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H&E EQUIPMENT SERVICES, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 31, 2014

The following discussion summarizes the financial position of H&E Equipment Services, Inc. and its subsidiaries as of June 30, 2014, and its results of operations for the three and six month periods ended June 30, 2014, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the audited consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the year ended December 31, 2013. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties (see discussion of "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013.



Overview

Background

As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers' varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and services operations. As of July 24, 2014, we operated 69 full-service facilities throughout the Intermountain, Southwest, Gulf Coast, West Coast, Southeast and Mid-Atlantic regions of the United States. Our work force includes distinct, focused sales forces for our new and used equipment sales and rental operations, highly skilled service technicians, product specialists and regional managers. We focus our sales and rental activities on, and organize our personnel principally by, our four core equipment categories. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our rental and sales force and strengthen our customer relationships. In addition, we have branch managers for each location who are responsible for managing their assets and financial results. We believe this fosters accountability in our business and strengthens our local and regional relationships. Through our predecessor companies, we have been in the equipment services business for approximately 53 years. H&E Equipment Services L.L.C. ("H&E LLC") was formed in June 2002 through the business combination of Head & Engquist Equipment, LLC ("Head & Engquist"), a wholly-owned subsidiary of Gulf Wide Industries, L.L.C. ("Gulf Wide"), and ICM Equipment Company L.L.C. ("ICM"). Head & Engquist, founded in 1961, and ICM, founded in 1971, were two leading regional, integrated equipment service companies operating in contiguous geographic markets. In the June 2002 transaction, Head & Engquist and ICM were merged with and into Gulf Wide, which was renamed H&E LLC. Prior to the combination, Head & Engquist operated 25 facilities in the Gulf Coast region, and ICM operated 16 facilities in the Intermountain region of the United States. Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and wholly-owned subsidiary of H&E Holdings L.L.C. ("H&E Holdings"), and immediately prior to the closing of our initial public offering, on February 3, 2006, H&E LLC and H&E Holdings merged with and into us (H&E Equipment Services, Inc.), with us surviving the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer existed under operation of law pursuant to the reincorporation merger.



Critical Accounting Policies

Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2013, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no changes to these critical accounting policies and estimates during the quarter ended June 30, 2014. These policies include, among others, revenue recognition, the adequacy of the allowance for doubtful accounts, the propriety of our estimated useful life of rental equipment and property and equipment, the potential impairment of long-lived assets including goodwill and intangible assets, obsolescence reserves on inventory, the allocation of purchase price related to business combinations, reserves for claims, including self-insurance reserves, and deferred income taxes, including the valuation of any related deferred tax assets. 22



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Information regarding our other significant accounting policies is included in note 2 to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2013 and in note 2 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Business Segments We have five reportable segments because we derive our revenues from five principal business activities: (1) equipment rentals; (2) new equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based upon how we allocate resources and assess performance. In addition, we also have non-segmented revenues and costs that relate to equipment support activities.



Equipment Rentals. Our rental operation primarily rents our four core

types of construction and industrial equipment. We have a well-maintained

rental fleet and our own dedicated sales force, focused by equipment type.

We actively manage the size, quality, age and composition of our rental

fleet based on our analysis of key measures such as time utilization

(which we analyze as equipment usage based on: (1) the number of rental

equipment units available for rent, and (2) as a percentage of original

equipment cost), rental rate trends and targets, rental equipment dollar

utilization and maintenance and repair costs, which we closely monitor. We

maintain fleet quality through regional quality control managers and our

parts and services operations. New Equipment Sales. Our new equipment sales operation sells new equipment

in all of our four core product categories. We have a retail sales force focused by equipment type that is separate from our rental sales force. Manufacturer purchase terms and pricing are managed by our product specialists.



Used Equipment Sales. Our used equipment sales are generated primarily

from sales of used equipment from our rental fleet, as well as from sales

of inventoried equipment that we acquire through trade-ins from our

equipment customers and through selective purchases of high quality used

equipment. Used equipment is sold by our dedicated retail sales force. Our

used equipment sales are an effective way for us to manage the size and

composition of our rental fleet and provide a profitable distribution

channel for disposal of rental equipment. Parts Sales. Our parts business sells new and used parts for the equipment

we sell and also provides parts to our own rental fleet. To a lesser degree, we also sell parts for equipment produced by manufacturers whose



products we neither rent nor sell. In order to provide timely parts and

services support to our customers as well as our own rental fleet, we maintain an extensive parts inventory.



Services. Our services operation provides maintenance and repair services

for our customers' equipment and to our own rental fleet at our facilities

as well as at our customers' locations. As the authorized distributor for

numerous equipment manufacturers, we are able to provide service to that equipment that will be covered under the manufacturer's warranty. Our non-segmented revenues and costs relate to equipment support activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to reportable segments.



For additional information about our business segments, see note 8 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Revenue Sources We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals and new equipment sales account for more than half of our total revenues. For the six month period ended June 30, 2014, approximately 35.8% of our total revenues were attributable to equipment rentals, 30.9% of our total revenues were attributable to new equipment sales, 11.7% were attributable to used equipment sales, 10.5% were attributable to parts sales, 5.7% were attributable to our services revenues and 5.4% were attributable to non-segmented other revenues. The equipment that we sell, rent and service is principally used in the construction industry, as well as by companies for commercial and industrial uses such as plant maintenance and turnarounds, as well as in the petrochemical and energy sectors. As a 23



