Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Neff Corpneff-2015x06x30x15xex311.htm
EX-32.2 - EXHIBIT 32.2 - Neff Corpneff-2015x06x30x15xex322.htm
EX-32.1 - EXHIBIT 32.1 - Neff Corpneff-2015x06x30x15xex321.htm
EX-31.2 - EXHIBIT 31.2 - Neff Corpneff-2015x06x30x15xex312.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File No. 001-36752
Neff Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
 
 
37-1773826
(I.R.S. Employer
Identification No.)
 
3750 N.W. 87th Avenue, Suite 400
Miami, FL 33178
(Address of registrant's principal executive offices) (zip code)

(305) 513-3350
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ý 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
Accelerated filer
¨
 
Non-accelerated filer
ý
 
Smaller Reporting Company
¨
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨ No ý

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.         Yes ý No ¨

As of July 31, 2015, the number of shares of Class A Common Stock outstanding was 10,476,190 and the number of shares of Class B Common Stock outstanding was 14,951,625.



 
NEFF CORPORATION
TABLE OF CONTENTS
 
10-Q Part and Item No.
 
Page No.
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements include statements regarding industry outlook, our expectations regarding the performance of our business, liquidity, our expected tax rate and benefits and estimated payments under the Tax Receivable Agreement, expected capital expenditures, anticipated future indebtedness or financings and the other non-historical statements. We use words such as "could," "may," "might," "will," "expect," "likely," "believe," "continue," "anticipate," "estimate," "intend," "plan," "project" and other similar expressions to identify some but not all forward-looking statements. Forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to the important factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2015 (the “2014 10-K”).

The forward-looking statements contained in this quarterly report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other important factors we believe are appropriate under the circumstances. As you read and consider this quarterly report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many important factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these important factors include, but are not limited to, those described under the captions "Risk Factors" in our 2014 10-K. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this quarterly report on Form 10-Q to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New important factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them.


3


PART I

Item 1.     FINANCIAL STATEMENTS

NEFF CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
June 30, 2015
 
December 31, 2014
ASSETS


 
 

 
 
 
 
Cash and cash equivalents
$
225

 
$
207

Accounts receivable, net of allowance for doubtful accounts of $2,087 in 2015 and $2,125 in 2014
59,490

 
66,375

Inventories
2,109

 
2,005

Rental equipment, net
479,491

 
420,245

Property and equipment, net
35,575

 
30,210

Prepaid expenses and other assets
17,276

 
16,959

Goodwill
58,765

 
58,765

Intangible assets, net
15,957

 
16,600

Total assets
$
668,888

 
$
611,366

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 

 
 
 
 
Liabilities
 
 
 

Accounts payable
$
21,370

 
$
27,389

Accrued expenses and other liabilities
30,086

 
31,203

Revolving credit facility
293,000

 
245,200

Second lien loan, net of original issue discount
476,833

 
476,713

Payable pursuant to tax receivable agreement
28,670

 
31,557

Deferred tax liability, net
6,617

 
5,405

Total liabilities
856,576

 
817,467

 
 
 
 
Stockholders' deficit
 
 
 

   Class A Common Stock; $.01 par value, 100,000,000 shares authorized, 10,476,190 shares issued and outstanding as of June 30, 2015 and December 31, 2014
105

 
105

   Class B Common Stock; $.01 par value, 15,000,000 shares authorized, 14,951,625 shares issued and outstanding as of June 30, 2015 and December 31, 2014
150

 
150

   Additional paid-in capital
(111,794
)
 
(112,185
)
   Retained earnings
9,947

 
1,599

Total stockholders' deficit
(101,592
)
 
(110,331
)
Non-controlling interest
(86,096
)
 
(95,770
)
Total stockholders' deficit and non-controlling interest
(187,688
)
 
(206,101
)
Total liabilities and stockholders' deficit and non-controlling interest
$
668,888

 
$
611,366

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


NEFF CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
For the Three Months Ended June 30, 2015
 
For the Three Months Ended June 30, 2014
Revenues
 
 
 

Rental revenues
$
84,820

 
$
83,497

Equipment sales
6,174

 
5,467

Parts and service
3,233

 
3,398

Total revenues
94,227

 
92,362

Cost of revenues
 
 
 

Cost of equipment sold
4,058

 
2,981

Depreciation of rental equipment
21,213

 
18,302

Cost of rental revenues
19,511

 
19,308

Cost of parts and service
1,807

 
2,051

Total cost of revenues
46,589

 
42,642

Gross profit
47,638

 
49,720

Other operating expenses
 
 
 

Selling, general and administrative expenses
22,468

 
20,276

Other depreciation and amortization
2,657

 
2,462

Transaction bonus

 
24,506

Total other operating expenses
25,125

 
47,244

Income from operations
22,513

 
2,476

Other (income) expenses
 
 
 

Interest expense
10,753

 
8,316

Adjustment to tax receivable agreement
(3,408
)
 

Loss on extinguishment of debt

 
15,896

Gain on interest rate swap
(1,007
)
 

Amortization of debt issue costs
381

 
1,012

Total other (income) expenses
6,719

 
25,224

Income (loss) before income taxes
15,794

 
(22,748
)
Provision for income taxes
(1,100
)
 
(119
)
Net income (loss)
14,694

 
(22,867
)
Less: net income (loss) attributable to non-controlling interest
7,275

 
(22,867
)
Net income attributable to Neff Corporation
$
7,419

 
$

 
 
 
 
Net income attributable to Neff Corporation per share of
        Class A common stock:
 
 
 

Basic
$
0.71

 
 
Diluted
$
0.62

 
 
Weighted average shares of Class A common stock outstanding:
 
 
 

Basic
10,482

 
 
Diluted
12,036

 
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


NEFF CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
Revenues
 
 
 

Rental revenues
$
158,961

 
$
152,626

Equipment sales
12,961

 
10,794

Parts and service
6,391

 
6,675

Total revenues
178,313

 
170,095

Cost of revenues
 
 
 

Cost of equipment sold
8,390

 
6,119

Depreciation of rental equipment
40,727

 
36,489

Cost of rental revenues
37,370

 
37,624

Cost of parts and service
3,570

 
4,094

Total cost of revenues
90,057

 
84,326

Gross profit
88,256

 
85,769

Other operating expenses


 
 

Selling, general and administrative expenses
44,758

 
40,372

Other depreciation and amortization
5,118

 
4,708

Transaction bonus

 
24,506

Total other operating expenses
49,876

 
69,586

Income from operations
38,380

 
16,183

Other (income) expenses
 
 
 

Interest expense
21,267

 
15,119

Adjustment to tax receivable agreement
(2,887
)
 

Loss on extinguishment of debt

 
15,896

Gain on interest rate swap
(119
)
 

Amortization of debt issue costs
752

 
2,339

Total other (income) expenses
19,013

 
33,354

Income (loss) before income taxes
19,367

 
(17,171
)
Provision for income taxes
(1,345
)
 
(238
)
Net income (loss)
18,022

 
(17,409
)
Less: net income (loss) attributable to non-controlling interest
9,674

 
(17,409
)
Net income attributable to Neff Corporation
$
8,348

 
$

 
 
 
 
Net income attributable to Neff Corporation per share of
        Class A common stock:
 
 
 

Basic
$
0.80

 
 
Diluted
$
0.69

 
 
Weighted average shares of Class A common stock outstanding:
 
 
 

Basic
10,479

 
 
Diluted
12,033

 
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6



NEFF CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
AND NON-CONTROLLING INTEREST

FOR THE SIX MONTHS ENDED JUNE 30, 2015
(in thousands)

 
Class A Common Stock
 
Class B Common Stock
 
Additional Paid-In
 
Retained
 
Non-Controlling
 
Total Stockholders' Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Interest
 
and Non-Controlling Interest
BALANCE—December 31, 2014
10,476

 
$
105

 
14,952

 
$
150

 
$
(112,185
)
 
$
1,599

 
$
(95,770
)
 
$
(206,101
)
Payment of costs directly associated with the issuance of Class A common stock

 

 

 

 
(283
)
 

 

 
(283
)
Equity-based compensation

 

 

 

 
674

 

 

 
674

Net income

 

 

 

 

 
8,348

 
9,674

 
18,022

BALANCE—June 30, 2015
10,476

 
$
105

 
14,952

 
$
150

 
$
(111,794
)
 
$
9,947

 
$
(86,096
)
 
$
(187,688
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


NEFF CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
Cash Flows from Operating Activities
 
 
 

Net income (loss)
$
18,022

 
$
(17,409
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
45,202

 
40,444

Amortization of debt issue costs
752

 
2,339

Amortization of intangible assets
643

 
753

Amortization of original issue discount on second lien loan
120

 
17

Gain on sale of equipment
(4,571
)
 
(4,675
)
Provision for bad debt
825

 
1,371

Equity-based compensation
674

 
528

Deferred income taxes
1,212

 

Adjustment to tax receivable agreement
(2,887
)
 

Unrealized gain on interest rate swap
(218
)
 

Loss on extinguishment of debt

 
15,896

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,060

 
(1,096
)
Inventories, prepaid expenses and other assets
(955
)
 
(2,061
)
Accounts payable
(2,271
)
 
(1,690
)
Accrued expenses and other liabilities
(1,905
)
 
1,150

Net cash provided by operating activities
60,703

 
35,567

Cash Flows from Investing Activities
 
 
 

Purchases of rental equipment
(111,095
)
 
(105,938
)
Proceeds from sale of equipment
12,961

 
10,794

Purchases of property and equipment
(10,068
)
 
(11,020
)
Net cash used in investing activities
(108,202
)
 
(106,164
)
Cash Flows from Financing Activities
 
 
 

Repayments under revolving credit facility
(53,111
)
 
(436,939
)
Borrowings under revolving credit facility
100,911

 
481,912

Proceeds from second lien loan, net

 
572,125

Distribution to members

 
(329,885
)
Repayments of senior secured notes

 
(200,000
)
Call premiums

 
(7,218
)
Debt issue costs

 
(8,999
)
Payment of costs directly associated with the issuance of Class A common stock
(283
)
 

Net cash provided by financing activities
47,517

 
70,996

Net increase in cash and cash equivalents
18

 
399

Cash and cash equivalents, beginning of period
207

 
190

Cash and cash equivalents, end of period
$
225

 
$
589


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


8


NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BUSINESS AND ORGANIZATION

Neff Corporation was formed as a Delaware corporation on August 18, 2014. On November 26, 2014, Neff Corporation completed an initial public offering (the "IPO") of 10,476,190 shares of Class A common stock at a public offering price of $15.00 per share. A portion of the gross proceeds received by Neff Corporation from the IPO were used to purchase common membership units ("Common Units") in Neff Holdings LLC, ("Neff Holdings") which was wholly owned by private investment funds managed by Wayzata Investment Partners ("Wayzata") prior to the IPO. We refer to these transactions as the “Organizational Transactions.” Neff Corporation's only business is to act as the sole managing member of Neff Holdings. As a result, Neff Corporation consolidates Neff Holdings for all periods presented. Neff Corporation and its consolidated subsidiaries, including Neff Holdings, Neff LLC and Neff Rental LLC, are referred to as "the Company."

The Company owns and operates equipment rental locations in the United States. The Company also sells used equipment, parts and merchandise and provides ongoing repair and maintenance services.

NOTE 2—BASIS OF PRESENTATION
Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”) and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements are presented on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s balance sheets as of June 30, 2015 and December 31, 2014, the results of its operations for the three and six months ended June 30, 2015 and 2014, the cash flows for the six months ended June 30, 2015 and 2014, and changes in its stockholders’ deficit and non-controlling interest for the six months ended June 30, 2015. Interim results may not be indicative of full year performance. The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Unaudited Condensed Consolidated Financial Statements
Balance Sheets - The assets, liabilities and equity of Neff Corporation and Neff Holdings have been consolidated and carried forward at historical values;
Statements of Operations - The consolidated statements of operations include the historical consolidated statements of operations of Neff Holdings consolidated with the statement of operations of Neff Corporation;
Statement of Stockholders' Deficit and Non-Controlling Interest - Following the IPO, Wayzata retained a portion of its economic interest in Neff Holdings directly through the ownership of Neff Holdings Common Units and these interests are included within the non-controlling interest subsequent to the IPO; and
Statements of Cash Flows - The statements of cash flows include the historical consolidated statements of cash flows of Neff Holdings consolidated with the statement of cash flows of Neff Corporation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company considers




9

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 2—BASIS OF PRESENTATION (Continued)
critical accounting estimates to be those that require more significant judgments in the preparation of the unaudited condensed consolidated financial statements including those related to depreciation, bad debts, income taxes, self-insurance reserves, goodwill and intangible assets, derivative financial instruments, contingencies and amounts payable pursuant to the tax receivable agreement ("Tax Receivable Agreement") (Note 3). Management relies on historical experience and other assumptions, believed to be reasonable under the circumstances, in making its judgments and estimates. Actual results could differ from those judgments and estimates.

