounds, as well as in the petrochemical and energy sectors. As a
result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental
equipment, rental rates and other competitive factors, the demand for new and used equipment, the level of construction and industrial
activities, spending levels by our customers, adverse weather conditions and general economic conditions.
Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a
well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality,
age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as
equipment usage based on: (1) a percentage of original equipment cost, and (2) the number of rental equipment units available for
rent), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely
monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.
New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-
house retail sales force focused by product type. While sales of new equipment are impacted by the availability of equipment
from the manufacturer, we believe our status as a leading distributor for some of our key suppliers improves our ability to obtain
equipment. New equipment sales are an important component of our integrated model due to customer interaction and service
contact and new equipment sales also lead to future parts and services revenues.
Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet.
The remainder of our used equipment sales revenues comes from the sale of inventoried equipment that we acquire through trade-
ins from our equipment customers and selective purchases of high-quality used equipment. Our policy is not to offer specified
price trade-in arrangements on equipment for sale. Sales of our rental fleet equipment allow us to manage the size, quality,
composition and age of our rental fleet, and provide us with a profitable distribution channel for the disposal of rental equipment.
Parts Sales. We generate revenues from the sale of new and used parts for equipment that we rent or sell, as well as for other
makes of equipment. Our product support sales representatives are instrumental in generating our parts revenues. They are
product specialists and receive performance incentives for achieving certain sales levels. Most of our parts sales come from our
extensive in-house parts inventory. Our parts sales provide us with a relatively stable revenue stream that is generally less
sensitive to the economic cycles that tend to affect our rental and equipment sales operations.
Services. We derive our services revenues from maintenance and repair services to customers for their owned equipment. In
addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance
services to industrial customers. Our after-market service provides a high-margin, relatively stable source of revenue through
changing economic cycles.
30
Our non-segmented other revenues for the periods presented in this Annual Report on Form 10-K 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 the costs to purchase the new equipment we sell, the costs associated with the used equipment we sell,
rental expenses, rental depreciation and costs associated with parts sales and services, all of which are included in cost of revenues.
For the year ended December 31, 2019, our total cost of revenues was approximately $849.2 million. Our operating expenses consist
principally of selling, general and administrative (“SG&A”) expenses. For the year ended December 31, 2019, our SG&A expenses
were $311.0 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income
and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable
segments.
We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result
in additional income tax expense based on probable outcomes of such matters.
Cost of Revenues:
Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment.
Estimated useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year
estimated useful life, earthmoving over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a
seven year estimated useful life. Attachments and other smaller type equipment are depreciated over a three year estimated useful life.
We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment.
Rental Expense. Rental expense represents the costs associated with rental equipment, including, among other things, the cost of
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.
New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net
of any amount of credit given to the customer towards the equipment for trade-ins.
Used Equipment Sales. Cost of used equipment sold consists of the net book value of rental equipment for used equipment sold
from our rental fleet, the equipment costs for used equipment we purchase for sale or the trade-in value of used equipment that we
obtain from customers in equipment sales transactions.
Parts Sales. Cost of parts sales represents costs attributable to the sale of parts directly to customers.
Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of
customer-owned equipment and equipment then on-rent by customers.
Our non-segmented 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.
Interest Expense:
Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate
amounts outstanding under our revolving Credit Facility, senior unsecured notes due 2025 and our finance (capital) lease obligations,
as well as our extinguished senior unsecured notes due 2022 (the “Old Notes”) for the periods during which such Old Notes were
outstanding. Interest expense also includes interest on our outstanding manufacturer flooring plans payable, which are used to finance
inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs and
the accretion/amortization of note discount/premium are also included in interest expense.
31
Principal Cash Flows
We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities,
manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase
inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital
Resources” below). Our management of our working capital is closely tied to operating cash flows, as working capital can be
significantly impacted by, among other things, our accounts receivable activities, the level of new and used equipment inventories,
which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable
payment cycles.
Rental Fleet
A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at
December 31, 2019 was $1.2 billion, or approximately 61.7% of our total assets. Our rental fleet as of December 31, 2019 consisted of
43,939 units having an original acquisition cost (which we define as the cost originally paid to manufacturers) of approximately $1.9
billion. As of December 31, 2019, our rental fleet composition was as follows (dollars in millions):
Hi-Lift or Aerial Work Platforms ...........................................
Cranes .....................................................................................
Earthmoving ...........................................................................
Industrial Lift Trucks..............................................................
Other .......................................................................................
Total........................................................................................
Units
28,671
232
5,254
1,317
8,465
43,939
% of
Total
Units
Original
Acquisition
Cost
1,223.3
84.1
463.2
40.3
131.9
1,942.8
% of
Original
Acquisition
Cost
Average
Age in
Months
63.0%
4.3%
23.8%
2.1%
6.8%
100.0%
41.4
59.6
25.0
29.9
26.5
36.3
65.2% $
0.5%
12.0%
3.0%
19.3%
100.0% $
Determining the optimal age and mix for our rental fleet equipment is subjective and requires considerable estimates and
judgments by management. We constantly evaluate the mix, age and quality of the equipment in our rental fleet in response to current
economic and market conditions, competition and customer demand. The mix and age of our rental fleet, as well as our cash flows, are
impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary
auction market levels, and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions,
we evaluate current economic and market conditions, competition, manufacturers’ availability, pricing and return on investment over
the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive
maintenance program, we believe our rental fleet is well-maintained.
The original acquisition cost of our gross rental fleet increased by approximately $179.3 million, or 10.2%, for the year ended
December 31, 2019, largely reflective of the WRI acquired fleets, combined with increase in 2019 rental capital expenditures to meet
customer demand. The average age of our rental fleet equipment increased by approximately 1.8 months for the year ended
December 31, 2019. Our average rental rates for the year ended December 31, 2019 were approximately 2.1% higher than the year
ended December 31, 2018 (see further discussion on rental rates in “Results of Operations” below).
The rental equipment mix among our four core product lines for the year ended December 31, 2019 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 this Annual Report on
Form 10-K.
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Economic downturns. The demand for our products is dependent on the general economy, the stability of the global credit
markets, the industries in which our customers operate or serve, and other factors. Downturns in the general economy or
in the construction and manufacturing industries, as well as adverse credit market conditions, can cause demand for our
products to materially decrease.
32
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Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies
constitute a significant portion of our total revenues. As a result, we depend upon customers in these businesses and their
ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is
impacted by fluctuations in customers’ spending levels on capital expenditures and by the availability of credit to those
customers.
Adverse weather. Adverse weather in a geographic region in which we operate may depress demand for equipment in that
region. Our equipment is primarily used outdoors and, as a result, prolonged adverse weather conditions may prohibit our
customers from continuing their work projects. Adverse weather also has a seasonal impact in parts of our Intermountain
region, particularly in the winter months.
Regional and Industry-Specific Activity and Trends. Expenditures by our customers may be impacted by the overall level
of construction activity in the markets and regions in which they operate, the price of oil and other commodities and other
general economic trends impacting the industries in which our customers and end users operate. As our customers adjust
their activity and spending levels in response to these external factors, our rentals and sales of equipment to those
customers will be impacted. For example, high levels of industrial activity in our Gulf Coast and Intermountain regions
have been a meaningful driver of recent growth in our revenues. However, the decline in oil and natural gas prices and the
related downturn in oil industry activities during fiscal years 2014, 2015 and 2016 resulted in a significant decrease in our
new equipment sales, primarily the sale of new cranes, due to lower demand. Although oil prices have subsequently
stabilized and improved in 2017 and into 2018, prices decreased significantly at the end of 2018 into early 2019 and we
believe the uncertainty regarding future oil prices continues to impact customer capital expenditure decisions.
We believe that our integrated business tempers the effects of downturns in a particular segment.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America. The application of many accounting principles requires us to make assumptions, estimates and/or judgments that
affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our
estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These
assumptions, estimates and/or judgments, however, are often subjective and they and our actual results may change based on changing
circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in
our results of operations for the period in which the actual amounts first become known. We believe the following critical accounting
policies could potentially produce materially different results if we were to change underlying assumptions, estimates and/or
judgments. See also note 2 to our consolidated financial statements for a summary of our significant accounting policies.
Useful Lives of Rental Equipment and Property and Equipment. We depreciate rental equipment and property and equipment over
their estimated useful lives (generally three to ten years), after giving effect to an estimated salvage value ranging from 0% to 25% of
cost. The useful life of rental equipment is determined based on our estimate of the period the asset will generate revenues, and the
salvage value is determined based on our estimate of the minimum value we could realize from the asset after such period. We
periodically review the assumptions utilized in computing rates of depreciation. We may be required to change these estimates based
on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize
increased or decreased depreciation expense for these assets.
The amount of depreciation expense we record is highly dependent upon the estimated useful lives and the salvage values
assigned to each category of rental equipment. Generally, we assign estimated useful lives to our rental fleet ranging from a three-year
life, five-year life with a 25% salvage value, seven-year life and a ten-year life. Depreciation expense on our rental fleet for the year
ended December 31, 2019 was approximately $243.8 million. For the year ended December 31, 2019, the estimated impact of a
change in estimated useful lives for each category of equipment by two years was as follows:
Hi-Lift or
Aerial
Work
Platforms
Cranes
Earth-
moving
Industrial
Lift
Trucks
($ in millions)
Other
Total
Impact of 2-year change in useful life on results of
operations for the year ended December 31, 2019
Depreciation expense for the year ended
December 31, 2019.................................................... $
Increase of 2 years in useful life ...................................
Decrease of 2 years in useful life..................................
117.8 $
100.0
150.0
9.5 $
7.3
11.0
87.5 $
45.8
106.9
6.2 $
4.4
7.9
22.8 $
24.8
22.8
243.8
182.3
298.6
33
For purposes of the sensitivity analysis above, we elected not to decrease the useful lives of other equipment, which are primarily
three-year estimated useful life assets; rather, we have held the depreciation expense constant at the actual amount of depreciation
expense. We believe that decreasing the life of the other equipment by two years is an unreasonable estimate and would potentially
lead to the decision to expense, rather than capitalize, a significant portion of the subject asset class. In general terms, a one-year
increase in the estimated life across all classes of our rental equipment will give rise to an approximate decrease in our annual
depreciation expense of approximately $30.7 million. Additionally, a one-year decrease in the estimated life across all classes of our
rental equipment (with the exception of other equipment as discussed above) will give rise to an approximate increase in our annual
depreciation expense of approximately $27.4 million.
Another significant assumption used in our calculation of depreciation expense is the estimated salvage value assigned to our
earthmoving equipment. Based on our recent experience, we have used a 25% factor of the equipment’s original cost to estimate its
salvage value. This factor is subjective and subject to change in the future based upon actual results at the time we dispose of the
equipment. A change of 5%, either increase or decrease, in the estimated salvage value would result in a change in our annual
depreciation expense of approximately $4.3 million.
Acquisition Accounting. We have made significant acquisitions in the past and we intend to make additional acquisitions in the
future that meet our selection criteria that solidify our presence in the contiguous regions where we operate with an objective of
increasing our revenues, improving our profitability, entering additional attractive markets and strengthening our competitive position.
Pursuant to Topic 350, Intangibles-Goodwill and Other, we record as goodwill the excess of the consideration transferred plus the fair
value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.
Such fair market value assessments require judgments and estimates that can be affected by various factors over time, which may
cause final amounts to differ materially from original estimates.
With the exception of goodwill, long-lived fixed assets generally represent the largest component of our acquisitions. Typically,
the long-lived fixed assets that we acquire are primarily comprised of rental fleet equipment. Historically, virtually all of the rental
equipment that we have acquired through business combinations have been classified as “To be Used,” rather than as “To be Sold.”
Equipment that we acquire and classify as “To be Used” is recorded at fair value. Any significant inventories of new and used
equipment acquired in the transaction are valued at fair value, which should approximate a market participant’s estimated selling price
adjusted for (1) costs in the selling effort and (2) a reasonable profit allowance.
In addition to long-lived fixed assets, we also acquire other assets and assume liabilities. These other assets and liabilities
typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items.
Because of their short-term nature, the fair values of these assets and liabilities generally approximate the carrying values reflected on
the acquired entities balance sheets. However, when appropriate, we adjust these carrying values for factors such as collectibility and
existence. The intangible assets that we have acquired generally consist primarily of the goodwill recognized. Depending upon the
applicable purchase agreement and the particular facts and circumstances of the business acquired, we may identify other intangible
assets, such as trade names or trademarks, non-compete agreements and customer-related intangibles (specifically, customer
relationships). A trademark has a fair value equal to the present value of the royalty income attributable to it. The royalty income
attributable to a trademark represents the hypothetical cost savings that are derived from owning the trademark instead of paying
royalties to license the trademark from another owner. When specifically negotiated by the parties in the applicable purchase
agreements, we base the value of non-compete agreements on the amounts assigned to them in the purchase agreements as these
amounts represent the amounts negotiated in an arm’s length transaction. When not negotiated by the parties in the applicable
purchase agreements, the fair value of non-compete agreements is estimated based on an income approach since their values are
representative of the current and future revenue and profit erosion protection they provide. Customer relationships are generally
valued based on an excess earnings or income approach with consideration to projected cash flows.
Goodwill. We have made acquisitions in the past that resulted in the recognition of goodwill. Goodwill is the excess of the
consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values
of the identifiable net assets acquired. We evaluate goodwill for impairment annually or more frequently if triggering events occur or
other impairment indicators arise which might impair recoverability.
Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of
assets and liabilities to reporting units; assignment of goodwill to reporting units; determination of the fair value of each reporting
unit; and an assumption as to the form of the transaction in which the reporting unit would be acquired by a market participant (either
a taxable or nontaxable transaction). Impairment of goodwill is evaluated at the reporting unit level. A reporting unit is defined as an
operating segment (i.e., before aggregation or combination), or one level below an operating segment (i.e., a component). A
component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of that component. We have identified two components
within our Rental operating segment (Equipment Rentals Component 1 and Equipment Rentals Component 2) and have determined
34
that each of our other four operating segments (New Equipment, Used Equipment, Parts, and Service segments) represents a reporting
unit, resulting in six total reporting units.
As of December 31, 2019, our goodwill was comprised of the following carrying values for our six reporting units (amounts in
thousands):
Reporting Unit
Equipment Rentals Component 1 ....................................................................................................................... $
Equipment Rentals Component 2 .......................................................................................................................
New Equipment Sales .........................................................................................................................................
Used Equipment Sales ........................................................................................................................................
Parts Sales ...........................................................................................................................................................
Services Revenues...............................................................................................................................................
Total Goodwill............................................................................................................................................... $
Carrying Value
at December 31,
2019
49,215
62,311
—
8,961
10,955
—
131,442
Prior to our adoption of Accounting Standards Update (“ASU”) 2017-04, described below, Topic 350 required a two-step
assessment to determine whether goodwill is impaired. The first step (“Step 1”) requires an entity to compare each reporting unit’s
carrying value, including goodwill, and its fair value. If the carrying value exceeds the fair value, then the entity must perform the
second step (“Step 2”), which is to compare the implied fair value of goodwill to its carrying value, and record an impairment charge
for any excess of carrying value over implied fair value. An entity also has an option to perform a qualitative assessment to determine
if the quantitative impairment test is necessary. Considerable judgment is required by management in using the qualitative approach
under Topic 350 to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
During 2017 and 2018, we performed, as of October 1 of each respective year, a qualitative assessment and determined that it is more
likely than not that the fair value of each of our reporting units is not less than its carrying value and, therefore, did not perform the
prescribed quantitative goodwill impairment test. We considered various factors in performing the qualitative test, including
macroeconomic conditions, industry and market considerations, the overall financial performance of our reporting units, the
Company’s stock price and the excess amount or “cushion” between our reporting unit’s fair value and carrying value as indicated on
our most recent quantitative assessment.
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”) to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. As amended, the goodwill impairment test consists of one step comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to the reporting unit. We adopted ASU 2017-
04 as of October 1, 2019.
We performed a Step 1 quantitative assessment of goodwill impairment as of October 1, 2019, our annual impairment testing
date. For all reporting units, we compared the carrying values of each reporting unit, inclusive of goodwill and definite-lived
intangible assets, to its fair value. We estimated the fair value of these reporting units by weighting results from the income approach
and the market approach, as further described below. Based on this quantitative test, we determined that our Rental Component 1,
Rental Component 2, Used Equipment Sales and Parts reporting units were not impaired as their respective fair values exceeded their
respective carrying values by at least 24% or more. However, the results of the quantitative test indicated that the New Equipment
Sales and Service Revenues reporting units were less than the carrying value of each reporting unit, resulting in a goodwill impairment
totaling $12.2 million, or $10.7 million and $1.5 million for the New Equipment Sales and Service Revenues reporting units,
respectively.
The New Equipment Sales reporting unit impairment was largely due to a sharp decline in our 2019 fourth quarter new equipment
sales revenues as over 75% of our full-year new equipment sales decline occurred in the fourth quarter. The fourth quarter new
equipment sales decline was primarily driven by lower new crane sales, which were down 28.7%, or $12.0 million. As noted in our
Risk Factors in this Annual Report on Form 10-K, we believe that demand for cranes is impacted by oil prices and while oil prices
have partially recovered from their low point in 2016, there remains considerable uncertainty regarding future oil prices and this
uncertainty impacts customer capital expenditure decisions. This fourth quarter decline in new equipment sales, combined with our
new equipment sales revenues growth rate and operating results assumptions for the forecast period under the income approach,
resulted in a fair value determination, that when combined with the weighted fair value of the reporting unit determined under the
market approach, was less than the reporting unit’s carrying value as of October 1, 2019, resulting in a $10.7 million impairment
charge.
The impairment of the Service Revenues reporting unit was largely due to our service revenues growth rate and operating results
assumptions for the forecast period under the income approach, which resulted in a fair value determination, that when combined with
35
the weighted fair value of the reporting unit determined under the market approach, was less than the reporting unit’s carrying value as
of October 1, 2019, resulting in a $1.5 million impairment charge.
For purposes of performing the quantitative impairment test described above, we estimate the fair value of our reporting units by
utilizing fair value techniques consistent with the income approach and market approach. When performing the income approach for
each reporting unit, we use a discounted cash flow analysis based on our internal projected results of operations, weighted average
cost of capital (“WACC”) and terminal value assumptions. Our cash flow projections are based on ten-year financial forecasts
developed by management that include revenue projections, capital spending trends, and investment in working capital to support
anticipated revenue growth. The WACC is an estimate of the overall after-tax rate of return required by equity and debt holders of a
business enterprise and represents the expected cost of new capital likely to be used by market participants. The WACC is used to
discount our combined future cash flows. The inputs and variables used in determining the fair value of a reporting unit require
management to make certain assumptions regarding the impact of operating and macroeconomic changes, as well as estimates of
future cash flows. Our estimates regarding future cash flows are based on historical experience and projections of future operating
performance, including revenues, margins and operating expenses. We also make certain forecasts about future economic conditions,
interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these
assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of a
reporting unit’s fair value, and therefore could affect the likelihood and amount of potential impairment. Under the market approach,
we compare the reporting units to selected reasonably similar (or "guideline") publicly-traded companies. Under this method,
valuation multiples are: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the
strengths and weaknesses of our reporting unit relative to the selected guideline companies; and (iii) applied to the operating data of
our reporting unit to arrive at an indication of value. The application of the market approach results in an estimate of the price
reasonably expected to be realized from the sale of the reporting unit.
Long-lived Assets. Our long-lived assets principally consist of rental equipment and property and equipment. We review our long-
lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash
flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s
recorded value, an impairment charge is recognized to reduce the carrying value of the asset to its estimated fair value. The
determination of future cash flows as well as the estimated fair value of long-lived and intangible assets involves significant estimates
and judgment on the part of management. Our estimates and assumptions may prove to be inaccurate due to factors such as changes in
economic conditions, changes in our business prospects or other changing circumstances.
Income Taxes. The Company files a consolidated federal income tax return with its wholly-owned subsidiaries. The Company is a
C-Corporation under the provisions of the Internal Revenue Code. We utilize the asset and liability approach to measure deferred tax
assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect of a change in tax rate is recognized as income or expense in the period that includes the enactment date of that tax rate.
The Company recognizes the effect of an income tax position only if it is more likely than not (a likelihood of greater than 50%)
that such position will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company recognizes both interest and penalties related to uncertain tax positions in net other income (expense).
Our deferred tax calculation requires management to make certain estimates about future operations. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Our U.S. federal tax returns for 2016 and subsequent years remain subject to examination by tax authorities. We are also subject
to examination in various state jurisdictions for 2013 and subsequent years.
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 years ended December 31, 2019, 2018 and 2017. The period-to-period
comparisons of our financial results are not necessarily indicative of future results.
As discussed further in note 2 to these consolidated financial statements, upon our adoption of Topic 842, as of January 1, 2019
using a transition method that allowed us not to recast prior periods, certain ancillary revenues and related cost of revenues associated
36
with our rental activities, such as damage waiver income, environmental fees and other recovery fees, that have been historically
presented within Other Revenues and Other Cost of Revenues, are presented within Rental Revenues and Rental Other Cost of
Revenues beginning January 1, 2019. As a result, Rental Revenues, as presented in our consolidated statements of income in this
Report on Form 10-K for the years ended December 31, 2018 and 2017, do not include these revenues and related cost of revenues, as
they are included within Other Revenues and Other Cost of Revenues.
Prior to 2019 we presented hauling revenues and related costs of revenues associated with our equipment rental activities within
Other Revenues and Other Cost of Revenues. Given the presentation changes required by Topic 842 as described above and in note 2
to these consolidated financial statements, we reclassified equipment rental hauling revenues and related costs of revenues within
Rental Other Revenues and Rental Other Cost of Revenues in prior periods to conform to the current period presentation. We believe
this presentation results in a more meaningful presentation and analysis of our equipment rental activities.
The following tables (1) reconcile our Revenues, Cost of Revenues, Gross Profit and resulting gross margin for our historical
consolidated statements of income for years ended December 31, 2018 and 2017 to the presentation in this Annual Report on Form
10-K, reflecting the classification of rental hauling fees and related costs of revenues, and (2) reconcile our Revenues, Cost of
Revenues, Gross Profit and resulting gross margin for the years ended December 31, 2018 and 2017 as presented in this Annual
Report on Form 10-K to an “As Adjusted” basis (non-GAAP measures) to conform the prior year presentation to the current year
presentation of Revenues, Cost of Revenues, and resulting gross profit and gross margin for the years ended December 31, 2019 as
presented in this Annual Report on Form 10-K, reflecting the line item presentation changes required by Topic 842 (dollars in
thousands). We use these non-GAAP metrics to provide further detail to evaluate the period over period performance of the Company,
and believe these may be useful to investors for this reason. However, you should not consider them in isolation, or as substitutes for
analysis of our results as reported under GAAP.
37
As Previously
Reported
Reclassification
of Hauling Fees
As Reported
under GAAP
Adjustments for
Other Rental
Fees
As Adjusted
Year Ended December 31, 2018
Revenues:
Equipment rentals (1)
Rentals.................................................... $
Rentals other ..........................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total revenues.......................................
Cost of revenues:
Rental depreciation .....................................
Rental expense ............................................
Rental other.................................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total cost of revenues ...........................
Gross Profit (loss):
Rentals.........................................................
Rentals other ...............................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
$
592,193
—
592,193
262,948
125,125
120,454
63,488
74,753
1,238,961
208,453
89,520
—
297,973
232,057
86,052
88,263
21,328
74,754
800,427
294,220
—
294,220
30,891
39,073
32,191
42,160
(1)
Total gross profit................................... $
438,534
$
Gross Margin:
Rentals.........................................................
Rentals other ...............................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total gross profit...................................
49.7%
—
49.7%
11.7%
31.2%
26.7%
66.4%
—
35.4%
$
—
34,988
34,988
—
—
—
—
(34,988)
—
—
—
55,449
55,449
—
—
—
—
(55,449)
—
—
(20,461)
(20,461)
—
—
—
—
20,461
—
$
—
-58.5%
-58.5%
—
—
—
—
58.5%
—
$
592,193
34,988
627,181
262,948
125,125
120,454
63,488
39,765
1,238,961
$
—
28,152
28,152
—
—
—
—
(28,152)
—
592,193
63,140
655,333
262,948
125,125
120,454
63,488
11,613
1,238,961
208,453
89,520
55,449
353,422
232,057
86,052
88,263
21,328
19,305
800,427
294,220
(20,461)
273,759
30,891
39,073
32,191
42,160
20,460
438,534
—
—
6,572
6,572
—
—
—
—
(6,572)
—
—
21,580
21,580
—
—
—
—
(21,580)
—
$
$
49.7%
-58.5%
43.6%
11.7%
31.2%
26.7%
66.4%
51.5%
35.4%
—
76.7%
76.7%
—
—
—
—
-76.7%
—
208,453
89,520
62,021
359,994
232,057
86,052
88,263
21,328
12,733
800,427
294,220
1,119
295,339
30,891
39,073
32,191
42,160
(1,120)
438,534
49.7%
1.8%
45.1%
11.7%
31.2%
26.7%
66.4%
-9.6%
35.4%
(1) Pursuant to SEC Regulation S-X, our equipment rental revenues, as presented in our condensed consolidated statements of income in this
Annual Report on Form 10-K, are aggregated and presented in a single line item, “Equipment Rentals”. The above table disaggregates our
equipment rental revenues for discussion and analysis purposes only.
