UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__________________________
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 001-14145
__________________________
NEFF CORP.
__________________________
(Exact Name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
Internal Revenue Service - Employer No. 65-0626400
3750 N.W. 87th Avenue, Suite 400, Miami, Florida 33178
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(305) 513-3350
__________________________
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 X No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 16,065,350 shares of Class A Common Stock, $.01 par value per share and 5,100,000 shares of Class B Common Stock, $.01 par value, outstanding at August 1, 2002.
Neff Corp.
Quarterly Report on Form 10-Q
For the Quarter and Period ended
June 30, 2002
| PART I. FINANCIAL INFORMATION | PAGE |
| Item 1. Financial Statements | |
| Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, | |
| 2001 (Unaudited)............................................................................................................... | 3 |
| Condensed Consolidated Statements of Operations for the three months ended | |
| June 30, 2002 and 2001 (Unaudited)............................................................................... | 4 |
| Condensed Consolidated Statements of Operations for the six months ended | |
| June 30, 2002 and 2001 (Unaudited)............................................................................... | 5 |
| Condensed Consolidated Statements of Cash Flows for the six months | |
| ended June 30, 2002 and 2001 (Unaudited)................................................................... | 6 |
| Notes to Condensed Consolidated Financial Statements (Unaudited).................... | 7 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of | |
| Operations.......................................................................................................................... | 11 |
| PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings............................................................................................................. | 19 |
| Item 2. Changes in Securities and Use of Proceeds.................................................................. | 20 |
| Item 3. Defaults upon Senior Securities...................................................................................... | 20 |
| Item 4. Submission of Matters to a Vote of Security Holders................................................. | 20 |
| Item 5. Other Information.............................................................................................................. | 20 |
| Item 6. Exhibits and Reports on Form 8-K.................................................................................. | 20 |
| SIGNATURE .............................................................................................................................................. | 21 |
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June 30, December 31,
2002 2001
---------- ----------
ASSETS
Cash and cash equivalents ...................................... $ 194 $ 4,305
Accounts receivable, net of allowance for doubtful
accounts of $2,592 in 2002 and $2,947 in 2001 ................ 30,662 31,458
Inventories .................................................... 2,205 2,415
Rental equipment, net .......................................... 241,236 258,391
Property and equipment, net .................................... 19,022 21,790
Goodwill, net .................................................. 82,296 82,296
Prepaid expenses and other assets .............................. 13,039 13,802
---------- ----------
Total assets .............................................. $ 388,654 $ 414,457
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable ............................................. $ 8,566 $ 10,067
Accrued expenses ............................................. 24,352 22,997
Credit facility .............................................. 137,316 118,217
Senior subordinated notes .................................... 155,426 198,967
Capitalized lease obligations ................................ - 38
---------- ----------
Total liabilities ......................................... 325,660 350,286
---------- ----------
Commitments and contingencies
Stockholders' equity
Class A Common Stock; $.01 par value; 100,000
shares authorized; 16,065 shares issued and outstanding ... 161 161
Class B Special Common Stock; $.01 par value, liquidation
preference $11.67; 20,000 shares authorized; 5,100 shares
issued and outstanding...................................... 51 51
Additional paid-in capital ................................... 127,759 127,759
Accumulated deficit .......................................... (64,977) (63,800)
---------- ----------
Total stockholders' equity ................................ 62,994 64,171
---------- ----------
Total liabilities and stockholders' equity ................ $ 388,654 $ 414,457
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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For the Three Months Ended
June 30,
------------------------
2002 2001
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Revenues
Rental revenues ........................................ $ 42,511 $ 47,704
Equipment sales ........................................ 3,147 6,196
Parts and service ...................................... 2,958 3,762
---------- ----------
Total revenues .................................... 48,616 57,662
---------- ----------
Cost of revenues
Cost of equipment sold ................................. 2,764 5,233
Depreciation of rental equipment ....................... 10,285 11,004
Maintenance of rental equipment ........................ 15,314 16,377
Costs of parts and service ............................. 2,046 2,494
---------- ----------
Total cost of revenues ............................ 30,409 35,108
---------- ----------
Gross profit ................................................ 18,207 22,554
---------- ----------
Other operating expenses
Selling, general and administrative expenses ........... 13,997 13,428
Other depreciation and amortization .................... 1,707 2,624
---------- ----------
Total other operating expenses .................... 15,704 16,052
---------- ----------
Income from operations ...................................... 2,503 6,502
---------- ----------
Other expenses
Interest expense ....................................... 6,042 7,849
