H&E Equipment Services Reports Third Quarter 2020 Results

H&E Equipment Services, Inc. (NASDAQ: HEES) today announced results for the third quarter ended September 30, 2020.

THIRD QUARTER 2020 SUMMARY

• Revenues decreased 18.1% to $289.3 million versus $353.0 million a year ago.
• Net income was $10.1 million in the third quarter of 2020 compared to net income of $28.4 million a year ago. The effective income tax rate was 40.9% in the third quarter of 2020 and 26.7% in the third quarter of 2019. The increase in the effective income tax rate was primarily due to unfavorable permanent differences in relation to profit before tax. Excluding the impact of our 2020 first quarter goodwill impairment charge, our effective tax rate in the third quarter would have been 26.2%.
• Adjusted EBITDA decreased 22.5% to $98.8 million in the third quarter of 2020 compared to $127.5 million a year ago, yielding a margin of 34.1% of revenues compared to 36.1% a year ago.
• Total equipment rental revenues for the third quarter of 2020 were $165.8 million, a decrease of $38.3 million, or 18.8%, compared to $204.1 million a year ago. Rental revenues for the third quarter of 2020 were $149.4 million, a decrease of approximately $35.4 million, or 19.1%, compared to $184.8 million in the third quarter of 2019.
• New equipment sales decreased 42.7% to $37.2 million in the third quarter of 2020 compared to $65.0 million a year ago.
• Used equipment sales increased 28.3% to $40.0 million in the third quarter of 2020 compared to $31.2 million a year ago.
• Gross margin was 34.2% compared to 37.4% a year ago. The decrease in gross margin was largely the result of lower rental gross margins.
• Total equipment rental gross margins were 39.4% in the third quarter of 2020 compared to 46.3% a year ago. Rental gross margins were 44.0% in the third quarter of 2020 compared to 50.8% last year. The decrease was primarily due to lower time utilization and rates.
• Average time utilization (based on original equipment cost) was 63.8% compared to 71.4% a year ago. The size of the Company’s rental fleet based on original acquisition cost decreased 7.8% from a year ago, to $1.8 billion.
• Average rental rates decreased 4.0% compared to a year ago and declined 0.4% sequentially, based on ARA guidelines.
• Dollar utilization was 32.4% in the third quarter of 2020 compared to 37.5% a year ago.
• Average rental fleet age at September 30, 2020, was 40.0 months compared to an industry average age of 50.7 months.

Brad Barber, H&E Equipment Services, Inc.’s chief executive officer and president, said, “We are encouraged that demand in our end-user rental markets accelerated during the third quarter. As a result of increased project activity and our focus on operating execution, physical utilization was 63.8% for the third quarter. This improvement represented a 430 basis point increase from the second quarter.”

Barber added, “While we are seeing meaningful improvements in our rental business, our financial results remain below year-ago levels. Total revenues were down 18.1%, or $63.7 million, compared to a year ago. This was largely the result of an 18.8%, or $38.3 million, decline in total rental revenue and a 42.7%, or $27.8 million, decline in new equipment sales from a year ago. Adjusted EBITDA declined 22.5%, or $28.7 million, from a year ago, and margins decreased 200 basis points to 34.1%. However, our ongoing actions to reduce capital expenditures and operating costs resulted in significant free cash flow for the quarter. We have also continued to improve our leverage and liquidity.”

Barber concluded, “The current environment could further increase the secular shift toward renting equipment versus owning, creating greater opportunities for us to increase market share. Based on our improving visibility, we plan to accelerate our growth strategy. This includes significantly increasing the number of warm starts next year. We remain focused on pursuing acquisition opportunities in both the general rental and specialty rental businesses.”

FINANCIAL DISCUSSION FOR THIRD QUARTER 2020:

Revenue

Total revenues decreased 18.1% to $289.3 million in the third quarter of 2020 from $353.0 million in the third quarter of 2019. Total equipment rental revenues decreased 18.8% to $165.8 million compared to $204.1 million in the third quarter of 2019. Rental revenues decreased 19.1% to $149.4 million compared with $184.8 million in the third quarter of 2019. New equipment sales decreased 42.7% to $37.2 million compared to $65.0 million a year ago. Used equipment sales increased 28.3% to $40.0 million compared to $31.2 million a year ago. Parts sales decreased 11.6% to $27.9 million compared to $31.5 million a year ago. Service revenues decreased 13.6% to $15.6 million compared to $18.1 million a year ago.