38
As Previously
Reported
Reclassification
of Hauling Fees
As Reported
under GAAP
Adjustments for
Other Rental
Fees
As Adjusted
Year Ended December 31, 2017
Revenues:
Equipment rentals (1)
Rentals.................................................... $
Rentals other ..........................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total revenues.......................................
Cost of revenues:
Rental depreciation .....................................
Rental expense ............................................
Rental other.................................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total cost of revenues ...........................
Gross Profit (loss):
Rentals.........................................................
Rentals other ...............................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
$
479,016
—
479,016
203,301
107,329
114,253
62,873
63,247
1,030,019
169,455
77,706
—
247,161
180,702
74,132
83,135
21,111
63,870
670,111
231,855
—
231,855
22,599
33,197
31,118
41,762
(623)
Total gross profit................................... $
359,908
$
Gross Margin:
Rentals.........................................................
Rentals other ...............................................
New equipment sales ..................................
Used equipment sales..................................
Parts sales....................................................
Services revenues........................................
Other ...........................................................
Total gross profit...................................
48.4%
—
48.4%
11.1%
30.9%
27.2%
66.4%
-1.0%
34.9%
$
—
29,105
29,105
—
—
—
—
(29,105)
—
—
—
47,438
47,438
—
—
—
—
(47,438)
—
—
(18,333)
(18,333)
—
—
—
—
18,333
—
$
—
-63.0%
-63.0%
—
—
—
—
63.0%
—
$
479,016
29,105
508,121
203,301
107,329
114,253
62,873
34,142
1,030,019
$
—
23,123
23,123
—
—
—
—
(23,123)
—
479,016
52,228
531,244
203,301
107,329
114,253
62,873
11,019
1,030,019
169,455
77,706
47,438
294,599
180,702
74,132
83,135
21,111
16,432
670,111
231,855
(18,333)
213,522
22,599
33,197
31,118
41,762
17,710
359,908
—
—
4,638
4,638
—
—
—
—
(4,638)
—
—
18,485
18,485
—
—
—
—
(18,485)
—
$
$
48.4%
-63.0%
42.0%
11.1%
30.9%
27.2%
66.4%
51.9%
34.9%
—
79.9%
79.9%
—
—
—
—
-79.9%
—
169,455
77,706
52,076
299,237
180,702
74,132
83,135
21,111
11,794
670,111
231,855
152
232,007
22,599
33,197
31,118
41,762
(775)
359,908
48.4%
0.3%
43.7%
11.1%
30.9%
27.2%
66.4%
-7.0%
34.9%
(1) Pursuant to SEC Regulation S-X, our equipment rental revenues, as presented in our condensed consolidated statements of income in this
Annual Report on Form 10-K, are aggregated and presented in a single line item, “Equipment Rentals”. The above table disaggregates our
equipment rental revenues for discussion and analysis purposes only.
39
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
To enhance period-to-period comparability of our revenues and gross profit, the tabular information below is derived from the
table above. Our revenues and gross profit for the year ended December 31, 2018 are presented on an “As Adjusted” basis.
Revenues.
Segment revenues:
For the Year Ended
December 31,
2019
As Adjusted
2018
Total Dollar
Increase
(Decrease)
Total
Percentage
Increase
(Decrease)
Equipment rentals
Rentals ..................................................................................... $
Rentals other ............................................................................
Total equipment rentals ......................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Non-Segmented other revenues .........................................................
592,193 $
63,140
655,333
262,948
125,125
120,454
63,488
11,613
Total revenues ......................................................................... $ 1,348,365 $ 1,238,961 $
694,547 $
71,807
766,354
239,091
139,349
123,855
67,941
11,775
102,354
8,667
111,021
(23,857)
14,224
3,401
4,453
162
109,404
17.3%
13.7%
16.9%
(9.1)%
11.4%
2.8%
7.0%
1.4%
8.8%
Total Revenues. Our total revenues were $1.3 billion for the year ended December 31, 2019 compared to $1.2 billion for the year
ended December 31, 2018, an increase of $109.4 million, or 8.8%. Revenues of all reportable segments and non-segmented other
revenues are further discussed below.
Equipment Rental Revenues. Our revenues from equipment rentals for the year ended December 31, 2019 increased $111.0
million, or 16.9%, to $766.4 million from $655.3 million in 2018, as adjusted. The increase in equipment rental revenues was largely
due to increased demand, combined with the impact of the WRI locations acquired on February 1, 2019.
Rentals: Rental revenues increase $102.4 million, or 17.3%, to $694.5 million for the year ended December 31, 2019 compared to
$592.2 million for the year ended December 31, 2018, as adjusted. Rental revenues from aerial work platform equipment increased
$56.3 million and earthmoving equipment rental revenues increased $36.7 million, while rental revenues from lift trucks increased
$2.2 million. Other equipment rental revenues and crane rental revenues increased $13.8 million and $0.4 million, respectively, as
compared to the prior period. The product line equipment rental revenue fluctuations above do not include the impact of legacy WRI
equipment rental revenues for February through April 2019 or legacy CEC and Rental Inc. equipment rental revenues for January
through March 2018 and April through June 2018, respectively.
Our average rental rates for the year ended December 31, 2019 increased 2.1% compared to the year ended December 31, 2018.
Our average rental rates for the year ended December 31, 2019 do not include the impact of legacy WRI equipment rental revenues for
February through April 2019 or legacy CEC and Rental Inc. equipment rental revenues for January through March 2018 and April
through June 2018, respectively.
Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the
year ended December 31, 2019 increased 0.5% to 36.3% from 35.8% in 2018. The increase in comparative rental equipment dollar
utilization was primarily the result of the increase in equipment rental rates, combined with the mix of equipment rented, which was
partially offset by a decrease in rental equipment time utilization. Rental equipment time utilization as a percentage of original
equipment cost was approximately 70.4% for the year ended December 31, 2019 compared to 71.6% in the year ended December 31,
2018, a decrease of 1.2%, largely attributable to a 3.9% decrease in time utilization in the three month period ended December 31,
2019 compared to the three month period ended December 31, 2018.
Rentals Other: Our rentals other revenues consist primarily of equipment support activities that we provide to customers in
connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental
other revenues for the year ended December 31, 2019 were $71.8 million compared to $63.1 million for the year ended December 31,
2018, as adjusted, an increase of $8.7 million, or 13.7%, primarily due to the increase in equipment rental revenues as described
above.
40
New Equipment Sales Revenues. Our new equipment sales for the year ended December 31, 2019 decreased $23.9 million, or
9.1%, to $239.1 million from $262.9 million in 2018. This decrease, as noted below, was driven primarily by decreased sales of new
cranes and aerial work platform equipment.
Sales of new cranes decreased $29.4 million. Sales of new aerial work platform equipment and new lift trucks decreased $2.3
million and $1.0 million, respectively. Partially offsetting these decreases, sales of new earthmoving equipment and new other
equipment sales increased $8.8 million and $2.4 million, respectively. The product line new equipment sales revenue fluctuations
above do not include the impact of legacy WRI equipment rental revenues for February through April 2019 or legacy CEC and Rental
Inc. equipment rental revenues for January through March 2018 and April through June 2018, respectively.
Used Equipment Sales Revenues. Our used equipment sales increased $14.2 million, or 11.4%, to $139.3 million for the year
ended December 31, 2019, from $125.1 million for the same period in 2018.
Sales of used earthmoving equipment, used lift truck equipment and other used equipment sales increased $13.6 million, $1.5
million and $1.0 million, respectively. Partially offsetting these increases were decreases of used aerial work platform equipment and
used cranes decreasing $1.1 million and $0.3 million, respectively. The product line used equipment sales revenue fluctuations above
do not include the impact of legacy WRI equipment rental revenues for February through April 2019 or legacy CEC and Rental Inc.
equipment rental revenues for January through March 2018 and April through June 2018, respectively.
Parts Sales Revenues. Our parts sales revenues increased $3.4 million, or 2.8%, to $123.9 million for the year ended
December 31, 2019 from $120.5 million for the same period in 2018. The increase in parts sales was largely attributable to increases
in crane parts sales, aerial work platform equipment parts sales and earthmoving equipment parts sales.
Services Revenues. Our services revenues for the year ended December 31, 2019 increased $4.5 million, or 7.0%, to $67.9 million
from $63.5 million in the same period last year. The increase in service revenues was largely attributable to increases in cranes, aerial
work platforms and earthmoving equipment services.
Non-Segmented Other Revenues. For the year ended December 31, 2019, our other revenues were $11.8 million, an increase of
approximately $0.2 million, or 1.4%, from $11.6 million in 2018, as adjusted.
Gross Profit.
Segment Gross Profit:
Equipment rentals
Rentals ..................................................................................... $
Rentals other ............................................................................
Total equipment rentals ......................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Non-Segmented other gross loss ........................................................
Total gross profit ..................................................................... $
For the Year Ended
December 31,
2019
As Adjusted
2018
Total Dollar
Increase
(Decrease)
(in thousands, except percentages)
Total
Percentage
Increase
(Decrease)
345,688 $
1,194
346,882
27,719
47,328
32,892
45,995
(1,646)
499,170 $
294,220 $
1,119
295,339
30,891
39,073
32,191
42,160
(1,120)
438,534 $
51,468
75
51,543
(3,172)
8,255
701
3,835
(526)
60,636
17.5%
6.7%
17.5%
(10.3)%
21.1%
2.2%
9.1%
(47.0)%
13.8%
Total Gross Profit. Our total gross profit was $499.2 million for the year ended December 31, 2019 compared to $438.5 million
for the year ended December 31, 2018, an increase of $60.6 million, or 13.8%. Total gross profit margin for the year ended
December 31, 2019 was approximately 37.0%, an increase of 1.6% from the 35.4% gross profit margin for the same period in 2018.
Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the year ended December 31, 2019 increased
$51.5 million, or 17.5%, to approximately $346.9 million from $295.3 million in 2018, as adjusted.
41
Rentals: Rental revenue gross profit increased $51.5 million to $345.7 million for the year ended December 31, 2019 compared to
$294.2 million for the year ended December 31, 2018, as adjusted. The increase in equipment rentals gross profit was the result of a
$102.4 million increase in equipment rental revenues for the year ended December 31, 2019 compared to last year, which was
partially offset by a $35.3 million increase in rental equipment depreciation expense, and $15.6 million increase in rental expenses.
The increases are primarily due to a larger fleet size in 2019 compared to 2018 due to the WRI acquisition, organic growth and higher
demand. Gross profit margin on equipment rentals for the year ended December 31, 2019 was approximately 49.8% compared to
49.7% in 2018, an increase of 0.1%. As a percentage of equipment rental revenues, rental expenses were 15.1% for both years ended
December 31, 2019 and 2018. Depreciation expense was 35.1% of equipment rental revenues for the year ended December 31, 2019
compared to 35.2% for the same period in 2018, a decrease of 0.1%.
Rentals Other: Our rentals other consist primarily of equipment support activities that we provide to customers in connection with
renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues
gross profit for the year ended December 31, 2019 was $1.2 million compared to $1.1 million, as adjusted, for the year ended
December 31, 2018, an increase of $0.1 million. Gross profit margin was 1.7% for the year ended December 31, 2019 compared to
1.8%, as adjusted, for the same period last year, a decrease of 0.1%.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the year ended December 31, 2019 decreased $3.2
million, or 10.3%, to $27.7 million compared to $30.9 million in 2018 on a decrease in total new equipment sales of $23.9 million.
Gross profit margin on new equipment sales for the year ended December 31, 2019 was approximately 11.6%, a decrease of 0.1%
from 11.7% in 2018.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the year ended December 31, 2019 increased
approximately $8.3 million, or 21.1%, to $47.3 million from $39.1 million in 2018, on a used equipment sales increase of $14.2
million. Gross profit margin on used equipment sales for the year ended December 31, 2019 was 34.0%, up 2.8% from 31.2% for the
year ended December 31, 2018, primarily as a result of the mix of used equipment sold.
Our used equipment sales from the rental fleet, which comprised approximately 91.5% and 89.6% of our used equipment sales for
the years ended December 31, 2019 and 2018, respectively, were approximately 157.6% and 152.1% of net book value for the years
ended December 31, 2019 and 2018, respectively.
Parts Sales Gross Profit. For the year ended December 31, 2019, our parts sales revenue gross profit increased $0.7 million, or
2.2%, to $32.9 million from $32.2 million for the same period in 2018, on a $3.4 million increase in parts sales revenues. Gross profit
margin on parts sales for the year ended December 31, 2019 was 26.6%, a decrease of 0.1% from 26.7% in the same period in 2018.
Services Revenues Gross Profit. For the year ended December 31, 2019, our services revenues gross profit increased $3.8 million,
or 9.1%, to $46.0 million from $42.2 million for the same period in 2018, on a $4.5 million increase in services revenues. Gross profit
margin on services revenues for the years ended December 31, 2019 and 2018 was 67.7% and 66.4%, respectively, an increase of
1.3%, as a result of services revenues mix.
Non-Segmented Other Gross Loss. Our non-segmented other gross loss was approximately $1.6 million for the year ended
December 31, 2019 compared to a gross loss of $1.1 million for the same period last year, a decrease of $0.5 million, as adjusted.
Selling, General and Administrative Expenses. SG&A expenses increased $32.7 million, or approximately 11.8%, to $311.0
million for the year ended December 31, 2019 compared to $278.3 million for the year ended December 31, 2018.
The net increase in SG&A expenses was attributable to several factors. Employee salaries, wages, payroll taxes and related
employee benefit and other employee expenses increased $16.8 million, primarily because of our recent acquisitions, a larger
workforce and higher incentive compensation related to improved profitability. Facility-related expenses increased $5.3 million. Bad
debt expense increased $3.2 million and depreciation and amortization expenses increased $2.6 million. Legal and professional fees
increased $2.4 million and liability insurance costs increased $1.4 million.
Our results for the year ended December 31, 2019 above included $9.8 million of incremental expenses resulting from the Rental
Inc. and WRI acquisitions. Approximately $3.4 million of the total above increase in SG&A expenses was attributable to branches
opened since January 1, 2018 (but excluding for this purpose branches acquired as a result of our WRI acquisition) with less than a
full year of comparable operations in either or both of the years ended December 31, 2019 and 2018.
As a percentage of total revenues, SG&A expenses were 23.1% for the year ended December 31, 2019 compared to 22.5% for the
year ended December 31, 2018, an increase of 0.6%.
42
Impairment of Goodwill. Impairment of goodwill incurred in the year ended December 31, 2019 was $12.2 million. The
impairment related to two of our six reporting units, New Equipment Sales and Service Revenues. There was no impairment of
goodwill for the year ended December 31, 2018. See note 2 to the consolidated financial statements for additional information.
Merger Costs (net of Merger Breakup Fee Proceeds). Merger costs incurred in the year ended December 31, 2019 and 2018
were approximately $0.4 million and $0.7 million, respectively.
Gain on Sales of Property and Equipment, Net. During the year ended December 31, 2019, gain on sales of property and
equipment, net amounted to $4.6 million for the period, compared to $7.1 million for the year ended December 31, 2018, a decrease of
$2.5 million. During the year ended December 31, 2018, we sold a parcel of company-owned land and realized a gain of
approximately $3.7 million.
Other Income (Expense). For the year ended December 31, 2019, our net other expenses increased approximately $2.3 million to
$64.3 million compared to $62.0 million for the same period in 2018. Interest expense increased approximately $4.6 million to $68.3
million for the year ended December 31, 2019 compared to $63.7 million for the year ended December 31, 2018. Interest costs related
to the Credit Facility increased $4.5 million for the year ended December 31, 2019 compared to the same period last year. The
increase in Credit Facility interest costs is largely due to higher borrowings in 2019 compared to 2018, which was partially offset by a
0.7% decrease in our average borrowing rate in 2019 compared to 2018. Other income, net, increased $2.3 million to $4.0 million for
the year ended December 31, 2019 compared to $1.7 million for the year ended December 31, 2018, primarily attributable to proceeds
from a favorable litigation settlement.
Income Taxes. We recorded income tax expense of $28.7 million for the year ended December 31, 2019 compared to an income
tax expense of approximately $28.0 million for the year ended December 31, 2018. Our effective income tax rate for the year ended
December 31, 2019 was 24.7% compared to 26.8% for the same period last year, a decrease of 2.1%. The decrease in our effective
tax rate is primarily due to a decrease in our state income tax rate, resulting from changes in apportionment factors and state statutory
income tax rates.
Based on available evidence, both positive and negative, we believe it is more likely than not that our deferred tax assets at
December 31, 2019 are fully realizable through future reversals of existing taxable temporary differences and future taxable income.
For the year ended December 31, 2019, we decreased our valuation allowance by $0.6 million for certain state net operating losses
that are expected to be fully realizable.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
To enhance period-to-period comparability of our revenues and gross profit, the tabular information below is derived from the
table above. Our revenues and gross profit for the years ended December 31, 2018 and 2017 are presented on an “As Adjusted” basis.
Revenues.
Segment revenues:
For the Year Ended
December 31,
2018
2017
As Adjusted
As Adjusted
Total
Dollar
Increase
Total
Percentage
Increase
(in thousands, except percentages)
Equipment rentals
Rentals ..................................................................................... $
Rentals Other ...........................................................................
Total equipment rentals ......................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Non-Segmented other revenues .........................................................
479,016 $
52,228
531,244
203,301
107,329
114,253
62,873
11,019
Total revenues ......................................................................... $ 1,238,961 $ 1,030,019 $
592,193 $
63,140
655,333
262,948
125,125
120,454
63,488
11,613
113,177
10,912
124,089
59,647
17,796
6,201
615
594
208,942
23.6%
20.9%
23.4%
29.3%
16.6%
5.4%
1.0%
5.4%
20.3%
Total Revenues. Our total revenues were $1.2 billion for the year ended December 31, 2018 compared to $1.0 billion for the year
ended December 31, 2017, an increase of $208.9 million, or 20.3%. Revenues increased for all of our reportable segments and non-
segmented other revenues and are further discussed below.
43
Equipment Rental Revenues. Our total revenues from equipment rentals for the year ended December 31, 2018 increased $124.1
million, or 23.4%, to $655.3 million from $531.2 million in 2017, as adjusted. The increase in equipment rental revenues was largely
due to increased demand and the equipment rental revenues from our CEC and Rental Inc. locations.
Rentals. Rental revenues increased $113.2 million to $592.2 million for the year ended December 31, 2018, as adjusted,
compared to $479.0 million for the year ended December 31, 2017, as adjusted. Rental revenues from aerial work platform equipment
increased $66.7 million and earthmoving equipment rental revenues increased $24.3 million, while rental revenues from lift trucks
increased $3.0 million. Partially offsetting these increases in equipment rental revenues was a $1.1 million decrease in crane rental
revenues. The product line equipment rental revenue fluctuations above do not include the impact of legacy CEC and Rental Inc.
equipment rental revenues by product line for the three month periods ended March 31, 2018 and June 30, 2018, respectively.
Our average rental rates for the year ended December 31, 2018 increased 2.1% compared to the year ended December 31, 2017.
Our average rental rates for the year ended December 31, 2018 do not include rental rate data for legacy CEC and Rental Inc. for the
three month periods ended March 31, 2018 and June 30, 2018, respectively.
Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the
year ended December 31, 2018 increased 0.9% to 35.8% from 34.9% in 2017. The increase in comparative rental equipment dollar
utilization was primarily the result of the increase in equipment rental rates, combined with the mix of equipment rented, which was
partially offset by a decrease in rental equipment time utilization. Rental equipment time utilization as a percentage of original
equipment cost was approximately 71.6% for the year ended December 31, 2018 compared to 72.1% in the year ended December 31,
2017, a decrease of 0.5%.
Rentals Other. Our rentals other revenues consist primarily of equipment support activities that we provide to customers in
connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental
other revenues for the year ended December 31, 2018 were $63.1 million, as adjusted, compared to $52.2 million for the year ended
December 31, 2017, as adjusted, an increase of $10.9 million, or 20.9%, primarily due to the increase in equipment rental revenues as
described above.
New Equipment Sales Revenues. Our new equipment sales for the year ended December 31, 2018 increased $59.6 million, or
29.3%, to $262.9 million from $203.3 million in 2017. This increase, as noted below, was driven primarily by increased sales of new
cranes and aerial work platform equipment, combined with the new equipment sales revenues from our Rental Inc. locations.
Sales of new cranes increased $44.3 million, resulting from improved crane demand. Sales of new aerial work platform
equipment increased $13.8 million. Sales of new lift trucks and new earthmoving equipment increased $1.4 million and $1.0 million,
respectively. Partially offsetting these increases in new equipment sales was a $3.3 million decrease in new other equipment sales. The
product line new equipment sales revenue fluctuations above do not include the impact of legacy CEC and Rental Inc. new equipment
sales revenues by product line for the three month periods ended March 31, 2018 and June 30, 2018, respectively.
Used Equipment Sales Revenues. Our used equipment sales increased $17.8 million, or 16.6%, to $125.1 million for the year
ended December 31, 2018, from $107.3 million for the same period in 2017.
Sales of used aerial work platform equipment increased $24.8 million while sales of used other equipment and used cranes
increased $2.4 million and $1.5 million, respectively. Partially offsetting these increases in used equipment sales were a $9.6 million
decrease in used earthmoving equipment sales and a $1.8 million decrease in used lift truck sales. The product line used equipment
sales revenue fluctuations above do not include the impact of legacy CEC and Rental Inc. used equipment sales revenues by product
line for the three month period ended March 31, 2018 and June 30, 2018, respectively.
Parts Sales Revenues. Our parts sales revenues increased $6.2 million, or 5.4%, to $120.5 million for the year ended
December 31, 2018 from $114.3 million for the same period in 2017. The increase in parts sales was largely attributable to increases
in crane parts sales, aerial work platform equipment parts sales and earthmoving equipment parts sales, combined with parts sales
revenues from our CEC and Rental Inc. locations.
Services Revenues. Our services revenues for the year ended December 31, 2018 increased $0.6 million, or 1.0%, to $63.5 million
from $62.9 million in the same period last year. The increase in services revenues was primarily due to services revenues from our
CEC and Rental Inc. locations.
Non-Segmented Other Revenues. For the year ended December 31, 2018, our other revenues were $11.6 million, an increase of
approximately $0.6 million, or 5.4%, from $11.0 million in 2017, as adjusted. This increase was primarily driven by higher hauling
44
revenues and damage waiver income associated with our equipment rental activities, combined with non-segmented other revenues
from our CEC and Rental Inc. locations.
Gross Profit.
For the Year Ended
December 31,
2018
2017
As Adjusted
As Adjusted
Total
Dollar
Increase
(Decrease)
Total
Percentage
Increase
(Decrease)
(in thousands, except percentages)
Segment Gross Profit:
Equipment rentals
Rentals ..................................................................................... $
Rentals Other ...........................................................................
Total equipment rentals ......................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Non-Segmented other gross loss ........................................................
Total gross profit ..................................................................... $
294,220 $
1,119
295,339
30,891
39,073
32,191
42,160
(1,120)
438,534 $
231,855 $
152
232,007
22,599
33,197
31,118
41,762
(775)
359,908 $
62,365
967
63,332
8,292
5,876
1,073
398
(345)
78,626
26.9%
636.2%
27.3%
36.7%
17.7%
3.4%
1.0%
(44.5)%
21.8%
Total Gross Profit. Our total gross profit was $438.5 million for the year ended December 31, 2018 compared to $359.9 million
for the year ended December 31, 2017, an increase of $78.6 million, or 21.8%. Total gross profit margin for the year ended
December 31, 2018 was approximately 35.4%, an increase of 0.5% from the 34.9% gross profit margin for the same period in 2017.
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 year ended December 31, 2018 increased
$63.3 million, or 27.3%, to approximately $295.3 million from $232.0 million in 2017, as adjusted.
Rentals. Rentals revenues gross profit increased $62.4 million, or 26.9%, to $294.2 million, as adjusted, for the year ended
December 31, 2018 as compared to $231.9 million, as adjusted, for the year ended December 31, 2017. The increase in equipment
rentals gross profit was the result of a $113.2 million increase in equipment rental revenues for the year ended December 31, 2018
compared to last year, which was partially offset by a $38.9 million increase in rental equipment depreciation expense and an $11.9
million increase in rental expenses. The increases in both depreciation expense and rental expenses are primarily due to a larger fleet
size in 2018 compared to 2017.