Litigation settlement .................................. 3,944 -
Amortization of debt issue costs ....................... 475 446
---------- ----------
Total other expenses .............................. 10,461 8,295
---------- ----------
Loss before extraordinary item .............................. (7,958) (1,793)
Extraordinary gain on debt extinguishment ................... 5,271 -
---------- ----------
Net loss .................................................... $ (2,687) $ (1,793)
========== ==========
Basic and diluted loss per common share:
Loss before extraordinary item ......................... $ (0.38) $ (0.08)
Extraordinary gain on debt extinguishment .............. 0.25 -
---------- ----------
Net loss ............................................. $ (0.13) $ (0.08)
========== ==========
Weighted average common shares outstanding:
Basic and diluted ....................................... 21,165 21,165
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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For the Six Months Ended
June 30,
-----------------------
2002 2001
---------- ----------
Revenues
Rental revenues ......................................... $ 79,457 $ 91,323
Equipment sales ......................................... 6,828 18,172
Parts and service ....................................... 5,733 7,362
---------- ----------
Total revenues ..................................... 92,018 116,857
---------- ----------
Cost of revenues
Cost of equipment sold .................................. 5,911 15,116
Depreciation of rental equipment ........................ 20,597 21,922
Maintenance of rental equipment ......................... 29,674 31,786
Costs of parts and service .............................. 3,674 4,926
---------- ----------
Total cost of revenues ............................. 59,856 73,750
---------- ----------
Gross profit ................................................. 32,162 43,107
---------- ----------
Other operating expenses
Selling, general and administrative expenses ............ 26,499 28,231
Other depreciation and amortization ..................... 3,446 5,309
Recovery of costs incurred to sell the company .......... (1,752) -
Branch closure and other related costs .................. - 9,128
---------- ----------
Total other operating expenses ..................... 28,193 42,668
---------- ----------
Income from operations ....................................... 3,969 439
---------- ----------
Other expenses
Interest expense ........................................ 12,543 16,117
Litigation settlement ................................... 3,944 -
Amortization of debt issue costs ........................ 955 852
---------- ----------
Total other expenses ............................... 17,442 16,969
---------- ----------
Loss before extraordinary item ............................... (13,473) (16,530)
Extraordinary gain on debt extinguishment .................... 12,296 -
---------- ----------
Net loss ..................................................... $ (1,177) $ (16,530)
========== ==========
Basic and diluted loss per common share:
Loss before extraordinary item .......................... $ (0.64) $ (0.78)
Extraordinary gain on debt extinguishment ............... 0.58 -
---------- ----------
Net loss .............................................. $ (0.06) $ (0.78)
========== ==========
Weighted average common shares outstanding:
Basic and diluted ....................................... 21,165 21,165
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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For the Six Months Ended
June 30,
-----------------------
2002 2001
---------- ----------
Cash Flows from Operating Activities
Net loss .................................................... $ (1,177) $ (16,530)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization ........................... 24,998 28,083
Gain on sale of equipment ............................... (917) (3,056)
Extraordinary gain on debt extinguishment ............... (12,296) -
Recovery of costs incurred to sell the company .......... (1,752) -
Branch closure and other related costs .................. - 9,128
Litigation settlement ................................... 3,944 -
Change in operating assets and liabilities
Accounts receivable .............................. 796 8,354
Other assets ..................................... (1,081) (1,732)
Accounts payable and accrued expenses ............ (3,587) (11,978)
---------- ----------
Net cash provided by operating activities ..... 8,928 12,269
---------- ----------
Cash Flows from Investing Activities
Purchases of rental equipment ................................ (9,144) (19,132)
Proceeds from sale of rental equipment ....................... 6,828 18,172
(Purchases) sales of property and equipment .................. 212 (90)
---------- ----------
Net cash used in investing activities.......... (2,104) (1,050)
---------- ----------
Cash Flows from Financing Activities
Net borrowings (repayments) under credit facility ............ 19,099 (11,950)
Repurchase of senior subordinated notes ...................... (29,996) -
Repayments under capitalized lease obligations ............... (38) (305)
---------- ----------
Net cash used in financing activities ......... (10,935) (12,255)
---------- ----------
Net decrease in cash and cash equivalents .................... (4,111) (1,036)
Cash and cash equivalents, beginning of period ............... 4,305 3,102
---------- ----------
Cash and cash equivalents, end of period ..................... $ 194 $ 2,066
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest ....................................... $ 12,977 $ 18,453
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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The accompanying unaudited interim condensed consolidated financial statements include the accounts of Neff Corp. and its subsidiary (the "Company" or "Neff") and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of financial results for the quarter and six months ended June 30, 2002 and 2001, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial reporting and pursuant to Article 10 of Regulation S-X. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2001 appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission. The results of operations for the quarter and six months ended June 30, 2002 are not necessarily indicative of the results which may be reported for the year ending December 31, 2002.
