H&E EQUIPMENT SERVICES LLC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2003

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

For the transition period from to

Commission file numbers:

333-99587
333-99589

H&E EQUIPMENT SERVICES L.L.C.
(Exact name of registrant as specified in its charter)

Louisiana (State of Incorporation)		72-1287046 (I.R.S. Employer Identification No.)

11100 Mead Road, Suite 200, Baton Rouge, Louisiana (Address of principal executive offices)		70816 (Zip Code)

Registrant's telephone number, including area code (225) 298-5200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

H&E Holdings L.L.C. owns 100% of the registrant's limited liability company interests.

H&E EQUIPMENT SERVICES L.L.C.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Changes in Securities and Use of Proceeds	28
Item 3.	Defaults upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits and Reports on Form 8-K	29
Signature Pages		29

H&E EQUIPMENT SERVICES L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

			June 30, 2003			December 31, 2002
			(In thousands)
ASSETS
Cash			$	2,826		$	3,398
Receivables, net of allowance for doubtfull accounts of $3,012 and $3,609, respectively				65,268			65,145
Inventories, net				49,809			47,992
Prepaid expenses and other assets				3,757			1,945
Rental equipment, net of accumulated depreciation of $111,223 and $87,064, respectively				289,581			314,892
Property and equipment, net of accumulated depreciation of $12,531 and $13,338, respectively				16,516			19,156
Deferred financing costs, net of accumulated amortization of $1,825 and $854, respectively				11,926			12,612
Goodwill, net				3,204			3,204

		Total assets	$	442,887		$	468,344

LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Liabilities:
	Senior secured credit facility		$	73,701		$	76,724
	Accounts payable			87,010			91,213
	Accrued expenses and other liabilities			15,052			12,329
	Accrued loss from litigation			17,000			—
	Notes payable			1,217			1,402
	Senior secured notes, net of discount			198,614			198,570
	Senior subordinated notes, net of discount			42,797			42,602
	Capital lease obligations			8,266			10,841
	Deferred compensation			10,610			10,233

		Total liabilities		454,267			443,914

Member's equity (deficit)				(11,380	)		24,430

		Total liabilities and member's equity (deficit)	$	442,887		$	468,344

See notes to condensed consolidated financial statements

H&E EQUIPMENT SERVICES L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2003			2002			2003			2002
			(In thousands)						(In thousands)
Revenues:
	Equipment rentals		$	37,828		$	27,003		$	74,856		$	49,882
	New equipment sales			20,460			16,410			40,830			32,457
	Used equipment sales			18,657			13,043			37,067			22,166
	Parts sales			14,234			10,822			26,439			20,312
	Service revenues			8,591			6,078			17,178			11,247
	Other			5,086			3,406			9,708			6,398

		Total revenues		104,856			76,762			206,078			142,462

Cost of revenues:
	Rental depreciation			13,962			9,624			27,753			17,408
	Rental expense			12,571			6,553			24,722			12,539
	New equipment sales			18,370			14,677			36,949			29,394
	Used equipment sales			15,409			11,385			30,007			18,886
	Parts sales			10,191			8,076			19,120			15,159
	Service revenues			3,517			2,493			6,870			4,689
	Other			4,907			3,640			9,512			6,794

		Total cost of revenues		78,927			56,448			154,933			104,869

		Gross profit		25,929			20,314			51,145			37,593
Selling, general and administrative expenses				25,663			17,289			50,409			32,857
Loss from litigation				—			—			17,000			—
Gain on sale of assets				64			8			37			29

		Income (loss) from operations		330			3,033			(16,227	)		4,765

Other income (expense):
	Interest expense			(9,866	)		(5,648	)		(19,679	)		(8,494	)
	Other, net			75			68			96			93

		Total other expense, net		(9,791	)		(5,580	)		(19,583	)		(8,401	)

		Loss before income taxes		(9,461	)		(2,547	)		(35,810	)		(3,636	)
Income tax benefit				—			892			—			1,271

		Net loss	$	(9,461	)	$	(1,655	)	$	(35,810	)	$	(2,365	)

See notes to condensed consolidated financial statements

H&E EQUIPMENT SERVICES L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Six Months Ended June 30,
			2003			2002
			(In thousands)
Cash flows from operating activities:
	Net loss		$	(35,810	)	$	(2,365	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation on property and equipment			1,964			1,092
	Depreciation on rental equipment			27,753			17,408
	Amortization of loan discounts and deferred financing costs			1,209			76
	Provision for losses on accounts receivable			142			176
	Gain on sale of property and equipment			(37	)		(29	)
	Gain on sale of rental equipment			(5,748	)		(2,273	)
	Deferred income taxes			—			(1,306	)
	Changes in operating assets and liabilities, net of business combination:
		Receivables, net		(265	)		(4,650	)
		Inventories, net		(2,371	)		(10,645	)
		Prepaid expenses and other assets		(1,812	)		(1,314	)
		Accounts payable		(4,203	)		1,853
		Accrued expenses and other liabilities		2,723			2,019
		Accrued loss from litigation		17,000			—
		Deferred compensation		377			17

		Net cash provided by operating activities		922			59

Cash flows from investing activities:
	Purchases of property and equipment			(1,562	)		(1,666	)
	Purchases of rental equipment			(21,220	)		(16,545	)
	Proceeds from sale of property and equipment			2,275			62
	Proceeds from sale of rental equipment			25,650			12,362
	Cash acquired in ICM business combination			—			3,643

		Net cash provided by (used in) investing activities		5,143			(2,144	)

Cash flows from financing activities:
	Borrowings on senior secured credit facility			203,641			81,900
	Payments on senior secured credit facility			(206,664	)		(304,415	)
	Net proceeds from issuance of senior secured notes			—			198,526
	Net proceeds from issuance of senior subordinated notes			—			50,009
	Payment of amount due to member			—			(13,347	)
	Payment of deferred financing costs			(854	)		(11,487	)
	Principal payments on notes payable			(185	)		(284	)
	Payments on capital lease obligations			(2,575	)		(1,947	)

		Net cash (used in) provided by financing activities		(6,637	)		(1,045	)

		Net decrease in cash		(572	)		(3,130	)
Cash, beginning of period				3,398			4,322

Cash, end of period			$	2,826		$	1,192

See notes to condensed consolidated financial statements

H&E EQUIPMENT SERVICES L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Six Months Ended June 30,
			2003		2002
			(In thousands)
Supplemental schedule of noncash investing and financing activities:
		Assets transferred from new and used inventory to rental fleet	$	554	$	4,690
		Rental equipment financed under capital lease obligations		—		4,182
		Members' equity issued with the subordinated notes		—		7,600
Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Interest		19,626		10,356
		Income taxes		97		106

As of June 30, 2003 and December 31, 2002, the Company had $51.8 and $55.1 million, respectively, in flooring plans outstanding, which were used to finance purchases of inventory and rental equipment.

