Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT - Essex Rental Corp. | essx-20140930xex312.htm |
| EX-31.1 - EXHIBIT - Essex Rental Corp. | essx-20140930xex311.htm |
| EX-10.1 - EXHIBIT - Essex Rental Corp. | essx-20140930xex101.htm |
| EX-32.1 - EXHIBIT - Essex Rental Corp. | essx-20140930xex321.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Essex Rental Corp. | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2014 | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number: 001-34601
Essex Rental Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-5415048 | |
(State of Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
1110 Lake Cook Road, Suite 220 | ||
Buffalo Grove, Illinois | 60089 | |
(Address of Principal Executive Offices) | (ZIP Code) | |
847-215-6500
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | |
Non-accelerated filer o | Smaller reporting company o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
24,813,619 shares of common stock, par value $.0001 per share, were outstanding as of the close of business on November 1, 2014.
ESSEX RENTAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||
PART II. OTHER INFORMATION | ||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements which are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent and belief or current expectations of Essex Rental Corp. (“Essex Rental”) and its management team and may be identified by the use of words like "anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "will", "should", "seek", the negative of these terms or other comparable terminology. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from Essex Rental’s expectations include, without limitation, the continued ability of Essex Rental to successfully execute its business plan, the possibility of a change in demand for the products and services that Essex Rental provides (through its operating subsidiaries, Essex Crane Rental Corp., Coast Crane Company and Coast Crane Ltd.), intense competition which may require us to lower prices or offer more favorable terms of sale, our reliance on third party suppliers, our indebtedness which could limit our operational and financial flexibility, global economic factors including interest rates, general economic conditions, geopolitical events and regulatory changes, our dependence on our management team and key personnel, as well as other relevant risks detailed in our Annual Report on Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission and available on the investor relations section of our website, www.essexrentalcorp.com. The factors listed here are not exhaustive. Many of these uncertainties and risks are difficult to predict and beyond management’s control. Forward-looking statements are not guarantees of future performance, results or events. Essex Rental assumes no obligation to update or supplement forward-looking information in this Form 10-Q whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results or financial conditions, or otherwise.
3
ESSEX RENTAL CORP. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) | ||||||||
September 30, 2014 | December 31, 2013 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,423 | $ | 1,349 | ||||
Accounts receivable, net of allowances for doubtful accounts and credit memos of $2,799 and $2,485, respectively | 16,676 | 14,059 | ||||||
Other receivables | 2,105 | 2,412 | ||||||
Deferred tax assets | 3,313 | 2,878 | ||||||
Inventory | ||||||||
Retail equipment | 8,213 | 3,416 | ||||||
Retail spare parts, net | 1,727 | 1,598 | ||||||
Rental equipment, held for sale | 3,339 | — | ||||||
Prepaid expenses and other assets | 1,584 | 1,791 | ||||||
TOTAL CURRENT ASSETS | 38,380 | 27,503 | ||||||
Rental equipment, net | 271,718 | 287,860 | ||||||
Property and equipment, net | 4,601 | 5,205 | ||||||
Spare parts inventory, net | 3,728 | 3,248 | ||||||
Identifiable finite lived intangibles, net | 819 | 1,069 | ||||||
Goodwill | 1,796 | 1,796 | ||||||
Loan acquisition costs, net | 5,489 | 6,095 | ||||||
TOTAL ASSETS | $ | 326,531 | $ | 332,776 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 5,385 | $ | 5,703 | ||||
Accrued employee compensation and benefits | 2,085 | 2,012 | ||||||
Accrued taxes | 3,634 | 3,909 | ||||||
Accrued interest | 1,081 | 655 | ||||||
Accrued other expenses | 1,230 | 1,007 | ||||||
Unearned rental revenue | 1,962 | 1,668 | ||||||
Customer deposits | 238 | 293 | ||||||
Term loan - short-term | 2,000 | 2,000 | ||||||
Purchase money security interest debt - short-term | 1,365 | 959 | ||||||
Capital lease obligation - short-term | 34 | — | ||||||
TOTAL CURRENT LIABILITIES | 19,014 | 18,206 | ||||||
LONG-TERM LIABILITIES | ||||||||
Revolving credit facilities | 143,235 | 165,482 | ||||||
Term loans | 65,000 | 36,500 | ||||||
Promissory notes | 1,655 | 3,655 | ||||||
Purchase money security interest debt | 3,302 | 1,975 | ||||||
Deferred tax liabilities | 35,910 | 40,869 | ||||||
Capital lease obligation | 171 | — | ||||||
TOTAL LONG-TERM LIABILITIES | 249,273 | 248,481 | ||||||
TOTAL LIABILITIES | 268,287 | 266,687 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.0001 par value, Authorized 1,000,000 shares, none issued | — | — | ||||||
Common stock, $.0001 par value, Authorized 40,000,000 shares; issued and outstanding 24,813,619 shares at September 30, 2014 and 24,743,513 shares at December 31, 2013 | 2 | 2 | ||||||
Paid in capital | 126,398 | 125,952 | ||||||
Accumulated deficit | (68,184 | ) | (59,876 | ) | ||||
Accumulated other comprehensive income | 28 | 11 | ||||||
TOTAL STOCKHOLDERS' EQUITY | 58,244 | 66,089 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 326,531 | $ | 332,776 | ||||
4
ESSEX RENTAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except share and per share data) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
REVENUES | |||||||||||||||
Equipment rentals | $ | 13,640 | $ | 11,802 | $ | 37,202 | $ | 35,447 | |||||||
Retail equipment sales | 2,760 | 3,772 | 6,938 | 8,337 | |||||||||||
Used rental equipment sales | 6,024 | 1,265 | 10,089 | 9,922 | |||||||||||
Retail parts sales | 2,165 | 1,827 | 6,707 | 5,778 | |||||||||||
Transportation | 2,056 | 1,349 | 6,021 | 4,420 | |||||||||||
Equipment repairs and maintenance | 2,936 | 2,793 | 8,219 | 9,182 | |||||||||||
TOTAL REVENUES | 29,581 | 22,808 | 75,176 | 73,086 | |||||||||||
COST OF REVENUES | |||||||||||||||
Salaries, payroll taxes and benefits | 3,021 | 2,673 | 8,399 | 8,174 | |||||||||||
Depreciation | 4,538 | 4,652 | 13,755 | 13,981 | |||||||||||
Retail equipment sales | 2,425 | 3,250 | 6,117 | 7,059 | |||||||||||
Used rental equipment sales | 5,074 | 829 | 8,253 | 7,439 | |||||||||||
Retail parts sales | 1,691 | 1,475 | 5,287 | 4,456 | |||||||||||
Transportation | 2,082 | 1,400 | 5,906 | 4,341 | |||||||||||
Equipment repairs and maintenance | 3,234 | 2,283 | 8,886 | 7,762 | |||||||||||
Yard operating expenses | 999 | 790 | 2,601 | 2,332 | |||||||||||
TOTAL COST OF REVENUES | 23,064 | 17,352 | 59,204 | 55,544 | |||||||||||
GROSS PROFIT | 6,517 | 5,456 | 15,972 | 17,542 | |||||||||||
Selling, general and administrative expenses | 5,939 | 5,723 | 17,686 | 18,117 | |||||||||||
Impairment - rental equipment, held for sale | 771 | — | 771 | — | |||||||||||
Other depreciation and amortization | 195 | 251 | 708 | 793 | |||||||||||
LOSS FROM OPERATIONS | (388 | ) | (518 | ) | (3,193 | ) | (1,368 | ) | |||||||
OTHER INCOME (EXPENSES) | |||||||||||||||
Other income (expense) | (3 | ) | 553 | (1 | ) | 559 | |||||||||
Interest expense | (3,669 | ) | (3,075 | ) | (10,243 | ) | (8,576 | ) | |||||||
Foreign currency exchange gains (losses) | (172 | ) | 107 | (225 | ) | (222 | ) | ||||||||
TOTAL OTHER INCOME (EXPENSES) | (3,844 | ) | (2,415 | ) | (10,469 | ) | (8,239 | ) | |||||||
LOSS BEFORE INCOME TAXES | (4,232 | ) | (2,933 | ) | (13,662 | ) | (9,607 | ) | |||||||
BENEFIT FOR INCOME TAXES | (1,834 | ) | (1,030 | ) | (5,354 | ) | (3,609 | ) | |||||||
NET LOSS | $ | (2,398 | ) | $ | (1,903 | ) | $ | (8,308 | ) | $ | (5,998 | ) | |||
Weighted average shares outstanding: | |||||||||||||||
Basic | 24,813,619 | 24,653,513 | 24,801,537 | 24,639,667 | |||||||||||
Diluted | 24,813,619 | 24,653,513 | 24,801,537 | 24,639,667 | |||||||||||
Loss per share: | |||||||||||||||
Basic | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.33 | ) | $ | (0.24 | ) | |||
Diluted | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.33 | ) | $ | (0.24 | ) | |||
The accompanying notes are an integral part of these financial statements
5
ESSEX RENTAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (Amounts in thousands) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (2,398 | ) | $ | (1,903 | ) | $ | (8,308 | ) | $ | (5,998 | ) | |||
Other comprehensive income (loss) | |||||||||||||||
Foreign currency translation adjustments | 21 | (2 | ) | 17 | (6 | ) | |||||||||
Other comprehensive income (loss) | 21 | (2 | ) | 17 | (6 | ) | |||||||||
Comprehensive loss | $ | (2,377 | ) | $ | (1,905 | ) | $ | (8,291 | ) | $ | (6,004 | ) | |||
The accompanying notes are an integral part of these financial statements
6
ESSEX RENTAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) | |||||||
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net loss | $ | (8,308 | ) | $ | (5,998 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation and amortization of tangible assets | 14,210 | 14,523 | |||||
Amortization of loan acquisition costs and other intangibles | 2,094 | 1,595 | |||||
Amortization of promissory notes discount | — | 72 | |||||
Gain on sale of rental equipment | (1,836 | ) | (2,483 | ) | |||
Gain on sale of property and equipment | — | (552 | ) | ||||
Impairment - rental equipment, held for sale | 771 | — | |||||
Deferred income taxes | (5,392 | ) | (3,942 | ) | |||
Share based compensation expense | 296 | 719 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net | (3,311 | ) | 1,677 | ||||
Other receivables | 307 | 45 | |||||
Prepaid expenses and other assets | 207 | 67 | |||||
Retail equipment inventory | (5,288 | ) | (1,989 | ) | |||
Spare parts inventory | (621 | ) | (319 | ) | |||
Accounts payable and accrued expenses | 303 | (1,179 | ) | ||||
Unearned rental revenue | 294 | 172 | |||||
Customer deposits | (55 | ) | 106 | ||||
Total change in operating assets and liabilities | (8,164 | ) | (1,420 | ) | |||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (6,329 | ) | 2,514 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchases of rental equipment | (6,252 | ) | (5,510 | ) | |||
Purchases of property and equipment | (554 | ) | (692 | ) | |||
Accounts receivable from rental equipment sales | 694 | (1,012 | ) | ||||
Proceeds from sale of rental equipment | 10,089 | 9,922 | |||||
Proceeds from sale of property and equipment, net | — | 1,752 | |||||
NET CASH PROVIDED BY INVESTING ACTIVITIES | 3,977 | 4,460 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from revolving credit facilities | 83,168 | 74,818 | |||||
Payments on revolving credit facilities | (105,415 | ) | (118,596 | ) | |||
Proceeds from term loans | 30,000 | 40,000 | |||||
Payments on term loans | (1,500 | ) | (1,000 | ) | |||
Payments on purchase money security interest debt | (847 | ) | (767 | ) | |||
Payments on promissory notes | (2,000 | ) | — | ||||
Payments on capital lease obligation | (10 | ) | (3 | ) | |||
Employer repurchase of shares to satisfy minimum tax withholding | (24 | ) | (103 | ) | |||
Payments for loan acquisition costs | (1,238 | ) | (6,783 | ) | |||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 2,134 | (12,434 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 292 | 101 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 74 | (5,359 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,349 | 8,389 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,423 | $ | 3,030 | |||
7
ESSEX RENTAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (Amounts in thousands) | |||||||
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
SUPPLEMENTAL SCHEDULE OF NON-CASH | |||||||
INVESTING / FINANCING ACTIVITIES | |||||||
Board of Directors fees paid in common stock | $ | 150 | $ | 150 | |||
Equipment obtained through capital lease | $ | 215 | $ | — | |||
Equipment purchased directly through short-term debt obligation | $ | 2,580 | $ | 982 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Cash paid for interest | $ | 7,975 | $ | 6,683 | |||
Cash paid for income taxes, net | $ | 127 | $ | 27 | |||
The accompanying notes are an integral part of these financial statements
8
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Business and Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of Essex Rental Corp. (“Essex Rental”) and its wholly owned subsidiaries Essex Holdings, LLC ("Holdings"), Essex Crane Rental Corp. ("Essex Crane"), Essex Finance Corp. (“Essex Finance”), CC Acquisition Holding Corp. (“CC Acquisition”), Coast Crane Company, formerly known as CC Bidding Corp. (“Coast Crane”) and Coast Crane Ltd. (“Coast Crane Ltd.") (collectively the "Company"). All intercompany accounts and transactions have been eliminated in consolidation.