Goodwill and Intangible Assets

Goodwill and trademarks and tradenames are reviewed at least annually (October 1 annual test date) for impairment. The customer list is amortized over its useful life (see Note 5). The Company expenses costs to renew or extend the term of its recognized intangible assets.
Segment Reporting
The Company's operations consist of the rental and sale of equipment, and parts and services in five regions in the United States: Florida, Atlantic, Central, Southeastern and Western. The five regions are the Company's operating segments and are aggregated into one reportable segment. The Company operates in the United States and had minimal international sales for each of the periods presented.

Comprehensive Income (Loss)

The Company had no items of other comprehensive income (loss) in any of the periods presented.
Recently Issued Accounting Pronouncements
Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to avail itself of this exemption from adopting new or revised accounting standards and, therefore, will not be subject to new or revised accounting standards until such time as those standards apply to private companies. There were no significant new accounting pronouncements that the Company adopted during the six months ended June 30, 2015.

In April 2015, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03 Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03") which provides guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and amortization of debt issuance costs will be reported as interest expense. This guidance is effective for private companies for fiscal years after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016, and requires application on a retrospective basis. The Company expects to adopt this guidance when effective for private companies, and does not expect this guidance to have a material impact on its financial statements, although it will change the financial statement classification of debt issuance costs. As of June 30, 2015, $9.7 million of debt issuance costs were included in total assets in the Company's unaudited condensed consolidated balance sheet.

NOTE 3—NON-CONTROLLING INTEREST

Following the IPO, Neff Corporation became Neff Holdings sole managing member. As a result, Neff Corporation operates and controls all of the business and affairs of Neff Holdings while owning a 41.2% minority economic interest in Neff Holdings. Therefore, on November 26, 2014, Neff Corporation began to consolidate the financial results of Neff Holdings and its subsidiaries and to record a non-controlling interest for the remaining 58.8% economic interest in Neff Holdings held by Wayzata. On a stand alone basis, Neff Corporation's only sources of cash flow from operations are distributions from Neff Holdings. Net income attributable to the non-controlling interest on the unaudited condensed consolidated statements of operations represents the portion of earnings attributable to the economic interest in Neff Holdings held by the non-controlling unitholders. The non-controlling interest on the unaudited condensed consolidated balance sheets represents the carryover basis of Wayzata's capital account in Neff Holdings. Non-controlling interest


10

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     

NOTE 3—NON-CONTROLLING INTEREST (Continued)

is adjusted to reflect the distributions to and income allocated to the non-controlling unitholders. The ownership of the Common Units is summarized as follows:

 
Non-controlling ownership of Common Units in Neff Holdings
 
Neff Corporation ownership of Common Units in Neff Holdings
 
Total
As of June 30, 2015 and December 31, 2014
14,951,625

 
10,476,190

 
25,427,815

 
58.8
%
 
41.2
%
 
100.0
%

The following table summarizes the activity in non-controlling interest from December 31, 2014 to June 30, 2015 (in thousands):
Balance of non-controlling interest as of December 31, 2014
$
(95,770
)
Net income attributable to non-controlling interest
9,674

Balance of non-controlling interest as of June 30, 2015
$
(86,096
)

Distributions for Taxes

As a limited liability company (treated as a partnership for income tax purposes), Neff Holdings does not incur significant federal or state and local income taxes, as these taxes are primarily the obligations of the members of Neff Holdings. As authorized by the Neff Holdings LLC agreement, Neff Holdings is required to distribute cash, generally, on a pro rata basis, to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to their share of Neff Holdings earnings.

Payable Pursuant to the Tax Receivable Agreement

As of June 30, 2015, the Company recorded a liability of $28.7 million, representing the estimated payments due to Wayzata and certain members of management of Neff Holdings and certain non-executive members of its board of managers (collectively, our "Prior LLC Owners") under the Tax Receivable Agreement with our Prior LLC Owners as a result of the special allocation of depreciation and amortization deductions in excess of our pro rata share of such items. The liability as of June 30, 2015 decreased by $2.9 million from December 31, 2014, due to the Tax Receivable Agreement Amendment (see below) and changes in estimated future payments as a result of the tax benefit Neff Corporation will obtain as a result of the special allocation of gain, to Wayzata, resulting from the sale of equipment that existed at the date of the IPO, in accordance with Section 704(c) of the Internal Revenue Code. The Company expects these changes from the special allocation of gain will likely occur quarterly.

On June 2, 2015, the Company, Wayzata and the Prior LLC Owners entered into an amendment to the Tax Receivable Agreement (the "Tax Receivable Agreement Amendment"), dated as of May 27, 2015. The Tax Receivable Agreement Amendment amended the Tax Receivable Agreement to eliminate any benefit to the Wayzata and the Prior LLC Owners relating to tax adjustments arising from state, local or foreign taxes in order to relieve the substantial burden on the Company to calculate such benefit.

No amounts were paid pursuant to the terms of the Tax Receivable Agreement during the three and six months ended June 30, 2015.

Payments are anticipated to be made under the Tax Receivable Agreement, when Neff Corporation utilizes a benefit, with the first potential payment becoming due on the original due date of Neff Corporation's federal income tax return. The payments are to be made in accordance with the terms of the Tax Receivable Agreement. The timing of the payments is subject to certain contingencies including Neff Corporation having sufficient taxable income to utilize the tax benefits defined in the Tax Receivable Agreement.





11

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




NOTE 3—NON-CONTROLLING INTEREST (Continued)

Obligations pursuant to the Tax Receivable Agreement are obligations of Neff Corporation and are not obligations of Neff Holdings. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes. In general, items of income, gain, loss and deduction are allocated on the basis of members' respective ownership interests pursuant to the Neff Holdings LLC agreement after taking into consideration all relevant sections of the Internal Revenue Code.

NOTE 4 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, including vested restricted stock units ("RSUs"). Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares plus the dilutive effect of potential common shares outstanding during the period. For RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted earnings per share until the related performance criteria have been met. During the quarter ended June 30, 2015, 18 thousand RSUs vested, and were included in the computation of basic earnings per share. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
For the Three Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2015
Numerator:
 
 
 
Net income attributable to Neff Corporation
$
7,419

 
$
8,348

Denominator for basic net income per share of Class A common stock:
 
 
 
Weighted average shares of Class A common stock outstanding
10,482

 
10,479

Denominator for diluted net income per share of Class A common stock:
 
 
 
Weighted average shares of Class A common stock outstanding
10,482

 
10,479

Add dilutive effect of the following:
 
 

Neff Holdings options (redeemable for cash or Class A common stock)
1,265

 
1,265

Neff Corporation stock options
289

 
289

Weighted average shares of Class A common stock outstanding, diluted
12,036

 
12,033

Earnings per share of Class A common stock:
 
 
 
Net income attributable to Neff Corporation per share of Class A common stock, basic
$
0.71

 
$
0.80

Net income attributable to Neff Corporation per share of Class A common stock, diluted
$
0.62

 
$
0.69


The shares of Class B common stock outstanding do not participate in the earnings of Neff Corporation and are therefore not participating securities. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.



12

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 5—INTANGIBLE ASSETS
The carrying amount and accumulated amortization of intangible assets as of June 30, 2015 and December 31, 2014, consisted of the following (in thousands, except as noted):
 
 
 
June 30, 2015
 
Average
Useful Life
(in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Indefinite life:
 
 
 

 
 

 
 

Trademarks and tradenames
N/A
 
$
10,854

 
$

 
$
10,854

Finite life:
 
 
 

 
 

 
 

Customer list
12
 
13,987

 
(8,884
)
 
5,103

Total intangible assets
 
 
$
24,841

 
$
(8,884
)
 
$
15,957

 
 
 
December 31, 2014
 
Average
Useful Life
(in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Indefinite life:
 
 
 

 
 

 
 

Trademarks and tradenames
N/A
 
$
10,854

 
$

 
$
10,854

Finite life:
 
 
 

 
 

 
 

Customer list
12
 
13,987

 
(8,241
)
 
5,746

Total intangible assets
 
 
$
24,841

 
$
(8,241
)
 
$
16,600

The customer list is amortized on an accelerated basis, based on estimated cash flows over the useful life of the customer list. Accumulated amortization and expected future annual amortization expense are as follows (in thousands):
Accumulated amortization at June 30, 2015
$
8,884

Estimated amortization expense for:
 

Remainder of 2015
643

2016
1,070

2017
877

2018
719

2019
589

2020 through 2022
1,205

Total
$
13,987

Amortization expense related to the customer list was $0.3 million and $0.4 million for the three months ended June 30, 2015 and 2014, respectively. Amortization expense related to the customer list was $0.6 million and $0.8 million for the six months ended June 30, 2015 and 2014, respectively.


13

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 6—DEBT
Debt consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands, except percent data):
 
June 30, 2015
 
December 31, 2014
Revolving Credit Facility with interest ranging from the lender's prime rate plus up to 1.5% to LIBOR plus up to 2.5% (2.5% at June 30, 2015)
$
293,000

 
$
245,200

Second Lien Loan with interest of LIBOR plus 6.25%, with 1.0% LIBOR floor, net of unamortized discount of $2,167 (7.25% at June 30, 2015)
476,833

 
476,713

Total indebtedness
$
769,833

 
$
721,913


On October 1, 2010, Neff Rental LLC and Neff LLC (subsidiaries of Neff Holdings) entered into a senior secured revolving credit facility (the “Revolving Credit Facility”) as co-borrowers. The obligations under the Revolving Credit Facility are guaranteed by Neff Holdings. The Revolving Credit Facility is secured by a first priority security interest in substantially all of the Company’s assets. Interest on any base rate loans under the Revolving Credit Facility is due quarterly and interest on any LIBOR rate loans under the Revolving Credit Facility is due at three month intervals or, if shorter, at the end of the selected LIBOR period. Availability under the Revolving Credit Facility is subject to a borrowing base formula consisting of eligible accounts receivable and eligible rental fleet.

In May 2011, Neff Rental LLC and Neff Rental Finance Corp. (subsidiary of Neff Holdings), as co-issuers, completed a private offering of $200.0 million aggregate principal amount of 9.625% Senior Secured Notes (the “Senior Secured Notes”). The terms of the Senior Secured Notes were governed by an indenture. The obligations under the Senior Secured Notes were guaranteed by Neff Holdings and Neff LLC and were secured by a second priority security interest in substantially all of the Company’s assets. Interest on the Senior Secured Notes was payable in cash semi-annually in arrears on May 15 and November 15 of each year. The Senior Secured Notes maturity date was May 15, 2016. The Senior Secured Notes were repaid in full on June 9, 2014. Following the repayment of the Senior Secured Notes, Neff Rental Finance Corp. was dissolved on July 18, 2014.

On March 12, 2012, the Revolving Credit Facility was amended (the “March 2012 Amendment”). The March 2012 Amendment increased total borrowing capacity to $200.0 million, provided for a mechanism whereby the Company could request (but the lenders under the Revolving Credit Facility have no obligation to provide) up to $100.0 million of incremental revolving loan commitments under the Revolving Credit Facility, reduced applicable margins applicable to loans and other credit extensions, extended the maturity to the earlier of March 12, 2016 and ninety days prior to the maturity date of the Senior Secured Notes and modified the excess availability requirements relating to cash dominion and the implementation of certain financial covenants.