Gross Profit

Gross profit decreased 25.0% to $99.1 million from $132.1 million in the third quarter of 2019. Gross margin was 34.2% for the third quarter ended September 30, 2020, as compared to 37.4% for the third quarter ended September 30, 2019. On a segment basis, gross margin on total equipment rentals was 39.4% in the third quarter of 2020 compared to 46.3% in the third quarter of 2019. Rental margins were 44.0% in the third quarter of 2020 compared to 50.8% last year. On average, rental rates were 4.0%¹ lower than rates in the third quarter of 2019. Time utilization (based on original equipment cost) was 63.8% in the third quarter of 2020 compared to 71.4% a year ago.

Gross margins on new equipment sales were 11.1% in the third quarter compared to 11.6% a year ago. Gross margins on used equipment sales were 30.3% compared to 31.3% a year ago. Gross margins on parts sales were 24.9% in the third quarter of 2020 compared to 26.4% a year ago. Gross margins on service revenues were 66.8% for the third quarter of 2020 compared to 67.4% in the third quarter of 2019.

____________________

1 Based on ARA guidelines.

Rental Fleet

At the end of the third quarter of 2020, the original acquisition cost of the Company’s rental fleet was $1.8 billion, which is a 7.8%, or $154.5 million, decrease from the end of the third quarter of 2019. Dollar utilization for the third quarter of 2020 was 32.4% compared to 37.5% for the third quarter of 2019.

Selling, General and Administrative Expenses

SG&A expenses for the third quarter of 2020 were $70.0 million compared with $77.3 million the prior year, a $7.3 million, or 9.4%, decrease. SG&A expenses in the third quarter of 2020 as a percentage of total revenues were 24.2% compared to 21.9% a year ago. Employee salaries, wages, payroll taxes and related employee benefits, and other employee related expenses decreased $5.6 million. Expenses related to Greenfield branch expansions increased $1.3 million compared to a year ago.

Income from Operations

Income from operations for the third quarter of 2020 decreased 44.2% to $31.0 million, or 10.7% of revenues, compared to $55.5 million, or 15.7% of revenues, a year ago.

Interest Expense

Interest expense was $14.9 million for the third quarter of 2020 compared to $17.3 million a year ago.

Net Income

Net income was $10.1 million, or $0.28 per diluted share, in the third quarter of 2020 compared to net income of $28.4 million, or $0.79 per diluted share, in the third quarter of 2019. The effective income tax rate was 40.9% in the third quarter of 2020 and 26.7% in the third quarter of 2019. The increase in the effective income tax rate was primarily due to unfavorable permanent differences in relation to profit before tax. Excluding the impact of the 2020 first quarter goodwill impairment charge, our effective tax rate for the nine month period ended September 30, 2020, would have been 23.5%, resulting in a third quarter effective tax rate (net of goodwill impairment) of 26.2%.

Adjusted EBITDA

Adjusted EBITDA for the third quarter of 2020 decreased 22.5% to $98.8 million compared to $127.5 million in the third quarter of 2019. Adjusted EBITDA as a percentage of revenues was 34.1% compared with 36.1% in the third quarter of 2019.

Non-GAAP Financial Measures

This press release contains certain Non-GAAP measures (EBITDA, Adjusted EBITDA, Adjusted Income from Operations, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per share and the disaggregation of equipment rental revenues and cost of sales numbers) detailed below. Please refer to our Current Report on Form 8-K for a description of these measures and of our use of these measures. These measures as calculated by the Company are not necessarily comparable to similarly titled measures reported by other companies. Additionally, these Non-GAAP measures are not a measurement of financial performance or liquidity under GAAP and should not be considered as alternatives to the Company's other financial information determined under GAAP.

Conference Call

The Company’s management will hold a conference call to discuss third quarter results today, October 28, 2020 at 10:00 a.m. (Eastern Time). To listen to the call, participants should dial 877-270-2148 approximately 10 minutes prior to the start of the call. A telephonic replay will become available after 1:00 p.m. (Eastern Time) on October 28, 2020, and will continue through November 4, 2020, by dialing 877-344-7529 and entering the confirmation code 10148956.

The live broadcast of H&E Equipment Services, Inc.’s quarterly conference call will be available online at www.he-equipment.com on October 28, 2020, beginning at 10:00 a.m. (Eastern Time) and will continue to be available for 30 days. Related presentation materials will be posted to the “Investor Relations” section of the Company’s web site at www.he-equipment.com prior to the call. The presentation materials will be in Adobe Acrobat format.

About H&E Equipment Services, Inc.

