Attached files
file | filename |
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EX-32.1 - EX-32.1 - Essex Rental Corp. | v191813_ex32-1.htm |
EX-31.1 - EX-31.1 - Essex Rental Corp. | v191813_ex31-1.htm |
EX-31.2 - EX-31.2 - Essex Rental Corp. | v191813_ex31-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2010
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period
from to
Commission
file number: 001-34601
Essex
Rental Corp.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
of Other Jurisdiction of Incorporation or Organization)
|
20-5415048
(I.R.S.
Employer Identification No.)
|
|
1110
Lake Cook Road, Suite 220
Buffalo
Grove, Illinois
(Address
of Principal Executive Offices)
|
60089
(ZIP
Code)
|
847-215-6500
(Registrant’s
Telephone Number, Including Area Code)
None
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer þ
|
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o No
þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
17,155,496
shares of common stock, par value $.0001 per share, were outstanding as of the
close of business on July 31, 2010.
ESSEX RENTAL CORP.
TABLE
OF CONTENTS
Page
|
||
PART
I. FINANCIAL INFORMATION
|
|
|
Item 1.
Financial Statements:
|
||
Essex
Rental Corp. Consolidated Balance Sheets as of June 30, 2010 (Unaudited)
and December 31, 2009
|
2
|
|
Essex
Rental Corp. Consolidated Statements of Operations (Unaudited) for the
Three and Six Months ended June 30, 2010 and 2009
|
3
|
|
Essex
Rental Corp. Consolidated Statements of Cash Flows (Unaudited) for the Six
Months ended June 30, 2010 and 2009
|
4
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
5
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
27
|
|
Item 4.
Controls and Procedures
|
27
|
|
PART
II. OTHER INFORMATION
|
||
Item 1.
Legal Proceedings
|
28
|
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Item 1A.
Risk Factors
|
28
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
28
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Item 3.
Defaults upon Senior Securities
|
29
|
|
Item 4.
Reserved
|
29
|
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Item 5.
Other Information
|
29
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Item 6.
Exhibits
|
29
|
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Signatures
|
30
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains statements which are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements include statements regarding the intent and belief or current
expectations of Essex and its management team and may be identified by the use
of words like "anticipate", "believe", "estimate", "expect", "intend", "may",
"plan", "will", "should", "seek", the negative of these terms or other
comparable terminology. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements. Important factors that could
cause actual results to differ materially from Essex’s expectations include,
without limitation, the continued ability of Essex to successfully execute its
business plan, the possibility of a change in demand for the products and
services that Essex provides (through its subsidiary, Essex Crane), intense
competition which may require us to lower prices or offer more favorable terms
of sale, our reliance on third party suppliers, our indebtedness which could
limit our operational and financial flexibility, global economic factors
including interest rates, general economic conditions, geopolitical events and
regulatory changes, our dependence on our management team and key personnel, as
well as other relevant risks detailed in our Annual Report on Form 10-K and
subsequent periodic reports filed with the Securities and Exchange Commission
and available on our website, www.essexcrane.com.
The factors listed here are not exhaustive. Many of these
uncertainties and risks are difficult to predict and beyond management’s
control. Forward-looking statements are not guarantees of future
performance, results or events. Essex assumes no obligation to update
or supplement forward-looking information in this Form 10-Q whether to reflect
changed assumptions, the occurrence of unanticipated events or changes in future
operating results or financial conditions, or otherwise.
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ESSEX
RENTAL CORP.
CONSOLIDATED
BALANCE SHEETS
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
(Unaudited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 502,148 | $ | 199,508 | ||||
Accounts
receivable, net of allowances for doubtful accounts and credit memos
of $1,231,000 and $1,545,000, respectively
|
4,806,697 | 4,973,995 | ||||||
Other
receivables
|
3,504,157 | 3,791,845 | ||||||
Deferred
tax assets
|
1,657,493 | 1,724,621 | ||||||
Prepaid
expenses and other assets
|
640,629 | 410,198 | ||||||
TOTAL
CURRENT ASSETS
|
11,111,124 | 11,100,167 | ||||||
Rental
equipment, net
|
256,229,690 | 260,767,678 | ||||||
Property
and equipment, net
|
6,579,085 | 6,981,660 | ||||||
Spare
parts inventory, net
|
3,671,235 | 3,556,236 | ||||||
Restricted
cash deposits
|
5,226,400 | - | ||||||
Identifiable
finite lived intangibles, net
|
1,590,268 | 2,160,239 | ||||||
Loan
acquisition costs, net
|
1,649,719 | 1,897,177 | ||||||
TOTAL
ASSETS
|
$ | 286,057,521 | $ | 286,463,157 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 1,539,132 | $ | 1,790,683 | ||||
Accrued
employee compensation and benefits
|
707,417 | 679,078 | ||||||
Accrued
taxes
|
5,343,358 | 5,663,263 | ||||||
Accrued
interest
|
310,425 | 303,186 | ||||||
Accrued
other expenses
|
877,323 | 739,639 | ||||||
Unearned
rental revenue
|
951,250 | 793,797 | ||||||
Short-term
debt obligations
|
7,214,400 | 5,170,614 | ||||||
Current
portion of capital lease obligation
|
6,489 | 6,269 | ||||||
TOTAL
CURRENT LIABILITIES
|
16,949,794 | 15,146,529 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Revolving
credit facility
|
134,561,795 | 131,919,701 | ||||||
Deferred
tax liabilities
|
59,604,059 | 62,935,535 | ||||||
Interest
rate swap
|
4,049,670 | 2,306,294 | ||||||
Capital
lease obligation
|
13,767 | 17,067 | ||||||
TOTAL
LONG-TERM LIABILITIES
|
198,229,291 | 197,178,597 | ||||||
TOTAL
LIABILITIES
|
215,179,085 | 212,325,126 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock, $.0001 par value, Authorized 1,000,000 shares, none
issued
|
- | - | ||||||
Common
stock, $.0001 par value, Authorized 40,000,000 shares; issued and
outstanding 17,154,846 shares at June 30, 2010 and 14,124,563 shares
at December 31, 2009
|
1,715 | 1,412 | ||||||
Paid
in capital
|
86,626,378 | 84,589,119 | ||||||
Accumulated
deficit
|
(13,238,861 | ) | (9,022,597 | ) | ||||
Accumulated
other comprehensive loss, net of tax
|
(2,510,796 | ) | (1,429,903 | ) | ||||
TOTAL
STOCKHOLDERS' EQUITY
|
70,878,436 | 74,138,031 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 286,057,521 | $ | 286,463,157 |
2
ESSEX
RENTAL CORP.
CONSOLIDATED
STATEMENTS OF OPERATIONS
THREE
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
||||||||||||||||
Equipment
rentals
|
$ | 5,438,566 | $ | 8,859,104 | $ | 10,569,068 | $ | 21,079,466 | ||||||||
Used
rental equipment sales
|
1,782,538 | 2,664,782 | 2,792,919 | 4,684,853 | ||||||||||||
Transportation
|
969,109 | 1,515,115 | 2,008,167 | 2,907,790 | ||||||||||||
Equipment
repairs and maintenance
|
855,933 | 1,494,242 | 1,983,301 | 3,209,281 | ||||||||||||
TOTAL
REVENUES
|
9,046,146 | 14,533,243 | 17,353,455 | 31,881,390 | ||||||||||||
COST
OF REVENUES
|
||||||||||||||||
Salaries,
payroll taxes and benefits
|
1,296,685 | 1,502,691 | 2,649,916 | 3,202,102 | ||||||||||||
Depreciation
|
2,901,722 | 2,787,032 | 5,754,125 | 5,555,237 | ||||||||||||
Net
book value of rental equipment sold
|
1,345,313 | 2,354,608 | 2,198,164 | 4,076,843 | ||||||||||||
Transportation
|
934,387 | 1,065,912 | 1,795,942 | 2,114,376 | ||||||||||||
Equipment
repairs and maintenance
|
1,072,490 | 1,092,551 | 1,960,280 | 2,475,727 | ||||||||||||
Yard
operating expenses
|
341,239 | 349,378 | 649,476 | 764,794 | ||||||||||||
TOTAL
COST OF REVENUES
|
7,891,836 | 9,152,172 | 15,007,903 | 18,189,079 | ||||||||||||
GROSS
PROFIT
|
1,154,310 | 5,381,071 | 2,345,552 | 13,692,311 | ||||||||||||
Selling,
general and administrative expenses
|
2,628,330 | 2,728,168 | 5,128,427 | 5,833,898 | ||||||||||||
Other
depreciation and amortization
|
220,380 | 199,481 | 412,066 | 409,859 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
(1,694,400 | ) | 2,453,422 | (3,194,941 | ) | 7,448,554 | ||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Other
income
|
2,946 | 166 | 3,051 | 199 | ||||||||||||
Interest
expense
|
(1,658,186 | ) | (1,674,283 | ) | (3,277,907 | ) | (3,354,002 | ) | ||||||||
TOTAL
OTHER INCOME (EXPENSES)
|
(1,655,240 | ) | (1,674,117 | ) | (3,274,856 | ) | (3,353,803 | ) | ||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
(3,349,640 | ) | 779,305 | (6,469,797 | ) | 4,094,751 | ||||||||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
(1,121,115 | ) | 307,224 | (2,253,533 | ) | 1,572,647 | ||||||||||
NET
INCOME (LOSS)
|
$ | (2,228,525 | ) | $ | 472,081 | $ | (4,216,264 | ) | $ | 2,522,104 | ||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
14,535,982 | 14,108,186 | 14,332,142 | 14,108,143 | ||||||||||||
Diluted
|
14,535,982 | 16,671,916 | 14,332,142 | 14,812,624 | ||||||||||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$ | (0.15 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.18 | ||||||
Diluted
|
$ | (0.15 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.17 |
The
accompanying notes are an integral part of these financial
statements
3
ESSEX
RENTAL CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
SIX
MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (4,216,264 | ) | $ | 2,522,104 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
|
5,894,837 | 5,614,687 | ||||||
Amortization
of loan acquisition costs and other intangibles
|
518,811 | 597,868 | ||||||
Gain
on sale of equipment
|
(594,755 | ) | (608,010 | ) | ||||
Deferred
income taxes
|
(2,303,247 | ) | 1,333,228 | |||||
Share
based compensation expense
|
534,487 | 244,961 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
167,298 | 4,827,981 | ||||||
Other
receivables
|
180,646 | 230,534 | ||||||
Prepaid
expenses and other assets
|
(230,431 | ) | (190,379 | ) | ||||
Spare
parts inventory
|
(114,999 | ) | (320,939 | ) | ||||
Accounts
payable and accrued expenses
|
(398,194 | ) | (2,832,994 | ) | ||||
Unearned
rental revenue
|
157,453 | (1,047,649 | ) | |||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(404,358 | ) | 10,371,392 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of rental equipment
|
(138,350 | ) | (12,183,388 | ) | ||||
Purchases
of property and equipment
|
(452,475 | ) | (189,579 | ) | ||||
Accounts
receivable from rental equipment sales
|
107,042 | - | ||||||
Proceeds
from sale of rental equipment
|
2,792,919 | 4,684,853 | ||||||
Increase
in restricted cash deposits
|
(5,226,400 | ) | - | |||||
NET
CASH (USED IN) INVESTING ACTIVITIES
|
(2,917,264 | ) | (7,688,114 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from revolving credit facility
|
21,070,819 | 34,652,298 | ||||||
Payments
on revolving credit facility
|
(18,428,725 | ) | (37,312,130 | ) | ||||
Payments
on short-term debt obligations
|
(517,061 | ) | - | |||||
Payments
on capital lease obligation
|
(3,846 | ) | (749 | ) | ||||
Proceeds
from the exercise of warrants
|
2,356,336 | - | ||||||
Payments
to repurchase warrants
|
(853,261 | ) | (25,396 | ) | ||||
Payments
for debt issuance costs
|
- | (14,651 | ) | |||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
3,624,262 | (2,700,628 | ) | |||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
302,640 | (17,350 | ) | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
199,508 | 139,000 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 502,148 | $ | 121,650 | ||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING/FINANCING ACTIVITIES
|
||||||||
Equipment
obtained through capital lease
|
$ | 766 | $ | 27,060 | ||||
Equipment
purchased directly through short-term debt obligation
|
$ | 2,560,847 | $ | - | ||||
Unrealized
loss on derivative instruments, net of tax
|
$ | 1,080,893 | $ | 1,020,272 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for interest, swaps and debt issuance costs
|
$ | 3,023,210 | $ | 3,252,519 | ||||
Cash
(received) paid for income taxes, net of refunds
|
$ | 53,972 | $ | 362,615 |
The
accompanying notes are an integral part of these financial
statements
4
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Business
and Principles of Consolidation
|
The
accompanying consolidated financial statements include the accounts of Essex
Rental Corp. (“Essex Rental”), formerly known as Hyde Park Acquisition Corp.