All material intercompany transactions and balances have been eliminated in consolidation. No tax benefit was recorded for the quarter or six months ended June 30, 2002 and 2001, due to uncertainty regarding the realization of the tax benefit.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires, among other things, that the purchase method of accounting be used for all business combinations and applies to all business combinations initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001 or later. The Company did not enter into any business combinations during 2001 or the first six months of 2002. The Company adopted SFAS 142 effective January 1, 2002. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. As part of the adoption of SFAS 142, the Company changed its accounting for goodwill and other indefinite-lived intangible assets from an amortization methodology to an impairment-only methodology. SFAS 142 provided for a six month transitional period from the effective date of adoption to June 30, 2002, and required that the Company perform an initial assessment of whether there was an indication that the carrying value of its goodwill was impaired. The Company has completed the initial assessment by comparing its fair value, as determined in accordance with SFAS 142, to its carrying value and has concluded that its goodwill was impaired at January 1, 2002.
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The Company is now performing the second step of the impairment testing, which will be completed no later than December 31, 2002. In accordance with the transitional implementation guidance of SFAS 142, once the charge is determined, it will be recorded as a cumulative effect of a change in accounting principle, retroactive to January 1, 2002. The transitional impairment charge is a one time non-cash charge and will not have an effect on the Company's existing bank covenants. In future periods, the assessment must be performed annually, and any such impairment must be recorded as a charge to operating earnings.
The following table reflects consolidated results adjusted as though the Company's adoption of SFAS 142 occurred as of January 1, 2001.
For The Three Months For The Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Reported net loss ......................$ (2,687) $ (1,793) $ (1,177) $ (16,530)
Add back: goodwill amortization ....... - 584 - 1,165
-------- -------- -------- --------
Adjusted net loss.......................$ (2,687) $ (1,209) $ (1,177) $ (15,365)
======== ======== ======== ========
Basic and diluted loss per common share:
Reported net loss .................$ (0.13) $ (0.08) $ (0.06) $ (0.78)
Goodwill amortization ............. - 0.03 - 0.06
-------- -------- -------- --------
Adjusted net loss .................$ (0.13) $ (0.05) $ (0.06) $ (0.72)
======== ======== ======== ========
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The provisions of SFAS 143 will be effective for fiscal years beginning after June 15, 2002; however early application is permitted. The Company is currently evaluating the implications of adoption of SFAS 143 on its financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and the Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations.
-8-
Liquidity
The Company’s revolving credit facility (the “Credit Facility”) and the indentures (the “Indentures”) governing Neff’s senior subordinated notes (the “Notes”) require the Company to maintain specified financial ratios. These covenants may significantly limit the Company’s ability to respond to changing business and economic conditions and to secure additional financing, and the Company may be prevented from engaging in transactions, including acquisitions, that might be considered important to the Company’s business strategy or otherwise beneficial to Neff. Neff’s ability to comply with the restrictive covenants in the Credit Facility and the Indentures may be affected by events that are beyond Neff’s control. The breach of any of these covenants could result in a default under the Credit Facility or the Indentures. In the event of a default under the Credit Facility, Neff’s lenders could declare all amounts borrowed under the Credit Facility, together with accrued interest and other fees, to be due and payable. In the event of a default under the Indentures, the trustee under the Indentures or the holders of the Notes may declare the principal of and accrued interest on the Notes to be due and payable. A default that is not cured or that can not be cured under the Credit Facility would constitute a default under the Indentures, and vice versa. The Company cannot assure that it would be able to repay all amounts due under the Credit Facility or the Notes in the event these amounts are declared due upon a breach of the Credit Facility or of the Indentures. As of June 30, 2002, Neff was in compliance with all restrictive covenants under the Credit Facility and the Indentures. However, if the Company’s revenues for 2002 are less than expected or if the Company’s expenses are more than expected, operating results and related cash flows will be less than planned. Such a shortfall might cause the Company to be in default of one or more of the financial covenants in its Credit Facility that depend on the Company’s operating results.
Certain amounts for the prior year have been reclassified to conform with the current year presentation.
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The treasury stock method was used to determine the dilutive effect of options on earnings per share data. Net loss and weighted average number of shares outstanding used in the computations are summarized as follows (in thousands, except per share data):
For The Three Months For The Six Months
Ended June 30, Ended June 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss ...............................$ (2,687) $ (1,793) $ (1,177) $(16,530)
======== ======== ======== ========
Number of shares:
Weighted average common shares -
basic and diluted (1)............. 21,165 21,165 21,165 21,165
======== ======== ======== ========
Basic and diluted loss per common share:
Loss before extraordinary item .......$ (0.38) $ (0.08) $ (0.64) $ (0.78)
Extraordinary gain on
debt extinguishment............... 0.25 - 0.58 -
-------- -------- -------- --------
Net loss .............................$ (0.13) $ (0.08) $ (0.06) $ (0.78)
======== ======== ======== ========
- ---------------
(1) Effects of employee stock options for the three and six months ended June 30, 2002
and 2001 were not included as they were anti-dilutive due to losses from continuing
operations.