The Company is engaged primarily in renting lattice boom crawler cranes and attachments, tower cranes and attachments, rough terrain cranes, boom trucks and other related heavy lifting machinery and equipment to the construction industry throughout the United States of America, including Hawaii and Alaska, and Canada. The assets are rented for use in building and maintaining power plants, refineries, bridge and road construction, alternative energy, water treatment facilities and other industrial, commercial, residential and infrastructure related projects. The Company is also engaged in servicing and distributing heavy lifting machinery and other construction related equipment and parts.
The accompanying consolidated financial statements of the Company include all adjustments (consisting of normal recurring adjustments) which management considers necessary for the fair presentation of the Company’s operating results, financial position and cash flows as of and for all periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these unaudited financial statements in accordance with applicable rules.
The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. For further information, please refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
2. | Significant Accounting Policies |
Please refer to Note 2 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for a complete description of our significant accounting policies.
Use of Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect certain reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and the related disclosures. Accordingly, actual results could materially differ from those estimates. Significant estimates include the allowance for doubtful accounts and credit memos, spare parts inventory obsolescence reserve, useful lives for rental equipment and property and equipment, deferred income taxes, personal property tax receivable and accrual, loss contingencies and the fair value of financial instruments.
Fair Value of Financial Instruments
The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.
Segment Reporting
We have determined, in accordance with applicable accounting guidance regarding operating segments, that we have three reportable segments. We derive our revenues from three principal business activities: (1) equipment rentals; (2) equipment distribution; and (3) parts and service. These segments are based upon how we allocate resources and assess performance. See Note 11 to the consolidated financial statements regarding our segment information.
Long-lived Assets - Held for Use
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The criteria for determining impairment for such long-lived assets to be held and used is
9
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
determined by comparing the carrying value of these long-lived assets to be held and used to management's best estimate of future undiscounted cash flows expected to result from the use of these assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimated fair value of the assets is measured by estimating the present value of the future discounted cash flows to be generated.
During the nine months ended September 30, 2014 and as a result of continuing losses and depressed utilization rates, the Company determined that triggering event had occurred at Essex Crane, which caused the Company to determine if an impairment of these long-lived assets to be held and used was necessary.
Application of the long-lived asset to be held and used impairment test requires judgment, including the identification of the primary asset, identification of the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and the future cash flows of the long-lived assets to be held and used. The Company identified its crawler crane rental equipment fleet as the primary asset as it is the basis of all revenue generating activities for Essex Crane, its replacement would require a significant level of investment and its remaining useful life significantly exceeds the remaining useful life of all other assets. The lowest level of identifiable cash flows within the rental equipment fleet is at the equipment model level. Each equipment model group is capable of producing cash flows without other complementary assets and each asset within the specific equipment model groups is interchangeable with any other asset within that equipment model group. The Company tested the recoverability of the rental equipment assets to be held and used by model using an undiscounted cash flow approach dependent primarily upon estimates of future rental income, orderly liquidation value and discount rates. Cash flows for each equipment model group considered the possibility of continuing to rent the assets and selling the assets in orderly transactions in the future or at the end of their remaining useful lives. The Company estimated that the future cash flows generated by each of the equipment model groups exceeded the carrying value of the assets and no impairment was recorded for assets to be held and used as of September 30, 2014.
The Company also assessed whether a triggering event for potential impairment of its other equipment assets existed, and it was determined that no such event occurred for these assets during the nine months ended September 30, 2014.
Long-lived Assets - Held for Sale
During the three months ended September 30, 2014, the Company agreed to terms to sell certain traditional crawler crane rental equipment assets. Under the agreed upon terms, the rental equipment assets, in their current condition, will be sold in three groups with the first group sale completed during the three months ended September 30, 2014 and the remaining group sales to be completed during each of the three months ended December 31, 2014 and March 31, 2015, respectively. As a result of the agreed upon sales terms, the Company has determined that these long-lived rental equipment assets shall be classified as held for sale. The held for sale assets are classified within the Company's equipment rentals segment.
As a result of the held for sale classification, the Company performed an impairment analysis of the long-lived rental equipment assets held for sale. Application of the long-lived asset held for sale impairment test requires comparing the carrying value of the the asset to its fair value less cost to sell. The Company determined that the fair value of the assets was equal to the agreed upon sales price. The carrying value of the assets exceeded the fair value of the assets less cost to sell resulting in the Company recording an impairment charge of approximately $0.8 million during the three months ended September 30, 2014.
Recently Issued and Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for reporting discontinued operations and disposals of components of an entity. The guidance raises the threshold for a disposal to qualify as a discontinued operation by requiring that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale be reported as such. The amendments also expand the disclosure requirements regarding the assets, liabilities, revenues and expenses of discontinued operations and add new disclosure requirements for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years beginning after December 15, 2014, and interim reporting periods within those years (early adoption is permitted only for disposals that have not been previously reported). Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial results.
In May 2014, FASB issued guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
10
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is not permitted. We expect to adopt this guidance when effective, and the impact on our financial statements is not currently estimable.
3. | Intangible Assets |
As of September 30, 2014 and December 31, 2013, goodwill related to the acquisition of Coast Crane's assets was approximately $1.8 million. Goodwill represents the excess of the total consideration transferred over the fair value of the identifiable assets acquired, net of liabilities assumed.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of the Company’s other identifiable finite lived intangible assets (amounts in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Essex Crane customer relationship | $ | 785 | $ | 785 | |||
Essex Crane trademark | 804 | 804 | |||||
Coast Crane customer relationship | 1,500 | 1,500 | |||||
Coast Crane trademark | 600 | 600 | |||||
Total intangible assets | 3,689 | 3,689 | |||||
Less: accumulated amortization | (2,870 | ) | (2,620 | ) | |||
Intangible assets, net | $ | 819 | $ | 1,069 | |||
The Company’s amortization expense associated with other intangible assets was approximately $0.1 million for each of the three months ended September 30, 2014 and 2013. The Company's amortization expense associated with other intangible assets was approximately $0.3 million for each of the nine months ended September 30, 2014 and 2013.
The following table presents the estimated future amortization expense related to intangible assets as of September 30, 2014 for the years ended December 31st (amounts in thousands):
2014 | $ | 84 | |
2015 | 324 | ||
2016 | 214 | ||
2017 | 197 | ||
Total | $ | 819 | |
11
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. | Revolving Credit Facilities and Other Debt Obligations |
The Company’s revolving credit facilities and other debt obligations consist of the following (amounts in thousands):
Principal Outstanding at | Weighted Average Interest Rate as of September 30, 2014 | |||||||||||
September 30, 2014 | December 31, 2013 | Maturity Dates | ||||||||||
Essex Crane revolving credit facility | $ | 121,459 | $ | 148,149 | 3.91 | % | October 2016 | |||||
Coast Crane revolving credit facility | 21,776 | 17,333 | 5.35 | % | March 2017 | |||||||
Essex Crane term loan | 30,000 | — | 11.50 | % | May 2019 | |||||||
Coast Crane term loan | 35,000 | 36,500 | 5.25 | % | December 2015 to March 2017 | |||||||
Coast Crane term loan - short-term | 2,000 | 2,000 | 5.25 | % | within 1 year | |||||||
Unsecured promissory notes (related party) | 1,655 | 3,655 | 18.00 | % | October 2016 | |||||||
Purchase money security interest debt | 3,302 | 1,975 | 4.26 | % | October 2015 to June 2019 | |||||||
Purchase money security interest debt - short-term | 1,365 | 959 | 4.26 | % | within 1 year | |||||||
Total debt obligations outstanding | $ | 216,557 | $ | 210,571 | ||||||||
Aggregate payments of principal on debt obligations outstanding as of September 30, 2014 for each of the years ended December 31st based on contractual installment payment terms and maturities are as follows:
2014 | $ | 868 | |
2015 | 3,256 | ||
2016 | 125,905 | ||
2017 | 55,313 | ||
2018 and thereafter | 31,215 | ||
Total | $ | 216,557 | |
Essex Crane Revolving Credit Facility
On May 13, 2014, Essex Crane entered into the Fourth Amended and Restated Credit Agreement (the “Essex Crane Revolving Credit Facility”). The credit facility provides for a revolving loan in the amount of $145.0 million, with a $20.0 million aggregate sublimit for letters of credit, and a $30.0 million term loan. Essex Crane may borrow on the revolving loan an amount equal to the sum of 85% of eligible net receivables and 75% of the net orderly liquidation value of eligible rental equipment. The aggregate commitment will be reduced by: (i) on an individual transaction basis, 100% of the net cash proceeds from the sales of certain assets and (ii) on an annual basis, 60% of free cash flow, other than net cash proceeds from certain asset sales, as defined within the credit agreement. The maximum commitment under the Essex Crane Revolving Credit Facility may not exceed $130.0 million beginning on February 28, 2016. The revolving loan and term loan mature on October 31, 2016 and May 13, 2019, respectively. The Essex Crane Revolving Credit Facility is collateralized by a first priority security interest in substantially all of Essex Crane’s assets.
Under the terms of the Essex Crane Revolving Credit Facility, borrowings on the revolving loan accrue interest at the borrower’s option of either (a) the bank’s prime rate plus the applicable prime rate margin of 1.75% or (b) a Euro-dollar rate based on the rate the bank offers deposits of U.S. Dollars in the London interbank market (“LIBOR”) plus the applicable LIBOR margin of 3.75%. Borrowings on the term loan accrue interest at LIBOR plus the applicable LIBOR term loan margin of 10.50% with a LIBOR floor of 1.00%. Essex Crane is also required to pay a monthly commitment fee with respect to the undrawn commitments under the Essex Crane Revolving Credit Facility of 0.375%.
The Essex Crane Revolving Credit Facility requires Essex Crane to maintain a trailing twelve month fixed charge coverage ratio of not less than 1.10 to 1.00. Additionally, Essex Crane must generate net cash proceeds, through the sale of certain assets, of not less than $8.0 million by March 31, 2016 with not less than $3.0 million of net cash proceeds generated by March 31, 2015. The Essex Crane Revolving Credit Facility also provides for an annual limit on certain capital expenditures of $2.0 million and limits the ability of Essex Crane to make distributions to affiliates. Essex Crane is permitted to incur certain additional indebtedness,
12
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
including secured purchase money indebtedness, of up to $1.5 million outstanding at any time, subject to certain provisions set forth in the Essex Crane Revolving Credit Facility.
On October 30, 2014, Essex Crane entered into a First Amendment to the Fourth Amended and Restated Credit Agreement to modify the calculation of the fixed charge coverage ratio to allow for the exclusion of severance expenses. Additionally, the amendment reduced the required fixed charge coverage ratio for September 2014 to not less than 1.08 to 1.00 and to waived an event of default that occurred as a result of the fixed charge coverage ratio falling below the required ratio of 1.10 to 1.00 in August 2014. All other terms of the May 13, 2014 Essex Crane Revolving Credit facility remained in effect following such amendment.
The maximum amount that could be borrowed under the revolving loan portion of the Essex Crane Revolving Credit Facility, net of letters of credit, interest rate swaps and other reserves was approximately $138.3 million and $170.1 million as of September 30, 2014 and December 31, 2013, respectively. Essex Crane’s available borrowing under its revolving credit facility was approximately $16.7 million and $21.9 million as of September 30, 2014 and December 31, 2013, respectively. After consideration of the 10% availability threshold covenant, the Company had available borrowings under its revolving credit facility of approximately $2.5 million and $4.4 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, there was $3.1 million and $9.3 million, respectively, of available formulated collateral in excess of the maximum borrowing amounts of approximately $138.3 million and $170.1 million, respectively. As of September 30, 2014 and December 31, 2013, the outstanding balance on the term loan portion of the Essex Crane Revolving Credit Facility was $30.0 million and zero, respectively.
As of September 30, 2014, the applicable prime rate, LIBOR rate and undrawn commitment fee on the revolving loan were 3.25%, 0.15% and 0.375%, respectively. As of December 31, 2013, the applicable prime rate, LIBOR rate and undrawn commitment fee on the revolving loan were 3.25%, 0.15% and 0.375%, respectively. As of September 30, 2014, the LIBOR rate on the term loan was 0.15% with a LIBOR floor of 1.00%.
Essex Crane is currently in compliance with the covenants and other provisions set forth in the Essex Crane Revolving Credit Facility, as amended. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on the Company’s liquidity and operations.
Coast Crane Revolving Credit Facility
On November 24, 2010, Coast Crane entered into a new revolving credit facility in conjunction with the acquisition of Coast Crane's assets (the “Coast Crane Revolving Credit Facility”). The Coast Crane Revolving Credit Facility provided for a revolving loan and letter of credit facility in the maximum aggregate principal amount of $75.0 million with a $2.0 million aggregate principal sublimit for letters of credit. Coast Crane’s ability to borrow under the Coast Crane Revolving Credit Facility is subject to, among other things, a borrowing base calculated based on the sum of (a) 85% of eligible accounts, (b) the lesser of 50% of eligible spare parts inventory and $5.0 million, (c) the lesser of 95% of the lesser of (x) the net orderly liquidation value and (y) the invoice cost, of eligible new equipment inventory and $15.0 million and (d) 85% of the net orderly liquidation value of eligible other equipment, less reserves established by the lenders and the liquidity reserve.