See notes to condensed consolidated financial statements

H&E EQUIPMENT SERVICES L.L.C.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Nature of Operations

Basis of Presentation

H&E Equipment Services L.L.C. (H&E Equipment Services) is a wholly owned subsidiary of H&E Holdings L.L.C. (H&E Holdings). H&E Holdings is principally a holding company conducting all of its operations through H&E Equipment Services (see Note 2). The condensed consolidated financial statements include the results of operations of H&E Equipment Services and its wholly owned subsidiaries H&E Finance Corp., GNE Investments, Inc. and Great Northern Equipment, Inc., collectively referred to herein as the "Company".

The nature of the Company's business is such that short-term obligations are typically met by cash generated from long-term assets. Consequently, consistent with industry practice, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.

Nature of Operations

The Company is an integrated equipment rental, service and sales company located in the United States with an integrated network of 41 facilities, most of which have full service capabilities, and a workforce that includes a group of service technicians and a separate rental and equipment sales force. In addition to renting equipment, the Company also sells new and used equipment and provides extensive parts and service support. The Company generates a significant portion of its gross profit from parts sales and service revenues.

The Company's operations are principally connected with construction and industrial activities. Consequently, a downturn in construction or industrial activity may lead to a decrease in the demand for equipment or depressed rental rates and sales prices of equipment. The Company has a substantial amount of debt. In accordance with the terms of the current debt agreements, the Company must comply with certain restrictive financial and operational covenants. Failure to comply with these covenants may adversely affect the Company's ability to finance future operations or capital needs or to engage in business activities.

The accompanying condensed consolidated financial statements are unaudited and, in the opinion of management, such financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary to present fairly the results of the interim periods presented. Interim financial statements do not require all disclosures normally presented in year-end financial statements prepared in accordance with accounting principles generally accepted in the United States of America, and, accordingly, certain disclosures have been omitted. Results of operations for the three- and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The Company suggests the information included in this report be read in conjunction with the financial statements and related notes included in the Company's Form 10-K for the year ended December 31, 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the prior-period condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current condensed consolidated financial statements.

Adoption of Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The new statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity. The provisions of SFAS No. 150 apply to the classification and disclosure requirements for the following three types of financial instruments: Mandatorily Redeemable Instruments, Instruments with Repurchase Obligations, and Instruments with Obligations to Issue a Variable Number of Securities. The new reporting and disclosure requirements for SFAS No. 150 become effective for the first interim period beginning after June 15, 2003 or for any covered instruments entered into or modified subsequent to May 31, 2003. The Company has not completed its analysis of the potential impacts from adopting the new reporting requirements of SFAS No. 150.

2. Reorganization and Acquisition of ICM Equipment Company L.L.C.

On June 17, 2002, the equity holders of H&E Equipment Services and ICM Equipment Company L.L.C. (ICM) formed H&E Holdings by executing a Limited Liability Company Agreement of H&E Holdings and by contributing to H&E Holdings all of the outstanding equity securities and certain outstanding subordinated debt of the two companies to the members of H&E Holdings in exchange for certain equity securities of H&E Holdings. Pursuant to a Contribution Agreement and Plan of Reorganization, H&E Holdings contributed all of the outstanding equity securities of ICM to H&E Equipment Services, consummating the merger.

The consolidated results of operations data shown below is presented on an unaudited pro forma basis and represents the results of H&E Equipment Services had the business combination occurred at the beginning of the period presented for the three and six months ended June 30, 2002 (in thousands):

		Three Months Ended June 30, 2002			Six Months Ended June 30, 2002
Revenues		$	116,000		$	222,500
Net loss		$	(4,600	)	$	(10,600	)

The unaudited pro forma financial information is presented for informational purposes only and is based upon certain assumptions and estimates, which are subject to change. The results are not necessarily indicative of the operating results that would have occurred had the transaction been consummated at the beginning of the period presented, nor are they necessarily indicative of future operating results.

3. Litigation

In July 2000, a complaint was filed by a competitor of the Company in the General Court of Justice, Superior Court Division, State of North Carolina, County of Mecklenburg under the caption Sunbelt Rentals, Inc. v. Head & Engquist Equipment, d/b/a H&E Hi-Lift, et al. On May 2, 2003, the court handed down an order and opinion in favor of the plaintiff. The Company recorded a $17.0 million loss for estimated damages, plaintiff's attorney's fees and other costs during the quarter ended March 31, 2003.

The final judgment has not yet been entered in this matter. The Company's management intends to appeal and vigorously contest this judgment. During the appeals process, management anticipates posting a standby letter of credit for the amount of the final judgment. Even if there is a reduction in the amount of damages awarded to the plaintiff on appeal, management believes that the resulting judgment could have a material adverse effect on the Company's business or financial condition.

As a result of the Company recording the $17.0 million estimated loss from litigation, on May 14, 2003, the Company's senior secured credit agreement was amended to modify certain restrictive financial covenants and financial ratios. The credit agreement was amended to:

1.

Exclude the loss from litigation from the calculation of Company's earnings before interest, taxes, depreciation, and amortization.

2.

Adjust the maximum leverage ratio and the maximum adjusted leverage ratio, respectively, to 5.20x from 4.60x for the remaining term of the credit agreement. The minimum adjusted interest coverage ratio was adjusted to 1.25x from 1.45x through 2004. In 2005, the ratio increases to 1.30x with an additional increase to 1.40x in 2006 through the remainder of the agreement.

3.

Increase the maximum amount of letters of credit allowed under the senior credit facility to $30.0 million from $10.0 million.

4.

Institute a pricing grid such that if excess availability (defined as the total borrowing base assets less total outstanding borrowings):

a.: falls below $90.0 million, the interest rate and letter of credit fee increase by 25 basis points,
b.: falls below $50.0 million, the interest rate and letter of credit fee increase an additional 25 basis points.

5.

Institute a $20.0 million block on availability based on the total borrowing base assets.

On May 14, 2003, the Company paid a loan amendment fee of $0.4 million that is being amortized over the remaining term of the loan. Consequently, the Company is not and does not expect to be in default under the senior secured credit facility as a result of the estimated loss from litigation.

4. Segment Information

The Company has identified five reportable segments; new equipment sales, used equipment sales, equipment rentals, parts and service revenues. These segments are based upon how management of the Company allocates resources and assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. Selling, general, and administrative expenses and all other income and expense items below gross profit are generally not allocated to reportable segments. The Company does not compile discrete financial information by its segments other than the information presented below. The following table presents information about the Company's reportable segments (in thousands):

			For the Three Months Ended June 30,					For the Six Months Ended June 30,
			2003		2002			2003		2002
Revenues:
	Equipment rentals		$	37,828	$	27,003		$	74,856	$	49,882
	New equipment sales			20,460		16,410			40,830		32,457
	Used equipment sales			18,657		13,043			37,067		22,166
	Parts sales			14,234		10,822			26,439		20,312
	Services revenues			8,591		6,078			17,178		11,247

		Total segmented revenues		99,770		73,356			196,370		136,064
		Non-segmented revenues		5,086		3,406			9,708		6,398

		Total revenues	$	104,856	$	76,762		$	206,078	$	142,462

Gross Profit:
	Equipment rentals		$	11,295	$	10,826		$	22,381	$	19,935
	New equipment sales			2,090		1,733			3,881		3,063
	Used equipment sales			3,248		1,658			7,060		3,280
	Parts sales			4,043		2,746			7,319		5,153
	Services revenues			5,074		3,585			10,308		6,558

	Total gross profit from revenues			25,750		20,548			50,949		37,989
	Non-segmented gross profit (loss)			179		(234	)		196		(396	)

	Total gross profit		$	25,929	$	20,314		$	51,145	$	37,593

			As of June 30,		As of December 31,
			2003		2002
Segment identified assets:
	Equipment sales		$	34,182	$	31,283
	Equipment rentals			289,581		314,892
	Parts and service			15,627		16,709

		Total segment identified assets		339,390		362,884
		Non-segment identified assets		103,497		105,460

		Total assets	$	442,887	$	468,344

The Company operates only in U.S. markets and had no significant international sales for any of the periods presented. No one customer accounted for more than 10% of the Company's sales on an overall or segment basis for any of the periods presented.