("Hyde Park"), Essex Holdings, LLC ("Holdings") and its wholly owned
subsidiaries, Essex Crane Rental Corp. ("Essex Crane") and Essex Finance Corp.
(“Essex Finance”), (collectively the "Company" or
"Successor"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The
Company, through its subsidiary, Essex Crane, is engaged primarily in renting
lattice boom crawler cranes and attachments to the construction industry mainly
throughout the United States of America and Canada for use in building and
maintaining power plants, refineries, bridge and road construction, alternative
energy, water treatment facilities and other industrial, commercial and
infrastructure related projects.
In August
2009, the Company formed a new subsidiary, Essex Finance Corp., to facilitate
the acquisition of rental equipment.
The
accompanying unaudited financial statements of Essex Rental Corp. include all
adjustments (consisting of normal recurring adjustments) which management
considers necessary for the fair presentation of the Company’s operating
results, financial position and cash flows as of and for all periods
presented. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) have been omitted
from these unaudited financial statements in accordance with applicable
rules.
The
results of operations for the three and six month periods ended June 30, 2010
are not necessarily indicative of the results to be expected for the full year
ended December 31, 2010. For further information, please refer to the
financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009.
Essex
Holdings, LLC - Predecessor
Essex
Holdings, LLC filed a certificate of formation in Delaware on May 4,
2000. Essex Holdings, LLC is a holding company whose only activity
related to its investment in Essex Crane Rental Corp. (collectively the
“Predecessor”).
Essex
Crane was incorporated in Delaware on April 7, 2000 as Essex Holdings, Inc. and
in June 2000 changed its legal name to Essex Crane Rental Corp.
In May
2000, Essex Holdings, LLC entered into an Asset Purchase Agreement and acquired
substantially all the assets, liabilities and operations of Essex Crane Rental
Corp. This acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. The fair value of net assets acquired exceeded the
purchase price. The excess of the net fair values of assets acquired
and liabilities assumed over the purchase price was recorded as a pro-rata
reduction to the fair value of long term assets (rental equipment, property and
equipment and spare parts inventory).
Acquisition
of Predecessor
In
accordance with the purchase agreement (the “Purchase Agreement”) entered into
on March 6, 2008, and subsequently amended on May 9, 2008 and August 14, 2008,
among the Company, Essex Crane, the members of Holdings and KCP Services LLC
(the “Seller Representative”), on October 31, 2008 the Company acquired Holdings
through the acquisition of all of the membership interests of Holdings other
than membership interests which were retained by members of Holding’s senior
management, each of whom owned membership interests of Holdings prior to the
completion of the acquisition, and whom the Company sometimes refer to
collectively as the management members of Holdings or Essex Crane’s senior
management.
5
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
ownership interests in the Predecessor that were retained by the management
members (the “Retained Interests”), which consist of 632,911 Class A Units of
Holdings, the parent company of Essex Crane and a subsidiary of Essex Rental,
have been treated as effectively converted as they are only exchangeable for an
aggregate of 632,911 shares of the Company’s common stock, entitle the holder to
receive distributions on an “as exchanged” basis if Essex Rental pays a dividend
to its common stockholders, are not transferable (subject to limited exceptions
for estate planning purposes) and the Retained Interests are not mandatorily
redeemable. As provided in the Amended and Restated Limited Liability
Company Agreement of Holdings, dated October 31, 2008, among the Company and the
management members of Holdings, the Retained Interests do not carry any voting
rights but are entitled to distributions from Holdings if the Company pays a
dividend to its common stockholders, in which case a distribution on account of
the Retained Interests will be made on an “as exchanged”
basis. Holders of the Retained Interests have agreed, subject to
certain exceptions, not to sell their shares of the Company’s common stock (upon
exchange of such Retained Interests in Holdings), for a period of two years
following completion of the acquisition. The Company has granted
certain registration rights to the existing members of Holdings with respect to
the shares of the Company’s common stock issuable upon exchange of the Retained
Interests pursuant to a Registration Rights Agreement entered into by the
Company and the holders of the Retained Interests contemporaneously with the
closing of the acquisition of Essex.
The fair
value of the Retained Interests accepted by Essex Crane’s officers in lieu of
cash was based on the enterprise value for Holdings ascribed by the total
purchase price paid in the acquisition. The number of shares of the
Company’s common stock into which the Retained Interests could be converted was
based on the estimated per share amount of cash in trust as of the acquisition
closing date and approximated the per share common stock price on the
acquisition agreement date.
Essex
Rental paid a gross purchase price of $225,268,657 excluding liabilities
except assumed debt of which $73,146,539 was paid in cash to sellers;
$7,492,225 funded the General Escrow Agreement and Compliance Escrow Agreement
and $8,810,990 was paid for transaction and other costs of the
acquisition. Also, the purchase price included the fair value of the
Retained Interests of existing management of $5,000,000. Lastly,
the purchase price included common stock with a fair value (based on the closing
price of Essex Rental Corp. stock on the acquisition date) of $923,734 for
transaction related services and assumed debt of $129,895,169.
The
Company used $82,118,675 of the proceeds of its initial public offering held in
its trust account as of the closing date, as well as $9,298,594 advanced under
the Essex Crane amended credit facility, to pay the net purchase price in the
acquisition.
The
purchase price paid by Essex Rental consisted of the following:
Cash
paid to Sellers
|
$ | 73,146,539 | ||
Cash
paid into escrow
|
7,492,225 | |||
Cash
paid for seller transaction and other costs
|
3,763,346 | |||
Cash
paid for buyer transaction costs
|
5,047,644 | |||
Total
cash paid
|
89,449,754 | |||
Essex
Rental common stock issued for transaction costs (132,911 shares)
(1)
|
923,734 | |||
Reservation
of 632,911 shares of Essex Rental common stock for
|
||||
sellers'
conversion of Retained Interest in Holdings (2)
|
5,000,000 | |||
Essex
Crane debt assumed at closing
|
129,895,169 | |||
Total
purchase price paid for net assets acquired
|
$ | 225,268,657 |
(1)
|
The
common stock was valued at $6.95 per share, which approximates the quoted
market price of the common stock on the date the acquisition
closed.
|
(2)
|
The
common stock was valued at $7.90 per share, which approximates the quoted
market price of the common stock at the time the acquisition was
agreed.
|
6
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair
value of the assets acquired and liabilities assumed arising from the
acquisition as of October 31, 2008 were as follows:
Assets
Acquired:
|
||||
Cash
|
$ | 1,191,660 | ||
Accounts
receivable
|
10,701,304 | |||
Other
current assets
|
4,964,670 | |||
Rental
equipment
|
256,086,550 | |||
Property
and equipment
|
8,095,892 | |||
Spare
parts inventory
|
3,064,029 | |||
Goodwill
|
23,895,733 | |||
Other
intangible assets
|
3,640,000 | |||
Other
assets
|
2,429,403 | |||
Total
Assets Acquired
|
314,069,241 | |||
Liabilities
Assumed:
|
||||
Accounts
payable and accrued liabilities
|
13,848,973 | |||
Deferred
tax liabilities
|
74,951,611 | |||
Total
Liabilities Assumed
|
88,800,584 | |||
Net
Assets Acquired
|
$ | 225,268,657 |
The
methodology in allocating the final adjusted purchase price of Holdings of
$225.3 million, including related includable transaction expenses, to the assets
acquired and liabilities assumed is described below as follows:
|
·
|
The
book value of cash, accounts receivable, other current assets, accounts
payable and accrued liabilities were determined to approximate their fair
value due to their short term
nature;
|
|
·
|
An
experienced and qualified third party assisted in the valuation of the
Company’s rental equipment and property and equipment based in part on
assumptions provided by management;
|
|
·
|
An
experienced and qualified third party assisted in the valuation of
intangible assets including customer relationship intangible and trademark
based in part on assumptions provided by management;
and
|
|
·
|
The
remaining excess purchase price paid over the net assets acquired, which
included transaction costs incurred, was recorded as
goodwill.
|
2.
|
Significant
Accounting Policies
|
Please
refer to note 2 of the notes to the consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2009 for a
description of our significant accounting policies except for revenue
recognition, which is described below.
Revenue
Recognition
The
Company recognizes revenue, including multiple element arrangements, in
accordance with the provisions of applicable accounting guidance. We generate
revenue from Essex Crane’s rental of cranes and related equipment and other
services such as crane and equipment transportation and repairs and maintenance.
In many instances, the Company provides some of the above services under the
terms of a single customer Equipment Rental Agreement.
Revenue
arrangements with multiple elements are divided into separate units of
accounting based on vendor-specific objective evidence if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific objective evidence nor third-party
evidence is available. The Company is able to establish vendor specific
objective evidence of selling price related to rental revenues after analysis of
rental agreements absent any additional services offered by the Company. The
Company uses the estimated selling price for allocation of consideration to
transportation services based on the costs associated with providing the
services in addition to the other supply and demand factors within specific
sub-markets. The estimated selling prices of the individual deliverables are not
materially different than the terms of the Equipment Rental
Agreements.
Revenue
from equipment rentals are billed monthly in advance and recognized as earned,
on a straight line basis over the rental period specified in the associated
equipment rental agreement. Rental contract terms span several months or longer.
Because the term of the contracts can extend across financial reporting periods,
when rentals are billed in advance, we defer recognition of revenue and record
unearned rental revenue at the end of reporting periods so that rental revenue
is included in the appropriate period. Repair service revenue is recognized when
the service is provided. Transportation revenue from rental equipment delivery
service is recognized for the drop off of rental equipment on the delivery date
and is recognized for pick-up when the equipment is returned to the Essex Crane
service center, storage yard or next customer location. New and used rental
equipment sales are recognized upon acceptance by the customer and the execution
of a definitive sales agreement stipulating the date risk ownership is
transferred.
These
policies are directly related to our cash flow and earnings. There are estimates
required in recording certain repair and maintenance revenues and also in
recording any allowances for doubtful accounts. The estimates have historically
been accurate in all material respects and we do not anticipate any material
changes to our current estimates in these areas.
Use
of Estimates
The
preparation of these financial statements requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could materially differ from
those estimates. Significant estimates include the allowance for
doubtful accounts and credit memos, spare parts inventory obsolescence reserve,
useful lives for rental equipment and property and equipment, deferred income
taxes, personal property tax receivable accrual, loss contingencies and the fair
value of interest rate swaps and other financial instruments.
7
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Segment
Reporting
The
Company has determined that although it has several distinct revenue streams
including equipment rental and transportation, used equipment sales, and repairs
and maintenance, it has only one reportable segment. This
determination was based upon how management allocates its resources and assesses
performance.
