UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2006

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

For the transition period from            to

H&E EQUIPMENT SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of Incorporation)		81-0553291 (I.R.S. Employer Identification No.)
11100 Mead Road, Suite 200, Baton Rouge, Louisiana 70816 (Address of principal executive offices, including zip code)		(225) 298-5200 (Registrant’s telephone number, including area code)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-Accelerated filer þ

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

Number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of August 10, 2006 was 38,192,094 shares.

 

 

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
JUNE 30, 2006

		Page
PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements:			1
Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005			1
Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005			2
Condensed Consolidated Statements of Member’s Deficit and Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2006			3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2006 and 2005			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
PART II. OTHER INFORMATION			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			38
Signatures			39
2006 Stock-Based Incentive Compensation Plan
Certification pursuant to Section 302
Certification pursuant to Section 302
Certification pursuant to 18 U.S.C. Section 1350

Special Note Regarding Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” “foresee” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

     Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

	•		general economic conditions and construction activity in the markets where we operate in North America;
	•		relationships with new equipment suppliers;
	•		increased maintenance and repair costs;
	•		our substantial leverage;
	•		the risks associated with the expansion of our business;
	•		our possible inability to integrate any businesses we acquire;
	•		competitive pressures;
	•		compliance with laws and regulations, including those relating to environmental matters and corporate governance matters; and
	•		other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005 and under Item 1A — “Risk Factors” in this Quarterly Report on Form 10-Q.

     Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements after we file this Quarterly Report, whether as a result of any new information, future events or otherwise. Investors, potential investors and other readers are urged to consider the above mentioned factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance. For a more detailed discussion of some of the foregoing risk and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005 and Item 1A — “Risk Factors” in this Quarterly Report on Form 10-Q, as well as other reports and registration statements filed by us with the SEC. All of our annual, quarterly and current reports and amendments thereto, filed with the SEC are available on our website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our website at www.he-equipment.com.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Balances at
		June 30,				December 31,
		2006				2005
		(Unaudited)
ASSETS
Cash and cash equivalents		$	24,641			$	5,627
Receivables, net of allowance for doubtful accounts of $2,586 and $2,364, respectively			107,901				99,523
Inventories, net of reserve for obsolescence of $849 and $975, respectively			112,366				81,093
Prepaid expenses and other assets			3,126				1,378
Rental equipment, net of accumulated depreciation of $142,001 and $133,943, respectively			393,445				308,036
Property and equipment, net of accumulated depreciation of $23,997 and $21,142, respectively			28,122				18,284
Deferred financing costs and other intangible assets, net of accumulated amortization of $8,006 and $7,250, respectively			7,286				8,184
Goodwill			30,454				8,572
Total assets		$	707,341			$	530,697
LIABILITIES, MEMBERS’ DEFICIT AND STOCKHOLDERS’ EQUITY
Liabilities:
Amounts due on senior secured credit facility		$	—			$	106,451
Accounts payable			77,411				56,173
Manufacturer flooring plans payable			116,983				93,728
Accrued expenses payable and other liabilities			29,988				22,798
Related party obligation			764				869
Notes payable			1,190				521
Senior secured notes, net of original issue discount of $1,066 and $1,127, respectively			198,934				198,873
Senior subordinated notes, net of original issue discount of $8,624 and $8,943, respectively			44,376				44,057
Deferred income taxes			8,561				645
Deferred compensation payable			3,158				11,722
Total liabilities			481,365				535,837
Commitments and contingencies Members’ deficit			—				(5,140	)
Stockholders’ equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued at June 30, 2006 and December 31, 2005, respectively			—				—
Common stock, $0.01 par value, 175,000,000 shares authorized; 38,192,094 and no shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively			382				—
Additional paid-in capital			204,021				—
Retained earnings			21,573				—
Total stockholders’ equity			225,976				—
Total liabilities, members’ deficit and stockholders’ equity		$	707,341			$	530,697

The accompanying notes are an integral part of these condensed consolidated financial statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues:
Equipment rentals		$	64,011			$	45,576			$	118,006			$	86,167
New equipment sales			56,945				33,417				112,660				63,715
Used equipment sales			36,065				23,962				67,719				49,581
Parts sales			21,237				17,792				40,550				34,216
Service revenues			13,374				9,887				25,708				19,050
Other			10,904				7,096				20,103				13,551
Total revenues			202,536				137,730				384,746				266,280
Cost of revenues:
Rental depreciation			19,170				12,876				36,030				25,040
Rental expense			10,476				11,490				21,088				23,009
New equipment sales			49,733				29,557				98,294				56,020
Used equipment sales			25,746				17,922				49,545				37,718
Parts sales			15,080				12,698				28,604				24,133
Service revenues			4,731				3,747				9,298				6,993
Other			9,305				7,274				17,569				14,471
Total cost of revenues			134,241				95,564				260,428				187,384
Gross profit			68,295				42,166				124,318				78,896
Selling, general and administrative expenses			33,384				27,317				74,427				53,123
Gain (loss) on sales of property and equipment, net			60				(144	)			159				(103	)
Income from operations			34,971				14,705				50,050				25,670
Other income (expense):
Interest expense			(10,115	)			(10,321	)			(20,282	)			(20,425	)
Other, net			355				80				430				170
Total other expense, net			(9,760	)			(10,241	)			(19,852	)			(20,255	)
Income before provision for income taxes			25,211				4,464				30,198				5,415
Provision for income taxes			5,408				171				6,475				171
Net income		$	19,803			$	4,293			$	23,723			$	5,244
Net income per common share:
Basic		$	0.52			$	0.17			$	0.66			$	0.21
Diluted		$	0.52			$	0.17			$	0.66			$	0.21
Weighted average common shares outstanding
Basic			38,070				25,492				35,777				25,492
Diluted			38,096				25,492				35,790				25,492

