H&E Equipment Services announces Fourth Quarter results
H&E Equipment Services, Inc. has results their results for the fourth quarter and year ended December 31, 2019, including a $12.2 million non-cash goodwill impairment charge.
FOURTH QUARTER 2019 SUMMARY
- Revenues increased by 0.6% to $348.1 million versus $346.0 million a year ago.
- Included in fourth quarter 2019 net income was a $12.2 million pre-tax non-cash goodwill impairment charge. Net income decreased 12.5% to $21.9 million in the fourth quarter compared to net income of $25.1 million a year ago. Excluding the impairment charge, net income was $31.9 million, an increase of 27.2%, or $6.8 million. The effective income tax rate was 18.4% in the fourth quarter of 2019 and 27.9% in the fourth quarter of 2018.
- Adjusted EBITDA increased by 10.7% to $126.8 million in the fourth quarter compared to $114.6 million a year ago, yielding a margin of 36.4% of revenues compared to 33.1% a year ago.
- Total equipment rental revenues for the fourth quarter of 2019 were $193.8 million, an increase of $14.0 million, or 7.8%, compared to $179.8 million a year ago (as adjusted).(1) Rental revenues (as previously reported) for the fourth quarter of 2019 were $176.3 million, an increase of $13.3 million, or 8.2%, compared to $163.0 million in the fourth quarter of 2018.(1)
- New equipment sales decreased by 23.0% to $61.4 million in the fourth quarter compared to $79.7 million a year ago.
- Used equipment sales increased by 12.1% to $42.4 million in the fourth quarter compared to $37.8 million a year ago.
- Gross margin was 36.9% compared to 35.6% a year ago. The increase in gross margin was largely the result of a shift in revenue mix to rentals and higher margins on used equipment sales which were partially offset by lower margins in other business segments.
- Total equipment rental gross margins were 45.6% in the fourth quarter of 2019 compared to 46.7% in the fourth quarter of 2018 (as adjusted).(1) Rental gross margins (as previously reported) were 50.3% in the fourth quarter of 2019 compared to 51.5% a year ago primarily due to lower time utilization.
- Average time utilization (based on original equipment cost) was 69.0% compared to 72.9% a year ago. The size of the Company’s rental fleet based on original acquisition cost increased 10.2% from a year ago, to $1.9 billion.
- Average rental rates increased by 1.7% compared to a year ago and declined 0.1% sequentially.
- Dollar utilization was 36.0% in the fourth quarter compared to 37.0% a year ago.
- Average rental fleet age at December 31, 2019, was 36.3 months compared to an industry average age of 46.8 months.
The non-cash goodwill impairment charge of $12.2 million was identified in connection with the Company’s annual fourth quarter 2019 goodwill impairment test. The $12.2 million goodwill impairment charge consists of a $10.7 million impairment to our new equipment goodwill reporting unit and a $1.5 million impairment to our service revenues goodwill reporting unit. Our goodwill reporting units related to rental revenues, used equipment revenues and parts revenues were not impaired. The impairment charge will not result in any cash expenditures and will not affect the Company’s cash position, liquidity, availability or covenant test under its senior secured credit facility.
Brad Barber, H&E Equipment Services’ chief executive officer, and president said, “With seasonality, the balancing of supply and demand and a challenging comparable in the year ago quarter, the year finished as we expected during the fourth quarter. We produced solid results for the quarter despite these factors – growing revenues, gross profit and Adjusted EBITDA. The strength in our rental business continued with rental revenues increasing 8.2% from a year ago and we again achieved rate growth, which increased 1.7%. Our performance for the full year of 2019 was also positive as we delivered an 8.8% increase in revenues and a 16.7% increase in Adjusted EBITDA. The metrics for our rental business were impressive as rental revenues for the year increased 17.3% from 2018. The average physical utilization for the year remained solid at 70.4% and average rates were 2.1% higher than in 2018. Overall, we are pleased with our execution and results for 2019.”
Barber concluded, “Based on current industry indicators and customer sentiment, the non-residential construction markets we serve are expected to be stable in 2020. Increasing the scale and scope of our rental business through selective acquisitions and organic expansion remains one of our highest priorities.”