Reclassification
The
Company changed its presentation of revenues and related costs associated with
insurance recoveries for repair of damage to equipment from accidents or natural
disasters while on rent within the Statement of Operations to report these
revenues and costs of revenues gross within continuing operations to better
reflect the nature of the transactions for all periods presented and reflecting
the terms within the rental agreements. Insurance proceeds are now
included in equipment repairs and maintenance revenues and the related costs are
included in equipment repairs and maintenance cost of revenues on the
accompanying consolidated statements of operations. It had been
previously been presented on a net basis within Other Income
(Expenses).
Recently
Issued and Adopted Accounting Pronouncements
In April 2009, the FASB issued a
pronouncement that provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. In addition, the pronouncement amends previous guidance to
require that a reporting entity disclose in interim and annual periods the
inputs and valuation techniques used to measure fair value and a discussion of
changes in valuation techniques and related inputs, if any, during the
period. The Company adopted the pronouncement as required during the
quarter ended June 30, 2009. The adoption of this pronouncement
resulted in additional disclosures in Note 6.
In April 2009, the FASB issued
additional guidance which expands to
interim periods the fair value disclosures required for financial
instruments. It also requires entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial instruments
in financial statements on an interim basis and to highlight any changes in the
methods and significant assumptions from prior periods. The Company
adopted this guidance during the quarter ended June 30, 2009, which was applied
prospectively, resulted in additional disclosures contained in Note
6.
In
May 2009, the FASB issued a standard related to subsequent events that is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this standard
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The standard was effective for
fiscal years and interim periods ended after June 15, 2009 and was applied
prospectively. The Company adopted the standard during the quarter
ended June 30, 2009.
In
February 2010, the FASB issued a standard with amendments to the accounting
guidance related to subsequent events. The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been
reviewed. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. GAAP. This standard is effective for interim or
annual financial periods ending after June 15, 2010 and the Company adopted this
new standard during the quarter ended June 30, 2010 which did not have a
material effect on the Company’s consolidated financial statements.
In
June 2009, the FASB issued a standard that amends the GAAP
hierarchy. On July 1, 2009 the FASB launched FASB’s new
Codification entitled The FASB
Accounting Standards Codification which will supersede all existing
non-SEC accounting and reporting standards. The Codification is
effective for fiscal years and interim periods ended after September 15,
2009 and had no effect on our unaudited consolidated financial statements upon
adoption other than current references to GAAP which were replaced with
references to the applicable codification paragraphs or described in plain
English.
8
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
October 2009, the FASB issued accounting guidance that provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This guidance establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available. The Company would be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, as earlier application is permitted,
the Company decided to apply this guidance retrospectively for all prior
periods. The application of the new guidance had no impact on the
Company’s units of accounting, the allocation of arrangement consideration, the
pattern and timing of revenue recognition or the consolidated financial
statements.
In
January 2010, the FASB issued authoritative guidance that expands the required
disclosures about fair value measurements. This guidance provides for new
disclosures requiring the Company to (i) disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers and
(ii) present separately information about purchases, sales, issuances and
settlements in the reconciliation of Level 3 fair value measurements. This
guidance also provides clarification of existing disclosures requiring the
Company to (i) determine each class of assets and liabilities based on the
nature and risks of the investments rather than by major security type and
(ii) for each class of assets and liabilities, disclose the valuation
techniques and inputs used to measure fair value for both Level 2 and
Level 3 fair value measurements. This guidance was effective on
January 1, 2010, except for the presentation of purchases, sales, issuances
and settlements in the reconciliation of Level 3 fair value measurements,
which will be effective on January 1, 2011. This guidance has not and is
not expected to have a material impact on the Company’s consolidated financial
statements.
3.
|
Intangible
Assets
|
A
customer relationship intangible and a trademark intangible were recorded at
fair value associated with the acquisition of Holdings on October 31,
2008. The following table presents the gross carrying amount,
accumulated amortization and net carrying amount of the Company’s other
identifiable intangible assets at June 30, 2010:
Gross
|
Net
|
|||||||||||
Carrying
|
Accumulated
|
Carrying
|
||||||||||
Amount
|
Amortization
|
Amount
|
||||||||||
Other
identifiable intangible assets:
|
||||||||||||
Customer
relationship intangible
|
$ | 1,307,192 | $ | (520,963 | ) | $ | 786,229 | |||||
Trademark
intangible
|
1,336,591 | (532,552 | ) | 804,039 | ||||||||
$ | 2,643,783 | $ | (1,053,515 | ) | $ | 1,590,268 |
The
following table presents the gross carrying amount, accumulated amortization and
net carrying amount of the Company’s other identifiable intangible assets at
December 31, 2009:
Gross
|
Net
|
|||||||||||
Carrying
|
Accumulated
|
Carrying
|
||||||||||
Amount
|
Amortization
|
Amount
|
||||||||||
Other
identifiable intangible assets:
|
||||||||||||
Customer
relationship intangible
|
$ | 1,455,032 | $ | (386,783 | ) | $ | 1,068,249 | |||||
Trademark
intangible
|
1,487,369 | (395,379 | ) | 1,091,990 | ||||||||
$ | 2,942,401 | $ | (782,162 | ) | $ | 2,160,239 |
9
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The gross
carrying amount of the customer relationship intangible was reduced by $73,920
and $73,918 for the three months ended June 30, 2010 and 2009, respectively and
$147,840 and $197,130, respectively for the six months ended June 30, 2010 as a
result of the recognition of the tax benefit related to excess tax deductible
goodwill. The gross carrying amount of the trademark intangible was
reduced by $75,389 and $75,561, for the three months ended June 30, 2010 and
2009, respectively and $150,778 and $201,511, respectively for the six months
ended June 30, 2010 as a result of the recognition of the tax benefit related to
excess tax deductible goodwill.
The
Company’s amortization expense associated with other intangible assets was
$130,468 and $168,409 for the three months ended June 30, 2010 and 2009,
respectively and $271,353 and $350,410 for the six months ended June 30, 2010
and 2009, respectively.
4.
|
Short-term
Debt Obligations and Revolving Credit
Facility
|
Short-term
Debt Obligations
Essex Finance entered into two
short-term debt obligations with a vendor related to the acquisition of two
cranes and related attachments during the year ended December 31,
2009. Essex Finance entered into a third short-term obligation with
similar terms as the previous two obligations during the three months ended
March 31, 2010. These short-term obligations are interest free for
six months and then accrue interest at 3.0% for an additional six months and are
collateralized by the respective cranes and attachments purchased. On
the six month anniversary of the origination of each obligation, a principal
payment of 10% is due. On the one year anniversary of the origination
of each obligation, the remaining unpaid principal balance is due, at which time
the Company will repay the entire remaining unpaid principal likely using
proceeds from the revolving credit facility discussed below. The
unpaid principal balances of the individual obligations as of June 30, 2010 are
$2,299,174, $2,354,379 and $2,560,847 and mature on October 20, 2010, November
20, 2010 and March 20, 2011, respectively.
Revolving
Credit Facility
In
conjunction with the acquisition of Holdings on October 31, 2008, Essex Crane
amended its senior secured revolving line of credit facility (“revolving credit
facility”), which permits it to borrow up to $190.0 million. The
maximum borrowing amount of the revolving credit facility may be increased by up
to $5.0 million any time prior to November 2010 subject to certain specified
terms and conditions in the credit agreement. Essex Crane may borrow
up to an amount equal to the sum of 85% of eligible net receivables and 75% of
the net orderly liquidation value of eligible rental equipment. The
revolving credit facility is scheduled to mature in October 2013 and is
collateralized by a first security interest in substantially all of the
Company’s assets.
Borrowings
under the revolving credit facility accrue interest at the borrower’s option of
either (a) the bank’s prime rate (3.25% at June 30, 2010) plus an applicable
margin or (b) a Eurodollar rate based on the rate the bank offers deposits of
U.S. Dollars in the London interbank market (“LIBOR”) (0.35% at June 30, 2010)
plus an applicable margin. The Company is also required to pay a
monthly commitment fee with respect to the undrawn commitments under the
revolving credit facility. At June 30, 2010 the applicable prime rate
margin, euro-dollar LIBOR margin, and unused line commitment fee were 0.25%,
2.25% and 0.25%, respectively. See Note 5 Derivatives and Hedging
Activities – Interest Rate Swap Agreement for additional detail.
The
weighted average interest rates on the revolving credit facility at June 30,
2010 and 2009 were 2.63% and 2.57%, respectively.
The
outstanding balance on the revolving credit facility was $134.6 million as of
June 30, 2010. The maximum amount that could be borrowed under the
revolving credit facility, net of letters of credit, interest rate swaps and
other reserves was approximately $174.1 million as of June 30,
2010. The Company’s available borrowing under the revolving credit
facility is approximately $39.5 million as of June 30, 2010.
Loan
Covenants and Compliance
As of
June 30, 2010 and for the six months ended, the Company was in compliance with
its covenants and other provisions of the revolving line of credit
facility. Some of the financial covenants including a fixed charge
coverage ratio and rental equipment utilization ratio do not become active
unless the available borrowing falls below the $20.0 million
threshold. The amount available for borrowing by the Company of
approximately $39.5 million well exceeded the threshold at June 30,
2010. Any failure to be in compliance with any material provision or
covenant of these agreements could have a material adverse effect on the
Company’s liquidity and operations.
10
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Derivatives
and Hedging Activities – Interest Rate Swap Agreement
Risk
Management Objective of Using Derivatives
The
Company is exposed to certain risks arising from both its business operations
and economic conditions. The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. The Company manages economic risks,
including interest rate, liquidity, and credit risk primarily by managing the
amount, sources, and duration of its debt funding and the use of derivative
financial instruments. Specifically, the Company enters into
derivative financial instruments to manage exposures that arise from business
activities that result in the receipt or payment of future known and uncertain
cash amounts, the value of which are determined by interest
rates. The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally
related to the Company’s investments and borrowings.
Cash
Flow Hedges of Interest Rate Risk
The
Company’s objectives in using interest rate derivatives are to add stability to
interest expense and to manage its exposure to interest rate movements. To
accomplish these objectives, the Company primarily uses an interest rate swap as
part of its interest rate risk management strategy. The interest rate
swap is designated as a cash flow hedge and involves receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate
payments over the life of the agreement without exchange of the underlying
notional amount.
The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in accumulated other comprehensive
income and is subsequently reclassified into earnings in the period that the
hedged forecasted transaction affects earnings. The ineffective portion of the
change in fair value of the derivatives is recognized directly in
earnings. There was no hedge ineffectiveness recognized during the
six months ended June 30, 2010 or 2009.
In
November 2008, the Company entered into an interest rate swap agreement with the
lead lender of its revolving credit facility to hedge its exposure to interest
rate fluctuations. The swap agreement has a notional principal amount
of $100.0 million and matures in November 2012. Under the agreement,
the Company pays a 2.71% fixed interest rate plus the applicable margin under
the revolving credit facility (or a total interest rate of 4.96%).
The swap
agreement established a fixed rate of interest for the Company and requires the
Company or the bank to pay a settlement amount depending upon the difference
between the 30 day floating LIBOR rate and the swap fixed rate of
2.71%. The differential to be paid or received under the swap
agreement has been accrued and paid as interest rates changed and such amounts
were included in interest expense for the respective period. Interest
payment dates for the revolving loan were dependent upon the interest rate
options selected by the Company. Interest rates on the revolving
credit facility were determined based on Wachovia’s prime rate or LIBOR rate,
plus a margin depending on certain criteria in the agreement. As of
June 30, 2010, the Company had effectively fixed through 2012, from a cash flow
perspective, the interest rate on approximately 74% of the amount outstanding
under the Company’s revolving credit facility. As of June 30, 2010,
the interest rate on the effectively fixed portion of the credit facility was
4.96% and the weighted average interest rate on the portion of the credit
facility not effectively fixed by interest rate swap contracts was
2.72%.