The Company recorded costs of $4.3 million during the fourth quarter of 2000 to recognize costs incurred in its efforts to sell the Company. During the first quarter of 2002, the Company negotiated a reduction of those costs of approximately $1.8 million.
During the second quarter of 2002, the Company repurchased Notes with an aggregate principal amount of $19.0 million, or 9.5% of the aggregate principal amount of Notes issued by the Company. The Notes traded at a discount to face value, therefore the Company recognized an extraordinary gain on debt extinguishment for the three months ended June 30, 2002 of $5.3 million or $0.25 per diluted share. For the six months ended June 30, 2002, the Company has purchased Notes with an aggregate principal amount of $43.7 million or 21.9% of the aggregate principal amount of Notes issued by the Company. The Company recognized an extraordinary gain on debt extinguishment for the six months ended June 30, 2002 of $12.3 million, or $0.58 per diluted share. The extraordinary gain did not include any amount for taxes as the Company does not anticipate that it will have income from continuing operations during the year and losses from continuing operations will offset the extraordinary gain.
During the second quarter of 2002, the Company recorded a charge of $3.9 million in connection with the arbitration award from, and fees associated with, legal proceedings related to the sale of Neff Machinery, Inc. in December of 1999. The Company has not yet paid the arbitration award amount however it believes the amount will be paid before December 31, 2003.
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The following discussion and analysis compares the quarter and six months ended June 30, 2002 to the quarter and six months ended June 30, 2001 and should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Report on Form 10-Q and in conjunction with the Company’s Annual Report on Form 10-K, for the year ended December 31, 2001.
The matters discussed in this Report may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended. Statements beginning with such words as “believes”, “intends”, “plans”, “expects” and similar expressions include forward-looking statements that are based on management’s expectations given facts as currently known by management. Actual results may differ materially from those discussed in these forward-looking statements. Risks that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to our dependence on additional capital for future growth, the high degree to which we are leveraged, the restrictions on our operations imposed by our debt instruments, competition in our industry, and general economic conditions.
Any forward-looking statements speak only as of the date on which the statement is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances occurring after the date on which the statement is made. New factors that may affect our operating results emerge from time to time, and it is not possible for management to predict the materialization of all new factors. Further, management cannot assess the impact of each factor on our business or the extent to which any factor, or combinations of factors, may cause our actual results to differ materially from those discussed in any forward-looking statements. Additional information concerning these and other risks and uncertainties is contained from time to time in our filings with the Securities and Exchange Commission.
Overview
Neff Corp. (“Neff”, “we”, “us” or the “Company”) is one of the largest equipment rental companies in the United States, with 74 rental locations in 16 states as of June 30, 2002.
The Company derives revenue from (1) the rental of equipment, (2) sales of new and used equipment and (3) sales of parts and service. Our primary source of revenue is the rental of equipment to construction and industrial customers.
Growth in rental revenue is dependent upon several factors, including the demand for rental equipment, the amount of equipment available for rent, rental rates and the general economic environment. The level of new and used equipment sales is primarily a function of the supply and demand for such equipment, price and general economic conditions. The age, quality and mix of our rental fleet also affect revenues from the sale of used equipment. Revenues derived from the sale of parts and service generally correlate with sales of new equipment.
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As part of our strategy to improve utilization and return on fleet investments, we plan to reduce our capital expenditures on fleet assets during 2002 in order to apply operating cash flow to pay down debt. We expect this reduction in capital expenditures will result in a reduction in used equipment sales as we age the fleet and seek to maximize return on existing fleet investments. We will also continue to carefully analyze the market potential of each branch and may close branches that are not generating adequate return on investment or are in a market that we do not believe has significant future potential.
We own and lease rental equipment fleet for our operations. As of June 30, 2002 we owned rental fleet assets with a net book value of $241.2 million. We also lease rental fleet under operating leases that had an original cost of $54.2 million.
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 the net book value of rental equipment at the time of sale and cost for new equipment sales. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Maintenance of rental equipment represents the costs of servicing and maintaining rental equipment on an ongoing basis, as well as operating lease payments made on leased fleet. Costs of parts and service represents costs attributable to the sale of parts directly to customers and service provided for the repair of customer owned equipment.