Gross profit margin on equipment rentals for the year ended December 31, 2018 was approximately 49.7% compared to 48.4% in
2017, an increase of 1.3%. As a percentage of equipment rental revenues, rental expenses were 15.1% for the year ended December
31, 2018 compared to 16.2% for the same period last year, a decrease of 1.1%, resulting primarily from the increase in equipment
rental revenues. Depreciation expense was 35.2% of equipment rental revenues for the year ended December 31, 2018 compared to
35.4% for the same period in 2017, a decrease of 0.2%, primarily as a result of the increase in equipment rental revenues, which was
partially offset by the increase in depreciation expense resulting from the purchase accounting fair value step up adjustments on the
CEC and Rental Inc. acquired rental fleets, and the mix of our equipment rental fleet.
Rentals Other. Our rentals other revenues consist primarily of equipment support activities that we provide to customers in
connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rentals
other revenues gross profit increased $1.0 million to $1.1 million, as adjusted, for the year ended December 31, 2018 as compared to
$0.1 million, as adjusted, for the year ended December 31, 2017.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the year ended December 31, 2018 increased $8.3
million, or 36.7%, to $30.9 million compared to $22.6 million in 2017 on an increase in total new equipment sales of $59.6 million.
Gross profit margin on new equipment sales for the year ended December 31, 2017 was approximately 11.7%, an increase of 0.6%
from 11.1% in 2017, as a result of higher new crane and aerial work platform sales gross margins and the mix of new equipment sold.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the year ended December 31, 2018 increased
approximately $5.9 million, or 17.7%, to $39.1 million from $33.2 million in 2017 on a used equipment sales increase of $17.8
million. Gross profit margin on used equipment sales for the year ended December 31, 2018 was 31.2%, up 0.3% from 30.9% for the
year ended December 31, 2017, primarily as a result of the mix of used equipment sold and higher used equipment margins on used
45
aerial work platform equipment sales. These improved gross margins were partially offset by lower margins on sales of CEC and
Rental Inc. used equipment, reflecting the purchase accounting fair value step up basis adjustment applied to the acquired used
equipment inventory and rental equipment.
Our used equipment sales from the rental fleet, which comprised approximately 89.6% and 89.7% of our used equipment sales for
the years ended December 31, 2018 and 2017, respectively, were approximately 152.1% and 149.6% of net book value for the years
ended December 31, 2018 and 2017, respectively.
Parts Sales Gross Profit. For the year ended December 31, 2018, our parts sales revenue gross profit increased $1.1 million, or
3.4%, to $32.2 million from $31.1 million for the same period in 2017 on a $6.2 million increase in parts sales revenues. Gross profit
margin on parts sales for the year ended December 31, 2018 was 26.7%, a decrease of 0.5% from 27.2% in the same period in 2017,
as a result of the mix of parts sold.
Services Revenues Gross Profit. For the year ended December 31, 2018, our services revenues gross profit increased $0.4 million,
or 1.0%, to $42.2 million from $41.8 million for the same period in 2017 on a $0.6 million increase in services revenues. Gross profit
margin on services revenues for each of the years ended December 31, 2018 and 2017 was 66.4%.
Non-Segmented Other Gross Profit. Our non-segmented other gross loss was approximately $1.1 million for the year ended
December 31, 2018 compared to a gross loss of $0.8 million for the same period last year, a decrease of $0.3 million, as adjusted.
Selling, General and Administrative Expenses. SG&A expenses increased $45.5 million, or approximately 19.6%, to $278.3
million for the year ended December 31, 2018 compared to $232.8 million for the year ended December 31, 2017.
The net increase in SG&A expenses was attributable to several factors. Employee salaries, wages, payroll taxes and related
employee benefit and other employee expenses increased $30.8 million, primarily as a result of our CEC and Rental Inc. acquisitions,
a larger workforce and higher incentive compensation related to improved profitability. Legal and professional fees increased $3.6
million. Supply costs increased $2.0 million. Utilities costs increased $1.7 million and other facility-related expenses increased $1.8
million. Promotional expenses increased $1.1 million. Liability insurance costs increased $0.9 million. Additionally, our results for the
year ended December 31, 2018 also includes $3.3 million of amortization expense associated with the recognition of intangible assets
resulting from the CEC and Rental Inc. purchase price allocations.
Approximately $4.0 million of the total increase in SG&A expenses was attributable to branches opened since January 1, 2017
(but excluding for this purpose branches acquired as a result of our CEC and Rental Inc. acquisitions) with less than a full year of
comparable operations in either or both of the years ended December 31, 2018 and 2017.
As a percentage of total revenues, SG&A expenses were 22.5% for the year ended December 31, 2018 compared to 22.6% for the
year ended December 31, 2017, a decrease of 0.1%.
Merger Costs (net of Merger Breakup Fee Proceeds). Pursuant to the terms of our terminated 2017 merger agreement with
Neff, we received a $13.2 million breakup fee concurrently with Neff’s termination of the merger agreement in the third quarter of
2017. Related estimated merger transaction fees related to Neff and other acquisition-related activity for the year ended December 31,
2017 totaled $6.7 million, resulting in estimated net proceeds of $5.8 million for the year ended December 31, 2017. Merger costs
incurred in the year ended December 31, 2018 were approximately $0.7 million.
Gain on Sales of Property and Equipment, Net. During the year ended December 31, 2018, we sold a parcel of company-owned
land and realized a gain of approximately $3.7 million, resulting in total net gains on sales of property and equipment of $7.1 million
for the period, compared to $5.0 million for the year ended December 31, 2017, an increase of $2.1 million.
Other Income (Expense). For the year ended December 31, 2018, our net other expenses decreased approximately $16.6 million
to $62.0 million compared to $78.6 million for the same period in 2017. Included in Other Income (Expense) for the year ended
December 31, 2017 is a $25.4 million loss on the early extinguishment of debt (see “Loss on Early Extinguishment of Debt” below).
Interest expense increased approximately $8.7 million to $63.7 million for the year ended December 31, 2018 compared to $55.0
million for the year ended December 31, 2017. The increase in interest expense was due to additional interest costs of $7.2 million
associated with the upsize of our $950 million 5.625% senior unsecured notes that were issued in the third and fourth quarters of 2017
compared to our $630 million 7% senior unsecured notes, which were retired in the third quarter of 2017. Interest costs related to the
Credit Facility increased $1.3 million for the year ended December 31, 2018 compared to the same period last year.
46
Loss on Early Extinguishment of Debt. We recorded a one-time loss on the early extinguishment of debt in the three month
period ended September 30, 2017 of approximately $25.4 million, reflecting payment of $12.8 million of tender premiums associated
with our repurchase of the Old Notes and $10.5 million of premiums in accordance with the indenture governing the Old Notes to
redeem the remaining untendered Old Notes, combined with the write off of approximately $2.0 million of unamortized note
premium, unaccreted note discount and unamortized deferred financing costs, related to the Old Notes.
Income Taxes. We recorded income tax expense of $28.0 million for the year ended December 31, 2018 compared to an income
tax benefit of approximately $50.3 million for the year ended December 31, 2017. Our effective income tax rate for the year ended
December 31, 2018 was 26.8%.
The 2017 income tax benefit for the year ended December 31, 2017 was the result of the Act being signed into law on December
22, 2017. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is
enacted. With respect to U.S. federal income taxes, the enactment date is the date the bill becomes law (i.e. upon presidential
signature). Therefore, we recorded in the fourth quarter of 2017 a one-time decrease in income tax expense of $66.9 million from the
re-measurement of our deferred tax assets and liabilities resulting from the decrease in the corporate federal income tax rate from 35%
to 21% under the Act. Our accounting for the income tax effects of the Act has been completed.
Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets
at December 31, 2018 are fully realizable through future reversals of existing taxable temporary differences and future taxable income,
and are not subject to any limitations. For the year ended December 31, 2018, we decreased our valuation allowance by $0.1 million
for certain state net operating losses that were utilized.
Liquidity and Capital Resources
Cash Flow from Operating Activities. For the year ended December 31, 2019, the cash provided by our operating activities was
$319.2 million. Our reported net income of $87.2 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, goodwill impairment and net gains on the sale of long-lived assets, provided
positive cash flows of $375.5 million. These cash flows from operating activities were positively impacted by a $9.2 million decrease
in receivables. Also, prepaid expenses and other assets decreased $0.3 million. Additionally, manufacturing flooring plans payable and
deferred compensation increased $1.5 million and $0.1 million, respectfully. Partially offsetting these positive cash flows were a $19.6
million increase in inventories, a $43.4 million decrease in accounts payable and a $4.4 million decrease in accrued expenses and
other liabilities.
For the year ended December 31, 2018, the cash provided by our operating activities was $247.2 million. Our reported net income
of $76.6 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, 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 $302.9 million. These cash flows from operating activities were also positively impacted by a $7.0 increase in accounts payable and
a $2.8 million increase in accrued expenses and other liabilities. Additionally, manufacturing flooring plans payable and deferred
compensation increased $1.7 million and $0.1 million, respectfully. Partially offsetting these positive cash flows were a $48.2 million
increase in inventories and a $17.8 million increase in receivables. Also, prepaid expenses and other assets increased $1.0 million and
dividends payable increased $0.2 million.
Cash Flow from Investing Activities. For the year ended December 31, 2019, our cash provided by our investing activities was
exceeded by our cash used in our investing activities, resulting in net cash used in our investing activities of approximately $325.9
million. The acquisition of WRI totaled approximately $106.7 million (net of cash acquired) and purchases of rental and non-rental
equipment totaled approximately $352.8 million, which were partially offset by proceeds from the sale of rental and non-rental
equipment of approximately $133.6 million.
For the year ended December 31, 2018, our cash provided by our investing activities was exceeded by our cash used in our
investing activities, resulting in net cash used in our investing activities of approximately $526.2 million. The acquisitions of CEC and
Rental Inc. totaled approximately $196.0 million (net of cash acquired) and purchases of rental and non-rental equipment totaled
approximately $451.6 million, which were partially offset by proceeds from the sale of rental and non-rental equipment of
approximately $121.3 million.
47
Cash Flow from Financing Activities. For the year ended December 31, 2019, cash provided by our financing activities was $4.3
million. Net borrowings under our Credit Facility for the year ended December 31, 2019 were $46.1 million, which was partially
offset by dividends paid totaling $39.4 million, or $1.10 per common share, treasury stock purchases totaling approximately $1.7
million, payments on finance lease obligations of $0.2 million and payments of deferred financing costs of $0.6 million.
For the year ended December 31, 2018, cash provided by our financing activities was $129.8 million. Net borrowings under our
Credit Facility for the year ended December 31, 2018 were $170.8 million, which was partially offset by dividends paid totaling $39.3
million, or $1.10 per common share, treasury stock purchases totaling approximately $1.4 million, payments on capital lease
obligations of $0.2 million and payments of deferred financing costs of $0.1 million.
Senior Unsecured Notes
On August 24, 2017, we completed an offering of $750 million aggregate principal amount of 5.625% senior notes due 2025 (the
“New Notes”) and the settlement of a cash tender offer (the “Tender Offer”) with respect to our 7% senior notes due 2022 (the “Old
Notes”). Net proceeds, after deducting $10.3 million of estimated offering expenses, from the sale of the New Notes totaled
approximately $739.7 million. The New Notes were issued at par and require semiannual interest payments on March 1st and
September 1st of each year, commencing on March 1, 2018. No principal payments are due until maturity (September 1, 2025). The
New Notes are redeemable, in whole or in part, at any time on or after September 1, 2020 at specified redemption prices plus accrued
and unpaid interest to the date of redemption. We may redeem up to 40% of the aggregate principal amount of the New Notes before
September 1, 2020 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to September 1,
2020 at a specified “make-whole” redemption price plus accrued and unpaid interest to the date of redemption.
On November 22, 2017, we closed on an offering of $200 million aggregate principal amount of 5.625% senior notes due 2025
(the “Add-on Notes”) in an unregistered offering through a private placement. The Add-on Notes were priced at 104.25% of the
principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 24, 2017 totaled
approximately $209.2 million. The Add-on Notes were issued as additional notes under an indenture dated as of August 24, 2017,
pursuant to which we previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally
with and form a part of a single class of securities with the New Notes. We completed the Exchange Offer for the New Notes and the
Add-On Notes in March 2018.
For additional information regarding our senior unsecured notes, see note 9 to our consolidated financial statements.
Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC (as successor to
General Electric Company, successor-by-merger to General Electric Capital Corporation Capital Corporation) as Agent, and the
lenders named therein.
On December 22, 2017, we amended, extended and restated the Credit Facility by entering into the Fifth Amended and Restated
Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc.,
H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, the other credit parties named therein,
the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the
lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.
The Amended and Restated Credit Agreement, among other things, (i) extended the maturity date of the credit facility from
May 21, 2019 to December 22, 2022, (ii) increased the commitments under the senior secured asset based revolver provided for
therein from $602.5 million to $750 million, (iii) increased the uncommitted incremental revolving capacity from $150 million to
$250 million, (iv) provided that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage
(as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowered the interest rate (a) in the case of base rate
revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in
the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended
and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowered
the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and
(vii) permitted, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of
Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).
On February 1, 2019, we further amended and extended the Amended and Restated Credit Agreement with the First Amendment
to the Fifth Amended and Restated Credit Agreement (the “First Amendment”) by and among the Company, Great Northern
Equipment, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, the other credit parties
named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named
48
therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent
named therein.
The First Amendment, among other things, (i) extends the maturity date of the credit facility from December 22, 2022 to February
1, 2024, and (ii) lowers the interest rate in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of 1.25% to
1.75%, depending on the Average Availability and (iii) lowers the interest rate in the case of Base Rate loans, to the Base Rate (as
defined in the Amended and Restated Credit Agreement) plus an applicable margin of 0.25% to 0.75%, depending on the Average
Availability.
The Amended and Restated Credit Agreement continues to provide for, among other things, a $30 million letter of credit sub-
facility, and a guaranty by certain of the Company’s subsidiaries of the obligations under the Credit Facility. In addition, the Credit
Facility remains secured by substantially all of the assets of the Company and certain of its subsidiaries.
At December 31, 2019, we had total borrowings under the Credit Facility of $216.9 million and we could borrow up to $525.4
million and remain in compliance with the debt covenants under the Company’s credit facility. At February 18, 2020, we had $559.4
million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the sales of new, used and rental fleet
equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash have
been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet
equipment and property and equipment, fund payments due under facility operating leases and manufacturer flooring plans payable,
fund acquisitions and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to
open new start-up locations. We anticipate that the above described uses will be the principal demands on our cash in the future.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and
growth prospects. Our gross rental fleet capital expenditures for the year ended December 31, 2019 were approximately $349.1
million, including $39.5 million of non-cash transfers from new and used equipment to rental fleet inventory. Our gross property and
equipment capital expenditures for the year ended December 31, 2019 were $43.1 million. In response to changing economic
conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our
actual performance.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness
(including the New Notes and the Add-on Notes, the Credit Facility and our other indebtedness), will depend upon our future
operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives
available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as
well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given
the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the
Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. As of February 18, 2020, we had $559.4
million of available borrowings under the Credit Facility, net of a $7.7 million outstanding letter of credit.
We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term
obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our
indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or
restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. Given current
economic and market conditions, including the significant disruptions in the global capital markets, we cannot assure investors that
any of these actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to
continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Credit Facility and the indenture
governing the New Notes and the Add-on Notes, as well as any future debt agreements, contain or may contain restrictive covenants,
which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of
default which, if not cured or waived, could result in the acceleration of all of our debt.
Quarterly Dividend
On each of February 8, 2019, May 10, 2019, August 14, 2019 and November 12, 2019, the Company announced a quarterly
dividend of $0.275 per share to stockholders of record, which were paid on March 8, 2019, June 14, 2019, September 13, 2019 and
December 13, 2019, respectively, totaling approximately $39.4 million. On February 14, 2020, the Company announced a quarterly
dividend of $0.275 per share to stockholders of record as of the close of business on February 28, 2020, which is to be paid on
March 13, 2020.
49
The Company intends to continue to pay regular quarterly cash dividends; however, the declaration of any subsequent dividends
is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other
things, business and market conditions.
Certain Information Concerning Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated
entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation
under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated
entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or
research and development arrangements with the Company.
We have no off-balance sheet arrangements as described above. Further, we do not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We
are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships. We have also evaluated our relationships with related parties and determined that none of the related party interests
represent variable interest entities pursuant to Topic 810, Consolidation.
In the normal course of our business activities, we may lease real estate, rental equipment and non-rental equipment under
operating leases. See “Contractual and Commercial Commitments” below.
Contractual and Commercial Commitments
Our contractual obligations and commercial commitments principally include obligations associated with our outstanding
indebtedness and interest payments as of December 31, 2019.
950,000 $
Senior unsecured notes payable ............................................. $
325,079
Interest payments on senior unsecured notes (1) ...................
216,879
Credit Facility (2) ...................................................................
37,340
Interest payments on Credit Facility (1) (2) ...........................
585
Finance lease right-of-use liabilities (3).................................
222,915
Operating lease right-of-use liabilities (4) .............................
Other long-term obligations (5)..............................................
25,201
Total contractual cash obligations.......................................... $ 1,777,999 $
Total
2020
2023-2024
Thereafter
Payments Due by Year
2021-2022
(Amounts in thousands)
— $
106,875
—
18,282
315
43,180
13,543
182,195 $
— $
53,438
—
9,141
270
21,697
11,658
96,204 $
— $
106,875
216,879
9,917
—
43,246
—
950,000
57,891
—
—
—
114,792
—
376,917 $ 1,122,683
(1)
Future interest payments are calculated based on the assumption that all debt remains outstanding until maturity. Interest
on the Credit Facility assumes the interest rate in effect at December 31, 2019 and includes unused commitment fees.
(2) As described in further detail elsewhere in this Annual Report on Form 10-K, our Credit Facility was amended on
(3)
(4)
February 1, 2019.
This includes a real estate finance lease for which the related liability has been recorded (including interest) at the present
value of future minimum lease payments due under the leases.
This includes total minimum operating lease rental payments having initial or remaining non-cancelable lease terms
longer than one year, including interest.
(5) Represents amounts due on manufacturer flooring plans payable, which are used to finance certain purchases of new
equipment inventory and rental equipment.
As of December 31, 2019, we had standby letters of credit issued under our Credit Facility totaling $7.7 million that expire in
May 2020. The Company expects to renew those letters of credit under similar terms upon their expiration.
Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had for the
three most recent fiscal years ended, and is not likely in the foreseeable future to have, a material impact on our results of operations.
50
Acquisitions and Start-up Facilities
We periodically engage in evaluations of potential acquisitions and start-up facilities. We intend to continue to evaluate and
pursue, on an opportunistic basis, acquisitions which meet our selection criteria, and we are focused on identifying and acquiring
rental companies to complement our existing business, broaden our geographic footprint, and increase our density in existing markets.
Effective January 1, 2018, we completed the acquisition of CEC, a privately-held company focused on non-residential
construction equipment rentals serving the greater Denver, Colorado area out of three branch locations. Effective April 1, 2018, we
completed the acquisition of Rental Inc., an equipment rental and distribution company with five branch locations in Alabama and
Florida. Effective February 1, 2019, we completed the acquisition of WRI, an equipment rental company with six branch locations in
Central Texas.
The success of our growth strategy depends, in part, on selecting strategic acquisition candidates at attractive prices and
identifying strategic start-up locations. We expect to face competition for acquisition candidates, which may limit the number of
acquisition opportunities and lead to higher acquisition costs. We may not have the financial resources necessary to consummate any
acquisitions or to successfully open any new facilities in the future or the ability to obtain the necessary funds on satisfactory terms.
For further information regarding our risks related to acquisitions, see Item 1A – Risk Factors of this Annual Report on Form 10-K.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Our earnings may be affected by changes in interest rates since interest expense on the Credit Facility is currently calculated
based upon (a) the index rate plus an applicable margin of 0.25% to 0.75%, depending on the Average Availability (as defined in the
Credit Facility), in the case of index rate revolving loans and (b) LIBOR plus an applicable margin of 1.25% to 1.75%, depending on
the Average Availability (as defined in the Credit Facility), in the case of LIBOR revolving loans.
At December 31, 2019, we had outstanding borrowings under the Credit Facility totaling $216.9 million. A 1.0% increase in the
interest rate on the Credit Facility would result in an increase of approximately $2.2 million in interest expense on an annualized basis.
At February 18, 2020, we had borrowings outstanding totaling $182.8 million, with $559.4 million of available borrowings, net of
$7.7 million of outstanding letters of credit. We did not have significant exposure to changing interest rates as of December 31, 2019
on the fixed-rate senior unsecured notes. Historically, we have not engaged in derivatives or other financial instruments for trading,
speculative or hedging purposes, though we may do so from time to time if such instruments are available to us on acceptable terms
and prevailing market conditions are accommodating.
51
Item 8.
Financial Statements and Supplementary Data
Index to consolidated financial statements of H&E Equipment Services, Inc. and Subsidiaries
See note 17 to the consolidated financial statements for summarized quarterly financial data.
Report of Independent Registered Public Accounting Firm .........................................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018................................................................................................
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 ....................................................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017 ..............................
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017..............................................
Notes to Consolidated Financial Statements .................................................................................................................................
Page
53
55
56
57
58
60
52
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
H&E Equipment Services, Inc.
Baton Rouge, Louisiana
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of H&E Equipment Services, Inc. (the “Company”) and subsidiaries
as of December 31, 2019 and 2018, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2019, and the related notes and schedule (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated February 20, 2020, expressed an unqualified opinion thereon..
Adoption of New Accounting Standard
As discussed on Notes 2 and 11 to the consolidated financial statements, the Company changed its method of accounting for leases in
the year ended December 31, 2019 due to the adoption of ASU No. 2016-02, Leases, and the associated amendments (Topic 842),
using the modified retrospective method.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on
the accounts or disclosures to which it relates.
53
Goodwill Impairment Assessment
As described in Note 2 to the consolidated financial statements, the Company has recognized goodwill of approximately $131.4
million as of December 31, 2019. On October 1, 2019, the Company performed its annual impairment test by comparing the fair
value of its reporting units to the carrying value, and recognized impairment for certain reporting units for the excess of the carrying
value over the fair value. A combination of the income and the market approaches were used to estimate the fair value of the
Company’s reporting units.
We identified management’s judgments used in the income approach in estimating the fair value of certain reporting units as a critical
audit matter. Significant judgments are required by management to develop assumptions used in the discounted cash flow analysis
including internally projected results of operations, the weighted average cost of capital (“WACC”), and the terminal value growth
rate. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required in
performing procedures, and evaluating audit evidence obtained, related to management’s assumptions, including the use of
professionals with specialized skill and knowledge to assist in performing these procedures.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Evaluating the reasonableness of management’s assumptions used in the Company’s discounted cash flow analysis,
including evaluating whether the internally projected results of operations were reasonable considering the historical
performance of the reporting units, consistency with industry data, and consistency with evidence obtained through
other areas of the audit.
Testing the completeness, accuracy and relevance of the underlying data used in the discounted cash flow analysis.
Utilizing personnel with specialized skill and knowledge in valuation to assist in evaluating the Company’s discounted
cash flow analysis and certain significant assumptions, including reviewing internally projected results of operations to
ensure the WACC adequately captures the conditions present in the projections, as well as comparison of growth rates
and internally projected results of operations to historical measures, and those of other market participants.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2004.
Dallas, Texas
February 20, 2020
54
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
Assets
Cash .................................................................................................................................. $
Receivables, net of allowance for doubtful accounts of $5,236 and $4,094,
respectively ....................................................................................................................
Inventories, net of reserves for obsolescence of $331 and $368, respectively .................
Prepaid expenses and other assets ....................................................................................
Rental equipment, net of accumulated depreciation of $676,376 and $582,520,
respectively ....................................................................................................................
Property and equipment, net of accumulated depreciation and amortization
of $156,782 and $142,662, respectively ........................................................................
Operating lease right-of-use assets, net of accumulated amortization of $11,197 ...........
Finance lease right-of-use assets, net of accumulated amortization of $2,051.................
Deferred financing costs, net of accumulated amortization of $14,419 and
$13,717, respectively .....................................................................................................
Intangible assets, net of accumulated amortization of $6,952 and $3,320,
respectively ....................................................................................................................
Goodwill ...........................................................................................................................