On November 14, 2011 the Coast Crane Revolving Credit Facility was amended and restated to include Coast Crane Ltd. as a signatory to the credit facility. The amendment provided that equipment owned by Coast Crane located in Canada may be included in the borrowing base calculation, which was previously prohibited. As amended, the Coast Crane Revolving Credit Facility agreement is collateralized by a first priority security interest in substantially all of Coast Crane’s and Coast Crane Ltd.’s assets.
Proceeds of the first borrowing under the amended Coast Crane Revolving Credit Facility in the amount of $1.5 million were used to pay off the remaining balance on the Coast Crane Ltd.'s revolving credit facility at the time of its termination in November 2011.
On May 7, 2012, the Coast Crane Revolving Credit Facility was amended to provide certain limitations on net capital expenditures and a $3.7 million “first amendment reserve” (as defined in the Coast Crane Revolving Credit Facility). The amendment also provides for a modified fixed charge coverage ratio of 1.20 to 1.00 as well as an obligation of Essex to contribute, or cause to be contributed, to Coast Crane up to $2.5 million to the extent that EBITDA for Coast Crane for the year ending December 31, 2012 was less than $6.0 million. Coast Crane EBITDA for the year ended December 31, 2012 exceeded the $6.0 million threshold and no contribution from Essex was required. The amendment also reduced the amount of certain additional indebtedness, including secured purchase money indebtedness, that Coast Crane may incur to $7.0 million for the year ending December 31, 2013 and
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ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$10.0 million thereafter. All other terms of the November 14, 2011 amendment and restatement remained in effect following such amendment.
A definitional interpretation resulted in Coast Crane's lenders determining that the springing fixed charge coverage ratio of 1.20 to 1.00 (which under the Coast Crane Revolving Credit Facility was triggered if Coast Crane's borrowing availability fell below $8.0 million) was triggered notwithstanding that Coast Crane and Coast Crane Ltd. had combined excess availability of $9.5 million, $8.4 million and $8.5 million as of January 31, 2012, February 29, 2012 and March 31, 2012, respectively. The modified fixed charge coverage ratio included in the May 7, 2012 amendment replaced the springing trailing twelve month fixed charge coverage ratio. The May 7, 2012 amendment also addressed and waived Coast Crane’s non-compliance (which existed as of March 31, 2012) with certain delivery and reporting requirements contained in the Coast Crane Revolving Credit Facility.
On March 12, 2013, the Coast Crane Revolving Credit Facility was amended and restated to extend the maturity date to March 12, 2017. The amendment also provides for a $40.0 million term loan and reduces the aggregate maximum principal amount of the revolving loan and letter of credit facility by a corresponding amount to $35.0 million. In addition, the amendment provides for scheduled quarterly term loan payments to reduce the term loan principal outstanding by $0.5 million beginning on June 30, 2013. The amounts borrowed under the term loan which are repaid or prepaid may not be reborrowed. All other terms of the May 7, 2012 amendment and restatement remained in effect following such amendment.
On February 21, 2014, Coast Crane and Coast Crane Ltd. entered into a First Amendment to the Second Amended and Restated Credit Agreement to amend the mandatory prepayment provision to exclude proceeds received from permitted equipment asset sales and to waive an event of default that occurred as a result of permitted equipment asset sales and the failure to apply proceeds to the term loan under the Coast Crane Credit Agreement. In addition, the First Amendment amends the borrowing base calculation as it relates to new equipment inventory, and creates a progressive new equipment inventory cap based on a leverage ratio.
Under the terms of the February 21, 2014 amendment, Coast Crane and Coast Crane Ltd. may borrow, repay and reborrow under the Coast Crane Facility. Coast Crane’s ability to borrow under the Coast Crane Facility is subject to, among other things, a borrowing base which is calculated as the sum of (a) 85% of eligible Coast Crane accounts, (b) the lesser of 50% of eligible Coast Crane inventory and $5.0 million, (c) the lesser of (i) 95% of the lesser of (x) the Net Orderly Liquidation Value and (y) the invoice cost, of U.S. Eligible New Sale Equipment Inventory and (ii) the U.S. Eligible New Sale Equipment Inventory Cap (as hereinafter defined) and (d) 85% of the net orderly liquidation value of eligible other equipment, less reserves established by the lenders and the liquidity reserve. Coast Crane Ltd.’s ability to borrow under the Coast Crane Facility is subject to among other things, a borrowing base which is calculated as the sum of (a) 85% of eligible Coast Crane Ltd. accounts, (b) the lesser of 50% of eligible Coast Crane Ltd. inventory and $0.8 million, (c) the lesser of (i) 95% of the lesser of (x) the net orderly liquidation value and (y) the invoice cost, of eligible new Coast Crane Ltd. equipment and (ii) $2.0 million and (d) 85% of the net orderly liquidation value of eligible other Coast Crane Ltd. equipment, less reserves established by the lenders and the liquidity reserve.
The U.S. Eligible New Sale Equipment Inventory Cap shall mean the U.S. Eligible New Sale Equipment Inventory Cap in effect from time to time determined based upon the applicable leverage ratio then in effect. The U.S. Eligible New Sale Equipment Inventory Cap is adjusted from $4.0 million to $15.0 million based on the applicable leverage ratio then in effect and also based on the amount of U.S. Eligible New Sale Equipment Inventory that is under a written agreement to be sold to a customer.
On April 29, 2014, Coast Crane entered into a Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement. The purpose of the Second Amendment is to adjust the minimum fixed charge coverage ratio requirement to 0.88 to 1.00, 1.00 to 1.00 and 1.10 to 1.00 from 1.20 to 1.00, for the trailing twelve month periods ended April 30, 2014, May 31, 2014 and June 30, 2014, respectively. The minimum required fixed charge coverage ratio for the trailing twelve month periods ending July 31, 2014 and thereafter will remain 1.20 to 1.00. In addition, the Second Amendment waives any event of default arising from Coast Crane’s breach of the minimum 1.20 to 1.00 fixed charge coverage ratio requirement for the trailing twelve month period ended March 31, 2014, so long as the fixed charge coverage ratio for such period is at least equal to 1.00 to 1.00. Further, under the amendment, Coast Crane is required to achieve a minimum trailing twelve month EBITDA threshold as of the last day of the month of $7.7 million for March 2014 through August 2014; $7.9 million for September 2014 through November 2014; $8.0 million for December 2014 through February 2015; $8.2 million for March 2015 through May 2015; and $8.3 million for June, 2015 and thereafter. All other terms of the February 21, 2014 amendment and restatement remained in effect following such amendment.
Interest accrues on Coast Crane's outstanding revolving loans and term loan under the revolving credit facility at either a per annum rate equal to (a) LIBOR plus 3.75%, with a 1.50% LIBOR floor or (b) the Base rate plus 2.75%, at Coast Crane’s election. Coast Crane will be obligated to pay a letter of credit fee on the outstanding letter of credit accommodations based on a per annum
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ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
rate of 3.75%. Interest on the revolving loans and fees on the letter of credit accommodations is payable monthly in arrears. Coast Crane is also obligated to pay an unused line fee on the amount by which the maximum credit under the Coast Crane Revolving Credit Facility exceeds the aggregate amount of revolving loans and letter of credit accommodations based on a per annum rate of 0.50%. At September 30, 2014, the applicable LIBOR rate, Base rate, and unused line commitment fee were 0.23%, 3.25% and 0.50%, respectively. At December 31, 2013, the applicable LIBOR rate, Base rate, and unused line commitment fee were 0.24%, 3.25% and 0.50%, respectively.
The maximum amount that could be borrowed under the revolving loans under the Coast Crane Revolving Credit Facility was approximately $35.0 million and $34.4 million as of September 30, 2014 and December 31, 2013, respectively. Coast Crane’s available borrowing under the Coast Crane Revolving Credit Facility was approximately $7.6 million and $8.2 million, respectively, after certain lender reserves of $5.6 million and $8.9 million as of September 30, 2014 and December 31, 2013, respectively. Although the Coast Crane Revolving Credit Facility limits Coast Crane’s and Coast Crane Ltd.’s ability to incur additional indebtedness, Coast Crane and Coast Crane Ltd. are permitted to incur certain additional indebtedness, including secured purchase money indebtedness, subject to certain conditions set forth in the Coast Crane Revolving Credit Facility.
As of September 30, 2014 and December 31, 2013, the outstanding balance on the term loan portion of the Coast Crane Revolving Credit Facility was $37.0 million and $38.5 million, respectively. At September 30, 2014 and December 31, 2013, $2.0 million of the outstanding balance is classified as a current liability as a result of the scheduled quarterly term loan payments of $0.5 million that began on June 30, 2013.
Coast Crane was in compliance with the covenants and other provisions set forth in the Coast Crane Revolving Credit Facility as of September 30, 2014. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on the Company’s liquidity and operations.
Unsecured Promissory Notes
In November 2010, the Company entered into an agreement with the holders of certain Coast Crane indebtedness pursuant to which such holders agreed, in consideration of the assumption of such indebtedness by the Company, to exchange such indebtedness for one or more promissory notes issued by the Company in the aggregate principal amount of $5.2 million. As additional consideration under the agreement, the Company agreed to issue 90,000 warrants to the holders of such indebtedness entitling the holder thereof to purchase up to 90,000 shares of Essex Rental common stock at an exercise price of $0.01 per share, and to reimburse such holders for certain legal fees incurred in connection with the transaction. The warrants were exercised in full on October 24, 2013.
In accordance with accounting guidance related to debt issued with conversion or other options, the fair value of the detachable warrants of $0.3 million was recorded as a discount to the principal balance outstanding with an offset to additional paid-in capital on the consolidated statements of stockholders’ equity and was amortized on a straight-line basis over the 3 year life of the notes as additional interest expense on the consolidated statement of operations, which is not materially different than the effective interest method. As of June 30, 2014 and December 31, 2013, the discount related to the fair value of the detachable warrants was fully amortized.
On December 31, 2013, the unsecured promissory notes were amended and restated to extend the maturity date to the earlier of October 31, 2016 or the consummation of any Essex Crane Revolving Credit Facility refinancing to the extent that the terms and conditions of the refinancing permit the Company to use the proceeds from refinancing for the repayment of the outstanding principal balance on the unsecured promissory notes. In addition, beginning on January 1, 2014, interest accrues on the outstanding promissory notes at a per annum rate of 18.00% and is payable in arrears.
As of September 30, 2014 and December 31, 2013, the outstanding principal balance on the unsecured promissory notes was approximately $1.7 million and $3.7 million, respectively. Interest accrued on the outstanding promissory notes at a per annum rate of 18.00% and 10.00% at September 30, 2014 and December 31, 2013, respectively.
Purchase Money Security Interest Debt
As of September 30, 2014, the Company's purchase money security interest debt consisted of the financing of seventeen pieces of equipment. Ten of these debt obligations accrue interest at rates that range from LIBOR plus 3.25% to LIBOR plus 5.38% per annum with interest payable in arrears. Seven of the debt obligations accrue interest at rates that range from 3.59% to 8.29%. The obligations are secured by the equipment purchased and have maturity dates that range from September 2015 to June 2019. As
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ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
these loans are amortizing, approximately $1.4 million of the total $4.7 million in principal payments is due prior to September 30, 2015 and as such, this amount is classified as a current liability in the accompanying consolidated balance sheets as of September 30, 2014.
As of December 31, 2013, the purchase money security interest debt consisted of the financing of eleven pieces of equipment with an outstanding balance of approximately $2.9 million. The interest rates at December 31, 2013 ranged from LIBOR plus 3.25% to LIBOR plus 5.38% for ten of the debt obligations. One of the debt obligations accrued interest at a rate of 8.29% as of December 31, 2013.
5. | Fair Value |
The FASB issued a statement on Fair Value Measurements which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis and clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
• | Level 1 - Observable inputs such as quoted prices in active markets: |
• | Level 2- Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
• | Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The fair value of the Company’s total debt obligations was approximately $217.5 million and $212.0 million as of September 30, 2014 and December 31, 2013, respectively, calculated using a discounted cash flows approach at a market rate of interest. The inputs used in the calculation are classified within Level 2 of the fair value hierarchy.
The fair values of the Company’s financial instruments, including cash and cash equivalents, approximate their carrying values. The Company bases its fair values on listed market prices or third party quotes when available. If not available, then the Company bases its estimates on instruments with similar terms and maturities.