On October 25, 2012, the Revolving Credit Facility was amended (the “October 2012 Amendment”). The October 2012 Amendment increased total maximum borrowing capacity from $200.0 million to $225.0 million.

On November 20, 2013, the Revolving Credit Facility was amended and restated (the “2013 Amendment and Restatement”). Among other things, the 2013 Amendment and Restatement increased total maximum borrowing capacity from $225.0 million to $375.0 million and permitted the payment of a $110.0 million cash distribution to the members of Neff Holdings (the “2013 Distribution”), extended the maturity to the earlier of November 20, 2018 and ninety days prior to the maturity date of the Senior Secured Notes and modified the excess availability requirements relating to cash dominion and the implementation of certain financial covenants and covenants relating to appraisals and field audits. Following the repayment of the Senior Secured Notes, the maturity date of the Revolving Credit Facility is November 20, 2018.

On June 9, 2014, Neff Rental LLC entered into a second lien credit agreement (the “Second Lien Credit Agreement”) as borrower. Under the terms of the Second Lien Credit Agreement, Neff Rental LLC borrowed $575.0 million of second lien term loans (the “Second Lien Loan”).

The obligations under the Second Lien Credit Agreement are guaranteed by Neff Holdings and Neff LLC and are secured by a second priority security interest in substantially all of the Company’s assets. The Second Lien Loan included a $2.9 million original issue discount that is being amortized as interest expense over the term of the Second Lien Loan. The Second Lien Loan has a maturity date of June 9, 2021.


14

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 6—DEBT (Continued)

The Company used the net proceeds from the Second Lien Loan to redeem the outstanding Senior Secured Notes, to pay a $329.9 million cash distribution to the members of Neff Holdings (the “June 2014 Distribution”), to pay incentive bonuses earned in connection with consummation of the refinancing to management and certain members of the Company’s board of managers (the “Transaction Bonus”) and to pay fees and expenses. As a result of the repayment of the Senior Secured Notes, the Company recorded a loss on extinguishment of debt of $15.9 million (including $8.7 million of unamortized debt issue costs and $7.2 million for call premiums).

On June 9, 2014, in connection with entering into the Second Lien Credit Agreement and repayment of the Senior Secured Notes, the Revolving Credit Facility was further amended (the “June 2014 Amendment”). Among other things, the June 2014 Amendment increased total maximum borrowing capacity from $375.0 million to $425.0 million, permitted the payment of the June 2014 Distribution, permitted the payment of the Transaction Bonus, permitted the repayment of the Senior Secured Notes and modified the consolidated total leverage ratio covenant.

On October 14, 2014, the Revolving Credit Facility and Second Lien Loan were amended in anticipation of and conditional upon completion of the IPO (the "October 2014 Amendments"). The October 2014 Amendments, among other things, reflected the changes in the Company's structure as a result of the Organization Transactions and the IPO. The Company also prepaid $96.0 million of the principal amount of the Second Lien Loan with the net proceeds from the IPO.
Accumulated amortization at June 30, 2015 for debt issue costs was $3.6 million and $0.6 million for the Revolving Credit Facility and Second Lien Loan, respectively. Accumulated amortization at December 31, 2014 for debt issue costs was $3.2 million and $0.3 million for the Revolving Credit Facility and Second Lien Loan, respectively.

The Revolving Credit Facility and Second Lien Credit Agreement contain various affirmative, negative and financial reporting covenants. The covenants, among other things, place restrictions on the Company’s ability to acquire and sell assets, incur additional indebtedness and prepay other indebtedness other than the Revolving Credit Facility. The Company is subject to certain financial covenants under its Revolving Credit Facility if availability declines below $42.5 million. The Company was in compliance with all financial covenants under the Revolving Credit Facility and the Second Lien Credit Agreement as of June 30, 2015.

The Company had $3.7 million and $4.5 million in outstanding letters of credit at June 30, 2015 and December 31, 2014, respectively, that were primarily associated with its insurance coverage. As of June 30, 2015, total availability under the Revolving Credit Facility was $128.2 million.

NOTE 7—EQUITY—BASED COMPENSATION
On November 7, 2014, the Company's Board of Directors adopted the Neff Corporation 2014 Incentive Award Plan (the "2014 Incentive Plan"). The 2014 Incentive Plan became effective on November 7, 2014 and provides for the grant of options, restricted stock awards, performance awards, dividend equivalent awards, deferred stock awards, deferred stock unit awards, stock payment awards or stock appreciation rights to employees, consultants and directors of the Company.

For the three months ended June 30, 2015 and 2014, the Company recognized equity-based compensation expense of $0.3 million and $0.3 million, respectively. For the six months ended June 30, 2015 and 2014, the Company recognized equity-based compensation expense of $0.7 million and $0.5 million, respectively. Each option for Common Units of Neff Holdings can be redeemed for, at Neff Corporation's option, newly issued shares of Neff Corporation's Class A common stock on a 1-for-1 basis or for a cash payment equal to the market price of one share of Neff Corporation's Class A common stock.



15

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 7—EQUITY—BASED COMPENSATION (Continued)
The following table summarizes equity-based compensation activity for the six months ended June 30, 2015 (in thousands):
 
 
Neff Corporation
 
Neff Holdings
 
 
RSUs
 
Options
 
Options
Balance as of January 1, 2015
 
85

 
270

 
1,265

Granted
 
4

 
19

 

Exercised
 

 

 

Forfeited
 

 

 

Balance as of June 30, 2015
 
89

 
289

 
1,265

 
 
 
 
 
 
 
Vested
 
18

 

 
1,261

Unvested
 
71

 
289

 
4

Total
 
89

 
289

 
1,265


At June 30, 2015, there were 1.1 million additional shares available for the Company to grant under the 2014 Incentive Plan.


NOTE 8—DERIVATIVE FINANCIAL INSTRUMENTS
On March 24, 2015, the Company entered into an interest rate swap ("Interest Rate Swap"), effectively converting a portion of its variable rate debt into fixed rate debt. The Interest Rate Swap is not accounted for as a hedge and changes in fair value are included directly in the unaudited condensed consolidated statement of operations. The Company adjusts the accrued swap asset or liability by the amount of the monthly net settlement as settlements are made. Under the terms of the Interest Rate Swap, a monthly net settlement is made on approximately the 8th of each month for the difference between the fixed rate (see fixed rate schedule) and the variable rate based upon the one month LIBOR rate on the notional amount of the Interest Rate Swap. The Interest Rate Swap has a notional amount of $200.0 million through April 8, 2020.
The fixed rate follows the schedule below:
April 8, 2015 to April 7, 2016
0.4726
%
April 8, 2016 to April 9, 2017
1.1570
%
April 10, 2017 to April 8, 2018
1.6810
%
April 9, 2018 to April 7, 2019
1.9610
%
April 8, 2019 to April 8, 2020
2.1430
%
The Company's transactions in derivative financial instruments are authorized and executed pursuant to its regularly reviewed policies and procedures, which prohibit the use of derivative financial instruments for trading or speculative purposes.
For the three months ended June 30, 2015, the Company recognized a gain on the Interest Rate Swap of $1.0 million which consisted of $1.1 million of unrealized gains related to the change in fair value of the Interest Rate Swap and a $0.1 million realized loss for the settlement payments made. The Company did not record a gain or loss on the Interest Rate Swap for the three months ended June 30, 2014. For the six months ended June 30, 2015, the Company recognized a gain on the Interest Rate Swap of $0.1 million which consisted of $0.2 million of unrealized gains related to the change in fair value of the Interest Rate Swap and a $0.1 million realized loss for the settlement payments made. The Company did not record a gain or loss on the Interest Rate Swap for the six months ended June 30, 2014.

16

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




NOTE 8—DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following tables provide details regarding the Company's derivative financial instruments (in thousands):
 
 
For the Three Months Ended June 30, 2015
 
For the Three Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
 
 
Gain Recognized in Earnings (a)
 
Gain Recognized in Earnings
 
Gain Recognized in Earnings (a)
 
Gain Recognized in Earnings
Interest Rate Swap
 
1,007

 

 
$
119

 
$


 
 
June 30, 2015
 
December 31, 2014
 
 
Fair Value of
Derivative (b)
 
Fair Value of
Derivative
Interest Rate Swap (Note 11)
 
$
218

 
$

 
(a)
Classified in Other (income) expenses—Gain on interest rate swap
(b)
Classified in Assets—Prepaid expenses other assets

NOTE 9—INCOME TAXES
Neff Corporation is required to file federal and applicable state corporate income tax returns and recognizes income taxes on its pre-tax income, which to date has consisted primarily of its share of Neff Holdings pre-tax income. Neff Holdings is a limited liability company that is treated as a partnership for federal and state income tax purposes. Neff Holdings is not subject to income taxes for federal and state purposes. Rather, taxable income or loss is included in the respective federal and state income tax returns of Neff Holdings members.
The components of provision for income taxes included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):
 
For the Three Months Ended June 30, 2015
 
For the Three Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
Current expense
 
 
 
 
 
 
 
Federal
$

 
$

 
$

 
$

State and local
68

 
119

 
133

 
238

Total current expense
$
68

 
$
119

 
$
133

 
238

Deferred expense
 
 
 
 
 
 
 
Federal
$
1,371

 
$

 
$
1,256

 
$

State and local
(339
)
 

 
(44
)
 

Total deferred expense
1,032

 

 
1,212

 

Total
$
1,100

 
$
119

 
$
1,345

 
$
238










17

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



NOTE 9—INCOME TAXES (Continued)
The following table summarizes the differences between the statutory federal income tax rate and the Company’s effective income tax rate (percent data):
 
For the Three Months Ended June 30, 2015
 
For the Three Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
U.S. federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (decrease) in tax rate resulting from:
 
 
 
 
 
 
 
State and local income taxes net of federal benefit
(1.2
)
 

 
0.2

 

Uncertain tax positions

 
(0.5
)
 
0.1

 
(1.4
)
Permanent book/tax differences
(10.0
)
 

 
(10.7
)
 

Change in tax rate

 

 
0.1

 

Non-controlling interest
(16.7
)
 
(35.0
)
 
(17.5
)
 
(35.0
)
Other
0.1

 

 
(0.2
)
 

Effective tax rate
7.2
 %
 
(0.5
)%
 
7.0
 %
 
(1.4
)%

The following table summarizes the tax effects comprising the Company’s net deferred tax assets and liabilities (in thousands):
 
June 30, 2015
 
December 31, 2014
Deferred Tax Assets
 
 
 
Net operating loss carryforwards
$
8,644

 
$
2,535

Bad debt expense
329

 
336

Accrued liabilities
334

 
902

Equity-based compensation
203

 
139

Gain on interest rate swap
(34
)
 

Insurance/parts reserves
553

 
543

Straight-line rent adjustment
99

 
100

Uncertain tax positions
108

 
104

Subtotal
10,236

 
4,659

Less: valuation allowance

 

Total deferred tax assets
$
10,236

 
$
4,659

Deferred Tax Liabilities
 
 
 
Intangible assets
$
(3,151
)
 
$
(2,841
)
Deferred debt costs
(295
)
 
(230
)
Depreciation
(13,407
)
 
(6,993
)
Total deferred tax liability
$
(16,853
)
 
$
(10,064
)
 
 
 
 
Deferred Tax Liability, net
$
(6,617
)
 
$
(5,405
)

Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset and changes in applicable tax laws and other factors. If management determines that it is not probable that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the amount expected to be recoverable in the future. The allowance will result in a charge to the Company’s unaudited condensed consolidated statements of operations. Based on management’s assessment of the available positive and negative evidence, including future reversal of taxable temporary differences, we believe it is more likely than not that the deferred tax assets will be realized.
On October 1, 2010, Neff Holdings purchased substantially all of the assets of Neff Holdings Corp. and certain of its affiliates (collectively, the "Predecessor") in connection with the Predecessor's bankruptcy cases under chapter 11 of title 11 of the United States Code (the "Acquisition").


