H&E Equipment Services Reports 19.1% drop in third quarter compared same time last year
H&E Equipment Services, Inc. just announced results for the third quarter ended September 30, 2020.
THIRD QUARTER 2020 SUMMARY
- Revenues decreased by 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 by 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 by 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.
- The average rental fleet age on September 30, 2020, was 40.0 months compared to an industry average age of 50.7 months.
Brad Barber
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 by 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 by 18.8% to $165.8 million compared to $204.1 million in the third quarter of 2019. Rental revenues decreased by 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 by 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 by 13.6% to $15.6 million compared to $18.1 million a year ago.
Gross Profit
Gross profit decreased by 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, the 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.
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| 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, a 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 by $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 by 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.