At June
30, 2010, the interest rate swap liability had a fair value of $4,049,670 and
was included in long-term liabilities. The associated unrealized loss
reported in accumulated other comprehensive income was $2,510,796, which is net
of tax of $1,538,875.
11
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the
six months ended June 30, 2010, the change in net unrealized loss on derivatives
designated as cash flow hedges reported as a component of other accumulated
comprehensive income (loss) was an increase of $1,743,376 ($1,080,893 net of
tax). Amounts reported in accumulated other comprehensive income
related to derivatives will be reclassified to interest expense as interest
payments are made on the Company’s variable-rate debt. During the
twelve month period ending June 30, 2011, the Company estimates that an
additional $2.2 million will be reclassified as an increase to interest
expense.
The
weighted average interest rate of the revolving credit facility, including the
impact of the interest rate swaps was 4.39% and 4.35% at June 30, 2010 and 2009,
respectively. The impact of the interest rate swap resulted in an
increase in interest expense of approximately $612,000 and $580,000 for the
three months ended June 30, 2010 and 2009, respectively. The impact
of the interest rate swap resulted in an increase in interest expense of
approximately $1,233,000 and $1,146,000 for the six months ended June 30, 2010
and 2009, respectively.
The table
below presents the fair value of the Company’s derivative financial instruments
as adjusted for the risk of non-performance as well as their classification on
the Balance Sheet as of June 30, 2010 and December 31, 2009:
Fair Value as of
|
||||||||||
Balance Sheet
|
June 30,
|
December 31,
|
||||||||
Location
|
2010
|
2009
|
||||||||
Derivatives designated
as hedging instruments
|
||||||||||
Interest
Rate Swap
|
Long-term
Liabilities
|
$ | 4,049,670 | $ | 2,306,294 |
The table
below presents the effect of the Company’s derivative financial instruments on
the Income Statement for the six months ended June 30, 2010 and
2009. These amounts are presented as other comprehensive income
(“OCI”).
Derivatives in Cash Flow
Hedging Relationships |
Amount of Gain
or (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain
or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain
or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain or
(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount of Gain or
(Loss) Recognized
in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||
For
the Six Months Ended June 30, 2010
|
||||||||||||||
Interest
Rate Swap
|
$ | (2,976,229 | ) |
Interest
expense
|
$ | (1,232,853 | ) |
Other
income / (expense)
|
$ | - | ||||
For
the Six Months Ended June 30, 2009
|
||||||||||||||
Interest
Rate Swap
|
$ | 501,122 |
Interest
expense
|
$ | 1,146,680 |
Other
income / (expense)
|
$ | - |
Credit-risk-related
Contingent Features
The
Company has agreements with each of its derivative counterparties that contain a
provision where if the Company defaults on any of its indebtedness,
including default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in
default on its derivative obligations.
As of
June 30, 2010, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was approximately ($4.2 million). As of
June 30, 2010, the Company has not posted any cash collateral related to these
agreements; however, the Company’s available borrowings under its revolving
credit facility are reduced by the fair value of the interest rate swap while in
a liability position. If the Company had breached any of these
provisions at June 30, 2010, it would have been required to settle its
obligations under the agreements at their termination value of approximately
($4.2 million).
12
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Fair
Value
The FASB
issued a statement on Fair Value Measurements which, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis and clarifies that fair value
is an exit price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions, the
standard establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
|
·
|
Level
1 - Observable inputs such as quoted prices in active
markets:
|
|
·
|
Level
2- Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly;
and
|
|
·
|
Level
3 - Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own
assumptions.
|
The
Company’s interest rate swap is recorded at fair value on a recurring basis and
had a liability fair value of approximately $4.0 million and $2.3 million at
June 30, 2010 and December 31, 2009, respectively. The Company’s
interest rate derivative instrument is not traded on a market exchange and
therefore, the fair values are determined using valuation models which include
assumptions about interest rates based on those observed in the underlying
markets (LIBOR swap rate) and are classified within Level 2 of the valuation
hierarchy.
The
carrying value of the Company’s total debt obligations including the revolving
credit facility and short-term debt obligations at June 30, 2010 was
approximately $141.8 million. The fair value of the Company’s debt
was approximately $135.4 million as of June 30, 2010 calculated using a
discounted cash flows approach at a market rate of interest.
The fair values of the Company’s
financial instruments, other than the interest rate swap and debt obligations,
including cash and cash equivalents approximate their carrying
values. The Company bases its fair values on listed market prices or
third party quotes when available. If not available, then the Company
bases its estimates on instruments with similar terms and
maturities.
7. Earnings
per Share and Comprehensive Income
The following tables set forth the
computation of basic and diluted earnings per share:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income (loss)
|
$ | (2,228,525 | ) | $ | 472,081 | $ | (4,216,264 | ) | $ | 2,522,104 | ||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
14,535,982 | 14,108,186 | 14,332,142 | 14,108,143 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Warrants
|
- | 2,563,730 | - | 704,481 | ||||||||||||
Diluted
|
14,535,982 | 16,671,916 | 14,332,142 | 14,812,624 | ||||||||||||
Earnings
(loss) per share
|
||||||||||||||||
Basic
|
$ | (0.15 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.18 | ||||||
Diluted
|
$ | (0.15 | ) | $ | 0.03 | $ | (0.29 | ) | $ | 0.17 |
13
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Basic
earnings per share ("EPS") is computed by dividing the net income by the
weighted average number of common shares outstanding during the
period. Included in weighted average number of shares outstanding for
the three and six month periods ended June 30, 2010 and 2009 is 632,911 shares
of common stock for the effective conversion of the retained interest in
Holdings into common stock of the Company. Diluted EPS adjusts basic
EPS for the effects of Warrants, Units and Options; only in the periods in which
such effect is dilutive.
As part
of the initial public offering in March 2007, the Company issued an Underwriter
Purchase Option (“UPO”) to purchase 600,000 Units at an exercise price of $8.80
per unit. Each unit consists of one share of the Company’s common
stock and one warrant. Each warrant entitles the holder to purchase
from the Company one share of common stock.
The UPO
Units that could be converted into 1,200,000 weighted average common shares for
the three and six month periods ended June 30, 2010 and 2009 were outstanding
but were not included in the computation of diluted earnings per share because
the effects would be anti-dilutive. Options that could be converted
into 1,050,969 and 565,000 weighted average common shares for the three months
ended June 30, 2010 and 2009 and options that could be converted into 846,916
and 565,000 weighted average common shares for the six months ended June 30,
2010 and 2009, respectively were not included in the computation of diluted
earnings per share because the effects would be
anti-dilutive. Calculated on a weighted average basis on the number
of days outstanding warrants that could be converted into 11,718,155 and
12,183,617 weighted average common shares for the three and six month periods
ended June 30, 2010, respectively were outstanding but were not included in the
computation of diluted earnings per share because the effects would be
anti-dilutive. These weighted average amounts include a large number
of warrants that were converted to common stock in connection with the Company’s
offer to permit the Company’s warrant holders to tender their warrants for
exercise, on a cashless basis. Pursuant to the offer, approximately
7.6 million warrants were converted into shares of common stock as of June 29,
2010 (the expiration date of the offer) and therefore these warrants were
outstanding for most of the three and six month periods ended June 30, 2010 and
accordingly impacted the weighted average.
As of
June 30, 2010, there were 4,061,944 Warrants, 1,050,969 Stock Options, and the
UPO for 600,000 Units (as described above) outstanding, which are
exercisable at weighted average exercise prices of $5.00, $5.40, and $8.80,
respectively.
Comprehensive
income (loss) was composed of the following:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income (loss)
|
$ | (2,228,525 | ) | $ | 472,081 | $ | (4,216,264 | ) | $ | 2,522,104 | ||||||
Other
comprehensive gain (loss) -
|
||||||||||||||||
interest
rate swap
|
(576,686 | ) | 1,199,357 | (1,080,893 | ) | 1,020,272 | ||||||||||
Comprehensive
income (loss)
|
$ | (2,805,211 | ) | $ | 1,671,438 | $ | (5,297,157 | ) | $ | 3,542,376 |
8. Income
Taxes
The
Company’s effective tax rates of 33.5% and 34.8% for the three and six month
periods ended June 30, 2010, respectively were higher than the statutory federal
tax rate due to state taxes. The Company’s effective tax rates of
39.4% and 38.4% for the three and six month periods ended June 30, 2009,
respectively were higher than the statutory federal tax rate due to state
taxes.
At June
30, 2010, the Company has unused federal net operating loss carry-forwards
totaling approximately $57.3 million that begin expiring in 2020. At
June 30, 2010, the Company also has unused state net operating loss
carry-forwards totaling approximately $28.6 million that expire between 2010 and
2021. The net operating loss carry-forwards are primarily from the
acquisition of Holdings.
14
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At June
30, 2010, the Company also has unrecorded excess tax goodwill of approximately
$4.8 million associated with the acquisition of Holdings. The excess
tax goodwill is amortized over the remaining six year term as a reduction to the
balance in other identifiable intangibles until its balance is reduced to zero,
after which it will be recorded as a benefit to the income tax
provision.
The
Company had unrecognized tax benefits of approximately $1.2 million at June 30,
2010 and December 31, 2009 primarily associated with tax positions taken in a
prior year. The Company had unrecognized tax benefits of $1.1 million
at June 30, 2009 associated with tax positions taken in a prior
year. The Company did not incur any income tax related interest
expense or penalties related to uncertain tax positions during the three and six
month periods ended June 30, 2010 or 2009. The federal tax returns
related to Essex Rental Corp. are currently under examination by the IRS for tax
years ended December 31, 2008 and 2007. The Company has not received
indication of any adjustments to the returns for either tax year.
9.
Stock Based Compensation
The
Company may issue up to 1,575,000 shares of common stock pursuant to its 2008
Long-term Incentive Plan to employees, non-employee directors and consultants of
the Corporation. Options to purchase shares of common stock are
granted at or near the market price on the grant date and expire approximately
ten years from issuance.
The
Company issued 11,467 shares of common stock under the Hyde Park Acquisition
Corp. 2008 Long-term Incentive Plan during the six months ended June 30, 2010 to
certain employees as compensation. The weighted average grant price
of the shares was $6.26 per share. The aggregate grant date fair
value of approximately $74,000 was recorded as compensation within selling,
general and administrative expenses and salaries, payroll taxes and benefits
with an offset recorded in additional paid in capital. These shares,
which amount to 42% of the amount of reduced cash salaries, were issued as part
of a temporary salary reduction program pursuant to which our chief executive
officer, members of executive management and other key managers receiving
salaries elected to reduce the amount of their salaries paid in cash by 30
percent, 20 percent and 10 percent, respectively. The shares issued
pursuant to the salary reduction program vested immediately upon grant and are
restricted from sale for a period of two years from the date of
grant.
On March
18, 2010, the Company granted to certain key members of management options to
purchase 485,969 shares of common stock at $6.45 per share. The
weighted-average grant date fair value per share of options granted was $3.76
resulting in a grant date fair value of $1,827,243. The stock options
vest one-third annually beginning in January 1, 2011, and as such, none were
vested as of June 30, 2010. Such options will expire and no longer be
exercisable after March 18, 2020.
On
December 18, 2008, the Company granted to certain key members of management
options to purchase 565,000 shares of common stock at $4.50 per
share. The weighted-average grant date fair value per share of
options granted was $2.54 resulting in a grant date fair value of
$1,434,671. The stock options vest one-third annually beginning in
December 2009, and as such, 188,333 of these options were vested as of June 30,
2010. Such options will expire and no longer be exercisable after
December 18, 2018.