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result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for new and used equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions and general economic conditions. For a discussion of the impact of seasonality on our revenues, see "Seasonality" below. Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze: (1) as equipment usage based on the number of rental equipment units available for rent and (2) as a percentage of original equipment cost), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations. We recognize revenue from equipment rentals in the period earned on a straight-line basis, over the contract term, regardless of the timing of the billing to customers. New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-house retail sales force focused by product type. While sales of new equipment are impacted by the availability of equipment from the manufacturer, we believe our status as a leading distributor for some of our key suppliers improves our ability to obtain equipment. New equipment sales are an important component of our integrated model due to customer interaction and service contact and new equipment sales also lead to future parts and services revenues. We recognize revenue from the sale of new equipment at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured. Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet. The remainder of our used equipment sales revenues comes from the sale of inventoried equipment that we acquire through trade-ins from our equipment customers and selective purchases of high-quality used equipment. Our policy is not to offer specified price trade-in arrangements on equipment for sale. Sales of our rental fleet equipment allow us to manage the size, quality, composition and age of our rental fleet, and provide us with a profitable distribution channel for the disposal of rental equipment. We recognize revenue for the sale of used equipment at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured. Parts Sales. We generate revenues from the sale of new and used parts for equipment that we rent or sell, as well as for other makes of equipment. Our product support sales representatives are instrumental in generating our parts revenues. They are product specialists and receive performance incentives for achieving certain sales levels. Most of our parts sales come from our extensive in-house parts inventory. Our parts sales provide us with a relatively stable revenue stream that is generally less sensitive to the economic cycles that tend to affect our rental and equipment sales operations. We recognize revenues from parts sales at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectibility is reasonably assured. Services. We derive our services revenues from maintenance and repair services to customers for their owned equipment. In addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance services to industrial customers. Our after-market service provides a high-margin, relatively stable source of revenue through changing economic cycles. We recognize services revenues at the time services are rendered and collectibility is reasonably assured. Our non-segmented revenues relate to equipment support activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to reportable segments. We recognize non-segmented other revenues at the time of billing and after the related services have been provided. 24



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Principal Costs and Expenses

Our largest expenses are the costs to purchase the new equipment we sell, the costs associated with the used equipment we sell, rental expenses, rental depreciation and costs associated with parts sales and services, all of which are included in cost of revenues. For the six month period ended June 30, 2014, our total cost of revenues was approximately $355.8 million. Our operating expenses consist principally of selling, general and administrative expenses. For the six month period ended June 30, 2014, our selling, general and administrative expenses were $100.7 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable segments.



We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result in additional income tax expense based on probable outcomes of such matters.

Cost of Revenues:

Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a seven year estimated useful life. Attachments and other smaller types of equipment are depreciated over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment. Rental Expense. Rental expense represents the costs (excluding depreciation) associated with rental equipment, including, among other things, the cost of servicing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of rental equipment.



New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net of any amount of credit given to the customer towards the equipment for trade-ins.

Used Equipment Sales. Cost of used equipment sold consists of the net book value of rental equipment for used equipment sold from our rental fleet, the equipment costs for used equipment we purchase for sale or the trade-in value of used equipment that we obtain from customers in equipment sales transactions.



Parts Sales. Cost of parts sales represents costs attributable to the sale of parts directly to customers.

Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.



Non-Segmented Other. These expenses include costs associated with providing transportation, hauling, parts freight, and damage waiver including, among other items, drivers' wages, fuel costs, shipping costs, and our costs related to damage waiver policies.

Selling, General and Administrative Expenses:

Our selling, general and administrative ("SG&A") expenses include sales and marketing expenses, payroll and related benefit costs, insurance expenses, legal and professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with intangible assets. These expenses are not generally allocated to our reportable segments. Interest Expense: Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate amounts outstanding under our revolving senior secured credit facility (the "Credit Facility"), senior unsecured notes due 2022 and our capital lease obligations, as well as our extinguished senior unsecured notes due 2016 (the "Old Notes") for the periods during which such Old Notes were outstanding. Interest expense also includes interest on our outstanding manufacturer flooring plans payable which are used to finance inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs is also included in interest expense. 25



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Principal Cash Flows

We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities, manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also "Liquidity and Capital Resources" below). Our management of our working capital is closely tied to operating cash flows, as working capital can be significantly impacted by, among other things, our accounts receivable activities, the level of new and used equipment inventories, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.



Rental Fleet

A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at June 30, 2014 was $784.9 million, or approximately 63.8% of our total assets. Our rental fleet as of June 30, 2014 consisted of 24,302 units having an original acquisition cost (which we define as the cost originally paid to manufacturers or the original amount financed under operating leases) of approximately $1.1 billion. As of June 30, 2014, our rental fleet composition was as follows (dollars in millions): % of Original % of Original Average Total Acquisition Acquisition Age in Units Units Cost Cost Months Hi-Lift or Aerial Work Platforms 16,154 66.5 % $ 690.0 61.8 % 37.5 Cranes 424 1.7 % 133.1 11.9 % 36.4 Earthmoving 2,278 9.4 % 206.6 18.5 % 20.0 Industrial Lift Trucks 758 3.1 % 29.9 2.7 % 25.8 Other 4,688 19.3 % 57.3 5.1 % 21.3 Total 24,302 100.0 % $ 1,116.9 100.0 % 32.3 Determining the optimal age and mix for our rental fleet equipment is subjective and requires considerable estimates and judgments by management. We constantly evaluate the mix, age and quality of the equipment in our rental fleet in response to current economic and market conditions, competition and customer demand. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary auction market levels, and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions, we evaluate current economic and market conditions, competition, manufacturers' availability, pricing and return on investment over the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive maintenance program, we believe our rental fleet is well-maintained. The original acquisition cost of our gross rental fleet increased by approximately $116.1 million, or 11.6%, for the six month period ended June 30, 2014. The average age of our rental fleet equipment decreased by approximately 2.6 months for the six months ended June 30, 2014. Our average rental rates for the six month period ended June 30, 2014 were 0.9% higher than in the six month period ended June 30, 2013. Our average rental rates for the three month period ended June 30, 2014 were 2.1% higher than in the three month period ended June 30, 2013 and 1.8% higher than the three month period ended March 31, 2014 (see further discussion on rental rates in "Results of Operations" below). The rental equipment mix among our four core product lines for the six months ended June 30, 2014 was largely consistent with that of the prior year comparable period as a percentage of total units available for rent and as a percentage of original acquisition cost.