18

NEFF CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 9—INCOME TAXES (Continued)
In connection with the Acquisition uncertain tax liabilities were assumed by Neff Holdings and are recorded in the Company's accrued expenses as of June 30, 2015 and December 31, 2014. As a taxable entity, the Company recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. At June 30, 2015 and December 31, 2014, the amount of uncertain tax positions recorded in accrued expenses was approximately $0.4 million.
The Company's practice is to recognize interest and penalties on uncertain tax positions in income tax expense. The Company recognized accrued interest and penalties of $0.3 million as of June 30, 2015 and December 31, 2014. The Company expects to reverse $0.4 million in uncertain tax positions and $0.3 million in interest and penalties during the third quarter of 2015.
NOTE 10—SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
 
(in thousands)
Supplemental Disclosures of Cash Flow Information
 

 
 

Cash paid for interest
$
21,325

 
$
14,893

Cash paid for interest rate swap settlements
99

 

Non-cash investing activities:
 

 
 

Purchases of rental equipment included in accounts payable and other accrued liabilities at period end
$
22,017

 
$
24,947

NOTE 11—FAIR VALUE DISCLOSURES
The carrying amounts for accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to their immediate to short-term maturity. The fair value of the Revolving Credit Facility and the Second Lien Loan approximates its carrying value as of June 30, 2015 and December 31, 2014, as variable interest rates approximate market rates.
The Company used the following methods to measure the fair value of certain assets and liabilities:
Interest Rate Swap.   The Interest Rate Swap is valued utilizing pricing models taking into account inputs such as interest rates and notional amounts.
The FASB has established a framework for measuring fair value and requires that assets and liabilities measured at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
The following table provides fair value measurement information of the Company's financial asset measured on a recurring basis as of June 30, 2015 (in thousands):
 
Fair Value Measurements Using:
 
Quoted Prices in Active Markets
 
Observable Inputs
 
Unobservable Inputs
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest Rate Swap
$

 
$
218

 
$

The Company entered into the Interest Rate Swap on March 24, 2015.
There were no transfers into or out of Level 1, 2 or 3 during the six months ended June 30, 2015 and 2014.

19


NEFF CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2015
(in thousands)
 
Neff Rental LLC
 
Neff LLC
 
Neff Holdings LLC
 
Neff Corporation
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
223

 
$

 
$

 
$
2

 
$

 
$
225

Accounts receivable, net
59,490

 

 

 

 

 
59,490

Inventories
2,109

 

 

 

 

 
2,109

Rental equipment, net
479,491

 

 

 

 

 
479,491

Property and equipment, net
35,575

 

 

 

 

 
35,575

Prepaid expenses and other assets
17,276

 

 

 

 

 
17,276

Goodwill
58,765

 

 

 

 

 
58,765

Investment in subsidiary

 
42,080

 
42,080

 
156,244

 
(240,404
)
 

Intercompany
6,490

 

 

 
(6,490
)
 

 

Intangible assets, net
15,957

 

 

 

 

 
15,957

Total assets
$
675,376

 
$
42,080

 
$
42,080

 
$
149,756

 
$
(240,404
)
 
$
668,888

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT / MEMBERS' DEFICIT
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
21,370

 
$

 
$

 
$

 
$

 
$
21,370

Accrued expenses and other liabilities
29,966

 

 

 
120

 

 
30,086

Revolving credit facility
293,000

 

 

 

 

 
293,000

Second lien loan, net
476,833

 

 

 

 

 
476,833

Payable pursuant to tax receivable agreement

 

 

 
28,670

 

 
28,670

Deferred tax liability, net

 

 

 
6,617

 

 
6,617

Total liabilities
821,169

 

 

 
35,407

 

 
856,576

 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' deficit / members' deficit
 
 
 
 
 
 
 
 
 
 
 
   Class A Common Stock

 

 

 
105

 

 
105

   Class B Common Stock

 

 

 
150

 


 
150

   Additional paid-in capital

 

 

 
34,349

 
(146,143
)
 
(111,794
)
   Retained earnings

 

 

 
9,947

 

 
9,947

Members' deficit
(187,873
)
 

 

 

 
187,873

 

Accumulated surplus
42,080

 
42,080

 
42,080

 

 
(126,240
)
 

Total stockholders' deficit / members' deficit
(145,793
)
 
42,080

 
42,080

 
44,551

 
(84,510
)
 
(101,592
)
Non-controlling interest

 

 

 
69,798

 
(155,894
)
 
(86,096
)
Total stockholders' deficit / members' deficit and non-controlling interest
(145,793
)
 
42,080

 
42,080

 
114,349

 
(240,404
)
 
(187,688
)
Total liabilities and stockholders' deficit / members' deficit and non-controlling interest
$
675,376

 
$
42,080

 
$
42,080

 
$
149,756

 
$
(240,404
)
 
$
668,888






20


NEFF CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2014
(in thousands)
 
Neff Rental LLC
 
Neff LLC
 
Neff Holdings LLC
 
Neff Corporation
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
205

 
$

 
$

 
$
2

 
$

 
$
207

Accounts receivable, net
66,375

 

 

 

 

 
66,375

Inventories
2,005

 

 

 

 

 
2,005

Rental equipment, net
420,245

 

 

 

 

 
420,245

Property and equipment, net
30,210

 

 

 

 

 
30,210

Prepaid expenses and other assets
16,959

 

 

 

 

 
16,959

Goodwill
58,765

 

 

 

 

 
58,765

Investment in subsidiary

 
25,627

 
25,627

 
148,791

 
(200,045
)
 

Intercompany
6,206

 

 

 
(6,206
)
 

 

Intangible assets, net
16,600

 

 

 

 

 
16,600

Total assets
$
617,570

 
$
25,627

 
$
25,627

 
$
142,587

 
$
(200,045
)
 
$
611,366

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT / MEMBERS' DEFICIT
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
27,389

 
$

 
$

 
$

 
$

 
$
27,389

Accrued expenses and other liabilities
31,188

 

 

 
15

 

 
31,203

Revolving credit facility
245,200

 

 

 

 

 
245,200

Second lien loan, net
476,713

 

 

 

 

 
476,713

Payable pursuant to tax receivable agreement

 

 

 
31,557

 

 
31,557

Deferred tax liability, net

 

 

 
5,405

 

 
5,405

Total liabilities
780,490

 

 

 
36,977

 

 
817,467

 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' deficit / members' deficit
 
 
 
 
 
 
 
 
 
 
 
   Class A Common Stock

 

 

 
105

 

 
105

   Class B Common Stock

 

 

 
150

 


 
150

   Additional paid-in capital

 

 

 
33,958

 
(146,143
)
 
(112,185
)
   Retained earnings

 

 

 
1,599

 

 
1,599

Members' deficit
(188,547
)
 

 

 

 
188,547

 

Accumulated surplus
25,627

 
25,627

 
25,627

 

 
(76,881
)
 

Total stockholders' deficit / members' deficit
(162,920
)
 
25,627

 
25,627

 
35,812

 
(34,477
)
 
(110,331
)
Non-controlling interest

 

 

 
69,798

 
(165,568
)
 
(95,770
)
Total stockholders' deficit / members' deficit and non-controlling interest
(162,920
)
 
25,627

 
25,627

 
105,610

 
(200,045
)
 
(206,101
)
Total liabilities and stockholders' deficit / members' deficit and non-controlling interest
$
617,570

 
$
25,627

 
$
25,627

 
$
142,587

 
$
(200,045
)
 
$
611,366






21


NEFF CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2015
(in thousands)
 
Neff Rental LLC
 
Neff LLC
 
Neff Holdings LLC
 
Neff Corporation
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
Rental revenues
$
84,820

 
$

 
$

 
$

 
$

 
$
84,820

Equipment sales
6,174

 

 

 

 

 
6,174

Parts and service
3,233

 

 

 

 

 
3,233

Total revenues
94,227

 

 

 

 

 
94,227

Cost of revenues
 
 
 
 
 
 
 
 
 
 
 
Cost of equipment sold
4,058

 

 

 

 

 
4,058

Depreciation of rental equipment
21,213

 

 

 

 

 
21,213

Cost of rental revenues
19,511

 

 

 

 

 
19,511

Cost of parts and service
1,807

 

 

 

 

 
1,807

Total cost of revenues
46,589

 

 

 

 

 
46,589

Gross profit
47,638

 

 

 

 

 
47,638

Other operating expenses
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
22,468

 

 

 

 

 
22,468

Other depreciation and amortization
2,657

 

 

 

 

 
2,657

Total other operating expenses
25,125

 

 

 

 

 
25,125

Income from operations
22,513

 

 

 

 

 
22,513

Other (income) expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
10,753

 

 

 

 

 
10,753

Adjustment to tax receivable agreement

 

 

 
(3,408
)
 

 
(3,408
)
Gain on interest rate swap
(1,007
)
 

 

 

 

 
(1,007
)
Amortization of debt issue costs
381

 

 

 

 

 
381

Total other (income) expenses
10,127

 

 

 
(3,408
)
 

 
6,719

Income before income taxes
12,386

 

 

 
3,408

 

 
15,794

Equity earnings in subsidiaries

 
12,373

 
12,373

 
5,098

 
(29,844
)
 

Provision for income taxes
(13
)
 

 

 
(1,087
)
 

 
(1,100
)
Net income
12,373

 
12,373

 
12,373

 
7,419

 
(29,844
)
 
14,694

Less: net income attributable to non-controlling interest
7,275

 
7,275

 
7,275

 

 
(14,550
)
 
7,275

Net income attributable to Neff Corporation
$
5,098

 
$
5,098

 
$
5,098

 
$
7,419

 
$
(15,294
)
 
$
7,419


22


NEFF CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(in thousands)
 
Neff Rental LLC
 
Neff LLC
 
Neff Holdings LLC
 
Neff Corporation
 
Eliminations
 
Total
Revenues
 
 
 
 
 
 
 
 
 
 
 
Rental revenues
$
158,961

 
$

 
$

 
$

 
$

 
$
158,961

Equipment sales
12,961

 

 

 

 

 
12,961

Parts and service
6,391

 

 

 

 

 
6,391

Total revenues
178,313

 

 

 

 

 
178,313

Cost of revenues
 
 
 
 
 
 
 
 
 
 
 
Cost of equipment sold
8,390

 

 

 

 

 
8,390

Depreciation of rental equipment
40,727

 

 

 

 

 
40,727

Cost of rental revenues
37,370

 

 

 

 

 
37,370

Cost of parts and service
3,570

 

 

 

 

 
3,570

Total cost of revenues
90,057

 

 

 

 

 
90,057

Gross profit
88,256

 

 

 

 

 
88,256

Other operating expenses
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
44,758

 

 

 

 

 
44,758

Other depreciation and amortization
5,118

 

 

 

 

 
5,118

Total other operating expenses
49,876

 

 

 

 

 
49,876

Income from operations
38,380

 

 

 

 

 
38,380

Other (income) expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
21,267

 

 

 

 

 
21,267

Adjustment to tax receivable agreement

 

 

 
(2,887
)
 

 
(2,887
)
Gain on interest rate swap
(119
)
 

 

 

 

 
(119
)
Amortization of debt issue costs
752

 

 

 

 

 
752

Total other (income) expenses
21,900

 

 

 
(2,887
)
 

 
19,013

Income before income taxes
16,480

 

 

 
2,887

 

 
19,367

Equity earnings in subsidiaries

 
16,453

 
16,453

 
6,779

 
(39,685
)
 

Provision for income taxes
(27
)
 

 

 
(1,318
)
 

 
(1,345
)
Net income
16,453

 
16,453

 
16,453

 
8,348

 
(39,685
)
 
18,022

Less: net income attributable to non-controlling interest
9,674

 
9,674

 
9,674

 

 
(19,348
)
 
9,674

Net income attributable to Neff Corporation
$
6,779

 
$
6,779

 
$
6,779

 
$
8,348

 
$
(20,337
)
 
$
8,348


23


NEFF CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2015

(in thousands)
 
Neff Rental LLC
 
Neff LLC
 
Neff Holdings LLC
 
Neff Corporation
 
Eliminations
 
Total
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net income
$
16,453

 
$
16,453

 
$
16,453

 
$
8,348

 
$
(39,685
)
 
$
18,022

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation
45,202

 

 

 

 

 
45,202

Amortization of debt issue costs
752

 

 

 

 

 
752

Amortization of intangible assets
643

 

 

 

 

 
643

Amortization of original issue discount on second lien loan
120

 

 

 