Total assets .................................................................................................................. $
Liabilities and Stockholders’ Equity
Liabilities:
2019
2018
(Amounts in thousands, except
share amounts)
14,247 $
16,677
192,204
85,478
10,262
201,556
104,598
10,508
1,217,673
1,141,498
130,564
156,570
365
115,121
—
—
2,857
3,000
32,948
131,442
1,974,610 $
28,380
105,843
1,727,181
Amounts due on senior secured credit facility.................................................................. $
Accounts payable..............................................................................................................
Manufacturer flooring plans payable................................................................................
Accrued expenses payable and other liabilities ................................................................
Dividends payable.............................................................................................................
Senior unsecured notes, net of unaccreted discount of $2,691 and $3,168
and deferred financing costs of $1,743 and $2,052, respectively..................................
Operating lease right-of-use liabilities..............................................................................
Finance lease right-of-use liabilities .................................................................................
Capital leases payable.......................................................................................................
Deferred income taxes ......................................................................................................
Deferred compensation payable........................................................................................
Total liabilities.............................................................................................................
216,879 $
58,853
25,201
78,382
171
945,566
159,265
550
—
180,126
2,098
1,667,091
170,761
101,840
23,666
73,371
132
944,780
—
—
726
153,113
1,989
1,470,378
Commitments and Contingencies (Note 13)
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; 39,921,838 and
39,748,562 shares issued at December 31, 2019 and 2018, respectively, and
35,848,089 and 35,733,569 shares outstanding at December 31, 2019 and
2018, respectively ..........................................................................................................
Additional paid-in capital .................................................................................................
Treasury stock at cost, 4,073,749 and 4,014,993 shares of common stock held at
December 31, 2019 and 2018, respectively...................................................................
Retained earnings..............................................................................................................
Total stockholders’ equity ...........................................................................................
Total liabilities and stockholders’ equity .................................................................... $
—
—
398
235,844
(64,783)
136,060
307,519
1,974,610 $
396
231,174
(63,099)
88,332
256,803
1,727,181
The accompanying notes are an integral part of these consolidated statements.
55
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
2019
2017
2018
(Amounts in thousands, except per share amounts)
Revenues:
Equipment rentals......................................................................................... $
New equipment sales....................................................................................
Used equipment sales ...................................................................................
Parts sales .....................................................................................................
Services revenues .........................................................................................
Other .............................................................................................................
Total revenues .........................................................................................
766,354 $
239,091
139,349
123,855
67,941
11,775
1,348,365
627,181 $
262,948
125,125
120,454
63,488
39,765
1,238,961
508,121
203,301
107,329
114,253
62,873
34,142
1,030,019
Cost of revenues:
Rental depreciation.......................................................................................
Rental expense..............................................................................................
Rental other ..................................................................................................
New equipment sales....................................................................................
Used equipment sales ...................................................................................
Parts sales .....................................................................................................
Services revenues .........................................................................................
Other .............................................................................................................
Total cost of revenues .............................................................................
Gross profit .............................................................................................
Selling, general and administrative expenses ....................................................
Impairment of goodwill .....................................................................................
Merger costs (net of merger breakup fee proceeds)...........................................
Gain from sales of property and equipment, net................................................
Income from operations ..........................................................................
Other income (expense):
Interest expense ............................................................................................
Loss on early extinguishment of debt...........................................................
Other, net ......................................................................................................
Total other expense, net ..........................................................................
Income before provision (benefit) for income taxes..........................................
Provision (benefit) for income taxes..................................................................
Net income .............................................................................................. $
Net income per common share:
Basic........................................................................................................ $
Diluted..................................................................................................... $
Weighted average common shares outstanding:
Basic........................................................................................................
Diluted.....................................................................................................
Dividends declared per common share outstanding .......................................... $
243,780
105,079
70,613
419,472
211,372
92,021
90,963
21,946
13,421
849,195
499,170
311,026
12,184
416
4,617
180,161
(68,277)
—
3,977
(64,300)
115,861
28,650
87,211 $
2.43 $
2.42 $
35,859
36,033
1.10 $
208,453
89,520
55,449
353,422
232,057
86,052
88,263
21,328
19,305
800,427
438,534
278,298
—
708
7,118
166,646
(63,707)
—
1,724
(61,983)
104,663
28,040
76,623 $
2.15 $
2.13 $
35,677
35,903
1.10 $
169,455
77,706
47,438
294,599
180,702
74,132
83,135
21,111
16,432
670,111
359,908
232,784
—
(5,782)
5,009
137,915
(54,958)
(25,363)
1,750
(78,571)
59,344
(50,314)
109,658
3.09
3.07
35,516
35,699
1.10
The accompanying notes are an integral part of these consolidated statements.
56
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(Amounts in thousands, except share amounts)
Balances at December 31, 2016 ........................... 39,496,759 $
394 $ 223,544 $ (60,966) $
(20,207) $ 142,765
Common Stock
Shares
Issued
Amount
Additional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
—
—
—
127,014
—
—
—
1
—
3,526
—
—
881
—
881
3,526
—
—
—
(39,255)
(39,255)
—
—
1
Cumulative effect adjustment for previously
unrecognized excess tax benefits pursuant
to the adoption of ASU 2016-09..................
Stock-based compensation..............................
Cash dividends on common stock ($1.10
per share)......................................................
Issuances of non-vested restricted common
stock, net of restricted stock forfeitures.......
Repurchases of 37,565 shares of restricted
common stock ..............................................
Net income......................................................
Stock-based compensation..............................
Cash dividends declared on common stock
($1.10 per share) ..........................................
Issuances of non-vested restricted common
stock, net of restricted stock forfeitures.......
Repurchases of 37,805 shares of restricted
common stock ..............................................
Net income......................................................
Cumulative effect adjustment for Finance
Lease pursuant to the adoption of
ASC 842.......................................................
Stock-based compensation..............................
Cash dividends declared on common stock
($1.10 per share) ..........................................
Issuances of non-vested restricted common
stock, net of restricted stock forfeitures.......
Repurchases of 58,756 shares of restricted
common stock ..............................................
Net income......................................................
—
—
Balances at December 31, 2017 ........................... 39,623,773
—
—
—
395
—
—
—
227,070
4,214
(783)
—
(61,749)
—
—
109,658
51,077
—
(783)
109,658
216,793
4,214
—
—
—
—
(39,368)
(39,368)
124,789
1
(110)
—
—
(109)
—
—
Balances at December 31, 2018 ........................... 39,748,562
—
—
396
—
—
231,174
(1,350)
—
(63,099)
—
76,623
88,332
(1,350)
76,623
256,803
—
—
—
173,276
—
—
—
2
—
4,670
—
—
(56)
—
(56)
4,670
—
—
—
(39,427)
(39,427)
—
—
2
—
—
Balances at December 31, 2019 ........................... 39,921,838 $
(1,684)
—
—
—
—
—
398 $ 235,844 $ (64,783) $
—
(1,684)
87,211
87,211
136,060 $ 307,519
The accompanying notes are an integral part of these consolidated statements.
57
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Cash flows from operating activities:
Net income ......................................................................................................... $
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment..........................
Depreciation of rental equipment .................................................................
Amortization of intangible assets .................................................................
Amortization of deferred financing costs .....................................................
Accretion of note discount, net of premium amortization............................
Non-cash operating lease expense................................................................
Amortization of finance lease right-of-use assets ........................................
Provision for losses on accounts receivable .................................................
Provision for inventory obsolescence...........................................................
Deferred income taxes..................................................................................
Stock-based compensation expense .............................................................
Impairment of goodwill................................................................................
Loss on early extinguishment of debt...........................................................
Gain from sales of property and equipment, net ..........................................
Gain from sales of rental equipment, net .....................................................
Changes in operating assets and liabilities, net of acquisitions:
Receivables .............................................................................................
Inventories...............................................................................................
Prepaid expenses and other assets...........................................................
Accounts payable ....................................................................................
Manufacturer flooring plans payable ......................................................
Accrued expenses payable and other liabilities ......................................
Deferred compensation payable..............................................................
Net cash provided by operating activities .........................................
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired ...........................................
Purchases of property and equipment ..........................................................
Purchases of rental equipment......................................................................
Proceeds from sales of property and equipment ..........................................
Proceeds from sales of rental equipment......................................................
Net cash used in investing activities .......................................................
Cash flows from financing activities:
Purchases of treasury stock ..........................................................................
Borrowings on senior secured credit facility................................................
Payments on senior secured credit facility ...................................................
Principal payments on senior unsecured notes due 2022 .............................
Costs paid to tender and redeem senior unsecured notes due 2022 .............
Proceeds from issuance of senior unsecured notes due 2025.......................
Payments of deferred financing costs...........................................................
Dividends paid..............................................................................................
Payments of finance lease obligations..........................................................
Payments of capital lease obligations...........................................................
Net cash provided by financing activities ...............................................
Net increase (decrease) in cash ..........................................................................
Cash, beginning of year .....................................................................................
Cash, end of year................................................................................................ $
2019
2018
(Amounts in thousands)
2017
87,211 $
76,623 $
109,658
28,425
243,780
4,132
1,010
477
11,680
163
5,793
152
27,013
4,670
12,184
—
(4,617)
(46,613)
9,222
(19,637)
267
(43,358)
1,535
(4,380)
109
319,218
24,593
208,453
3,320
1,083
477
—
—
2,741
122
26,695
4,214
—
—
(7,118)
(38,352)
(17,761)
(48,230)
(965)
6,994
1,664
2,572
86
247,211
(106,746)
(43,111)
(309,654)
6,050
127,558
(325,903)
(1,684)
1,457,744
(1,411,626)
—
—
—
(559)
(39,388)
(232)
—
4,255
(2,430)
16,677
14,247 $
(196,027)
(34,960)
(416,600)
9,261
112,086
(526,240)
(1,350)
1,436,849
(1,266,088)
—
—
—
(97)
(39,274)
—
(212)
129,828
(149,201)
165,878
16,677 $
23,790
169,455
—
1,046
274
—
—
3,932
161
(50,535)
3,526
—
25,363
(5,009)
(31,882)
(40,012)
(31,771)
(1,659)
50,349
(8,778)
8,230
61
226,199
—
(22,515)
(234,209)
7,506
96,143
(153,075)
(783)
1,193,544
(1,356,186)
(630,000)
(23,336)
958,500
(17,278)
(39,172)
—
(218)
85,071
158,195
7,683
165,878
The accompanying notes are an integral part of these consolidated statements.
58
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31,
Supplemental schedule of non-cash investing and financing
activities:
Accrued acquisition purchase price consideration.......................... $
Non-cash asset purchases:
Assets transferred from new and used inventory
to rental fleet........................................................................... $
Purchases of property and equipment included in accrued
expenses payable and other liabilities .................................... $
Operating lease right-of-use assets and lease liabilities
recorded upon adoption of ASC 842...................................... $
Finance lease right-of-use assets and lease liabilities
recorded upon adoption of ASC 842...................................... $
Operating lease assets obtained in exchange for new
operating lease liabilities ........................................................ $
Supplemental disclosures of cash flow information:
Cash paid during the year for:
2019
2018
(Amounts in thousands)
2017
3,432 $
3,432 $
—
39,478 $
24,341 $
10,515
468 $
(473) $
162,814 $
782 $
7,094 $
— $
— $
— $
(23)
—
—
—
Interest ....................................................................................... $
Income taxes paid (refunds received), net................................. $
66,608 $
996 $
62,424 $
2,366 $
49,546
478
59
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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)
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our 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.”
All significant intercompany accounts and transactions have been eliminated in these consolidated financial statements. Business
combinations are included in the 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 consolidated balance sheets are presented on an unclassified
basis.
Reclassifications and Comparability
Prior period hauling revenues and related cost of revenues have been reclassified to conform to the current periods’ presentation.
The tables below (amounts in thousands) reconcile for the years ended December 31, 2018 and 2017, our Revenues, Cost of Revenues
and Gross Profit as previously reported to the current period presentation in this Annual Report on Form 10-K.
60
As Previously
Reported
2018
Reclassification
of Hauling Fees
As Currently
Reported
As Previously
Reported
2017
Reclassification
of Hauling Fees
As Currently
Reported
Year Ended December 31,
Revenues:
Equipment rentals ...................... $
New equipment sales .................
Used equipment sales.................
Parts sales...................................
Services revenues.......................
Other...........................................
Total revenues.......................
592,193 $
262,948
125,125
120,454
63,488
74,753
1,238,961
34,988 $
—
—
—
—
(34,988)
—
627,181 $
262,948
125,125
120,454
63,488
39,765
1,238,961
479,016 $
203,301
107,329
114,253
62,873
63,247
1,030,019
29,105 $
—
—
—
—
(29,105)
—
508,121
203,301
107,329
114,253
62,873
34,142
1,030,019
Cost of revenues:
Rental depreciation ....................
Rental expense ...........................
Rental other ................................
New equipment sales .................
Used equipment sales.................
Parts sales...................................
Services revenues.......................
Other...........................................
Total cost of revenues...........
Gross profit ........................... $
Use of Estimates
208,453
89,520
—
297,973
232,057
86,052
88,263
21,328
74,754
800,427
438,534 $
—
—
55,449
55,449
—
—
—
—
(55,449)
—
— $
208,453
89,520
55,449
353,422
232,057
86,052
88,263
21,328
19,305
800,427
438,534 $
169,455
77,706
—
247,161
180,702
74,132
83,135
21,111
63,870
670,111
359,908 $
—
—
47,438
47,438
—
—
—
—
(47,438)
—
— $
169,455
77,706
47,438
294,599
180,702
74,132
83,135
21,111
16,432
670,111
359,908
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.
Revenue Recognition
Under Topic 606, Revenue from Contracts with Customers, revenue is recognized when control of the promised goods or services
is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or
services. As described below and in note 11 to these consolidated financial statements, we adopted Topic 842, Leases, on January 1,
2019. We recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 842.
Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the
customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in
a contract to transfer a distinct good or service to a customer. Our contracts with customers generally do not include multiple
performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or
service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such
products or services.
Nature of goods and services
The tables below summarize our revenues as presented in our consolidated statements of income for the years ended December
31, 2019, 2018 and 2017 by revenue type and by the applicable accounting standard (amounts in thousands).
61
Year Ended December 31, 2019
Topic 842
Topic 606
Total
Revenues:
Rental revenues
Owned equipment rentals ................................................................... $
Re-rent revenue ..................................................................................
668,087 $
25,342
1,118 $
—
669,205
25,342
Ancillary and other rental revenues:
Delivery and pick-up ..........................................................................
Other ...................................................................................................
Total ancillary rental revenues.................................................................
Total equipment rental revenues..............................................................
New equipment sales ...............................................................................
Used equipment sales...............................................................................
Parts sales.................................................................................................
Services revenues.....................................................................................
Other ........................................................................................................
Total revenues.......................................................................................... $
—
31,758
31,758
725,187
—
—
—
—
—
725,187
$
40,049
—
40,049
41,167
239,091
139,349
123,855
67,941
11,775
623,178
$
40,049
31,758
71,807
766,354
239,091
139,349
123,855
67,941
11,775
1,348,365
Year Ended December 31, 2018
Topic 840(1)
Topic 606
Total
Revenues:
Rental revenues
Owned equipment rentals ................................................................... $
Re-rent revenue ..................................................................................
568,412
$
22,447
1,334 $
—
569,746
22,447
Ancillary and other rental revenues:
Delivery and pick-up ..........................................................................
Other ...................................................................................................
Total ancillary rental revenues.................................................................
Total equipment rental revenues..............................................................
New equipment sales ...............................................................................
Used equipment sales...............................................................................
Parts sales.................................................................................................
Services revenues.....................................................................................
Other ........................................................................................................
Total revenues.......................................................................................... $
—
—
—
590,859
—
—
—
—
21,693
612,552
$
34,988
—
34,988
36,322
262,948
125,125
120,454
63,488
18,072
626,409
$
34,988
—
34,988
627,181
262,948
125,125
120,454
63,488
39,765
1,238,961
Year Ended December 31, 2017
Topic 840(1)
Topic 606
Total
Revenues:
Rental revenues
Owned equipment rentals ................................................................... $
Re-rent revenue ..................................................................................
$
459,571
17,407
2,038 $
—
461,609
17,407
Ancillary and other rental revenues:
Delivery and pick-up ..........................................................................
Other ...................................................................................................
Total ancillary rental revenues.................................................................
Total equipment rental revenues..............................................................
New equipment sales ...............................................................................
Used equipment sales...............................................................................
Parts sales.................................................................................................
Services revenues.....................................................................................
Other ........................................................................................................
Total revenues.......................................................................................... $
—
—
—
476,978
—
—
—
—
17,791
494,769
$
29,105
—
29,105
31,143
203,301
107,329
114,253
62,873
16,351
535,250
$
29,105
—
29,105
508,121
203,301
107,329
114,253
62,873
34,142
1,030,019
62
(1) Prior to our adoption of Topic 842 on January 1, 2019, leases were accounted for under Topic 840. See additional
information below in Recently Adopted Accounting Pronouncements.
Revenues by reporting segment are presented in note 18 of our condensed consolidated financial statements, using the revenue
captions reflected in our consolidated statements of income. We believe that the disaggregation of our revenues from contracts to
customers as reflected above, coupled with further discussion below and the reporting segment in note 18, depicts how the nature,
amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.
Lease revenues
Topic 842 (for the year ended December 31, 2019)
Owned Equipment Rentals: Owned equipment rentals represent revenues from renting equipment. We account for these
rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of
billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily
basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record
unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately
stated for the periods presented.
Re-rent revenue: Re-rent revenue reflects revenues from equipment that we rent from vendors and then rent to our customers.
We account for such rentals as subleases. The accounting for re-rent revenue is the same as the accounting for owned equipment
rentals described above.
Other equipment rental revenue: Other equipment rental revenue is primarily comprised of (i) revenue from customers who
purchase insurance to protect against potential damages or loss the equipment they rent, (ii) environmental charges associated with
the rental of equipment, and (iii) fuel recovery fees charged to customers. Fuel consumption charges are recognized upon return of
the rental equipment when fuel consumption by the customer, if any, can be measured. Income from environmental fees and
damage waiver insurance policies are recognized when earned over the period the equipment is rented.
Topic 840 (for the years ended December 31, 2018 and 2017)
Rental Revenues: Owned equipment rentals represent revenues from renting equipment. We account for these rental contracts
as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to
customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as
rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled
rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the
periods presented.
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, environmental fees 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
environmental fees and damage waiver insurance policies are recognized when earned 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: An insignificant portion of our total equipment rental revenues are recognized pursuant to Topic 606 rather than
pursuant to Topic 842. These revenues represent services performed by us in connection with the rental of equipment and are
comprised of customer training fees on rented equipment and erection and dismantling services on rental equipment. Revenues for
these services are recognized upon completion of such services. See discussion above regarding rental revenues recognized pursuant
to Topic 842.
Delivery and pick-up: Delivery and pick-up revenue associated with renting equipment is recognized when the service is
performed.
63
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 made an accounting policy election permitted by Topic 606 to treat
such shipping activities as fulfillment costs, which results in the fees for shipping activities being included in the parts sales
transaction price.
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 ancillary charges associated with equipment maintenance and repair services.
Such revenues are recognized at the time the services are performed.
Receivables and contract assets and liabilities
We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically
generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and our
allowances for doubtful accounts address our total revenues from Topic 606 and Topic 842.
We believe concentration of credit risk with respect to our receivables is limited because our customer base is comprised of a
large number of geographically diverse customers. Our largest customer accounted for less than two percent of total revenues for the
years ended December 31, 2019, 2018 and 2017. No single customer accounted for more than 10% of our revenues on an overall or
segment basis for any of the periods presented in this Annual Report on Form 10-K. 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 years ended December 31, 2019, 2018
and 2017 were approximately 0.5%, 0.2% and 0.4%, respectively. See Pending Accounting Pronouncements for new guidance related
to expected credit losses.
We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with
contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of
recognizable revenue. We did not recognize material revenues during the years ended December 31, 2019, 2018 or 2017 that was
included in the contract liability balance as of the beginning of such periods.
64
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 years ended December 31, 2019, 2018 and 2017 was not material.
Payment terms
Our Topic 606 revenues do not include material amounts of variable consideration. Our payment terms are typically net 30 days,
but can 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.
Inventories
We measure inventory at the lower of cost or net realizable value; where net realizable value is considered to be estimated selling
price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. For new and used
equipment inventories, cost is determined by specific-identification. For inventories of parts and supplies, cost is determined by using
average cost.
Long-lived Assets and Goodwill
Rental Equipment
The rental equipment we purchase is stated at cost and is depreciated over the estimated useful life of the equipment using the
straight-line method. The depreciation is included in rental depreciation within our consolidated statements of income. Estimated
useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year estimated
useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a
seven year estimated useful life. Attachments and other smaller type equipment are depreciated generally over a three year estimated
useful life. We periodically evaluate the appropriateness of remaining depreciable lives and any salvage value assigned to rental
equipment.
Ordinary repair and maintenance costs and property taxes are charged to operations as incurred. However, expenditures for
additions or improvements that significantly extend the useful life of the asset are capitalized in the period incurred. When rental
equipment is sold or disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any
gains or losses are included in income. We receive individual offers for fleet on a continual basis, at which time we perform an
analysis on whether or not to accept the offer. The rental equipment is not transferred to inventory under the held for sale model as the
equipment is used to generate revenues until the equipment is sold.
65
Property and Equipment
Property and equipment are recorded at cost and are depreciated over the assets’ estimated useful lives using the straight-line
method. Ordinary repair and maintenance costs are charged to operations as incurred. However, expenditures for additions or
improvements that significantly extend the useful life of the asset are capitalized in the period incurred. At the time assets are sold or
disposed of, the cost and accumulated depreciation are removed from their respective accounts and the related gains or losses are
reflected in income.
We capitalize interest on qualified construction projects. We additionally capitalize certain costs associated with internally
developed software and cloud computing arrangements (see also Recently Adopted Accounting Pronouncements related to accounting
guidance for cloud computing arrangements).
We periodically evaluate the appropriateness of remaining depreciable lives assigned to property and equipment. Leasehold
improvements are amortized using the straight-line method over their estimated useful lives or the remaining term of the lease,
whichever is shorter, Depreciation expense on property and equipment is included in SG&A expenses on our consolidated statements
of income. Generally, we assign the following estimated useful lives to these categories:
Category
Transportation equipment................................................................
Buildings..........................................................................................
Office equipment .............................................................................
Computer equipment .......................................................................
Machinery and equipment ...............................................................
Estimated
Useful Life
5 years
39 years
5 years
3 years
7 years
When events or changes in circumstances indicate that the carrying amount of our rental fleet and property and equipment might
not be recoverable, the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount
of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is
recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is
determined based on discounted cash flows or appraised values, as appropriate. We did not record any impairment losses related to our
rental equipment or property and equipment during 2019, 2018 or 2017.
Goodwill
We have made acquisitions in the past that included the recognition of goodwill. Goodwill is recorded as the excess of the
consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values
of the identifiable net assets acquired.
We evaluate goodwill for impairment at least annually, or more frequently if triggering events occur or other impairment
indicators arise which might impair recoverability. Impairment of goodwill is evaluated at the reporting unit level. A reporting unit is
defined as an operating segment (i.e. before aggregation or combination), or one level below an operating segment (i.e. a component).
A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial
information is available and segment management regularly reviews the operating results of that component. We have identified two
components within our Rental operating segment and have determined that each of our other operating segments (New, Used, Parts
and Service) represent a reporting unit, resulting in six total reporting units.
Prior to our adoption of ASU No. 2017-04, described below, Topic 350 required a two-step assessment to determine whether
goodwill is impaired. The first step (“Step 1”) requires an entity to compare each reporting unit’s carrying value, including goodwill,
and its fair value. If the carrying value exceeds the fair value, then the entity must perform the second step (“Step 2”), which is to
compare the implied fair value of goodwill to its carrying value, and record an impairment charge for any excess of carrying value
over implied fair value. An entity also has an option to perform a qualitative assessment to determine if the quantitative impairment
test is necessary. Considerable judgment is required by management in using the qualitative approach to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying value. During 2018, we performed, as of October 1, a
qualitative assessment and determined that it was more likely than not that the fair value of each of our reporting units was not less
than its carrying value and, therefore, did not perform the prescribed quantitative goodwill impairment test. We considered various
factors in performing the qualitative test, including macroeconomic conditions, industry and market considerations, the overall
financial performance of our reporting units, the Company’s stock price and the excess amount or “cushion” between our reporting
unit’s fair value and carrying value as indicated on our most recent quantitative assessment.
66
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”) to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the
goodwill impairment test. As amended, the goodwill impairment test consists of one step, comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value, limited to the total amount of goodwill allocated to the reporting unit. We adopted ASU 2017-
04 as of October 1, 2019.
