H&E Equipment to "keep doing what we've been doing," now that bondholders nix bigger credit line

By Paul Deckelman

New York, May 19 - H&E Equipment Services LLC was hoping to line up a larger credit facility that might allow it to expand its operations or perhaps pursue acquisitions within the fragmented construction and materials handling equipment industry. But now that the company's bondholders have failed to give their OK to such an expansion, it's on to Plan B - which the company's president and chief executive officer describes as "keep doing what we've been doing and run our business."

Having more resources at its disposal for possible expansion or acquisitions no doubt would have been nice, and John M. Enquist told analysts on a conference call Thursday that since that isn't going to happen, "it will be very limited what we do in that area at this point without the increase in our senior credit facility."

That having been said, however, Enquist said that "Plan B is to continue doing what we're doing, and we have the capacity to conservatively grow our fleet. As you can see, we've done that, we've been able to access some additional fleet, and by year end, we'll increase our [purchase of new equipment for the rental fleet] by that $10 million in growth capex."

The company is coming off what its chief called "a strong quarter," revenues for the first quarter ended March 31 increased by $16.6 million, or 14.8%, to $128.6 million, versus $112 million for the first quarter of 2004; the company swung to a $1 million net profit from a $9 million year-earlier loss; and EBITDA increased by $10.4 million, or 74%, to $24.4 million, from $14 million a year earlier.

Speaking on a call to discuss the Baton Rouge, La.-based heavy equipment sales, rental and service company's first-quarter financial results, Enquist noted that non-residential construction, the primary driver of H&E's business, was increasing constantly, particularly in such key markets where the company operates such as the Las Vegas area, which he called simply "unbelievable" in its growth, in Florida and in the Gulf Coast region.

"It is our belief that we will continue to see rental rates improve throughout the remainder of the year. 2005 should be a very strong year for our company," he declared.

Sees EBITDA over $100 million

He said that given the fact that the first quarter is historically H&E's softest quarter of the year, the robust EBITDA improvement seen last quarter is a signal that EBITDA for the full year will be over $100 million. Frees cash flow for the year, he said, would be "flat, neither negative nor positive."

In April, H&E announced that it had begun soliciting the consent of the holders of its 11½% senior secured notes due 2012 and 12½% senior subordinated notes due 2013 to proposed changes in their respective indentures, which would have boosted the amount of debt the company would be allowed to incur under its senior revolving credit facility to $275 million from the present $150 million limit. That would have allowed the company to enter into a new five-year facility increasing the amount available to $250 million, including a sub-facility of $30 million of letters of credit, subject to the facility's borrowing base.

The increased credit facility "would have permitted the company to take advantage of its greater borrowing base to support its growth strategy," the acting chief financial officer, Leslie S. Magee, said on the call.

The noteholders were also being asked to waive certain defaults under the indenture related to the company's inability to file its 2004 annual report to the Securities and Exchange Commission on time, and to approve an extension to Sept. 30 of the time the company would have to file that report and otherwise fulfill its reporting requirements - waivers and extensions which the senior credit facilities lenders had already granted. However, despite having offered a $12.50 per $1,000 principal amount consent payment and having subsequently extended the original April 21 consent deadline, the company was unable to obtain a sufficient amount of noteholder consents, and the solicitation expired on May 12 without further extension.

Looking at opportunities, options

Asked by an analyst on the conference call whether the company might seek to increase its available funding by some other method not requiring the noteholder consents, such as, for instance, issuing additional subordinated notes as an add-on to its existing 121/2s, Enquist merely replied that "we're always evaluating our options there and we continue to do so."

Even without the additional liquidity that the new credit facility would have provided, Enquist said that the company might still consider some expansion or acquisition activities, albeit on a considerably smaller scale than might have been possible otherwise.

"We're in a very positive environment, we've got some markets we'd like to take a look at from a greenfield standpoint, contiguous markets to us that would allow for some expansion. There's a lot of opportunities that are going to come forward from an acquisition standpoint. We're not elephant hunters, we're not out to do something big, but this is a very fragmented industry and I believe there are some opportunities with small companies out there that would be accretive to us," he said.

Magee told participants on the call that as of the end of the first quarter, H&E had total debt on its balance sheet of $300.3 million, consisting of $57.1 million drawn against its revolver, $198.8 million of the 11½% senior secured notes, $43.6 million of the 12½% subordinated notes, and $800,000 of capital leases.

Revolver availability

There was also a total of $27.1 million of outstanding letters of credit, which count against the revolver. H&E, she said, was in compliance with its financial covenants - thanks to the waivers of the timely reporting requirements - and the full revolver was therefore undiminished. Between the $57.1 million balance already outstanding and the $27.1 million of letters of credit, the company had $65.8 million in borrowing availability as of the end of the quarter.

Asked on the credit call what level of additional revolver spending and revolver availability he would feel comfortable with, Enquist replied that "with the level of spending we see year, our analysis shows that we're going to maintain about $60 million of availability throughout the year. I would not want to get much below that."

Magee said that previously announced re-audits of the company's 2002 and 2003 financial statements and the attempts to complete its 2004 audit were continuing, and that H&E was "working diligently to complete its audit as soon as is practicable."

The company expects to complete its audits, and to complete its 2004 and first-quarter reporting requirements by the Sept. 30 deadline extension granted by the credit facility lenders. It expects to file its 10-Q report for the first quarter and thus satisfy at that time any remaining first-quarter reporting requirements under the credit facility and the bond indentures shortly after the 2004 10-K is filed with the SEC.

Magee said H&E was pleased with cooperation it has received from the credit facility lenders.

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