FINANCIAL DISCUSSION FOR FOURTH QUARTER of 2019:
Revenue
Total revenues increased by 0.6% to $348.1 million in the fourth quarter of 2019 from $346.0 million in the fourth quarter of 2018. Total equipment rental revenues increased 7.8% to $193.8 million compared to $179.8 million in the fourth quarter of 2018 (as adjusted). (1) Rental revenues (as previously reported) increased by 8.2% to $176.3 million compared to $163.0 million in the fourth quarter of 2018. (1) New equipment sales were $61.4 million compared to $79.7 million a year ago. Used equipment sales increased by 12.1% to $42.4 million compared to $37.8 million a year ago. Parts sales were $30.1 million compared to $30.5 million a year ago. Service revenues increased 15.1% to $17.5 million compared to $15.2 million a year ago.
Gross Profit
Gross profit increased by 4.4% to $128.6 million from $123.1 million in the fourth quarter of 2018. Gross margin was 36.9% for the quarter ended December 31, 2019, as compared to 35.6% for the quarter ended December 31, 2018. On a segment basis, gross margin on total equipment rentals was 45.6% in the fourth quarter of 2019 compared to 46.7% in the fourth quarter of 2018 (as adjusted). (1) Rental margins (as previously reported) were 50.3% in the fourth quarter of 2019 compared to 51.5% a year ago.(1) On average, rental rates were 1.7% higher than rates in the fourth quarter of 2018. Time utilization (based on original equipment cost) was 69.0% in the fourth quarter of 2019 compared to 72.9% a year ago.
Gross margins on new equipment sales were 10.8% in the fourth quarter compared to 12.7% a year ago. Gross margins on used equipment sales were 33.3% compared to 29.1% a year ago. Gross margins on parts sales were 26.1% in the fourth quarter of 2019 compared to 26.0% a year ago. Gross margins on service revenues were 67.6% for the fourth quarter of 2019 compared to 67.9% in the fourth quarter of 2018.
Rental Fleet
At the end of the fourth quarter of 2019, the original acquisition cost of the Company’s rental fleet was $1.9 billion, a 10.2%, or $179.3 million increase from the end of the fourth quarter of 2018. Dollar utilization for the fourth quarter of 2019 was 36.0% compared to 37.0% for the fourth quarter of 2018.
Selling, General and Administrative Expenses
SG&A expenses for the fourth quarter of 2019 were $77.2 million compared with $73.0 million the prior year, a $4.2 million, or 5.8%, increase. SG&A expenses in the fourth quarter of 2019 as a percentage of total revenues were 22.2% compared to 21.1% a year ago. Employee salaries, wages, payroll taxes, and related employee benefits and other employee-related expenses increased $1.4 million, primarily as a result of our acquisition since December 31, 2018, and a larger workforce and higher incentive compensation related to increased profitability. Facility related expenses, primarily rent expense, increased $1.0 million. Outside services increased by $0.9 million. Depreciation and amortization increased to $0.8 million. Expenses related to Greenfield branch expansions increased $0.4 million compared to a year ago.
Income from Operations
Income from operations for the fourth quarter of 2019 decreased by 18.8% to $41.3 million, or 11.9% of revenues, compared to $50.9 million, or 14.7% of revenues, a year ago. Excluding the impairment charge, income from operations was $53.5 million, an increase of 5.1%, or 15.4% of revenues compared to a year ago.
Interest Expense
Interest expense was $16.8 million for the fourth quarter of 2019 compared to $16.6 million a year ago.
Net Income
Net income was $21.9 million, or $0.61 per diluted share, in the fourth quarter of 2019 compared to net income of $25.1 million, or $0.70 per diluted share, in the fourth quarter of 2018. Excluding the impairment charge, net income was $31.9 million, or $0.88 per diluted share. The effective income tax rate was 18.4% in the fourth quarter of 2019 and 27.9% in the fourth quarter of 2018 due to discrete items in the current period.