6. | Accumulated Other Comprehensive Income Reclassifications |
The following table presents the Company's changes in accumulated other comprehensive income related to foreign currency translation adjustments for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Beginning balance | $ | 7 | $ | 6 | $ | 11 | $ | 10 | |||||||
Other comprehensive income (loss) before reclassifications | 21 | (2 | ) | 17 | (6 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net current period other comprehensive income (loss) | 21 | (2 | ) | 17 | (6 | ) | |||||||||
Ending balance | $ | 28 | $ | 4 | $ | 28 | $ | 4 | |||||||
7. | Earnings per Share |
The following tables set forth the computation of basic and diluted earnings per share (amounts in thousands except per share data):
16
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (2,398 | ) | $ | (1,903 | ) | $ | (8,308 | ) | $ | (5,998 | ) | |||
Weighted average shares outstanding: | |||||||||||||||
Basic | 24,814 | 24,654 | 24,802 | 24,640 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Warrants | — | — | — | — | |||||||||||
Options | — | — | — | — | |||||||||||
Restricted common stock | — | — | — | — | |||||||||||
Diluted | 24,814 | 24,654 | 24,802 | 24,640 | |||||||||||
Basic earnings (loss) per share | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.33 | ) | $ | (0.24 | ) | |||
Diluted earnings (loss) per share | $ | (0.10 | ) | $ | (0.08 | ) | $ | (0.33 | ) | $ | (0.24 | ) | |||
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Included in the weighted average number of shares outstanding for the nine months ended September 30, 2014 and 2013 are 493,671 shares of common stock for the effective conversion of the retained interest in Holdings into common stock of the Company. The retained interests were converted to common stock on April 17, 2014. Diluted EPS adjusts basic EPS for the effects of Warrants, Units and Options; only in the periods in which such effect is dilutive.
The weighted average restricted stock outstanding that could be converted into 24,215 and 3,931 common shares for the three months ended September 30, 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. Weighted average options outstanding that could be converted into zero and 74,259 common shares for the three months ended September 30, 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. Weighted average warrants outstanding that could be converted into 89,779 common shares for the three months ended September 30, 2013 were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
The weighted average restricted stock outstanding that could be converted into 30,197 and 1,738 common shares for the nine months ended September 30, 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. Weighted average options outstanding that could be converted into zero and 82,433 common shares for the nine months ended September 30, 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. Weighted average warrants outstanding that could be converted into 89,783 common shares for the nine months ended September 30, 2013 were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
As of September 30, 2014 and 2013, there were 1,461,717 and 1,430,459 stock options outstanding, respectively, which are exercisable at weighted average exercise prices of $4.52 and $5.29, respectively. As of September 30, 2013, there were 90,000 privately issued warrants outstanding which were exercisable at a weighted average exercise price of $0.01. The warrants were exercised in full on October 24, 2013.
8. | Income Taxes |
The Company’s effective tax rate of 39.2% for the nine months ended September 30, 2014 was higher than the statutory federal rate due to discrete items including return to provision adjustments, state net operating loss true-ups, state valuation allowances and state income tax audit activity. The Company’s effective tax rate of 37.6% for the nine months ended September 30, 2013 was higher than the statutory federal rate due to state taxes.
As of September 30, 2014, the Company has unused federal net operating loss carry-forwards totaling approximately $151.0 million that begin expiring in 2022. As of September 30, 2014, the Company also has unused state net operating loss carry-forwards totaling approximately $83.8 million, which expire between 2014 and 2035. The net operating loss carry-forwards are primarily from the acquisition of Holdings and losses in recent years. The Company had unused federal and state net operating loss carry-forwards totaling approximately $143.8 million and $77.3 million, respectively, as of December 31, 2013.
17
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company also has remaining excess tax goodwill of approximately $3.1 million as of September 30, 2014 associated with the acquisition of Holdings. The excess tax goodwill will be amortized and deducted for tax purposes over the remaining three year term. However, the excess tax goodwill has not been recorded for GAAP purposes and will not be realized as a benefit to the income tax provision until the amortization deductions are realized through the reduction of taxable income in future years. The Company had remaining excess tax goodwill of approximately $3.1 million as of December 31, 2013.
The Company is generally no longer subject to federal and state examinations for tax years prior to December 31, 2010.
The Company had unrecognized tax benefits of approximately $0.1 million as of September 30, 2014 primarily associated with tax positions taken in a prior years. The Company had unrecognized tax benefits of approximately $0.1 million as of December 31, 2013. The Company did not incur any interest expense related to uncertain tax positions for the nine months ended September 30, 2014 and 2013.
The Company utilizes a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
9. | Stock Based Compensation |
The Company may issue up to 1,500,000 shares of common stock pursuant to its 2011 Long-term Incentive Plan to employees, non-employee directors and consultants of the Company. The Company may issue up to 1,575,000 shares of common stock pursuant to its 2008 Long-term Incentive Plan to employees, non-employee directors and consultants of the Company. Options to purchase shares of common stock are granted at its market price on the grant date and expire at either seven or ten years from issuance.
Stock Options
The Company calculates stock option compensation expense based on the grant date fair value of the award and recognizes expense on a straight-line basis over the service period of the award. The Company has granted to certain key members of management options to purchase the following shares by grant date during the nine months ended September 30, 2014:
Grant Date | |||||||||||
June 27, 2014 | June 27, 2014 | March 13, 2014 | |||||||||
Options granted | 49,814 | 98,024 | 100,000 | ||||||||
Exercise price per share | $ | 2.51 | $ | 2.51 | $ | 3.26 | |||||
Service period | 3 years | 3 years | 3 years | ||||||||
Option life | 7 years | 10 years | 10 years | ||||||||
The fair values of the stock options granted are estimated at the date of grant using the Black-Scholes option pricing model. The model is sensitive to changes in assumptions which can materially affect the fair value estimate. The Company’s method of estimating the expected volatility for the 2014 option grants was based on the volatility of its own common shares outstanding. The expected dividend yield was estimated based on the Company’s expected dividend rate over the term of the options. The expected term of the options was based on management’s estimate, and the risk-free rate is based on U.S. Treasuries with a term approximating the expected life of the options.
The following table presents the assumptions used in the Black-Scholes option pricing model and the resulting option fair values by grant date during the nine months ended September 30, 2014 (amounts in thousands, except per share data):
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ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Grant Date | |||||||||||
June 27, 2014 | June 27, 2014 | March 13, 2014 | |||||||||
Expected dividend yield | — | % | — | % | — | % | |||||
Risk-free interest rate | 1.45 | % | 1.89 | % | 1.84 | % | |||||
Expected volatility | 69.94 | % | 69.94 | % | 71.12 | % | |||||
Expected life of option | 4.5 years | 6 years | 6 years | ||||||||
Grant date fair value per share | $ | 1.40 | $ | 1.58 | $ | 1.88 | |||||
Grant date fair value | $ | 70 | $ | 155 | $ | 188 | |||||
On November 11, 2013 and May 31, 2013, the Company entered into separation agreements with its former Chief Executive Officer and former Chief Financial Officer, respectively. In accordance with the terms of the separation agreements, and as permitted under the terms of the applicable option awards, the Company agreed that options awarded to the former executives of the Company on December 18, 2008 and January 14, 2011, to the extent vested, will remain exercisable until the ten year anniversary of the applicable grant date, instead of expiring 90 days following the date employment was terminated, as provided in the option award agreements. The separation agreements resulted in the forfeiture of 403,353 vested options issued under the March 18, 2010 option grant and 32,487 unvested options issued under the January 14, 2011 option grant.
Restricted Shares of Common Stock
On June 27, 2014, the Company granted to key members of management 51,640 shares of restricted common stock with an aggregate grant date fair value of approximately $0.1 million. One-third of the restricted shares are scheduled to vest on June 27, 2015, June 27, 2016 and June 27, 2017, respectively, and as such, no shares were vested as of September 30, 2014.
On November 15, 2013, the Company granted to a key member of management 50,000 shares of restricted common stock with an aggregate grant date fair value of $0.2 million. One-third of the restricted shares are scheduled to vest on November 15, 2014, November 15, 2015 and November 15, 2016, respectively, and as such, no shares were vested as of September 30, 2014.
On June 18, 2013, the Company granted to a key member of management 67,500 shares of restricted common stock with an aggregate grant date fair value of $0.3 million. One-third of the restricted shares vested on June 18, 2014 and an additional one-third of the restricted shares are scheduled to vest on June 18, 2015 and June 18, 2016, respectively, and as such, 22,500 shares were vested as of September 30, 2014.
On January 3, 2011, the Company granted to certain employees 166,943 shares of restricted common stock with an aggregate grant date fair value of $0.9 million. One half of these restricted shares vested on January 3, 2012 and the remainder vested on January 3, 2013, and as such, 166,943 were vested as of September 30, 2014 and 2013.
The Company recorded $0.1 million of non-cash compensation expense associated with stock options and restricted shares in selling, general and administrative expenses for each of the three months ended September 30, 2014 and 2013. The Company recorded $0.3 million and $0.7 million of non-cash compensation expense associated with stock options and restricted shares in selling, general and administrative expenses for the nine months ended September 30, 2014 and 2013, respectively. There was approximately $1.0 million and $0.7 million of total unrecognized compensation cost as of September 30, 2014 and December 31, 2013, respectively related to non-vested stock option and restricted share awards. The remaining cost is expected to be recognized ratably over the remaining respective vesting periods.
10. | Common Stock and Warrants |
In October 2008 our Board of Directors authorized a stock and warrant repurchase program, under which the Company may purchase, from time to time, in open market transactions at prevailing prices or through privately negotiated transactions as conditions permit, up to $12.0 million of the Company’s outstanding common stock and warrants. The Company’s stock repurchase program was suspended in May 2010 in conjunction with the launching of the cashless exercise warrant offer. Repurchases of our common stock and warrants were funded with cash flows of the business.
The Company issued 45,719 and 43,715 shares of common stock, respectively, for services provided by the members of the Strategic Planning and Finance Committee of the Board of Directors during the nine months ended September 30, 2014 and 2013, respectively. The Company issued 3,155 shares of common stock for services provided by one member of the Board of Directors
19
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
during the nine months ended September 30, 2014. The Company issued 8,352 shares of common stock to certain members of management in lieu of cash compensation during the nine months ended September 30, 2014. The Company issued 22,500 and 83,469 shares of common stock related to the vesting of restricted shares during the nine months ended September 30, 2014 and 2013, respectively, which were previously granted to certain employees. The Company withheld 9,621 and 29,489 common shares to cover the employee tax obligation related to the restricted shares issuance during the nine months ended September 30, 2014 and 2013, respectively.
11. | Segment Information |
We have identified three reportable segments: equipment rentals, equipment distribution, and parts and service. These segments are based upon how management of the Company allocates resources and assesses performance. The equipment rental segment includes rental, transportation and used rental equipment sales. There were no sales between segments for any of the periods presented. Selling, general, and administrative expenses as well as all other income and expense items below gross profit are not generally allocated to our reportable segments.
We do not compile discrete financial information by our segments other than the information presented below. The following table presents information about our reportable segments related to revenues and gross profit (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Segment revenues | |||||||||||||||
Equipment rentals | $ | 21,720 | $ | 14,416 | $ | 53,312 | $ | 49,789 | |||||||
Equipment distribution | 2,760 | 3,772 | 6,938 | 8,337 | |||||||||||
Parts and service | 5,101 | 4,620 | 14,926 | 14,960 | |||||||||||
Total revenues | $ | 29,581 | $ | 22,808 | $ | 75,176 | $ | 73,086 | |||||||
Segment gross profit | |||||||||||||||
Equipment rentals | $ | 5,150 | $ | 3,805 | $ | 11,825 | $ | 12,554 | |||||||
Equipment distribution | 161 | 368 | 335 | 807 | |||||||||||
Parts and service | 1,206 | 1,283 | 3,812 | 4,181 | |||||||||||
Total gross profit | $ | 6,517 | $ | 5,456 | $ | 15,972 | $ | 17,542 | |||||||
The following table presents information about our reportable segments related to total assets (amounts in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Segment identified assets | |||||||
Equipment rentals | $ | 295,990 | $ | 307,372 | |||
Equipment distribution | 9,195 | 5,150 | |||||
Parts and service | 6,910 | 5,261 | |||||
Total segment identified assets | 312,095 | 317,783 | |||||
Non-segmented identified assets | 14,436 | 14,993 | |||||
Total assets | $ | 326,531 | $ | 332,776 | |||
The Company operates primarily in the United States. Our sales to international customers for the three months ended September 30, 2014 were 5.8% of total revenues. Sales to customers in Canada represented 4.9% of total revenues. No customer accounted for more than 10% of our revenues on a consolidated basis. Within the equipment distribution segment for the three months ended September 30, 2014, four customers individually accounted for approximately 17.9%, 13.3%, 12.2% and 10.8% of revenues on a segmented basis. The concentration of revenues from these customers within the equipment distribution segment is directly attributable to the large dollar value of individual transactions and the small number of individual transactions.
Our sales to international customers for the three months ended September 30, 2013 were 8.3% of total revenues. Sales to customers in Canada represented 7.5% of total revenues. No customer accounted for more than 10% of our revenues on a consolidated basis. Within the equipment distribution segment for the three months ended September 30, 2013, four customers individually accounted for approximately 23.4%, 13.1%, 11.5% and 10.3% of revenues on a segmented basis. The concentration
20
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of revenues from these customers within the equipment distribution segment is directly attributable to the large dollar value of individual transactions and the small number of individual transactions.