The accompanying notes are an integral part of these condensed consolidated financial statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

										Additional								Total
		Common Stock								Paid-in				Retained				Stockholders’				Members’
		Shares				Amount				Capital				Earnings				Equity				Deficit
Balances at January 1, 2006			—			$	—			$	—			$	—			$	—			$	(5,140	)
Net income for the period January 1, 2006 through February 2, 2006			—				—				—				—				—				2,150
Effect of the Reorganization Transactions			25,492,019				255				(3,245	)			—				(2,990	)			2,990
Common stock issued on February 3, 2006 pursuant to initial public offering, net of $15,915 issue costs			12,578,125				126				206,892				—				207,018				—
Issuance of common stock			121,950				1				—				—				1				—
Stock-based compensation			—				—				374				—				374				—
Net income for the period February 3, 2006 through June 30, 2006			—				—				—				21,573				21,573				—
Balances at June 30, 2006			38,192,094			$	382			$	204,021			$	21,573			$	225,976			$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2006				2005
Cash flows from operating activities:
Net income		$	23,723			$	5,244
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation on property and equipment			3,263				2.399
Depreciation on rental equipment			36,030				25,041
Amortization of loan discounts and deferred financing costs			1,445				1,355
Amortization of other intangible assets			23				70
Provision for losses on accounts receivable			1,001				630
Provision for inventory obsolescence			17				30
Provision for deferred income taxes			5,843				—
Non-cash compensation expense			374				—
(Gain) loss on sales of property and equipment, net			(159	)			102
Gain on sales of rental equipment, net			(16,293	)			(10,386	)
Changes in operating assets and liabilities, net of impact of acquisition:
Receivables, net			(2,078	)			(3,001	)
Inventories			(52,224	)			(26,182	)
Prepaid expenses and other assets			(3,089	)			(1,833	)
Accounts payable			20,750				7,000
Manufacturer flooring plans payable			23,255				5,801
Accrued expenses payable and other liabilities			3,368				3,769
Deferred compensation payable			(8,564	)			576
Net cash provided by operating activities			36,685				10,615
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			(56,961	)			—
Purchases of property and equipment			(10,171	)			(4,159	)
Purchases of rental equipment			(105,453	)			(63,402	)
Proceeds from sales of property and equipment			382				568
Proceeds from sales of rental equipment			54,390				39,450
Net cash used in investing activities			(117,813	)			(27,543	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issue costs			207,018				—
Borrowings on senior secured credit facility			487,673				284,316
Payments on senior secured credit facility			(594,124	)			(263,200	)
Payment of deferred financing costs			(190	)			(10	)
Payments of related party obligation			(150	)			(150	)
Principal payments of notes payable			(85	)			(142	)
Payments on capital lease obligations			—				(1,120	)
Net cash provided by financing activities			100,142				19,694
Net increase in cash and cash equivalents			19,014				2,766
Cash, beginning of period			5,627				3,358
Cash and cash equivalents, end of period		$	24,641			$	6,124

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the six months ended June 30, 2006 and 2005
(Unaudited)
(Amounts in thousands)

		Six Months Ended
		June 30,
		2006				2005
Supplemental schedule of noncash investing activities:
Assets transferred from new and used inventory to rental fleet		$	21,849			$	18,077
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	19,027			$	19,731
Income taxes		$	500			$	171

     As of June 30, 2006 and June 30, 2005, we had $117.0 million and $57.0 million, respectively, in manufacturer flooring plans payable outstanding, which are used to finance purchases of inventory and rental equipment.