5. Condensed Consolidating Financial Information of Guarantor Subsidiaries

All of the indebtedness of H&E Equipment Services is guaranteed by GNE Investments, Inc. and its wholly owned subsidiary Great Northern Equipment, Inc. The guarantor subsidiaries are all wholly owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services' ability to obtain funds from the guarantor subsidiaries by dividend or loan.

The condensed consolidating financial information of H&E Equipment Services and its subsidiaries are included below.

CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)

				June 30, 2003
				Parent			Guarantor Subsidiaries		Elimination			Consolidated
ASSETS
	Cash			$	2,784		$	42	$	—		$	2,826
	Receivables, net				64,497			771		—			65,268
	Inventories, net				49,243			566		—			49,809
	Prepaid expenses and other assets				3,757			—		—			3,757
	Rental equipment, net				283,066			6,515		—			289,581
	Property and equipment, net				16,221			295		—			16,516
	Deferred financing costs, net				11,926			—		—			11,926
	Investment in guarantor subsidiaries				4,485			—		(4,485	)		—
	Goodwill, net				3,204			—		—			3,204

		Total assets		$	439,183		$	8,189	$	(4,485	)	$	442,887

LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Liabilities:
	Senior secured credit facility			$	73,701		$	—	$	—		$	73,701
	Accounts payable				87,010			—		—			87,010
	Accrued expenses and other liabilities				11,348			3,704		—			15,052
	Accrued loss from litigation				17,000			—		—			17,000
	Notes payable				1,217			—		—			1,217
	Senior secured notes, net of discount				198,614			—		—			198,614
	Senior subordinated notes, net of discount				42,797			—		—			42,797
	Capital lease obligations				8,266			—		—			8,266
	Deferred compensation				10,610			—		—			10,610

		Total liabilities			450,563			3,704		—			454,267
Member's equity (deficit)					(11,380	)		4,485		(4,485	)		(11,380	)

			Total liabilities and member's equity (deficit)	$	439,183		$	8,189	$	(4,485	)	$	442,887

CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)

				December 31, 2002
				Parent		Guarantor Subsidiaries		Elimination			Consolidated
ASSETS
	Cash			$	3,331	$	67	$	—		$	3,398
	Receivables, net				64,742		403		—			65,145
	Inventories, net				46,535		1,457		—			47,992
	Prepaid expenses and other assets				1,941		4		—			1,945
	Rental equipment, net				309,006		5,886		—			314,892
	Property and equipment, net				19,031		125		—			19,156
	Deferred financing costs, net				12,612		—		—			12,612
	Investment in guarantor subsidiaries				4,841		—		(4,841	)		—
	Goodwill, net				3,204		—		—			3,204

		Total assets		$	465,243	$	7,942	$	(4,841	)	$	468,344

LIABILITIES AND MEMBER'S EQUITY
Liabilities:
	Senior secured credit facility			$	76,724	$	—	$	—		$	76,724
	Accounts payable				91,125		88		—			91,213
	Accrued expenses and other liabilities				9,316		3,013		—			12,329
	Notes payable				1,402		—		—			1,402
	Senior secured notes, net of discount				198,570		—		—			198,570
	Senior subordinated notes, net of discount				42,602		—		—			42,602
	Capital lease obligations				10,841		—		—			10,841
	Deferred compensation				10,233		—		—			10,233

		Total liabilities			440,813		3,101		—			443,914
Member's equity					24,430		4,841		(4,841	)		24,430

			Total liabilities and member's equity	$	465,243	$	7,942	$	(4,841	)	$	468,344

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)

			Three Months Ended June 30, 2003
			Parent			Guarantor Subsidiaries			Elimination		Consolidated
Revenues:
	Equipment rentals		$	36,635		$	1,193		$	—	$	37,828
	New equipment sales			19,670			790			—		20,460
	Used equipment sales			17,592			1,065			—		18,657
	Parts sales			13,904			330			—		14,234
	Service revenues			8,372			219			—		8,591
	Other			4,940			146			—		5,086

		Total revenues		101,113			3,743			—		104,856

Cost of Revenues:
	Rental depreciation			13,510			452			—		13,962
	Rental expense			12,383			188			—		12,571
	New equipment sales			17,683			687			—		18,370
	Used equipment sales			14,598			811			—		15,409
	Parts sales			9,972			219			—		10,191
	Service revenues			3,455			62			—		3,517
	Other			4,748			159			—		4,907

		Total cost of revenues		76,349			2,578			—		78,927

		Gross profit		24,764			1,165			—		25,929
	Selling, general and administrative expenses			24,687			976			—		25,663
	Gain on sale of assets			59			5			—		64
	Equity (deficit) in earnings of guarantor subsidiaries			(16	)		—			16		—

		Income from operations		120			194			16		330

Other income (expense):
	Interest expense			(9,649	)		(217	)		—		(9,866	)
	Other, net			68			7			—		75

		Total other expense, net		(9,581	)		(210	)		—		(9,791	)

Net loss			$	(9,461	)	$	(16	)	$	16	$	(9,461	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)

			Three Months Ended June 30, 2002
			Parent			Guarantor Subsidiaries			Elimination			Consolidated
Revenues:
	Equipment rentals		$	26,837		$	166		$	—		$	27,003
	New equipment sales			16,355			55			—			16,410
	Used equipment sales			12,824			219			—			13,043
	Parts sales			10,779			43			—			10,822
	Service revenues			6,048			30			—			6,078
	Other			3,406			—			—			3,406

		Total revenues		76,249			513			—			76,762

Cost of Revenues:
	Rental depreciation			9,624			—			—			9,624
	Rental expense			6,452			101			—			6,553
	New equipment sales			14,641			36			—			14,677
	Used equipment sales			11,205			180			—			11,385
	Parts sales			8,047			29			—			8,076
	Service revenues			2,484			9			—			2,493
	Other			3,640			—			—			3,640

		Total cost of revenues		56,093			355			—			56,448

		Gross profit		20,156			158			—			20,314

	Selling, general and administrative expenses			17,215			74						17,289
	Gain on sale of assets			8			—			—			8
	Equity in earnings of guarantor subsidiaries			63			—			(63	)		—