 

 
120

Gain on sale of equipment
(4,571
)
 

 

 

 

 
(4,571
)
Provision for bad debt
825

 

 

 

 

 
825

Equity-based compensation
674

 

 

 

 

 
674

Deferred income taxes

 

 

 
1,212

 

 
1,212

Adjustment to tax receivable agreement

 

 

 
(2,887
)
 

 
(2,887
)
Unrealized gain on interest rate swap
(218
)
 

 

 

 

 
(218
)
Equity earnings in subsidiaries

 
(16,453
)
 
(16,453
)
 
(6,779
)
 
39,685

 

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
6,060

 

 

 

 

 
6,060

Inventories, prepaid expenses and other assets
(955
)
 

 

 

 

 
(955
)
Accounts payable
(2,271
)
 

 

 

 

 
(2,271
)
Accrued expenses and other liabilities
(2,010
)
 

 

 
105

 

 
(1,905
)
Net cash provided by (used in) operating activities
60,704

 

 

 
(1
)
 

 
60,703

Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Purchases of rental equipment
(111,095
)
 

 

 

 

 
(111,095
)
Proceeds from sale of equipment
12,961

 

 

 

 

 
12,961

Purchases of property and equipment
(10,068
)
 

 

 

 

 
(10,068
)
Net cash used in investing activities
(108,202
)
 

 

 

 

 
(108,202
)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Repayments under revolving credit facility
(53,111
)
 

 

 

 

 
(53,111
)
Borrowings under revolving credit facility
100,911

 

 

 

 

 
100,911

Payment of costs directly associated with the issuance of Class A common stock

 

 

 
(283
)
 

 
(283
)
Intercompany
(284
)
 

 

 
284

 

 

Net cash provided by financing activities
47,516

 

 

 
1

 

 
47,517

Net increase in cash and cash equivalents
18

 

 

 

 

 
18

Cash and cash equivalents, beginning of period
205

 

 

 
2

 

 
207

Cash and cash equivalents, end of period
$
223

 
$

 
$

 
$
2

 
$

 
$
225



24


Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The historical financial data discussed below reflects the historical results of operations and financial condition of Neff Holdings and its consolidated subsidiaries prior to Neff Corporation’s initial public offering completed on November 26, 2014 (the "IPO") and Neff Corporation and its consolidated subsidiaries, including Neff Holdings, Neff LLC and Neff Rental LLC, subsequent to the IPO. In addition, the statements in this discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, our expected tax rate and benefits and estimated amounts payable pursuant to the Tax Receivable Agreement, liquidity, expected capital expenditures, anticipated future indebtedness or financings and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors" set forth in our Annual Report on Form 10-K for the year ended December 31, 2014. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
We are a leading regional equipment rental company in the United States, focused on the fast-growing Sunbelt states. We offer a broad array of equipment rental solutions for our diverse customer base, including infrastructure, non-residential construction, oil and gas, municipal and residential construction customers. Our broad fleet of equipment includes earthmoving, material handling, aerial and other related rental equipment, which we package together to meet the specific needs of our customers. We consider the earthmoving equipment category to be a core competency of our Company and a key differentiator of our business.
Our revenues are affected primarily by the time utilization of the equipment in our rental fleet, the rental rates we can charge for that equipment and the amount of equipment we have in our fleet available for rent. See "—Key Performance Measures" for definitions of time utilization and rental rates. We generate revenues from the following three sources:
Rental revenues—this consists of rental revenues and related revenues such as the fees we charge for the pickup and delivery of equipment, damage waivers and other surcharges.
Equipment sales—this consists primarily of revenues from the sale of our used rental equipment and also includes sales of ancillary new equipment to our customers.
Parts and service—this includes revenues from customers for fuel and the repair of damaged rental equipment as well as from the sale of complementary parts, supplies and merchandise to our customers in conjunction with our equipment rental business.
Seasonality and Other External Factors That Affect Our Business
Our operating results are subject to annual and seasonal fluctuations resulting from a variety of factors, including:
the seasonality of rental activity by our customers, with lower activity levels during the winter;
the cyclicality of the construction industry;
the number of our significant competitors and the competitive supply of rental equipment;
general economic conditions; and
the price of oil and other commodities and other general economic trends impacting the industries in which our customers and end users operate.
In addition, our operating results may be affected by severe weather events (such as hurricanes and flooding) in the regions we serve. Severe weather events can result in short-term reductions in construction activity levels, but after these periods of reduced construction activity, repair and reconstruction efforts have historically resulted in periods of increased demand for rental equipment.
Financial Highlights
For the past several years, we have executed a strategy focused on improving the profitability of our core rental business through revenue growth, a focus on operating leverage and margin expansion. In particular we have focused on maximizing returns from improving construction activity in the markets we operate in by increasing rental rates and by increasing the amount

25


of rental equipment on our existing network of 64 branch locations. As a result, our Adjusted EBITDA increased 3.4% to $86.0 million for the six months ended June 30, 2015 as compared to the prior year.

"EBITDA" is defined as net income (loss) plus interest expense, provision for income taxes, depreciation of rental equipment, other depreciation and amortization and amortization of debt issue costs. "Adjusted EBITDA" is defined as EBITDA further adjusted to give effect to non-cash items and other items that we do not consider to be indicative of our ongoing operations. Adjusted EBITDA is not a measure of performance in accordance with US GAAP and should not be considered as an alternative to net income (loss) or operating cash flows determined in accordance with US GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow for management's discretionary use, as it excludes certain cash requirements such as interest payments, tax payments and debt service requirements. We believe that the inclusion of EBITDA and Adjusted EBITDA in this quarterly report on Form 10-Q is appropriate because securities analysts, investors and other interested parties use these non-US GAAP financial measures as important measures of assessing our operating performance across periods on a consistent basis. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements;
it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
it does not reflect changes in, or cash requirements for, our working capital needs;
it does not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our significant amount of indebtedness; and
it does not reflect the impact of earnings or charges resulting from matters we do not consider to be indicative of our ongoing operations but may nonetheless have a material impact on our results of operations.

In addition, because not all companies use identical calculations, these presentations of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry.
The following table reconciles Adjusted EBITDA to our net income (loss) for the periods indicated:
 
For the Three Months Ended June 30, 2015
 
For the Three Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2015
 
For the Six Months Ended June 30, 2014
 
(in thousands of dollars)
Net income (loss)
$
14,694

 
$
(22,867
)
 
$
18,022

 
$
(17,409
)
Interest expense
10,753

 
8,316

 
21,267

 
15,119

Provision for income taxes
1,100

 
119

 
1,345

 
238

Depreciation of rental equipment
21,213

 
18,302

 
40,727

 
36,489

Other depreciation and amortization
2,657

 
2,462

 
5,118

 
4,708

Amortization of debt issue costs
381

 
1,012

 
752

 
2,339

EBITDA
50,798

 
7,344

 
87,231

 
41,484

Loss on extinguishment of debt(a)

 
15,896

 

 
15,896

Transaction bonus(b)

 
24,506

 

 
24,506

Rental split expense(c)
299

 
395

 
1,103

 
745

Equity-based compensation(d)
322

 
262

 
674

 
526

Adjustment to tax receivable agreement(e)
(3,408
)
 

 
(2,887
)
 

Gain on interest rate swap(f)
(1,007
)
 

 
(119
)
 

Adjusted EBITDA
$
47,004

 
$
48,403

 
$
86,002

 
$
83,157

 
(a)
Represents expenses and realized losses that were incurred in connection with the redemption of our Senior Secured Notes.
(b)
Represents the payment of incentive bonuses earned in connection with consummation of a refinancing to management and certain members of the Company’s board of managers.
(c)
Represents cash payments made to suppliers of equipment in connection with rental splits, which payments are credited against the purchase price of the applicable equipment if Neff Holdings elects to purchase that equipment. See "—Results of Operations" for a discussion of rental splits.
(d)
Represents non-cash equity-based compensation expense recorded in the periods presented in accordance with US GAAP.
(e)
Represents adjustment to tax receivable agreement related to changes in estimates used in the calculation of the tax receivable agreement.
(f)
Represents gain on interest rate swap related to adjustments to fair value.




26


Company Structure
Neff Corporation was formed as a Delaware corporation on August 18, 2014. On November 26, 2014, Neff Corporation completed an initial public offering (the "IPO") of 10,476,190 shares of Class A common stock at a public offering price of $15.00 per share. A portion of the gross proceeds received by Neff Corporation from the IPO were used to purchase common membership units ("Common Units") in Neff Holdings LLC, ("Neff Holdings") which was wholly owned by private investment funds managed by Wayzata Investment Partners ("Wayzata") prior to the IPO. We refer to these transactions as the “Organizational Transactions.”

The historical results of operations discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the consolidated results of Neff Corporation and its consolidated subsidiaries, including Neff Holdings, Neff LLC and Neff Rental LLC (“the Company”, “we” or “us”).
Neff Corporation, is the sole managing member of Neff Holdings and owns Common Units of Neff Holdings representing a 41.2% equity interest in Neff Holdings, as of June 30, 2015. As the sole managing member of Neff Holdings, we control its business and affairs and, therefore, we consolidate its financial results with ours.

Wayzata retains Common Units in Neff Holdings representing a collective 58.8% economic interest and a non-controlling interest in Neff Holdings, and we reflect Wayzata's collective economic interest as a non-controlling interest in our unaudited condensed consolidated financial statements. As a result, net income (loss) attributable to us, after excluding the non-controlling interest of Wayzata, represents 41.2% of Neff Holdings' net income (loss) and our only material asset is our corresponding 41.2% economic interest and controlling interest in Neff Holdings. Neff Holdings is a holding company that conducts no operations and, as of the consummation of the IPO, its only material asset is the equity interests of its direct and indirect subsidiaries.

Neff Holdings has historically been and will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any entity-level U.S. federal income tax. Rather, taxable income or loss is included in the respective U.S. federal income tax returns of Neff Holdings' members. Neff Corporation will be subject to income taxes as follows:
Provision For (Benefit From) Income Tax—We are a taxpayer subject to income taxes at rates generally applicable to C corporations, and therefore our results of operations are affected by the amount of accruals for tax benefits or payments that Neff Holdings (as a partnership for U.S. federal income tax purposes) historically has not reflected in its results of operations. Our combined statutory federal and state income tax rate is approximately 39.0%.

Potential Tax Benefit Due to Special Allocations in connection with the IPO and Future Step-up In Basis—As a result of the Organizational Transactions and pursuant to U.S. Treasury regulations governing the purchase of an equity interest in a partnership (including a limited liability company such as Neff Holdings that is taxed as a partnership) at a time when the assets of the partnership have a fair market value in excess of tax basis, our purchase of Neff Holdings' Common Units directly from Neff Holdings with a portion of the proceeds from the IPO result in certain special allocations of Neff Holdings' items of loss or deduction to us over time that are in excess of our pro rata share of such items of loss or deduction pursuant to Section 704(c) of the Internal Revenue Code. The principles of Section 704(c) may also serve to allocate items of income or gain to Wayzata as a result of subsequent dispositions of assets to take into account the difference between the fair market value and basis difference at the time of the Organizational Transactions. We may obtain an increase in our share of the tax basis of the assets of Neff Holdings in the future, when certain members of management of Neff Holdings and certain non-executive members of its board of managers (each a "Prior LLC Owner") receives shares of our Class A common stock or cash at our election in connection with an exercise of such Prior LLC Owner's right to have Common Units in Neff Holdings held by such Prior LLC Owner redeemed by Neff Holdings or, at the election of Neff Corporation, exchanged (which we intend to treat as our direct purchase of Common Units from such Prior LLC Owner for U.S. federal income and other applicable tax purposes, regardless of whether such Common Units are surrendered by a Prior LLC Owner to Neff Holdings for redemption or sold to us upon the exercise of our election to acquire such Common Units directly). The special allocations and step-up in tax basis described above may result in a reduction in the amount of taxes that we are required to pay relative to the amount of taxes payable by other members of Neff Holdings who are similarly situated but who do not receive a similar step-up in basis or special allocations.