Our sales to international customers for the nine months ended September 30, 2014 were 7.1% of total revenues. Sales to customers in Canada represented 5.3% of total revenues. No customer accounted for more than 10% of our revenues on a consolidated basis. Within the equipment rentals segment for the nine months ended September 30, 2014, one customer individually accounted for approximately 10.3% of revenues on a segmented basis. The concentration of revenues from this customer within the equipment rentals segment is directly attributable to the number of pieces of equipment on rent and the high average monthly rental rates for those pieces of equipment. Within the equipment distribution segment for the nine months ended September 30, 2014, one customer individually accounted for approximately 16.7% of revenues on a segmented basis. The concentration of revenues from this customer within the equipment distribution segment is directly attributable to the large dollar value of individual transactions and the small number of individual transactions.
Our sales to international customers for the nine months ended September 30, 2013 were 8.9% of total revenues. Sales to customers in Canada represented 8.2% of total revenues. No customer accounted for more than 10% of our revenues on a consolidated basis. Within the equipment distribution segment for the nine months ended September 30, 2013, two customers individually accounted for approximately 34.0% and 10.6% of revenues on a segmented basis. The concentration of revenues from these customer swithin the equipment distribution segment is directly attributable to the large dollar value of individual transactions and the small number of individual transactions.
The Company maintains assets in Canada associated with our Coast Crane Ltd. subsidiary. Total assets located in Canada at September 30, 2014 totaled approximately $4.1 million, including long-lived assets totaling approximately $3.0 million. At December 31, 2013, total assets located in Canada totaled approximately $4.5 million, including long-lived assets totaling approximately $3.5 million.
12. | Commitments, Contingencies and Related Party Transactions |
Since December 2010, the Company has occupied office space at 500 Fifth Avenue, 50th Floor, New York, NY 10110, provided by Hyde Park Real Estate LLC, an affiliate of Laurence S. Levy, our chairman of the board. Such affiliate has agreed that it will make such office space, as well as certain office and administrative services, available to the Company, as may be required by the Company from time to time. Effective January 1, 2012, the Company has agreed to pay such entity $7,688 per month for such services based on reimbursement of actual costs with the terms of such arrangement being reconsidered from time to time. The Company’s statements of operations for the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2014 and 2013 include approximately $23,064 and $69,192, respectively of rent expense related to these agreements.
In November 2010, the Company entered into an agreement with the holders of certain Coast Crane indebtedness pursuant to which such holders agreed, in consideration of the assumption of such indebtedness by the Company, to exchange such indebtedness of $5.2 million for unsecured promissory notes issued by the Company in the aggregate principal amount of $5.2 million plus the receipt of up to 90,000 warrants to purchase Essex common stock at $0.01 per share. The warrants were exercised in full on October 24, 2013. The holders of the unsecured promissory notes are related parties to the Company as they owned a significant amount of the Company’s outstanding shares of common stock at the time of the transaction.
The Company maintains reserves for personal property taxes. These reserves are based on a variety of factors including: duration of rental in each county jurisdiction, tax rates, rental contract terms, customer filings, tax-exempt nature of projects or jurisdictions, statutes of limitations and potential related penalties and interest. Additionally, most customer rental contracts contain a provision that provides that personal property taxes are an obligation to be borne by the lessee. Where provided in the rental contract, management will invoice the customer for any personal property taxes paid by the Company. An estimated receivable has been recorded, net of an estimated allowance in connection with this liability. This customer receivable has been presented as other receivables in current assets while the property tax reserve has been included in accrued taxes.
Management estimated the gross personal property taxes liability and related contractual customer receivable of the Company to be approximately $3.2 million and $1.7 million, respectively, as of September 30, 2014 and approximately $3.3 million and $2.0 million, respectively, as of December 31, 2013.
13. | Subsequent Events |
On October 30, 2014, Essex Crane entered into a First Amendment to the Fourth Amended and Restated Credit Agreement to modify the calculation of the fixed charge coverage ratio to allow for the exclusion of severance expenses. Additionally, the
21
ESSEX RENTAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
amendment reduced the required fixed charge coverage ratio for September 2014 to not less than 1.08 to 1.00 and to waive an event of default that occurred as a result of the fixed charge coverage ratio falling below the required ratio of 1.10 to 1.00 in August 2014. All other terms of the May 13, 2014 Essex Crane Revolving Credit facility remained in effect following such amendment.
On October 8, 2014, Coast Crane entered into an interest rate cap agreement to hedge its exposure to interest rate fluctuations. The agreement has a notional principal amount of $40.0 million, a 90-day LIBOR cap of 2.50% and matures in June 2016. This interest rate cap was not designated for hedge accounting treatment.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the financial position of Essex Rental Corp. and its subsidiaries as of September 30, 2014, and its results of operations for the three and nine months ended September 30, 2014 and should be read in conjunction with (i) the unaudited 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.
As used in this Quarterly Report, references to “the Company” or “Essex” or to “we,” “us” or “our” refer to Essex Rental Corp., together with its consolidated subsidiaries, Essex Holdings, LLC, Essex Crane Rental Corp., Essex Finance Corp., Coast Crane Company and Coast Crane Ltd., unless the context otherwise requires.
Business
Background
Essex Rental Corp. (formerly Hyde Park Acquisition Corp.) was incorporated in Delaware on August 21, 2006 as a blank check company whose objective was to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our activities from our inception through October 31, 2008 were limited to completing our initial public offering and completing a business combination.
On October 31, 2008, we acquired Essex Crane Rental Corp., which we refer to as Essex Crane, through the acquisition of substantially all of the ownership interests of Essex Crane’s parent company, Essex Holdings, LLC, which we refer to as Holdings.
Essex Crane is a leading provider of lattice-boom crawler crane and attachment rental services and possesses one of the largest fleets of such equipment in the United States (U.S.). From October 31, 2008 until November 24, 2010, we conducted substantially all of our operations through Essex Crane.
On November 24, 2010 we acquired substantially all of the assets, and assumed certain liabilities (the “Coast Acquisition”) of Coast Crane Company (“Coast Liquidating Co.”), a leading provider of specialty lifting solutions and crane rental services on the West Coast of the United States. The assets acquired included all of the outstanding shares of capital stock of Coast Crane Ltd., a British Columbia corporation, through which Coast Liquidating Co. conducted its operations in Canada. References to “Coast Crane” mean Coast Crane Company, a Delaware corporation, formerly known as CC Bidding Corp. (“CCBC”), through which we operate the business and assets acquired in the Coast Acquisition.
We conduct substantially all of our operations through Essex Crane and Coast Crane.
Products and Services; Operating Segments
Our principal products and services, as grouped within the Company’s three defined operating segments, are described below.
Equipment Rental Segment We offer crawler cranes and attachments, rough terrain cranes, boom trucks and tower cranes for rent. Most attachments are rented separately and increase either the lifting capacity or the reach capabilities of the base cranes. In addition, we provide ancillary items for a fee that include, but are not limited to, accessory rentals, rental unit delivery charges, fuel charges, and in rare instances, third party contracted operator labor. We rent our large fleet of cranes and attachments and other lifting equipment to a variety of engineering and construction customers under contracts, most of which have rental periods of between four and eighteen months. Rough terrain cranes and boom trucks may be rented as frequently as daily. The contracts typically provide for an agreed upon rental rate and a specified rental period. The revenue from crane and attachment rentals is primarily driven by rental rates (which are typically higher for the more expensive cranes with heavier lifting capacities as compared to less expensive cranes with lower lifting capacities) charged to customers and the fleet utilization rate. Rental revenue is recognized as earned in accordance with the terms of the relevant rental agreement on a pro rata daily basis.
Transportation service revenue is derived from the management of the logistics process by which our rental equipment is transported to and from customers’ construction sites, including the contracting of third party trucking for such transportation. Transportation revenue is earned under equipment rental agreements on a gross basis representing both the third-party provider’s fee for transportation and our fee for managing these transportation services and they are matched with the associated costs for amounts paid to third party providers. The key drivers of transportation revenue are crane, attachment and other lifting equipment utilization rates and average contract lengths. Shorter average contract durations and high utilization rates generally result in higher
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requirements for transportation of equipment and resulting revenue. The distance that equipment has to move between different jobsites and the type of equipment being moved (number of truckloads) are also major drivers of transportation revenue and associated costs. Transportation revenue is recognized upon completion of the transportation of equipment.
In the ordinary course of business, we sell used rental cranes and attachments and other rental lifting equipment to optimize the combination of crane models and lifting capacities available in our rental fleet to match perceived market demands and opportunities. On average, we have historically achieved sale prices for equipment in excess of the appraised value. This is due to the long useful life of the crane and attachment fleet, the conditions prevailing in the secondary market and the high content of engineered high-strength steel included in these fleet assets. Used rental equipment sales are recognized at the time ownership transfers, which is generally based on delivery and/or inspection and acceptance of the equipment in accordance with the terms of the corresponding agreement. The rate at which we replace used equipment with new equipment depends on a number of factors, including changing general economic conditions, growth opportunities and the need to adjust fleet mix to meet customer requirements and demand.
Equipment Distribution Segment We offer a variety of construction equipment products for retail sales including crawler cranes, tower cranes, boom trucks, all-terrain cranes, rough terrain cranes and other lifting equipment used in the construction industry. The revenue from retail equipment sales is primarily driven by the level of construction activity in a particular geographic region. Equipment sales revenue is recognized at the time ownership transfers, which is generally based on delivery and/or inspection and acceptance of the equipment in accordance with the terms of the corresponding agreement. Our equipment distribution operations are conducted through our Coast Crane subsidiary.
Parts and Service Segment We are a parts distributor for various lifting equipment manufacturers and routinely sell parts to our customers in the construction industry. While crawler cranes or attachments, tower cranes, rough terrain cranes, boom trucks or other equipment are on rent, much of the repair and maintenance work beyond normal wear is paid for by the customer. We perform a portion of the repair and maintenance work and recognize revenues for such services to the extent they are the customer’s responsibility. This category of revenues also includes providing certain services while erecting the equipment during initial assembly or disassembly of the equipment at the end of the rental. We also provide repair and maintenance services for customers that own their own equipment and request our services at one of our service center locations. Our target customers for these ancillary services are our current rental customers, customers that own their own equipment and those who purchase new and used equipment from us. Key drivers for repair and maintenance revenue are the general construction activity in a given geographic region and our skilled mechanics. Repair and maintenance revenue is recognized as such services are performed. Parts revenue is recognized at the time of sale.
In summary, for the three months ended September 30, 2014, 73.4% of total revenues were derived from our equipment rental segment, 9.3% from our equipment distribution segment and 17.3% from our parts and service segment. For the nine months ended September 30, 2014, 70.9% of total revenues were derived from our equipment rental segment, 9.2% from our equipment distribution segment and 19.9% from our parts and service segment.
Utilization Measurement
We measure utilization using the method referred to as the “days” method. Management believes that this method, while it may reflect lower utilization rates than other methods used in the industry, is the most accurate method for measuring equipment utilization and correlates most closely with rental revenue. Under this method, a real time report is generated from the ERP system for each piece of equipment on rent in a period. The report includes the number of days each piece of equipment was on rent on a particular lease and the base monthly rental rate (excluding any overtime revenues). The total number of days on rent of all pieces of rental equipment provides the numerator for determining utilization. The denominator is all rental equipment assets owned times the number of days in the month. The “days” method is the utilization measurement that we currently use, and we anticipate that the “days” method will be the primary basis for future disclosure of utilization rates for our cranes and other construction equipment offered for rent.
The following table provides a summary of utilization rates calculated using the “days” method for the three and nine months ended September 30, 2014 and 2013 for the equipment types owned during those periods:
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Crawler Cranes - Hydraulic | 79.6 | % | 70.9 | % | 67.4 | % | 66.3 | % | |||
Crawler Cranes - Traditional | 30.0 | % | 31.4 | % | 27.8 | % | 31.0 | % | |||
Rough Terrain Cranes | 65.9 | % | 50.5 | % | 64.1 | % | 56.4 | % | |||
Boom Trucks | 49.8 | % | 52.0 | % | 47.1 | % | 51.9 | % | |||
Self-Erecting Tower Cranes | 42.9 | % | 32.6 | % | 39.4 | % | 40.8 | % | |||
City & Other Tower Cranes | 52.7 | % | 33.5 | % | 45.9 | % | 44.8 | % | |||
Fleet Overview
As of September 30, 2014 and December 31, 2013, the total orderly liquidation value of the rental equipment fleet was approximately $336.9 million and $345.6 million, respectively.
The Company remains focused on reshaping our asset portfolio and repositioning our fleet through the sale of rental equipment assets, which management believes will improve utilization and increase the return on invested capital. The Company intends to use the proceeds from the sale of rental equipment assets to rebalance the Company's rental fleet mix through the purchase of replacement assets or reduce debt. During the three months ended September 30, 2014, the Company agreed to terms on the sale of fifteen traditional crawler cranes with the sale to be completed in groups over the course of the nine month period ended March 31, 2015. A portion of the sale was completed during the three months ended September 30, 2014 and those assets were replaced with rough terrain cranes in specific tonnage capacities that are in high demand and whose utilization currently exceeds 80%.