The accompanying notes are an integral part of these condensed consolidated financial statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
June 30, 2006

(1) Organization and Nature of Operations

Basis of Presentation

     In connection with our initial public offering of common stock in February 2006 (see note 3 to the condensed consolidated financial statements for further information regarding our initial public offering), we converted H&E Equipment Services L.L.C. (“H&E LLC”), a Louisiana limited liability company and the wholly-owned operating subsidiary of H&E Holding L.L.C. (“Holdings”), into H&E Equipment Services, Inc., a Delaware corporation. Prior to our initial public offering, our business was conducted through H&E LLC. In order to have an operating Delaware corporation as the issuer of our initial public offering, immediately prior to the closing of the initial public offering, on February 3, 2006, H&E LLC and Holdings merged with and into us (H&E Equipment Services, Inc.), with us surviving the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and Holdings no longer existed. In these transactions (collectively, the “Reorganization Transactions”), holders of preferred limited liability company interests and holders of common limited liability company interests in H&E Holdings received shares of our common stock. All references to common stock share and per share amounts included in our condensed consolidated statements of income for the three and six months ended June 30, 2006 and 2005 have been retroactively adjusted to reflect the Reorganization Transactions as if the Reorganization Transactions had taken place as of the beginning of the earliest period presented.

     Our condensed consolidated financial statements include the financial position and results of operations of H&E Equipment Services, Inc. and its wholly-owned subsidiaries H&E Finance Corp., GNE Investments, Inc., Great Northern Equipment, Inc., and our recent acquisition, as described in note 4 to the condensed consolidated financial statements, of Eagle High Reach Equipment, Inc. (H&E California Holdings, Inc.) and Eagle High Reach Equipment, LLC (H&E Equipment Services (California LLC), consummated on February 28, 2006, collectively referred to herein as “we” or “us” or “our” or the “Company.”

     The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Certain items in the prior periods have been reclassified to make the presentation consistent with the current reporting periods. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006, and therefore, the results and trends in these interim condensed consolidated financial statements may not be the same for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2005.

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

Nature of Operations

     As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and service support for four core categories of specialized equipment: (1) hi-lift or aerial platform equipment, (2) cranes, (3) earthmoving equipment and (4) industrial lift trucks. By providing equipment sales, rental, on-site parts and repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full-service approach provides us with multiple points of customer contact, enables us to maintain an extremely high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and service operations.

(2) Significant Accounting Policies

     We describe our significant accounting policies in note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. During the quarter ended June 30, 2006, the Company began investing portions of its available cash on hand in cash equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Use of Estimates

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

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment”, (“SFAS 123(R)”), which revises SFAS No. 123 and supersedes APB Opinion No. 25 and related interpretations. SFAS No. 123(R) requires all share-based payment transactions, including grants of stock options, restricted stock awards, performance-based awards, shares appreciation rights and employee stock purchase plans to be valued at fair value on the date of grant, and to be expensed over the requisite service period. SFAS No. 123(R) is effective for the annual reporting period beginning after June 15, 2005 and requires one of two transition methods to be applied. We adopted SFAS 123 (R) on January 1, 2006. Please see note 5 to the condensed consolidated financial statements for further discussion related to the Company’s adoption of SFAS No. 123(R).

     In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20 (“APB 20”), “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Charges in Interim Financial Statements.” SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a correction of errors in previously issued financial statements should be termed a “restatement.” APB 20 previously required most voluntary changes in accounting principle to be recognized by including in net income at the period of change the cumulative effect of changing to the new accounting principle. In addition, SFAS 154 carries forward without change the guidance contained in APB 20 for reporting a correction of an error in previously issued financial statements and a change in accounting estimate. We adopted this new standard on January 1, 2006.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109 (“SFAS 109”). FIN 48 clarifies the application of SFAS 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management is currently evaluating the impact, if any, that the adoption of FIN 48 will have on the Company’s financial position, results of operations and cash flows.

(3) Initial Public Offering and Use of Proceeds

     We completed an initial public offering of our common stock, par value $.01 per share, on February 3, 2006. In the offering, we sold 12,578,125 shares for an aggregate offering price of $226.4 million. Net proceeds to us, after deducting underwriting discounts and commissions and offering expenses, totaled approximately $207.0 million. Aggregate underwriting discounts and commissions totaled approximately $15.9 million and aggregate offering expenses totaled approximately $3.6 million.

     We used the net offering proceeds to us of $207.0 million as follows:

	•		$56.9 million to complete our acquisition of Eagle High Reach Equipment, Inc. and all of the equity interests of its subsidiary, Eagle High Reach Equipment, LLC (together, “Eagle”), on February 28, 2006. For information on the Eagle acquisition, see note 4 to the condensed consolidated financial statements.
	•		$30.3 million to purchase rental equipment under operating leases;
	•		$8.6 million to pay deferred compensation owed to one of our current executives and a former executive; and
	•		$96.6 million to repay outstanding principal indebtedness under our senior secured credit facility.

Additionally, we paid $8.0 million to Bruckmann, Rosser, Sherill & Co., L.L.C. (an affiliate of Bruckmann, Rosser, Sherill & Co., L.P. and Bruckmann, Rosser, Sherill & Co. II, L.P., two of our principal stockholders) in connection with the termination of a management services agreement. Remaining net proceeds of approximately $6.6 million were used for general corporate purposes.

