H&E Equipment Services Reports Third Quarter 2008 Results
- SEE ALSO: ALL H&E ARTICLES
BATON ROUGE, La. November 6, 2008: H&E Equipment Services, Inc. today announced operating results for the third quarter ended September 30, 2008.
THIRD QUARTER 2008 SUMMARY
"Our strong presence in regions with exposure to petrochemical, oil patch, mining and energy sectors and our integrated business model are clearly helping to minimize the impact to our business from the numerous macroeconomic issues occurring in the country today,” said John Engquist, H&E Equipment Services’ president and chief executive officer. “There is no doubt the non-residential construction industry has slowed as a result of the unstable credit markets and other economic factors, yet our strong presence in the industrial sector resulted in solid financial performance during the third quarter.”
“We believe our business is very well positioned to navigate the current conditions in the market,” Engquist continued. “We have a strong balance sheet, are well capitalized and our debt carries a low interest rate and maturity dates well into the future. While we expect a difficult market to continue during the remainder of this year and into 2009 due to tight credit markets and economic slowdown, we are confident in our ability to make the necessary business adjustments to maximize our financial performance.”
“Although we are not seeing revenue growth as a result of the deterioration in the overall economy, our margins for this quarter improved on a sequential basis at the gross profit, EBIT, EBITDA and earnings per share level,” commented Leslie Magee, H&E Equipment Services’ chief financial officer. “Our product support business continues to show strength. This segment of our business has historically performed very well during periods of economic softness. We remain committed to reducing our capital fleet expenditures which will generate additional free cash flow. We plan to use excess cash to reduce debt and/or repurchase shares. With a challenging business climate, weakening visibility into future market demand, and times of uncertain access to credit, our focus continues to be cash generation and maintaining a strong, conservative balance sheet.”
FINANCIAL DISCUSSION FOR THIRD QUARTER 2008
Total revenues grew 3.0% to $278.6 million from $270.6 million in the third quarter of 2008. Third quarter revenues included $38.8 million from the Mid-Atlantic region compared to $10.1 million a year ago, reflecting one month’s results of the acquisition which closed on September 1, 2007. Equipment rental revenues increased 3.4% to $78.2 million compared with $75.6 million in the third quarter of 2007. Third quarter 2008 equipment rental revenues included $4.5 million of rental revenues from the Mid-Atlantic region compared to $1.3 million a year ago. New equipment sales increased 3.3% to $97.8 million from $94.7 million due to new equipment sales of $20.5 million from the Mid-Atlantic region compared to $3.1 million of new equipment sales from the Mid-Atlantic region a year ago. Used equipment sales decreased 10.3% to $39.9 million compared to $44.5 million in the third quarter of 2007. The decrease in used equipment sales was partially offset by an increase in used sales from the Mid-Atlantic region to $6.4 million from $2.9 million a year ago. Parts sales grew 15.9% to $31.0 million from $26.7 million in the third quarter of 2007. Service revenues increased 8.6% to $18.3 million compared with $16.9 million in the third quarter of 2007. Product support revenue increased due to parts and service sales of $6.4 million in the Mid-Atlantic region compared to $2.7 million a year ago and increased demand.
Gross profit decreased 1.7% to $82.5 million from $83.9 million in the third quarter of 2007. Gross margin was 29.6% for the quarter ended September 30, 2008 as compared to 31.0% for the quarter ended September 30, 2007. The reduced gross margin percentage in the current quarter is primarily due to the impact of a 16.9% gross margin on $38.8 million of revenues from the Mid-Atlantic operations. This lower gross margin is largely due to business mix, a continued challenging Mid-Atlantic market, and a lower margin rental segment in the Mid-Atlantic market due to fleet mix, utilization and rates. The gross profit contribution from the Mid-Atlantic region negatively impacted the Company’s consolidated gross margin by 210 basis points.
On a segment basis, gross margin on rentals decreased to 50.3% from 52.9% in the third quarter of 2007 due to increased depreciation costs, declines in rental rates and time utilization, and the impact from the Mid-Atlantic rental operations. On average and excluding rates in the Mid-Atlantic region, rental rates declined 2.0% as compared to the third quarter of 2007. Time utilization decreased to 67.4% from 70.7% a year ago.
