National Equipment Services, Inc.

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National Equipment Services, Inc.

1603 Orrington Avenue, Suite 1600
Evanston, Illinois 60201
U.S.A.
Telephone: (847) 733-1000
Fax: (847) 773-1078
Web site: http://www.n-e-s.com

Public Company
Incorporated: 1996
Employees: 2,900
Sales: $621.3 million (2002)
Stock Exchanges: OTC
Ticker Symbol: NEQSE
NAIC: 532412 Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing

Based in Evanston, Illinois, National Equipment Services, Inc. (NES) is one of the leading equipment rental companies, offering more than 750 different types of general and specialty equipment to industrial and construction firms. NES operates through 42 companies and a total of 180 locations spread across the United States. General rental equipment includes aerial work platforms, air compressors, cranes, earth-moving equipment, and rough-terrain forklifts. NES specialty equipment includes electric and pneumatic hoists, highway safety equipment, hydraulic and truck-mounted cranes, liquid storage tanks, and pumps. As a way to save money on acquiring new equipment, NES maintains two rebuilding facilities, located in Kentucky and Pennsylvania, which completely refurbish items in the company’s inventory. In addition to rental sales, NES acts as a distributor of new equipment for major original equipment manufacturers. It also sells used equipment, parts and other supplies, and merchandise, as well as provides repair and maintenance services.

Founding the Business in 1996

The two men primarily responsible for the creation of NES in 1996 were Carl Thoma and Kevin Rodgers. Thoma provided the financial backing through Golder, Thoma, Cressey, Rauner, Inc., a Chicago-based investment firm that was formed in 1980 and became instrumental in industry consolidation ventures. Thoma received an undergraduate degree from Oklahoma State University in 1970 before earning his M.B.A. from the Stanford Graduate School of Business in 1973. He became the chairman of the board of NES. Rodgers, named CEO, possessed considerable experience in the equipment business. In 1979 he went to work for Morgan Equipment Company, a construction and mining equipment firm, and in 1986 became CEO of its Australia operation, a Caterpillar dealership. Then in 1991 he became CEO of Brambles Equipment Services and Brambles Records Management, Inc., U.S. subsidiaries of a publicly traded Australian firm, Brambles Industries Limited. He helped Brambles enter the rental business through acquisitions, a roll-up approach that he would then employ with NES.

Rodgers quit Brambles in 1996, along with a senior team of management, and in June of that year joined forces with Thoma to form NES with the goal of creating a major consolidating vehicle in the rental industry, which at the time was generating some $18 billion in revenues per year and highly fragmented. More than 12,000 companies, many of them local and family-owned, operated in the industrial and construction equipment rental sector. It was also a rapidly expanding business. According to surveys conducted by the Associated Equipment Distributors, the rental industry had been growing at a compound annual rate of 24 percent. An increasing number of U.S. companies were opting to lease rather than devote precious capital to buying equipment that they were not likely to utilize as fully as a rental company. For many years these companies had few options, limited to the choice of either buying new or used equipment. Moreover, until the mid-1980s tax laws provided an incentive to purchase, due to investment tax credits. With the rise of rental companies that were able to provide equipment, and the loss of a tax incentive to buy, manufacturers and construction firms began to take advantage of the rental option, which in turn led to more rental companies cropping up to meet the growing demand. Reliance on rented equipment was much further along in such countries as Great Britain where 80 percent, and Australia where 50 percent, of such big ticket items were leased. In the United States, according to some studies, just 5 percent of equipment was leased, leaving a great deal of growth potential for rental companies. Thoma and Rodgers were not the only entrepreneurs to recognize the opportunity to create a company capable of serving as a roll-up vehicle in the industry, but the company was only one of a handful well-financed enough to be considered a true player in the consolidation game that was starting to unfold.

Thoma’s venture fund controlled 86 percent of the newly created NES, with Rodgers owning a 7 percent stake. Rodgers explained the NES business strategy in a 2000 interview with Rental Management: “When we started in June 1996, we wanted to put together a company with a primary focus on reach equipment—aerial equipment, cranes and reach forklifts—that would earn roughly half of its revenues from industrial applications and half from non-residential construction. And other than the specialty equipment—the traffic-safety group, which represents around 15 to 17 percent of the total business—the rest of the business is split pretty evenly, in rental revenue, between industrial applications and non-residential construction. That was the plan from the beginning—to try to even out the cyclicality that you see over time when a company is focused primarily on construction applications.” He further stated that “our plan was to leverage the initial equity to borrow as much as we could to grow the company as fast as we could, with a goal of trying to get the company to half a billion in revenue,” a level management hoped to reach in five years.