Depreciation of rental equipment is calculated on a straight-line basis over the estimated service life of the asset (generally two to eight years with 10-20% residual values). Since January 1, 1996, we have, from time to time, made certain changes to our depreciation assumptions to recognize extended estimated service lives and increased residual values of our rental equipment. We believe that these changes in estimates will more appropriately reflect our financial results by better allocating the cost of our rental equipment over the service lives of these assets. In addition, the new lives and residual values more closely conform to those prevalent in our industry.
Selling, general and administrative expenses include sales and marketing expenses, payroll and related costs, professional fees, property and other taxes and other administrative overhead. Other depreciation and amortization represents the depreciation associated with property and equipment (other than rental equipment) and the amortization of goodwill and intangible assets.
During the second quarter of 2002 the Company repurchased senior subordinated notes issued by the Company (the “Notes“) with an aggregate principal amount of $19.0 million, or 9.5% of the aggregate principal amount of Notes issued by the Company. The Notes traded at a discount to face value, therefore the Company recognized an extraordinary gain on debt extinguishment for the three months ended June 30, 2002 of $5.3 million, or $0.25 per diluted share. For the six months ended June 30, 2002, the Company purchased Notes with an aggregate principal amount of $43.7 million, or 21.9% of the aggregate principal amount of Notes issued by the Company. The Company recognized an extraordinary gain on debt extinguishment for the six months ended June 30, 2002 of $12.3 million, or $0.58 per diluted share. The extraordinary gain did not include any amount for taxes as the Company does not anticipate that it will have income from continuing operations during the year and losses from continuing operations will offset the extraordinary gain.
During the second quarter of 2002 the Company recorded a charge of $3.9 million in connection with the arbitration award from, and fees associated with, legal proceedings related to the sale of Neff Machinery, Inc. in December of 1999. The Company has not yet paid the arbitration award amount however it believes the amount will be paid before December 31, 2003.
The Company recorded costs of $4.3 million during the fourth quarter of 2000 to recognize costs incurred in its efforts to sell the Company. During the first quarter of 2002, the Company negotiated a reduction of those costs of approximately $1.8 million.
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Results of Operations
Management believes that the period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, the Company’s results of operations may fluctuate from period to period in the future as a result of the cyclical nature of the industry in which the Company operates, as well as other factors.
Second Quarter Ended June 30, 2002 Compared to Second Quarter Ended June 30, 2001 (in thousands, except percent data)
Revenues. Total revenues for the quarter ended June 30, 2002 decreased 15.7% to $48,616 from $57,662 for the quarter ended June 30, 2001. This decrease in total revenues is primarily attributable to a 49.2% decrease in equipment sales of $3,049 in addition to a 10.9% decrease in rental revenues of $5,193. The decrease in equipment sales is the result of our ongoing strategy to reduce equipment sales in order to minimize capital expenditures. The decrease in rental revenues is attributable to a decrease in same store rental revenues of 10.3% for the quarter resulting from a decline in rental rates and physical utilization of rental fleet.
Gross Profit. Gross profit for the quarter ended June 30, 2002 decreased 19.3% to $18,207 or 37.5% of total revenues from $22,554 or 39.1% of total revenues for the quarter ended June 30, 2001. The decrease in gross profit is largely due to declining rental margins and a reduction in the volume and margin earned on equipment sales. Rental margins continue to be affected by the competitive pricing environment in many of our markets.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended June 30, 2002 increased 4.2% to $13,997 or 28.8% of total revenues from $13,428 or 23.3% of total revenues for the quarter ended June 30, 2001. The increase in selling, general and administrative expenses is primarily attributable to increases in bad debt expenses and professional fees.
Interest Expense. Interest expense for the quarter ended June 30, 2002 decreased 23.0% to $6,042 from $7,849 for the quarter ended June 30, 2001. The decrease is primarily attributable to reductions in interest rates under our revolving credit facility (the "Credit Facility") and reduced interest expense on the Notes due to the repurchase of Notes during the year.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 (in thousands, except percent data)
Revenues. Total revenues for the six months ended June 30, 2002 decreased 21.3% to $92,018 from $116,857 for the six months ended June 30, 2001. This decrease in total revenues is primarily attributable to a 62.4% decrease in equipment sales of $11,344 in addition to a 13.0% decrease in rental revenues of $11,866. The decrease in equipment sales is the result of our ongoing strategy to reduce equipment sales to minimize capital expenditures. The decrease in rental revenues is due to the closure of branches during 2001 and the decline in the same store rental revenues of 10.5% for the six months ended June 30, 2002 compared with 2001.