Principal External Factors that Affect our Businesses

We are subject to a number of external factors that may adversely affect our businesses. These factors, and other factors, are discussed below and under the heading "Forward-Looking Statements," and in Item 1A-Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013. Economic downturns. The demand for our products is dependent on the general economy, the stability of the global credit markets, the



industries in which our customers operate or serve, and other factors.

Downturns in the general economy or in the construction and manufacturing

industries, as well as adverse credit market conditions, can cause demand for our products to materially decrease. 26



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Spending levels by customers. Rentals and sales of equipment to the

construction industry and to industrial companies constitute a significant

portion of our total revenues. As a result, we depend upon customers in

these businesses and their ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is impacted by fluctuations in customers' spending levels on



capital expenditures and by the availability of credit to those customers.

Adverse weather. Adverse weather in a geographic region in which we



operate may depress demand for equipment in that region. Our equipment is

primarily used outdoors and, as a result, prolonged adverse weather

conditions may prohibit our customers from continuing their work projects.

Adverse weather also has a seasonal impact in parts of our Intermountain

region, particularly in the winter months.

We believe that our integrated business tempers the effects of downturns in a particular segment. For a discussion of seasonality, see "Seasonality" on page 36 of this Quarterly Report on Form 10-Q.



Results of Operations

The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for our business segments and non-segmented revenues for the three and six months ended June 30, 2014 and 2013. The period-to-period comparisons of our financial results are not necessarily indicative of future results. Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Revenues. Total Total Three Months Ended Dollar Percentage June 30, Increase Increase 2014 2013 (Decrease) (Decrease) (in thousands, except percentages) Segment Revenues: Equipment rentals $ 98,814$ 83,728$ 15,086 18.0 % New equipment sales 90,581 73,436 17,145 23.3 % Used equipment sales 31,397 34,661 (3,264 ) (9.4 )% Parts sales 28,371 26,448 1,923 7.3 % Services revenues 16,102 13,770 2,332 16.9 % Non-Segmented revenues 15,113 13,297 1,816 13.7 % Total revenues $ 280,378$ 245,340$ 35,038 14.3 %



Total Revenues. Our total revenues were $280.4 million for the three month period ended June 30, 2014 compared to $245.3 million for the three month period ended June 30, 2013, an increase of approximately $35.0 million, or 14.3%. Revenues for all reportable segments are further discussed below.

Equipment Rental Revenues. Our revenues from equipment rentals for the three month period ended June 30, 2014 increased $15.1 million, or 18.0%, to $98.8 million from $83.7 million in the three month period ended June 30, 2013. Rental revenues from aerial work platforms increased $8.2 million, while rental revenues from earthmoving equipment increased $2.5 million. Rental revenues from cranes increased $0.9 million, and rental revenues from other equipment and lift trucks increased $3.2 million and $0.3 million, respectively. Our average rental rates for the three month period ended June 30, 2014 increased 2.1% compared to the same three month period last year and increased 1.8% from the first quarter ended March 31, 2014. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three month period ended June 30, 2014 improved to 36.3% compared to 35.8% in the three month period ended June 30, 2013, an increase of 0.5%. The increase in comparative rental equipment dollar utilization was primarily driven by a 2.1% increase in average rental rates and the mix of equipment rented, combined with an improvement in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was 72.7% for the three month period ended June 30, 2014 compared to 71.0% in the three month period ended June 30, 2013, an increase of 1.7%. Rental equipment time utilization based on the number of rental equipment units available for rent was 67.0% for the three month period ended June 30, 2014 compared to 66.3% in the same period last year, an increase of 0.7%. The increase in equipment rental time utilization based on original equipment cost and based on the number of units available for rent is largely reflective of increased demand for rental equipment. 27



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New Equipment Sales Revenues. Our new equipment sales for the three month period ended June 30, 2014 increased $17.1 million, or 23.3%, to $90.6 million from $73.4 million for the three month period ended June 30, 2013. Sales of new cranes increased approximately $8.0 million and sales of new aerial work platform equipment increased $6.4 million, while sales of new earthmoving equipment increased $3.2 million. Partially offsetting these increases were a $0.3 million decrease in new lift truck sales and a $0.1 million decrease in new other equipment sales. Used Equipment Sales Revenues. Our used equipment sales decreased $3.3 million, or 9.4%, to $31.4 million for the three month period ended June 30, 2014, from $34.7 million for the same three month period in 2013. Sales of used crane equipment decreased $5.1 million and sales of used aerial work platform equipment decreased $1.9 million, while sales of used lift trucks decreased $0.2 million. Offsetting these decreases were an increase in used earthmoving equipment sales of $3.7 million and a $0.1 million increase in used general equipment sales. Parts Sales Revenues. Our parts sales increased approximately $1.9 million, or 7.3%, to $28.4 million for the three month period ended June 30, 2014 from approximately $26.4 million for the same three month period in 2013. The increase in parts revenues was due to higher demand for parts compared to last year.



Services Revenues. Our services revenues for the three month period ended June 30, 2014 increased $2.3 million, or 16.9%, to $16.1 million from $13.8 million for the same three month period last year. The increase in services revenues was due to higher demand for services compared to last year.

Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including transportation, hauling, parts freight and damage waiver charges. For the three month period ended June 30, 2014, our other revenues were approximately $15.1 million, an increase of $1.8 million, or 13.7%, from $13.3 million in the same three month period in 2013. The increase was primarily due to an increase in hauling revenues and higher damage waiver income associated with equipment rentals. Gross Profit. Total Total Three Months Ended Dollar Percentage June 30, Change Change Increase Increase 2014 2013 (Decrease) (Decrease) (in thousands, except percentages) Segment Gross Profit: Equipment rentals $ 47,784$ 39,460$ 8,324 21.1 % New equipment sales 11,168 8,381 2,787 33.3 % Used equipment sales 10,341 10,489 (148 ) (1.4 )% Parts sales 8,330 7,215 1,115 15.5 % Services revenues 10,335 8,713 1,622 18.6 % Non-Segmented revenues 1,110 1,154 (44 ) (3.8 )% Total gross profit $ 89,068$ 75,412$ 13,656 18.1 % Total Gross Profit. Our total gross profit was $89.1 million for the three month period ended June 30, 2014 compared to $75.4 million for the same three month period in 2013, an increase of $13.7 million, or 18.1%. Total gross profit margin for the three month periods ended June 30, 2014 was 31.8%, an increase of 1.1% from 30.7% during the same three month period last year. Gross profit and gross margin for all reportable segments are further described below: Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the three month period ended June 30, 2014 increased $8.3 million, or 21.1%, to $47.8 million from $39.5 million in the same three month period in 2013. The increase in equipment rentals gross profit was the result of a $15.1 million increase in rental revenues, which was partially offset by a $1.3 million increase in rental expenses and a $5.4 million increase in rental equipment depreciation expense. The increase in rental expenses and rental equipment depreciation expense was due to a larger fleet size in 2014 compared to 2013. As a percentage of equipment rental revenues, rental expenses were 15.8% for the three month period ended June 30, 2014 compared to 17.0% for the same period last year. This percentage decrease was primarily attributable to the increase in comparative rental revenues. Depreciation expense was 35.9% of equipment rental revenues for each of the three month periods ended June 30, 2014 and 2013. 28



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Gross profit margin on equipment rentals for the three month period ended June 30, 2014 was approximately 48.4%, a 1.3% increase compared to a gross profit margin of 47.1% for the same period in 2013. This increase in gross profit margin was primarily due to the increase in equipment rental revenues and the decrease in rental expenses as a percentage of equipment rental revenues.

New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three month period ended June 30, 2014 increased $2.8 million, or 33.3%, to $11.2 million compared to $8.4 million for the same three month period in 2013 on a total new equipment sales increase of $17.1 million. Gross profit margin on new equipment sales for the three month period ended June 30, 2014 was 12.3%, an increase of 0.9% from 11.4% in the same three month period in 2013, primarily reflecting higher margins on sales of new cranes in the current year period. Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three month period ended June 30, 2014 decreased approximately $0.1 million, or 1.4%, to $10.3 million from $10.5 million in the same period in 2013 on a used equipment sales decrease of $3.3 million. Gross profit margin on used equipment sales for the three month period ended June 30, 2014 was 32.9%, up 2.6% from 30.3% for the same three month period in 2013, primarily as a result of higher margins on sales of used cranes, aerial work platform equipment and earthmoving equipment. Our used equipment sales from the rental fleet, which comprised approximately 88.4% and 79.7% of our used equipment sales for the three month periods ended June 30, 2014 and 2013, respectively, were approximately 154.7% and 154.0% of net book value for the three month periods ended June 30, 2014 and 2013, respectively. Parts Sales Gross Profit. For the three month period ended June 30, 2014, our parts sales revenue gross profit increased $1.1 million, or 15.5%, to $8.3 million from $7.2 million for the same three month period in 2013 on a $1.9 million increase in parts sales revenues. Gross profit margin for the three month period ended June 30, 2014 was 29.4%, an increase of 2.1% from 27.3% in the same three month period in 2012, as a result of higher margins on other equipment parts sales and the mix of parts sold. Services Revenues Gross Profit. For the three month period ended June 30, 2014, our services revenues gross profit increased $1.6 million, or 18.6%, to $10.3 million from $8.7 million for the same three month period in 2013 on a $2.3 million increase in services revenues. Gross profit margin for the three month period ended June 30, 2014 was 64.2%, up 0.9% from 63.3% in the same three month period in 2013, as a result of services revenues mix. Non-Segmented Other Revenues Gross Profit. Our non-segmented other revenues gross profit decreased less than $0.1 million, or 3.8%, to $1.1 million for the three month period ended June 30, 2014 from $1.2 million for the same period in 2013. Gross margin for the three month period ended June 30, 2014 was 7.3% compared to a gross margin of 8.7% in the same three month period last year, primarily reflective of lower margins on hauling and other transportations costs. Selling, General and Administrative Expenses. SG&A expenses increased $4.8 million, or 10.1%, to $51.9 million for the three month period ended June 30, 2014 compared to $47.1 million for the three month period ended June 30, 2013. The net increase in SG&A expenses was attributable to several factors. Employee salaries and wages and related employee expenses increased approximately $2.8 million as a result of higher salaries, wages and payroll taxes stemming primarily from an increase in commission and incentive pay that resulted from higher rental and new equipment sales revenues. Liability insurance costs increased $0.4 million and legal and professional fees increased $0.4 million. Facility and utility related expenses increased $0.5 million and depreciation expense increased $0.2 million. Supplies expense and other overhead costs increased $0.4 million. Stock-based compensation expense was $0.8 million and $0.9 million for the three month periods ended June 30, 2014 and 2013, respectively. Of the $4.8 million increase in SG&A expenses, approximately $0.6 million was attributable to branches opened since December 31, 2012 with less than three full months of operations (or no operations) in the second quarter of 2013. As a percentage of total revenues, SG&A expenses were 18.5% for the three month period ended June 30, 2014, a decrease of 0.7% from 19.2% for the same three month period in 2013, primarily as a result of the current year increase in total revenues. Other Income (Expense). For the three month period ended June 30, 2014, our net other expenses decreased $0.3 million to $12.6 million compared to $12.9 million for the same three month period in 2013. The decrease was the result of a $0.2 million decrease in interest expense to $12.9 million for the three month period ended June 30, 2014 compared to $13.1 million for the same three month period in 2013 and a $0.1 million increase in miscellaneous other income. The decrease in interest expense is primarily the result of a $0.2 million increase in expense related to manufacturing flooring plans used to finance inventory purchases. Income Taxes. We recorded income tax expense of $9.6 million for the three month period ended June 30, 2014 compared to income tax expense of $5.2 million for the three month period ended June 30, 2013. Our effective income tax rate was 38.0% for the three month period ended June 30, 2014 compared to 32.6% for the same three month period last year. The increase in our effective 29