Given that we have completed three acquisitions in 2018 and 2019, resulting in a substantial increase in the amount of goodwill,
we performed a Step 1 quantitative assessment of goodwill impairment as of October 1, 2019, our annual impairment testing date. For
all reporting units, we compared the carrying values of each reporting unit, inclusive of goodwill and definite-lived intangible assets,
to its fair value. We estimated the fair value of these reporting units by weighting results from the income approach and the market
approach. Based on this quantitative test, we determined that our Rental Component 1, Rental Component 2, Used Equipment Sales
and Parts reporting units were not impaired as their respective fair values exceeded their respective carrying values by at least 24% or
more. However, the results of the quantitative test indicated that the respective fair values of the New Equipment Sales and Service
Revenues reporting units were less than the carrying value of each reporting unit, resulting in a goodwill impairment totaling $12.2
million, or $10.7 million and $1.5 million for the New Equipment Sales and Service Revenues reporting units, respectively.
The New Equipment Sales reporting unit impairment was largely due to a sharp decline in our 2019 fourth quarter new equipment
sales revenues as over 75% of our full-year new equipment sales decline occurred in the fourth quarter. This decline, combined with
our new equipment sales revenues growth rate and operating results assumptions for the forecast period under the income approach,
resulted in a fair value determination, that when combined with the weighted fair value of the reporting unit determined under the
market approach, was less than the reporting unit’s carrying value as of October 1, 2019, resulting in a $10.7 million impairment
charge.
The impairment of the Service Revenues reporting unit was largely due to our service revenues growth rate and operating results
assumptions for the forecast period under the income approach, which resulted in a fair value determination, that when combined with
the weighted fair value of the reporting unit determined under the market approach, was less than the reporting unit’s carrying value as
of October 1, 2019, resulting in a $1.5 million impairment charge.
Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, prospective financial
information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry.
The inputs and variables used in determining the fair value of a reporting unit require management to make certain assumptions
regarding the impact of operating and macroeconomic changes, as well as estimates of future cash flows. Our estimates regarding
future cash flows are based on historical experience and projections of future operating performance, including revenues, margins and
operating expenses. We also make certain forecasts about future economic conditions, such as the timing and duration of economic
expansion or contraction cycles in our business, interest rates, and other market data. Many of the factors used in assessing fair value
are outside the control of management, and these assumptions and estimates may change in future periods.
The impairment charges are non-cash items and will not affect our cash flows, liquidity or borrowing capacity under the senior
credit facility, and the charge is excluded from our financial results in evaluating our financial covenant under the senior secured
credit facility.
The changes in the carrying amount of goodwill for our reporting units for the years ended December 31, 2019 and 2018 were as
follows (amounts in thousands):
Eq. Rental
Comp. 1
Eq. Rental
Comp. 2
New Eq.
Sales
Used Eq.
Sales
Balance at December 31, 2017 ............ $
Increases (1) .........................................
Decreases .............................................
Balance at December 31, 2018 ............
Increases (2) .........................................
Decreases (3)........................................
Balance at December 31, 2019 ............ $
—
34,297
—
34,297
14,918
—
49,215
$
$
18,700
23,836
—
42,536
19,775
—
62,311
$
$
$
—
10,434
—
10,434
254
(10,688)
$
—
$
Parts Sales
6,360
2,550
—
8,910
2,045
—
10,955
$
6,137
2,324
—
8,461
500
—
8,961
Service
Revenues
—
1,205
—
1,205
291
(1,496)
—
$
Total
31,197
74,646
—
105,843
37,783
(12,184)
$ 131,442
$
$
(1) Increases are related to goodwill recognized in the CEC and Rental Inc. 2018 acquisitions. See footnote 3 for further
information
(2) Increases are related to goodwill recognized in the WRI 2019 acquisition. See footnote 3 for further information
(3) Decreases are related to the goodwill impairment calculated as of October 1, 2019.
67
Intangible assets
Our intangible assets include customer relationships, tradenames and leasehold interests that we acquired in recent acquisitions
(see note 3 for further acquisition information). The customer relationships, tradenames and leasehold interests are amortized on a
straight-line basis over estimated useful lives of ten, one and ten years, respectively, from the date of acquisition.
The gross carrying values, accumulated amortization and net carrying amounts of our major classes of intangible assets as of
December 31, 2019 and 2018 are as follows (dollar amounts in thousands):
Customer relationships....... $
Tradenames ........................
Leasehold interests.............
Total ............................... $
December 31, 2019
Accumulated
Amortization
6,729
$
183
40
6,952
$
$
$
Gross
39,500
200
200
39,900
Net
Gross
32,771 $
17
160
32,948 $
31,000
500
200
31,700
December 31, 2018
Accumulated
Amortization
2,850
$
450
20
3,320
$
$
$
Net
28,150
50
180
28,380
Intangible assets are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when the carrying amount of the asset exceeds the estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recorded would be
the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis or
other valuation technique.
Total amortization expense for the years ended December 31, 2019 and 2018 totaled $4.1 million and $3.3 million, respectively,
and is included within SG&A expenses on the consolidated statements of income. There was no amortization expense for the year
ended December 31, 2017. The following table presents the expected amortization expense for each of the next five years ending
December 31 and thereafter for those intangible assets with remaining carrying value as of December 31, 2019 (dollar amounts in
thousands):
2020.............................................................................................................................. $
2021..............................................................................................................................
2022..............................................................................................................................
2023..............................................................................................................................
2024..............................................................................................................................
Thereafter .....................................................................................................................
$
Amortization Expense
3,987
3,970
3,970
3,970
3,970
13,081
32,948
Leases
The Company as Lessee
We determine whether an arrangement is a lease at the inception of the arrangement based on the terms and conditions in the
contract. A contract contains a lease if there is an identified asset and we have the right to control the asset for a period of time in
exchange for consideration. Lease arrangements can take several forms. Some arrangements are clearly within the scope of lease
accounting, such as a real estate contract that provides an explicit contractual right to use a building for a specified period of time in
exchange for consideration. However, the right to use an asset can also be conveyed through arrangements that are not leases in form,
such as leases embedded within service and supply contracts. We analyze all arrangements with potential embedded leases to
determine if an identified asset is present, if substantive substitution rights are present, and if the arrangement provides the customer
control of the asset.
Our lease portfolio is substantially comprised of operating leases related to leases of real estate and improvements at our branch
locations. From time to time, we may also lease various types of small equipment and vehicles.
68
Operating lease right-of-use (“ROU”) assets represent our right to use an individual asset for the lease term and lease liabilities
represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at
the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide the
lessor’s implicit rate, we use our incremental borrowing rate (“IBR”) at the commencement date in determining the present value of
lease payments by utilizing a fully collateralized rate for a fully amortizing loan with the same term as the lease.
Lease terms include options to extend the lease when it is reasonably certain those options will be exercised. For leases with terms
greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our
leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease
payments when such renewal options and/or termination options are reasonably certain of exercise. We do not separate lease and non-
lease components of contracts. Variable lease payments, which represent lease payments that vary due to changes in facts or
circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the
obligation for these payments was incurred.
A ROU asset is subject to the same impairment guidance as assets categorized as plant, property, and equipment. As such, any
impairment loss on ROU assets is presented in the same manner as an impairment loss recognized on other long-lived assets.
A lease modification is a change to the terms and conditions of a contract that change the scope or consideration of a lease. For
example, a change to the terms and conditions to the contract that adds or terminates the right to use one or more underlying assets, or
extends or shortens the contractual lease term, is a modification. Depending on facts and circumstances, a lease modification may be
accounted as either: (1) the original lease plus the lease of a separate asset(s) or (2) a modified lease. A lease will be remeasured if
there are changes to the lease contract that do not give rise to a separate lease.
See also Recently Adopted Accounting Pronouncements below regarding our adoption of the new lease accounting guidance as of
January 1, 2019. Also see note 11 related to the required lease disclosures.
The Company as Lessor
Our equipment rental business involves rental contracts with customers whereby we are the lessor in the transaction and therefore,
such transactions are subject to Topic 842. We account for such rental contracts as operating leases. We recognize revenue from
equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily,
weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental
contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of
reporting periods so rental revenues earned is appropriately stated for the periods presented.
Deferred Financing Costs and Initial Purchasers’ Discounts
Deferred financing costs include legal, accounting and other direct costs incurred in connection with the issuance and
amendments thereto, of the Company’s debt. These costs are amortized over the terms of the related debt using the straight-line
method which approximates amortization using the effective interest method.
Initial purchasers’ discount and bond premium is the differential between the price paid to an issuer for the new issue and the
prices (below and above, respectively) at which the securities are initially offered to the investing public. The amortization expense of
deferred financing costs and bond premium and accretion of initial purchasers’ discounts are included in interest expense as an overall
cost of the related financings. Such costs are presented in the balance sheet as a direct deduction from the carrying value of the
associated debt liability, consistent with the presentation of a debt discount.
69
Reserves for Claims
We are exposed to various claims relating to our business, including those for which we provide self-insurance. Claims for which
we self-insure include: (1) workers compensation claims; (2) general liability claims by third parties for injury or property damage
caused by our equipment or personnel; (3) automobile liability claims; and (4) employee health insurance claims. These types of
claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim,
including claims incurred but not reported as of a period-end reporting date, may not be known for an extended period of time. Our
methodology for developing self-insurance reserves is based on management estimates. Our estimation process considers, among
other matters, the cost of known claims over time, cost inflation and incurred but not reported claims. These estimates may change
based on, among other things, changes in our claim history or receipt of additional information relevant to assessing the claims.
Further, these estimates may prove to be inaccurate due to factors such as adverse judicial determinations or other claim settlements at
higher than estimated amounts. Accordingly, we may be required to increase or decrease our reserve levels. At December 31, 2019,
our claims reserves related to workers compensation, general liability and automobile liability, which are included in “Accrued
expenses and other liabilities” in our consolidated balance sheets, totaled $5.9 million and our health insurance reserves totaled $1.6
million. At December 31, 2018, our claims reserves related to workers compensation, general liability and automobile liability totaled
$4.8 million and our health insurance reserves totaled $1.3 million.
Advertising
Advertising costs are expensed as incurred and totaled $0.6 million, $0.5 million and $0.5 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
Income Taxes
The Company files a consolidated federal income tax return with its wholly-owned subsidiaries. The Company is a C-Corporation
under the provisions of the Internal Revenue Code. We utilize the asset and liability approach to measure deferred tax assets and
liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rate is recognized as income or expense in the period that includes the enactment date of that rate.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax provisions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes both interest
and penalties related to uncertain tax positions in net other income (expense).
Our deferred tax calculation requires management to make certain estimates about future operations. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
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
70
The carrying value of financial instruments reported in the accompanying 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 carrying amounts and fair values of our other financial instruments subject
to fair value disclosures as of December 31, 2019 and 2018 are presented in the table below (amounts in thousands).
December 31, 2019
Carrying
Amount
Fair
Value
Manufacturer flooring plans payable with interest computed
at 5.25% (Level 3) ................................................................... $
Senior unsecured notes due 2025 with interest computed
at 5.625% (Level 2) .................................................................
25,201 $
21,615
945,566
995,125
December 31, 2018
Carrying
Amount
Fair
Value
Manufacturer flooring plans payable with interest computed
at 5.50% (Level 3) ................................................................... $
Senior unsecured notes due 2025 with interest computed
at 5.625% (Level 2) .................................................................
Capital leases payable with interest computed at 5.929%
to 9.55% (Level 3) ...................................................................
23,666 $
19,870
944,780
871,625
726
330
At December 31, 2019 and 2018, the fair value of our senior unsecured notes due 2025 was based on quoted bond trading market
prices for those notes. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures have
been calculated based upon market quotes and present value calculations based on market rates. See also Pending Accounting
Pronouncements below for new guidance related to fair value disclosures.
Fair Value Measurements on a Nonrecurring Basis
Our non-financial assets, such as goodwill, intangible assets and property and equipment, are adjusted to fair value only when an
impairment charge is recognized or the underlying investment is sold. Such fair value measurements are based predominately on
Level 3 inputs. The results of our 2019 goodwill impairment quantitative test indicated that the respective fair values of the New
Equipment Sales and Service Revenues reporting units were less than the carrying value of each reporting unit, resulting in a goodwill
impairment totaling $12.2 million, or $10.7 million and $1.5 million for the New Equipment Sales and Service Revenues reporting
units, respectively. See above for additional information.
Concentrations of Credit and Supplier Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts
receivable. Credit risk can be negatively impacted by adverse changes in the economy or by disruptions in the credit markets.
However, we believe that credit risk with respect to trade accounts receivable is somewhat mitigated by our large number of
geographically diverse customers and our credit evaluation procedures. Although generally no collateral is required, when feasible,
mechanics’ liens are filed and personal guarantees are signed to protect the Company’s interests. We maintain reserves for potential
losses.
We record trade accounts receivables at sales value and establish specific reserves for certain customer accounts identified as
known collection problems due to insolvency, disputes or other collection issues. The amounts of the specific reserves estimated by
management are based on the following assumptions and variables: the customer’s financial position, age of the customer’s
receivables and changes in payment schedules. In addition to the specific reserves, management establishes a non-specific allowance
for doubtful accounts by applying specific percentages to the different receivable aging categories (excluding the specifically reserved
accounts). The percentage applied against the aging categories increases as the accounts become further past due. The allowance for
doubtful accounts is charged with the write-off of uncollectible customer accounts.
We purchase a significant amount of equipment from the same manufacturers with whom we have distribution agreements.
During the year ended December 31, 2019, we purchased approximately 54% from five manufacturers (Grove/Manitowoc, Genie
Industries (Terex), JCB, Komatsu, and John Deere) providing our rental and sales equipment. We believe that while there are
alternative sources of supply for the equipment we purchase in each of the principal product categories, termination of one or more of
our relationships with any of our major suppliers of equipment could have a material adverse effect on our business, financial
condition or results of operation if we were unable to obtain adequate or timely rental and sales equipment.
71
Income per Share
Income per common share for the years ended December 31, 2019, 2018 and 2017 is based on the weighted average number of
common shares outstanding during the period. The effects of potentially dilutive securities that are anti-dilutive are not included in the
computation of diluted income per share. We include all common shares granted under our incentive compensation plan which remain
unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid
(“participating securities”), in the number of shares outstanding in our basic and diluted EPS calculations using the two-class method.
All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to
common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common
shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both
common shares and restricted common shares based on the total weighted average shares outstanding during the period. The number
of restricted common shares outstanding during the years ended December 31, 2019, 2018 and 2017 were less than 1% of total
outstanding shares for each of the years ended December 31, 2019, 2018 and 2017 and consequently, were immaterial to the basic and
diluted EPS calculations. Therefore, use of the two-class method had no impact on our basic and diluted EPS calculations as presented
for the years ended December 31, 2019, 2018 and 2017.
The following table sets forth the computation of basic and diluted net income per common share for the years ended
December 31, (amounts in thousands, except per share amounts):
Basic net income per share:
Net income ................................................................................................... $
Weighted average number of common shares outstanding..........................
Net income per common share — basic....................................................... $
Diluted net income per share:
Net income ................................................................................................... $
Weighted average number of common shares outstanding..........................
Effect of dilutive securities:
Effect of dilutive non-vested stock...............................................................
Weighted average number of common shares outstanding — diluted ..............
Net income per common share — diluted.................................................... $
Common shares excluded from the denominator as anti-dilutive:
2019
2018
2017
87,211 $
35,859
2.43 $
87,211 $
35,859
174
36,033
2.42 $
76,623 $
35,677
2.15 $
109,658
35,516
3.09
76,623 $
35,677
109,658
35,516
226
35,903
2.13 $
183
35,699
3.07
Non-vested stock ..........................................................................................
32
43
—
Stock-Based Compensation
We adopted our 2006 Stock-Based Incentive Compensation Plan (as amended and restated from time to time, the “Prior Stock
Plan”) and over the ten years prior to June 2016, we had been granting awards under our Prior Stock Plan. The Prior Stock Plan
expired pursuant to its terms in June 2016, and the Company is no longer able to grant equity awards under the Prior Stock Plan. At
our annual meeting of stockholders in May 2016, our stockholders approved our 2016 Stock-Based Incentive Compensation Plan (the
“2016 Plan” and collectively with the Prior Stock Plan, the “Stock Plans”). To the extent that awards granted under the Prior Stock
Plan are forfeited or otherwise terminate for any reason whatsoever without an actual distribution or issuance of shares, the plan limit
will be increased by such number of shares. The Stock Plans are administered by the Compensation Committee of our Board of
Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award,
the terms, conditions, performance measures, if any, and other provisions of the award. Under the Stock Incentive Plan, we may offer
deferred shares or restricted shares of our common stock and grant options, including both incentive stock options and nonqualified
stock options, to purchase shares of our common stock. Shares available for future stock-based payment awards under our Stock
Incentive Plan were 1,645,414 shares of common stock as of December 31, 2019.
72
We account for our stock-based compensation plans at fair value on the grant date, and recognize an expense over the requisite
employee service period (generally the vesting period of the grant).
Non-vested Stock
From time to time, we issue shares of non-vested stock typically with vesting terms of three years. The following table
summarizes our non-vested stock activity for the years ended December 31, 2019 and 2018:
Non-vested stock at January 1, 2018 ..........................................
Granted........................................................................................
Vested..........................................................................................
Forfeited ......................................................................................
Non-vested stock at December 31, 2018 ....................................
Granted........................................................................................
Vested..........................................................................................
Forfeited ......................................................................................
Non-vested stock at December 31, 2019 ....................................
Number of
Shares
445,964 $
143,121 $
(181,194) $
(28,332) $
379,559 $
194,192 $
(161,615) $
(34,396) $
377,740 $
Weighted
Average Grant
Date Fair
Value
19.70
37.10
20.53
19.61
25.87
30.20
23.79
22.90
29.26
As of December 31, 2019, we had unrecognized compensation expense of approximately $6.4 million related to non-vested stock
award payments that we expect to be recognized over a weighted average period of 2.0 years. Stock compensation expense for the
years ended December 31, 2019, 2018 and 2017 was $4.7 million, $4.2 million and $3.5 million, respectively.
Purchases of Company Common Stock
Purchases of our common stock are accounted for as treasury stock in the accompanying consolidated balance sheets using the
cost method. Repurchased stock is included in authorized shares, but is not included in shares outstanding.
Segment Reporting
We have five reportable segments. We derive our revenues from five principal business activities: (1) equipment rentals; (2) new
equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based upon
how we allocate resources and assess performance. See note 18 to the consolidated financial statements regarding our segment
information.
Recent Accounting Pronouncements
Pronouncements Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard establishes an impairment model
(known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the
new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more
timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the
instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of
the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The
scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and
certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective
adoption. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-
Credit Losses. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses
standard. Instead, entities would need to apply other U.S. GAAP, namely Topic 842 (Leases), to account for changes in the
collectability assessment for operating leases. Other than operating lease receivables, our trade receivables include receivables from
equipment sales, parts and service sales. Under Topic 606 (Revenue from Contracts with Customers), revenue is recognized when,
among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred
to a customer. At the point that these trade receivables are recorded, they become subject to the CECL model and estimates of
expected credit losses over their contractual life will be required to be recorded at inception based on historical information, current
conditions, and reasonable and supportable forecasts. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which
73
amends and clarifies several provisions of Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit
Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the fair value option to be elected for certain
financial instruments upon adoption. ASU 2016-13 became effective for us as of January 1, 2020. Based on our analysis of the new
guidance, including the subsequent updates to Topic 326, we do not believe the adoption will have a material impact on our
consolidated financial statements and related disclosures or our existing internal controls because our accounts receivable are of short
duration and there is not a material difference between incurred losses and expected losses.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement - Disclosure Framework," or ASU 2018-13. ASU
2018-13 modifies the disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose
the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is
effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but
entities were permitted to early adopt the entire standard or only the provisions that eliminate or modify the requirements. We will
adopt ASU 2018-13 when effective. Based on our evaluation of ASU 2018-13, the adoption of ASU 2018-13 will not have a material
impact on our consolidated financial statements and footnotes.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance
in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for
calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new
guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the
accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2020, and generally requires prospective adoption. While we continue to
evaluate the new guidance of ASU 2019-12, we currently do not expect the guidance to have a material impact on our consolidated
financial statements.
Recently Adopted Accounting Pronouncements
Goodwill
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. We adopted ASU 2017-04 effective October 1, 2019 on a prospective
basis. Our adoption of the new guidance coincided with our annual impairment testing date, see our previous disclosures in Significant
Accounting Policies related to goodwill.
Internal-Use Software
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.
Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the
hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance
is effective for calendar-year public business entities in 2020, with early adoption permitted. We adopted ASU 2018-15 effective
October 1, 2019 on a prospective basis. Our adoption of the new guidance did not impact our consolidated financial statements.
74
Leases
We adopted Topic 842 on January 1, 2019. Topic 842 is an update to Topic 840, which was the lease accounting standard in
effect through December 31, 2018. Topic 842 applies to us from both a lessor and a lessee perspective, as further described below.
Lessor Accounting
Our equipment rental business involves rental contracts with customers whereby we are the lessor in the transaction and therefore,
we believe that such transactions are subject to Topic 842. We account for such rental contracts as operating leases pursuant to Topic
842, as well as pursuant to previous lease accounting guidance (Topic 840) in effect for periods prior to the effective date of Topic
842.
In accordance with Topic 842, certain ancillary fees that we charge our equipment rental customers result in a different
presentation within our consolidated statements of income compared to our historical presentation of those items under previous lease
accounting guidance. Specifically, amounts we charge our customers for loss damage waiver fees, environmental fees, and fuel and
other recovery fees, upon adoption of Topic 842, are to be included within our Equipment Rentals segment rather than included within
non-segmented Other Revenues as we have historically presented those items under previous lease accounting guidance. Likewise, the
related cost of revenues for these ancillary items under Topic 842 are to be presented within our Equipment Rentals segment rather
than included in non-segmented Other Cost of Revenues as we have historically presented under previous lease accounting guidance.
We adopted Topic 842 on January 1, 2019 using the transition method that allowed us to initially apply Topic 842 as of January 1,
2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As such,
Topic 842 will not be applied to periods prior to January 1, 2019. Therefore, the above changes as described are not reflected in our
consolidated statements of income for the years ended December 31, 2018 and 2017 in this Annual Report on Form 10-K. While the
above changes resulting from our adoption of Topic 842 do not impact total consolidated revenues or total consolidated gross profit,
the change does impact the comparability of our total Rental Revenues gross profit and total Other Revenues gross profit and resulting
gross margins for 2019 compared to our previously reported gross profit and resulting gross margins for periods prior to January 1,
2019.
Lessee Accounting
Topic 842 requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted Topic 842
using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Therefore,
prior year financial statements were not recast under the new standard. We recognized an adjustment of less than $0.1 million to
retained earnings upon adoption of Topic 842.
We elected the package of transition provisions available for expired or existing leases, which allowed us to carryforward our
historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We did not
elect the use-of-hindsight practical expedient or the practical expedient pertaining to land easements. We elected not to apply the
recognition requirements of Topic 842 to arrangements with lease terms of 12 months or less.
The adoption of Topic 842 had a material impact on our consolidated balance sheet related to operating leases. Upon adoption of
Topic 842, we recognized additional operating lease liabilities of $162.8 million. We also recognized net corresponding right-of-use
operating lease assets of $160.6 million. Finance lease liabilities recognized upon adoption of Topic 842 were $0.8 million and finance
right-of-use lease assets were $0.5 million.
Topic 842 significantly expanded the disclosure requirements related to our leasing activities. Additional information and
disclosures required by Topic 842 are presented in note 11 to these consolidated financial statements.
75
(3) Acquisitions
2019 Acquisitions
Cobra Equipment Rentals, LLC (dba “We-Rent-It”)
Effective February 1, 2019, we completed the acquisition of We-Rent-It (“WRI”), an equipment rental company with six
branches located in central Texas. The acquisition expands our presence in the surrounding market.
The aggregate consideration paid to the owners of WRI was approximately $108.5 million. The acquisition and related fees and
expenses were funded from borrowings under our Credit Facility (defined below). The following table summarizes the fair value of
the assets acquired and liabilities assumed as of the acquisition date. The amounts presented below should not significantly change
upon settlement of the final closing statement in the first quarter of 2020.
Cash .................................................................................................................................................................... $
Accounts receivable............................................................................................................................................
Inventory.............................................................................................................................................................
Prepaid expenses and other assets ......................................................................................................................
Rental equipment ................................................................................................................................................
Property and equipment......................................................................................................................................
Other assets.........................................................................................................................................................
Intangible assets (1) ............................................................................................................................................
Total identifiable assets acquired ..................................................................................................................
Accounts payable................................................................................................................................................
Accrued expenses payable and other liabilities ..................................................................................................