Gross Profit. Gross profit for the six months ended June 30, 2002 decreased 25.4% to $32,162 or 35.0% of total revenues from $43,107 or 36.9% of total revenues for the six months ended June 30, 2001. The decrease in gross profit is primarily due to our overall decline in revenue due to branch closings during 2001 and a decrease in gross profit from rental revenue of $8,429 or 22.4% and equipment sales of $2,139 or 70% compared to results for the six months ended June 30, 2001.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2002 decreased 6.1% to $26,499 or 28.8% of total revenues from $28,231 or 24.2% of total revenues for the six months ended June 30, 2001. The decrease in selling, general and administrative expenses is primarily attributable to branch closings during 2001 and our continued effort to reduce costs.
Interest Expense. Interest expense for the six months ended June 30, 2002 decreased 22.2% to $12,543 from $16,117 for the six months ended June 30, 2001. The increase is primarily attributable to decreased interest rates under our Credit Facility and the reduced interest on the Notes due to the repurchase of Notes during the year.
Liquidity and Capital Resources (in thousands)
For the six months ended June 30, 2002, net cash flows provided by operating activities was $8,928, compared to net cash provided by operating activities of $12,269 for the six months ended June 30, 2001. This decrease is primarily attributable to changes in working capital associated with the operations of the Company.
Net cash used in investing activities for the six months ended June 30, 2002 was $2,104 as compared to $1,050 for the same period of the prior year. This increase in cash used in investing activities is primarily attributable to an increase in the amount of net rental equipment purchases during the first six months of 2002 compared with the prior year.
Net cash used in financing activities was $10,935 for the six months ended June 30, 2002, as compared to $12,255 for the same period in the prior year. The decrease in net cash used in financing activities is primarily attributable to the repurchase of Notes during 2002. As of June 30, 2002, the Company had approximately $29,784 available under its Credit Facility.
These are not the only risks and uncertainties we face. The following important factors, among others, could adversely impact our business, operating results, financial condition and cash flows. These factors could cause our actual results to differ materially from those projected in any forward-looking statements made in this Report on Form 10-Q.
Although we believe that we have sufficient funds for working capital, we may need to raise additional funds in the future if we need to respond to competitive pressures or decide to accelerate our growth rate by increasing our rental equipment fleet, opening more start-up locations or making additional acquisitions. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and the terms of our existing indebtedness. We cannot assure you that we will be able to raise additional funds on terms acceptable to us, or at all. If we raise additional funds through the sale of equity or convertible debt securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. Our failure to obtain any required future financing on terms acceptable to us could materially and adversely effect our financial condition.
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As of July 31, 2002, we had total indebtedness of approximately $290.8 million. The degree to which Neff is leveraged could have important consequences to holders of our common stock including, but not limited to:
our leverage may limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes;
a substantial portion of our cash flow from operations will be dedicated to the payment of the principal of, and interest on, our indebtedness; and
our substantial leverage may make us more vulnerable to economic downturns, limit our ability to withstand competitive pressures and reduce our flexibility to respond to changing business and economic conditions.
Our ability to finance future acquisitions, start-ups and internal growth is limited by the covenants contained in our Credit Facility and in the indentures governing the Notes (the “Indentures”). These covenants restrict our ability, among other things to:
dispose of assets;
engage in mergers or consolidations;
incur debt;
pay dividends;
repurchase our capital stock;
create liens on our assets;
make capital expenditures;
make investments or acquisitions; and
engage in transactions with our affiliates.
Our Credit Facility also requires us to maintain specified financial ratios, including minimum cash flow levels and interest coverage. These covenants may significantly limit our ability to respond to changing business and economic conditions and to secure additional financing, and we may be prevented from engaging in transactions, including acquisitions, that might be considered important to our business strategy or otherwise beneficial to us.
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Our ability to comply with the restrictive covenants in our Credit Facility and the Indentures may be affected by events that are beyond our control. The breach of any of these covenants could result in a default under the Credit Facility or the Indentures. In the event of a default under the Credit Facility, our lenders could declare all amounts borrowed under the Credit Facility, together with accrued interest and other fees, to be due and payable. In the event of a default under the Indentures, the trustee under the Indentures or the holders of our Notes may declare the principal of and accrued interest on the Notes to be due and payable. A default that is not cured or that can not be cured under our Credit Facility would constitute a default under the Indentures, and vice versa. We cannot assure you that we would be able to repay all amounts due under the Credit Facility or the Notes in the event these amounts are declared due upon a breach of the Credit Facility or of the Indentures. As of June 30, 2002, we were in compliance with all restrictive covenants under the Credit Facility and the Indentures. However, if the Company’s revenues for 2002 are less than expected or if the Company’s expenses are more than expected, operating results and related cash flows will be less than planned. Such a shortfall might cause the Company to be in default of one or more of the financial covenants in its Credit Facility that depend on the Company’s operating results.
