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ESSX > SEC Filings for ESSX > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for ESSEX RENTAL CORP.

Form 10-K for ESSEX RENTAL CORP.


13-Mar-2014

Annual Report


Item 7. 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 December 31, 2013 and for the year then ended and should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains, in addition to historical information,


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forward looking statements that include risks and uncertainties (see discussion of "Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A-Risk Factors of this Annual Report on Form 10-K.

Overview

History

Essex Rental Corp. (formerly, Hyde Park Acquisition Corp.) was incorporated in Delaware on August 21, 2006 as a blank check company whose objective was to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. We consummated our initial public offering on March 13, 2007. All activity from August 21, 2006 (inception) through March 13, 2007 relates to our formation and initial public offering. From March 13, 2007 through October 31, 2008, our activities were limited to identifying prospective target businesses to acquire and complete a business combination. On October 31, 2008, we consummated the acquisition of Holdings and its wholly-owned subsidiary, Essex Crane, and, as a result, we are no longer in the development stage. In August 2009, we formed a new subsidiary, Essex Finance Corp., to facilitate the acquisition of rental equipment. In November 2010, we acquired substantially all of the assets of Coast Liquidating Co. (formerly known as Coast Crane Company) through a newly formed subsidiary CC Bidding Corp., which subsequently changed its name to Coast Crane Company. The assets acquired in the Coast Acquisition consisted of all of the assets used in the operation of Coast Liquidating Co.'s specialty lifting solutions and crane rental services business, including cranes and related heavy lifting machinery and equipment and spare parts, inventory, accounts receivable, rights under executory contracts, other tangible and intangible assets and all of the outstanding shares of capital stock of Coast Crane Ltd., a British Columbia corporation, through which Coast Liquidating Co. conducted its operations in Canada.

Business

Through our operating subsidiaries, Essex Crane and Coast Crane, we are one of North America's largest providers of lifting equipment (including lattice-boom crawler cranes, truck cranes and rough terrain cranes, tower cranes, and other lifting equipment) used in a wide array of construction projects. In addition, we provide product support including installation, maintenance, repair, and parts and services for our equipment provided to customers and customer owned equipment. With a large fleet of cranes and other construction equipment and customer service and support, we supply a wide variety of innovative lifting solutions for construction projects related to power generation, petro-chemical, refineries, water treatment and purification, bridges, highways, hospitals, shipbuilding, offshore oil fabrication and industrial plants, and commercial and residential construction. We rent our equipment "bare," meaning without supplying an operator and, in exchange for a fee, make arrangements for the transportation and delivery of our equipment. Once the crane is delivered and erected on the customer's site, inspected and determined to be operating properly by the customer's crane operator and management, most of the maintenance and repair costs are the responsibility of the customer while the equipment is on rent. This business model allows us to minimize our 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.

Over the past several years, we have been focused on reinvesting capital into our rental fleet. Specifically, we have sold lower lifting capacity cranes and other heavy lifting equipment for better utilized heavier lifting capacity cranes. During the years ended December 31, 2013, 2012, 2011, 2010, 2009, 2008 and 2007 the Company invested on a gross basis (excluding the proceeds received from rental equipment sales) approximately $9.0 million, $10.8 million, $24.8 million, $2.7 million, $19.8 million, $20.8 million and $18.8 million, respectively, into new cranes and attachments for our rental fleet. The Company's rental fleet investment for the years ended December 31, 2007, 2008, 2009 and 2010 primarily consisted of crawler cranes while the rental fleet investment for the years ended December 31, 2011, 2012 and 2013 primarily consisted of rough terrain cranes, tower cranes and Mantis crawler cranes.

These investment decisions contributed greatly to the repositioning our fleet to maximize its utilization rates and average rental rates. Although we believe the repositioning of the fleet has maximized utilization rates and average rental rates, the economic downturn has significantly adversely impacted our business activity levels.

The Company is also focused on selling older and underutilized models of crawler crane assets. We anticipate that the sale of these assets will not have any material impact on the future cash flows of the business from a rental contract perspective.