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tax rate is primarily due to a decrease in permanent differences in the relation to current year pre-tax income. We also recorded a reduction of book goodwill of approximately $0.2 million for the three month period ended June 30, 2013 for tax benefits realized from tax-deductible goodwill in excess of book goodwill. Based on available evidence, both positive and negative, we believe it is more likely than not that our deferred tax assets at June 30, 2014 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations. Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Revenues. Total Total Six Months Ended Dollar Percentage June 30, Increase Increase 2014 2013 (Decrease) (Decrease) (in thousands, except percentages) Segment Revenues: Equipment rentals $ 185,038$ 159,098$ 25,940 16.3 % New equipment sales 160,128 126,759 33,369 26.3 % Used equipment sales 60,742 66,810 (6,068 ) (9.1 )% Parts sales 54,173 51,400 2,773 5.4 % Services revenues 29,750 28,321 1,429 5.0 % Non-Segmented revenues 27,776 25,340 2,436 9.6 % Total revenues $ 517,607$ 457,728$ 59,879 13.1 % Total Revenues. Our total revenues were $517.6 million for the six month period ended June 30, 2014 compared to $457.7 million for the six month period ended June 30, 2013, an increase of $59.9 million, or 13.1%. Revenues for all reportable segments are further discussed below. Equipment Rental Revenues. Our revenues from equipment rentals for the six month period ended June 30, 2014 increased $25.9 million, or 16.3%, to $185.0 million from $159.1 million in the six month period ended June 30, 2013. Rental revenues from aerial work platforms increased $15.5 million, while rental revenues from earthmoving equipment increased $4.7 million. Rental revenues from other equipment increased approximately $3.5 million and rental revenues from cranes increased $1.6 million. Lift truck rental revenues increased $0.5 million. Our average rental rates for the six month period ended June 30, 2014 increased 0.9% compared to the same six month period last year. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the six month period ended June 30, 2014 improved to 35.3% from 34.9% in the six month period ended June 30, 2013, an increase of 0.4%. The increase in comparative rental equipment dollar utilization was primarily driven by an increase in rental equipment time utilization combined with a 0.9% increase in average rental rates. Rental equipment time utilization as a percentage of original equipment cost was approximately 71.0% for the six month period ended June 30, 2014 compared to 69.5% in the six month period ended June 30, 2013, an increase of 1.5%. Rental equipment time utilization based on the number of rental equipment units available for rent was 65.8% for the six month period ended June 30, 2014 compared to 65.0% in the same period last year, an increase of 0.8%. The increase in equipment rental time utilization based on original equipment cost and based on the number of units available for rent is reflective of increased equipment rental demand. New Equipment Sales Revenues. Our new equipment sales for the six month period ended June 30, 2014 increased approximately $33.4 million, or 26.3%, to $160.1 million from $126.8 million for the six month period ended June 30, 2013. Sales of new cranes increased $20.6 million and sales of new earthmoving equipment increased $6.9 million. Sales of new aerial work platform equipment increased $6.6 million. New other equipment sales decreased $0.7 million and sales of new lift trucks decreased approximately $0.1 million. Used Equipment Sales Revenues. Our used equipment sales decreased $6.1 million, or 9.1%, to $60.7 million for the six month period ended June 30, 2014, from $66.8 million for the same six month period in 2013. The decrease in used equipment sales was primarily driven by a $10.6 million decrease in used crane sales. Used aerial work platform equipment sales decreased $0.2 million. Offsetting these decreases were an increase in sales of used earthmoving equipment of $4.6 million and a $0.2 million increase in used lift truck sales. Parts Sales Revenues. Our parts sales increased $2.8 million, or 5.4%, to $54.2 million for the six month period ended June 30, 2014 from approximately $51.4 million for the same six month period in 2013. The increase in parts revenues was due to higher demand for parts compared to the same period last year. 30



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Services Revenues. Our services revenues for the six month period ended June 30, 2014 increased $1.4 million, or 5.0%, to approximately $29.8 million from $28.3 million for the same six month period last year. The increase in services revenues was primarily due to higher demand for services compared to last year. Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including transportation, hauling, parts freight and damage waiver charges. For the six month period ended June 30, 2014, our non-segmented other revenues were $27.8 million, an increase of approximately $2.4 million, or 9.6%, from $25.3 million in the same six month period in 2013. The increase was primarily due to an increase in hauling revenues and higher damage waiver income associated with equipment rentals. Gross Profit. Total Total Six Months Ended Dollar Percentage June 30, Change Change Increase Increase 2014 2013 (Decrease) (Decrease) (in thousands, except percentages) Segment Gross Profit: Equipment rentals $ 86,786$ 73,095$ 13,691 18.7 % New equipment sales 18,981 13,965 5,016 35.9 % Used equipment sales 19,268 19,890 (622 ) (3.1 )% Parts sales 15,850 13,863 1,987 14.3 % Services revenues 19,242 17,521 1,721 9.8 % Non-Segmented revenues 1,725 1,558 167 10.7 % Total gross profit $ 161,852$ 139,892$ 21,960 15.7 % Total Gross Profit. Our total gross profit was $161.9 million for the six month period ended June 30, 2014 compared to $139.9 million for the same six month period in 2013, an increase of $22.0 million, or 15.7%. Total gross profit margin for the six month period ended June 30, 2014 was 31.3%, an increase of 0.7% from the 30.6% gross profit margin for the same six month period in 2013. Gross profit and gross margin for all reportable segments are further described below: Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the six month period ended June 30, 2014 increased $13.7 million, or 18.7%, to $86.8 million from $73.1 million in the same six month period in 2013. The increase in equipment rentals gross profit was the result of a $25.9 million increase in rental revenues for the six month period ended June 30, 2014, which was partially offset by a $2.0 million increase in rental expenses and a $10.3 million increase in rental equipment depreciation expense. The increase in rental expenses and rental equipment depreciation expense was due to a larger fleet size in 2014 compared to 2013. As a percentage of equipment rental revenues, rental expenses were 16.1% for the six month period ended June 30, 2014 compared to 17.5% for the same period last year. This percentage decrease was primarily attributable to the increase in comparative rental revenues. Depreciation expense was 37.0% of equipment rental revenues for the six month period ended June 30, 2014 compared to 36.6% for the same period in 2013. The percentage increase in depreciation expense as a percentage of equipment rental revenues is primarily due to an increase in the volume of rental purchase option arrangements. Gross profit margin on equipment rentals for the six month period ended June 30, 2014 was approximately 46.9%, up 1.0% from 45.9% for the same period in 2013. This gross profit margin improvement was primarily due to the increase in comparative rental revenues resulting from higher average rental rates and the increase in time utilization for the six month period ended June 30, 2014 compared to the six month period ended June 30, 2013, combined with the decrease in rental expenses as a percentage of equipment rental revenues. New Equipment Sales Gross Profit. Our new equipment sales gross profit for the six month period ended June 30, 2014 increased $5.0 million, or 35.9%, to $19.0 million compared to $14.0 million for the same six month period in 2013 on a total new equipment sales increase of $33.4 million. Gross profit margin on new equipment sales for the six month period ended June 30, 2014 was 11.9%, an increase of 0.9% from 11.0% in the same six month period in 2013, primarily reflecting higher margins on new crane and earthmoving equipment sales. Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the six month period ended June 30, 2014 decreased $0.6 million, or 3.1%, to $19.3 million from $19.9 million in the same period in 2013 on a used equipment sales decrease of $6.1 million. Gross profit margin on used equipment sales for the six month period ended June 30, 2014 was 31.7%, up approximately 1.9% from 29.8% for the same six month period in 2013, primarily as a result of higher margins on sales of used cranes and aerial 31