		Income from operations		3,012			84			(63	)		3,033

Other income (expense):
	Interest expense			(5,648	)		—			—			(5,648	)
	Other, net			68			—			—			68

		Total other expense, net		(5,580	)		—			—			(5,580	)

	Income (loss) before provision for income taxes			(2,568	)		84			(63	)		(2,547	)
	Income tax benefit (provision)			913			(21	)		—			892

		Net income (loss)	$	(1,655	)	$	63		$	(63	)	$	(1,655	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)

			Six Months Ended June 30, 2003
			Parent			Guarantor Subsidiaries			Elimination		Consolidated
Revenues:
	Equipment rentals		$	72,842		$	2,014		$	—	$	74,856
	New equipment sales			39,798			1,032			—		40,830
	Used equipment sales			35,272			1,795			—		37,067
	Parts sales			25,831			608			—		26,439
	Service revenues			16,732			446			—		17,178
	Other			9,481			227			—		9,708

		Total revenues		199,956			6,122			—		206,078

Cost of Revenues:
	Rental depreciation			26,875			878			—		27,753
	Rental expense			24,282			440			—		24,722
	New equipment sales			36,061			888			—		36,949
	Used equipment sales			28,655			1,352			—		30,007
	Parts sales			18,708			412			—		19,120
	Service revenues			6,736			134			—		6,870
	Other			9,250			262			—		9,512

		Total cost of revenues		150,567			4,366			—		154,933

		Gross profit		49,389			1,756			—		51,145

	Selling, general and administrative expenses			48,689			1,720			—		50,409
	Loss from litigation			17,000			—			—		17,000
	Gain on sale of assets			15			22			—		37
	Equity in earnings of guarantor subsidiaries			(356	)		—			356		—

		Income (loss) from operations		(16,641	)		58			356		(16,227	)

Other income (expense):
	Interest expense			(19,259	)		(420	)		—		(19,679	)
	Other, net			90			6			—		96

		Total other expense, net		(19,169	)		(414	)		—		(19,583	)

		Net loss	$	(35,810	)	$	(356	)	$	356	$	(35,810	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)

			Six Months Ended June 30, 2002
			Parent			Guarantor Subsidiaries			Elimination			Consolidated
Revenues:
	Equipment rentals		$	49,716		$	166		$	—		$	49,882
	New equipment sales			32,402			55			—			32,457
	Used equipment sales			21,947			219			—			22,166
	Parts sales			20,269			43			—			20,312
	Service revenues			11,217			30			—			11,247
	Other			6,398			—			—			6,398

		Total revenues		141,949			513			—			142,462

Cost of Revenues:
	Rental depreciation			17,408			—			—			17,408
	Rental expense			12,438			101			—			12,539
	New equipment sales			29,358			36			—			29,394
	Used equipment sales			18,706			180			—			18,886
	Parts sales			15,130			29			—			15,159
	Service revenues			4,680			9			—			4,689
	Other			6,794			—			—			6,794

		Total cost of revenues		104,514			355			—			104,869

		Gross profit		37,435			158			—			37,593

	Selling, general and administrative expenses			32,783			74			—			32,857
	Gain on sale of assets			29			—			—			29
	Equity in earnings of guarantor subsidiaries			63			—			(63	)		—

		Income from operations		4,744			84			(63	)		4,765

Other income (expense):
	Interest expense			(8,494	)		—			—			(8,494	)
	Other, net			93			—			—			93

		Total other expense, net		(8,401	)		—			—			(8,401	)

	Income (loss) before provision for income taxes			(3,657	)		84			(63	)		(3,636	)
	Income tax benefit (provision)			1,292			(21	)		—			1,271

		Net income (loss)	$	(2,365	)	$	63		$	(63	)	$	(2,365	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)

				Six Months Ended June 30, 2003
				Parent			Guarantor Subsidiaries			Elimination			Consolidated
Cash flows from operating activities:
	Net loss			$	(35,810	)	$	(356	)	$	356		$	(35,810	)
	Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
		Depreciation on property and equipment			1,928			36			—			1,964
		Depreciation on rental equipment			26,875			878			—			27,753
		Amortization of loan discounts and deferred financing costs			1,209			—			—			1,209
		Provision for losses on accounts receivables			142			—			—			142
		Gain on sale of property and equipment			(15	)		(22	)		—			(37	)
		Gain on sale of rental equipment			(5,356	)		(392	)		—			(5,748	)
		Equity in earnings of guarantor subsidiaries			356			—			(356	)		—
	Changes in operating assets and liabilities:
		Receivables, net			103			(368	)		—			(265	)
		Inventories, net			(3,262	)		891			—			(2,371	)
		Prepaid expenses and other assets			(1,816	)		4			—			(1,812	)
		Accounts payable			(4,115	)		(88	)		—			(4,203	)
		Accrued expenses and other liabilities			2,032			691			—			2,723
		Accrued loss from litigation			17,000			—			—			17,000
		Deferred compensation			377			—			—			377

			Net cash (used in) provided by operating activities		(352	)		1,274			—			922

	Cash flows from investing activities:
		Purchases of property and equipment			(1,356	)		(206	)		—			(1,562	)
		Purchases of rental equipment			(18,588	)		(2,632	)		—			(21,220	)
		Proceeds from sale of property and equipment			2,253			22			—			2,275
		Proceeds from sale of rental equipment			24,133			1,517			—			25,650

			Net cash provided by (used in) investing activities:		6,442			(1,299	)		—			5,143

	Cash flows from financing activities:
		Borrowings on senior secured credit facility			203,641			—			—			203,641
		Payments on senior secured credit facility			(206,664	)		—			—			(206,664	)
		Payment of deferred financing costs			(854	)		—			—			(854	)
		Principal payments on notes payable			(185	)		—			—			(185	)
		Payments on capital lease obligations			(2,575	)		—			—			(2,575	)

			Net cash used in financing activities		(6,637	)		—			—			(6,637	)

	Net decrease in cash				(547	)		(25	)		—			(572	)
	Cash, beginning of period				3,331			67			—			3,398

	Cash, end of period			$	2,784		$	42		$	—		$	2,826

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)

				Six Months Ended June 30, 2002
				Parent			Guarantor Subsidiaries			Elimination			Consolidated
Cash flows from operating activities:
	Net income (loss)			$	(2,365	)	$	63		$	(63	)	$	(2,365	)
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation on property and equipment			1,092			—			—			1,092
		Depreciation on rental equipment			17,408			—			—			17,408
		Amortization of loan discounts and deferred financing costs			76			—			—			76
		Provision for losses on accounts receivables			176			—			—			176
		Gain on sale of property and equipment			(29	)		—			—			(29	)
		Gain on sale of rental equipment			(2,273	)		—			—			(2,273	)
		Equity in earnings of guarantor subsidiaries			(63	)		—			63			—
		Deferred taxes			(1,306	)		—			—			(1,306	)
	Changes in operating assets and liabilities, net of business combination:
		Receivables, net			(4,039	)		(611	)		—			(4,650	)
		Inventories, net			(10,345	)		(300	)		—			(10,645	)
		Prepaid expenses and other assets			(1,302	)		(12	)		—			(1,314	)
		Accounts payable			1,853			—			—			1,853
		Accrued expenses and other liabilities			2,231			(212	)		—			2,019
		Deferred compensation			17			—			—			17