Launching an Acquisition Spree in 1997

NES launched its acquisition program in 1997, buying six companies in separate transactions. In January it purchased Industrial Hoist Services, a national company that provided pneumatic and electric hoists. The following month NES added Aerial Platforms, an Atlanta, Georgia-based company that rented aerial work platforms. Next, in March 1997, NES added Lone Star Rentals, suppliers of general equipment to the Gulf Coast region. Another general equipment rental firm, BAT Rentals, serving Las Vegas, was acquired in April. Finally, in July 1997 NES made the last of its purchases for the year: Spintank, a Gulf Coast company that rented liquid and specialized storage tanks, and Equipco Rental & Sales, renters of general equipment to the western Virginia area. All of the acquired companies were profitable and well established in their markets. The youngest, Spintank, had been in business for nine years, while the oldest, BAT Rentals, had been in operation since 1960.

A clear acquisition strategy developed: buy profitable companies, retain the previous owners, who knew the local market and had long-term relationships with customers, and grant managers the authority to continue running the operations in a manner that helped to make the businesses successful in the first place. Further, NES provided greater access to funds, essential in the capital-intensive rental business, allowing the previous owners to take their businesses to a higher level. In keeping with this decentralized philosophy NES maintained a lean corporate headquarters. As Rodgers explained to Rental Management, “If a company has a large head office, we feel that there’d be a large number of people who do not add value to the equation but rather they would be bugging the people in the field.” Although NES delegated a great deal of authority to the local level, it expected a high level of results: 20 percent internal growth and 20 percent operating profit.

NES was even more aggressive in pursuing its roll-up strategy in 1998. In January it added Genpower Pump and Equipment, providers of pumps in the Gulf Coast Region, and Eagle Scaffolding, a Las Vegas scaffolding firm. A month later NES acquired Grand Hi-Reach, a Grand Rapids, Michigan, company that rented aerial work platforms, and Work Safe Supply, a Michigan company that specialized in highway safety items. In March 1998, NES made three purchases: Dragon Rentals, a Gulf Coast supplier of liquid storage tanks; Cormier Equipment Company, a general equipment provider to the East Coast; and Albany Ladder, which rented aerial work platforms in the Northeast.

There was a lull in NES’s buying spree as the company prepared to make an initial public offering (IPO) of stock. The hope of management and its investment banker, Salomon Smith Barney, was to place 17.2 million shares priced between $16 and $19, which would raise approximately $300 million and establish a market capitalization in the $525 million range. Between the time the company filed its prospectus in April and the time the stock was to be sold, however, the IPO market soured, with only Internet companies and brand names attracting strong investor interest. As a result, the NES offering was postponed, and when it finally took place on July 13 it commanded a price of just $13.50.

Despite disappointment in its IPO, NES closed out 1998 with several more acquisitions. In July it bought Falconite Equipment, Inc., supplier of aerial work platforms and cranes to the mid-South and Gulf Coast markets, and R&R Rentals, which rented cranes to the Gulf Coast. In August another highway safety equipment company, Wisconsin-based Traffic Signing and Marking, was added. NES then bought Shaugh-nessy Crane Service, Inc., which rented aerial work platforms and cranes to the Northeast. The last acquisition in 1998 came in October when NEX picked up Rebel Studio Rentals, a California supplier of aerial work platforms.

Company Perspectives

For equipment rentals or sales, depend on NES to deliver the goods!