Total liabilities assumed................................................................................................................................
Net identifiable assets acquired.....................................................................................................................
Goodwill (2)........................................................................................................................................................
Net assets acquired ........................................................................................................................................ $
$’s in thousands
1,745
5,119
731
544
51,747
3,207
21
8,700
71,814
(115)
(991)
(1,106)
70,708
37,783
108,491
(1) The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our
purchase accounting assessments:
Customer relationships........................................................................................................... $
Tradenames ............................................................................................................................
$
Fair Value
(amounts in
thousands)
8,500
200
8,700
Life (years)
10
1
(2) We have allocated the $37.8 million goodwill among our six goodwill reporting units as follows (amounts in thousands):
Rental Component 1 ........................................................................................................................................... $
Rental Component 2 ...........................................................................................................................................
New Equipment ..................................................................................................................................................
Used Equipment..................................................................................................................................................
Parts ....................................................................................................................................................................
Service ................................................................................................................................................................
$
14,918
19,775
254
500
2,045
291
37,783
The level of goodwill that resulted from the WRI acquisition is primarily reflective of WRI’s going-concern value, the value of
WRI’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from
combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.
Total WRI acquisition costs were $0.4 million. Since our acquisition of WRI on February 1, 2019, significant amounts of
equipment rental fleet have been moved between H&E locations and the acquired WRI locations, and it is impractical to reasonably
estimate the amount of WRI revenues and earnings since the acquisition date.
76
2018 Acquisitions
Contractors Equipment Center (“CEC”)
Effective January 1, 2018, we completed the acquisition of CEC, a non-residential construction focused equipment rental
company with three branches located in the greater Denver, Colorado area. The acquisition significantly expands our presence in the
Denver area and surrounding markets.
The aggregate consideration paid to the pre-acquisition owners of CEC was approximately $132.4 million. The acquisition and
related fees and expenses were funded through available cash. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed as of the acquisition date.
Cash .................................................................................................................................................................... $
Accounts receivable............................................................................................................................................
Inventory.............................................................................................................................................................
Prepaid expenses and other assets ......................................................................................................................
Rental equipment ................................................................................................................................................
Property and equipment......................................................................................................................................
Intangible assets (1) ............................................................................................................................................
Total identifiable assets acquired ..................................................................................................................
Accounts payable................................................................................................................................................
Accrued expenses payable and other liabilities ..................................................................................................
Total liabilities assumed................................................................................................................................
Net identifiable assets acquired.....................................................................................................................
Goodwill (2)........................................................................................................................................................
Net assets acquired ........................................................................................................................................ $
$’s in thousands
1,244
7,583
504
324
55,342
2,700
21,500
89,197
(1,023)
(876)
(1,899)
87,298
45,092
132,390
(1)
The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on
our purchase accounting assessments:
Customer relationships........................................................................................................... $
Tradenames ............................................................................................................................
Leasehold interests.................................................................................................................
$
Fair Value
(amounts in
thousands)
21,000
300
200
21,500
Life (years)
10
1
10
(2) We have allocated the $45.1 million goodwill among our six goodwill reporting units as follows (amounts in thousands):
Rental Component 1 ........................................................................................................................................... $
Rental Component 2 ...........................................................................................................................................
New Equipment ..................................................................................................................................................
Used Equipment..................................................................................................................................................
Parts ....................................................................................................................................................................
Service ................................................................................................................................................................
$
25,233
18,391
217
632
379
240
45,092
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.
77
Total CEC acquisition costs were $1.0 million. Since our acquisition of CEC on January 1, 2018, significant amounts of
equipment rental fleet have been moved between H&E locations and the acquired CEC locations, and it is impractical to reasonably
estimate the amount of CEC revenues and earnings since the acquisition date.
Rental, LLC (dba “Rental Inc.”)
Effective April 1, 2018, we completed the acquisition of Rental Inc., a non-residential equipment rental and distribution company
with five branches located in Alabama, Florida and Western Georgia. The acquisition expands our presence in the surrounding 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 fair value of the assets acquired and liabilities assumed as of the acquisition date.
Cash .................................................................................................................................................................... $
Accounts receivable............................................................................................................................................
Inventory.............................................................................................................................................................
Prepaid expenses and other assets ......................................................................................................................
Rental equipment ................................................................................................................................................
Property and equipment......................................................................................................................................
Intangible assets (1) ............................................................................................................................................
Total identifiable assets acquired ..................................................................................................................
Accounts payable................................................................................................................................................
Manufacturer flooring plans payable..................................................................................................................
Accrued expenses payable and other liabilities ..................................................................................................
Total liabilities assumed................................................................................................................................
Net identifiable assets acquired.....................................................................................................................
Goodwill (2)........................................................................................................................................................
Net assets acquired ........................................................................................................................................ $
$’s in thousands
260
2,873
5,324
47
22,578
1,935
10,200
43,217
(439)
(3,293)
(469)
(4,201)
39,016
29,554
68,570
(1)
The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on
our purchase accounting assessments:
Customer relationships........................................................................................................... $
Tradenames ............................................................................................................................
$
Fair Value
(amounts in
thousands)
10,000
200
10,200
Life (years)
10
1
(2) We have allocated the $29.6 million goodwill among our six goodwill reporting units as follows (amounts in thousands):
Rental Component 1 ........................................................................................................................................... $
Rental Component 2 ...........................................................................................................................................
New Equipment ..................................................................................................................................................
Used Equipment..................................................................................................................................................
Parts ....................................................................................................................................................................
Service ................................................................................................................................................................
$
9,064
5,445
10,217
1,692
2,171
965
29,554
Included in the total goodwill amount of $29.6 million is approximately $3.4 million of accrued purchase price consideration to
be paid to the sellers pursuant to the terms of the purchase agreement among the parties named thereto. The level of goodwill that
resulted from the Rental Inc. acquisition is primarily reflective of Rental Inc.’s going-concern value, the value of Rental Inc.’s
assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining
operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.
78
Total Rental Inc. acquisition costs were $0.3 million. Since our acquisition of Rental Inc. on April 1, 2018, significant amounts of
equipment rental fleet have been moved between H&E locations and the acquired Rental Inc. locations, and it is impractical to
reasonably estimate the amount of Rental Inc. revenues and earnings since the acquisition date.
Pro forma financial information
We completed the CEC acquisition effective January 1, 2018. Therefore, the operating results of CEC are included in our reported
condensed consolidated statements of income for the full year ended December 31, 2018. We completed the Rental Inc. acquisition
effective April 1, 2018. Therefore, our reported consolidated statements of income for the year ended December 31, 2018 do not
include Rental Inc. for the period from January 1, 2018 through March 31, 2018. We completed the WRI acquisition on February 1,
2019. Therefore, our reported condensed consolidated statements for the year ended December 31, 2019 do not include WRI for the
month of January 2019.
Pursuant to Topic 805, Business Combinations, pro forma disclosures should be repeated whenever the year or interim period of
the acquisition is presented. 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 acquisitions. The unaudited tables below present unaudited pro forma
consolidated statements of income information for the year December 31, 2017 as if CEC and Rental Inc. were included in our
consolidated results for the entire period presented.
H&E(1)
Total revenues.................................................................................... $ 1,030,019 $
Pretax income.....................................................................................
59,344
Pro forma adjustments to pretax income:
Impact of fair value mark-ups/useful life changes on
depreciation (2) ...............................................................................
Intangible asset amortization (3)........................................................
Interest expense (4) ............................................................................
Elimination of merger related costs ...................................................
Elimination of historic interest expense (5) .......................................
Pro forma pretax income....................................................................
Income tax expense............................................................................
Net income ......................................................................................... $
Net income per share – basic (6)........................................................ $
Net income per share – diluted (6)..................................................... $
—
—
—
788
—
60,132
(50,511)
110,643 $
3.12 $
3.10 $
(amounts in thousands)
Year Ended December 31, 2017
Rental Inc.
CEC
36,790 $
3,043
34,942
7,267
$
Total
1,101,751
69,654
(3,575)
(2,420)
—
4,497
1,966
3,511
(2,949)
6,460 $
0.18 $
0.18 $
(2,794)
(1,200)
(1,609)
—
382
2,046
(1,719)
3,765
0.11
0.11
$
$
$
(6,369)
(3,620)
(1,609)
5,285
2,348
65,689
(55,179)
120,868
3.40
3.39
(1)
(2)
(3)
(4)
(5)
(6)
Amounts presented above for “H&E” are derived from the Company’s consolidated statement of income in this Annual
Report on Form 10-K for the year ended December 31, 2017.
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.
Represents the amortization of the intangible assets acquired in the acquisitions.
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.
Represents the elimination of historic debt of CEC and Rental Inc. that is not part of the combined entity.
Because of the method used in calculating per share data, the summation of entities may not necessarily total to the per
share data computed for the total company due to rounding.
The pro forma information below gives effect to the Rental Inc. and WRI acquisitions as if they had been completed on January 1,
2018 (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
79
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 acquisitions. The unaudited tables below present unaudited pro forma consolidated
statements of income information for the year December 31, 2018 as if Rental Inc. and WRI were included in our consolidated results
for the entire period presented.
H&E(1)
(amounts in thousands, except per share data)
Year Ended December 31, 2018
We-Rent-It
$
Rental Inc.(7)
7,408
1,020
36,002 $
6,892
Total
1,282,371
112,575
Total revenues.................................................................................... $ 1,238,961 $
Pretax income.....................................................................................
104,663
Pro forma adjustments to pretax income:
Impact of fair value mark-ups/useful life changes on
depreciation (2) ...............................................................................
Intangible asset amortization (3)........................................................
Interest expense (4) ............................................................................
Elimination of historic interest expense (5) .......................................
Pro forma pretax income (loss)..........................................................
Income tax expense (benefit) .............................................................
Net income (loss) ............................................................................... $
Net income (loss) per share – basic (6).............................................. $
Net income (loss) per share – diluted (6)........................................... $
—
—
—
—
104,663
28,040
76,623 $
2.15 $
2.13 $
(749)
(300)
(480)
82
(427)
(114)
(313)
(0.01)
(0.01)
$
$
$
(4,452)
(1,050)
(5,664)
517
(3,757)
(973)
(2,784) $
(0.08) $
(0.08) $
(5,201)
(1,350)
(6,144)
599
100,479
26,953
73,526
2.05
2.04
(1) Amounts presented above for “H&E” are derived from the Company’s consolidated statement of income in this Annual
Report on Form 10-K for the year ended December 31, 2018 and includes actual results for CEC for the full twelve months
ended December 31, 2018 and actual results for Rental Inc. for the period April 1, 2018 through December 31, 2018.
(2) 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.
(3) Represents the amortization of the intangible assets acquired in the acquisitions.
(4)
Interest expense was adjusted to reflect the additional debt resulting from the acquisition.
(5) Represents the elimination of historic debt of Rental Inc. and WRI that is not part of the combined entity.
(6) Because of the method used in calculating per share data, the summation of entities may not necessarily total to the per share
data computed for the total company due to rounding.
(7) Represents Rental Inc. pro forma operating results for the three month period ended March 31, 2018. We completed the
Rental Inc. acquisition effective April 1, 2018.
(4) Receivables
Receivables consisted of the following at December 31, (amounts in thousands):
Trade receivables ........................................................................ $
Unbilled rental revenue...............................................................
Income tax receivables ...............................................................
Other ...........................................................................................
Less allowance for doubtful accounts.........................................
Total receivables, net .................................................................. $
2019
186,472 $
9,529
1,405
34
197,440
(5,236)
192,204 $
2018
194,601
8,833
2,181
35
205,650
(4,094)
201,556
80
(5)
Inventories
Inventories consisted of the following at December 31, (amounts in thousands):
New equipment........................................................................... $
Used equipment ..........................................................................
Parts, supplies and other .............................................................
Total inventories, net .................................................................. $
2019
65,549 $
1,993
17,936
85,478 $
2018
84,603
1,980
18,015
104,598
The above amounts are presented net of reserves for inventory obsolescence at December 31, 2019 and 2018 totaling
approximately $0.3 million and $0.4 million, respectively.
(6)
Property and Equipment
Net property and equipment consisted of the following at December 31, (amounts in thousands):
Land ............................................................................................ $
Transportation equipment...........................................................
Building and leasehold improvements........................................
Office and computer equipment .................................................
Machinery and equipment ..........................................................
Property under capital leases ......................................................
Construction in progress .............................................................
Less accumulated depreciation and amortization .......................
Total net property and equipment............................................... $
2019
7,597 $
130,099
69,031
53,597
18,732
—
8,290
287,346
(156,782)
130,564 $
2018
7,597
106,011
63,060
51,758
17,811
2,417
9,129
257,783
(142,662)
115,121
Total depreciation and amortization on property and equipment was $28.4 million, $24.6 million and $23.8 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
(7) Manufacturer Flooring Plans Payable
Manufacturer flooring plans payable are financing arrangements for inventory and rental equipment. The interest cost incurred on
the manufacturer flooring plans ranged from 0% to the prime rate (4.75% at December 31, 2019) plus an applicable margin at
December 31, 2019. Certain manufacturer flooring plans provide for a one to twelve-month reduced interest rate term or a deferred
payment period. We recognize interest expense based on the effective interest method. We make payments in accordance with the
original terms of the financing agreements. However, we routinely sell equipment that is financed under manufacturer flooring plans
prior to the original maturity date of the financing agreement. The related manufacturer flooring plan payable is then paid at the time
the equipment being financed is sold. The manufacturer flooring plans payable are secured by the equipment being financed.
Maturities (based on original financing terms) of the manufacturer flooring plans payable as of December 31, 2019 for the
following years ending December 31 until paid are as follows (amounts in thousands):
2020 ............................................................................................... $
2021 ...............................................................................................
2022 ...............................................................................................
Total............................................................................................... $
11,658
13,369
174
25,201
81
(8) Accrued Expenses Payable and Other Liabilities
Accrued expenses payable and other liabilities consisted of the following at December 31, (amounts in thousands):
2019
2018
Payroll and related liabilities ...................................................... $
Sales, use and property taxes ......................................................
Accrued interest ..........................................................................
Accrued insurance ......................................................................
Deferred revenue ........................................................................
Other ...........................................................................................
Total accrued expenses payable and other liabilities.................. $
30,903 $
11,042
18,804
5,837
4,038
7,758
78,382 $
24,864
10,069
18,771
4,328
5,973
9,366
73,371
(9)
Senior Unsecured Notes
On August 24, 2017, we completed an offering of $750 million aggregate principal amount of 5.6250% senior notes due 2025
(the “New Notes”) and the settlement of a cash tender offer (the “Tender Offer”) with respect to our 7% senior notes due 2022 (the
“Old Notes”). Net proceeds, after deducting $10.3 million of estimated offering expenses, from the sale of the New Notes totaled
approximately $739.7 million. We used a portion of the net proceeds from the sale of the New Notes to repurchase $329.7 million of
aggregate principal amount of the Old Notes in early settlement of the Tender Offer, which the Company launched on August 17,
2017. Holders who tendered their Old Notes prior to the early tender deadline received $1,038.90 per $1,000 principal amount of Old
Notes tendered, plus accrued and unpaid interest up to, but not including, the payment date of August 24, 2017. Effective as of August
24, 2017, we (i) provided notice of the redemption of all remaining Old Notes that were not validly tendered in the Tender Offer at the
expiration time and (ii) satisfied and discharged the indenture governing the Old Notes in accordance with its terms. On September 25,
2017, we redeemed the remaining $300.3 million principal amount outstanding of the Old Notes at a redemption price equal to
103.50% of the principal amount thereof, plus accrued and unpaid interest up to, but not including, the date of redemption.
In connection with the above transactions, we recorded a one-time loss on the early extinguishment of debt of approximately
$25.4 million, or approximately $18.9 million after-tax, reflecting payment of $12.8 million of tender premiums and $10.5 million of
premiums in accordance with the indenture governing the Old Notes to redeem the Old Notes that remained outstanding following
completion of the Tender Offer, combined with the write-off of approximately $2.0 million of unamortized note discount related to the
Old Notes. Additional transaction costs incurred in connection with the offering of the New Notes totaled approximately $1.6 million.
The New Notes were issued at par and require semiannual interest payments on March 1st and September 1st of each year,
commencing on March 1, 2018. No principal payments are due until maturity (September 1, 2025).
The New Notes are redeemable, in whole or in part, at any time on or after September 1, 2020 at specified redemption prices plus
accrued and unpaid interest to the date of redemption. We may redeem up to 40% of the aggregate principal amount of the New Notes
before September 1, 2020 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to
September 1, 2020 at a specified “make-whole” redemption price plus accrued and unpaid interest to the date of redemption.
The New Notes rank equally in right of payment to all of our existing and future senior indebtedness and rank senior to any of our
subordinated indebtedness. The New Notes are unconditionally guaranteed on a senior unsecured basis by all of our current and future
significant domestic restricted subsidiaries. In addition, the New Notes are effectively subordinated to all of our and the guarantors’
existing and future secured indebtedness, including the Credit Facility, to the extent of the assets securing such indebtedness, and are
structurally subordinated to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the New Notes.
If we experience a change of control, we will be required to offer to purchase the New Notes at a repurchase price equal to 101%
of the principal amount, plus accrued and unpaid interest to the date of repurchase.
The indenture governing the New Notes contains certain covenants that, among other things, limit our ability and the ability of
our restricted subsidiaries to: (i) incur additional indebtedness, assume a guarantee or issue preferred stock; (ii) pay dividends or make
other equity distributions or payments to or affecting our subsidiaries; (iii) purchase or redeem our capital stock; (iv) make certain
investments; (v) create liens; (vi) sell or dispose of assets or engage in mergers or consolidations; (vii) engage in certain transactions
with subsidiaries or affiliates; (viii) enter into sale-leaseback transactions; and (ix) engage in certain business activities. Each of the
covenants is subject to exceptions and qualifications. As of December 31, 2019, we were in compliance with these covenants.
On November 22, 2017, we closed on an offering of $200 million aggregate principal amount of 5.625% senior notes due 2025
(the “Add-on Notes”) in an unregistered offering through a private placement. The Add-on Notes were priced at 104.25% of the
82
principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 24, 2017 totaled
approximately $209.2 million. The net proceeds of the offering, was used to repay indebtedness outstanding under the Company’s
existing senior secured credit facility (the “Credit Facility”) and for the payment of fees and expenses related to the offering.
The Add-on Notes were issued as additional notes under an indenture dated as of August 24, 2017, pursuant to which we
previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally with and form a part of a
single class of securities with the New Notes.
Pursuant to registration rights agreements entered into among us, the guarantors of the New Notes and the Add-On Notes,
respectively, and the initial purchasers of the New Notes and the Add-On Notes, respectively, we agreed to make offers to exchange
(collectively, the “Exchange Offer”) the New Notes and Add-On Notes and the respective guarantees for registered, publicly tradable
notes and guarantees that have terms identical in all material respects to the New Notes and the Add-On Notes, respectively (except
that the exchange notes do not contain any transfer restrictions) within a certain period of time following the completion of the
respective note offerings. We completed the Exchange Offer for the New Notes and the Add-On Notes in March 2018.
The following table reconciles our Senior Unsecured Notes to our Consolidated Balance Sheets (amounts in thousands):
Balance at December 31, 2017 ..................................................... $
Accretion of discount through December 31, 2018 ......................
Amortization of note premium through December 31, 2018........
Additional deferred financing costs on New Notes ......................
Amortization of deferred financing costs through
December 31, 2018 ....................................................................
Balance at December 31, 2018 ..................................................... $
Accretion of discount through December 31, 2019 ......................
Amortization of note premium through December 31, 2019........
Additional deferred financing costs on New Notes ......................
Amortization of deferred financing costs through
December 31, 2019 ....................................................................
Balance at December 31, 2019 ..................................................... $
944,088
1,539
(1,062)
(97)
312
944,780
1,539
(1,062)
—
309
945,566
(10) Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC (as successor to
General Electric Capital Corporation) as administrative agent, and the lenders named therein.
On December 22, 2017, we amended, extended and restated the Credit Facility by entering into the Fifth Amended and Restated
Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc.,
H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, the other credit parties named therein,
the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the
lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.
The Amended and Restated Credit Agreement, among other things, (i) extended the maturity date of the credit facility from
May 21, 2019 to December 22, 2022, (ii) increased the commitments under the senior secured asset based revolver provided for
therein from $602.5 million to $750 million, (iii) increased the uncommitted incremental revolving capacity from $150 million to
$250 million, (iv) provided that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage
(as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowered the interest rate (a) in the case of base rate
revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in
the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended
and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowered
the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and
(vii) permitted, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of
Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).
On February 1, 2019, we further amended and extended the Amended and Restated Credit Agreement with the First Amendment
to the Fifth Amended and Restated Credit Agreement (the “First Amendment”) by and among the Company, Great Northern
Equipment, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, the other credit parties
named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named
83
therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent
named therein.
The First Amendment, among other things, (i) extended the maturity date of the credit facility from December 22, 2022 to
January 31, 2024, and (ii) lowered the interest rate in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of
1.25% to 1.75%, depending on the Average Availability and (iii) lowered the interest rate in the case of Base Rate loans, to the Base
Rate (as defined in the Amended and Restated Credit Agreement) plus an applicable margin of 0.25% to 0.75%, depending on the
Average Availability.
As amended, the Amended and Restated Credit Agreement continues to provide for, among other things, a $30 million letter of
credit sub-facility, and a guaranty by certain of the Company’s subsidiaries of the obligations under the Credit Facility. In addition, the
Credit Facility remains secured by substantially all of the assets of the Company and certain of its subsidiaries.
At December 31, 2019, we had $216.9 million in borrowings outstanding under the Credit Facility and could borrow up to $525.4
million and remain in compliance with the debt covenants under the Company’s credit facility. At February 18, 2020, we had $559.4
million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.
(11) Leases
We adopted Topic 842 on January 1, 2019. Because we adopted Topic 842 using the transition method that allowed us to initially
apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption, prior year financial statements were not recast under the new standard and, therefore, those prior year amounts are
not presented below.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do
not provide a readily determinable implicit rate. Therefore, we estimate our IBR to discount the lease payments based on information
available at lease commencement. Our IBR represents a fully collateralized rate for a fully amortizing loan with the same term as the
lease.
At December 31, 2019, as disclosed in our consolidated balance sheet, we had net operating lease right-of-use assets of
$156.6 million and net finance lease right-of-use assets of $0.4 million. Our operating lease liabilities at December 31, 2019 were
$159.3 million and finance lease liabilities were $0.6 million. The weighted average remaining lease term for operating leases was
approximately 10.4 years and the weighted average remaining lease term for finance leases was approximately 2.3 years. The
weighted average discount rate for operating and finance leases was approximately 6.8% and 5.9%, respectively.
The table below presents certain information related to lease costs, under Topic 842, for our operating and finance leases for the
years ended December 31, (in thousands).
Classification
Year Ended December 31, 2019
Operating lease cost ....................................................... SG&A expenses
Finance lease costs.........................................................
Amortization of leased assets.................................... SG&A expenses
Interest on lease liabilities.........................................
Interest expense
Variable lease cost ......................................................... SG&A expenses
Sublease income............................................................. Other income
Total lease cost...............................................................
$
$
22,293
162
39
523
(567)
22,450
Under Topic 840, rent expense under non-cancelable operating lease agreements for the years ended December 31, 2018 and 2017
amounted to approximately $23.1 million and $20.1 million, respectively.
The table below presents supplemental cash flow information related to leases for the year ended December 31, 2019 (in
thousands).
Year Ended December 31, 2019
Cash paid for amounts included in the measurements of lease liabilities:
Operating cash flows for operating leases...................................................................... $
Operating cash flows for finance leases .........................................................................
Finance cash flows for finance leases ............................................................................
21,720
39
232
84
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the
operating lease liabilities recorded on our consolidated balance sheet as of December 31, 2019 (in thousands).
Operating Leases
Finance Leases
2020 ........................................................................................................................................ $
2021 ........................................................................................................................................
2022 ........................................................................................................................................
2023 ........................................................................................................................................
2024 ........................................................................................................................................
Thereafter................................................................................................................................
Total minimum lease payments ..............................................................................................
Less: amount of lease payments representing interest............................................................
Present value of future minimum lease payments .................................................................. $
21,697 $
21,672
21,508
21,506
21,740
114,792
222,915
(63,650)
159,265 $
270
270
45
—
—
—
585
(35)
550
Under Topic 840, future minimum operating lease payments existing at December 31, 2018 for the years ending December 31,
2019, 2020, 2021, 2022, 2023 and thereafter are $21.8 million, $21.9 million, $21.2 million, $19.9 million, $17.1 million and $86.4
million, respectively. Under Topic 840, future minimum capital lease payments existing at December 31, 2018 for the years ending
December 31, 2019, 2020, 2021, and interest are $0.3 million, $0.3 million, $0.3 million, and $0.1 million, respectively.