			Net cash provided by (used in) operating activities		1,131			(1,072	)		—			59

	Cash flows from investing activities:
		Purchases of property and equipment			(1,666	)		—			—			(1,666	)
		Purchases of rental equipment			(17,301	)		756			—			(16,545	)
		Proceeds from sale of property and equipment			62			—			—			62
		Proceeds from sale of rental equipment			12,362			—			—			12,362
		Cash acquired in ICM business combination			3,643			—			—			3,643

			Net cash (used in) provided by investing activities:		(2,900	)		756			—			(2,144	)

	Cash flows from financing activities:
		Borrowings on senior secured credit facility			82,245			(345	)		—			81,900
		Payments on senior secured credit facility			(304,415	)		—			—			(304,415	)
		Net proceeds from issuance of senior secured notes			198,526			—			—			198,526
		Net proceeds from issuance of senior subordinated notes			50,009			—			—			50,009
		Payment of amount due to member			(13,347	)		—			—			(13,347	)
		Payment of deferred financing costs			(11,487	)		—			—			(11,487	)
		Principal payments on notes payable			(284	)		—			—			(284	)
		Payments on capital lease obligations			(1,947	)		—			—			(1,947	)

			Net cash provided by (used in) financing activities		(700	)		(345	)		—			(1,045	)

	Net decrease in cash				(2,469	)		(661	)		—			(3,130	)
	Cash, beginning of period				3,630			692			—			4,322

	Cash, end of period			$	1,161		$	31		$	—		$	1,192

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion reviews our operations for the three and six months ended June 30, 2003 and 2002 and should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes included herein. The following discussion and analysis should also be read in conjunction with the Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-K for the year ended December 31, 2002.

General

The Company derives its revenues primarily from the following sources: (i) rental of equipment; (ii) new equipment sales and distribution; (iii) used equipment sales and distribution; and (iv) parts and service. Equipment rental, as well as new and used equipment sales, includes products such as hi-lift equipment, cranes, earthmoving equipment and industrial lift trucks. Used equipment sales are primarily derived from our rental fleet. Our integrated approach leads to revenue for each source being partially driven by our activities of the other sources. Our revenues are dependent on several factors, including the demand for rental equipment, rental fleet availability, rental rates, the demand for new and used equipment, the level of industrial and construction activity and general economic conditions.

Cost of revenues include cost of equipment sold, depreciation and maintenance costs of rental equipment and cost of parts and service. Cost of equipment sold consists of (i) the net book value of rental equipment at the time of sales for used equipment and (ii) the cost of new equipment sales. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment and is generally calculated over the assets estimated useful lives after giving effect to an estimated salvage value of 0% to 25% of cost. Maintenance of rental equipment represents the costs of servicing and maintaining rental equipment on an ongoing basis. Cost of parts and service represents costs attributable to the sale of parts directly to customers and service provided for the maintenance and repair of customer owned equipment.

Selling, general and administrative expenses include sales and marketing expenses, payroll and related costs, professional fees, property and other taxes and administrative overhead, and depreciation associated with property and equipment (other than rental equipment).

Accounting for Acquisitions

The Company completed the acquisition of ICM on June 17, 2002 (see Note 2 to the Unaudited Condensed Consolidated Financial Statements included herein for further information) and accounted for this acquisition using the purchase method of accounting. Accordingly, ICM's results of operations are included in the Unaudited Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2002 from the date of acquisition (June 17, 2002) and thereafter.

Results of Operations

Three months ended June 30, 2003 compared to three months ended June 30, 2002

Total revenues for the three months ended June 30, 2003 increased 36.6% or $28.1 million to $104.9 million, from $76.8 million for the three months ended June 30, 2002. The revenues during these periods were attributable to the following sources:

Equipment Rental Revenues. Total revenues from equipment rentals increased $10.8 million, or 40.0%, to $37.8 million for the three months ended June 30, 2003 from $27.0 million for the three months ended June 30, 2002. Included in the increase is $13.4 million of equipment rental revenues generated by rental locations associated with the ICM acquisition. The remaining decrease of $2.6 million is comprised of a decrease in crane rental revenues of $1.5 million, a decrease in hi lift equipment rental revenues of $0.4 million and a decrease in other small

equipment rental revenues of $1.6 million. These decreases were offset by an increase in earthmoving equipment rental revenues of $0.9 million. The overall decline is due primarily to lower time utilization in our crane segment and both lower time utilization and rental rates in our hi lift segment.

Equipment Sales Revenues. Revenues from new equipment sales increased $4.1 million, or 25.0% to $20.5 million for the three months ended June 30, 2003 from $16.4 million for the three months ended June 30, 2002. Total increase in new equipment sales attributable to the acquisition of ICM was $5.6 million. The remaining $1.5 million decrease in new equipment sales year over year is attributable primarily to a $1.3 million decline in new crane sales and a $3.4 million decline in new hi lift equipment sales. Sales of new earthmoving equipment increased $3.5 million and sales of other new equipment decreased $0.3 million. Customer demand for new equipment has declined as a result of the current economic conditions.

Revenues from used equipment sales increased $5.7 million, or 43.8% to $18.7 million for the three months ended June 30, 2003 from $13.0 million for the three months ended June 30, 2002. The total increase in used equipment sales attributable to the acquisition of ICM was $5.0 million. The remaining $0.7 million increase in used equipment sales is attributable to a $2.4 million increase in used earthmoving equipment and a $0.3 increase in used lift trucks and other small equipment. Sales of used cranes decreased $1.6 million and sales of used hi lift equipment decreased $0.4 million.

Parts and Service Revenues. Parts sales and service revenues increased $5.9 million, or 34.9% to $22.8 million for the three months ended June 30, 2003 from $16.9 million for the three months ended June 30, 2002. Total parts sales and service revenues attributable to the acquisition of ICM were $6.2 million. The offsetting $0.3 million decrease in parts sales and service revenues was attributable to a $0.1 million increase in parts sales and a decrease of $0.4 million in service revenues. Service revenues are down accross all product lines.

Other Revenues. Other revenues consist primarily of billings to customers for equipment support activities including transportation, hauling, parts freight, and damage waiver charges. Other revenues for the three months ended June 30, 2003 increased $1.7 million, or 50.0% to $5.1 million from $3.4 million for the three months ended June 30, 2002. The acquisition of ICM accounted for $1.7 million of the increase.

Total Gross Profit. Total gross profit for the three months ended June 30, 2003 increased $5.6 million or 27.6% to $25.9 million from $20.3 million for the three months ended June 30, 2002. Total gross profit increase attributable to the acquisition of ICM was $8.7 million. Gross profit contribution by segment as a percentage of total gross profit was 43.6% for equipment rentals, 8.1% for new equipment sales, 12.4% for used equipment sales and 35.1% for parts sales and service revenue and 0.8% for other revenues.