The fair
values of the stock options granted are estimated at the date of grant using the
Black-Scholes option pricing model. The model is sensitive to changes
in assumptions which can materially affect the fair value estimate. The
Company’s method of estimating expected volatility was based on the volatility
of its peers since the Successor had only had operations for a short time as of
the date of grant. The expected dividend yield was estimated based on the
Company’s expected dividend rate over the term of the options. The expected term
of the options was based on management’s estimate, and the risk-free interest
rate is based on U.S. Treasuries with a term approximating the expected
life of the options. The expected volatility, dividend, term and risk free
interest rate used to value the stock options granted in 2010 were 61.0%, 0.0%,
6 years and 2.79%, respectively. The expected volatility, dividend,
term and risk free interest rate used to value the stock options granted in 2008
were 61.0%, 0.0%, 6 years and 1.43%, respectively.
15
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
Company recorded $311,343 and $460,405 of non-cash compensation expense in
selling, general and administrative expenses for the three and six month periods
ended June 30, 2010, respectively. The Company recorded $119,556 and
$239,112 of non-cash compensation expense in selling, general and administrative
expenses for the three and six month periods ended June 30, 2009,
respectively. As of June 30, 2010 and 2009, there was approximately
$2.3 million and $1.2 million, respectively of total unrecognized
compensation cost related to non-vested stock option awards. The
remaining cost is expected to be recognized ratably over the remaining
respective vesting periods. Based on the Company’s closing common
stock price of $5.98 at June 30, 2010, 565,000 of the options outstanding were
in the money resulting in an aggregate intrinsic value of approximately $0.8
million.
10. Common
Stock and Warrants
In May
2009, our Board of Directors approved an offer allowing warrant holders to
tender their warrants for exercise on a cashless basis by exchanging their
warrants for shares of the Company’s common stock. The offer was
approved in accordance with the recommendation of a committee comprised of the
independent members of the Board who do not own warrants. In June
2010, the Board of Directors extended and amended the offer. Under
the terms of the amended offer, the Board temporarily modified the terms of the
Company’s outstanding warrants, to provide warrant holders with the opportunity
to exercise their warrants on a cashless basis by exchanging three warrants for
one share of the Company’s common stock. The number of properly
tendered warrants that would be accepted by the Company in the offer was limited
to 8,000,000 warrants. The amended offer expired on June 29,
2010. Pursuant to the offer, a total of 7,642,674 warrants were
tendered for cashless exercise. Included in the tendered warrants
were 936,840 warrants tendered by our officers and directors. In
accordance with the offer, our officers and directors participated in the offer
to the same extent as other warrant holders, which was at a participation rate
of 65.3%. As a result of the exercise of warrants, 2,547,558 shares
of common stock were issued.
In
October 2008, our Board of Directors authorized a stock and warrant repurchase
program, under which the Company may purchase, from time to time, in open market
transactions at prevailing prices or through privately negotiated transactions
as conditions permit, up to $12.0 million of the Company’s outstanding common
stock and warrants. Repurchases of our common stock and warrants are
funded with cash flows of the business.
The
Company repurchased 519,905 warrants to acquire common stock for approximately
$0.9 million during the six months ended June 30, 2010. The Company
repurchased 28,200 warrants to acquire common stock for approximately $25,000
during the six months ended June 30, 2009. There was approximately
$9.0 million remaining available for future common stock and warrant repurchases
subsequent to these repurchases. In May 2010, the Company suspended
its share and warrant repurchase program in conjunction with the launching of
the cashless exercise warrant offer.
The
Company issued 471,258 shares of common stock upon the exercise of warrants in
exchange for cash proceeds of approximately $2.4 million during the six months
ended June 30, 2010. The Company issued 1,300 shares of common stock
during the six months ended June 30, 2009 for director services.
11. Commitments,
Contingencies and Related Party Transactions
The
Company occupies office space provided by ProChannel Management LLC, an
affiliate of Laurence S. Levy, our chairman of the board. Such affiliate has
agreed that it will make such office space, as well as certain office and
administrative services, available to the Company, as may be required by the
Company from time to time. The Company has agreed to pay such entity $7,500 per
month for such services with the terms of such arrangement being reconsidered
from time to time. The Company’s statements of operations for the
three and six month periods ended June 30, 2010 and 2009 include $22,500 and
$45,000, respectively of expense related to this agreement.
The
Initial Stockholders and the holders of the Insider Warrants (or underlying
securities) will be entitled to registration rights with respect to their
founding shares or Insider Warrants (or underlying securities), as the case may
be. The holders of the majority of the founding shares are entitled
to demand that the Company register these shares at any time commencing three
months prior to the first anniversary of the consummation of a business
combination. The holders of the Insider Warrants (or underlying
securities) are entitled to demand that the Company register these securities at
any time. In addition, the Initial Stockholders and holders of the
Insider Warrants (or underlying securities) have certain ‘‘piggy-back’’
registration rights on registration statements filed after the Company’s
consummation of a Business Combination.
16
ESSEX
RENTAL CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
connection with the closing of the acquisition of Essex Crane, Essex Rental
granted registration rights to Ronald Schad, Martin Kroll, William Erwin and
William O’Rourke, members of Essex Crane’s senior management, with respect to
the shares of common stock issuable upon exchange of their Retained
Interests. Prior to October 31, 2010, Ronald Schad, Martin Kroll,
William Erwin and William O’Rourke will have piggyback registration rights with
respect to the 632,911 shares of common stock issuable upon exchange of their
Retained Interests, in connection with any registration of shares of common
stock held by Laurence Levy or Edward Levy and their respective
affiliates. Following October 31, 2010, Messrs. Schad, Kroll, Erwin
and O’Rourke will have piggyback registration rights with respect to such shares
in connection with any registration of shares of Common Stock and the holders of
50% of the shares of Common Stock issuable upon exchange of the Retained
Interests held by Messrs. Schad, Kroll, Erwin and O’Rourke will be entitled to
one demand that Essex Rental register their shares Common Stock.
The
Company maintains reserves for personal property taxes. These
reserves are based on a variety of factors including: duration of rental in each
county jurisdiction, tax rates, rental contract terms, customer filings,
tax-exempt nature of projects or jurisdictions, statutes of limitations and
potential related penalties and interest. Additionally, most customer
rental contracts contain a provision that provides that personal property taxes
are an obligation to be borne by the lessee. Where provided in the
rental contract, management will invoice the customer for any personal property
taxes paid by the Company. An estimated receivable has been recorded,
net of an estimated allowance in connection with this liability. This
customer receivable has been presented as other receivables in current assets
while the property tax reserve has been included in accrued taxes.
Management
estimated the gross personal property taxes liability and related contractual
customer receivable of the Company to be approximately $4.5 million and $3.4
million, respectively at June 30, 2010 and approximately $4.3 million and $4.1
million, respectively at June 30, 2009.
A portion
of the sale proceeds of Holdings in the amount of $7,392,000 was placed into a
general escrow and compliance escrow of which, $1.0 million was related to a
working capital escrow and $492,255 was for environmental remediation projects
in process at the time the acquisition transaction closed. The
remaining funds were related to other transaction related items estimated at the
time of close. During 2009, the Company received approximately $0.6
million from the escrow as reimbursement for environmental remediation projects
and the remaining funds were released from escrow to the seller in accordance
with the terms of the escrow agreement.
In May
2010, the Company funded a letter of credit of approximately $5.2 million as
collateral in relation to potential future financial obligations and is
classified within restricted cash deposits within the accompanying consolidated
balance sheets. The letter of credit has no expiration but may be
terminated upon consent by the Company and a third party.
The
Company is subject to a number of claims and proceedings that generally arise in
the normal conduct of business. The Company believes that any
liabilities ultimately resulting from these claims will not, individually or in
the aggregate, have a material adverse effect on our financial position, results
of operations or cash flows.
17
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion summarizes the financial position of Essex Rental Corp. and
its subsidiaries as of June 30, 2010, and its results of operations for the
three and six month periods ended June 30, 2010 and should be read in
conjunction with (i) the unaudited consolidated financial statements and
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and
(ii) the audited consolidated financial statements and accompanying notes
to our Annual Report on Form 10-K for the year ended December 31,
2009.
As used
in this Quarterly Report, references to “the Company” or “Essex” or to
“we,” “us” or “our” refer to Essex Rental Corp., together with its consolidated
subsidiaries, Essex Holdings, LLC, Essex Finance Corp. and Essex Crane Rental
Corp, unless the context otherwise requires.
Business
Background
Essex
Rental was formed on August 21, 2006 as Hyde Park Acquisition Corp. to serve as
a vehicle to effect a merger, capital stock exchange, asset acquisition or other
similar business combination with an operating company. Essex Rental
consummated its initial public offering on March 13, 2007. All
activity from August 21, 2006 (inception) through March 13, 2007 related to
Essex Rental Corp’s (formerly Hyde Park Acquisition Corp.) formation and initial
public offering. From March 13, 2007 through October 31, 2008, the Company’s
activities were limited to identifying prospective target businesses to acquire
and complete a business combination. On October 31, 2008, the Company
consummated the acquisition of Holdings and its wholly-owned subsidiary, Essex
Crane, and, as a result, is no longer in the development stage. For
more information regarding the acquisition of Holdings and Essex Crane, see Note
1 to our consolidated financial statements.
Essex
Crane is a leading provider of lattice-boom crawler crane and attachment rental
services and possesses one of the largest fleets of such equipment in the United
States. Over approximately 49 years of operation, since its founding
in 1960, Essex Crane has steadily grown from a small, family-owned crane rental
company to a private equity owned professionally managed company that today is a
public company and one of the leading players in its industry offering lattice
boom crawler rental services to a variety of customers, industries and regions
mainly throughout the United States and Canada.
Essex
Crane’s fleet size currently stands at more than 350 lattice-boom crawler cranes
and various types of attachments which are made available to clients depending
upon the lifting requirements of its customers such as weight, pick and carry
aspects, reach and angle of reach. The fleet’s combination of crawler
cranes and attachments is diverse by lift capacity and capability, allowing
Essex Crane to meet the crawler crane requirements of its engineering and
construction firm customer base. Essex Crane rents its crawler cranes
and attachments “bare,” meaning without an Essex Crane-supplied operator, and
arranges the transportation of cranes and attachments for its customers in
return for a charge for these services. Once the crane is erected on
the customer’s site, inspected and determined to be operating properly by the
customer’s crane operator and management, the majority of the maintenance and
repair costs are the responsibility of the customer while the equipment is on
rent. This business model allows Essex Crane to minimize its
headcount and operating costs including reduced liability related to operator
error and provides the customer with a more flexible situation where they
control the crane and the operator’s work schedule.
Through a
network of four main service centers, three smaller service locations and
several remote storage yards, complemented by a geographically dispersed highly
skilled staff of sales and maintenance service professionals, Essex Crane serves
a variety of customers engaged in construction and maintenance projects related
to power plants, refineries, bridge and road, alternative energy, water
treatment and purification, hospitals, shipbuilding and other infrastructure and
commercial construction. Essex Crane has significantly diversified
the end-markets it serves in recent years to avoid over-exposure to any one
sector of the construction segment. Essex Crane uses its significant
investment in modern enterprise resource planning (“ERP”) systems and business
process methods to help its management assimilate information more quickly than
others in our industry, and to provide management with real time visibility of
the factors that must be effectively managed to achieve Essex’s
goals. Essex Crane’s end-markets are characterized by medium to large
construction projects many times with longer lead times. Management
believes that these longer lead times, coupled with most contracts having rental
periods of between 4 and 18 months, provide them more visibility over future
project pipelines and revenues.
18
Products
and Services
Our
principal products and services are described below.
Equipment
Rental We offer for rent approximately 30 models of
crawler crane and attachment rental equipment on a monthly basis. The
attachments are rented separately and increase either the lifting capacity or
the reach capabilities of the base crawler crane. Crawler cranes are
long-lived assets with actual lives of up to 50 years or more when properly
maintained. The weighted-average age of our fleet was approximately
14 years at June 30, 2010 and December 31, 2009. The weighted-average
lifting capacity of our fleet was approximately 255 tons and 250 tons as of June
30, 2010 and December 31, 2009, respectively.
