H&E Equipment Services last week announced operating results for the fourth quarter and year ended Dec. 31, including non-cash goodwill and intangible asset impairment charges. Revenues decreased 9.6 percent to $261.9 million versus $289.7 million a year ago. Equipment rental revenues decreased 9.5 percent to $70.8 million compared with $78.2 million in the fourth quarter of 2007.
Adjusted EBITDA decreased 11.1 percent to $59.8 million, or a 22.8 percent margin, compared to $67.3 million, or a 23.2 percent margin, a year ago. Income from operations decreased 77.2 percent to $8.5 million compared to $37.3 million a year ago primarily due to goodwill and intangible asset impairment charges of $22.7 million. Excluding the impairment charges, income from operations decreased 16.3 percent to $31.2 million compared to a year ago.
Net loss was $0.6 million, or ($0.02) per diluted share (including the pre-tax non-cash impairment charges of $22.7 million), compared to net income of $17.1 million, or $0.45 per diluted share.
The non-cash goodwill and intangible asset impairment charges of $22.7 million were identified in connection with the company’s annual fourth-quarter goodwill impairment test and preparation, review and audit of the year-end financial statements. The impairment charges will not result in any cash expenditures and will not affect the company’s cash position, liquidity position, availability or covenant test under its senior secured credit facility, the company said.
“H&E Equipment again delivered solid financial results in the fourth quarter in spite of the extraordinary economic challenges that occurred throughout the year,” said John Engquist, H&E Equipment Services’ president and CEO. “The current economic situation and lack of future visibility is clearly impacting all of our customers and their industries at some level. The continuing credit crisis and virtual inability to access lending is resulting in more and more project cancellations and delays.
“Given the current economic conditions and future uncertainty, our primary focus is protecting our balance sheet and cash generation.We are taking the necessary steps to protect our performance by reducing capital expenditures and closely monitoring our inventory levels. We have also conducted a staged workforce reduction and hiring freeze, which has resulted in a 10-percent reduction in staff over the last year. We remain confident in our business and ability to adapt to the current environment; however, with our current lack of visibility into our customers’ demand for our products and services due primarily to the frozen credit markets and volatile commodity prices, we do not believe it would be appropriate to provide 2009 guidance at this time.”
“One of the strengths of our business model lies in our ability to manage assets and generate strong cash flow in an economic downturn,” said Leslie Magee, H&E Equipment Services’ chief financial officer. “As a result, we will continue to protect our balance sheet, reduce our debt and maintain low leverage. At year-end, availability under our senior secured credit facility was in excess of $230 million. We continue to maintain a significant cushion in the fixed charge covenant ratio, which is only triggered if availability falls below $25 million.
“We reduced our rental fleet capital spending by approximately 67 percent on a net basis during 2008 and began to reduce the size of our fleet in the fourth quarter, and we expect to further reduce our fleet spending in 2009 as a result of market conditions. In response to the weakened demand, we are also committed to reducing our operating costs. These measures have included a recent workforce reduction of 4 percent, which is in addition to a 5-percent headcount reduction in the first quarter of 2008. Also, we plan to eliminate executive and other key management incentive compensation for the foreseeable future and reduce spending on employee benefits, advertising, and travel and entertainment, among other general cut-backs.”
In the fourth quarter, new equipment sales decreased 12.5 percent to $99.9 million from $114.3 million in the fourth quarter of 2007. Used equipment sales decreased 16.0 percent to $32.3 million compared to $38.6 million in the fourth quarter of 2007. Parts sales grew 2.6 percent to $29.2 million from $28.5 million in the fourth quarter of 2007. Service revenues were flat at $17.5 million compared with a year ago.
Gross profit decreased 12.9 percent to $74.3 million from $85.2 million in the fourth quarter of 2007. Gross margin was 28.4 percent for the quarter ended Dec. 31, as compared to 29.4 percent for the quarter ended Dec. 31, 2007. The reduced gross margin percentage in the current quarter is primarily due to lower gross margins from the rental operations.