Equipment Rentals Gross Profit. Gross profit from equipment rentals increased $0.5 million to $11.3 million in the three months ended June 30, 2003 from $10.8 million for the three months ended June 30, 2002. Included in the increase is $3.7 million of equipment rental gross profit generated by rental locations associated with the ICM acquisition. The remaining gross profit decreased $3.2 million, or 33.3% for the three months ended June 30, 2003 to $6.7 million from $9.9 million for the same period last year. The decline is primarily a result of lower rental revenue and increasing maintenance costs associated with aging the rental fleet.

Equipment Sales Gross Profit. Gross profit from new equipment sales increased $0.4 million to $2.1 million for the three months ended June 30, 2003 from $1.7 million for the three months ended June 30, 2002. Included in gross profit is $0.8 million related to the new equipment sales from the ICM locations. Excluding the increase related to the ICM acquisition, the gross profit margin on new equipment sales decreased to 8.6% for the three months ended June 30, 2003 from 10.7% for the three months ended June 30, 2002. This decline in the gross profit margin is attributable to the mix of new equipment sold.

The gross profit from used equipment sales increased $1.5 million to $3.2 million for the three months ended June 30, 2003 from $1.7 million for the three months ended June 30, 2002. Included in the gross profit is $1.0 million related to the used equipment sales from the ICM locations. The remaining $0.5 million increase in used equipment gross profit is primarily due to a $0.2 million increase in used earthmoving equipment sales. Used crane sales and other equipment sales accounted for the remaining $0.3 million increase. The gross profit margin on used equipment sales, excluding the increase related to the ICM acquisition, increased 4.6% to 16.5% for the three months ended June 30, 2003 from 11.9% for the three months ended June 30, 2002. The increase in gross margin is primarily a result of the mix of used equipment sold.

Parts Sales and Service Revenues Gross Profit. Gross profit from parts sales and service revenues increased $2.8 million to $9.1 million for the three months ended June 30, 2003 from $6.3 million for the three months ended June 30, 2002. Total parts sales and service revenues attributable to the acquisition of ICM were $3.0 million. The remaining $0.2 million decrease for the second quarter relates primarily to lower parts sales and service revenues as previously discussed. The gross profit margin for the three months ended June 30, 2003 decreased 0.9% to 36.0% compared to 36.9% for the three months ended June 30, 2002.

Depreciation and Amortization. Depreciation expense on rental equipment is recorded in rental cost of revenues. Depreciation and amortization expense on property and equipment is recorded in selling, general and administrative expenses. Total depreciation and amortization expense increased $4.7 million to $14.9 million for the three months ended June 30, 2003 from $10.2 million for the three months ended June 30, 2002. Included in the depreciation and amortization expense is $5.8 million related to the ICM acquisition.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased $8.4 million to $25.7 million, or 24.5% of total revenues for the three months ended June 30, 2003 from $17.3 million, or 22.5% of total revenues for the three months ended June 30, 2002. Included in SG&A expense is $10.0 million associated with the ICM acquisition. The remaining $1.6 million decrease in SG&A expense year over year, excluding the effect of ICM, is primarily due to reductions in labor-related costs.

Income from Operations. Based on the foregoing, income from operations decreased to $0.3 million for the three months ended June 30, 2003 from $3.0 million for the three months ended June 30, 2002. The $2.7 million decrease was net of $1.2 million loss from operations relating to ICM's operations for the second quarter of 2003.

Other Income (Expense). Other expense increased by $4.2 million to $9.8 million for the three months ended June 30, 2003 from $5.6 million for the three months ended June 30, 2002. Interest expense for the quarter ended June 30, 2003 increased $4.2 million year over year as a result of the refinancing of the Company's total debt and the acquisition of ICM. Other income was comparable year over year. The annual interest rates on the senior secured credit facility averaged 5.3% for the three months ended June 30, 2003 compared to 5.2% for the three months ended June 30, 2002.

Income Tax Benefit. H&E Equipment Services is a limited liability company that has elected to be treated as a C corporation for income tax purposes. Income tax benefit decreased by $0.9 million for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The Company has recorded a tax valuation allowance for its entire net deferred income tax assets. The valuation allowance was recorded given the cumulative losses incurred by the Company and the Company's belief that it is more likely than not that the Company will be unable to recover the net deferred income tax assets. Accordingly, no income tax benefit was recorded in the three months ended June 30, 2003.

Six months ended June 30, 2003 compared to six months ended June 30, 2002.

Total revenues for the six months ended June 30, 2003 increased 44.6% or $63.6 million to $206.1 million, from $142.5 million for the six months ended June 30, 2002. The revenues during these periods were attributable to the following sources:

Equipment Rental Revenues. Total revenues from equipment rentals increased $25.0 million, or 50.1%, to $74.9 million for the six months ended June 30, 2003 from $49.9 million for the six months ended June 30, 2002. Included in the increase is $29.9 million of equipment rental revenues generated by rental locations associated with the ICM acquisition. The remaining decrease of $4.9 million is comprised of a decrease in crane rental revenues of $2.5 million, a decrease in hi lift equipment rental revenues of $1.3 million and a decrease in other small equipment rental revenues of $2.6 million. These decreases were offset by an increase in earthmoving equipment rental revenues of $1.5 million. The decline is primarily due to lower time utilization in our crane segment and both lower time utilization and rental rates in our hi lift segment. The Company continues to focus on its four core segments and is de-emphasizing the other small equipment rentals.

Equipment Sales Revenues. Revenues from new equipment sales increased $8.3 million, or 25.5% to $40.8 million for the six months ended June 30, 2003 from $32.5 million for the six months ended June 30, 2002. Total new equipment sales attributable to the acquisition of ICM were $10.9 million. The remaining $2.6 million decrease in new equipment sales year over year is attributable primarily to a $3.3 million decline in new hi lift equipment sales. Sales of new cranes decreased $0.8 million and sales of other new equipment decreased $0.4 million. These decreases were offset by a $1.9 million increase in new earthmoving equipment sales.

Revenues from used equipment sales increased $14.9 million, or 67.1% to $37.1 million for the six months ended June 30, 2003 from $22.2 million for the six months ended June 30, 2002. Total used equipment sales attributable to the acquisition of ICM were $11.2 million. The remaining $3.7 million increase in used equipment sales is attributable to a $4.2 million increase in used earthmoving equipment sales and a $0.5 increase in used other equipment sales from other product lines. Sales of used cranes decreased $1.0 million.

Customer demand for new and used equipment has declined due to the current economic conditions.

Parts and Service Revenues. Parts sales and service revenues increased $12.0 million, or 38.0% to $43.6 million for the six months ended June 30, 2003 from $31.6 million for the six months ended June 30, 2002. Total parts sales and service revenues attributable to the acquisition of ICM were $14.2 million. The offsetting $2.1 million decrease in parts sales and service revenues was attributable to a $1.3 million decrease in the parts sales and a $0.8 million decrease in service revenues. As a result of the slowing economy, customers continue deferring or canceling major repairs to their fleets.

