H&E Equipment Services(HEES) - 2023 Q4 - Annual Report

PART I Business Overview H&E Equipment Services, Inc. is a leading equipment rental company with 137 branches, transitioning to a pure-play model - H&E Equipment Services, Inc. was founded in 1961 and operates 137 branch facilities in 30 states, primarily focusing on equipment rentals[16][17][18] - The company is transitioning to operate purely as an equipment rental company, having historically operated in both rental and dealer channels[18][19] Rental Fleet Overview (as of December 31, 2023) | Metric | Value | | :-------------------------- | :------------------- | | Number of pieces of equipment | 61,044 | | Original acquisition cost | $2.8 billion | | Average age | 39.7 months | - In 2023, approximately 99.3% of used sales revenues were derived from sales of rental fleet[21] - Key competitive strengths include an integrated platform, a high-quality multipurpose fleet, diverse customer markets, complementary parts and services, a well-developed infrastructure, strong supplier relationships, customized IT systems (including CONNECT digital platform), strong customer relationships (~44,200 customers as of Dec 31, 2023), and an experienced management team[29][30][31][32][33][34][35] - Strategic initiatives include managing the rental equipment lifecycle, expanding specialty rental product offerings (e.g., trench safety, pump and power), increasing product availability through branch expansion, executing strategic divestitures (e.g., Komatsu distribution rights in 2022, crane business in 2021), and pursuing selective acquisitions (e.g., OSR in 2022, Giffin in 2023)[36][37][38][39][40][41] - As of December 31, 2023, the company had approximately 2,765 employees, with a strong focus on health and safety (LIVESAFE program, 2023 lost time incident rate of 0.10), diversity (29% people of color, 14% female), and training (average 54 hours/employee/year)[51][53][55][56] - H&E is committed to ESG, with 34% of its rental units being battery and electricity powered as of December 31, 2023, and efforts to reduce carbon footprint through telematics tracking[58][59] Risk Factors H&E faces operational, competitive, strategic, liquidity, regulatory, and general business risks, including economic downturns and cybersecurity - Operational risks include declines in construction/industrial activities, economic downturns, heightened inflation, and supply chain disruptions impacting equipment availability and costs[62][65][76] - Competitive risks arise from a highly fragmented industry, with some competitors possessing significantly greater financial resources, and the need to innovate technology infrastructure against improving competitor systems, including AI[73][74] - The company faces residual value risk on rental equipment disposition, with 2023 sales at 255.0% of net book value, and increased operating costs as its fleet ages[78][79] - Strategic growth through acquisitions and new locations is subject to risks such as difficulty identifying attractive candidates/sites, significant transaction expenses, integration challenges, and potential diversion of management resources[88][90][95][97] Indebtedness and Liquidity (as of December 31, 2023) | Metric | Amount | | :-------------------------- | :------------------- | | Total outstanding indebtedness | $1.4 billion | | Credit Facility availability (Feb 15, 2024) | $460.3 million | | Cash and cash equivalents | $8.5 million | - Variable rate indebtedness under the Credit Facility exposes the company to interest rate risk, which could significantly increase debt service obligations[110][112] - Compliance with diverse federal, state, and local regulations, including environmental, safety, and emerging AI laws, could increase operational costs and affect business[116][117][122] - Increased investor and customer focus on ESG and climate-related matters could impact investment attractiveness and demand if the company fails to meet evolving standards[120] - Cybersecurity threats, amplified by AI technologies, pose risks to information systems, potentially leading to operational disruptions, data breaches, and reputational damage[124][125][127] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC Item 1C. Cybersecurity H&E's operations rely on technology, facing sophisticated AI-amplified cyber threats, managed by a NIST-based program with Board oversight - The company's operations are dependent on its technology network infrastructure and information systems, which are susceptible to cybersecurity threats[135] - Cybersecurity threats are becoming more sophisticated, with increased funding from state actors and the rapid evolution of AI and machine-learning technologies[135] - H&E utilizes the National Institute of Standards and Technology (NIST) framework for its cybersecurity management, including vulnerability assessments, penetration testing, disaster recovery exercises, and employee training[136] - The cybersecurity program is managed by the CIO and IT Security Team, with oversight from the Board of Directors, specifically the Audit Committee, which receives annual and semi-annual updates[137][139] Item 2. Properties H&E operates 137 branch facilities across 30 states, mostly leased, with headquarters in Baton Rouge, Louisiana - As of December 31, 2023, H&E had 137 branch facilities in 30 states[140] - Of these facilities, 125 are leased and 12 are owned[140] - Branch operating facilities are typically staffed with 10 to over 50 people and provide 