(4) Acquisition

     We completed, effective as of February 28, 2006, the previously announced acquisition of all of the capital stock of Eagle High Reach Equipment, Inc. and all of the equity interests of its subsidiary, Eagle High Reach Equipment, LLC for estimated consideration of approximately $66.2 million, consisting of cash paid of $59.9 million, liabilities assumed of $3.6 million, liabilities incurred of $2.1 million, and transaction costs of $0.6 million. The purchase price is subject to post closing adjustments and certain escrows. The Eagle purchase price was determined based on the expected cash flows from the Eagle business and negotiation with the sellers. The purchase price was funded out of the proceeds from our recently completed initial public offering (see note 3 to the condensed consolidated financial statements for further information on our initial public offering). Prior to the acquisition Eagle was a privately-held construction and industrial equipment rental company. Eagle serves the southern California construction and industrial markets out of four locations. This acquisition marks our initial entry into the southern California market and is consistent with our business strategy. For further information on our business strategy, see Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005.

     The Eagle acquisition has been accounted for using the purchase method of accounting. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based an estimate of their fair values as determined by a valuation performed by an independent national firm. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets has been allocated to goodwill. Goodwill generated from the acquisition was recognized given the expected contribution of Eagle to the overall corporate strategy. We estimate that approximately $9.9 million of the goodwill acquired will be tax deductible. Our purchase price allocation is subject to adjustment as post closing adjustments, if any, and certain escrows are finalized during the quarterly period ended September 30, 2006. Additionally, we are in the process of evaluating the allocation of Eagle goodwill to our operating segments. Our operating results for the six month period ended June 30, 2006 include the operating results of Eagle since the date of acquisition, February 28, 2006.

     The following table summarizes the estimated preliminary allocation based on fair values of the Eagle assets acquired and liabilities assumed in February 2006 (amount in thousands).

Cash		$	32
Receivables			7,300
Inventories			915
Rental equipment			32,235
Property and equipment			3,153
Prepaid expenses and other assets			654
Goodwill			21,883
Accounts payable			(483	)
Accrued expenses payable and other liabilities			(2,349	)
Deferred income taxes			(2,073	)
Notes payable			(755	)
Net assets acquired		$	60,512

     Our estimated preliminary allocation as of March 31, 2006, included in our Form 10-Q/A for the quarterly period then ended allocated approximately $17.5 million and $3.3 million to goodwill and deferred income taxes, respectively. The approximate $4.4 million increase in goodwill and $1.3 million decrease in deferred income taxes is largely the result of the finalization of the aforementioned valuation performed by an independent national firm. In that final valuation report, the fair market value allocated to the acquired value of Eagle’s rental fleet was $32.2 million, a decrease of approximately $5.2 million from the $37.4 million estimated preliminary allocation to those assets.

     The following table contains pro forma condensed consolidated statements of income information for the three month and six month periods ended June 30, 2006 and 2005, as if the Eagle transaction occurred at the beginning of each respective period (amounts in thousands except per share data).

		Three Month Period Ended								Six Month Period Ended
		June 30,								June 30,
		2006				2005				2006				2005
Total revenues		$	202,536			$	146,056			$	390,074			$	281,761
Gross profit			68,295				45,117				126,092				86,608
Operating income			34,971				16,087				49,342				28,864
Net income			19,803				5,190				23,374				6,205
Basic net income per common share		$	0.52			$	0.20			$	0.65			$	0.24
Diluted net income per common share		$	0.52			$	0.20			$	0.65			$	0.24

     The pro forma information above is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred had the Eagle transaction occurred as presented. Further, the above pro forma amounts do not consider any potential synergies or integration costs that may result from the transaction. In addition, future results may vary significantly from the results reflected in such pro forma information.

(5) Stock-Based Compensation

     We adopted our 2006 Stock-Based Incentive Compensation Plan (the “Stock Incentive Plan”) in January 2006 prior to the Company’s initial public offering of common stock. The Stock Incentive Plan was further amended and restated with the approval of our stockholders at the 2006 annual meeting of the stockholders of the Company to provide for the inclusion of non-employee directors as persons eligible to receive awards under the Stock Incentive Plan. Prior to the adoption of the Stock Incentive Plan, no share-based payment arrangements existed. The Stock Incentive Plan is administered by the Compensation Committee of our Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions, performances measures, if any, and other provisions of the award. Under the Stock Incentive Plan, we may offer deferred shares or restricted shares of our common stock and grant options, including both incentive stock options and nonqualified stock options, to purchase shares of our common stock.

     Statement of Financial Accounting Standard No. 123 (revised), (“SFAS 123(R)”), “Share-Based Payment,” became effective for us in the first quarter of our current fiscal year ending December 31, 2006. Under the provisions of SFAS 123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant).