(12)
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act reduced the
corporate federal income tax rate from 35% to 21%. As a result of the rate change, in 2017 we recorded a one-time decrease in
income tax expense of $66.9 million from the re-measurement of our deferred tax assets and liabilities which is reflected in the tables
below. Our accounting for the income tax effects of the Act is complete and there were no changes made to the enactment-date
accounting during 2018 and 2019.
Our income tax provision (benefit) for the years ended December 31, 2019, 2018 and 2017, consists of the following (amounts in
thousands):
Current
Deferred
Total
Year ended December 31, 2019:
U.S. Federal ......................................................................... $
State .....................................................................................
$
(761) $
2,398
1,637 $
25,134 $
1,879
27,013 $
Year ended December 31, 2018:
U.S. Federal ......................................................................... $
State .....................................................................................
$
(1,523) $
2,868
1,345 $
23,127 $
3,568
26,695 $
24,373
4,277
28,650
21,604
6,436
28,040
Year ended December 31, 2017:
U.S. Federal ......................................................................... $
State .....................................................................................
$
— $
221
221 $
(54,241) $
3,706
(50,535) $
(54,241)
3,927
(50,314)
85
Significant components of our deferred income tax assets and liabilities as of December 31 are as follows (amounts in thousands):
Deferred tax assets:
Accounts receivable .............................................................. $
Inventories.............................................................................
Net operating losses ..............................................................
AMT and tax credits..............................................................
Sec 263A costs ......................................................................
Accrued liabilities .................................................................
Deferred compensation .........................................................
Accrued interest ....................................................................
Stock-based compensation ....................................................
Goodwill and intangible assets..............................................
Other assets ...........................................................................
Valuation allowance ...................................................................
Deferred tax liabilities:
Property and equipment ........................................................
Investments ...........................................................................
Goodwill and intangible assets..............................................
Net deferred tax liabilities .......................................................... $
2019
2018
1,283 $
83
101,212
1,334
608
2,970
1,499
410
247
711
597
110,954
—
110,954
1,010
93
86,859
2,110
752
2,869
1,561
387
146
346
415
96,548
(609)
95,939
(287,654)
(1,072)
(2,354)
(291,080)
(180,126) $
(245,198)
(1,076)
(2,778)
(249,052)
(153,113)
The reconciliation between income taxes computed using the statutory federal income tax rate (21% for the years ended
December 31, 2019 and 2018 and 35% for the year ended December 31, 2017) to the actual income tax expense (benefit) is below
(amounts in thousands):
2019
2018
2017
Computed tax at statutory rates................................................. $
Permanent items - other ............................................................
Permanent items - excess of tax deductible goodwill ...............
State income tax, net of federal tax effect.................................
Change in valuation allowance .................................................
Change in uncertain tax positions .............................................
Other - change in deferred state rate .........................................
Impact of the Act federal rate change .......................................
$
24,331 $
1,065
—
6,944
(609)
—
(3,081)
—
28,650 $
21,979 $
1,021
—
5,246
(123)
(83)
—
—
28,040 $
20,770
911
(2,130)
2,563
397
(5,960)
—
(66,865)
(50,314)
At December 31, 2019, we had available federal net operating loss carry forwards of approximately $86.2 million, which expire
in varying amounts from 2030 through 2036 and $366.9 million, which does not expire. We also had federal alternative minimum tax
credit carry forwards at December 31, 2019 of approximately $1.5 million which do not expire and $0.4 million general business
credit carry forwards that expire in varying amounts from 2026 and 2037, and state income tax credits of $0.2 million that expire in
varying amounts beginning in 2022. In accordance with changes made by the Act, our AMT credit became refundable between 2018
and 2022; therefore, we have reclassified $0.8 million from deferred income taxes to income tax receivable during the year ended
December 31, 2019. The federal and state net operating loss carryforwards in the income tax returns filed included unrecognized tax
benefits taken in prior years. These net operating losses for which a deferred tax asset is recognized for financial statement purposes in
accordance with ASC 740 are presented net of these unrecognized tax benefits.
Management has concluded that it is more likely than not that the deferred tax assets are fully realizable through future reversals
of existing taxable temporary differences and future taxable income. Therefore, a valuation allowance is not required to reduce those
deferred tax assets as of December 31, 2019. For the year ended December 31, 2019, we decreased our valuation allowance by $0.6
million for certain state net operating losses that are expected to be fully realized.
86
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in
thousands):
Gross unrecognized tax benefits at January 1............................. $
Increases in tax positions taken in prior years ............................
Decreases in tax positions taken in prior years...........................
Lapse in statute of limitations.....................................................
Gross unrecognized tax benefits at December 31....................... $
2019
2018
— $
—
—
—
— $
106
—
(106)
—
—
As of December 31, 2019 and 2018, we have no reserves established for the gross amount of unrecognized tax benefits. We do
not expect a material change in unrecognized tax benefits related to federal and state exposures will occur within the next twelve
months.
Our U.S. federal tax returns for 2016 and subsequent years remain subject to examination by tax authorities. We are also subject
to examination in various state jurisdictions for 2013 and subsequent years.
(13) Commitments and Contingencies
Legal Matters
As further discussed in Note 2 to these consolidated financial statements, we are exposed to various claims relating to our
business, including those for which we retain portions of the losses through the application of deductibles and self-insured retentions,
or self-insurance. Losses that exceed our deductibles and self-insured retentions are insured through various commercial lines of
insurance policies. As of February 20, 2020, we are aware of a contingent liability related to an automobile liability claim for which
we have determined that an unfavorable outcome is probable. Based on the information currently available to us, we cannot predict the
timing of the claim’s ultimate resolution or reasonably estimate the amount or a range of potential losses that will arise from the claim.
The ultimate loss on the insured claim could be material. Pursuant to ASC 450, Contingencies, and other relevant guidance, when the
contingency become both probable and estimable, our consolidated balance sheets will reflect a liability for the total amount of
estimated claim and an asset for the portion of the claim recoverable through insurance. This gross-up presentation could be material
to our consolidated balance sheets. Our loss exposure, however, is limited to our insurance policy deductible, which is immaterial to
our consolidated statements of income.
We are also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or liquidity.
Letters of Credit
The Company had outstanding letters of credit issued under its Credit Facility totaling $7.7 million as of December 31, 2019 and
2018, respectively. The letters of credit expire in May 2020 and are expected to be renewed for similar one-year terms.
(14) Employee Benefit Plan
We offer substantially all of our employees’ participation in a qualified 401(k)/profit-sharing plan in which we match employee
contributions up to predetermined limits for qualified employees as defined by the plan. For the years ended December 31, 2019, 2018
and 2017, we contributed to the plan, net of employee forfeitures, $5.5 million, $2.5 million and $2.2 million, respectively.
(15) Deferred Compensation Plans
In 2001, we assumed, in a business combination, nonqualified employee deferred compensation plans under which certain
employees had previously elected to defer a portion of their annual compensation. Upon assumption of the plans, the plans were
amended to not allow further participant compensation deferrals. Compensation previously deferred under the plans is payable upon
the termination, disability or death of the participants. At December 31, 2019, we have obligations remaining under one deferred
compensation plan. All other plans have terminated pursuant to the provisions of each respective plan. The remaining plan
accumulates interest each year at a bank’s prime rate in effect at the beginning of January of each year. This rate remains constant
throughout the year. The effective rate for the 2019 calendar plan year was 5.50%. The aggregate deferred compensation payable at
87
December 31, 2019 and December 31, 2018 was approximately $2.1 million and $2.0 million, respectively. Included in these amounts
at December 31, 2019 and 2018 was accrued interest of $1.6 million and $1.5 million, respectively.
(16) Related Party Transactions
Mr. John M. Engquist, who served as the Company’s Executive Chairman of the Board for the year ended December 31, 2019
and the Company’s Chief Executive Officer for the years ended December 31, 2018 and 2017, has a 48.0% ownership interest in
Perkins-McKenzie Insurance Agency, Inc. (“Perkins-McKenzie”), an insurance brokerage firm. Perkins-McKenzie brokers a
substantial portion of our commercial liability insurance. As the broker, Perkins-McKenzie receives from our insurance provider as a
commission a portion of the premiums we pay to the insurance provider. Commissions paid to Perkins-McKenzie on our behalf as
insurance broker totaled approximately $0.9 million, $0.8 million and $0.8 million for the years ended December 31, 2019, 2018 and
2017, respectively.
We purchase products and services from, and sell products and services to, B-C Equipment Sales, Inc., in which Mr. Engquist has
a 50% ownership interest. In each of the years ended December 31, 2019, 2018 and 2017, our purchases totaled $0.3 million, $0.1
million and $0.4 million, respectively, and our sales to B-C Equipment Sales, Inc. totaled approximately $0.1 million, $0.1 million and
$0.1 million, respectively.
(17) Summarized Quarterly Financial Data (Unaudited)
The following is a summary of our unaudited quarterly financial results of operations for the years ended December 31, 2019 and
2018 (amounts in thousands, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2019:
Total revenues ......................................................................... $
Income from operations(1)........................................................
Income before provision for income taxes(1) ...........................
Net income(1)............................................................................
Basic net income per common share(2) .................................... $
Diluted net income per common share(2)................................. $
313,638 $
35,675
19,352
14,243
0.40 $
0.40 $
333,597 $
47,673
30,895
22,614
0.63 $
0.63 $
352,997 $
55,503
38,760
28,431
0.79 $
0.79 $
348,133
41,310
26,854
21,923
0.61
0.61
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018:
Total revenues ......................................................................... $
Income from operations...........................................................
Income before provision for income taxes ..............................
Net income...............................................................................
Basic net income per common share(2) .................................... $
Diluted net income per common share(2)................................. $
260,482 $
27,326
13,068
9,478
0.27 $
0.26 $
310,364 $
43,103
27,869
20,771
0.58 $
0.58 $
322,141 $
45,318
28,971
21,314
0.60 $
0.59 $
345,974
50,899
34,755
25,060
0.70
0.70
(1)
(2)
During the quarter ended December 31, 2019, we recorded non-cash impairment charge totaling approximately $12.2
million, or $9.9 million after-tax, related to the impairment of goodwill. See note 2 to the consolidated financial statements
for additional information.
Because of the method used in calculating per share data, the summation of quarterly per share data may not necessarily
total to the per share data computed for the entire year due to rounding.
88
(18) Segment Information
We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and
service revenues. These segments are based upon revenue streams and how management of the Company allocates resources and
assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including
transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. There were no
sales between segments for any of the periods presented. Selling, general, and administrative expenses as well as all other income and
expense items below gross profit are not generally allocated to our reportable segments.
We do not compile discrete financial information by our segments other than the information presented below. The following
table presents information about our reportable segments (amounts in thousands):
Segment Revenues:
Years Ended December 31,
2018
2017
2019
Equipment rentals ................................................................ $
New equipment sales ...........................................................
Used equipment sales ..........................................................
Parts sales ............................................................................
Services revenues ................................................................
627,181 $
262,948
125,125
120,454
63,488
Total segmented revenues .............................................. 1,336,590 1,199,196
39,765
508,121
203,301
107,329
114,253
62,873
995,877
34,142
Total revenues........................................................... $ 1,348,365 $ 1,238,961 $ 1,030,019
766,354 $
239,091
139,349
123,855
67,941
Non-Segmented revenues .........................................................
11,775
Segment Gross Profit:
Equipment rentals ................................................................ $
New equipment sales ...........................................................
Used equipment sales ..........................................................
Parts sales ............................................................................
Services revenues ................................................................
Total gross profit from segmented revenues..................
Non-Segmented gross profit (loss) ...........................................
Total gross profit....................................................... $
346,882 $
27,719
47,328
32,892
45,995
500,816
(1,646)
499,170 $
273,759 $
30,891
39,073
32,191
42,160
418,074
20,460
438,534 $
213,522
22,599
33,197
31,118
41,762
342,198
17,710
359,908
Segment identified assets:
December 31,
2019
2018
Equipment sales .................................................................... $
Equipment rentals..................................................................
Parts and service....................................................................
Total segment identified assets ........................................
Non-Segmented identified assets................................................
86,583
1,141,498
18,015
1,246,096
481,085
Total assets ................................................................. $ 1,974,610 $ 1,727,181
67,542 $
1,217,673
17,936
1,303,151
671,459
The Company operates primarily in the United States and our sales to international customers for the years ended December 31,
2019, 2018 and 2017 were 0.2%, 0.1% and 0.4%, respectively, of total revenues for the periods presented. No one customer accounted
for more than 10% of our revenues on an overall or segmented basis for any of the periods presented.
(19) Consolidating Financial Information of Guarantor Subsidiaries
All of the indebtedness of H&E Equipment Services, Inc. is guaranteed by GNE Investments, Inc. and its wholly-owned
subsidiary Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E
Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp. The guarantor subsidiaries are all wholly-owned and the guarantees,
made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation
which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed
without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s
ability to obtain funds from the guarantor subsidiaries by dividend or loan.
89
The consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial
statements for H&E Finance Corp. are not included within the consolidating financial statements because H&E Finance Corp. has no
assets or operations.
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2019
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Assets:
Cash .............................................................................................. $
Receivables, net ............................................................................
Inventories, net..............................................................................
Prepaid expenses and other assets ................................................
Rental equipment, net ...................................................................
Property and equipment, net .........................................................
Operating lease right-of-use assets, net ........................................
Finance lease right-of-use assets, net............................................
Deferred financing costs, net ........................................................
Investment in guarantor subsidiaries ............................................
Intangible assets, net .....................................................................
Goodwill .......................................................................................
14,247 $
164,260
81,945
10,129
1,062,154
111,429
137,625
—
2,857
235,749
32,948
101,916
Total assets .............................................................................. $ 1,955,259 $
Liabilities and Stockholders’ Equity:
Amount due on senior secured credit facility ...............................
Accounts payable..........................................................................
Manufacturer flooring plans payable............................................
Accrued expenses payable and other liabilities ............................
Dividends payable.........................................................................
Senior unsecured notes, net ..........................................................
Operating lease right-of-use liabilities..........................................
Finance lease right-of-use liabilities .............................................
Deferred income taxes ..................................................................
Deferred compensation payable....................................................
Total liabilities.........................................................................
Stockholders’ equity .....................................................................
216,879 $
56,225
25,201
81,646
231
945,566
139,768
—
180,126
2,098
1,647,740
307,519
Total liabilities and stockholders’ equity ................................ $ 1,955,259 $
—
27,944
3,533
133
155,519
19,135
18,945
365
—
—
—
29,526
255,100
—
2,628
—
(3,264)
(60)
—
19,497
550
—
—
19,351
235,749
255,100
$
$
$
$
—
—
—
—
—
—
—
—
—
(235,749)
—
—
(235,749)
—
—
—
—
—
—
—
—
—
—
—
(235,749)
(235,749)
$
14,247
192,204
85,478
10,262
1,217,673
130,564
156,570
365
2,857
—
32,948
131,442
$ 1,974,610
$
216,879
58,853
25,201
78,382
171
945,566
159,265
550
180,126
2,098
1,667,091
307,519
$ 1,974,610
90
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2018
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Assets:
Cash .............................................................................................. $
Receivables, net ............................................................................
Inventories, net..............................................................................
Prepaid expenses and other assets ................................................
Rental equipment, net ...................................................................
Property and equipment, net .........................................................
Deferred financing costs, net ........................................................
Investment in guarantor subsidiaries ............................................
Intangible assets, net .....................................................................
Goodwill .......................................................................................
16,677 $
166,393
94,483
10,382
983,281
98,251
3,000
246,309
28,380
76,317
Total assets .............................................................................. $ 1,723,473 $
Liabilities and Stockholders’ Equity:
Amount due on senior secured credit facility ............................... $
Accounts payable..........................................................................
Manufacturer flooring plans payable............................................
Accrued expenses payable and other liabilities ............................
Dividends payable.........................................................................
Senior unsecured notes, net ..........................................................
Capital leases payable...................................................................
Deferred income taxes ..................................................................
Deferred compensation payable....................................................
Total liabilities.........................................................................
Stockholders’ equity .....................................................................
170,761 $
95,866
23,178
76,798
185
944,780
—
153,113
1,989
1,466,670
256,803
Total liabilities and stockholders’ equity ................................ $ 1,723,473 $
—
35,163
10,115
126
158,217
16,870
—
—
—
29,526
250,017
—
5,974
488
(3,427)
(53)
—
726
—
—
3,708
246,309
250,017
$
$
$
$
—
—
—
—
—
—
—
(246,309)
—
—
(246,309)
—
—
—
—
—
—
—
—
—
—
(246,309)
(246,309)
$
16,677
201,556
104,598
10,508
1,141,498
115,121
3,000
—
28,380
105,843
$ 1,727,181
$
170,761
101,840
23,666
73,371
132
944,780
726
153,113
1,989
1,470,378
256,803
$ 1,727,181
91
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2019
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
$
103,776
25,214
20,845
16,695
10,106
1,921
178,557
32,528
14,594
11,070
58,192
22,327
13,318
11,767
3,076
1,614
110,294
45,584
2,887
7,527
4,928
7,030
307
68,263
40,493
—
—
—
660
28,430
(13,221)
232
(12,989)
15,441
—
15,441
$
$
Revenues:
Equipment rentals ......................................................................... $
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total revenues .........................................................................
662,578
213,877
118,504
107,160
57,835
9,854
1,169,808
$
Cost of revenues:
Rental depreciation .......................................................................
Rental expense ..............................................................................
Rental other...................................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total cost of revenues..............................................................
Gross profit (loss):
Equipment rentals .........................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Gross profit..............................................................................
Selling, general and administrative expenses.....................................
Impairment of goodwill......................................................................
Equity in earnings of guarantor subsidiaries ......................................
Merger costs .......................................................................................
Gain from sales of property and equipment, net ................................
Income from operations...........................................................
Other income (expense):
Interest expense.............................................................................
Other, net ......................................................................................
Total other expense, net...........................................................
Income before provision for income taxes ...................................
Provision for income taxes .................................................................
Net income.................................................................................... $
211,252
90,485
59,543
361,280
189,045
78,703
79,196
18,870
11,807
738,901
301,298
24,832
39,801
27,964
38,965
(1,953)
430,907
270,533
12,184
15,441
416
3,957
167,172
(55,056)
3,745
(51,311)
115,861
28,650
87,211
92
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(15,441)
—
—
(15,441)
—
—
—
(15,441)
—
(15,441)
$
$
766,354
239,091
139,349
123,855
67,941
11,775
1,348,365
243,780
105,079
70,613
419,472
211,372
92,021
90,963
21,946
13,421
849,195
346,882
27,719
47,328
32,892
45,995
(1,646)
499,170
311,026
12,184
—
416
4,617
180,161
(68,277)
3,977
(64,300)
115,861
28,650
87,211
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2018
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
$
91,630
55,384
23,120
16,868
9,954
6,063
203,019
30,082
13,033
9,410
52,525
48,893
16,092
11,838
3,228
2,599
135,175
39,105
6,491
7,028
5,030
6,726
3,464
67,844
45,406
—
—
643
23,081
(10,026)
192
(9,834)
13,247
—
13,247
$
$
Revenues:
Equipment rentals ......................................................................... $
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total revenues .........................................................................
535,551
207,564
102,005
103,586
53,534
33,702
1,035,942
$
Cost of revenues:
Rental depreciation .......................................................................
Rental expense ..............................................................................
Rental other...................................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total cost of revenues..............................................................
Gross profit (loss):
Equipment rentals .........................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Gross profit..............................................................................
Selling, general and administrative expenses.....................................
Equity in earnings of guarantor subsidiaries ......................................
Merger costs .......................................................................................
Gain from sales of property and equipment, net ................................
Income from operations...........................................................
Other income (expense):
Interest expense.............................................................................
Other, net ......................................................................................
Total other expense, net...........................................................
Income before provision for income taxes ...................................
Provision for income taxes .................................................................
Net income.................................................................................... $
178,371
76,487
46,039
300,897
183,164
69,960
76,425
18,100
16,706
665,252
234,654
24,400
32,045
27,161
35,434
16,996
370,690
232,892
13,247
708
6,475
156,812
(53,681)
1,532
(52,149)
104,663
28,040
76,623
93
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(13,247)
—
—
(13,247)
—
—
—
(13,247)
—
(13,247)
$
$
627,181
262,948
125,125
120,454
63,488
39,765
1,238,961
208,453
89,520
55,449
353,422
232,057
86,052
88,263
21,328
19,305
800,427
273,759
30,891
39,073
32,191
42,160
20,460
438,534
278,298
—
708
7,118
166,646
(63,707)
1,724
(61,983)
104,663
28,040
76,623
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2017
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Revenues:
Equipment rentals ......................................................................... $
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total revenues .........................................................................
Cost of revenues:
Rental depreciation .......................................................................
Rental expense ..............................................................................
Rental other...................................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Total cost of revenues..............................................................
Gross profit (loss):
Equipment rentals .........................................................................
New equipment sales ....................................................................
Used equipment sales....................................................................
Parts sales......................................................................................
Services revenues..........................................................................
Other .............................................................................................
Gross profit..............................................................................
Selling, general and administrative expenses.....................................
Equity in earnings of guarantor subsidiaries ......................................
Merger breakup fees, net of merger costs ..........................................
Gain from sales of property and equipment, net ................................
Income from operations...........................................................
Other income (expense):
Interest expense.............................................................................
Loss on early extinguishment of debt ...........................................
Other, net ......................................................................................
Total other expense, net...........................................................
Income before benefit for income taxes .......................................
Benefit for income taxes ....................................................................
Net income.................................................................................... $
418,769
166,730
84,741
97,852
52,807
28,133
849,032
140,489
64,598
38,228
243,315
148,163
59,481
71,603
17,851
13,840
554,253
175,454
18,567
25,260
26,249
34,956
14,293
294,779
190,392
16,136
(5,782)
2,435
128,740
(45,480)
(25,363)
1,447
(69,396)
59,344
(50,314)
109,658
$
$
89,352
36,571
22,588
16,401
10,066
6,009
180,987
28,966
13,108
9,210
51,284
32,539
14,651
11,532
3,260
2,592
115,858
38,068
4,032
7,937
4,869
6,806
3,417
65,129
42,392
—
—
2,574
25,311
(9,478)
—
303
(9,175)
16,136
—
16,136
$
$
94
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(16,136)
—
—
(16,136)
—
—
—
—
(16,136)
—
(16,136)
$
$
508,121
203,301
107,329
114,253
62,873
34,142
1,030,019
169,455
77,706
47,438
294,599
180,702
74,132
83,135
21,111
16,432
670,111
213,522
22,599
33,197
31,118
41,762
17,710
359,908
232,784
—
(5,782)
5,009
137,915
(54,958)
(25,363)
1,750
(78,571)
59,344
(50,314)
109,658
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2019
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Cash flows from operating activities:
Net income.................................................................................... $
87,211
$
15,441
$
(15,441)
$
87,211
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on property and equipment..........
Depreciation on rental equipment.................................................
Amortization of intangible assets .................................................
Amortization of deferred financing costs .....................................
Accretion of note discount, net of premium amortization ............
Non-cash operating lease expense ................................................
Amortization of finance lease right-of-use assets.........................
Provision for losses on accounts receivable .................................
Provision for inventory obsolescence ...........................................
Deferred income taxes ..................................................................
Impairment of goodwill ................................................................
Stock-based compensation expense..............................................
Gain from sales of property and equipment, net...........................
Gain from sales of rental equipment, net......................................
Equity in earnings of guarantor subsidiaries.................................
Changes in operating assets and liabilities, net of acquisitions:
Receivables ...................................................................................
Inventories ....................................................................................
Prepaid expenses and other assets ................................................
Accounts payable..........................................................................
Manufacturer flooring plans payable............................................
Accrued expenses payable and other liabilities ............................
Deferred compensation payable....................................................
Net cash provided by operating activities ...............................
Cash flows from investing activities:
25,058
211,252
4,132
1,010
477
10,306
—
5,382
152
27,013
12,184
4,670
(3,957)
(39,102)
(15,441)
2,414
(21,121)
274
(40,012)
2,023
(3,597)
109
270,437
Acquisition of business, net of cash acquired...............................
Purchases of property and equipment...........................................
Purchases of rental equipment ......................................................
Proceeds from sales of property and equipment...........................
Proceeds from sales of rental equipment ......................................
Investment in subsidiaries.............................................................
Net cash used in investing activities........................................
(106,746)
(36,824)
(272,015)
5,276
107,127
26,001
(277,181)
Cash flows from financing activities:
Purchases of treasury stock...........................................................
Borrowings on senior secured credit facility ................................
Payments on senior secured credit facility ...................................
Dividends paid ..............................................................................