Our quarterly and annual operating results may fluctuate and the price of our common stock may change in response to those fluctuations
Our quarterly and annual revenues and operating results have varied in the past and may continue to fluctuate in the future depending on factors such as:
general economic conditions in our markets;
changes in our, and our competitors' pricing;
the timing of start-up locations and acquisitions and related costs;
the effectiveness of efforts to integrate start-up locations and acquired businesses with existing operations;
rental patterns of our customers; and
increased competition.
In addition, equipment rental businesses often experience a slowdown in demand during the winter months when adverse weather conditions affect construction activity. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of our future performance. In future periods, our operating results may fall below the expectations of public market analysts or investors. If this occurs, the price of our common stock is likely to decrease.
We face intense competition. If we are unable to compete successfully, we will lose market share and our business will suffer
The equipment rental industry is highly competitive. Our competitors include large national rental companies, regional competitors that operate in one or more states, smaller independent businesses with one or two rental locations, and equipment vendors and dealers who both sell and rent equipment to customers. Some of our competitors have greater financial resources, are more geographically diverse, and have greater name recognition than we do. If existing or future competitors reduce prices and we must also reduce prices to remain competitive, our operating results would be adversely affected. In addition, other equipment rental companies may compete with us for acquisition candidates or start-up locations, which may increase acquisition prices and reduce the number of suitable acquisition candidates or expansion locations.
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We depend on our senior management
Neff is managed by a small number of key executive officers. The loss of the services of these key executives could have a material adverse effect on our business. We do not maintain any key man life insurance policies on any of our officers. Our success also depends on our ability to hire and retain qualified management personnel. We cannot assure you that we will be able to hire and retain the personnel we need.
Any acquisitions we make could disrupt our business, increase our expenses and adversely affect our financial condition or operations
In the future, we may make material acquisitions of, or investments in, other equipment rental businesses. We cannot assure you that we would successfully integrate any businesses or personnel that we might acquire with our existing operations. Any future acquisitions or investments we might make would present risks commonly associated with these types of transactions, including:
difficulty in combining the operations or work force of an acquired business;
potential loss of key personnel of an acquired business;
disruptions of our ongoing business;
difficulty in maintaining uniform standards, controls, procedures and policies;
potential negative impact on results of operations due to amortization of intangible assets acquired other than goodwill or assumption of liabilities;
risks associated with entering markets with which we have limited previous experience; and
diversion of management attention.
We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and common stock. Additional equity issued in connection with future acquisitions could result in dilution of our stockholders’ equity interest. Fluctuations in our stock price may make acquisitions more expensive or prevent us from being able to complete acquisitions on terms that are acceptable to us.
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We may incur substantial costs in order to comply with environmental and safety regulations
We are subject to certain federal, state and local laws and regulations relating to environmental protection and occupational health and safety, including those governing:
wastewater discharges;
the treatment, storage and disposal of solid and hazardous wastes and materials; and
the remediation of contamination associated with the release of hazardous substances.
These laws often impose liability without regard to whether the owner or lessee of real estate knew of, or was responsible for, the presence of hazardous or toxic substances. Some of our present and former facilities have used substances and generated or disposed of wastes which are or may be considered hazardous, and we may incur liability in connection with these activities. Although we investigate each business or property that we acquire or lease, these businesses or properties may have undiscovered potential liabilities relating to non-compliance with environmental laws and regulations that we will be required to investigate and/or remediate. While we do not currently expect to make any material capital expenditures for environmental compliance or remediation in the foreseeable future, we cannot assure you that environmental and safety requirements will not become more stringent or be interpreted and applied more stringently in the future, which could cause us to incur additional environmental compliance or remediation costs. These compliance and remediation costs could materially adversely affect our financial condition or results of operations.
We may be liable for claims that our insurance will not cover
Our business exposes us to possible claims for personal injury or death resulting from the use of equipment that we rented or sold and from injuries caused in motor vehicle accidents in which our delivery and service personnel are involved. We carry comprehensive insurance subject to a deductible at a level management believes is sufficient to cover existing and future claims. We cannot assure you that existing or future claims will not exceed the level of our insurance or that such insurance will continue to be available on economically reasonable terms, or at all. In addition, our insurance may not cover claims for punitive damages or for damages arising from intentional misconduct.
The trading price for our common stock has been and may continue to be highly volatile. The market price of our common stock could fluctuate substantially due to factors, many of which are beyond our control, such as:
actual or anticipated variations in our quarterly results of operations;
additions or departures of key personnel;
announcements of acquisitions, new products or new services by us or our competitors;
changes in earnings estimates or recommendations by securities analysts;
changes in business or regulatory conditions affecting us;
changes in the market valuations of other equipment rental companies;
trading of our common stock; and
general market conditions.