Tax Receivable Agreement—Under the Tax Receivable Agreement with our Prior LLC Owners we are obligated to pay to our Prior LLC Owners 85.0% of the amount of tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result of the step-up in basis and special allocations discussed above. We account for the effects of these increases in tax basis and associated payments under the Tax Receivable Agreement arising from future redemptions or exchanges as follows:


27


we will record a change in the deferred tax accounts for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;
to the extent we estimate that we will not realize the full benefit of a resulting deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
we will record 85% of the estimated realizable tax benefit as an increase to the liability associated with the future payments due under the Tax Receivable Agreement and the remaining 15.0% of the estimated realizable tax benefit as an increase to additional paid-in capital.
All of the effects of changes in any of our estimates after the date of the exchange will be included in net income (loss) for the period in which those changes occur. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss) for the period in which the change occurs.

Key Performance Measures
From time to time we use certain key performance measures in evaluating our business and results of operations and we may refer to one or more of these key performance measures in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." These key performance measures in addition to Adjusted EBITDA include:
OEC—we present OEC, defined as the first cost of acquiring the equipment, or in the case of used equipment purchases and rental splits, an estimate of the first cost that would have been paid to acquire the equipment if it had been purchased new in its year of manufacture.
Rental rates—we define rental rates as the rates charged to our customers on rental contracts that typically are for a daily, weekly or monthly term. Rental rates change over time based on a combination of pricing, the mix of equipment on rent and the mix of rental terms with customers. Period over period changes in rental rates are calculated on a weighted average with the weighting based on prior period revenue mix.
Time utilization—we define time utilization as the daily average OEC of equipment on rent, divided by the OEC of all equipment in the rental fleet during the relevant period.
Results of Operations
The following summary highlights the key elements of certain line items discussed further below in the period-over-period analysis of our results of operations:
Total Revenues:
Rental Revenues:  relates primarily to revenues received from customers under leases for our rental equipment and includes related revenues such as the fees we charge for the pickup and delivery of equipment, damage waivers and other surcharges.
Equipment Sales:  relates primarily to revenues received from third parties upon the sale of used equipment from our rental fleet, which generally increases in the winter months when customer activity and time utilization are comparatively lower. To a much lesser extent, this line item also includes revenues received upon the sale to customers of ancillary new equipment.
Parts and Service:  relates primarily to revenues received from sales of complementary parts, supplies and merchandise in conjunction with our equipment rental business, as well as from services provided to repair rental equipment damaged by customers, which is billable to our customers, and fuel costs charged to customers.
Cost of Equipment Sold:  relates primarily to the net book value of our used rental fleet that is sold in the ordinary course of our active fleet management. To a much lesser extent, this line item also includes net book value of ancillary new equipment that is sold.
Depreciation of Rental Equipment:  relates to the depreciation of the cost of equipment in our rental fleet and is generally calculated on a straight-line basis over the estimated service life of the asset (generally two to eight years with a 10% to 20% residual value).
Cost of Rental Revenues:  relates primarily to the delivery and retrieval of rental equipment (including fuel), maintenance and repairs to our rental equipment fleet (including parts), and labor costs and related payroll expenses

28


(such as insurance, benefits and overtime) for drivers and mechanics. This line item also includes the portion of rental revenues paid over to Original Equipment Manufacturers ("OEMs") under rental splits described below that we may have in place from time to time.
Cost of Parts and Service:  relates primarily to costs attributable to the sale of parts and fuel directly to customers and service provided for the maintenance and repair of our equipment damaged by customers, which is billable to our customers.
Selling, General and Administrative Expenses:  relates primarily to general selling, general overhead and administrative costs such as branch management and sales, accounting, finance, legal and marketing expenses. This line item also includes payments under leases for our headquarters and branch locations, expenses associated with software licenses, property taxes payable on our rental equipment and payroll, sales commission, bonus and benefits expenses allocable to executive, regional and branch management. This line item also includes provisions for bad debt expense and any ordinary course litigation expense.
Other Depreciation and Amortization:  relates primarily to depreciation of non-rental property, plant and equipment, such as trucks and trailers used to transport rental equipment as well as office equipment, and amortization of intangibles such as customer lists.
Interest Expense:  relates primarily to interest expense incurred in connection with our long-term debt facilities and the amortization of the related original issue discount, in each case for the periods in which those debt obligations were outstanding.
We utilize rental splits in our operations. Rental splits are a consignment arrangement of new equipment by OEMs in which we hold their equipment in our rental fleet for a period of time (typically between three and 12 months) and agree to share with the OEM a percentage of the rental revenue we receive on the rental of that unit. We do not take title to the unit under this arrangement and we can return the unit to the OEM at any time at no additional cost to us. We also can elect to purchase the unit from the OEM from time to time. The revenue we pay to the OEM under rental splits is expensed in cost of rental revenues on our statement of operations, but added back to Adjusted EBITDA in order to maintain comparability to our results from period to period. If we exercise the option to purchase the unit, the unit becomes part of our rental fleet and is depreciated, with depreciation added back to Adjusted EBITDA. Before we exercise the option to purchase a unit, we count the unit as part of our rental fleet for OEC calculations but do not depreciate the unit.


29


Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

The following table illustrates our operating activity for the three months ended June 30, 2015 and the three months ended June 30, 2014.
 
Three Months Ended June 30,
 
2015
 
2014
 
% Change
 
(in thousands of dollars)
Revenues
 

 
 

 
 

Rental revenues
$
84,820

 
$
83,497

 
1.6

Equipment sales
6,174

 
5,467

 
12.9

Parts and service
3,233

 
3,398

 
(4.9
)
Total revenues
94,227

 
92,362

 
2.0

Cost of revenues


 
 

 


Cost of equipment sold
4,058

 
2,981

 
36.1

Depreciation of rental equipment
21,213

 
18,302

 
15.9

Cost of rental revenues
19,511

 
19,308

 
1.1

Cost of parts and service
1,807

 
2,051

 
(11.9
)
Total cost of revenues
46,589

 
42,642

 
9.3

Gross profit
47,638

 
49,720

 
(4.2
)
Other operating expenses


 
 

 


Selling, general and administrative expenses
22,468

 
20,276

 
10.8

Other depreciation and amortization
2,657

 
2,462

 
7.9

Transaction bonus

 
24,506

 
nm

Total other operating expenses
25,125

 
47,244

 
(46.8
)
Income from operations
22,513

 
2,476

 
nm

Other (income) expenses


 
 

 


Interest expense
10,753

 
8,316

 
29.3

Adjustment to tax receivable agreement
(3,408
)
 

 
nm

Loss on extinguishment of debt

 
15,896

 
nm

Gain on interest rate swap
(1,007
)
 

 
nm

Amortization of debt issue costs
381

 
1,012

 
(62.4
)
Total other (income) expenses
6,719

 
25,224

 
(73.4
)
Income (loss) before income taxes
15,794

 
(22,748
)
 
nm

Provision for income taxes
(1,100
)
 
(119
)
 
nm

Net income (loss)
$
14,694

 
$
(22,867
)
 
nm

______________________________
"nm"—means not meaningful

Total Revenues.    Total revenues for the three months ended June 30, 2015 increased 2.0% to $94.2 million from $92.4 million for the three months ended June 30, 2014. The components of our revenues are rental revenues, equipment sales, and parts and service, and the changes between periods in each of these components are discussed below.

Rental Revenues.     Rental revenues for the three months ended June 30, 2015 increased 1.6% to $84.8 million from $83.5 million for the three months ended June 30, 2014. The increase in rental revenues was primarily due to an increase in the amount of equipment on rent as a result of an increase in the size of our rental fleet and an increase in rental rates, partially offset by a decrease in the time utilization of the larger fleet. We estimate that our rental rates increased 1.7%, as compared to the three months ended June 30, 2014. For the three months ended June 30, 2015, the average OEC of our rental fleet increased by 10.9% to $762.5 million from $687.2 million at June 30, 2014, as a result of increased capital expenditures. Time utilization for the three months ended June 30, 2015 decreased to 67.1% from 72.2% for the three months ended June 30, 2014 primarily due to wet weather conditions in several of our regions combined with decreased rental activity among our customers operating in the oil and gas markets.

30


Equipment Sales.     Equipment sales for the three months ended June 30, 2015 increased 12.9% to $6.2 million from $5.5 million for the three months ended June 30, 2014. The increase in equipment sales revenues was primarily due to increased volume of sales of used equipment.
Parts and Service.     Revenues from the sales of parts and service for the three months ended June 30, 2015 decreased 4.9% to $3.2 million from $3.4 million for the three months ended June 30, 2014. The decrease in these revenues for the three months ended June 30, 2015 was primarily due to decreased parts, repair and fuel costs charged to customers.
Cost of Equipment Sold.    Costs associated with the sale of rental equipment increased 36.1% to $4.1 million for the three months ended June 30, 2015 from $3.0 million for the three months ended June 30, 2014. The increase in costs associated with the sale of rental equipment was due primarily to the increase in equipment sales for the three months ended June 30, 2015.
Depreciation of Rental Equipment.    Depreciation of rental equipment increased 15.9% to $21.2 million for the three months ended June 30, 2015 from $18.3 million for the three months ended June 30, 2014. The increased depreciation expense of rental equipment was primarily due to the increase in the number of units in our rental fleet and the related increase in the cost of our rental equipment. As a percentage of rental revenues, depreciation of rental equipment was 25.0% for the three months ended June 30, 2015 and was 21.9% for the three months ended June 30, 2014. The increase in depreciation of rental equipment as a percentage of rental revenues was primarily due to an increase in the size of our rental fleet and the lack of a corresponding increase in rental revenues which was impacted by wet weather and decreased rental activity among our customers operating in the oil and gas markets.
Cost of Rental Revenues.    Costs associated with our rental revenues increased 1.1% to $19.5 million for the three months ended June 30, 2015 from $19.3 million for the three months ended June 30, 2014. The increase in cost of rental revenues was primarily a result of increased payroll and payroll related expenses partially offset by decreases in fuel, rerent and rental split expenses. As a percentage of rental revenues, cost of rental revenues decreased to 23.0% for the three months ended June 30, 2015 from 23.1% for the three months ended June 30, 2014. This decrease was primarily attributable to the increase in comparative rental revenues, since cost of rental revenues includes fixed costs that generally do not increase at the same rate as the increase in rental revenue.
Cost of Parts and Service.    Costs associated with generating our parts and service revenues decreased 11.9% to $1.8 million for the three months ended June 30, 2015 from $2.1 million for the three months ended June 30, 2014 primarily due to decreased fuel and repair costs.
Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the three months ended June 30, 2015 increased $2.2 million, or 10.8%, to $22.5 million from $20.3 million for the three months ended June 30, 2014. The net increase in selling, general and administrative expenses was attributable to several factors. Employee salaries, benefits and related employee expenses increased $0.6 million primarily as a result of higher salaries and increased commissions and incentive pay that resulted from higher rental revenues. Public company expenses in the form of professional fees, investor relations and director and officer insurance expenses also increased by $1.6 million. As a percentage of total revenues, selling, general and administrative expenses were 23.8% for the three months ended June 30, 2015, an increase of 8.2% from 22.0% for the three months ended June 30, 2014, primarily as a result of the increase in public company expenses.
Other Depreciation and Amortization.    Other depreciation and amortization expense increased 7.9% to $2.7 million for the three months ended June 30, 2015 from $2.5 million for the three months ended June 30, 2014. The increase was primarily due to an increase in depreciation expense for property and equipment.
Transaction Bonus. Transaction bonus expense for the three months ended June 30, 2014 was $24.5 million. This amount reflects payments made in connection with the consummation of the June 9, 2014 refinancing (the "Refinancing"). There was no transaction bonus for the three months ended June 30, 2015.

Interest Expense.    Interest expense for the three months ended June 30, 2015 increased 29.3% to $10.8 million from $8.3 million for the three months ended June 30, 2014. The increase in interest expense was primarily due to the increase in outstanding debt as a result of the Refinancing.