Non-vested Stock

     On February 22, 2006, we issued non-vested stock grants for 121,950 shares of our common stock. These stock awards may not be sold or otherwise transferred until certain restrictions have lapsed. The unrecognized compensation cost related to these awards is expected to be expensed over the period the restrictions lapse (one to three years). Compensation expense was determined based on the $24.60 market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of June 30, 2006, we have unrecognized compensation expense of $2.7 million associated with these awards. Compensation expense related to these awards included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2006 was $0.3 million and $0.4 million, respectively. At June 30, 2006, there were 121,950 non-vested shares outstanding.

Stock Options

     On February 22, 2006, stock options for 45,000 shares of our common stock were granted by the Company, subject to stockholder approval of the amendment to and restatement of the Stock Incentive Plan at the Company’s annual meeting of stockholders, with an exercise price of $24.60 per share, the market price of our stock on the date of grant. On June 6, 2006, the Company’s stockholders approved the Stock Incentive Plan. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards. The following assumptions were used in determining the estimated fair value for these awards:

Risk-free interest rate			5.00	%
Expected life of options (in years)			6.0
Expected volatility			35.00	%
Expected annual dividend yield			—

     The assumptions above are based on multiple factors. Since the Company is a new public entity with limited historical data on the price of its publicly traded common shares and has no history of share-based payments exercise activity, the Company, as provided for in SEC Staff Accounting Bulletin No. 107, used a simplified method for determining the options expected term and based its estimate of expected volatility on the historical, expected or implied volatility of similar entities within our industry whose share or option prices are publicly available.

     At June 30, 2006, there was $0.8 million of unrecognized compensation cost related to these stock options awards that is expected to be recognized over a period of 2.7 years. Compensation expense related to these awards included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income was $21,000 for both the three and six months ended June 30, 2006. At June 30, 2006, 45,000 options were outstanding with a grant-date value of $24.60 per share. The aggregate intrinsic value of options outstanding at June 30, 2006 was $1.1 million. None of the options outstanding were exercisable as of June 30, 2006.

     Shares available for future stock-based payment awards under our Stock Incentive Plan were 4,401,467 shares as of June 30, 2006.

(6) Earnings per Share

     Earnings per common share for the three and six months ended June 30, 2006 and 2005 are based on the weighted average number of common shares outstanding during the period and have been retroactively adjusted for the three and six month periods ended June 30, 2006 and 2005, to reflect the Reorganization Transactions as if the Reorganization Transactions had occurred at the beginning of the earliest period presented. The following table sets forth the computation of basic and diluted net income per common share for the three and six months ended June 30, 2006 and 2005 (amounts in thousands, except per share amounts).

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2006				2005				2006				2005
Basic net income per share:
Net income		$	19,803			$	4,293			$	23,723			$	5,244
Weighted average number of common shares outstanding			38,070				25,492				35,777				25,492
Net income per common share — basic		$	0.52			$	0.17			$	0.66			$	0.21
Diluted net income per share:
Net income		$	19,803			$	4,293			$	23,723			$	5,244
Weighted average number of common shares outstanding			38,070				25,492				35,777				25,492
Effect of dilutive securities:
Effect of dilutive stock options and non-vested stock			26				—				13				—
Weighted average number of shares outstanding — diluted			38,096				25,492				35,790				25,492
Net income per common share — diluted		$	0.52			$	0.17			$	0.66			$	0.21

(7) Senior Secured Credit Facility

     On February 3, 2006, the senior secured credit agreement dated June 17, 2002, as amended, by and among the Company, Great Northern Equipment, Inc. (together with the Company, the “Borrowers”), Eagle High Reach Equipment, LLC, GNE Investments, Inc., H&E Finance Corp., General Electric Capital Corporation and the Lenders Party thereto (the “Credit Agreement”), was amended primarily to (1) approve, as described elsewhere in this Quarterly Report on Form 10-Q, the merger of H&E Holdings and H&E LLC, with and into H&E Equipment Services, Inc., with H&E Equipment Services, Inc. surviving the reincorporation merger as the operating company, and to effectuate H&E Equipment Services, Inc. as a “Borrower” under the terms of the senior secured credit facility; and (2) require that the proceeds of certain stock and debt issuances in excess of $1,000,000 in the aggregate be used to prepay amounts outstanding under the senior secured credit facility in an amount equal to such proceeds. We did not pay an amendment fee relating to this amendment.

     On February 6, 2006, we used a portion of the proceeds from our initial public offering to pay $96.6 million of our total outstanding principal indebtedness related to the senior secured credit facility. Accrued interest in the amount of $0.2 million was subsequently paid in March 2006. At June 30, 2006, we had no borrowings under the senior secured credit facility and we had $156.7 million of borrowing availability, net of $ 8.3 million of issued letters of credit.