24-hour, seven-day-per-week service[140] - The corporate headquarters in Baton Rouge, Louisiana, employs approximately 381 people[141] Item 3. Legal Proceedings Legal proceedings information is incorporated by reference from Note 13 to the Consolidated Financial Statements - Information on legal proceedings is detailed in Note 13 to the Consolidated Financial Statements[143] Item 4. Mine Safety Disclosures This item is not applicable to the company PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities H&E common stock trades on Nasdaq (HEES), with 53 stockholders, paying $1.10 per share quarterly dividends - H&E's common stock trades on the Nasdaq Global Market under the symbol 'HEES'[146] - As of December 31, 2023, there were 53 stockholders of record[146] Quarterly Cash Dividends Paid | Year | Dividends per Share | Total Dividends (Millions) | | :--- | :------------------ | :------------------------- | | 2023 | $1.10 | $40.0 | | 2022 | $1.10 | $39.9 | Cumulative Five-Year Total Stockholder Return (12/31/2018 to 12/31/2023) | Index | Value at 12/31/18 | Value at 12/31/23 | | :-------------------------- | :---------------- | :---------------- | | H&E Equipment Services, Inc. | $100.00 | $304.99 | | Russell 2000 Index | $100.00 | $160.85 | | Peer Group 2023 | $100.00 | $342.99 | | Peer Group 2022 | $100.00 | $382.05 | Item 6. [Reserved] This item is reserved and not applicable Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations H&E reported strong 2023 financial performance with 18.1% revenue growth to $1.5 billion, driven by rentals and improved net income - H&E Equipment Services, Inc. is one of the largest rental equipment companies, operating 137 branch locations across 30 states, and has transitioned to a pure-play rental company[157][158][159] - The company completed the acquisition of Giffin Equipment in November 2023 and One Source Equipment Rentals (OSR) in October 2022, while divesting its Komatsu distributorship in December 2022 and crane business in October 2021[161][162][163] - H&E has five reportable segments: equipment rentals (primary focus), sales of rental equipment, sales of new equipment, parts sales, and services revenue[164] Key Financial Highlights (2023 vs. 2022) | Metric | 2023 (Thousands) | 2022 (Thousands) | Change (Thousands) | % Change | | :----------------------------------- | :--------------- | :--------------- | :----------------- | :------- | | Total Revenues | $1,469,216 | $1,244,518 | $224,698 | 18.1% | | Equipment Rental Revenues | $1,186,152 | $956,042 | $230,110 | 24.1% | | Sales of Rental Equipment Revenues | $165,074 | $90,885 | $74,189 | 81.6% | | Sales of New Equipment Revenues | $39,099 | $92,526 | $(53,427) | (57.7%) | | Parts, Service and Other Revenues | $78,891 | $105,065 | $(26,174) | (24.9%) | | Total Gross Profit | $684,461 | $555,163 | $129,298 | 23.3% | | Total Gross Profit Margin | 46.6% | 44.6% | 2.0% | - | | SG&A Expenses | $405,432 | $343,845 | $61,587 | 17.9% | | Impairment of Goodwill | $5,714 | $0 | $5,714 | - | | Interest Expense | $60,891 | $54,033 | $6,858 | 12.7% | | Net Income from Continuing Operations | $169,293 | $133,694 | $35,599 | 26.6% | | Basic EPS from Continuing Operations | $4.69 | $3.72 | $0.97 | 26.1% | Cash Flow Summary (2023 vs. 2022) | Cash Flow Type | 2023 (Thousands) | 2022 (Thousands) | Change (Thousands) | | :--------------------------------- | :--------------- | :--------------- | :----------------- | | Net cash provided by operating activities | $405,483 | $313,238 | $92,245 | | Net cash used in investing activities | $(608,762) | $(546,537) | $(62,225) | | Net cash provided by (used in) financing activities | $130,449 | $(42,667) | $173,116 | | Cash and cash equivalents, end of year | $8,500 | $81,330 | $(72,830) | - The original acquisition cost of the gross rental fleet increased by $432.6 million (18.3%) in 2023, and the average age of the rental fleet decreased by 3.9 months, with average rental rates increasing by 5.6%[183] Contractual Cash Obligations (as of December 31, 2023) | Obligation Type | Total (Thousands) | Due in 2024 (Thousands) | Due 2025-2026 (Thousands) | Due 2027-2028 (Thousands) | Thereafter (Thousands) | | :--------------------------------- | :---------------- | :---------------------- | :------------------------ | :------------------------ | :--------------------- | | Senior unsecured notes | $1,250,000 | $0 | $0 | $1,250,000 | $0 | | Interest payments on senior unsecured notes | $242,188 | $48,438 | $96,875 | $96,875 | $0 | | Senior secured credit facility | $181,642 | $0 | $0 | $181,642 | $0 | | Interest payments on senior secured credit facility | $61,609 | $15,082 | $30,164 | $16,363 | $0 | | Operating lease liabilities | $234,222 | $25,875 | $66,454 | $61,690 | $80,203 | | Other lease commitments | $29,799 | $1,427 | $4,904 | $5,245 | $18,223 | | Finance lease liabilities | $3,871 | $423 | $874 | $915 | $1,659 | | Other long-term obligations | $2,708 | $2,708 | $0 | $0 | $0 | | Total contractual cash obligations | $2,006,039 | $93,953 | $199,271 | $1,612,730 | $100,085 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk H&E's earnings are exposed to interest rate risk from its $750.0 million SOFR-based Senior Secured Credit Facility, with $181.6 million outstanding - The company's earnings are affected by changes in interest rates due to variable rate borrowings under its Credit Facility, which is based on SOFR[254] - As of December 31, 2023, $181.6 million was outstanding under the Credit