Adjustment to Tax Receivable Agreement. Adjustment to Tax Receivable Agreement for the three months ended June 30, 2015 was $3.4 million. The adjustment was primarily due to the Tax Receivable Agreement Amendment and to changes in estimated future payments. There was no adjustment to the Tax Receivable Agreement for the three months ended June 30, 2014.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was $15.9 million for the three months ended June 30, 2014. The loss on extinguishment of debt included the write-off of $8.7 million in unamortized debt issue costs on the Senior

31


Secured Notes, as well as $7.2 million paid in call premiums, paid in connection with the redemption of the Senior Secured Notes. There was no loss on extinguishment of debt for the three months ended June 30, 2015.

Gain on Interest Rate Swap. Gain on interest rate swap for the three months ended June 30, 2015 was $1.0 million and included a $1.1 million unrealized gain on the Interest Rate Swap related to the change in fair value and $0.1 million of settlement payments made. In March 2015, the Company entered into and recorded the Interest Rate Swap on its unaudited condensed consolidated balance sheet. The Interest Rate Swap is not accounted for as a hedge and changes in fair value are included directly in the unaudited condensed consolidated statement of operations. There was no gain or loss on the Interest Rate Swap for the three months ended June 30, 2014.
Amortization of Debt Issue Costs.    Amortization of debt issue costs for the three months ended June 30, 2015 decreased 62.4% to $0.4 million from $1.0 million for the three months ended June 30, 2014. The decrease in amortization of debt issue costs was primarily due to debt issue costs related to the Second Lien Loan being amortized over a longer term than the debt issue costs related to the Senior Secured Notes.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following table illustrates our operating activity for the six months ended June 30, 2015 and the six months ended June 30, 2014.
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
(in thousands of dollars)
Revenues
 

 
 

 
 

Rental revenues
$
158,961

 
$
152,626

 
4.2

Equipment sales
12,961

 
10,794

 
20.1

Parts and service
6,391

 
6,675

 
(4.3
)
Total revenues
178,313

 
170,095

 
4.8

Cost of revenues
 
 
 

 
 
Cost of equipment sold
8,390

 
6,119

 
37.1

Depreciation of rental equipment
40,727

 
36,489

 
11.6

Cost of rental revenues
37,370

 
37,624

 
(0.7
)
Cost of parts and service
3,570

 
4,094

 
(12.8
)
Total cost of revenues
90,057

 
84,326

 
6.8

Gross profit
88,256

 
85,769

 
2.9

Other operating expenses
 
 
 

 
 
Selling, general and administrative expenses
44,758

 
40,372

 
10.9

Other depreciation and amortization
5,118

 
4,708

 
8.7

Transaction bonus

 
24,506

 
nm

Total other operating expenses
49,876

 
69,586

 
(28.3
)
Income from operations
38,380

 
16,183

 
137.2

Other (income) expenses
 
 
 

 
 
Interest expense
21,267

 
15,119

 
40.7

Adjustment to tax receivable agreement
(2,887
)
 

 
nm

Loss on extinguishment of debt

 
15,896

 
nm

Gain on interest rate swap
(119
)
 

 
nm

Amortization of debt issue costs
752

 
2,339

 
(67.8
)
Total other (income) expenses
19,013

 
33,354

 
(43.0
)
Income (loss) before income taxes
19,367

 
(17,171
)
 
(212.8
)
Provision for income taxes
(1,345
)
 
(238
)
 
nm

Net income (loss)
$
18,022

 
$
(17,409
)
 
(203.5
)
______________________________
"nm"—means not meaningful

32



Total Revenues.    Total revenues for the six months ended June 30, 2015 increased 4.8% to $178.3 million from $170.1 million for the six months ended June 30, 2014. The components of our revenues are rental revenues, equipment sales, and parts and service, and the changes between periods in each of these components are discussed below.

Rental Revenues.     Rental revenues for the six months ended June 30, 2015 increased 4.2% to $159.0 million from $152.6 million for the six months ended June 30, 2014. The increase in rental revenues was primarily due to an increase in the amount of equipment on rent as a result of an increase in the size of our rental fleet and an increase in rental rates, partially offset by a decrease in the time utilization of the larger fleet. We estimate that our rental rates increased 2.7%, as compared to the six months ended June 30, 2014. For the six months ended June 30, 2015, the average OEC of our rental fleet increased by 12.7% to $742.3 million from $658.8 million at June 30, 2014, as a result of increased capital expenditures. Time utilization for the six months ended June 30, 2015 decreased to 65.4% from 70.3% for the six months ended June 30, 2014 primarily due to extreme weather conditions in several of our regions combined with decreased rental activity among our customers operating in the oil and gas markets.
Equipment Sales.     Equipment sales for the six months ended June 30, 2015 increased 20.1% to $13.0 million from $10.8 million for the six months ended June 30, 2014. The increase in equipment sales revenues was primarily due to increased volume of sales of used equipment.
Parts and Service.     Revenues from the sales of parts and service for the six months ended June 30, 2015 decreased 4.3% to $6.4 million from $6.7 million for the six months ended June 30, 2014. The decrease in these revenues for the six months ended June 30, 2015 was primarily due to decreased parts, repair and fuel costs charged to customers.
Cost of Equipment Sold.    Costs associated with the sale of rental equipment increased 37.1% to $8.4 million for the six months ended June 30, 2015 from $6.1 million for the six months ended June 30, 2014. The increase in costs associated with the sale of rental equipment was due primarily to the increase in equipment sales for the six months ended June 30, 2015.
Depreciation of Rental Equipment.    Depreciation of rental equipment increased 11.6% to $40.7 million for the six months ended June 30, 2015 from $36.5 million for the six months ended June 30, 2014. The increased depreciation expense of rental equipment was primarily due to the increase in the number of units in our rental fleet and the related increase in the cost of our rental equipment. As a percentage of rental revenues, depreciation of rental equipment was 25.6% for the six months ended June 30, 2015 and was 23.9% for the six months ended June 30, 2014. The increase in depreciation of rental equipment as a percentage of rental revenues was primarily due to increases in the size of our rental fleet and the lack of a corresponding increase in rental revenues which was impacted by extreme weather and decreased rental activity among our customers operating in the oil and gas markets.
Cost of Rental Revenues.    Costs associated with our rental revenues decreased 0.7% to $37.4 million for the six months ended June 30, 2015 from $37.6 million for the six months ended June 30, 2014. The decrease in cost of rental revenues was primarily a result of decreases in fuel and insurance expenses, partially offset by increased rental split and payroll and payroll related expenses. As a percentage of rental revenues, cost of rental revenues decreased to 23.5% for the six months ended June 30, 2015 from 24.7% for the six months ended June 30, 2014. This decrease was primarily attributable to the increase in comparative rental revenues, since cost of rental revenues includes fixed costs that generally do not increase at the same rate as the increase in rental revenue.
Cost of Parts and Service.    Costs associated with generating our parts and service revenues decreased 12.8% to $3.6 million for the six months ended June 30, 2015 from $4.1 million for the six months ended June 30, 2014 primarily due to decreased fuel and repair costs.
Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the six months ended June 30, 2015 increased $4.4 million, or 10.9%, to $44.8 million from $40.4 million for the six months ended June 30, 2014. The net increase in selling, general and administrative expenses was attributable to several factors. Employee salaries, benefits and related employee expenses increased $1.2 million primarily as a result of higher salaries, payroll taxes and increased commissions and incentive pay that resulted from higher rental revenues and improved results. Public company expenses in the form of professional fees, investor relations and director and officer insurance expenses also increased by $2.6 million. As a percentage of total revenues, selling, general and administrative expenses were 25.1% for the six months ended June 30, 2015, an increase of 5.9% from 23.7% for the six months ended June 30, 2014, primarily as a result of the increase in public company expenses.

33


Other Depreciation and Amortization.    Other depreciation and amortization expense increased 8.7% to $5.1 million for the six months ended June 30, 2015 from $4.7 million for the six months ended June 30, 2014. The increase was primarily due to an increase in depreciation expense for property and equipment.
Transaction Bonus. Transaction bonus expense for the six months ended June 30, 2014 was $24.5 million. This amount reflects payments made in connection with the consummation of the Refinancing. There was no transaction bonus for the six months ended June 30, 2015.
Interest Expense.    Interest expense for the six months ended June 30, 2015 increased 40.7% to $21.3 million from $15.1 million for the six months ended June 30, 2014. The increase in interest expense was primarily due to the increase in outstanding debt as a result of the Refinancing.
Adjustment to Tax Receivable Agreement. Adjustment to Tax Receivable Agreement for the six months ended June 30, 2015 was $2.9 million. The adjustment was primarily due to the Tax Receivable Agreement Amendment and to changes in estimated future payments. There was no adjustment to the Tax Receivable Agreement for the six months ended June 30, 2014.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was $15.9 million for the six months ended June 30, 2014. The loss on extinguishment of debt included the write-off of $8.7 million in unamortized debt issue costs on the Senior Secured Notes, as well as $7.2 million paid in call premiums, paid in connection with the redemption of the Senior Secured Notes. There was no loss on extinguishment of debt for the six months ended June 30, 2015.
Gain on Interest Rate Swap. Gain on interest rate swap for the six months ended June 30, 2015 was $0.1 million and included a $0.2 million unrealized gain on the Interest Rate Swap related to the change in fair value and $0.1 million of settlement payments made. In March 2015, the Company entered into and recorded the Interest Rate Swap on its unaudited condensed consolidated balance sheet. The Interest Rate Swap is not accounted for as a hedge and changes in fair value are included directly in the unaudited condensed consolidated statement of operations. There was no gain or loss on the Interest Rate Swap for the six months ended June 30, 2014.
Amortization of Debt Issue Costs.    Amortization of debt issue costs for the six months ended June 30, 2015 decreased 67.8% to $0.8 million from $2.3 million for the six months ended June 30, 2014. The decrease in amortization of debt issue costs was primarily due to debt issue costs related to the Second Lien Loan being amortized over a longer term than the debt issue costs related to the Senior Secured Notes.

Liquidity and Capital Resources
Overview
Our principal needs for liquidity historically have been the purchase of rental fleet equipment, other capital expenditures, including funding startup costs for new branch locations, and debt service. These will be our principal liquidity needs going forward, in addition to payments under the Tax Receivable Agreement.
Our largest use of liquidity has been and will continue to be the acquisition of equipment for our rental fleet. Our large rental fleet requires a substantial ongoing commitment of capital. While we can manage the size and aging of our fleet generally over time, eventually we must retire older equipment and either allow our fleet to shrink or replace the older equipment in our fleet with newer models. For the six months ended June 30, 2015 and 2014, our net capital expenditures totaled approximately $98.1 million and $95.1 million, respectively. We have historically financed these net additions to our rental fleet using cash flow from operations and borrowings under our Revolving Credit Facility, and we expect that to continue in the future. We also use our liquidity to finance other non-rental equipment capital expenditures, typically consisting of property, plant and equipment and funding startup costs for new branch locations. The liquidity required to open a new branch location typically ranges from $5.0 million to $10.0 million, the majority of which consists of acquisitions of rental fleet equipment for the new branch location.
For the six months ended June 30, 2015 and 2014, our net other capital expenditures totaled approximately $10.1 million and $11.0 million, respectively. We expect net other rental capital expenditures for the full years 2015 and 2016 to be in a similar range. We have historically financed these net other capital expenditures using cash flow from operations and borrowings under our Revolving Credit Facility, and we expect that to continue in the future.
We will use liquidity going forward to make payments under the Tax Receivable Agreement.  Payments for tax benefits related to the Tax Receivable Agreement for the year ended December 31, 2015 are currently estimated to be as much as $11.6 million and would be paid in 2016.  However, we expect the actual payments under the Tax Receivable Agreement could vary depending on a number of factors. 
  

34


Under the terms of our Second Lien Loan as of June 30, 2015, we are not required to make principal payments prior to the stated maturity of June 9, 2021. We expect to satisfy our debt service going forward, which will consist primarily of interest payments under the current terms of the Second Lien Loan, out of cash flow from operations.
As of June 30, 2015, our principal sources of liquidity consisted of $0.2 million of cash and cash equivalents and availability of $128.2 million under our Revolving Credit Facility, subject to customary borrowing conditions. We believe that our cash flow from operations, available cash and cash equivalents and available borrowing capacity under the Revolving Credit Facility will be sufficient to meet our liquidity needs for at least the next 12 months.