Adjusted EBITDA
Adjusted EBITDA for the fourth quarter of 2019 increased by 10.7% to $126.8 million compared to $114.6 million in the fourth quarter of 2018. Adjusted EBITDA as a percentage of revenues was 36.4% compared with 33.1% in the fourth quarter of 2018.
FINANCIAL DISCUSSION FOR THE YEAR ENDED DECEMBER 31, 2019:
Revenue
Total revenues increased 8.8%, or $109.4 million, to $1.3 billion in 2019 from $1.2 billion in 2018. Total equipment rental revenues increased by 16.9% to $766.4 million compared to $655.3 million in 2018 (as adjusted). (2) Rental revenues (as previously reported) increased by 17.3% to $694.5 million compared to $592.2 million in 2018. (2) New equipment sales decreased 9.1% to $239.1 million from $262.9 million a year ago. Used equipment sales increased 11.4% to $139.3 million compared to $125.1 million a year ago. Parts sales increased 2.8% to $123.9 million from $120.5 million in 2018. Service revenues increased 7.0% to $67.9 million from $63.5 million a year ago.
Gross Profit
Gross profit increased 13.8%, or $60.6 million, to $499.2 million from $438.5 million in 2018. Gross margin was 37.0% for 2019 compared to 35.4% for 2018. On a segment basis, the gross margin on total equipment rentals was 45.3% compared to 45.1% in 2018 (as adjusted).(2) Rental margins (as previously reported) were 49.8% compared to 49.7% a year ago. (2) On average, 2019 rental rates increased by 2.1% compared to 2018. In 2019, time utilization (based on original equipment cost) was 70.4% compared to 71.6% a year ago.
Gross margins on new equipment sales were 11.6% from 11.7% a year ago. Gross margins on used equipment sales increased to 34.0% compared to 31.2% a year ago. Gross margins on parts sales were 26.6% compared to 26.7% a year ago. Gross margins on service revenues increased to 67.7% in 2019 from 66.4% in 2018.
Selling, General and Administrative Expenses
SG&A expenses for 2019 were $311.0 million compared with $278.3 million in 2018, an increase of $32.7 million, or 11.8%. In 2019, SG&A expenses as a percentage of total revenues were 23.1% compared to 22.5% a year ago. The increase in SG&A expenses was attributable to higher labor, wages, incentives, related employee benefits costs and other employee expenses of $16.8 million due to a larger workforce and higher compensation related to our improved profitability. Facility related expenses increased to $5.3 million. Depreciation and amortization increased by $2.6 million. Legal and professional fees increased by $2.4 million. Promotional expenses increased by $1.5 million. Liability insurance cost increased to $1.4 million. Expenses related to Greenfield branch expansions increased $3.4 million compared to a year ago.
Approximately, $10.6 million of the total increase in SG&A was attributable to branches opened since January 1, 2018, with less than a full year of comparable operations in either or both of the years ended December 31, 2019, and 2018. Included in the $10.6 million is $0.8 million of amortization expense associated with the recognition of intangibles resulting from acquisitions.
Income from Operations
Income from operations for 2019 increased 8.1% to $180.2 million, or 13.4% of revenues, compared to $166.6 million, or 13.5% of revenues, a year ago. Excluding the impairment charge, income from operations was $192.3 million, an increase of 15.4%, or 14.3% of revenues compared to a year ago.
Interest Expense
Interest expense in 2019 was $68.3 million, a $4.6 million increase from $63.7 million a year ago.
Net Income
Net income was $87.2 million, or $2.42 per diluted share, compared to net income of $76.6 million, or $2.13 per diluted share, in 2018. Excluding the impairment charge, net income was $96.4 million, or $2.67 per diluted share. The effective income tax rate was 24.7% in 2019 compared to 26.8% in 2018.
Adjusted EBITDA
Adjusted EBITDA for 2019 increased 16.7% to $473.2 million from $405.4 million in 2018. Adjusted EBITDA as a percentage of revenues was 35.1% compared with 32.7% in 2018.
Non-GAAP Financial Measures
This press release contains certain Non-GAAP measures (EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share and recasting of certain revenue and cost of revenue 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.