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work platform equipment. Our used equipment sales from the rental fleet, which comprised approximately 86.5% and 74.8% of our used equipment sales for the six month periods ended June 30, 2014 and 2013, respectively, were approximately 152.9% and 157.1% of net book value for the six month periods ended June 30, 2014 and 2013, respectively. Parts Sales Gross Profit. For the six month period ended June 30, 2014, our parts sales revenue gross profit increased approximately $2.0 million, or 14.3%, to $15.9 million from $13.9 million for the same six month period in 2013 on a $2.8 million increase in parts sales revenues. Gross profit margin for the six month period ended June 30, 2014 was 29.3%, an increase of 2.3% from 27.0% in the same six month period in 2013, as a result of the mix of parts sold and pricing on other equipment parts. Services Revenues Gross Profit. For the six month period ended June 30, 2014, our services revenues gross profit increased $1.7 million, or 9.8%, to $19.2 million from $17.5 million for the same six month period in 2013 on a $1.4 million increase in services revenues. Gross profit margin for the six month period ended June 30, 2014 was 64.7%, up approximately 2.8% from 61.9% in the same six month period in 2013, as a result of services revenues mix. Non-Segmented Other Revenues Gross Profit. Our non-segmented other revenues gross profit increased $0.2 million, or 10.7%, to $1.7 million for the six month period ended June 30, 2014 from approximately $1.6 million for the same period in 2013. Gross margin for the six month period ended June 30, 2014 was 6.2% compared to a gross margin of 6.1% in the same six month period last year. Selling, General and Administrative Expenses. SG&A expenses increased approximately $7.4 million, or 7.9%, to approximately $100.7 million for the six month period ended June 30, 2014 compared to $93.4 million for the six month period ended June 30, 2013. The net increase in SG&A expenses was attributable to several factors. Employee salaries and wages and related employee expenses increased approximately $4.2 million as a result of higher salaries, wages and payroll taxes stemming primarily from an increase in commission and incentive pay that resulted from higher rental and new equipment sales revenues. Liability insurance costs increased $0.7 million and depreciation expense increased $0.5 million. Promotional expenses increased $0.4 million and legal and professional fees increased $0.5 million. Facility and utility related expenses increased $0.8 million. Stock-based compensation expense was $1.6 million for each of the six month periods ended June 30, 2014 and 2013. Of the $7.4 million increase in SG&A expenses, approximately $1.2 million was attributable to branches opened since December 31, 2012 with less than six full months of operations (or no operations) in the first six months of 2013. As a percentage of total revenues, SG&A expenses were 19.5% for the six month period ended June 30, 2014, a decrease of 0.9% from 20.4% for the same six month period in 2013, primarily as a result of the current year increase in total revenues. Other Income (Expense). For the six month period ended June 30, 2014, our net other expenses increased approximately $0.3 million to $24.9 million compared to $24.6 million for the same six month period in 2013. The increase was the result of a $0.2 million increase in interest expense to $25.6 million for the six month period ended June 30, 2014 compared to $25.4 million for the same six month period in 2013 and a $0.1 million decrease in miscellaneous other income. The increase in interest expense is the net result of an approximately $0.7 million increase in expense related to our senior unsecured notes and a $0.4 million decrease in interest expense related to manufacturing flooring plans used to finance inventory purchases. The increase in interest expense on our senior unsecured notes is primarily due to the increase in the aggregate principal amount of these notes from $530 million to $630 million on February 4, 2013. Income Taxes. We recorded income tax expense of approximately $14.4 million for the six month period ended June 30, 2014 compared to income tax expense of $7.4 million for the six month period ended June 30, 2013. Our effective income tax rate was 38.4% for the six month period ended June 30, 2014 compared to 32.2% for the same six month period last year. The increase in our effective tax rate is primarily due to a decrease in permanent differences in the relation to current year pre-tax income. We also recorded a reduction of book goodwill of approximately $0.4 million for the six month period ended June 30, 2013 for tax benefits realized from tax-deductible goodwill in excess of book goodwill. Based on available evidence, both positive and negative, we believe it is more likely than not that our deferred tax assets at June 30, 2014 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.