Other Revenues. Other revenues consist primarily of billings to customers for equipment support activities including transportation, hauling, parts freight, and damage waiver charges. Other revenues for the six months ended June 30, 2003 increased $3.3 million, or 51.6% to $9.7 million from $6.4 million for the six months ended June 30, 2002. The acquisition of ICM accounted for $3.6 million of the increase.

Total Gross Profit. Total gross profit for the six months ended June 30, 2003 was $51.1 million compared to total gross profit of $37.6 million for the six months ended June 30, 2002. Total gross profit attributable to the acquisition of ICM was $19.9 million. Gross profit contribution by segment as a percentage of total gross profit was 43.8% for equipment rentals, 7.6% for new equipment sales, 13.8% for used equipment sales, 34.4% for parts sales and service revenue, and 0.4% for other revenues.

Equipment Rentals Gross Profit. Gross profit from equipment rentals increased $2.5 million to $22.4 million in the six months ended June 30, 2003 from $19.9 million for the six months ended June 30, 2002. Included in the increase is $9.0 million of equipment rental gross profit generated by rental locations associated with the ICM acquisition. The remaining gross profit decreased $6.5 million, or 32.7% for the six months ended June 30, 2003 to $12.5 million from $19.0 million for the same period last year. This decline is primarily a result of lower rental revenues and increasing maintenance costs associated with aging the rental fleet.

Equipment Sales Gross Profit. Gross profit from new equipment sales increased $0.8 million to $3.9 million for the six months ended June 30, 2003 from $3.1 million for the six months ended June 30, 2002. Included in the gross profit is $1.2 million related to the new equipment sales from the ICM locations. In addition to the lower sales volumes and excluding the increase related to the ICM acquisition, the gross profit margin on new equipment sales decreased to 8.6% for the six months ended June 30, 2003 from 9.4% for the six months ended June 30, 2002. This decline in the gross margin is attributable to the mix of new equipment sold and the Company's continued focus on retail selling rental fleet equipment.

The gross profit from used equipment sales increased $3.8 million to $7.1 million for the six months ended June 30, 2003 from $3.3 million for the six months ended June 30, 2002. Included in the gross profit is $2.6 million related to the used equipment sales from the ICM locations. The remaining $1.2 million increase in used equipment gross profit is primarily due to a $0.5 million increase in used earthmoving equipment sales. Used crane sales and other used equipment sales accounted for the remaining $0.7 million increase. The gross profit margin on used equipment sales, excluding the increase related to the ICM acquisition, increased 2.6% to 17.1% for the six months ended June 30, 2003 from 14.5% for the six months ended June 30, 2002. The increase in gross margin is primarily a result of the mix of used equipment sold.

Parts Sales and Service Revenues Gross Profit. Gross profit from parts sales and service revenues increased $5.9 million to $17.6 million for the six months ended June 30, 2003 from $11.7 million for the six months ended June 30, 2002. Total parts sales and service revenues attributable to the acquisition of ICM were $6.9 million. The gross profit on parts sales and service revenue, excluding the ICM acquisition, decreased $1.0 million for the second quarter 2003 compared to the second quarter 2002, and the gross profit margin for the six months ended June 30, 2003 decreased 0.5% to 36.3% compared to 36.8% for the six months ended June 30, 2002. The decrease in the gross profit margin is attributable to changes in product mix.

Depreciation and Amortization. Depreciation expense on rental equipment is recorded in rental costs of revenues. Depreciation and amortization expense on property and equipment is recorded in SG&A expenses. Total depreciation and amortization expense increased $11.2 million to $29.7 million for the six months ended June 30, 2003 from $18.5 million for the six months ended June 30, 2002. Included in the depreciation and amortization expense is $12.4 million related to the ICM acquisition.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased $17.5 million to $50.4 million, or 24.5% of total revenues for the six months ended June 30, 2003 from $32.9 million, or 23.1% of total revenues for the six months ended June 30, 2002. Included in SG&A expense is $21.7 million relating to the acquisition of ICM. The remaining $4.2 million decrease in SG&A expense year over year, excluding the effect of ICM, is primarily due to reductions in labor related costs.

Loss from Litigation. On May 2, 2003, an order and opinion was handed down by the General Court of Justice, Superior Court Division, State of North Carolina, County of Mecklenberg in the complaint of Sunbelt Rentals Inc. v. Head and Engquist Equipment L.L.C., d/b/a H&E Hi Lift, et al. pursuant to which the plaintiff was awarded damages of $5.0 million, which amount was trebled pursuant to statute to total $15.0 million, plus plaintiff's attorneys' fees. The Company has recorded a $17.0 million loss for estimated damages, plaintiff's attorneys' fees and other costs. The Company intends to appeal and vigorously contest this judgment. The Company will continue to monitor the progress of the case and modify the estimated loss, if necessary. See Liquidity and Capital Resources and Part II Item 1. Legal Proceedings, for further information.

Income (Loss) from Operations. Based primarily on the foregoing, income (loss) from operations decreased to a $16.2 million loss for the six months ended June 30, 2003 from income of $4.8 million for the six months ended June 30, 2002. The $21.0 million decrease was net of $1.7 million loss from operations relating to ICM's income from operations for the six months ended June 30, 2003.

Other Income (Expense). Other expense increased by $11.2 million to $19.6 million for the six months ended June 30, 2003 from $8.4 million for the six months ended June 30, 2002. Interest expense for the six months ended June 30, 2003 increased $11.2 million quarter over quarter as a result of the refinancing of the Company's total debt and the acquisition of ICM. Other income was comparable quarter over quarter. The annual interest rates on the senior secured credit facility averaged 5.2% for the six months ended June 30, 2003 compared to 5.1% for the six months ended June 30, 2002.

Income Tax Benefit. H&E Equipment Services is a limited liability company that has elected to be treated as a C corporation for income tax purposes. Income tax benefit decreased by $1.3 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. The Company has recorded a tax valuation allowance for its entire net deferred income tax assets. The valuation allowance was recorded given the cumulative losses incurred by the Company and the Company's belief that it is more likely than not that the Company will be unable to recover the net deferred income tax assets. Accordingly, no income tax benefit was recorded in the six months ended June 30, 2003.

Liquidity and Capital Resources

Cash flows from operating activities. For the six months ended June 30, 2003 cash provided by operating activities was $0.9 million. The significant components of operating activities that provided cash were total property and equipment and rental fleet depreciation expense of $29.7 million and the $17.0 million accrued loss from litigation. Significant components of operating activities that used cash consisted of a $35.8 million net loss, a net gain on sale of both rental and non-rental equipment of $5.8 million, an increase in accounts receivable of $0.3 million, an increase in inventories of $2.4 million, and a decrease in accounts payable and accrued expenses of $1.5 million.

Cash flows from investing activities. For the six months ended June 30, 2003 cash provided by investing activities was $5.1 million. This is a result of purchasing $22.8 million in rental and non-rental equipment. The proceeds from the sale of rental and non-rental equipment was $27.9 million.

Cash flows from financing activities. For the six months ended June 30, 2003 cash used in financing activities was $6.6 million. The net payments under the senior secured credit facility were $3.0 million. Payments on capital leases and other notes totaled $2.7 million and $0.9 million was paid in additional deferred financing costs.