The following table provides a summary of utilization rates calculated using the "days" method for the years ended December 31, 2013, 2012 and 2011:


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                                      For The Years Ended December 31,
                                     2013           2012           2011
Crawler Cranes                        45.4 %         41.2 %         39.8 %
Rough Terrain Cranes (1)              55.8 %         63.4 %         62.0 %
Boom Trucks                           51.9 %         50.5 %         54.0 %
Self-Erecting Tower Cranes            42.8 %         32.4 %         24.4 %
City and Other Tower Cranes           41.7 %         53.4 %         40.1 %
Forklifts and Other Equipment (2)      n/a           13.5 %         39.9 %

(1) Includes the impact of a 14.5% increase in the number of units available for rent for the year ended December 31, 2012 as compared to the prior year.

(2) Includes the impact of a 65.4% decrease in the number of units available for rent for the year ended December 31, 2012 as compared to the prior year. The reduction in the number of units available for rent reflects the Company's strategic decision to sell equipment within this asset class that is not part of our core strategy and does not leverage our crane expertise. During the year ended December 31, 2013, the Company sold the remaining equipment within this asset class and its utilization rate is no longer meaningful.

Adjusted EBITDA to Net Income Reconciliation

Adjusted EBITDA represents the sum of net income, tax benefit, foreign currency exchange gains and losses, interest expense, other income, depreciation and amortization. Adjusted EBITDA is used internally when evaluating our operating performance and, we believe, allows investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results under GAAP and the accompanying reconciliation, provides useful information about operating performance and period-over-period growth, and provides additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. However, Adjusted EBITDA is not a measure of financial performance under GAAP and, accordingly, should not be considered as an alternative to net income (loss) as an indicator of operating performance.

                                                         For The Years Ended December 31,
                                                     2013             2012              2011
Net loss                                        $ (9,644,597 )   $ (12,652,955 )   $ (17,146,900 )
Benefit for income taxes                          (5,064,126 )      (5,564,179 )     (10,775,749 )
Foreign currency exchange (gains) losses             379,712            (5,484 )           6,999
Interest expense                                  11,662,168        11,334,705        11,455,390
Other income                                        (561,689 )         (41,230 )        (316,492 )

Loss from operations                              (3,228,532 )      (6,929,143 )     (16,776,752 )

Depreciation                                      18,662,640        20,458,784        21,146,477
Other depreciation and amortization                1,039,434         1,274,466         1,338,378

Adjusted EBITDA                                 $ 16,473,542     $  14,804,107     $   5,708,103

Results of Operations

Year ended December 31, 2013 compared to years ended December 31, 2012 and 2011

The Company had a net loss of $9.6 million for the year ended December 31, 2013. Total revenue, cost of revenues and gross profit were $95.5 million, $73.3 million and $22.2 million, respectively, for the year ended December 31, 2013. Total selling, general, administrative and other expenses of $25.4 million was composed primarily of salaries, payroll taxes and benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to


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borrowings under our revolving credit facilities and other debt obligations was $11.7 million for the year ended December 31, 2013. The Company had an income tax benefit of $5.1 million for the year ended December 31, 2013 related to a loss before income taxes of $14.7 million. Adjusted EBITDA for the year ended December 31, 2013 was $16.5 million.

The Company had a net loss of $12.7 million for the year ended December 31, 2012. Total revenue, cost of revenues and gross profit were $98.3 million, $76.9 million and $21.3 million, respectively, for the year ended December 31, 2012. Total selling, general, administrative and other expenses of $28.3 million was composed primarily of salaries, payroll taxes and benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $11.3 million for the year ended December 31, 2012. The Company had an income tax benefit of $5.6 million for the year ended December 31, 2012 related to a loss before income taxes of $18.2 million. Adjusted EBITDA for the year ended December 31, 2012 was $14.8 million.

The Company had a net loss of $17.1 million for the year ended December 31, 2011. Total revenue, cost of revenues and gross profit were $89.6 million, $76.5 million and $13.1 million, respectively, for the year ended December 31, 2011. Total selling, general, administrative and other expenses of $29.9 million was composed primarily of salaries, payroll taxes and benefits, sales and marketing, insurance, professional fees, rent, travel, depreciation and amortization expenses. Interest expense related to borrowings under our revolving credit facilities and other debt obligations was $11.5 million for the year ended December 31, 2011. The Company had an income tax benefit of $10.8 million for the year ended December 31, 2011 related to a loss before income taxes of $27.9 million. Adjusted EBITDA for the year ended December 31, 2011 was $5.7 million. The year ended December 31, 2011 was the first full year of inclusion for Coast Crane subsequent to its acquisition in late November 2010.