The Company is one of the largest integrated equipment services companies in the United States with 97 full-service facilities throughout the West Coast, Intermountain, Southwest, Gulf Coast, Mid-Atlantic and Southeast regions. The Company is focused on heavy construction and industrial equipment, and rents, sells, and provides parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial platform equipment; (2) cranes; (3) earthmoving equipment; and (4) material handling equipment. By providing equipment rental, sales, on site parts, repair services, and maintenance functions under one roof, the Company is a one-stop provider for its customers' varied equipment needs. This full service approach provides the Company with multiple points of customer contact, enabling it to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal, and provides cross-selling opportunities among its new and used equipment sales, rentals, parts sales, and services operations.

Forward-Looking Statements

Statements contained in this press release that are not historical facts, including statements about H&E’s beliefs and expectations, are “forward-looking statements” within the meaning of the federal securities laws. Statements containing the words “may”, “could”, “would”, “should”, “believe”, “expect”, “anticipate”, “plan”, “estimate”, “target”, “project”, “intend”, “foresee” and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following: (1) risks related to the impact of the COVID-19 global pandemic, such as the scope and duration of the outbreak, government actions and restrictive measures implemented in response, material delays and cancellations of construction or infrastructure projects, supply chain disruptions and other impacts to the business; (2) general economic conditions and construction and industrial activity in the markets where we operate in North America; (3) our ability to forecast trends in our business accurately, and the impact of economic downturns and economic uncertainty in the markets we serve (including as a result of current uncertainty due to COVID-19); (4) trends in oil and natural gas could adversely affect the demand for our services and products; (5) the impact of conditions in the global credit and commodity markets (including as a result of current volatility and uncertainty in credit and commodity markets due to COVID-19) and their effect on construction spending and the economy in general; (6) relationships with equipment suppliers; (7) increased maintenance and repair costs as we age our fleet and decreases in our equipment’s residual value; (8) our indebtedness; (9) risks associated with the expansion of our business and any potential acquisitions we may make, including any related capital expenditures, or our inability to consummate such acquisitions; (10) our possible inability to integrate any businesses we acquire; (11) competitive pressures; (12) security breaches and other disruptions in our information technology systems; (13) adverse weather events or natural disasters; (14) 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 (15) other factors discussed in our public filings, including the risk factors included in the Company’s most recent Annual Report on Form 10-K and the Company’s most recent Quarterly Report on Form 10-Q. Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. 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, we are under no obligation to publicly update or revise any forward-looking statements after the date of this release. These statements are based on the current beliefs and assumptions of H&E’s management, which in turn are based on currently available information and important, underlying assumptions. H&E is under no obligation to publicly update or revise any forward-looking statements after this press release, whether as a result of any new information, future events or otherwise. Investors, potential investors, security holders 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.

H&E EQUIPMENT SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (Amounts in thousands, except per share amounts)
		Three Months Ended										Nine Months Ended
			Sept. 30,					Sept. 30,					Sept. 30,				Sept. 30,
			2020					2019					2020				2019
Revenues:
Equipment rentals		$	165,849				$	204,132				$	496,162			$	572,563
New equipment sales			37,248					65,010					112,068				177,709
Used equipment sales			40,000					31,180					105,231				96,942
Parts sales			27,853					31,499					83,842				93,798
Service revenues			15,637					18,105					48,116				50,398
Other			2,673					3,071					8,099				8,822
Total revenues			289,260					352,997					853,518				1,000,232
Cost of revenues:
Equipment rentals
Rental depreciation			58,083					63,065					177,225				181,647
Rental expense			25,628					27,889					74,461				79,676
Rental other			16,816					18,620					47,847				52,742
			100,527					109,574					299,533				314,065
New equipment sales			33,124					57,475					99,809				156,638
Used equipment sales			27,872					21,409					71,592				63,742
Parts sales			20,925					23,171					62,180				68,750
Service revenues			5,198					5,898					15,911				16,261
Other			2,547					3,342					7,873				10,167
Total cost of revenues			190,193					220,869					556,898				629,623
Gross Profit			99,067					132,128					296,620				370,609
Selling, general, and administrative expenses			70,040					77,296					217,525				233,783
Merger costs			150					47					308				314
Gain on sales of property and equipment, net			(2,102		)			(718	)				(9,260	)			(2,339	)
Impairment of goodwill			-					-					61,994				-
Income from Operations			30,979					55,503					26,053				138,851
Interest expense			(14,887		)			(17,331	)				(46,489	)			(51,453	)
Other income, net			990					588					2,262				1,609
Income (loss) before provision (benefit) for income taxes			17,082					38,760					(18,174	)			89,007
Provision (benefit) for income taxes			6,979					10,329					(124	)			23,719
Net Income (Loss)		$	10,103				$	28,431				$	(18,050	)		$	65,288
NET INCOME (LOSS) PER SHARE:
Basic – Net income (loss) per share		$	0.28				$	0.79				$	(0.50	)		$	1.82
Basic – Weighted average number of common shares outstanding			36,110					35,893					36,035				35,835
Diluted – Net income (loss) per share		$	0.28				$	0.79				$	(0.50	)		$	1.81
Diluted – Weighted average number of common shares outstanding			36,249					36,046					36,035				36,012
Dividends declared per common share		$	0.275				$	0.275				$	0.825			$	0.825