To the extent we require additional liquidity, we anticipate that it will be funded through the incurrence of other indebtedness (which may include capital markets indebtedness, the incremental facility under the credit agreement for the Second Lien Loan or indebtedness under other credit facilities), equity financings or a combination thereof. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.

Cash Flows for the Six Months Ended June 30, 2015 and 2014

For the six months ended June 30, 2015, our operating activities provided net cash flow of $60.7 million as compared to $35.6 million for the six months ended June 30, 2014. The increase in cash flows from operating activities was due primarily to the payment of incentive bonuses earned in connection with the consummation of the Refinancing to management and certain members of the Company’s board of managers which was paid in the six months ended June 30, 2014 and was not paid in the six months ended June 30, 2015.
Cash used in investing activities was $108.2 million for the six months ended June 30, 2015 as compared to $106.2 million for the six months ended June 30, 2014. Cash used for the purchase of rental equipment was $111.1 million for the six months ended June 30, 2015, compared to $105.9 million for the six months ended June 30, 2014. We received $13.0 million in cash proceeds from the sale of equipment for the six months ended June 30, 2015 compared to $10.8 million for the six months ended June 30, 2014.
Net cash provided by financing activities was $47.5 million for the six months ended June 30, 2015, compared to $71.0 million provided by financing activities for the six months ended June 30, 2014. The decrease in cash from financing activities was primarily due to the Refinancing which provided cash for the six months ended June 30, 2014.

Revolving Credit Facility
Certain of our subsidiaries entered into the Revolving Credit Facility with Bank of America, N.A. as agent, swing-line lender and letter of credit issuer, Bank of America, N.A. and Wells Fargo Capital Finance, LLC as co-collateral agents and a syndicate of other banks and financial institutions on October 1, 2010. The Revolving Credit Facility was amended and restated on November 20, 2013, and further amended on June 9, 2014 as part of the Refinancing.
The Revolving Credit Facility provides $425.0 million in commitments for revolving borrowings, including a $30.0 million sublimit for the issuance of letters of credit, and a $42.5 million sublimit for swing-line loans, subject to certain availability conditions. The aggregate amount of all borrowings available to us under the Revolving Credit Facility is the lesser of the aggregate commitments and the "borrowing base", which is a formula that applies certain advance rates against our eligible accounts receivable and our eligible rental equipment and, as a result of which, could result in us not being able to borrow all of the available commitments at any given time. As of June 30, 2015, the borrowing base under the Revolving Credit Facility was $425.0 million. The Revolving Credit Facility matures on November 20, 2018. Borrowings under the Revolving Credit Facility bear interest, at our option, at either a LIBOR rate or base rate, in each case plus an applicable margin. LIBOR loans bear interest at the LIBOR rate plus 250 basis points and base rate loans bear interest at the sum of (a) 150 basis points plus (b) the greatest of (i) the prime rate, (ii) the federal funds rate plus 50 basis points and (iii) LIBOR plus 100 basis points. The applicable margin for LIBOR loans and base rate loans will be subject to quarterly performance pricing adjustments based on our average availability and our consolidated total leverage ratio under the Revolving Credit Facility for the most recently completed quarter. The Revolving Credit Facility provides for the payment to the lenders of an unused line fee of 0.50% if less than 33% of the daily average unused portion under the Revolving Credit Facility is utilized, 0.375% if less than 66% but at least 33% is utilized, and 0.25% if 66% or more is utilized. The unused line fee is payable on the daily average unused portion of the commitments under the Revolving Credit Facility (whether or not then available).
Neff Holdings and each of its subsidiaries is a borrower or a credit party under the Revolving Credit Facility. Neff Corporation is not a party to the Revolving Credit Facility. The Revolving Credit Facility is secured by first-priority liens on

35


substantially all of the assets of the borrower and the guarantors. The credit agreement for the Revolving Credit Facility contains customary restrictive covenants applicable to each credit party, including, among others, restrictions on the ability to incur additional indebtedness, create liens, make investments and declare or pay dividends. In addition, the Revolving Credit Facility contains financial covenants, applicable at any time excess availability is less than the greater of $35.0 million and 10% of the aggregate commitments of all lenders, or $42.5 million as of June 30, 2015, which require us to maintain (i) a consolidated total leverage ratio of not more than 5.25 to 1.00 for each fiscal quarter ended during the period from July 1, 2015 through and including September 30, 2015, stepping down to 5.00 to 1.00 for each fiscal quarter ended during the period from October 1, 2015 through and including December 31, 2015, stepping down to 4.75 to 1.00 for each fiscal quarter ended during the period from January 1, 2016 through and including June 30, 2016, stepping down to 4.50 to 1.00 for each fiscal quarter ended during the period from September 30, 2016 and thereafter, and (ii) a fixed charge coverage ratio of not less than 1.00 to 1.00, in each case, until such time as excess availability exceeds the threshold described above for a period of at least 30 consecutive days. As of June 30, 2015, we had availability based on our borrowing base as of such date under the Revolving Credit Facility of $128.2 million and were in compliance with the applicable covenants in the Revolving Credit Facility.
We entered into an amendment to our Revolving Credit Facility to, among other things, reflect the changes in our structure as a result of the Organizational Transactions.


Second Lien Loan
Our subsidiary, Neff Rental LLC, incurred the Second Lien Loan under a senior secured credit facility with Credit Suisse AG, as administrative agent and collateral agent, and the other lenders and agents thereto, on June 9, 2014. The credit agreement for the Second Lien Loan provides for (a) a $575.0 million term loan facility, all of which was drawn on June 9, 2014, and (b) an uncommitted incremental term loan facility not to exceed (together with any incremental equivalent debt) $75.0 million plus additional amounts that may be incurred subject to a pro forma total leverage ratio of 5.25:1.00 and certain other customary conditions. The Second Lien Loan matures on June 9, 2021. The Second Lien Loan bears interest, at our option, at either a LIBOR rate or base rate, in each case plus an applicable margin. LIBOR loans bear interest at the LIBOR rate plus 625 basis points and base rate loans bear interest at the sum of (a) 525 basis points plus (b) the greatest of (i) the prime rate, (ii) the federal funds rate plus 50 basis points and (iii) LIBOR plus 100 basis points. The LIBOR rate margin is subject to a "floor" of 100 basis points. We generally elect the LIBOR rate, and given that LIBOR currently is less than 1.00%, our interest rate as of June 30, 2015 under the Second Lien Loan was 7.25% per annum. We must make mandatory prepayments of principal on the Second Lien Loan if our total leverage ratio for any fiscal year, commencing with the fiscal year ending December 15, 2015, exceeds 3.00 to 1.00. These prepayment provisions require us to prepay an amount equal to (i) either 25% of our excess cash flow (if our total leverage ratio is equal to or less than 4.00 to 1.00 but greater than 3.00 to 1.00) or 50% of our excess cash flow (if our total leverage ratio is greater than 4.00 to 1.00) over (ii) the optional prepayment amount for such excess cash flow period.
Neff Holdings and each of its subsidiaries is a borrower or a credit party under the Second Lien Loan. Neff Corporation is not a party to the Second Lien Loan. The Second Lien Loan is secured by second-priority liens on substantially all of the assets of the borrower and the guarantors. The credit agreement for the Second Lien Loan contains customary incurrence-based restrictive covenants applicable to each credit party, including, among other things, restrictions on the ability to incur additional indebtedness, create liens, make investments and declare or pay dividends.
We have entered into an amendment to our Second Lien Loan to, among other things, reflect the changes in our structure as a result of the Organizational Transactions. We prepaid $96.0 million of the principal amount of the Second Lien Loan with the net proceeds from the IPO and paid approximately $1.9 million in prepayment premiums in connection with that prepayment.
Certain Information Concerning Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2015, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.
In the normal course of our business activities, we lease real estate for our headquarters and branch locations and we may from time to time lease rental equipment and non-rental equipment under operating leases. See "—Contractual and Commercial Commitments."

36


Contractual and Commercial Commitments
There have been no material changes from the information included in our annual report on Form 10-K for the year ended December 31, 2014.

Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had and is not likely in the foreseeable future to have, a material impact on our results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Judgments and Estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2014, for which there were no material changes, included:

Valuation of Accounts Receivable;
Useful Lives and Salvage Value of Rental Equipment;
Goodwill and Intangibles with Indefinite Useful Lives;
Valuation of Long-Lived Assets and Intangibles with Finite Useful Lives;
Income Taxes;
Equity-Based Compensation;
Reserve for Claims; and
Payable pursuant to Tax Receivable Agreement.


Recent Accounting Pronouncements
We meet the definition of an emerging growth company under the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption from adopting new or revised accounting standards and, therefore, will not be subject to new or revised accounting standards until such time as those standards apply to private companies. There were no significant new accounting pronouncements that the Company adopted during the six months ended June 30, 2015.

In April 2015, the FASB issued ASU 2015-03 which provides guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and amortization of debt issuance costs will be reported as interest expense. This guidance is effective for private companies for fiscal years after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016, and requires application on a retrospective basis. We expect to adopt this guidance when effective for private companies, and do not expect this guidance to have a material impact on our financial statements, although it will change the financial statement classification of debt issuance costs. As of June 30, 2015, $9.7 million of debt issuance costs were included in total assets in our unaudited condensed consolidated balance sheet.


Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to loans outstanding under our Revolving Credit Facility and Second Lien Loan. All outstanding indebtedness under the

37


Revolving Credit Facility and Second Lien Loan bears interest at a variable rate. Each quarter point change in interest rates on the variable portion of indebtedness under our Revolving Credit Facility and Second Lien Loan would result in a change of $0.7 million and $1.2 million, respectively, to our interest expense on an annual basis.

The variable nature of our obligations under the Revolving Credit Facility and Second Lien Loan creates interest rate risk. In order to mitigate this risk, in March 2015, we entered into the Interest Rate Swap in the notional amount of $200.0 million to hedge the variable rate on the Revolving Credit Facility for the period between April 8, 2015 and April 8, 2020.

All transactions in derivative financial instruments are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of derivative financial instruments for trading or speculative purposes.



38


Item 4.    CONTROLS AND PROCEDURES

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2015.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




39


PART II


Item 1.        LEGAL PROCEEDINGS

We are party to various litigation matters in the ordinary course of our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to our pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability with respect to these matters will not have a material adverse effect on our financial position, results of operations or cash flows.


Item 1A.    RISK FACTORS

There have been no material changes in our risk factors since the filing of our annual report on Form 10-K for the year ended December 31, 2014.


Item 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.        DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.        MINE SAFETY DISCLOSURES

None.

Item 5.        OTHER INFORMATION

None.


40


Item 6.         EXHIBIT INDEX
 
 
 
 
Incorporated by reference
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing
Date
 
Filed/
Furnished
Herewith
3.1
 
Amended and Restated Certificate of Incorporation of Neff Corporation, dated as of November 26, 2014
 
8-K
 
001-36752
 
3.1
 
12/2/2014
 
 
3.2
 
Amended and Restated By-Laws of Neff Corporation, dated as of November 26, 2014
 
8-K
 
001-36752
 
3.1
 
12/2/2014
 
 
10.1
 
Amendment No. 1 to Tax Receivable Agreement, dated as of May 27, 2015, by and among Neff Corporation, Neff Holdings LLC, Wayzata Opportunities Fund II, L.P. and Wayzata Opportunities Fund Offshore II, L.P., certain members of management of Neff Holdings and certain non-executive members of its board of managers and Mark Irion, as the management representative
 
8-K
 
001-36752
 
10.1
 
06/04/2015
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
 
 
 
 
 
 
 
*
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
 
 
 
 
 
 
 
*
32.1
 
Section 1350 Certification of Chief Executive Officer
 
 
 
 
 
 
 
 
 
**
32.2
 
Section 1350 Certification of Chief Financial Officer
 
 
 
 
 
 
 
 
 
**
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
*
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
*

 
*
Filed herewith.
**
Furnished herewith.



41


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
NEFF CORPORATION
Date
By:
 
 /s/ Graham Hood
August 4, 2015


Graham Hood
 Chief Executive Officer and Director (Principal Executive Officer)
Date
By:
 
 /s/ Mark Irion
August 4, 2015
 
 
Mark Irion
Chief Financial Officer



42