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Neff is controlled by members of the Mas family. Juan Carlos Mas, our Chief Executive Officer, his brothers Jorge Mas and Jose Ramon Mas, who are also members of our board of directors, and Santos Fund I, L.P. (“Santos”), a limited partnership controlled by the Mas family beneficially own approximately 44.9% of our common stock. In addition, General Electric Capital Corporation (“GE Capital”) owns Class B Special common stock that represents 24.1% of the outstanding equity of Neff. Neff, GE Capital, Santos and the Mas family have entered into a Stockholders’ Agreement. The agreement provides that if GE Capital transfers common stock representing 15% or more of the equity of Neff to a third party, the parties to the agreement will cause Neff’s Board of Directors to increase by one member and will cause the nominee designated by the purchaser of GE Capital’s common stock to be elected as the additional director.
The Mas family, Santos and GE Capital, or a transferee who acquires the common stock held by GE Capital, if they were to act together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, they may dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination which you, as a stockholder, may otherwise view favorably.
Future sales of our common stock may adversely affect our common stock price
If our stockholders sell a large number of shares of common stock or if we issue a large number of shares in connection with future acquisitions or financings, the market price of our common stock could decline significantly. In addition, the perception in the public market that our stockholders might sell a large number of shares of common stock could cause a decline in the market price of our common stock. An additional 1.9 million shares of our common stock may be issued upon the exercise of vested stock options we have previously granted, all of which could be sold in the public market if issued, subject to compliance with Rule 144 of the Securities Act in the case of shares held by our affiliates.
On December 17, 1999, we completed the sale of Neff Machinery, Inc. (“Machinery”), a wholly-owned subsidiary of Neff. Neff received $90.5 million and recorded a gain on the sale of $3.8 million. The Machinery sale agreement (the “Agreement”) provided for a post-closing purchase price adjustment based on the difference between the net worth of Machinery as of June 30, 1999 (the date of a pro forma balance sheet prepared in advance of the execution of the Agreement) and the closing date (on the basis of a balance sheet prepared after closing).
Following preparation of a closing date balance sheet, the purchaser told Neff that Neff owed the purchaser an adjustment payment of $20.3 million. Neff responded by informing the purchaser that the purchaser owed Neff additional consideration of $8.8 million.
In August 2001, Neff and the purchaser agreed that all disputes pertaining to the closing balance sheet and the pro forma balance sheet would be resolved by an arbitrator selected by the parties (the “Arbitrator”). The parties each submitted opening and closing statements and replies thereto to the Arbitrator, and in November and December 2001, the Arbitrator held a hearing at which each side presented testimony. On June 13, 2002, the Arbitrator rendered a decision awarding the purchaser $3.5 million.
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Not Applicable
Not Applicable
Not Applicable
Not Applicable
(a) Exhibits:
Exhibits Description
99.1 Certification of Financial Statements by Juan Carlos
Mas, Chief Executive Officer, Neff Corp.
99.2 Certification of Financial Statements by Mark H. Irion,
Chief Financial Officer, Neff Corp.
(b) The Company did not file any reports on Form 8-K during the second quarter of 2002.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEFF CORP.
Registrant
Date: August 14, 2002 /s/Mark H. Irion
----------------------
MARK H. IRION
Chief Financial Officer
On behalf of the Registrant and as
Principal Financial and Accounting Officer
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EXHIBIT 99.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350:
In connection with the accompanying Quarterly Report on Form 10-Q of Neff Corp. for the quarter ended June 30, 2002, I, Juan Carlos Mas, Chief Executive Officer of Neff Corp. hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) such Quarterly Report on Form 10-Q of Neff Corp. for the quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in such Quarterly Report on Form 10-Q of Neff Corp., fairly presents, in all material respects, the financial condition and results of operations of Neff Corp.
Dated: August 14, 2002 By: /s/ Juan Carlos Mas
---------------------------
Juan Carlos Mas
Chief Executive Officer
(Principal Executive Officer and
Duly Authorized Officer)
EXHIBIT 99.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350:
In connection with the accompanying Quarterly Report on Form 10-Q of Neff Corp. for the quarter ended June 30, 2002, I, Mark H. Irion, Chief Financial Officer of Neff Corp. hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) such Quarterly Report on Form 10-Q of Neff Corp. for the quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in such Quarterly Report on Form 10-Q of Neff Corp., fairly presents, in all material respects, the financial condition and results of operations of Neff Corp.
Dated: August 14, 2002 By: /s/ Mark H. Irion
---------------------------
Mark H. Irion
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)