                                                    For The Years Ended December 31,
                                                2013             2012              2011
Revenues                                   $ 95,537,435     $  98,260,854     $  89,584,979
Cost of revenues                             73,349,613        76,928,734        76,487,741
Gross profit                                 22,187,822        21,332,120        13,097,238
Selling, general, administrative and other
operating expenses                           25,416,354        28,261,263        29,873,990
Loss from operations                         (3,228,532 )      (6,929,143 )     (16,776,752 )
Other expenses, net                         (11,480,191 )     (11,287,991 )     (11,145,897 )
Loss before income taxes                    (14,708,723 )     (18,217,134 )     (27,922,649 )
Benefit for income taxes                     (5,064,126 )      (5,564,179 )     (10,775,749 )
Net loss                                   $ (9,644,597 )   $ (12,652,955 )   $ (17,146,900 )

Business Segments

We have identified three reportable segments: equipment rentals, equipment distribution, and parts and service. These segments are based upon how management of the Company allocates resources and assesses performance.

Year ended December 31, 2013 compared to year ended December 31, 2012

Revenues

Revenues for the year ended December 31, 2013 were $95.5 million, a 2.8% decrease compared to revenues of $98.3 million for the year ended December 31, 2012. The following table provides a summary of the Company's revenues by operating segment:

                                For The Years Ended December 31,
                                     2013                2012         Dollar Change     Percentage Change
SEGMENT REVENUES
Equipment rentals             $      64,945,446     $ 71,231,291     $  (6,285,845 )            (8.8 )%
Equipment distribution               11,211,876        4,087,127         7,124,749             174.3  %
Parts and service                    19,380,113       22,942,436        (3,562,323 )           (15.5 )%
Total revenues                $      95,537,435     $ 98,260,854     $  (2,723,419 )            (2.8 )%


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Equipment Rentals

Equipment rental segment revenues, which represents 68.0% of total revenues, was $64.9 million for the year ended December 31, 2013, an 8.8% decrease from $71.2 million for the year ended December 31, 2012. The equipment rental segment includes rental, transportation and used rental equipment sales.

Equipment rentals revenue, which represented 48.8% of total revenues, was $46.6 million for the year ended December 31, 2013, a 0.2% increase from $46.5 million for the year ended December 31, 2012. The two key drivers of equipment rental revenues are utilization and average rental rates.

While crawler crane utilization has increased year over year, there is still significant room for improvement. Management believes that these current utilization levels are related to the overall economic environment, and not a loss of market share. The construction market has displayed a slow, gradual recovery from historic recession levels, which management believes is the principal factor in our year over year increase in utilization rates, and still has a large opportunity for growth to match prior peak levels. Utilization for crawler cranes, as measured on a "days" basis, increased to 45.4% for the year ended December 31, 2013 compared to 41.2% for the same period in the prior year. Within our crawler crane fleet, we are particularly encouraged by the utilization trends for our hydraulic heavy lift crawler cranes. These hydraulic crawler cranes have higher dollar rental rates and account for approximately 70% of the value of our crawler crane fleet and approximately 50% of the value of our total fleet. Utilization for our fleet of heavy lift hydraulic cranes for the year ended December 31, 2013 and 2012 was 63.9% and 57.9%, respectively.

There was a decrease in average crawler crane rental rate of 0.1% to $17,179 (per crane per rental month) for the year ended December 31, 2013 from $17,195 for the year ended December 31, 2012. This change is primarily the result of the mix of cranes on rent, as opposed to individual rental rate changes by equipment group. Management does not expect a meaningful increase in average rental rates on an individual group basis until utilization rates recover significantly. As a result of utilization and rental rate changes, rental revenue for crawler cranes increased approximately $1.8 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012, and is primarily due to increases in demand in our industrial marine, petrochemical and sewer and water end-markets, which was partially offset by a decline in demand for our power end-market..