Current Environment
Since 2012, the Company has experienced increasing demand from the end markets that it serves, but has yet to return to pre-recession levels of revenue that were experienced prior to 2009. During the nine months ended September 30, 2014, the Company has experienced a robust increase in rental demand, particularly for hydraulic crawler cranes and rough terrain cranes. Crawler crane quoting activity remains strong and has increased by approximately 20% in the nine months ended September 30, 2014 as compared to the prior year. This increase in demand occurred most significantly during the latter part of the quarter ended June 30, 2014. The expected revenue from signed crawler crane leases increased by approximately 32% as of September 30, 2014 as compared to September 30, 2013 and the backlog of expected rental revenues based on minimum lease terms for crawler cranes as of September 30, 2014 increased by approximately 19% as compared to the backlog as of September 30, 2013. Rental backlog is comprised of the expected revenue over the course of the succeeding 12 months for 1) the remaining minimum term, as per executed equipment rental agreements with customers of ongoing equipment rental agreements at year-end and 2) executed equipment rental agreements scheduled to begin within the next 12 months. The Company is also experiencing increasing utilization rates for city and other tower cranes. Despite increasing utilization rates, market forces continue to make it difficult for the Company to increase rental rates in a meaningful way. The Company is focused on increasing utilization by striving to create a more customer centric, service oriented culture with an emphasis on continuous quality improvement. The Company is also focused on selling underutilized rental assets, particularly traditional crawler cranes, in order to increase shareholders' return on invested capital.
Adjusted EBITDA to Net Income Reconciliation
Adjusted EBITDA represents the sum of net income, tax benefit, foreign currency exchange gains and losses, interest expense, other income, depreciation, amortization and impairment expense. Adjusted EBITDA is used internally when evaluating our operating performance and, we believe, allows investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results under GAAP and the accompanying reconciliation, provides useful information about operating performance and period-over-period growth, and provides additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. However, Adjusted EBITDA is not a measure of financial performance under GAAP and, accordingly, should not be considered as an alternative to net income (loss) as an indicator of operating performance.
The following table provides a summary of Adjusted EBITDA for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (2,398 | ) | $ | (1,903 | ) | $ | (8,308 | ) | $ | (5,998 | ) | |||
Benefit for income taxes | (1,834 | ) | (1,030 | ) | (5,354 | ) | (3,609 | ) | |||||||
Foreign currency exchange (gains) losses | 172 | (107 | ) | 225 | 222 | ||||||||||
Interest expense | 3,669 | 3,075 | 10,243 | 8,576 | |||||||||||
Other (income) expense | 3 | (553 | ) | 1 | (559 | ) | |||||||||
Loss from operations | (388 | ) | (518 | ) | (3,193 | ) | (1,368 | ) | |||||||
Depreciation | 4,538 | 4,652 | 13,755 | 13,981 | |||||||||||
Impairment - rental equipment, held for sale | 771 | — | 771 | — | |||||||||||
Other depreciation and amortization | 195 | 251 | 708 | 793 | |||||||||||
Adjusted EBITDA | $ | 5,116 | $ | 4,385 | $ | 12,041 | $ | 13,406 | |||||||
Results of Operations
Three months ended September 30, 2014 compared to the three months ended September 30, 2013
The Company had a net loss of $2.4 million for the three months ended September 30, 2014. Total revenue, cost of revenues and gross profit were $29.6 million, $23.1 million and $6.5 million, respectively, for the three months ended September 30, 2014. Total selling, general, administrative and other expenses of $6.1 million was composed primarily of salaries, payroll taxes benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $3.7 million for the three months ended September 30, 2014. The Company had an income tax benefit of $1.8 million for the three months ended September 30, 2014 related to loss before income taxes of $4.2 million. Adjusted EBITDA, which includes the impact of $0.1 million of non-cash stock compensation and $0.1 million of non-recurring expenses, was $5.1 million for the three months ended September 30, 2014.
The Company had a net loss of $1.9 million for the three months ended September 30, 2013. Total revenue, cost of revenues and gross profit were $22.8 million, $17.4 million and $5.5 million, respectively, for the three months ended September 30, 2013. Total selling, general, administrative and other expenses of $6.0 million was composed primarily of salaries, payroll taxes benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $3.1 million for the three months ended September 30, 2013. The Company had an income tax benefit of $1.0 million for the three months ended September 30, 2013 related to loss before income taxes of $2.9 million. Adjusted EBITDA, which includes the impact of $0.1 million of non-cash stock compensation expense, was $4.4 million for the three months ended September 30, 2013.
Revenues
Revenues for the three months ended September 30, 2014 were $29.6 million, a 29.7% increase compared to revenues of $22.8 million for the three months ended September 30, 2013. The following table provides a summary of the Company’s revenues by operating segment (amounts in thousands):
Three Months Ended September 30, | Dollar | Percentage | ||||||||||||
2014 | 2013 | Change | Change | |||||||||||
Segment revenues | ||||||||||||||
Equipment rentals | $ | 21,720 | $ | 14,416 | $ | 7,304 | 50.7 | % | ||||||
Equipment distribution | 2,760 | 3,772 | (1,012 | ) | (26.8 | )% | ||||||||
Parts and service | 5,101 | 4,620 | 481 | 10.4 | % | |||||||||
Total revenues | $ | 29,581 | $ | 22,808 | $ | 6,773 | 29.7 | % | ||||||
Equipment Rentals
Equipment rental segment revenues, which represent 73.4% of total revenues, was $21.7 million for the three months ended September 30, 2014, a 50.7% increase from $14.4 million for the three months ended September 30, 2013. The equipment rental segment includes rental, transportation and used rental equipment sales.
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Equipment rentals revenue, which represented 46.1% of total revenues, was $13.6 million for the three months ended September 30, 2014, a 15.6% increase from $11.8 million for the three months ended September 30, 2013. The two key drivers of equipment rental revenues are utilization and average rental rates.
The increase in equipment rentals revenue is primarily due to an increase in rental revenue generated from rough terrain cranes, tower cranes, and hydraulic crawler cranes and attachments. These increases in rental revenues were partially offset by a decrease in rental revenues for traditional crawler cranes and attachments and boom trucks.
There was an increase in average crawler crane rental rate of 4.5% to $18,297 (per crane per rental month) for the three months ended September 30, 2014 from $17,509 for the three months ended September 30, 2013. This increase in the overall average rental rate, which includes both traditional and hydraulic crawler cranes, is primarily the result of the mix of cranes on rent, with hydraulic crawler cranes contributing a larger portion of overall crawler crane revenue than they did in the three months ended September 30, 2013. Our crawler crane fleet has benefited from an increase in power and industrial marine related projects in the Gulf Coast and southeast region of the country. While average rental rates have increased for most subclasses within the hydraulic crawler crane fleet when compared to the three months ended September 30, 2013, management has not been able to significantly increase average rental rates due to competitive pressure.
Utilization for rough terrain cranes for the three months ended September 30, 2014 and 2013 was 65.9% and 50.5%, respectively. Rough terrain cranes benefit from the broad array of markets that they can serve. The increase in utilization was driven by an increase in demand from the power, petrochemical and transportation end markets along with the utilization improvement initiative that made these assets available to the entire sales force. Boom truck utilization decreased to 49.8% for the three months ended September 30, 2014 compared to 52.0% for the three months ended September 30, 2013. Weakening demand in the power and transportation end markets was the primary factor for the decreased boom truck utilization. Tower crane utilization was 42.9% and 52.7% for the self-erecting and city & other tower cranes, respectively, for the three months ended September 30, 2014 as compared to 32.6% and 33.5% for the self-erecting and city & other tower cranes, respectively, for the three months ended September 30, 2013. Our tower cranes are primarily impacted by the general building end market, and their utilization levels will reflect the strength of that end market.
Transportation revenue, which represents 6.9% of total revenues, was $2.1 million for the three months ended September 30, 2014, a 52.4% increase from $1.3 million for the three months ended September 30, 2013. The increase in transportation revenue is directly attributable to the number of equipment moves for our higher lifting capacity rental equipment.
Used rental equipment sales revenue was $6.0 million for the three months ended September 30, 2014; a $4.8 million or 376.2% increase compared to the three months ended September 30, 2013. The increase in total used rental equipment sales revenue is primarily attributable to the type and number of used rental equipment assets sold during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The Company sold seven high lifting capacity crawler cranes during the three months ended September 30, 2014, which generated sales proceeds of approximately $2.6 million. In total, during the three months ended September 30, 2014, the Company sold twenty-one pieces of used rental equipment. During the three months ended September 30, 2013, the Company sold seven pieces of used rental equipment.
Equipment Distribution
Equipment distribution segment revenue, which represents 9.3% of total revenue, was $2.8 million for the three months ended September 30, 2014, a 26.8% decrease from $3.8 million for the three months ended September 30, 2013. The decrease in equipment distribution segment revenue is primarily attributable to the number sales transactions as compared to the prior year.
Parts and Service
Parts and service segment revenue, which represents 17.3% of total revenue, was $5.1 million for the three months ended September 30, 2014, a 10.4% increase from $4.6 million for the three months ended September 30, 2013. The increase is primarily attributable to an increase in over the counter parts sales and repair and maintenance revenue billed related to customer owned equipment.
Gross Profit
Gross Profit for the three months ended September 30, 2014 was $6.5 million, a 19.4% increase from gross profit of $5.5 million for the three months ended September 30, 2013. Gross profit margin was 22.0% for the three months ended September
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30, 2014 compared to 23.9% for the three months ended September 30, 2013. The following table provides a summary of the Company’s gross profit by operating segment (amounts in thousands):
Three Months Ended September 30, | Dollar | Percentage | ||||||||||||
2014 | 2013 | Change | Change | |||||||||||
Segment gross profit | ||||||||||||||
Equipment rentals | $ | 5,150 | $ | 3,805 | $ | 1,345 | 35.3 | % | ||||||
Equipment distribution | 161 | 368 | (207 | ) | (56.3 | )% | ||||||||
Parts and service | 1,206 | 1,283 | (77 | ) | (6.0 | )% | ||||||||
Total gross profit | $ | 6,517 | $ | 5,456 | $ | 1,061 | 19.4 | % | ||||||
Equipment rentals segment gross profit of $5.2 million for the three months ended September 30, 2014 increased $1.3 million or 35.3% as compared to the three months ended September 30, 2013. Within the equipment rentals segment, certain revenue streams have inherently higher margins. The gross margin achieved from the revenues provided by equipment rentals is typically higher than those achieved by gain on sale of used rental equipment and transportation. Furthermore, due to the operating leverage of our business model, the margin from equipment rentals improves as the revenue from this line of business increases. The gross profit margin percentage related to the equipment rentals segment excluding the impact of used rental equipment sales and transportation was 31.0% and 29.0% for the three months ended September 30, 2014 and 2013, respectively. The quality improvement initiatives and customer-centric service oriented strategies that the Company has adopted have resulted in an increase in equipment utilization, but have also resulted in increased costs related to higher quality of equipment when beginning rental contracts and a reduction in the amount of rental-end repair billing. Gain on the sale of used rental equipment was $1.0 million for the three months ended September 30, 2014, a 117.9% increase from $0.4 million for the three months ended September 30, 2013. The increase in the gain on the sale of used rental equipment was directly attributable to an increase in the number of rental assets sold during the three months ended September 30, 2014.
Equipment distribution segment gross profit of approximately $0.2 million (5.8% margin) for the three months ended September 30, 2014 decreased $0.2 million, or 56.3%, from approximately $0.4 million (9.8% margin) for the three months ended September 30, 2013. The decreased gross profit and margin are functions of higher profit margins on individual sale transactions and a larger number of sales transactions during the three months ended September 30, 2013.
Parts and service segment gross profit of $1.2 million (23.6% margin) for the three months ended September 30, 2014 decreased approximately $0.1 million or 6.0% from $1.3 million (27.8% margin) for the three months ended September 30, 2013. The parts and service segment gross profit decrease was driven by lower repair and maintenance revenue billed related to equipment on rent along with lower margin rigging work performed to generate long-term equipment rental revenues.
Total selling, general, administrative and other expenses for the three months ended September 30, 2014 and 2013 were $6.1 million and $6.0 million, respectively. The increase in selling, general, administrative and other expenses was due to increases in sales and marketing expense of $0.1 million, travel expense of $0.1 million, rent expense of $0.1 million and professional fees of $0.1 million. These increases were partially offset by decreases in bad debt expense and business taxes of $0.2 million. Selling, general and administrative expenses include, legal fees, professional fees, bad debt expense, employee benefits, insurance and selling and marketing expenses. Selling, general and administrative and other expenses include $0.1 million of non-cash stock based compensation expense for each of the three months ended September 30, 2014 and 2013.
Impairment expense related to rental equipment held for sale during three months ended September 30, 2014 was approximately $0.8 million. As a result of agreeing to terms on the sale of certain traditional crawler crane assets during the three months ended September 30, 2014, the Company compared they carrying value to the fair value of the assets. The fair value of the assets was determined to be the agreed upon sales price, which was less than the carrying value of the assets, resulting in the impairment charge recorded during the period.
Interest expense increased 19.3% to $3.7 million for the three months ended September 30, 2014 from $3.1 million for the three months ended September 30, 2013. The increase in interest expense is related primarily to a $0.5 million increase in loan cost amortization expense along with a higher overall interest rates primarily due to the new Essex Crane term loan.
