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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2024

Our condensed consolidated financial statements include the financial position and results of operations of H&E Equipment Services, Inc. and its wholly-owned subsidiaries H&E Finance Corp., GNE Investments, Inc., Great Northern Equipment, Inc., H&E California Holding, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Midwest), Inc. and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we”, “us”, “our” or the “Company.”

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, and therefore, the results and trends in these interim condensed consolidated financial statements may not be the same for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2023, from which the consolidated balance sheet amounts as of December 31, 2023 were derived. All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements.

The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.

Use of Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, which requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. These assumptions and estimates could have a material effect on our condensed consolidated financial statements. Actual results may differ materially from those estimates. We review our estimates on an ongoing basis based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

Reclassifications

Certain reclassifications have been made to prior period amounts in the condensed consolidated statements of income to conform to the current period presentation. These reclassifications did not have a material impact on previously reported amounts.

Revenue Recognition

We recognize revenue in accordance with two different Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) standards: 1) Topic 606 and 2) Topic 842.

Under Topic 606, Revenue from Contracts with Customers, revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Our contracts with customers generally do not include multiple performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.

Under Topic 842, Leases, we account for equipment rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the periods presented.

In the table below, revenues as presented in our condensed consolidated statements of income for the three and six months ended June 30, 2024 and 2023 are summarized by type and by the applicable accounting standard.


	Three Months Ended June 30,
	2024						2023
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Rental revenues
Owned equipment rentals	$	267,162	$	205	$	267,367	$	250,718	$	113	$	250,831
Re-rent revenue		8,106		—		8,106		7,892		—		7,892
Ancillary and other rental revenues:
Delivery and pick-up		—		20,242		20,242		—		17,674		17,674
Other		16,641		—		16,641		15,062		—		15,062
Total ancillary rental revenues		16,641		20,242		36,883		15,062		17,674		32,736
Total equipment rental revenues		291,909		20,447		312,356		273,672		17,787		291,459
Sales of rental equipment		—		34,937		34,937		—		39,653		39,653
Sales of new equipment		—		10,670		10,670		—		8,857		8,857
Parts, service and other		—		18,319		18,319		—		20,263		20,263
Total revenues	$	291,909	$	84,373	$	376,282	$	273,672	$	86,560	$	360,232


	Six Months Ended June 30,
	2024						2023
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Rental revenues
Owned equipment rentals	$	520,460	$	327	$	520,787	$	474,298	$	250	$	474,548
Re-rent revenue		16,427		—		16,427		16,251		—		16,251
Ancillary and other rental revenues:
Delivery and pick-up		—		38,849		38,849		—		33,165		33,165
Other		31,618		—		31,618		29,503		—		29,503
Total ancillary rental revenues		31,618		38,849		70,467		29,503		33,165		62,668
Total equipment rental revenues		568,505		39,176		607,681		520,052		33,415		553,467
Sales of rental equipment		—		83,052		83,052		—		71,768		71,768
Sales of new equipment		—		21,082		21,082		—		16,675		16,675
Parts, service and other		—		35,824		35,824		—		40,804		40,804
Total revenues	$	568,505	$	179,134	$	747,639	$	520,052	$	162,662	$	682,714

Revenues by reporting segment are presented in Note 11 of our condensed consolidated financial statements. We believe that the disaggregation of our revenues from contracts to customers as reflected above, coupled with further discussion below and the reporting segments in Note 11, depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further information related to our accounting for revenues pursuant to Topic 606 and Topic 842, see Significant Accounting Policies in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2023.

Receivables and contract assets and liabilities

We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and our allowance for doubtful accounts address our total revenues from Topic 606 and Topic 842.

We believe concentration of credit risk with respect to our receivables is limited because our customer base is comprised of a large number of geographically diverse customers. No single customer accounted for more than 10% of our total revenues for any of the periods presented in this Quarterly Report on Form 10-Q. We manage credit risk through credit approvals, credit limits and other monitoring procedures.

Pursuant to Topic 842 and Topic 326 for rental and non-rental receivables, respectively, we maintain an allowance for doubtful accounts that reflects our estimate of our expected credit losses. Our allowance is estimated using a loss rate model based on delinquency. The estimated loss rate is based on our historical experience with specific customers, our understanding of our current economic circumstances, reasonable and supportable forecasts, and our own judgment as to the likelihood of ultimate payment based upon available data. Our largest exposure to doubtful accounts is our rental operations, which as discussed above is accounted for under Topic 842. For the six months ended June 30, 2024, revenue under ASC 842 represents 76% of our total revenues and an approximate corresponding percentage of our receivables, net and associated allowance for doubtful accounts. We perform credit evaluations of customers and establish credit limits based on reviews of our customers’ current credit information and payment histories. We believe our credit risk is somewhat mitigated by our geographically diverse customer base and our credit evaluation procedures. The actual rate of future credit losses, however, may not be similar to past experience. Our estimate of doubtful accounts could change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance for doubtful accounts. Bad debt expense as a percentage of total revenues for the six months ended June 30, 2024 and 2023 was approximately 0.4% and 0.3%, respectively.