Used Equipment
Sales We routinely sell used rental equipment and invest
in new equipment in order to manage the mix, composition and size of our
fleet. We also sell used equipment in response to customer demand for
this equipment. The rate at which we replace used equipment with new
equipment depends on a number of factors, including changing general economic
conditions, growth opportunities and the need to adjust fleet mix to meet
customer requirements and demand.
Transportation
Service and Other Revenue We also offer transportation
and repair and maintenance services and sell parts mainly for equipment that is
owned by Essex Crane. Our target customers for these ancillary
services are our current rental customers as well as those who purchase used
equipment from us.
Essex
Crane generates revenues from a number of sources as follows:
|
·
|
Equipment
rentals revenue – Essex Crane rents its fleet of over 350 cranes and
attachments to a variety of engineering and construction customers under
rental agreements, most of which have rental periods of between 4 and 18
months. The rental agreements typically provide for an agreed
rental rate and a specified rental period. Essex Crane’s
revenue from crane and attachment rentals is primarily driven by rental
rates (which are typically higher for the more expensive cranes with
heavier lifting capacities than less expensive cranes with lower lifting
capacities) charged to its customers and its fleet utilization
rate. Rental revenue is recognized as earned in accordance with
the terms of the relevant rental agreement on a pro rata daily
basis;
|
|
·
|
Used
rental equipment sales revenue – In Essex Crane’s ordinary course of
business, it sells used cranes and attachments over time to optimize the
combination of crane models and lifting capacities available in its fleet
as it perceives market demands and opportunities. On average,
Essex Crane has historically achieved sale prices for equipment in excess
of the appraised value. This is due to the long useful life of
Essex Crane’s crane and attachment fleet, the conditions prevailing in the
secondary market and the high content of engineered high-strength steel
included in these fleet assets. Used rental equipment sales are
recognized upon acceptance by the customer or the execution of a
definitive sales agreement stipulating the date of transferring the risk
of ownership;
|
|
·
|
Transportation
services revenue – Transportation services revenue is derived from Essex
Crane’s management of the logistics process by which Essex Crane’s rental
equipment is transported to and from customers’ construction sites,
including the contracting of third party trucking for such
transportation. Transportation revenue is earned under
equipment rental agreements on a gross basis representing both the
third-party provider’s fee for transportation and Essex Crane’s fee for
managing these transportation services and they are matched with the
associated costs, and related costs for amounts paid to third party
providers. The key drivers of transportation revenue are crane
and attachment utilization rates and average contract
lengths. Shorter average contract durations and high
utilization rates generally result in higher requirements for
transportation of equipment and resulting revenue. The distance
that equipment has to move between different jobsites and the type of
equipment being moved (number of truckloads) are also major drivers of
transportation revenue and associated costs. Transportation
revenue is recognized upon completion of the transportation of equipment;
and
|
19
|
·
|
Equipment
repair and maintenance services revenue – While crawler cranes or
attachments are on rent, much of the repair and maintenance work is paid
for by the customer. Essex Crane performs a portion of the
repair and maintenance work and recognizes revenue for such services to
the extent they are the customer’s responsibility. This
category of revenue also includes Essex Crane providing certain services
while erecting the equipment during initial assembly or disassembly of the
equipment at the end of the rental. Lastly, parts sales revenue
is also included in this category of revenue. Key drivers for
repair and maintenance revenue are the utilization rates for cranes and
attachments as well as jobsite operating conditions. Repair and
maintenance revenue is recognized as such services are
performed.
|
The
following table provides a summary of the Company’s revenue generating
activities discussed above expressed as a percentage of total
revenues:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Equipment
rentals
|
60.1 | % | 61.0 | % | 60.9 | % | 66.1 | % | ||||||||
Used
rental equipment sales
|
19.7 | % | 18.3 | % | 16.1 | % | 14.7 | % | ||||||||
Transportation
|
10.7 | % | 10.4 | % | 11.6 | % | 9.1 | % | ||||||||
Equipment
repairs and maintenance
|
9.5 | % | 10.3 | % | 11.4 | % | 10.1 | % |
Utilization
Measurement
Historically,
Essex Crane measured equipment utilization using what was referred to as the
“hits” method. Under this method, equipment on rent for any
period of time within a month counted as a utilization hit. This
meant that if a piece of equipment were on rent for one day in a month it would
be treated the same in the utilization statistic as a piece of equipment on rent
for all 30 days in a month. Essex Crane's management believes that
the “hits” utilization measurement has a less direct correlation with equipment
rental revenue than the “days” method described below.
Upon
implementation of Essex Crane’s ERP System in 2002, Essex Crane began to measure
utilization using the method referred to as the “days”
method. Essex's management believes that this method, while it may
reflect lower utilization rates than the “hits” method, is the most accurate
method for measuring equipment utilization and correlates most closely with
rental revenue. Under this method, a real time report is generated
from the ERP system for each piece of equipment on rent in a
period. The report includes the number of days each piece of
equipment was on rent on a particular lease and the base monthly rental rate
(excluding any overtime revenues). The total number of days on rent
of all pieces of rental equipment provides the numerator for determining
utilization. The denominator is all rental equipment assets owned
times the number of days in the month. The “days” method is the
utilization measurement currently used by Essex, and Essex anticipates that the
“days” method will be the primary basis for future disclosure of utilization
rates for Essex’s cranes and attachments.
Current
Environment
Many of
the market sectors served by Essex Crane have been adversely affected by the
weakening economy and difficult commercial credit
environment. Management believes that, in the long-term, Essex
Crane’s strong niche market position and improvements in its fleet due to
investment in new cranes will provide opportunity for future
growth. Management bases such belief on the assumption that, in the
long-term, there will be improvements in our customers’ ability to obtain
financing, including credit for infrastructure projects. We cannot
assure you, however, that Essex Crane’s customers’ access to financing for
infrastructure projects, including credit, will improve.
Results
of Operations
Three
months ended June 30, 2010 compared to the three months ended June 30,
2009
The
Company had a net loss before income taxes of $3.3 million for the three months
ended June 30, 2010 compared to a net income before income taxes of $0.8 million
for the three months ended June 30, 2009, a decrease of $4.1
million. The decline in net income is primarily related to a decrease
in total revenues of $5.5 million, which was partially offset by decreases in
total cost of revenues and selling, general and administrative expenses of $1.3
million and $0.1 million, respectively. These decreases are discussed
in more detail below.
20
Revenues
Revenues
for the three months ended June 30, 2010 were $9.0 million, a 37.8% decrease
compared to revenues of $14.5 million for the three months ended June 30,
2009. Total revenues were comprised of the following
components:
|
·
|
Equipment
rentals revenue, which represented 60.1% of total revenues, was $5.4
million for the three months ended June 30, 2010, a 38.6% decrease from
$8.9 million for the three months ended June 30, 2009. This
decrease was primarily driven by a decrease in crane utilization to 35.1%
under the “days” method (or 38.8% if calculated using the “hits” method)
for the three months ended June 30, 2010 from 43.9% under the “days”
method (or 48.5% if calculated using the “hits” method) for the three
months ended June 30, 2009. The decrease in utilization was a
result of excess market supply of rental equipment compared to the demand
brought on by the weakening economy and a difficult commercial credit
environment. The Company also experienced a decrease in the
average crane rental rate of 24.3% to $16,372 (per crane per rental month)
for the three months ended June 30, 2010 from $21,633 for the three months
ended June 30, 2009. Approximately one-third of this $5,261 per
month decline in the average rental rate is due to a less robust mix of
equipment on rent. The large decrease in the average rental
rate is also due in part to the expiration of rental agreements executed
at higher rental rates in the prior years and new agreements being entered
into at lower average rental rates. Management does not expect
an increase in average rental rates until utilization rates
recover.
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Used
rental equipment sales revenue, which represented 19.7% of total revenues,
was $1.8 million for the three months ended June 30, 2010, a 33.1%
decrease from used rental equipment sales revenue of $2.7 million for the
three months ended June 30, 2009. These used equipment sales
have presented the Company with opportunities to further enhance its
combination of cranes and attachments by providing an additional cash flow
source for purchasing additional new rental equipment. Three
lower lifting capacity cranes and attachments were sold by the Company for
the three months ended June 30, 2010, a decrease from six for the three
months ended June 30, 2009. During both periods, the market
provided opportunities to sell lower utilized units with lower rental
rates that represented excess capacity even at historically high
utilization periods. The average lifting capacity of cranes
sold was 230 tons and 150 tons for the three month periods ended June 30,
2010 and 2009, respectively, compared to approximately 440 tons for a
crane purchased during the three months ended June 30,
2009. Cranes sold during the three months ended June 30, 2010
were sold at an average price in excess of 120% of Orderly Liquidation
Value (“OLV”). OLV is determined for collateral measurement
purposes by an independent appraiser on behalf of the lead lender for the
Company’s asset based revolving credit facility. During the
three months ended June 30, 2009, Essex reinvested the proceeds of such
sales into a smaller number of larger cranes and attachments which
typically yield higher utilization rates and higher relative rental rates
on the capital costs and enable Essex to improve the strategic position of
its rental fleet for the future;
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Transportation
revenue, which represented 10.7% of total revenues was $1.0 million for
the three months ended June 30, 2010, a 36.0% decrease from transportation
revenue of $1.5 million for the three months ended June 30,
2009. This decrease is primarily a result of lower crane rental
utilization and was impacted by the combination of cranes and attachments
rented and the specific distances that equipment had to move for various
rentals; and
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Equipment
repairs and maintenance revenue (including rigging and other services),
which represented 9.5% of total revenues, was $0.9 million for the three
months ended June 30, 2010, a 42.7% decrease from equipment repair and
maintenance revenue of $1.5 million for the three months ended June 30,
2009. This decrease is attributed to a lower demand for
repairs, maintenance and other services resulting from lower crane rental
utilization.
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21
Cost
of Revenues
Cost of
revenues for the three months ended June 30, 2010 was $7.9 million, a 13.8%
decrease from cost of revenues of $9.2 million for the three months ended June
30, 2009. Cost of revenues was 87.2% of total revenue for the three
months ended June 30, 2010, relative to 63.0% for the three months ended June
30, 2009. The decrease in cost of revenues resulted from decreases in
salaries, payroll taxes and benefits, transportation, equipment repairs and
maintenance and a decrease in the book value of equipment sold. These
reductions in cost of revenues were partially offset by a small increase in
depreciation expense as described below. The increase in cost of
revenues as a percentage of total revenue is due to fixed costs including
non-cash depreciation expense, other cash fixed costs and the proportion of
total revenues from the sale of used equipment at lower margins than rental
related margins.
Salary, payroll tax and benefit
expenses decreased 13.7% to $1.3 million for the three months ended June 30,
2010 from $1.5 million for the three months ended June 30, 2009. The
decrease was a direct result of a 10% salary reduction on certain operations
managers, reduced hours, lower overtime, some headcount reduction and reduced
bonus expense. The temporary salary reduction program began in May
2009.
Depreciation expense related to rental
equipment increased 4.1% to $2.9 million for the three months ended June 30,
2010 compared to $2.8 million for the three months ended June 30,
2009. The increase in depreciation expense is primarily related to
depreciation expense incurred on rental equipment purchased during 2009 and 2010
in excess of the foregone depreciation expense related to used rental equipment
sold during the same period. Since January 1, 2009, the Company has
invested approximately $22.5 million in rental equipment and sold used rental
equipment assets over the same period with a combined book value, net of
accumulated depreciation of approximately $6.9 million.