The acquisition pace accelerated even more in 1999 when NES added 19 rental companies. In the process, NES piled on debt, but because rental companies provided consistent cash flow, it was able to service the resulting load. In March 1999 NES purchased three companies: Barricade & Light Rental, Inc., an Arizona highway safety equipment supplier; Mayer Hammant, which rented pumps and compressors in the Gulf Coast region; and Wellesley Crane Service, operating in the Northeast. The following month, NES completed two highway safety equipment acquisitions: Oklahoma-based Advanced Warnings, Inc., and the Indiana-based businesses of The Mike Madrid Company Inc., Latshaw Traffic Services, Inc., and Madrid Leasing Corp. In May 1999 NES bought the Illinois operations of S&R Equipment Co., providers of aerial work platforms and cranes to the mid-South and Gulf Coast. An earth-moving equipment firm also serving the Gulf Coast, Elite Rentals, was added in June 1999, followed the next month by Gould & Associates, Inc., which rented pumps in the Southeast. Several purchases were made in August 1999: The Plank Company, which supplied trench safety equipment to the Gulf Coast and West Coast; Interstate Traffic Control, Inc. and Rich-Lite, Inc., a southeastern highway safety equipment company; American Tool Rental Corp., an East Coast general equipment firm; and Management Technology America, a national provider of management information systems. NES then acquired a pair of highway safety equipment companies in September 1999: Alternate Construction Controls, doing business in Illinois; and L and Flashing Barricades, serving the East Coast. Three more companies were added to NES in October 1999: highway safety equipment company, Safety Light Sales & Leasing, Inc. of Texas, serving the Gulf Coast; and two Florida general equipment renters, Tropical Ladder and Lifts and ABC Barricades. The final acquisitions in 1999 came in November when NES closed on the purchase of Cantei, Inc., a trench safety equipment company serving the Northwest, and Iowa-based Tri-State Signing, Inc., a highway safety equipment company.

Focus in 2000 on Internal Improvements

At the end of 1999 NES was ahead of schedule in reaching its goal of $500 million in annual revenues. Management eased up on external growth, opting instead to focus more attention on what had already been assembled, looking to improve operating performance and grow by internal means. Part of this equation involved the two rebuilding facilities, one that had already been opened in Paducah, Kentucky, and a second to operate in McConnellsburg, Pennsylvania. These plants were primarily intended to rebuild such high-reach equipment as booms, reach forklifts, and cranes. Each facility was capable of rebuilding about 1,000 units a year. As a result of these efforts, machinery would receive a second life at a fraction of what it would cost to buy new. On the acquisition side, management was interested in selective tuck-ins, companies that operated in existing markets, rather than to break new ground. NES made just four purchases in 2000, in March adding a pair: Cassidy & Lee, Inc., a Northeast earth-moving equipment firm, and Road Light, Inc. and Interstate Sign, Inc., providers of highway safety equipment to the East Coast. In addition in 2000, NES acquired Georgia-based trench safety equipment company Laser Products, Inc. and St. Clair Equipment Company, a Gulf Coast provider of aerial work platforms.

In 2000 Rodgers told Rental Management, “Even in a recession—assuming the next one is no worse than 1990–91—the cash flow is so strong in this business that you should be able to weather the storm. From 1990 to 1992, when I was traveling around the country looking for rental companies to buy at Brambles, I honestly can’t recall coming across a single rental company that went out of business.” As the U.S. economy slipped into recession in 2001, Rodgers’ comments would assume ironic importance. A top rental company, NationsRent, with annual revenues of some $600 million, filed for Chapter 11 bankruptcy in December 2001, and the rest of the so-called recession-proof industry also showed signs of strain. Lowering business activity that resulted in declining rental rates crippled cash flow and forced NES to take several cost-cutting steps in 2002, including staff reductions and the consolidation of branch and support operations. The company also sold off its trench shoring business. Nevertheless, it still found the resources to acquire Brambles’ U.S. rental business for $122 million in January 2002. The additional revenue, in excess of $150 million, was not enough, however, to offset the company’s mounting difficulties. In November 2002, Rodgers stepped down as CEO, replaced by Joseph Gullion, a former aviation industry executive. Rodgers stayed on as vice-chairman, charged with focusing on acquisitions and other areas. In December 2002, the New York Stock Exchange delisted NES because it failed to meet certain financial standards.

With significant debts coming due, and the economy continuing to prove sluggish, NES faced more difficulties in 2003. In January the company defaulted on certain debt provisions, and a month later Rodgers resigned in order to “pursue other interests.” With the performance of NES continuing to deteriorate the company sought to restructure its debt rather than seek bankruptcy protection, but the future of the company remained in doubt.