Income tax benefit was $1.8 million for the three months ended September 30, 2014 compared to a $1.0 million for the three months ended September 30, 2013. The increase in income tax benefit is due to an increase in the pre-tax loss. The effective tax rates were 43.3% and 35.1% for the three months ended September 30, 2014 and 2013, respectively. The effective tax rate increased
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from the prior year due to an increase in state tax rates resulting primarily from changes in apportionment and certain discrete items.
Essex had 257 full-time employees at September 30, 2014 compared to 253 full-time employees September 30, 2013.
Results of Operations
Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013
The Company had a net loss of $8.3 million for the nine months ended September 30, 2014. Total revenue, cost of revenues and gross profit were $75.2 million, $59.2 million and $16.0 million, respectively, for the nine months ended September 30, 2014. Total selling, general, administrative and other expenses of $18.4 million was composed primarily of salaries, payroll taxes benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $10.2 million for the nine months ended September 30, 2014. The Company had an income tax benefit of $5.4 million for the nine months ended September 30, 2014 related to loss before income taxes of $13.7 million. Adjusted EBITDA, which includes the impact of $0.3 million of non-cash stock compensation and $0.8 million of non-recurring expenses, was $12.0 million for the nine months ended September 30, 2014.
The Company had a net loss of $6.0 million for the nine months ended September 30, 2013. Total revenue, cost of revenues and gross profit were $73.1 million, $55.5 million and $17.5 million, respectively, for the nine months ended September 30, 2013. Total selling, general, administrative and other expenses of $18.9 million was composed primarily of salaries, payroll taxes benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $8.6 million for the nine months ended September 30, 2013. The Company had an income tax benefit of $3.6 million for the nine months ended September 30, 2013 related to loss before income taxes of $9.6 million. Adjusted EBITDA, which includes the impact of $0.7 million and $0.3 million of non-cash stock compensation and non-recurring expenses, respectively, was $13.4 million for the nine months ended September 30, 2013.
Revenues
Revenues for the nine months ended September 30, 2014 were $75.2 million, a 2.9% decrease compared to revenues of $73.1 million for the nine months ended September 30, 2013. The following table provides a summary of the Company’s revenues by operating segment (amounts in thousands):
Nine Months Ended September 30, | Dollar | Percentage | ||||||||||||
2014 | 2013 | Change | Change | |||||||||||
Segment revenues | ||||||||||||||
Equipment rentals | $ | 53,312 | $ | 49,789 | $ | 3,523 | 7.1 | % | ||||||
Equipment distribution | 6,938 | 8,337 | (1,399 | ) | (16.8 | )% | ||||||||
Parts and service | 14,926 | 14,960 | (34 | ) | (0.2 | )% | ||||||||
Total revenues | $ | 75,176 | $ | 73,086 | $ | 2,090 | 2.9 | % | ||||||
Equipment Rentals
Equipment rental segment revenues, which represents 70.9% of total revenues, was $53.3 million for the nine months ended September 30, 2014, a 7.1% increase from $49.8 million for the nine months ended September 30, 2013. The equipment rental segment includes rental, transportation and used rental equipment sales.
Equipment rentals revenue, which represented 49.5% of total revenues, was $37.2 million for the nine months ended September 30, 2014, a 5.0% increase from $35.4 million for the nine months ended September 30, 2013. The two key drivers of equipment rental revenues are utilization and average rental rates.
The increase in equipment rentals revenue is primarily due to an increase in rental revenue generated from rough terrain cranes, tower cranes and hydraulic crawler cranes and attachments. The increase in rental revenue was partially offset by reductions in rental revenue from boom trucks and traditional crawler cranes and attachments. In addition to increased utilization for rough terrain cranes, tower cranes and hydraulic crawler cranes, each of these equipment categories realized increased average rental rates as compared to the nine months ended September 30, 2013.
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There was an increase in average crawler crane rental rate of 3.9% to $17,891 (per crane per rental month) for the nine months ended September 30, 2014 from $17,223 for the nine months ended September 30, 2013. This increase in the overall average rental rate, which includes both traditional and hydraulic crawler cranes, is primarily the result of the mix of cranes on rent, with hydraulic crawler cranes contributing a larger portion of overall crawler crane revenue than they did in the nine months ended September 30, 2013. Our crawler crane fleet has benefited from an increase in power and industrial marine related projects in the Gulf Coast and southeast region of the country. While average rental rates have increased for most subclasses within the hydraulic crawler crane fleet when compared to the nine months ended September, 2013, management has not been able to significantly increase average rental rates due to competitive pressure.
Utilization for rough terrain cranes for the nine months ended September 30, 2014 and 2013 was 64.1% and 56.4%, respectively. Rough terrain cranes benefit from the broad array of markets that they can serve. The increase in utilization was driven by an increase in demand for the general building, power, petrochemical and transportation end markets along with the utilization improvement initiative that made these assets available to the entire sales force. Boom truck utilization decreased to 47.1% for the nine months ended September 30, 2014 compared to 51.9% for the nine months ended September 30, 2013. Weakening demand in the general building, power and transportation end markets was the primary factor for decreased boom truck utilization. Tower crane utilization was 39.4% and 45.9% for the self-erecting and city & other tower cranes, respectively, for the nine months ended September 30, 2014 as compared to 40.8% and 44.8% for the self-erecting and city & other tower cranes, respectively, for the nine months ended September 30, 2013. Our tower cranes are primarily impacted by the general building end market, and their utilization levels will reflect the strength of that end market.
Transportation revenue, which represents 8.2% of total revenues, was $6.0 million for the nine months ended September 30, 2014, a 36.2% increase from $4.4 million for the nine months ended September 30, 2013. The increase in transportation revenue is directly attributable to the number of equipment moves for our higher lifting capacity rental equipment.
Used rental equipment sales revenue was $10.1 million for the nine months ended September 30, 2014; a $0.2 million or 1.7% increase compared to the nine months ended September 30, 2013. The increase in total used rental equipment sales revenue is primarily attributable an increase in the size of the individual sales transactions. During the nine months ended September 30, 2014, the Company sold thirty-eight pieces of used rental equipment, including eleven crawler cranes which generated $4.0 million in revenue. During the nine months ended September 30, 2013, the Company sold ninety-one pieces of used rental equipment with the majority of the sales related to aerial work platforms.
Equipment Distribution
Equipment distribution segment revenue, which represents 9.2% of total revenue, was $6.9 million for the nine months ended September 30, 2014, a 16.8% decrease from $8.3 million for the nine months ended September 30, 2013. The decrease in equipment distribution segment revenue is primarily attributable a decline in the number of sales transactions and to the size of sales transactions as compared to the prior year. During the nine months ended September 30, 2013, the Company sold thirteen more pieces of equipment than during the nine months ended September 30, 2014, and had a large individual sale transaction that generated sale proceeds of approximately $2.8 million.
Parts and Service
Parts and service segment revenue, which represents 19.9% of total revenue, was $14.9 million for the nine months ended September 30, 2014, a 0.2% decrease from $15.0 million for the nine months ended September 30, 2013. The decrease is primarily attributable to a decrease in repair and maintenance revenue billed related to equipment on rent.
Gross Profit
Gross Profit for the nine months ended September 30, 2014 was $16.0 million, an 8.9% decrease from gross profit of $17.5 million for the nine months ended September 30, 2013. Gross profit margin was 21.2% for the nine months ended September 30, 2014 compared to 24.0% for the nine months ended September 30, 2013. The following table provides a summary of the Company’s gross profit by operating segment (amounts in thousands):
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Nine Months Ended September 30, | Dollar | Percentage | ||||||||||||
2014 | 2013 | Change | Change | |||||||||||
Segment gross profit | ||||||||||||||
Equipment rentals | $ | 11,825 | $ | 12,554 | $ | (729 | ) | (5.8 | )% | |||||
Equipment distribution | 335 | 807 | (472 | ) | (58.5 | )% | ||||||||
Parts and service | 3,812 | 4,181 | (369 | ) | (8.8 | )% | ||||||||
Total gross profit | $ | 15,972 | $ | 17,542 | $ | (1,570 | ) | (8.9 | )% | |||||
Equipment rentals segment gross profit of $11.8 million for the nine months ended September 30, 2014 decreased $0.7 million or 5.8% as compared to the nine months ended September 30, 2013. Within the equipment rentals segment, certain revenue streams have inherently higher margins. The gross margin achieved from the revenues provided by equipment rentals is typically higher than those achieved by gain on sale of used rental equipment and transportation. Furthermore, due to the operating leverage of our business model, the margin from equipment rentals improves as the revenue from this line of business increases. The gross profit margin percentage related to the equipment rentals segment excluding the impact of used rental equipment sales and transportation was 26.5% and 28.2% for the nine months ended September 30, 2014 and 2013, respectively. The quality improvement initiatives and customer-centric service oriented strategies that the Company has adopted has resulted in an increase in equipment utilization, but has also resulted in increased costs related to higher quality of equipment when beginning rental contracts and a reduction in the amount of rental-end repair billing.Gain on the sale of used rental equipment was $1.8 million for the nine months ended September 30, 2014, a 26.1% decrease from $2.5 million for the nine months ended September 30, 2013. The decrease in the gain on the sale of used rental equipment was directly attributable to a decline in the number of assets sold.
Equipment distribution segment gross profit of approximately $0.3 million (4.8% margin) for the nine months ended September 30, 2014 decreased $0.5 million, or 58.5%, from approximately $0.8 million (9.7% margin) for the nine months ended September 30, 2013. The decreased gross profit and margin are functions of lower profit margins on individual sale transactions and lower sales volume during the nine months ended September 30, 2014. During the nine months ended September 30, 2013, the Company had a large sales transaction with a gross profit of $0.4 million.
Parts and service segment gross profit of $3.8 million (25.5% margin) for the nine months ended September 30, 2014 decreased approximately $0.4 million or 8.8% from $4.2 million (27.9% margin) for the nine months ended September 30, 2013. The parts and service segment gross profit decrease was driven by lower margin repair and maintenance and rigging revenue billed related to equipment currently on rent.
Total selling, general, administrative and other expenses for the nine months ended September 30, 2014 and 2013 were $18.4 million and $18.9 million, respectively. The decrease in selling, general, administrative and other expenses was primarily due to decreases in salary and tax expense of $0.4 million, benefits expense of $0.1 million and business tax expense of $0.4 million. These decreases were partially offset by increases in sales and marketing expense of $0.2 million, professional fees of $0.1 million, travel expense of $0.2 million and rent expense of $0.1 million. Selling, general and administrative expenses include, legal fees, professional fees, bad debt expense, employee benefits, insurance and selling and marketing expenses. Selling, general and administrative and other expenses include $0.3 million and $0.7 million of non-cash stock based compensation expense for the nine months ended September 30, 2014 and 2013, respectively.
Impairment expense related to rental equipment held for sale during nine months ended September 30, 2014 was approximately $0.8 million. As a result of agreeing to terms on the sale of certain traditional crawler crane assets during the nine months ended September 30, 2014, the Company compared they carrying value to the fair value of the assets. The fair value of the assets was determined to be the agreed upon sales price, which was less than the carrying value of the assets, resulting in the impairment charge recorded during the period.
Interest expense increased 19.4% to $10.2 million for the nine months ended September 30, 2014 from $8.6 million for the nine months ended September 30, 2013. The increase in interest expense is related primarily to additional loan costs of $0.2 million amortized to interest expense and $0.3 million of loan costs written off to interest expense of as a result of the Essex Crane Revolving Credit Facility amendment entered into in May 2014 along with a higher overall interest rate as a result of the new Essex Crane term loan.
Income tax benefit was $5.4 million for the nine months ended September 30, 2014 compared to $3.6 million for the nine months ended September 30, 2013. The increase in income tax benefit is due to an increase in the pre-tax loss. The effective tax rates were 39.2% and 37.6% for the nine months ended September, 2014 and 2013, respectively. The effective tax rate increased from the prior year due to discrete items including changes in state valuation allowances and state income tax audit activity.
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Liquidity and Capital Resources
Cash flow from operating activities. The Company’s cash used in operating activities for the nine months ended September 30, 2014 was $6.3 million. This was primarily the result of a net loss of $8.3 million, which, when adjusted for non-cash expense items, such as depreciation and amortization, gains on the sale of rental equipment, rental equipment impairment charges, deferred income taxes and stock-based compensation expense, provided cash flows of approximately $1.8 million. The positive cash flows from operating activities were decreased by a total change in operating assets and liabilities of $8.2 million, which was comprised of a $3.3 million increase in accounts receivable, a $5.2 million increase in retail equipment inventory, a $0.6 million increase in spare parts inventory and a $0.1 million decrease in customer deposits. These uses of cash were partially offset by a $0.3 million decrease in other receivables a $0.2 million decrease in prepaid expenses, a $0.3 million increase in accounts payable and accrued expenses and a $0.3 million increase in unearned rental revenue.