Liquidity and Capital Resources

Cash flow from operating activities. For the six month period ended June 30, 2014, the cash provided by our operating activities was $37.8 million. Our reported net income of $23.2 million, which, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived 32



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assets, provided positive cash flows of $97.6 million. These cash flows from operating activities were also positively impacted by a $27.4 million increase in accounts payable and a $3.1 million increase in manufacturing flooring plans payable. Also increasing our operating cash flows was a $3.0 million increase in accrued expenses payable and other liabilities. Offsetting these positive cash flows was an increase of $76.6 million in inventories as a result of increasing demand and improving sales of new equipment. Also decreasing our operating cash flows was a $13.9 million increase in receivables and a $2.8 million increase in prepaid expenses and other assets. For the six month period ended June 30, 2013, the cash provided by our operating activities was $28.8 million. Our reported net income of approximately $15.6 million, which, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense, writedown of goodwill for tax-deductible goodwill in excess of book goodwill and net gains on the sale of long-lived assets, provided positive cash flows of $70.0 million. These cash flows from operating activities were also positively impacted by a $40.7 million increase in accounts payable and a $5.5 million increase in manufacturing flooring plans payable. Also increasing our operating cash flows were a $6.2 million decrease in net accounts receivables and a $4.3 million increase in accrued expenses payable and other liabilities. Offsetting these positive cash flows was an increase of $94.6 million in net inventories as a result of increasing demand and improving sales of new and used equipment. Also decreasing our operating cash flows was a $3.3 million increase in prepaid expenses and other assets. Cash flow from investing activities. For the six month period ended June 30, 2014, cash provided by our investing activities was exceeded by cash used in our investing activities, resulting in net cash used in our investing activities of $118.1 million. This was a result of purchases of rental and non-rental equipment totaling $172.2 million, which was partially offset by proceeds from the sale of rental and non-rental equipment of approximately $54.1 million. For the six month period ended June 30, 2013, cash provided by our investing activities was exceeded by cash used in our investing activities, resulting in net cash used in our investing activities of approximately $82.1 million. This was a result of purchases of rental and non-rental equipment totaling $133.3 million, which was partially offset by proceeds from the sale of rental and non-rental equipment of approximately $51.2 million. Cash flow from financing activities. For the six month period ended June 30, 2014, cash provided by our financing activities was $68.7 million. Net borrowings under the Credit Facility totaled approximately $70.3 million. Partially offsetting these positive cash flows were deferred financing costs of $0.8 million. As more fully described in our Quarterly Report on Form 10-Q for the three months ended September 30, 2012, the Company on September 19, 2012 paid a one-time special dividend of $7.00 per share on the then-outstanding common stock and dividends on nonvested stock at that time were to be paid upon vesting of those shares. On June 6, 2014, the Company paid all remaining dividends on those shares of common stock totaling $0.7 million. For the six month period ended June 30, 2013, cash provided by our financing activities was approximately $48.6 million. Net proceeds from our 7% senior notes due 2022 issued on February 4, 2013 (the "Add-on Notes") were approximately $107.3 million. Net borrowings under the Credit Facility totaled $57.2 million and excess tax benefits realized from stock-based awards totaled $0.2 million. Partially offsetting these positive cash flows were payments of deferred financing costs of $0.7 million and dividends paid of $0.4 million. Additionally, purchases of treasury stock totaled $0.4 million.



Senior Secured Credit Facility

We and our subsidiaries are parties to a senior secured Credit Facility with General Electric Capital Corporation as agent, and the lenders named therein.

On May 21, 2014, we amended, extended and restated its existing $402.5 million senior secured credit facility with General Electric Capital Corporation by entering into the Fourth Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, General Electric Capital Corporation, as administrative agent, Bank of America, N.A. as co-syndication agent and documentation agent, Wells Fargo Capital Finance, LLC, as co-syndication agent and Deutsche Bank Securities Inc. as joint lead arranger and joint bookrunner. The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the credit facility from February 29, 2017 to May 21, 2019, (ii) increases the uncommitted incremental revolving capacity from $130 million to $150 million, (iii) permits a like-kind exchange program under Section 1031 of the Internal Revenue Code of 1986, as amended, (iv) provides that the unused commitment fee margin will be either 0.50%, 0.375% or 0.25%, depending on the ratio of the average of the daily closing balances of the aggregate revolving loans, swing line loans and letters of credit outstanding during each month to the aggregate 33