     On March 20, 2006, the senior secured credit facility was further amended to (1) adjust the “Applicable Revolver Index Margin”, the “Applicable Revolver LIBOR Margin” and the “Applicable L/C Margin” to reflect tiered pricing based upon our monthly computed “Leverage Ratio” applied on a prospective basis commencing at least one day after the date of delivery to the “Lenders” of the monthly unaudited “Financial Statements” beginning after March 31, 2006; (2) adjust the “Applicable Unused Line Fee Margin” to reflect tiered pricing based upon our “Excess Availability Percentage” computed on the first day of a calendar month applied on a prospective basis commencing with the first adjustment to the “Applicable Revolver Index Margin” and “Applicable Revolver LIBOR

Margin,”; (3) eliminate the $16.5 million block on availability of assets; (4) revise the financial covenants to (i) add a covenant requiring maintenance of a minimum “Fixed Charge Coverage Ratio” of 1.10 to 1.00, which is tested at the end of each fiscal month only if a “Covenant Liquidity Event” has occurred and is then continuing and (ii) eliminate all other “Financial Covenants”; and (5) revise the definitions of various other capitalized terms contained within the original senior secured credit agreement. In connection with this amendment, we paid fees to the “Lenders” of $190,000.

     As of July 12, 2006, the Company was granted a waiver (the “Waiver”) under the Credit Agreement. Pursuant to the Waiver, our lenders under the Credit Agreement have waived our non-compliance with, and the effects of our non-compliance under, various representations and non-financial covenants contained in the Credit Agreement affected by the accounting adjustment in connection with our restatement of our consolidated financial statements for the three months ended March 31, 2006 contained in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006. As a result of the restatement, among other things, we would no longer be able to make the representations under the Credit Agreement concerning the conformity with GAAP of our previously delivered financial statements, or confirm our prior compliance with certain obligations concerning the maintenance of our books and records in accordance with GAAP. Because the restatement does not result in our having breached the financial covenant in the Credit Agreement, the Waiver does not waive or modify the financial covenant. As a result of the Waiver, we continue to have full access to our revolving credit facility under the Credit Agreement.

     On August 4, 2006, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), amending and restating the Company’s Credit Agreement pursuant to which, among other things, (i) the principal amount of availability of the credit facility was increased from $165.0 million to $250.0 million; (ii) the “Applicable Unused Line Fee Margin” (as defined in the Amended Credit Agreement) in respect of undrawn commitments was lowered to 0.25%; (iii) the advance rate on rental fleet assets from the lesser of 100% of net book value or 80% of orderly liquidation value was changed to the lesser of 100% of net book value or 85% of orderly liquidation value; (iv) the maturity date of the facility was extended from February 10, 2009 to August 4, 2011; and (v) H&E Equipment Services (California), LLC was added as a borrower. The Company paid $1.4 million to the “Lenders” in connection with this Amended Credit Agreement and estimate other transaction costs to be paid of approximately $0.6 million. As of August 10, 2006, we had $14.6 million of outstanding borrowings under our senior secured credit facility with $227.1 million of additional borrowing availability, net of $8.3 million of issued standby letters of credit. As of June 30, 2006, the Company was in compliance with its financial covenant under the senior secured credit facility.

(8) Segment Information

     We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and service revenue. These segments are based upon how management of the Company allocates resources and assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. There were no sales between segments for any of the periods presented. Selling, general and administrative expenses as well as all other income and expense items below gross profit are not generally allocated to reportable segments.

     The Company does not compile discrete financial information by its segments other than the information presented below. The following table presents information about the Company’s reportable segments (amounts in thousands).

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Revenues:
Equipment rentals		$	64,011			$	45,576			$	118,006			$	86,167
New equipment sales			56,945				33,417				112,660				63,715
Used equipment sales			36,065				23,962				67,719				49,581
Parts sales			21,237				17,792				40,550				34,216

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Service revenue			13,374				9,887				25,708				19,050
Total segmented revenues			191,632				130,634				364,643				252,729
Non-segmented revenues			10,904				7,096				20,103				13,551
Total revenues		$	202,536			$	137,730			$	384,746			$	266,280
Gross Profit:
Equipment rentals		$	34,365			$	21,210			$	60,888			$	38,118
New equipment sales			7,212				3,860				14,366				7,695
Used equipment sales			10,319				6,040				18,174				11,863
Parts sales			6,157				5,094				11,946				10,083
Service revenue			8,643				6,140				16,410				12,057
Total segmented gross profit			66,696				42,344				121,784				79,816
Non-segmented gross profit (loss)			1,599				(178	)			2,534				(920	)
Total gross profit		$	68,295			$	42,166			$	124,318			$	78,896

		June 30,				December 31,
		2006				2005
Balances at
Segment identified assets:
Equipment sales		$	91,653			$	62,344
Equipment rentals			393,446				308,036
Parts and service			20,713				18,749
Total segment identified assets			505,812				389,129
Non-segment identified assets			201,529				141,568
Total assets		$	707,341			$	530,697

     The Company operates primarily in the United States and had minimal international sales for any of the periods presented. No one customer accounted for more than 10% of the Company’s revenues on an overall or segment basis for any of the periods presented.