On a segment basis, gross margin on rentals decreased to 45.6 percent from 51.9 percent in the fourth quarter of 2007 due to declines in rental rates and time utilization. On average, rental rates declined 3.4 percent as compared to the fourth quarter of 2007. Time utilization decreased to 63.8 percent from 67.8 percent a year ago.
At the end of the fourth quarter of 2008, the original acquisition cost of the company’s rental fleet was $785.6 million, down $17.6 million from $803.2 million at the end of the fourth quarter of 2007. Dollar utilization was 35.6 percent compared to 39.1 percent for the fourth quarter of 2007. Dollar returns decreased reflecting lower year-over-year average rental rates and lower time utilization.
Income from operations for the fourth quarter of 2008 decreased 77.2 percent to $8.5 million compared with $37.3 million, or an operating margin of 12.9 percent, a year ago because of impairment charges related to goodwill of $15.9 million and intangible asset of $6.8 million in the current quarter.
Excluding the impairment charges, income from operations in the fourth quarter was $31.2 million, or an 11.9 percent operating margin. On this basis, operating income decreased due to lower revenues and gross margin.
The company’s operating results for the year ended Dec. 31, 2007 include the operating results of the Mid-Atlantic operations since the date of acquisition, Sept. 1, 2007. Therefore, its operating results for the year ended Dec. 31, 2007, include only four months of results from the Mid-Atlantic operations.
Total revenues for the full-year 2008 increased 6.6 percent to $1.1 billion from $1.0 billion in 2007. 2008 revenues included $144.2 million from the Mid-Atlantic region compared to $42.5 million a year ago. Equipment rental revenues increased 3.1 percent to $295.4 million compared with $286.6 million in 2007. 2008 equipment rental revenues included $15.2 million of rental revenues from the Mid-Atlantic region compared to $4.9 million a year ago. New equipment sales increased 5.3 percent to $374.1 million from $355.2 million in 2007. The Mid-Atlantic region generated $75.2 million of new equipment sales compared to $16.3 million a year ago. Used equipment sales increased 8.1 percent to $160.8 million compared to $148.7 million in 2007. Used equipment sales for the Mid-Atlantic region were $26.3 million compared to $11.0 million in 2007. Parts sales grew 15.7 percent to $118.3 million from $102.3 million in 2007. Service revenues increased 9.5 percent to $70.1 million compared with $64.1 million a year ago. The Mid-Atlantic region generated parts and service revenue of $23.9 million compared to $9.5 million in 2007.
On a segment basis, gross margin on rentals decreased to 47.9 percent from 51.3 percent in 2007 due to increased depreciation costs, declines in rental rates and time utilization, and the impact from the Mid-Atlantic rental operations. On average, rental rates declined 2.7 percent as compared to 2007. Time utilization decreased to 65.9 percent from 68.0 percent a year ago.
Net income decreased to $43.3 million, or $1.22 per diluted share, from $64.6 million, or $1.70 per diluted share in 2007. The goodwill and intangible asset impairment charges reduced 2008 net income by $0.40 per diluted share. The effective income tax rate was 37.6 percent in 2008 as compared to 38.7 percent in 2007.
Adjusted EBITDA for 2008 increased $1.3 million to $248.1 million from $246.8 million in 2007. Adjusted EBITDA as a percentage of revenues was 23.2 percent compared with 24.6 percent in 2007. For 2008, the Mid-Atlantic region contributed $12.7 million of EBITDA, or an 8.8-percent EBITDA margin, compared to $5.3 million of EBITDA, or a 12.6-percent EBITDA margin, for 2007.
Headquartered in Baton Rouge, La., H&E Equipment Services is No. 9 on the RER 100. It has 64 full-service facilities throughout the West Coast, Intermountain, Southwest, Gulf Coast, Mid-Atlantic and Southeast regions of the United States.