As of July 31, 2003, the balance outstanding on the senior secured credit facility was $73.3 million with $71.6 million available in additional borrowings (based on the borrowing base assets) net of $5.1 million in standby letters of credit. Also, at July 31, 2003, the total balance payable on capital lease obligations and notes payable were $7.8 million and $1.2 million, respectively.

1.

Exclude the loss from litigation from the calculation of Company's earnings before interest, taxes, depreciation, and amortization.

2.

3.

Increase the maximum amount of letters of credit allowed under the senior credit facility to $30.0 million from $10.0 million.

4.

Institute a pricing grid such that if excess availability (defined as the total borrowing base assets less total outstanding borrowings):

a.: falls below $90.0 million, the interest rate and letter of credit fee increase by 25 basis points,
b.: falls below $50.0 million, the interest rate and letter of credit fee increase an additional 25 basis points.

5.

Institute a $20.0 million block on availability based on the total borrowing base assets.

The Company's management intends to appeal and vigorously contest the judgement related to the litigation described in Note 3 of the notes to condensed consolidated financial statements. During the appeals process, management anticipates posting a standby letter of credit for the amount of the final judgement.

Off-Balance Sheet Arrangements. At June 30, 2003 and at December 31, 2002, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Contractual and Commercial Commitments Summary

The following summarizes our contractual obligations at June 30, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).

		Payments Due by Year
		Total		2003(1)		2004-2005		2006-2007		Threafter
		(In thousands)
Long-term debt (including subordinated notes payable)		$	254,217	$	163	$	593	$	364	$	253,097
Interest payments on senior secured notes			211,251		11,125		44,500		44,500		111,126
Interest payments on senior subordinated notes			69,525		3,312		13,250		13,250		39,713
Revolving credit facility			73,701		—		—		—		73,701
Capital lease obligations (including interest)			8,807		6,164		2,643		—		—
Operating leases (2)			84,805		14,960		40,356		22,565		6,924
Other long-term obligations (3)			58,103		8,462		27,672		21,669		300

	Total contractual cash obligations	$	760,409	$	44,186	$	129,014	$	102,348	$	484,861

(1): This includes payments due during the six months ending December 31, 2003.
(2): This includes total operating lease payments having initial or remaining non-cancelable lease terms longer than one year.
(3): This includes: (i) BRS annual management fees through 2006 (based upon the lesser of 1.75% of estimated EBITDA excluding operating lease expense or $2.0 million per year) for $4.7 million; (ii) Thomas R. Engquist management fees (6 years) for $1.7 million; (iii) payments for secured floor plan financing for $51.7 million.

Additionally, we have standby letters of credit totaling $5.1 million that expire in September 2003 and January 2004.

Seasonality

Our business is seasonal with demand for our rental equipment tending to be lower in the winter months. The equipment rental activities are directly related to commercial and industrial construction and maintenance activities. Therefore, equipment rental will be correlated to the levels of active construction activities. The severity of weather conditions can have a temporary impact on the level of construction activities.

Equipment sales cycles are also subject to seasonality with the peak selling period during spring season and expanding through summer. Parts and service activities are less affected by changes in demand caused by seasonality.

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

We prepare our financial statements in accordance with accounting principles generally accepted in the United States. In applying many accounting principles, we need to make assumptions, estimates and/or judgements. These assumptions, estimates and judgements are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates, and judgements have the potential to materially alter our results of operations. We have

identified below those of our accounting policies that we believe could potentially produce materially different results were we to change underlying assumptions, estimates and judgements.

Revenue Recognition. The Company's policy is to recognize revenue from equipment rentals in the period earned, over the contract term, regardless of the timing of the billing to customers. A rental contract term can be daily, weekly or monthly. Because the term of the contracts can extend across financial reporting periods, we record unbilled rental revenue and deferred revenue at the end of reporting periods so rental revenue is appropriately stated in the periods presented. Revenue from the sale of equipment and parts is recognized at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled and collectability is reasonably assured. Service revenues are recognized at the time the services are rendered. Other revenues consist primarily of billings to customers for rental equipment delivery and damage waiver charges.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts. This allowance reflects our estimate of the amount of our receivables that we will be unable to collect. Our estimate could require 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.

Useful Lives of Rental Equipment and Property and Equipment. We depreciate rental equipment and property and equipment over their estimated useful lives, after giving effect to an estimated salvage value ranging from 0% to 25% of cost. The useful life of an asset (ranging from three to ten years) is determined based on our estimate of the period the asset will generate revenues, and the salvage value is determined based on our estimate of the minimum value we could realize from the asset after such period. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for the assets.

Forward-Looking Statements

Certain of the statements contained in this Report are forward looking in nature. Such statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "seek," "on- track," "plan," "intend," or "anticipate" or the negative thereof or comparable terminology, or by discussions of strategy. You are cautioned that our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected by any forward-looking statements. Certain of these factors are discussed in our Form 10-K for the year ended December 31, 2002. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company's earnings are effected by changes in interest rates due to the fact that interest on the revolving line of credit is calculated based upon LIBOR plus 300 basis points. The Company is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the revolving credit facility. At June 30, 2003, and as a result of the refinancing the Company had variable rate debt representing 22.8% of total debt. A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. Based upon the balances outstanding at June 30, 2003, a one percent increase in market rates would increase our annual interest expense approximately $1.3 million. The Company does not have significant exposure to the changing interest rates on its fixed-rate senior secured notes, senior subordinated notes or the capital lease obligations, which represented 77.2% of total debt.

Item 4. Controls and Procedures

(a) The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(d). Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

(b) There have been no significant changes in the Company's internal control over financial reporting identified in connection with the evaluation described in paragraph (a) above that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

As of June 30, 2003, except for the legal proceeding referred to below, we were not subject to any legal proceedings that management believes could have a material adverse effect on our business or financial condition.

Item 2. Changes in Securities and Use of Proceeds.

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other information.

None.

Item 6. Exhibits and reports on Form 8-K.

a): Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
b): Reports on Form 8-K
1. Form 8-K filed on May 15, 2003

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

	H&E EQUIPMENT SERVICES L.L.C.
Dated: August 14, 2003	By:	/s/ JOHN M. ENGQUIST John M. Engquist Chief Executive Officer (Principal Executive Officer)
Dated: August 14, 2003	By:	/s/ LINDSAY C. JONES Lindsay C. Jones Chief Financial Officer (Principal Financial Officer)

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H&E EQUIPMENT SERVICES L.L.C. TABLE OF CONTENTS
H&E EQUIPMENT SERVICES L.L.C. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
H&E EQUIPMENT SERVICES L.L.C. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
H&E EQUIPMENT SERVICES L.L.C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
H&E EQUIPMENT SERVICES L.L.C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
H&E EQUIPMENT SERVICES L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET (In thousands)
CONDENSED CONSOLIDATING BALANCE SHEET (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds.

Item 3. Defaults upon Senior Securities.

Item 4. Submission of Matters to a Vote of Security Holders.

Item 5. Other information.

Item 6. Exhibits and reports on Form 8-K.