(9) Condensed Consolidating Financial Information of Guarantor Subsidiaries

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

     The consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial statements for H&E Finance Corp., the subsidiary co-issuer, are not included within the consolidating financial statements because H&E Finance Corp. has no assets or operations. The financial statements of H&E Equipment Services (California), LLC and H&E California Holdings, Inc. included are from the date of the Company’s acquisition of Eagle, February 28, 2006, to June 30, 2006 and as of June 30, 2006.

CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)

		As of June 30, 2006
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
Assets:
Cash and cash equivalents		$	24,504			$	137			$	—			$	24,641
Receivables, net			98,409				9,492				—				107,901
Inventories, net			107,074				5,292				—				112,366
Prepaid expenses and other assets			2,717				409				—				3,126
Rental equipment, net			345,798				47,647				—				393,445
Property and equipment, net			24,103				4,019				—				28,122
Deferred financing costs, net			7,286				—				—				7,286
Investment in guarantor subsidiaries			8,852				—				(8,852	)			—
Goodwill			30,454				—				—				30,454
Total assets		$	649,197			$	66,996			$	(8,852	)		$	707,341
Liabilities and Stockholders’ Equity:
Amount due on senior secured credit facility		$	—			$	—			$	—			$	—
Accounts payable			77,266				145				—				77,411
Manufacturer flooring plans payable			116,983				—				—				116,983
Accrued expenses payable and other liabilities			(27,260	)			57,248				—				29,988
Intercompany balance			—				—				—				—
Related party obligation			764				—				—				764
Notes payable			439				751				—				1,190
Senior secured notes, net of discount			198,934				—				—				198,934
Senior subordinated notes, net of discount			44,376				—				—				44,376
Deferred income taxes			8,561				—				—				8,561
Deferred compensation payable			3,158				—				—				3,158
Total liabilities			423,221				58,144				—				481,365
Stockholders’ equity			225,976				8,852				(8,852	)			225,976
Total liabilities and stockholders’ equity		$	649,197			$	66,996			$	(8,852	)		$	707,341

CONDENSED CONSOLIDATING BALANCE SHEET
(Amounts in thousands)

		As of December 31, 2005
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
Assets:
Cash		$	5,610			$	17			$	—			$	5,627
Receivables, net			95,427				4,096				—				99,523
Inventories, net			76,533				4,560				—				81,093
Prepaid expenses and other assets			1,378				—				—				1,378
Rental equipment, net			298,708				9,328				—				308,036
Property and equipment, net			17,526				758				—				18,284
Deferred financing costs, net			8,184				—				—				8,184
Investment in guarantor subsidiaries			7,025				—				(7,025	)			—
Goodwill			8,572				—				—				8,572
Total assets		$	518,963			$	18,759			$	(7,025	)			530,697
Liabilities and Member’s Equity (Deficit):
Amount due on senior secured credit facility		$	102,980			$	3,471			$	—			$	106,451
Accounts payable			56,173				—				—				56,173
Manufacturer flooring plans payable			93,728				—				—				93,728
Accrued expenses payable and other liabilities			22,696				102				—				22,798
Intercompany balance			(8,161	)			8,161				—				—
Related party obligation			869				—				—				869
Notes payable			521				—				—				521
Senior secured notes, net of discount			198,873				—				—				198,873
Senior subordinated notes, net of discount			44,057				—				—				44,057
Deferred income taxes			645				—				—				645
Deferred compensation payable			11,722				—				—				11,722
Total liabilities			524,103				11,734				—				535,837
Members’ equity (deficit)			(5,140	)			7,025				(7,025	)			(5,140	)
Total liabilities and members’ equity (deficit)		$	518,963			$	18,759			$	(7,025	)		$	530,697

CONDENSED CONSOLIDATING STATEMENT OF INCOME
(Amounts in thousands)