Payments of deferred financing costs ...........................................
Payments of finance lease obligations ..........................................
Capital contributions.....................................................................
Net cash provided by (used in) financing activities ................
Net decrease in cash ...........................................................................
Cash, beginning of year......................................................................
Cash, end of year ................................................................................ $
(1,684)
1,457,744
(1,411,626)
(39,381)
(559)
(56)
—
4,438
(2,306)
16,677
14,371
$
3,367
32,528
—
—
—
1,374
163
411
—
—
—
—
(660)
(7,511)
—
6,808
1,484
(7)
(3,346)
(488)
(783)
—
48,781
—
(6,287)
(37,639)
774
20,431
—
(22,721)
—
—
—
(7)
—
(176)
(26,001)
(26,184)
(124)
—
(124)
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,441
—
—
—
—
—
—
—
—
—
—
—
—
—
(26,001)
(26,001)
—
—
—
—
—
—
26,001
26,001
—
—
—
28,425
243,780
4,132
1,010
477
11,680
163
5,793
152
27,013
12,184
4,670
(4,617)
(46,613)
—
9,222
(19,637)
267
(43,358)
1,535
(4,380)
109
319,218
(106,746)
(43,111)
(309,654)
6,050
127,558
—
(325,903)
(1,684)
1,457,744
(1,411,626)
(39,388)
(559)
(232)
—
4,255
(2,430)
16,677
14,247
$
95
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2018
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Cash flows from operating activities:
Net income.................................................................................... $
76,623
$
13,247
$
(13,247)
$
76,623
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on property and equipment..........
Depreciation on rental equipment.................................................
Amortization of intangible assets .................................................
Amortization of deferred financing costs .....................................
Accretion of note discount, net of premium amortization ............
Provision for losses on accounts receivable .................................
Provision for inventory obsolescence ...........................................
Deferred income taxes ..................................................................
Stock-based compensation expense..............................................
Gain from sales of property and equipment, net...........................
Gain from sales of rental equipment, net......................................
Equity in earnings of guarantor subsidiaries.................................
Changes in operating assets and liabilities, net of acquisitions:
Receivables ...................................................................................
Inventories ....................................................................................
Prepaid expenses and other assets ................................................
Accounts payable..........................................................................
Manufacturer flooring plans payable............................................
Accrued expenses payable and other liabilities ............................
Deferred compensation payable....................................................
Net cash provided by operating activities ...............................
Cash flows from investing activities:
21,570
178,371
3,320
1,083
477
2,065
122
26,695
4,214
(6,475)
(31,595)
(13,247)
(19,346)
(45,349)
(981)
11,990
2,878
4,176
86
216,677
Acquisition of business, net of cash acquired...............................
Purchases of property and equipment...........................................
Purchases of rental equipment ......................................................
Proceeds from sales of property and equipment...........................
Proceeds from sales of rental equipment ......................................
Investment in subsidiaries.............................................................
Net cash used in investing activities........................................
(196,027)
(26,903)
(362,780)
8,617
92,014
(10,845)
(495,924)
Cash flows from financing activities:
Purchases of treasury stock...........................................................
Borrowings on senior secured credit facility ................................
Payments on senior secured credit facility ...................................
Dividends paid ..............................................................................
Payments of deferred financing costs ...........................................
Payments of capital lease obligations ...........................................
Capital contributions.....................................................................
Net cash provided by financing activities ...............................
Net decrease in cash ...........................................................................
Cash, beginning of year......................................................................
Cash, end of year ................................................................................ $
(1,350)
1,436,849
(1,266,088)
(39,268)
(97)
—
—
130,046
(149,201)
165,878
16,677
$
3,023
30,082
—
—
—
676
—
—
—
(643)
(6,757)
—
1,585
(2,881)
16
(4,996)
(1,214)
(1,604)
—
30,534
—
(8,057)
(53,820)
644
20,072
—
(41,161)
—
—
—
(6)
—
(212)
10,845
10,627
—
—
—
$
—
—
—
—
—
—
—
—
—
—
—
13,247
—
—
—
—
—
—
—
—
—
—
—
—
—
10,845
10,845
—
—
—
—
—
—
(10,845)
(10,845)
—
—
—
24,593
208,453
3,320
1,083
477
2,741
122
26,695
4,214
(7,118)
(38,352)
—
(17,761)
(48,230)
(965)
6,994
1,664
2,572
86
247,211
(196,027)
(34,960)
(416,600)
9,261
112,086
—
(526,240)
(1,350)
1,436,849
(1,266,088)
(39,274)
(97)
(212)
—
129,828
(149,201)
165,878
16,677
$
96
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2017
H&E
Equipment
Services
Guarantor
Subsidiaries
Elimination
Consolidated
(Amounts in thousands)
Cash flows from operating activities:
Net income.................................................................................... $
109,658
$
16,136
$
(16,136)
$
109,658
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on property and equipment..........
Depreciation on rental equipment.................................................
Amortization of deferred financing costs .....................................
Accretion of note discount, net of premium amortization ............
Provision for losses on accounts receivable .................................
Provision for inventory obsolescence ...........................................
Deferred income taxes ..................................................................
Stock-based compensation expense..............................................
Loss on early extinguishment of debt ...........................................
Gain from sales of property and equipment, net...........................
Gain from sales of rental equipment, net......................................
Equity in earnings of guarantor subsidiaries.................................
Changes in operating assets and liabilities:
Receivables ...................................................................................
Inventories ....................................................................................
Prepaid expenses and other assets ................................................
Accounts payable..........................................................................
Manufacturer flooring plans payable............................................
Accrued expenses payable and other liabilities ............................
Deferred compensation payable....................................................
Net cash provided by operating activities ...............................
Cash flows from investing activities:
20,742
140,489
1,046
274
3,148
161
(50,535)
3,526
25,363
(2,435)
(24,063)
(16,136)
(29,083)
(23,221)
(1,687)
42,623
(10,599)
8,660
61
197,992
Purchases of property and equipment...........................................
Purchases of rental equipment ......................................................
Proceeds from sales of property and equipment...........................
Proceeds from sales of rental equipment ......................................
Investment in subsidiaries.............................................................
Net cash used in investing activities........................................
(17,852)
(198,988)
3,528
74,090
14,128
(125,094)
Cash flows from financing activities:
Purchases of treasury stock...........................................................
Borrowings on senior secured credit facility ................................
Payments on senior secured credit facility ...................................
Dividends paid ..............................................................................
Principal payments on senior unsecured notes due 2023 .............
Costs paid to tender and redeem senior unsecured notes due
2022 ...........................................................................................
Proceeds from issuance of senior unsecured notes due 2025 .......
Payments of deferred financing costs ...........................................
Payments of capital lease obligations ...........................................
Capital contributions.....................................................................
Net cash provided by (used in) financing activities ................
Net increase in cash............................................................................
Cash, beginning of year......................................................................
Cash, end of year ................................................................................ $
97
(783)
1,193,544
(1,356,186)
(39,164)
(630,000)
(23,336)
958,500
(17,278)
—
—
85,297
158,195
7,683
165,878
$
—
—
—
(218)
(14,128)
(14,354)
—
—
—
$
3,048
28,966
—
—
784
—
—
—
—
(2,574)
(7,819)
—
(10,929)
(8,550)
28
7,726
1,821
(430)
—
28,207
(4,663)
(35,221)
3,978
22,053
—
(13,853)
—
—
—
(8)
—
—
—
—
—
—
—
—
—
—
—
—
16,136
—
—
—
—
—
—
—
—
—
—
—
—
(14,128)
(14,128)
23,790
169,455
1,046
274
3,932
161
(50,535)
3,526
25,363
(5,009)
(31,882)
—
(40,012)
(31,771)
(1,659)
50,349
(8,778)
8,230
61
226,199
(22,515)
(234,209)
7,506
96,143
—
(153,075)
—
—
—
—
—
(783)
1,193,544
(1,356,186)
(39,172)
(630,000)
—
—
—
—
14,128
14,128
—
—
—
$
(23,336)
958,500
(17,278)
(218)
—
85,071
158,195
7,683
165,878
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports
that the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required financial disclosure.
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer,
respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on
Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of
December 31, 2019, our current disclosure controls and procedures were effective.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the
degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and
procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f))
that occurred during the fourth quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
98
Management’s Report on Internal Control Over Financial Reporting
The management of H&E Equipment Services, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Any evaluation or
projection of effectiveness to future periods is also subject to risk that controls may become inadequate due to changes in conditions,
or that the degree of compliance with the policies and procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019,
based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based on that evaluation, management concluded that, as of December 31, 2019, our internal
control over financial reporting was effective based on these criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by BDO USA, LLP,
an independent registered public accounting firm, as stated in their report, which is included herein.
Date: February 20, 2020
/s/ Bradley W. Barber
Bradley W. Barber
Chief Executive Officer, President and Director
/s/ Leslie S. Magee
Leslie S. Magee
Chief Financial Officer and Secretary
99
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
H&E Equipment Services, Inc.
Baton Rouge, Louisiana
Opinion on Internal Control over Financial Reporting
We have audited H&E Equipment Services, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2019 and 2018, the related
consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2019, and the related notes and schedule, and our report dated February 20, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Dallas, Texas
February 20, 2020
100
Item 9B.
Other Information
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement for use
in connection with the 2020 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
We have adopted a code of conduct that applies to our Chief Executive Officer and Chief Financial Officer. This code of conduct
is available on the Company’s internet website at www.he-equipment.com. The information on our website is not a part of or
incorporated by reference into this Annual Report on Form 10-K. If the Company makes any amendments to this code other than
technical, administrative or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of
this code to the Company’s Chief Executive Officer or Chief Financial Officer, the Company will disclose the nature of the
amendment or waiver, its effective date and to whom it applies by posting such information on the Company’s internet website at
www.he-equipment.com.
Item 11.
Executive Compensation
The information required by this Item is incorporated herein by reference from the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference from the Proxy Statement.
101
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1)
Financial Statements
The Company’s consolidated financial statements listed below have been filed as part of this report:
Report of Independent Registered Public Accounting Firm—Internal Control over Financial Reporting ....................................
Report of Independent Registered Public Accounting Firm—Consolidated Financial Statements ...............................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 .................................................................................................
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017......................................................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017................................
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017...............................................
Notes to Consolidated Financial Statements ..................................................................................................................................
Page
100
53
55
56
57
58
60
(2)
Financial Statement Schedule for the years ended December 31, 2019, 2018 and 2017:
Schedule II—Valuation and Qualifying Accounts.........................................................................................................................
106
All other schedules are omitted because they are not applicable or not required, or the information appears in the Company’s
consolidated financial statements or notes thereto.
(3)
Exhibits: The exhibits to this report are listed in the exhibit index below.
(b) Description of exhibits
102
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
Exhibit Index
Agreement and Plan of Merger, dated February 2, 2006, among the Company, H&E LLC and Holdings (incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed
February 3, 2006).
Agreement and Plan of Merger, dated as of May 15, 2007, by and among H&E Equipment Services, Inc., HE-JWB
Acquisition, Inc., J.W. Burress, Incorporated, the Burress Shareholders (as defined therein), and Richard S. Dudley, as
Burress Shareholders Representative (as defined therein) (incorporated by reference to Exhibit 2.1 to Current Report on
Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on May 17, 2007.
Amendment No. 1 to Agreement and Plan of Merger, dated as of August 31, 2007, by and among H&E Equipment
Services, Inc., HE-JWB Acquisition, Inc., J.W. Burress, Incorporated, the Burress Shareholders (as defined therein), and
Richard S. Dudley, as Burress Shareholders Representative (as defined therein) (incorporated by reference to Exhibit 2.1 to
Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on September 4, 2007).
Acquisition Agreement, dated as of January 4, 2005, among H&E Equipment Services, L.L.C., Eagle Merger Corp., Eagle
High Reach Equipment, LLC, Eagle High Reach Equipment, Inc., SBN Eagle LLC, SummitBridge National Investments,
LLC and the shareholders of Eagle High Reach Equipment, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K of
H&E Equipment Services L.L.C. (File Nos. 333-99587 and 333-99589), filed January 5, 2006).
Amended and Restated Certificate of Incorporation of H&E Equipment Services, Inc. (incorporated by reference to
Exhibit 3.4 to Registration Statement on Form S-1 of H&E Equipment Services, Inc. (File No. 333-128996), filed
January 20, 2006).
Amended and Restated Bylaws of the Company, dated as of August 29, 2019 (incorporated by reference to Exhibit 3.1 to
the Current Report on Form 8-K of H&E Equipment Services Inc. (File No. 000-51759), filed on September 4, 2019).
Amended and Restated Articles of Organization of Gulf Wide Industries, L.L.C. (incorporated by reference to Exhibit 3.2
to Registration Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13,
2002).
Amended Articles of Organization of Gulf Wide Industries, L.L.C., Changing Its Name To H&E Equipment Services
L.L.C. (incorporated by reference to Exhibit 3.3 to Registration Statement on Form S-4 of H&E Equipment Services L.L.C.
(File No. 333-99589), filed September 13, 2002).
Amended and Restated Operating Agreement of H&E Equipment Services L.L.C. (incorporated by reference to Exhibit 3.8
to Registration Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13,
2002).
Certificate of Incorporation of H&E Finance Corp. (incorporated by reference to Exhibit 3.4 to Registration Statement on
Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Certificate of Incorporation of Great Northern Equipment, Inc. (incorporated by reference to Exhibit 3.5 to Registration
Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Articles of Incorporation of Williams Bros. Construction, Inc. (incorporated by reference to Exhibit 3.6 to Registration
Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Articles of Amendment to Articles of Incorporation of Williams Bros. Construction, Inc. Changing its Name to GNE
Investments, Inc. (incorporated by reference to Exhibit 3.7 to Registration Statement on Form S-4 of H&E Equipment
Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Bylaws of H&E Finance Corp. (incorporated by reference to Exhibit 3.9 to Registration Statement on Form S-4 of
H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Bylaws of Great Northern Equipment, Inc. (incorporated by reference to Exhibit 3.10 to Registration Statement on Form S-
4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Bylaws of Williams Bros. Construction, Inc. (incorporated by reference to Exhibit 3.11 to Registration Statement on
Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed September 13, 2002).
Articles of Incorporation of H&E California Holding, Inc., as amended (incorporated by reference to Exhibit 3.13 to
Registration Statement on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334), filed December 7, 2012).
103
3.14
3.15
3.16
3.17
3.18
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
Bylaws of H&E California Holding, Inc., as amended (incorporated by reference to Exhibit 3.14 to Registration Statement
on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334), filed December 7, 2012).
Certificate of Formation of H&E Equipment Services (California), LLC, as amended (incorporated by reference to
Exhibit 3.15 to Registration Statement on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334), filed
December 7, 2012).
Bylaws of H&E Equipment Services (California), LLC (incorporated by reference to Exhibit 3.16 to Registration Statement
on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334), filed December 7, 2012).
Amended and Restated Articles of Incorporation of H&E Equipment Services (Mid-Atlantic), Inc. (incorporated by
reference to Exhibit 3.17 to Registration Statement on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334),
filed December 7, 2012).
Bylaws of H&E Equipment Services (Mid-Atlantic), Inc. (incorporated by reference to Exhibit 3.18 to Registration
Statement on Form S-4 of H&E Equipment Services, Inc. (File No. 333-185334), filed December 7, 2012).
Amended and Restated Security Holders Agreement, dated as of February 3, 2006, among the Company and certain other
parties thereto (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K of H&E Equipment Services, Inc.
(File No. 000-51759), filed February 3, 2006).
Amended and Restated Investor Rights Agreement, dated as of February 3, 2006, among the Company and certain other
parties thereto (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K of H&E Equipment Services, Inc.
(File No. 000-51759), filed February 3, 2006).
Amended and Restated Registration Rights Agreement, dated as of February 3, 2006, among the Company and certain
other parties thereto (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K of H&E Equipment Services,
Inc. (File No. 000-51759), filed February 3, 2006).
Form of H&E Equipment Services, Inc. common stock certificate (incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1 of H&E Equipment Services, Inc. (File No. 333-128996), filed January 5, 2006).
Indenture, dated August 24, 2017, by and among H&E Equipment Services, Inc., the guarantors party thereto and The
Bank of New York Mellon Trust Company, N.A, as Trustee, relating to the 5.6250% Senior Notes due 2025 (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759),
filed August 24, 2017).
Registration Rights Agreement, dated August 24, 2017, by and among the Company, GNE Investments, Inc., Great
Northern Equipment, Inc., H&E California Holding, Inc., H&E Equipment Services (California, LLC, H&E Equipment
Services (Mid-Atlantic), Inc., and H&E Finance Corp. and Wells Fargo Securities, LLC (incorporated by reference to
Exhibit 4.2 to the Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed August 24,
2017).
Registration Rights Agreement, dated November 22, 2017, by and among the Company, the Guarantors, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed November 22, 2017).
Description of H&E Equipment Services, Inc.’s Common Stock.*
Fifth Amended and Restated Credit Agreement, dated December 22, 2017, by and among the Company, Great Northern
Equipment, Inc., H&E Equipment Services (California), LLC and H&E Equipment Services (Mid-Atlantic), Inc.
(collectively, the “Borrowers”), Wells Fargo Capital Finance, LLC, as administrative agent for each member of the Lender
Group and the Bank Product Providers, and the joint lead arrangers, joint book runners, co-syndication agents and
documentation agent party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of H&E
Equipment Services, Inc. (File No. 000-51759), filed December 27, 2017).
First Amendment to the Fifth Amended and Restated Credit Agreement, dated February 1, 2019, by and among the
Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC and H&E Equipment Services
(Mid-Atlantic), Inc. (collectively, the “Borrowers”), Wells Fargo Capital Finance, LLC, as administrative agent for each
member of the Lender Group and the Bank Product Providers, and the joint lead arrangers, joint book runners, co-
syndication agents and documentation agent party thereto (incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759, filed February 4, 2019).
104
10.3
10.4
10.5
10.6
10.7
Purchase Agreement by and among H&E Equipment Services L.L.C., H&E Finance Corp., the guarantors party thereto and
Credit Suisse First Boston Corporation, dated June 3, 2002 (incorporated by reference to Exhibit 10.21 to Registration
Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99587), filed September 13, 2002).
Purchase Agreement, among H&E Equipment Services L.L.C., H&E Finance Corp., H&E Holdings L.L.C., the guarantors
party thereto and Credit Suisse First Boston Corporation, Inc. dated June 17, 2002 (incorporated by reference to
Exhibit 10.21 to Registration Statement on Form S-4 of H&E Equipment Services L.L.C. (File No. 333-99589), filed
September 13, 2002).
H&E Equipment Services, Inc. Amended and Restated 2006 Stock-Based Incentive Compensation Plan (incorporated by
reference to Appendix B to the Definitive Proxy Statement of H&E Equipment Services, Inc. (File No. 000-51759), filed
April 28, 2006.)†
Amendment No. 1 to the H&E Equipment Services, Inc. Amended and Restated 2006 Stock-Based Incentive
Compensation Plan (incorporated by reference from Exhibit 10.7 to Form 10-K of H&E Equipment Services, Inc. (File No.
000-51579), filed March 3, 2011).†
Amendment No. 2 to the H&E Equipment Services, Inc. Amended and Restated 2006 Stock-Based Incentive
Compensation Plan (incorporated by reference from Exhibit 10.8 to Form 10-K of H&E Equipment Services, Inc. (File No.
000-51579), filed February 25, 2016).†
10.8
H&E Equipment Services, Inc. 2016 Stock-Based Incentive Compensation Plan (incorporated by reference to Appendix A
to the Definitive Proxy Statement of H&E Equipment Services, Inc. (File No. 000-51759), filed April 1, 2016.†
10.9
10.10
10.11
18.1
21.1
23.1
31.1
31.2
32.1
Form of Restricted Stock Award Agreement for Officers of H&E Equipment Services, Inc. (incorporated by reference from
Exhibit 10.1 to Form 10-Q of H&E Equipment Services, Inc. (File No. 000-51759), filed November 3, 2011). †
Restrictive Covenant Agreement, dated August 14, 2015, by and between the Company and Bradley W. Barber
(incorporated by reference to Exhibit 10.1 to Form 10-Q of H&E Equipment Services, Inc. (File No. 000-51759), filed
October 29, 2015). †
Restrictive Covenant Agreement, dated October 12, 2015, by and between the Company and Leslie S. Magee (incorporated
by reference to Exhibit 10.12 to Form 10-K of H&E Equipment Services, Inc. (File No. 000-51579), filed on February 25,
2016).†
BDO Seidman, LLP Preferability Letter (incorporated by reference to Exhibit 18.1 to Form 10-K of H&E Equipment
Services, Inc. (File No. 000-51759), filed March 7, 2008).
Subsidiaries of the registrant.*
Consent of BDO USA, LLP.*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
101.INS Inline XBRL Instance Document*
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
**
†
Filed herewith
Furnished herewith
Management contract or compensatory plan or arrangement
105
Item 16.
Form 10-K Summary
None.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
(Amounts in thousands)
Description
Year Ended December 31, 2019
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses
Deductions
Balance at
End
of Year
Allowance for doubtful accounts receivable ............................... $
Allowance for inventory obsolescence........................................
$
Year Ended December 31, 2018 .......................................................
Allowance for doubtful accounts receivable ............................... $
Allowance for inventory obsolescence........................................
$
Year Ended December 31, 2017 .......................................................
Allowance for doubtful accounts receivable ............................... $
Allowance for inventory obsolescence........................................
$
4,094
368
4,462
3,774
947
4,721
3,769
900
4,669
$
$
$
$
$
$
5,793
152
5,945
2,741
122
2,863
3,932
161
4,093
$
$
$
$
$
$
(4,651)
(189)
(4,840)
(2,421)
(701)
(3,122)
(3,927)
(114)
(4,041)
$
$
$
$
$
$
5,236
331
5,567
4,094
368
4,462
3,774
947
4,721
106
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 20, 2020.
SIGNATURES
H&E EQUIPMENT SERVICES, INC.
By: /s/ Bradley W. Barber
Bradley W. Barber
Its: Chief Executive Officer, President and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates indicated.
Date
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
Signature
Capacity
By: /s/ Bradley W. Barber
Bradley W. Barber
By: /s/ Leslie S. Magee
Leslie S. Magee
By: /s/ John M. Engquist
John M. Engquist
By: /s/ Paul N. Arnold
Paul N. Arnold
By: /s/ Gary W. Bagley
Gary W. Bagley
By: /s/ Bruce C. Bruckmann
Bruce C. Bruckmann
By: /s/ Patrick L. Edsell
Patrick L. Edsell
By: /s/ Thomas J. Galligan III
Thomas J. Galligan III
By: /s/ Lawrence C. Karlson
Lawrence C. Karlson
By: /s/ John T. Sawyer
John T. Sawyer
By: /s/ Mary Pat Thompson
Mary Pat Thompson
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Executive Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director
107
John M. Engquist
Executive Chairman
Gary W. Bagley
Private Investments
Bruce C. Bruckmann
Managing Director,
Bruckmann, Rosser, Sherrill & Co., Inc.
Patrick L. Edsell
Private Investments
Mary P. Thompson
President, Titan Technologies, Inc.
Board of Directors
Bradley W. Barber
Chief Executive Officer, President and Director
Paul N. Arnold
Private Investments
Lawrence C. Karlson
Private Investments
John T. Sawyer
Private Investments
Thomas J. Galligan III
Private Investments
Management
John M. Engquist
Executive Chairman
Bradley W. Barber
Chief Executive Officer, President & Director
Leslie S. Magee
Chief Financial Officer and Secretary
Corporate Office
H&E Equipment Services, Inc.
7500 Pecue Lane
Baton Rouge, Louisiana 70809
(225) 298-5200
www.he-equipment.com
Stock
Stock Symbol: HEES
Stock Traded on NASDAQ Global Market
Investor Relations Contacts
Kevin Inda
Vice President of Investor Relations
H&E Equipment Services, Inc.
Phone: (225) 298-5200
Fax: (225) 298-5382
E-mail: kinda@he-equipment.com
Form 10-K
A copy of the Annual Report on Form 10-K for fiscal year ended December 31, 2019 is included with this
Annual Report. A copy of the Annual Report on Form 10-K, filed with the Securities and Exchange Commission,
is available by contacting H&E Equipment Services, Inc., Investor Relations, 7500 Pecue Lane, Baton Rouge,
LA 70809.
The Annual Report, Form 10-K and other financial information are available at www.he-equipment.com
under the “Investor Relations” tab.
Transfer Agent
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Phone: 877-373-6374
Email: web.queries@computershare.com
Website: www.computershare.com/investor
H&E Equipment Services, Inc.
7500 Pecue Lane
Baton Rouge, Louisiana 70809
(225) 298-5200
www.he-equipment.com