Utilization for rough terrain cranes for the year ended December 31, 2013 and 2012 was 55.8% and 63.4%, respectively. Rough terrain cranes benefit from the broad array of markets that they can serve. However, demand declined in the power and transportation end markets for the year ended December 31, 2013 as compared to the year ended December 31, 2012, which was the principal cause for the overall decrease in utilization of rough terrain cranes during 2013 compared to 2012. Boom truck utilization increased to 51.9% for the year ended December 31, 2013 compared to 50.5% for the year ended December 31, 2012. Tower crane utilization was 42.8% and 41.7%% for the self-erecting and city & other tower cranes, respectively, for the year ended December 31, 2013 as compared to 32.4% and 53.4% for the self-erecting and city & other tower cranes, respectively, for the year ended December 31, 2012. Our tower cranes are primarily impacted by the general building end market, and their utilization levels will reflect the strength of that end market.

Transportation revenue, which represents 6.2% of total revenues, was $5.9 million for the year ended December 31, 2013, a 20.9% decrease from $7.5 million for the year ended December 31, 2012. The decrease in transportation revenue is directly attributable to the number of equipment moves and the rental locations of the cranes on rent. In addition, with respect to our larger assets available for rent, during the year ended December 31, 2013, we more aggressively priced transportation services in order to maximize utilization.

Used rental equipment sales revenue was $12.4 million for the year ended December 31, 2013; a $4.8 million or 27.9% decrease compared to the year ended December 31, 2012. Included in total used rental equipment revenues are revenues related to the sale of aerial work platforms of $0.5 million and $4.8 million for the years ended December 31, 2013 and 2012, respectively. The decrease in total used rental equipment sales revenue is primarily attributable to the sale of aerial work platforms during the year ended December 31, 2012 as part of a strategic decision to eliminate this equipment class from our rental fleet. During the year ended December 31, 2013, the Company sold 115 pieces of used rental equipment. During the year ended December 31, 2012, the Company sold 314 pieces of rental equipment.

Equipment Distribution

Equipment distribution segment revenue, which represents 11.7% of total revenue, was $11.2 million for the year ended December 31, 2013, a 174.3% increase from $4.1 million for the year ended December 31, 2012. The increase in equipment distribution segment revenue is due to an increase in the number of sale transactions as compared to the prior period and completing the transition to new equipment suppliers that negatively impacted the prior year equipment distribution revenue. In addition,we


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more aggressively stocked new equipment inventory, which improved our ability to close sales transactions.

Parts and Service

Parts and service segment revenue, which represents 20.3% of total revenue, was $19.4 million for the year ended December 31, 2013, a 15.5% decrease from $22.9 million for the year ended December 31, 2012. The decrease is primarily attributable to a decrease in third party service work performed on customer equipment and a reduction in over-the-counter parts sales primarily due to our transition to represent new manufacturers.

Gross Profit

Gross profit for the year ended December 31, 2013 was $22.2 million, a 4.0%
increase from gross profit of $21.3 million for the year ended December 31,
2012. Gross profit margin was 23.2% for the year ended December 31, 2013
compared to 21.7% for the year ended December 31, 2012. The following table
provides a summary of the Company's gross profit by operating segment:

                                For The Years Ended December 31,          Dollar          Percentage
                                     2013                2012             Change            Change
Segment gross profit (loss)
Equipment rentals             $      15,815,361     $ 14,922,405     $      892,956             6.0  %
Equipment distribution                1,046,151           16,059          1,030,092         6,414.4  %

Parts and service 5,326,310 6,393,656 (1,067,346 ) (16.7 )% Total gross profit $ 22,187,822 $ 21,332,120 $ 855,702 4.0 %

Equipment rentals segment gross profit of $15.8 million for the year ended December 31, 2013 increased $0.9 million or 6.0% as compared to the year ended December 31, 2012. Within the equipment rentals segment, certain revenue streams have inherently higher margins. The gross margin achieved from the revenues provided by equipment rentals is typically higher than those achieved by gain on sale of used rental equipment and transportation. Furthermore, due to the operating leverage of our business model, the margin from equipment rentals improves as the revenue for this line of business increases. Also, there were initiatives implemented in the beginning of 2012 that were geared toward reducing expenses and overhead, which was also a key driver that contributed to the year over year improvement in gross margin. These initiatives included headcount reductions and the divestiture of the Company's aerial work platforms. Gain on the sale of used rental equipment was $3.3 million for the year ended December 31, 2013, a 12.0% increase from $2.9 million for the year ended December 31, 2012. The increase in the gain on the sale of used rental equipment was attributable to the mix of rental assets sold during the year ended December 31, 2013.