The Company’s cash provided by operating activities for the nine months ended September 30, 2013 was approximately $2.5 million. This was primarily the result of net loss of $6.0 million, which, when adjusted for non-cash expense items, such as depreciation and amortization, including amortization of the promissory note discount, gains on the sale of rental equipment, deferred income taxes and stock-based compensation expense, provided cash flows of approximately $3.9 million. The cash flows from operating activities were decreased by a total change in operating assets and liabilities of $1.4 million, which was comprised of a $2.0 million increase in retail equipment, a $0.3 million increase in spare parts inventory, and a $1.2 decrease in accounts payable and accrued expenses. These uses of cash were partially offset by a $1.7 million decrease in accounts receivable, a $0.2 increase in unearned rental revenue and a $0.1 million increase in customer deposits.
Cash flow from investing activities. The Company's cash provided by investing activities for the nine months ended September 30, 2014 was $4.0 million. This was primarily the result of proceeds from the sale of rental equipment of $10.1 million and a decrease in accounts receivable from rental equipment sales of $0.7 million. These sources of cash were partially offset by purchases of rental equipment of $6.2 million and purchases of property and equipment of $0.6 million.
The Company's cash provided by investing activities for the nine months ended September 30, 2013 was approximately $2.5 million. This was primarily the result of proceeds from the sale of rental equipment of $9.9 million and proceeds from the sale of property and equipment of $1.8 million. These sources of cash were partially offset by purchases of rental equipment of $5.5 million, purchases of property and equipment of $0.7 million and an increase in accounts receivable related rental equipment sales of $1.0 million. During the nine months ended September 30, 2013, the Company sold ninety-one pieces of used rental equipment.
Cash flow from financing activities. The Company's cash provided by financing activities for the nine months ended September 30, 2014 was $2.1 million. This was primarily the result of net borrowings made on the revolving credit facilities and term loans of $6.3 million. These sources of cash were partially offset by payments on the purchase money security interest debt of $0.8 million, payments on promissory notes of $2.0 million and payments for loan acquisition costs of $1.2 million. Gross borrowings and payments on the revolving credit facilities were $83.2 million and $105.4 million, respectively, for the period. Gross borrowings and payments on the term loans were $30.0 million and $1.5 million, respectively. Gross borrowings and payments on the purchase money security interest debt for the period were $2.6 million and $0.8 million, respectively.
The Company's cash used in financing activities for the nine months ended September 30, 2013 was approximately $12.4 million. This was primarily the result of payments made for loan acquisition costs of $6.8 million as a result of refinancing the Essex Crane Revolving Credit Facility and the Coast Crane Revolving Credit Facility. This financing activity use of cash was increased by the payments on purchase money security interest debt of $0.8 million, employer repurchase of shares to satisfy minimum tax withholdings of $0.1 million and net payments on the revolving credit facilities and term loan of $4.8 million. Gross borrowings and payments on the revolving credit facilities were $74.8 million and $118.6 million, respectively, for the period. Gross proceeds and payments on the term loan were $40.0 million and $1.0 million, respectively. Gross borrowings and payments on the purchase money security interest debt for the period were $1.0 million and $0.8 million, respectively.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the sales of used rental fleet equipment, proceeds from the issuance of debt, and borrowings available under our revolving credit facilities. Our principal uses of cash have been to fund operating activities and working capital and purchases of rental fleet equipment and property and equipment. 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, growth prospects and the Company’s overall strategy. Proceeds from the sale of used rental equipment of $6.0 million and $10.1 million, respectively, during the three and nine months ended September 30, 2014 were used primarily to pay down our outstanding
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debt balance or to reinvest in new rental equipment assets. In response to changing economic conditions, we believe we have the flexibility to increase or decrease our capital expenditures to match our actual performance and needs. As of September 30, 2014, we had approximately $10.1 million of available borrowings under our revolving credit facilities, net of outstanding letters of credit and other reserves, and additionally, approximately $1.4 million of cash on hand; providing the company with $11.5 million of potential liquidity.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under the revolving credit facilities will be adequate to meet our future liquidity needs for the foreseeable future. The Essex Crane Revolving Credit Facility and Coast Crane Credit Facility mature in October 2016 and March 2017, respectively. No assurance can be given that we will be able to refinance our credit facilities prior to their respective maturity dates upon terms acceptable to us.
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 affected 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 or future debt agreements, including the indenture governing the revolving credit facilities, contain certain 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 accelerations of all of our debt.
On April 29, 2014, Coast Crane entered into a Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement. The purpose of the Second Amendment is to adjust the minimum fixed charge coverage ratio requirement to 0.88 to 1.00, 1.00 to 1.00 and 1.10 to 1.00 from 1.20 to 1.00, for the trailing twelve month periods ended April 30, 2014, May 31, 2014 and June 30, 2014, respectively. The minimum required fixed charge coverage ratio for the trailing twelve month periods ending July 31, 2014 and thereafter will remain 1.20 to 1.00. In addition, the Second Amendment waives any event of default arising from Coast Crane’s breach of the minimum 1.20 to 1.00 fixed charge coverage ratio requirement for the trailing twelve month period ended March 31, 2014, so long as the fixed charge coverage ratio for such period is at least equal to 1.00 to 1.00. Further, under the amendment, Coast Crane is required to achieve a minimum trailing twelve month EBITDA threshold as of the last day of the month of $7.7 million for March 2014 through August 2014; $7.9 million for September 2014 through November 2014; $8.0 million for December 2014 through February 2015; $8.2 million for March 2015 through May 2015; and $8.3 million for June, 2015 and thereafter. All other terms of the February 21, 2014 amendment and restatement remained in effect following such amendment.
On May 13, 2014, Essex Crane entered into the Fourth Amended and Restated Credit Agreement (the “Essex Crane Revolving Credit Facility”). The credit facility provides for a revolving loan in the amount of $145.0 million, with a $20.0 million aggregate sublimit for letters of credit, and a $30.0 million term loan. Essex Crane may borrow on the revolving loan an amount equal to the sum of 85% of eligible net receivables and 75% of the net orderly liquidation value of eligible rental equipment. The aggregate commitment will be reduced by: (i) on an individual transaction basis, 100% of the net cash proceeds from the sales of certain assets and (ii) on an annual basis, 60% of free cash flow, other than net cash proceeds from certain asset sales, as defined within the credit agreement. The maximum commitment under the Essex Crane Revolving Credit Facility may not exceed $130.0 million beginning on February 28, 2016. Essex Crane must generate net cash proceeds, through the sale of certain assets, of not less than $8.0 million by March 31, 2016 with not less than $3.0 million of net cash proceeds generated by March 31, 2015.The revolving loan and term loan mature on October 31, 2016 and May 13, 2019, respectively. The Essex Crane Revolving Credit Facility is collateralized by a first priority security interest in substantially all of Essex Crane’s assets.
On October 30, 2014, Essex Crane entered into a First Amendment (the “First Amendment”) to the Essex Crane Revolving Credit Facility. The purpose of the First Amendment is to amend the definition of earnings before interest, taxes, depreciation and amortization ("EBITDA"), solely for the purpose of calculating EBITDA when determining compliance with the fixed charge coverage ratio covenant, to exclude certain severance expenses. The amendment also adjusts the minimum fixed charge coverage ratio requirement to 1.08 to 1.00 for the trailing twelve month period ended September 30, 2014 and 1.10 to 1.00 for the trailing twelve months ended October 31, 2014 and each month ending thereafter. In addition, the amendment waives any event of default arising from Essex Crane’s breach of the minimum 1.10 to 1.00 fixed charge coverage ratio requirement for the trailing twelve month period ended August 31, 2014.
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Seasonality
Although we believe our business traditionally 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 are directly related to infrastructure, commercial, residential 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.
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 service activities are traditionally affected to a lesser extent by changes in demand caused by seasonality.
Contractual Obligations
During the three and nine months ended September 30, 2014, there were no material changes outside the ordinary course of our business in our long-term debt, capital lease or purchase obligations or in other long-term liabilities disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 with the exception of the Fourth Amended and Restated Credit Agreement at Essex Crane.
On May 13, 2014, Essex Crane entered into the Fourth Amended and Restated Credit Agreement (the “Essex Crane Revolving Credit Facility”). The credit facility provides for a revolving loan in the amount of $145.0 million, with a $20.0 million aggregate sublimit for letters of credit, and a $30.0 million term loan. Essex Crane may borrow on the revolving loan an amount equal to the sum of 85% of eligible net receivables and 75% of the net orderly liquidation value of eligible rental equipment. The aggregate commitment will be reduced by: (i) on an individual transaction basis, 100% of the net cash proceeds from the sales of certain assets and (ii) on an annual basis, 60% of free cash flow, other than net cash proceeds from certain asset sales, as defined within the credit agreement. The maximum commitment under the Essex Crane Revolving Credit Facility may not exceed $130.0 million beginning on February 28, 2016. Essex Crane must generate net cash proceeds, through the sale of certain assets, of not less than $8.0 million by March 31, 2016 with not less than $3.0 million of net cash proceeds generated by March 31, 2015.The revolving loan and term loan mature on October 31, 2016 and May 13, 2019, respectively. The Essex Crane Revolving Credit Facility is collateralized by a first priority security interest in substantially all of Essex Crane’s assets.
Off-Balance Sheet Arrangements
During the three and nine months ended September 30, 2014, there were no material changes in the off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
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. These include, among other things, revenue recognition, the propriety of our estimated useful life of rental equipment and property and equipment, the adequacy of the allowance for doubtful accounts, income taxes, the potential impairment of long-lived assets including intangible assets and derivative financial instruments.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings are affected by changes in interest rates due to the fact that interest on our revolving credit facilities is calculated based upon either LIBOR or Prime Rate plus an applicable margin as of September 30, 2014. The weighted average interest rate in effect on all of the Company’s borrowings at September 30, 2014 was 5.45%. A 1.0% increase in the effective interest rate on our total outstanding borrowings (including our short-term debt obligations) at September 30, 2014 would increase our interest expense by approximately $1.4 million on an annualized basis.
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Item 4. Controls and Procedures
Management’s Quarterly Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Our management, with participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(f) promulgated under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2014, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required financial disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is party to various legal actions in the normal course of our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending matters. Management believes that the Company is not party to any litigation that, if adversely determined, would have a material adverse effect on our business, financial condition, result of operations or cash flows.
Item 1A. Risk Factors
Part I, Item 1A — “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2013, describes important factors that could materially affect our business, financial condition and/or future results and cause our operating results to differ materially from those indicated, projected or implied by forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results and cause our operating results to differ materially from those indicated, projected or implied by forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time.
There have been no material changes with respect to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Issuer Purchases of Equity Securities
In October 2008, the Company's board of directors authorized a stock repurchase program, under which from time to time, in open market transactions at prevailing prices or through privately negotiated transactions as conditions permit. The Company may purchase up to $12.0 million of the Company's common stock and publicly-traded warrants of which approximately $9.0 million remained available at September 30, 2014. Such repurchase plan was publicly announced on October 22, 2008. The Company’s stock repurchase program was suspended in May 2010 in conjunction with the launching of the cashless exercise warrant offer.
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Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
On October 30, 2014, Essex Crane and Holdings, a wholly-owned subsidiary of Essex and the direct parent of Essex Crane, entered into a First Amendment (the “First Amendment”) to the Essex Crane Revolving Credit Facility by and among Essex Crane, Holdings, Wells Fargo Capital Finance, LLC, as Agent for the several financial institutions from time to time party to the Essex Crane Credit Agreement and for itself as a lender, PNC Bank, National Association, Alostar Bank of Commerce, Kayne Senior Credit Fund (QP), L.P., Kayne Senior Credit Fund, L.P., 1492 Capital, LLC, and Medley Capital Corporation, as lenders.
The purpose of the First Amendment is to amend the definition of EBITDA, solely for the purpose of calculating EBITDA when determining compliance with the fixed charge coverage ratio covenant, to exclude certain severance expenses. The amendment also adjusts the minimum fixed charge coverage ratio requirement to 1.08 to 1.00 for the trailing twelve month period ended September 30, 2014 and 1.10 to 1.00 for the trailing twelve months ended October 31, 2014 and each month ending thereafter. In addition, the amendment waives any event of default arising from Essex Crane’s breach of the minimum 1.10 to 1.00 fixed charge coverage ratio requirement for the trailing twelve month period ended August 31, 2014.
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Item 6. Exhibits
A. Exhibits
10.1 | First Amendment to the Fourth Amended and Restated Credit Agreement (the “First Amendment”), dated October 30, 2014, by and among Essex Crane Rental Corp., Essex Holdings, LLC, Wells Fargo Capital Finance, LLC, as Agent for the several financial institutions from time to time party to the Essex Crane Credit Agreement and for itself as a lender, PNC Bank, National Association, Alostar Bank of Commerce, Kayne Senior Credit Fund (QP), L.P., Kayne Senior Credit Fund, L.P., 1492 Capital, LLC, and Medley Capital Corporation, as lenders. |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ESSEX RENTAL CORP. | |||
Dated: | November 5, 2014 | By: | /s/ Nicholas J. Matthews |
Nicholas J. Matthews Chief Executive Officer (Principal Executive Officer) | |||
Dated: | November 5, 2014 | By: | /s/ Kory M. Glen |
Kory M. Glen Chief Financial Officer (Principal Financial and Accounting Officer) | |||