Net book value of rental equipment sold
decreased 42.9% to $1.3 million for the three months ended June 30, 2010 from
$2.4 million for the three months ended June 30, 2009. The decrease
in net book value of equipment sold was driven by a decrease in the number of
rental equipment items sold.
Transportation
expenses decreased 12.3% to $0.9 million for the three months ended June 30,
2010 from $1.1 million for the three months ended June 30, 2009. The
decrease was related primarily to lower crane rental utilization.
Equipment
repairs and maintenance expenses were $1.1 million for both three month periods
ended June 30, 2010 and 2009.
Yard
operating expenses were $0.3 million for both three month periods ended June 30,
2010 and 2009.
Essex
Crane’s gain on the sale of used rental equipment was $0.4 million (24.5%
margin, calculated by dividing the gain on the sale by the revenue from such
sale) for the three months ended June 30, 2010 compared to a gain of $0.3
million (11.6% margin) for the three months ended June 30, 2009. The
increase in gain on sale was due to higher accumulated depreciation balances
resulting in lower book values of equipment sold, the mix of used equipment sold
and also due to the assets maintaining their market values. Three
cranes and attachments were sold during the three months ended June 30, 2010
compared to six cranes and attachments sold during the three months ended June
30, 2009.
Total
selling, general and administrative expenses for the three months ended June 30,
2010 were $2.6 million, a $0.1 million or 3.7% decrease from $2.7 million for
the three months ended June 30, 2009. Selling, general, and
administrative expenses decreased despite an increase in professional and legal
fees incurred as a result of the Company’s cashless exercise warrant offer,
primarily due to reductions in rental commissions, bad debt expense and a
compensation expense decrease primarily due to a reduction in bonus expense and
the temporary salary reduction program pursuant to which our chief executive
officer, members of our executive management and other key managers receiving
salaries elected to reduce the amount of their salaries paid in cash in exchange
for fully vested common shares that are temporarily restricted from sale and
valued at approximately 42% of the reduced cash compensation. The
temporary salary reduction program began in May 2009. Other
components of administrative expenses include: employee benefits, insurance and
selling and marketing expenses.
Interest
expense was $1.7 million for both three month periods ended June 30, 2010 and
2009. The balances outstanding on the revolving credit facility as of
June 30, 2010, December 31, 2009, June 30, 2009 and December 31, 2008 were
$134.6 million, $131.9 million, $134.7 million and $137.4 million,
respectively. For the three months ended June 30, 2010 and 2009,
interest rates remained consistently low.
22
Income
tax benefit was $1.1 million for the three months ended June 30, 2010 compared
to a $0.3 million income tax expense for the three months ended June 30,
2009. The decrease in income tax expense is due to the decrease in
income before taxes. The effective tax rates were 33.5% and 39.4% for
the three months ended June 30, 2010 and 2009, respectively.
Essex
Crane had 109 full-time employees at June 30, 2010 compared to 119 full-time
employees at June 30, 2009 after a reduction in headcount by nine employees
during the three months ended March 31, 2009.
Six
months ended June 30, 2010 compared to the six months ended June 30,
2009
The
Company had a net loss before income taxes of $6.5 million for the six months
ended June 30, 2010 compared to a net income before income taxes of $4.1 million
for the six months ended June 30, 2009, a decrease of $10.6
million. The decline in net income is primarily related to a decrease
in total revenues of $14.5 million, which was partially offset by decreases in
total cost of revenues and selling, general and administrative expenses of $3.2
million and $0.7 million, respectively. These decreases are discussed
in more detail below.
Revenues
Revenues
for the six months ended June 30, 2010 were $17.4 million, a 45.6% decrease
compared to revenues of $31.9 million for the six months ended June 30,
2009. Total revenues were comprised of the following
components:
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Equipment
rentals revenue, which represented 60.9% of total revenues, was $10.6
million for the six months ended June 30, 2010, a 49.9% decrease from
$21.1 million for the six months ended June 30, 2009. This
decrease was primarily driven by a decrease in crane utilization to 32.6%
under the “days” method (or 36.1% if calculated using the “hits” method)
for the six months ended June 30, 2010 from 50.6% under the “days” method
(or 55.5% if calculated using the “hits” method) for the six months ended
June 30, 2009. The decrease in utilization was a result of
excess market supply of rental equipment compared to the demand brought on
by the weakening economy and a difficult commercial credit
environment. The Company also experienced a decrease in the
average crane rental rate of 23.6% to $16,967 (per crane per rental month)
for the six months ended June 30, 2010 from $22,213 for the six months
ended June 30, 2009. Approximately one-half of this $5,246 per
month decline in the average rental rate is due to a less robust mix of
equipment on rent. The large decrease in the average rental
rate is also due in part to the expiration of rental agreements executed
at higher rental rates in the prior years and new agreements being entered
into at lower average rental rates. Management does not expect
an increase in average rental rates until utilization rates
recover.
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Used
rental equipment sales revenue, which represented 16.1% of total revenues,
was $2.8 million for the six months ended June 30, 2010, a 40.4% decrease
from used rental equipment sales revenue of $4.7 million for the six
months ended June 30, 2009. These used equipment sales have
presented the Company with opportunities to further enhance its
combination of cranes and attachments by providing an additional cash flow
source for purchasing additional new rental equipment. Five
lower lifting capacity cranes and attachments were sold by the Company for
the six months ended June 30, 2010, a decrease from nine for the six
months ended June 30, 2009. In both periods, the market
presented opportunities to sell a number of the lower utilization units
which have lower rental rates, and Essex reinvested the proceeds of such
sales into a smaller number of larger cranes and attachments which
typically yield higher utilization rates and higher relative rental rates
on the capital costs and enable Essex to improve the strategic position of
its rental fleet for the future. The average lifting capacity
of cranes sold was 193 tons and 163 tons for the six month periods ended
June 30, 2010 and 2009, respectively, compared to over 440 tons and
approximately 312 tons for cranes purchased during the same periods,
respectively. Cranes sold during the six months ended June 30,
2010 were sold at an average price in excess of 120% of
OLV. OLV is determined for collateral measurement purposes by
an independent appraiser on behalf of the lead lender for the Company’s
asset based revolving credit
facility;
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Transportation
revenue, which represented 11.6% of total revenues was $2.0 million for
the six months ended June 30, 2010, a 30.9% decrease from transportation
revenue of $2.9 million for the six months ended June 30,
2009. This decrease is primarily a result of lower crane rental
utilization and was impacted by the combination of cranes and attachments
rented and the specific distances that equipment had to move for various
rentals; and
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Equipment
repairs and maintenance revenue (including rigging and other services),
which represented 11.4% of total revenues, was $2.0 million for the six
months ended June 30, 2010, a 38.2% decrease from equipment repair and
maintenance revenue of $3.2 million for the six months ended June 30,
2009. This decrease is attributed to a lower demand for
repairs, maintenance and other services resulting from lower crane rental
utilization.
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Cost
of Revenues
Cost of
revenues for the six months ended June 30, 2010 was $15.0 million, a 17.5%
decrease from cost of revenues of $18.2 million for the six months ended June
30, 2009. Cost of revenues was 86.5% of total revenue for the six
months ended June 30, 2010, relative to 57.1% for the six months ended June 30,
2009. The decrease in cost of revenues resulted from decreases in
salaries, payroll taxes and benefits, transportation, equipment repairs and
maintenance, yard operating expenses and a decrease in the book value of
equipment sold. These reductions in cost of revenues were partially
offset by a small increase in depreciation expense as described
below. The increase in cost of revenues as a percentage of total
revenue is due to fixed costs including non-cash depreciation expense, other
cash fixed costs and the proportion of total revenues from the sale of used
equipment at lower margins than rental related margins.
Salary,
payroll tax and benefit expenses decreased 17.2% to $2.6 million for the six
months ended June 30, 2010 from $3.2 million for the six months ended June 30,
2009. The decrease was a direct result of a 10% salary reduction on
certain operations managers, reduced hours, lower overtime, some headcount
reduction and reduced bonus expense. The temporary salary reduction
program began in May 2009.
Depreciation expense related to rental
equipment increased 3.6% to $5.8 million for the six months ended June 30, 2010
compared to $5.6 million for the six months ended June 30, 2009. The
increase in depreciation expense is primarily related to depreciation expense
incurred on rental equipment purchased during 2009 and 2010 in excess of the
foregone depreciation expense related to used rental equipment sold during the
same period. Since January 1, 2009, the Company has invested
approximately $22.5 million in rental equipment and sold used rental equipment
assets over the same period with a combined book value, net of accumulated
depreciation of approximately $6.9 million.
Net book value of rental equipment sold
decreased 46.1% to $2.2 million for the six months ended June 30, 2010 from $4.1
million for the six months ended June 30, 2009. The decrease in net
book value of equipment sold was driven by a decrease in the number of rental
equipment items sold.
Transportation
expenses decreased 15.1% to $1.8 million for the six months ended June 30, 2010
from $2.1 million for the six months ended June 30, 2009. The
decrease was related primarily to lower crane rental utilization.
Equipment
repairs and maintenance expenses decreased 20.8% to $2.0 million for the six
months ended June 30, 2010 from $2.5 million for the six months ended June 30,
2009. The decrease was related primarily to lower crane rental
utilization and also related to improved cost productivity and lower parts
expense.
Yard
operating expenses decreased 15.1% to $0.6 million for the six months ended June
30, 2010 from $0.8 million for the six months ended June 30,
2009. The decrease was related primarily to lower crane rental
utilization.
Essex
Crane’s gain on the sale of used rental equipment was $0.6 million (21.3%
margin, calculated by dividing the gain on the sale by the revenue from such
sale) for the six months ended June 30, 2010 compared to a gain of $0.6 million
(13.0% margin) for the six months ended June 30, 2009. Five cranes
and attachments were sold during the six months ended June 30, 2010 compared to
nine cranes and attachments sold during the six months ended June 30,
2009. Despite the decrease in the number of cranes and attachments
sold, gain on sale was consistent between the periods because higher accumulated
depreciation balances resulting in lower book values of equipment sold, the mix
of used equipment sold and also due to the assets maintaining their market
values.
24
Total
selling, general and administrative expenses for the six months ended June 30,
2010 were $5.1 million, a $0.7 million or 12.1% decrease from $5.8 million for
the six months ended June 30, 2009. Selling, general, and
administrative expenses decreased despite an increase in professional and legal
fees incurred as a result of the Company’s cashless exercise warrant offer,
primarily due to reductions in rental commissions, bad debt expense and a
compensation expense decrease primarily due to a reduction in bonus expense and
the temporary salary reduction program pursuant to which our chief executive
officer, members of our executive management and other key managers receiving
salaries elected to reduce the amount of their salaries paid in cash in exchange
for fully vested common shares that are temporarily restricted from sale and
valued at approximately 42% of the reduced cash compensation. Other
components of administrative expenses include: employee benefits, insurance and
selling and marketing expenses.
Interest
expense decreased 2.3% to $3.3 million for the six months ended June 30, 2010
from $3.4 million for the six months ended June 30, 2009. The
decrease in interest expense was primarily due to a decrease in the average
balance outstanding under the revolving credit facility. For the six
months ended June 30, 2010 and 2009, interest rates were consistently
low.
Income
tax benefit was $2.3 million for the six months ended June 30, 2010 compared to
a $1.6 million income tax expense for the six months ended June 30,
2009. The decrease in income tax expense is due to the decrease in
income before taxes. The effective tax rates were 34.8% and 38.4% for
the six months ended June 30, 2010 and 2009, respectively.