Gross margins on new equipment sales were 13.4% as compared to 13.9% in the third quarter a year ago due to the mix of equipment sold. Gross margins on used equipment sales decreased to 23.3% from 24.2% a year ago due to lower margin on fleet sales in the Mid-Atlantic region. Gross margin on parts sales increased to 29.5% from 29.3%. Gross margin on service revenues increased to 64.0% from 63.7% in the third quarter of 2007 due to revenue mix.
At the end of the third quarter of 2008, the original acquisition cost of the Company’s rental fleet was $806.3 million, up $26.4 million from $779.9 million at the end of the third quarter of 2007. Dollar utilization was 38.8%, including results from the Mid-Atlantic region, compared to 41.9% for the third quarter of 2007. Dollar utilization for the three months ended September 30, 2008 was 39.8% excluding the Mid-Atlantic region. Dollar returns decreased reflecting lower year-over-year average rental rates and lower time utilization.
Selling, General and Administrative Expenses
SG&A expenses for the third quarter of 2008 were $45.6 million compared with $41.6 million last year, a $4.0 million, or 9.5%, increase. Third quarter SG&A expenses included $4.8 million from the Mid-Atlantic region. Costs have increased primarily due to labor and benefit costs to support the growth of the Company. SG&A expenses also grew by $0.6 million due to the amortization of intangibles associated with the acquisition in the Mid-Atlantic region. For the third quarter of 2008, SG&A expenses increased as a percentage of total revenues to 16.4% as compared with 15.4% last year.
Income from Operations
Income from operations for the third quarter of 2008 decreased 12.3% to $37.2 million compared with $42.4 million a year ago.
Interest expense for the third quarter of 2008 increased $0.5 million to $9.5 million from $9.0 million primarily due to an increase in average borrowings on the Company’s senior secured credit facility.
Net income decreased to $17.6 million, or $0.50 per diluted share, from $20.2 million, or $0.53 per diluted share. The effective income tax rate decreased to 36.9% in the third quarter of 2008 as compared to 39.4% last year.
EBITDA for the third quarter of 2008 decreased $2.0 million to $67.2 million from $69.2 million in the third quarter of 2007. EBITDA as a percentage of revenues was 24.1% compared with 25.6% in the third quarter of 2007. For the third quarter, the Mid-Atlantic region contributed $3.4 million of EBITDA, or an 8.8% EBITDA margin compared to $1.7 million of EBITDA, or a 16.8% EBITDA margin a year ago. Excluding the three month results from the Mid-Atlantic region, EBITDA margins increased to 26.6% for the third quarter of 2008 compared to 25.9% a year ago.
“In spite of today’s challenging and uncertain business environment, we are reaffirming our full year guidance for EBITDA and EPS and we are lowering our revenue guidance primarily to adjust for the expected delay in fourth quarter crane shipments,” said Engquist.
Non-GAAP Financial Measures
This press release contains certain Non-GAAP measures (EBITDA). Please refer to our Current Report on Form 8-K for a description of our use of these measures. EBITDA as calculated by the Company is not necessarily comparable to similarly titled measures reported by other companies. Additionally, these Non-GAAP measures are not measurements of financial performance or liquidity under GAAP and should not be considered as alternatives to the Company's other financial information determined under GAAP.
The Company’s management will hold a conference call to discuss third quarter results today, November 6, 2008, at 10:00 a.m. (Eastern Time). To listen to the call, participants should dial 913-312-0411 approximately 10 minutes prior to the start of the call. A telephonic replay will become available after 1:00 p.m. (Eastern Time) on November 6, 2008, and will continue through November 14, 2008, by dialing 719-457-0820 and entering confirmation code 7320492.
The live broadcast of the Company’s quarterly conference call will be available online at H&E EQUIPMENT or EARNINGS on November 6, 2008, 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 H&E EQUIPMENT prior to the call. The presentation materials will be in Adobe Acrobat format.