Facility, with $460.3 million available as of February 15, 2024[255] - H&E has not historically engaged in derivatives or other financial instruments for trading, speculative, or hedging purposes[255] Item 8. Financial Statements and Supplementary Data This section presents H&E's audited consolidated financial statements for 2021-2023, showing significant growth in assets, revenues, and net income - BDO USA, P.C. issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting for the period ended December 31, 2023[257][258] - Revenue recognition for equipment rental, sales of rental equipment, and sales of new equipment was identified as a critical audit matter[263][264] Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2023 (Thousands) | 2022 (Thousands) | % Change | | :----------------------------------- | :--------------- | :--------------- | :------- | | Total Assets | $2,639,886 | $2,291,699 | 15.2% | | Rental Equipment, Net | $1,756,578 | $1,418,951 | 23.8% | | Total Liabilities | $2,105,597 | $1,890,657 | 11.4% | | Senior Secured Credit Facility | $181,642 | $0 | - | | Senior Unsecured Notes, Net | $1,242,852 | $1,241,409 | 0.1% | | Total Stockholders' Equity | $534,289 | $401,042 | 33.2% | Consolidated Statements of Income Highlights (Years Ended December 31) | Metric | 2023 (Thousands) | 2022 (Thousands) | 2021 (Thousands) | | :----------------------------------- | :--------------- | :--------------- | :--------------- | | Total Revenues | $1,469,216 | $1,244,518 | $1,062,797 | | Gross Profit | $684,461 | $555,163 | $415,363 | | Net Income from Continuing Operations | $169,293 | $133,694 | $60,564 | | Basic EPS from Continuing Operations | $4.69 | $3.72 | $1.67 | Consolidated Statements of Cash Flows Highlights (Years Ended December 31) | Metric | 2023 (Thousands) | 2022 (Thousands) | 2021 (Thousands) | | :--------------------------------- | :--------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $405,483 | $313,238 | $259,572 | | Net cash used in investing activities | $(608,762) | $(546,537) | $(170,975) | | Net cash provided by (used in) financing activities | $130,449 | $(42,667) | $(42,183) | | Cash and cash equivalents, end of year | $8,500 | $81,330 | $357,296 | - In 2023, H&E acquired Giffin Equipment for $31.3 million and in 2022, acquired One Source Equipment Rentals (OSR) for $136.7 million. The company also divested its Komatsu earthmoving distributorship in 2022 for $29.2 million and its crane business in 2021 for $135.9 million (reported as discontinued operations)[378][384][393][394] - A goodwill impairment charge of $5.7 million was recognized in 2023 for the Parts Sales reporting unit due to a sustained decline in volume and revenue[196][328] - As of December 31, 2023, the company had $1.25 billion in 3.875% Senior Unsecured Notes due 2028 and $181.6 million outstanding under its $750.0 million Senior Secured Credit Facility, which matures in February 2028[412][413][420][429][431] - The effective income tax rate for 2023 was 24.2%, with federal net operating loss carryforwards of approximately $285.9 million and a $3.0 million valuation allowance for certain state tax credits[229][442][443] - Subsequent to year-end, H&E acquired Precision Rentals for $117.6 million on January 1, 2024, and declared a quarterly dividend of $0.275 per share on February 9, 2024[460][461] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure Item 9A. Controls and Procedures Management and BDO USA, P.C. concluded that H&E's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2023[465] - No material changes in internal control over financial reporting occurred during the fourth quarter ended December 31, 2023[467] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[472] - BDO USA, P.C. issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[475] Item 9B. Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fiscal quarter ended December 31, 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fiscal quarter ended December 31, 2023[482] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[485] - The company has a code of conduct applicable to its CEO and CFO, available on its website[486] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the Proxy Statement - Executive compensation information is incorporated by reference from the Proxy Statement[487] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the Proxy Statement - Security ownership information is incorporated by reference from the Proxy Statement[488] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the Proxy Statement[489] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[490] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits, including audited consolidated financial statements and Schedule II - The report includes consolidated financial statements (Balance Sheets, Statements of Income, Stockholders' Equity, Cash Flows, and Notes) and Schedule II—Valuation and Qualifying Accounts[493][494] - A comprehensive list of exhibits is provided in the Exhibit Index[496][497] Item 16. Form 10-K Summary This item indicates that no summary is provided within the Form 10-K itself SIGNATURES The Form 10-K report was duly signed by H&E Equipment Services, Inc. executives and directors on February 22, 2024 - The report was signed by Bradley W. Barber (Chief Executive Officer), Leslie S. Magee (Chief Financial Officer), John M. Engquist (Executive Chairman of the Board), and other Directors[508][509] - The signing date for the report was February 22, 2024[507][509]