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commitments for the revolving loans, swing line loans and letters of credit, (v) lowers the interest rate (a) in the case of index rate revolving loans, to the index rate plus an applicable margin of 0.75% to 1.25% depending on the leverage ratio and (b) in the case of LIBOR revolving loans, to LIBOR plus an applicable margin of 1.75% to 2.25%, depending on the leverage ratio, (vi) lowers the margin applicable to the letter of credit fee to between 1.75% and 2.25%, depending on the leverage ratio, and (vii) permits, under certain conditions, for the payment of dividends and/or stock repurchases or redemptions on the capital stock of the Company of up to $75 million per calendar year and further additionally permits the payment of the special cash dividend of $7.00 per share previously declared by the Company on August 20, 2012 to the holders of outstanding restricted stock of the Company following the declared payment date with such permission not tied to the vesting of such restricted stock (which includes the Company's payment in June 2014 of all amounts that remained payable to the holders of the restricted stock of the Company with respect to such special dividend that was otherwise payable following the applicable vesting dates in May and July 2014 and 2015). At June 30, 2014, the interest rate on the Credit Facility was based on LIBOR plus 200 basis points. The weighted average interest rate at June 30, 2014 was approximately 2.5%. At July 24, 2014, we had $203.3 million of available borrowings under our Credit Facility, net of $6.5 million of outstanding letters of credit. Senior Unsecured Notes On August 20, 2012, the Company closed on its offering of $530 million aggregate principal amount of its 7% senior notes due 2022 (the "New Notes") in an unregistered offering. The New Notes and related guarantees were offered in a private placement solely to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), or outside the United States to persons other than "U.S. persons" in compliance with Regulation S under the Securities Act. Net proceeds to the Company from the sale of the New Notes totaled approximately $520.7 million. The Company used a portion of the net proceeds from the sale of the New Notes to repurchase $158.7 million of the $250 million aggregate principal amount of its 8 3/8% senior notes due 2016 (the "Old Notes") in early settlement of a tender offer and consent solicitation (the "Tender Offer") that the Company launched on August 6, 2012. Holders who tendered their Old Notes prior to the early tender deadline received $1,031.67 per $1,000 principal amount of Old Notes tendered, plus accrued and unpaid interest to the date of repurchase. Having received the requisite consents from the holders of the Old Notes in the Tender Offer, the Company, certain of its subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee, executed a supplemental indenture amending the indenture relating to the Old Notes. Also on August 20, 2012, the Company satisfied and discharged its obligations under the indenture relating to the Old Notes and issued a notice of redemption for the remaining outstanding principal amount of the Old Notes. On September 19, 2012, the Company redeemed the remaining $91.3 million principal amount outstanding of the Old Notes at a redemption price equal to 102.792% of the aggregate principal amount of the Old Notes being redeemed, plus accrued and unpaid interest on the Old Notes to the redemption date. The Company used the remaining net proceeds of the offering of the New Notes to pay on September 19, 2012 a special, one-time cash dividend. Actual dividends paid totaled approximately $244.4 million, representing $7.00 per share paid on 34,911,455 outstanding shares of Common Stock of the Company. Dividends on 232,431 outstanding shares of non-vested common stock totaling approximately $1.5 million, net of estimated forfeitures, are to be paid upon vesting of those shares pursuant to their respective stock awards' terms and conditions. In connection with the above transactions, the Company recorded a one-time loss on the early extinguishment of debt of approximately $10.2 million, or approximately $6.6 million after-tax, reflecting payment of $5.0 million of tender premiums and $2.6 million to redeem the Old Notes that remained outstanding following completion of the Tender Offer, combined with the write-off of approximately $2.6 million of unamortized deferred financing costs related to the Old Notes. Transaction costs incurred in connection with the offering of the New Notes totaled approximately $1.7 million. The New Notes were issued at par and require semiannual interest payments on March 1 and September 1 of each year, commencing on March 1, 2013. No principal payments are due until maturity (September 1, 2022). The New Notes are redeemable, in whole or in part, at any time on or after September 1, 2017 at specified redemption prices plus accrued and unpaid interest to the date of redemption. We may redeem up to 35% of the aggregate principal amount of the New Notes before September 1, 2015 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to September 1, 2017 at a specified "make-whole" redemption price plus accrued and unpaid interest to the date of redemption. The New Notes rank equally in right of payment to all of our existing and future senior indebtedness and rank senior to any of our subordinated indebtedness. The New Notes are unconditionally guaranteed on a senior unsecured basis by all of our current and future significant domestic restricted subsidiaries. In addition, the New Notes are effectively subordinated to all of our and the guarantors' existing and future secured indebtedness, including the Credit Facility, to the extent of the assets securing such indebtedness, and are structurally subordinated to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the New Notes. 34



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If we experience a change of control, we will be required to offer to purchase the New Notes at a repurchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. On February 4, 2013, the Company closed on its offering of $100 million aggregate principal amount of Add-on Notes in an unregistered offering through a private placement. The Add-on Notes were priced at 108.5% of the principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 20, 2012 totaled approximately $110.4 million. The Company used the proceeds from the offering to repay indebtedness outstanding under its Credit Facility and for the payment of fees and expenses related to the offering. The Add-on Notes were issued as additional notes under an indenture dated as of August 20, 2012, pursuant to which the Company previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally with and form a part of a single class of securities with the New Notes. In order to satisfy our obligations under two separate registration rights agreements, one entered into between the Company, the guarantors of the New Notes and the initial purchasers of the New Notes, and the other entered into between the Company, the guarantors of the Add-on Notes and the initial purchaser of the Add-on Notes, we commenced an offering on April 1, 2013 to exchange the New Notes and guarantees and the Add-on Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New Notes and the Add-on Notes (except that the exchange notes will not contain any transfer restrictions). This exchange offer closed on April 30, 2013.



Cash Requirements Related to Operations

Our principal sources of liquidity have been from cash provided by operating activities and the sales of new, used and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the above described uses will be the principal demands on our cash in the future. The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the six month period ended June 30, 2014 were $199.0 million, including $37.4 million of non-cash transfers from new and used equipment to rental fleet inventory. Our gross property and equipment capital expenditures for the six month period ended June 30, 2014 were $10.6 million. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our actual performance. To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the New Notes and the Add-on Notes, the Credit Facility and our other indebtedness), will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. As of July 24, 2014, we had $203.3 million of available borrowings under the Credit Facility, net of $6.5 million of outstanding letters of credit. We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. Given current economic and market conditions, including the significant disruptions in the global capital markets, we cannot assure investors that any of these actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Credit Facility and the indenture governing the New Notes and the Add-on Notes, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.



Quarterly Dividends

On July 28, 2014, the Company announced a dividend of $0.25 per share to stockholders of record as of the close of business on August 25, 2014, payable on September 9, 2014. The Company intends to pay regular quarterly cash dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other things, business and market conditions. 35



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Seasonality

Although we believe our business is not materially impacted by seasonality, the demand for our rental equipment tends to be lower in the winter months. The level of equipment rental activities is directly related to commercial and industrial construction and maintenance activities. Therefore, equipment rental performance will be correlated to the levels of current construction activities. The severity of weather conditions can have a temporary impact on the level of construction activities. Adverse weather has a seasonal impact in parts of the markets we serve, including our Intermountain region, particularly in the winter months. Equipment sales cycles are also subject to some seasonality with the peak selling period during the spring season and extending through the summer. Parts and services activities are typically less affected by changes in demand caused by seasonality.



Contractual and Commercial Commitments

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet Arrangements

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2013.


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