We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of recognizable revenue. We did not recognize material revenues during the three and six months ended June 30, 2024 and 2023 that were included in the contract liability balance as of the beginning of such periods.

Goodwill

Goodwill is recorded as the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. The change to the carrying amount of goodwill for the year ended December 31, 2023 and the six months ended June 30, 2024 is as follows (amounts in thousands):


	Equipment Rentals			Sales of Rental Eq.		Parts Sales			Total
Balance at December 31, 2022 (1)	$	88,529		$	8,447	$	5,714		$	102,690
Increase (2)		29			—		—			29
Decrease (3)		—			—		(5,714	)		(5,714	)
Decrease (4)		(132	)		—		—			(132	)
Increase (5)		11,282			—		—			11,282
Balance at December 31, 2023 (1)		99,708			8,447		—			108,155
Increase (6)		17,536			—		—			17,536
Decrease (7)		(100	)		—		—			(100	)
Increase (8)		8,401			—		—			8,401
Increase (9)		651			—		—			651
Balance at June 30, 2024 (1)	$	126,196		$	8,447	$	—		$	134,643

(1)

The total carrying amount of goodwill as of December 31, 2022 in the table above is reflected net of $92.7 million of accumulated impairment charges. The total carrying amount of goodwill as of December 31, 2023 and June 30, 2024 in the table above is reflected net of $98.4 million of accumulated impairment charges.

(2)

Increase is related to the closing adjustments of the OSR Acquisition during the first quarter of 2023.

(3)

Decrease is related to the Parts Sales goodwill impairment calculated during the third quarter of 2023.

(4)

Decrease is related to the final closing adjustment of the OSR Acquisition during the third quarter of 2023.

(5)

Increase due to the Giffin Equipment (“Giffin”) Acquisition during the fourth quarter of 2023.

(6)

Increase due to the Precision Rentals (“Precision”) Acquisition during the first quarter of 2024.

(7)

Decrease is related to the purchase accounting adjustment of the Giffin Acquisition during the first quarter of 2024.

(8)

Increase due to Lewistown Rentals (“Lewistown”) Acquisition during the second quarter of 2024.

(9)

Increase is related to the final closing adjustment of the Precision Acquisition during the second quarter of 2024.

Rental Equipment

The rental equipment we purchase is recorded in rental equipment on the condensed consolidated balance sheets and is stated at cost. Due to the Company’s shift to operate as a pure-play rental company, as of the quarter ended June 30, 2024 purchases of equipment are now disaggregated between inventory and rental equipment according to classification at the time of purchase as opposed to considering all generally available for sale. Purchases of equipment designated for fleet are now recorded as rental equipment while equipment designated for sale is recorded as inventory. Rental equipment is depreciated over the estimated useful life of the equipment upon placed in service using the straight-line method and is included in rental depreciation within our condensed consolidated statements of income. Estimated useful lives vary based upon type of equipment. Generally, we depreciate aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and material handling equipment over a seven year estimated useful life. Attachments and other smaller type equipment are depreciated generally over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives and any salvage value assigned to rental equipment. Depreciation expense on rental equipment is reflected in rental depreciation in cost of revenues on the condensed consolidated statements of income.

Ordinary repair and maintenance costs and property taxes are reflected in rental expenses in cost of revenues on the condensed consolidated statements of income. However, expenditures for additions or improvements that significantly extend the useful life of the asset are capitalized in the period incurred. When rental equipment is sold or disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gains or losses are included in gross profit in the condensed consolidated statements of income. We receive individual offers for fleet on a continual basis, at which time we perform an analysis on whether or not to accept the offer. The rental equipment is not transferred to inventory under the held for sale model as the equipment is used to generate revenues until the equipment is sold.

Recent Accounting Pronouncements

Pronouncements Not Yet Adopted

Segment Reporting

In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves the disclosures about a public entity’s reportable segments and addresses requests for additional, more detailed information about a reportable segment’s expenses. The amendments in this ASU require disclosure of incremental segment information on an annual and interim basis for all public entities. The amendments are effective for our Annual Report on Form 10-K for fiscal years beginning after December 15, 2023, and for the interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. ASU 2023-07 became effective on January 1, 2024 and is not expected to have an impact on our financial statements, but will result in expanded reportable segment disclosures.

Income Taxes

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which should improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The ASU requires that public entities on an annual basis disclose specific categories in the rate reconciliation, provide additional information for reconciling items that meet a quantitative threshold and the following information about income taxes paid: the amount of income taxes paid disaggregated by federal (national), state, and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions. Lastly, the amendments in this ASU require that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. ASU 2023-09 becomes effective January 1, 2025 and is not expected to have an impact on our financial statements, but will result in expanded tax disclosures.