Liquidity
and Capital Resources
Cash flow from operating
activities. The
Company’s cash used in operating activities for the six months ended June 30,
2010 was approximately $0.4 million. This was primarily the result of
net loss of $4.2 million, which, when adjusted for non-cash expense items, such
as depreciation and amortization, gains on the sale of equipment, deferred
income taxes and share-based compensation expense, resulted in the use of
approximately $0.2 million of cash. The cash flows from operating
activities were also increased by a $0.3 million reduction in net accounts
receivable and a $0.2 million increase in unearned rental
revenue. These positive cash flows were reduced by a $0.2 million
increase in prepaid expenses and other assets, a $0.1 million increase in spare
parts inventory and a $0.4 million decrease in accounts payable and accrued
expenses. The total cash used in operating activities related to
working capital changes was $0.2 million.
The
Company’s cash provided by operating activities for the six months ended June
30, 2009 was approximately $10.4 million. This was primarily the
result of net income of $2.5 million, which, when adjusted for non-cash expense
items such as depreciation and amortization, deferred income taxes, stock-based
compensation expense and net gains on the sale of rental equipment, provided
positive cash flows of approximately $9.7 million. The cash flows
from operating activities were also positively impacted by a decrease of $4.8
million in net accounts receivable. Partially offsetting these
positive cash flows were increases in our spare parts inventory of $0.3 million,
a $2.8 million decrease in accounts payable and accrued expenses and a $1.0
million decrease in unearned rental revenue. The total increase to
cash flow from operating activities related to working capital changes was $0.7
million.
Cash flow from investing
activities. The
Company’s cash used in investing activities for the six months ended June 30,
2010 was approximately $2.9 million. This was primarily the result of
an increase to restricted cash deposits of $5.2 million and payments to acquire
or improve rental equipment and property and equipment of $0.6
million. These uses of cash were partially offset by $2.8 million in
proceeds on the sale of equipment and a reduction in the amount of receivables
related to rental equipment sales of $0.1 million. In addition, the
Company purchased one rental equipment item for approximately $2.6 million
during the six months ended June 30, 2010, which was directly funded by a new
short-term debt obligation.
The
Company’s cash used in investing activities for the six months ended June 30,
2009 was approximately $7.7 million. This was primarily due to
purchases of rental equipment and property and equipment of $12.2 million and
$0.2 million, respectively, which was partially offset by the proceeds from the
sale of rental equipment of approximately $4.7 million.
25
Cash flow from financing
activities. Cash
provided by financing activities was approximately $3.6 million for the six
months ended June 30, 2010. This is primarily due to a net increase
in the amount drawn on the Company’s revolving credit facility of $2.6
million. Total borrowings for the six months ended June 30, 2010
under the revolving credit facility were $21.1 million and total payments on the
revolving credit facility in the same period were $18.5 million. The
Company also used approximately $0.5 million to make scheduled principal
payments on its short-term debt obligations. In addition, the Company
also used approximately $0.9 million to repurchase warrants, which was offset by
proceeds received from the exercise of warrants to acquire common stock of
approximately $2.4 million.
Cash used
in financing activities for the six months ended June 30, 2009 was approximately
$2.7 million. This was primarily due to a net decrease in the amount
drawn on the Company’s revolving credit facility of $2.7
million. Total borrowings for the six months ended June 30, 2009
under the revolving credit facility were $34.6 million and total payments on the
revolving credit facility in the same period were $37.3 million.
Cash
Requirements Related to Operations
Our
principal sources of liquidity have been from cash provided by operating
activities and the sales used rental fleet equipment, proceeds from the issuance
of debt, and borrowings available under our revolving credit
facility. Our principal uses of cash have been to fund operating
activities and working capital, purchases of rental fleet equipment and property
and equipment and to fund repurchases of the Company’s common stock and warrants
pursuant to the Company’s stock repurchase program, under which we may purchase
up to $12.0 million of the Company’s outstanding common stock and
warrants. Under the terms of the stock repurchase program, as of June
30, 2010, we may purchase up to an additional $9.0 million of our common
stock and warrants. We anticipate that the above described uses will
be the principal demands on our cash in the future.
The
amount of our future capital expenditures will depend on a number of factors
including general economic conditions, growth prospects and the Company’s
overall strategy. Proceeds from equipment sold of $2.8 million during
the six months ended June 30, 2010 were partially utilized to fund our capital
spending on rental equipment of $0.5 million and to fund the repurchase of
warrants pursuant to the Company’s stock repurchase program, which the Company
suspended in May 2010 in conjunction with the launching of the cashless exercise
warrant offer. In response to changing economic conditions, we
believe we have the flexibility to modify our capital expenditures by adjusting
them (either up or down) to match our actual performance. As of June
30, 2010, we had $39.5 million of available borrowings under our revolving
credit facility, net of outstanding letters of credit, a reserve for our
interest rate swap liability and other reserves.
To
service our debt, we will require a significant amount of cash. Our
ability to pay interest and principal on our indebtedness will depend upon our
future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, some of which are beyond
our control. Based on our current level of operations, we believe our
cash flow from operations, available cash and available borrowings under the
revolving credit facility will be adequate to meet our future liquidity needs
for the foreseeable future.
We cannot
provide absolute assurance that our future cash flow from operating activities
will be sufficient to meet our long-term obligations and
commitments. If we are unable to generate sufficient cash flow from
operating activities in the future to service our indebtedness and to meet our
other commitments, we will be required to adopt one or more alternatives, such
as refinancing or restructuring our indebtedness, selling material assets or
operations or seeking to raise additional debt or equity
capital. Given current economic and market conditions, including the
significant disruptions in the global capital markets, we cannot assure
investors that any of these actions could be affected on a timely basis or on
satisfactory terms or at all, or that these actions would enable us to continue
to satisfy our capital requirements. In addition, our existing or
future debt agreements, including the indenture governing the revolving credit
facility, contain certain restrictive covenants, which may prohibit us from
adopting any of these alternatives. Our failure to comply with these
covenants could result in an event of default which, if not cured or waived,
could result in the accelerations of all of our debt.
26
Seasonality
Although
we believe our business is not materially impacted by seasonality, the demand
for our rental equipment tends to be lower in the winter months. The
level of equipment rental activities are directly related to heavy commercial
and industrial construction and maintenance activities. Therefore,
equipment rental performance will be correlated to the levels of current
construction activities. The severity of weather conditions can have
a temporary impact on the level of construction activities.
Equipment
sales cycles are also subject to some seasonality with the peak selling period
during the spring season and extending through the summer. Parts and
service activities are less affected by changes in demand caused by
seasonality.
Contractual
Obligations
During
the six months ended June 30, 2010, there were no material changes outside the
ordinary course of our business in our long-term debt, capital lease or purchase
obligations or in other long-term liabilities disclosed in our Annual Report on
Form 10-K for the year ended December 31.
Off-Balance
Sheet Arrangements
During
the six months ended June 30, 2010, there were no material changes in the
off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2009.
Critical
Accounting Policies
Item 7,
included in Part II of our Annual Report on Form 10-K for the year ended
December 31, 2009, presents the accounting policies and related estimates
that we believe are the most critical to understanding our consolidated
financial statements, financial condition, and results of operations and cash
flows, and which require complex management judgment and assumptions, or involve
uncertainties. These include, among other things, revenue
recognition, the propriety of our estimated useful life of rental equipment and
property and equipment, the adequacy of the allowance for doubtful accounts,
income taxes, the potential impairment of long-lived assets including intangible
assets and derivative financial instruments.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Our
earnings are affected by changes in interest rates due to the fact that interest
on our revolving credit facility is calculated based upon either LIBOR or the
Prime Rate plus an applicable margin. As of June 30, 2010, we had an
interest rate swap to effectively fix the interest rate at 4.96% for $100
million of the $134.6 million of outstanding borrowings under our senior
secured credit facility. The weighted average interest rate in effect
on those borrowings at June 30, 2010 was 2.63% excluding the impact of the
interest rate swap and 4.39% taking into consideration the swap. A
1.0% increase in the effective interest rate on our variable rate outstanding
borrowings not effectively fixed as a result of the interest rate swap at June
30, 2010 would increase our interest expense by approximately $0.3 million
on an annualized basis.
Item 4. Controls
and Procedures
Management’s
Quarterly Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required financial
disclosure.
Our
management, with participation of our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively), have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on
this evaluation, our principal executive officer and principal financial officer
have concluded that, as of June 30, 2010, our disclosure controls and procedures
are effective to provide reasonable assurance that material information required
to be included in our periodic SEC reports is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and
that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required financial
disclosure.
27
The
design of any system of control is based upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated objectives under all future events, no matter
how remote, or that the degree of compliance with the policies or procedures may
not deteriorate. Because of its inherent limitations, disclosure
controls and procedures may not prevent or detect all
misstatements. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) that occurred during the six month
period ended June 30, 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART II. OTHER
INFORMATION
Item 1. Legal
Proceedings
From time
to time, the Company is party to various legal actions in the normal course of
our business. We cannot estimate with certainty our ultimate legal
and financial liability with respect to such pending
matters. Management believes that the Company is not party to any
litigation that, if adversely determined, would have a material adverse effect
on our business, financial condition, result of operations or cash
flows.
Item 1A. Risk
Factors
Part I,
Item 1A — “Risk Factors,” of our Annual Report on Form 10-K for the year
ended December 31, 2009, describes important factors that could materially
affect our business, financial condition and/or future results and cause our
operating results to differ materially from those indicated, projected or
implied by forward-looking statements made in this Quarterly Report or presented
elsewhere by management from time to time. The risks described in our
Annual Report on Form 10-K are not the only risks facing our Company; additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results and cause our operating results to differ
materially from those indicated, projected or implied by forward-looking
statements made in this Quarterly Report or presented elsewhere by management
from time to time.
There
have been no material changes with respect to the risk factors previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds. Issuer Purchases of Equity
Securities
In
October 2008, the Company's board of directors authorized a stock repurchase
program, under which from time to time, in open market transactions at
prevailing prices or through privately negotiated transactions as conditions
permit. The Company may purchase up to $12 million of the Company's
common stock and publicly-traded warrants of which approximately $9.0 million
remained available at June 30, 2010. Such repurchase plan was
publicly announced on October 22, 2008. The Company’s stock
repurchase program was suspended in May 2010 in conjunction with the launching
of the cashless exercise warrant offer.
28
The
following table provides information with respect to the Company’s repurchase of
warrants during the three months ended June 30, 2010.
Period
|
Total Number
of Warrants
Purchased
|
Average Price
Paid per
Warrant
|
Total Number of
Warrants
Purchased as Part
of Repurchase Plan
(1)
|
Maximum Dollar Value
of Warrants and/or
Common Stock that
may Yet be Purchased
|
||||||||||||
April
1, 2010 to April 30, 2010
|
455,561 | $ | 1.73 | 455,561 | $ | 8,969,263 | ||||||||||
May
1, 2010 to May 31, 2010
|
- | $ | - | - | $ | 8,969,263 | ||||||||||
June
1, 2010 to June 30, 2010
|
- | $ | - | - | $ | - | ||||||||||
455,561 | $ | 1.73 | 455,561 | $ | - |
(1) In
addition to the Warrants purchased for the three months ended June 30, 2010
pursuant to the repurchase plan, the Company previously purchased a total of
2,421,236 shares of its common stock including 63,500 shares repurchased
pursuant to the repurchase plan and 2,357,736 shares previously held by
shareholders who voted against the acquisition of Holdings and exercised their
conversion rights, and 1,806,063 warrants pursuant to the repurchase
plan.
Item 3. Defaults
upon Senior Securities
None.
Item 4. Reserved
Item 5. Other
Information
None.
Item 6. Exhibits
A. Exhibits
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
29
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ESSEX
RENTAL CORP.
|
||
|
||
Dated:
July 30, 2010
|
By:
|
/s/
Ronald Schad
|
Ronald
Schad
|
||
Chief
Executive Officer
(Principal Executive Officer) |
Dated:
July 30, 2010
|
By
|
/s/
Martin Kroll
|
Martin
Kroll
|
||
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
|
30