H&E EQUIPMENT SERVICES, INC.
SELECTED BALANCE SHEET DATA (unaudited)
(Amounts in thousands)
		September 30,			December 31,
		2020			2019
Cash	$	11,997		$	14,247
Rental equipment, net		1,078,403			1,217,673
Total assets		1,731,495			1,974,610
Total debt (1)		968,354			1,167,429
Total liabilities		1,469,736			1,667,091
Stockholders’ equity		261,759			307,519
Total liabilities and stockholders’ equity	$	1,731,495		$	1,974,610

(1)	Total debt consists of the aggregate amounts on the senior secured credit facility, senior unsecured notes and finance lease obligations.

H&E EQUIPMENT SERVICES, INC.
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
		Nine Months Ended September 30,
		2020								2020
		As Reported				Adjustment				As Adjusted
Gross profit		$	296,620				–			$	296,620
Selling, general and administrative expenses			217,525				–				217,525
Impairment of goodwill			61,994				(61,994	)			–
Gain on sale of property and equipment, net			(9,260	)			–				(9,260	)
Merger costs			308				–				308
Income from operations			26,053				61,994				88,047
Interest expense			(46,489	)			–				(46,489	)
Other income, net			2,262				–				2,262
Income (loss) before provision (benefit) for income taxes			(18,174	)			61,994				43,820
Provision (benefit) for income taxes			(124	)			10,430				10,306
Net income (loss)		$	(18,050	)		$	51,564			$	33,514
		Nine Months Ended September 30,
		2020								2020
		As Reported				Adjustment				As Adjusted
NET INCOME (LOSS) PER SHARE (1)
Basic – Net income (loss) per share		$	(0.50	)		$	1.43			$	0.93
Basic – Weighted average number of common shares outstanding
			36,035				36,035				36,035
Diluted – Net income (loss) per share		$	(0.50	)		$	1.43			$	0.93
Diluted – Weighted average number of common shares outstanding
			36,035				36,146				36,146

(1)	Because of the method used in calculating per share data, the summation of the above per share data may not necessarily total to the as adjusted per share data.

H&E EQUIPMENT SERVICES, INC.
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Amounts in thousands)
	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
Net Income (loss)	$	10,103			$	28,431			$	(18,050	)		$	65,288
Interest Expense		14,887				17,331				46,489				51,453
Provision (benefit) for income taxes		6,979				10,329				(124	)			23,719
Depreciation		65,642				70,320				199,634				202,610
Amortization of intangibles		994				1,042				2,996				3,091
EBITDA	$	98,605			$	127,453			$	230,945			$	346,161
Merger costs		150				47				308				314
Impairment of goodwill		-				-				61,994				-
Adjusted EBITDA	$	98,755			$	127,500			$	293,247			$	346,475

H&E EQUIPMENT SERVICES, INC.
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Amounts in thousands)
		Three Months Ended						Nine Months Ended
			Sept. 30, 2020			Sept. 30, 2019			Sept. 30, 2020				Sept. 30, 2019
RENTAL REVENUES
Equipment rentals (1)		$	149,423		$	184,797		$	448,817			$	518,294
Rentals other			16,426			19,335			47,345				54,269
Total equipment rentals			165,849			204,132			496,162				572,563
RENTAL COST OF SALES
Rental depreciation			58,083			63,065			177,225				181,647
Rental expense			25,628			27,889			74,461				79,676
Rental other			16,816			18,620			47,847				52,742
Total rental cost of sales			100,527			109,574			299,533				314,065
RENTAL REVENUES GROSS PROFIT (LOSS)
Equipment rentals			65,712			93,843			197,131				256,971
Rentals other			(390)			715			(502)				1,527
Total rental revenues gross profit			65,322			94,558			196,629				258,498
RENTAL REVENUES GROSS MARGIN
Equipment rentals			44.0%			50.8%			43.9%				49.6%
Rentals other			-2.3%			3.7%			-1.1%				2.8%
Total rental revenues gross margin			39.4%			46.3%			39.6%				45.1%

(1)

Pursuant to SEC Regulation S-X, our equipment rental revenues are aggregated and presented in our unaudited consolidated statements of operations in this press release as a single line item, “Equipment Rentals”. The above table disaggregates our equipment rental revenues for discussion and analysis purposes only.

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