		Three Months Ended June 30, 2006
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
Revenues:
Equipment rentals		$	54,536			$	9,475			$	—			$	64,011
New equipment sales			55,439				1,506				—				56,945
Used equipment sales			33,519				2,546				—				36,065
Parts sales			20,435				802				—				21,237
Service revenue			12,936				438				—				13,374
Other			9,660				1,244				—				10,904
Total revenues			186,525				16,011				—				202,536
Cost of revenues:
Rental depreciation			16,752				2,418				—				19,170
Rental expense			8,915				1,561				—				10,476
New equipment sales			48,529				1,204				—				49,733
Used equipment sales			23,865				1,881				—				25,746
Parts sales			14,544				536				—				15,080
Service revenue			4,600				131				—				4,731
Other			8,166				1,139				—				9,305
Total cost of revenues			125,371				8,870				—				134,241
Gross profit:
Equipment rentals			28,869				5,496				—				34,365
New equipment sales			6,910				302				—				7,212
Used equipment sales			9,654				665				—				10,319
Parts sales			5,891				266				—				6,157
Service revenue			8,336				307				—				8,643
Other			1,494				105				—				1,599
Gross profit			61,154				7,141				—				68,295
Selling, general and administrative expenses			28,870				4,514				—				33,384
Equity in earnings of guarantor subsidiaries			1,359				—				(1,359	)			—
Gain on sale of property and equipment			60				—				—				60
Income (loss) from operations			33,703				2,627				(1,359	)			34,971
Other income (expense):
Interest expense			(8,839	)			(1,276	)			—				(10,115	)
Other, net			347				8				—				355
Total other expense, net			(8,492	)			(1,268	)			—				(9,760	)
Income before income taxes			25,211				1,359				(1,359	)			25,211
Income tax provision			5,408				—				—				5,408
Net income		$	19,803			$	1,359			$	(1,359	)		$	19,803

CONDENSED CONSOLIDATING STATEMENT OF INCOME
(Amounts in thousands)

		Three Months Ended June 30, 2005
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
Revenues:
Equipment rentals		$	43,808			$	1,768			$	—			$	45,576
New equipment sales			31,571				1,846				—				33,417
Used equipment sales			21,814				2,148				—				23,962
Parts sales			17,212				580				—				17,792
Service revenue			9,537				350				—				9,887
Other			6,772				324				—				7,096
Total revenues			130,714				7,016				—				137,730
Cost of revenues:
Rental depreciation			12,321				555				—				12,876
Rental expense			11,255				235				—				11,490
New equipment sales			27,977				1,580				—				29,557
Used equipment sales			16,367				1,555				—				17,922
Parts sales			12,292				406				—				12,698
Service revenue			3,648				99				—				3,747
Other			6,960				314				—				7,274
Total cost of revenues			90,820				4,744				—				95,564
Gross profit:
Equipment rentals			20,232				978				—				21,210
New equipment sales			3,594				266				—				3,860
Used equipment sales			5,447				593				—				6,040
Parts sales			4,920				174				—				5,094
Service revenue			5,889				251				—				6,140
Other			(188	)			10				—				(178	)
Gross profit			39,894				2,272				—				42,166
Selling, general and administrative expenses			25,854				1,463				—				27,317
Equity in loss of guarantor subsidiaries			513				—				(513	)			—
Gain on sale of property and equipment			(144	)			—				—				(144	)
Income from operations			14,409				809				(513	)			14,705
Other income (expense):
Interest expense			(10,024	)			(297	)			—				(10,321	)
Other, net			79				1				—				80
Total other expense, net			(9,945	)			(296	)			—				(10,241	)
Income before provision for income taxes			4,464				513				(513	)			4,464
Provision for income taxes			171				—				—				171
Net income		$	4,293			$	513			$	(513	)		$	4,293

CONDENSED CONSOLIDATING STATEMENT OF INCOME
(Amounts in thousands)

		Six Months Ended June 30, 2006
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
Revenues:
Equipment rentals		$	104,525			$	13,481			$	—			$	118,006
New equipment sales			109,285				3,375				—				112,660
Used equipment sales			63,083				4,636				—				67,719
Parts sales			39,157				1,393				—				40,550
Service revenue			24,917				791				—				25,708
Other			18,264				1,839				—				20,103
Total revenues			359,231				25,515				—				384,746
Cost of revenues:
Rental depreciation			32,192				3,838				—				36,030
Rental expense			18,680				2,408				—				21,088
New equipment sales			95,433				2,861				—				98,294
Used equipment sales			46,274				3,271				—				49,545
Parts sales			27,670				934				—				28,604
Service revenue			9,061				237				—				9,298
Other			15,809				1,760				—				17,569
Total cost of revenues			245,119				15,309				—				260,428
Gross profit:
Equipment rentals			53,653				7,235				—				60,888
New equipment sales			13,852				514				—				14,366
Used equipment sales			16,809				1,365				—				18,174
Parts sales			11,487				459				—				11,946
Service revenue			15,856				554				—				16,410
Other			2,455				79				—				2,534
Gross profit			114,112				10,206				—				124,318
Selling, general and administrative expenses			67,879				6,548				—				74,427
Equity in earnings of guarantor subsidiaries			1,826				—				(1,826	)			—
Gain on sale of property and equipment			129				30				—				159
Income (loss) from operations			48,188				3,688				(1,826	)			50,050
Other income (expense):
Interest expense			(18,416	)			(1,866	)			—				(20,282	)
Other, net			426				4				—				430
Total other expense, net			(17,990	)			(1,862	)			—				(19,852	)
Income before income taxes			30,198				1,826				(1,826	)			30,198
Income tax provision			6,475				—				—				6,475
Net income		$	23,723			$	1,826			$	(1,826	)		$	23,723