Equipment distribution segment gross profit of $1.0 million (9.3% margin) for the year ended December 31, 2013 increased $1.0 million, or 6,414.4%, from $16,059 (0.4% margin) for the year ended December 31, 2012. The increased gross profit and margin are functions of higher profit margins on individual sale transactions, larger sales volume during the year ended December 31, 2013 and completing the transition to new equipment suppliers that negatively impacted the prior year equipment distribution sales volume and, therefore, gross margin.

Parts and service segment gross profit of $5.3 million (27.5% margin) for the year ended December 31, 2013 decreased $1.1 million or 16.7% from $6.4 million (27.9% margin) for the year ended December 31, 2012. The parts and service segment gross profit decrease was driven by lower over-the-counter parts sales and third party service work volume.

Total selling, general, administrative and other expenses for the year ended December 31, 2013 and 2012 were $25.4 million and $28.3 million, respectively. The decrease in selling, general, administrative and other expenses was primarily due to decreases in salary and related benefits expense of $0.6 million, professional, consulting expense and legal expense of $0.9 million, travel expense of $0.3 million, business taxes of $0.2 million and bad debt expense of $0.5 million. Selling, general and administrative expenses include, legal fees, professional fees, bad debt expense, employee benefits, insurance and selling and marketing expenses. Selling, general and administrative and other expenses include $1.4 million and $1.5 million of non-cash stock based compensation expense for the year ended December 31, 2013 and 2012, respectively.

Other income increased to $0.6 million for the year ended December 31, 2013 from $41,230 for the year ended December 31, 2012 primarily due to a $0.5 million gain on the sale of land and buildings that had not been used in the operations of the business for several years.


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Interest expense increased 2.9% to $11.7 million for the year ended December 31, 2013 from $11.3 million for the year ended December 31, 2012. The increase in interest expense was related primarily to a $1.0 million increase in the amount of deferred financing fee amortization as a result of the revolving credit facility amendments entered into in March 2013 offset by interest charged on lower average debt balances in 2013.

Income tax benefit was $5.1 million for the year ended December 31, 2013 compared to a $5.6 million for the year ended December 31, 2012. The decrease in income tax benefit is due to a decrease in the pre-tax loss. The effective tax rates were 34.4% and 30.5% for the year ended December 31, 2013 and 2012, respectively. The effective tax rate increased from the prior year due to an increase in state tax rates resulting primarily from changes in apportionment.

Essex had 236 full-time employees at December 31, 2013 compared to 250 full-time employees at December 31, 2012.

Year ended December 31, 2012 compared to year ended December 31, 2011

Revenues

Revenues for the year ended December 31, 2012 were $98.3 million, a 9.7% increase compared to revenue of $89.6 million for the year ended December 31, 2011. The following table provides a summary of the Company's revenues by operating segment:

                                For The Years Ended December 31,
                                     2012                2011         Dollar Change     Percentage Change
SEGMENT REVENUES
Equipment rentals             $      71,231,291     $ 53,907,588     $  17,323,703              32.1  %
Equipment distribution                4,087,127       14,206,479       (10,119,352 )           (71.2 )%
Parts and service                    22,942,436       21,470,912         1,471,524               6.9  %
Total revenues                $      98,260,854     $ 89,584,979     $   8,675,875               9.7  %

Equipment Rentals

Equipment rental segment revenues, which represent 72.5% of total revenues, was $71.2 million for the year ended December 31, 2012, a 32.1% increase from $53.9 million for the year ended December 31, 2011. The equipment rental segment includes rental, transportation, rental equipment repairs and used rental equipment sales.

Rental revenues, which represented 47.3% of total revenues and are the key driver of revenues in our equipment rentals segment, were $46.5 million for the year ended December 31, 2012, an 10.8% increase from $42.0 million for the year . . .

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