AMERCO Form 10-Q Summary
Filing-period clarification: The supplied filing is for AMERCO, the parent of U-Haul, for the quarter ended December 31, 2016, representing the third quarter of fiscal 2017. It does not correspond to the requested “U-Haul Holding Co. 2014 Q3” period. The financial statements are unaudited; insurance subsidiaries report through September 30, 2016 and are consolidated with AMERCO.
Business Context and Reporting Period
AMERCO operates through three reportable segments: Moving and Storage, Property and Casualty Insurance, and Life Insurance. Moving and Storage includes U-Haul truck and trailer rentals, self-storage, portable storage, moving supplies, towing products, propane and related services in the United States and Canada.
Key Financial Metrics
| Metric | Quarter ended Dec. 31, 2016 | Quarter ended Dec. 31, 2015 | Change |
|---|---|---|---|
| Revenue | $790.7 million | $744.8 million | Up 6.2% |
| Earnings from operations | $132.2 million | $157.9 million | Down 16.3% |
| Operating margin | 16.7% | 21.2% | Down 4.5 percentage points |
| Earnings available to common stockholders | $65.2 million | $81.8 million | Down 20.2% |
| Basic and diluted EPS | $3.33 | $4.17 | Down 20.1% |
| Net margin | 8.3% | 11.0% | Down 2.7 percentage points |
For the first nine months, revenue was $2.713 billion versus $2.592 billion, earnings from operations were $699.2 million versus $760.1 million, and earnings available to common stockholders were $388.9 million versus $436.4 million. Nine-month EPS was $19.85 versus $22.27.
- Self-moving equipment rental revenue increased to $541.5 million from $517.4 million in the quarter.
- Self-storage revenue increased to $72.3 million from $63.2 million. Average occupied square footage increased 10.9%, while average occupancy based on room count declined to 75.1% from 78.4% because of newly added capacity.
- Net investment and interest income increased to $23.1 million from $19.0 million, primarily from a larger insurance investment base and mortgage-loan gains.
- Cash provided by operating activities for the first nine months was $930.5 million, up from $854.3 million.
- Capital expenditures were substantial: gross capital expenditures were $1.361 billion and net capital expenditures were $568.4 million for the first nine months.
- Cash and cash equivalents were $984.2 million at December 31, 2016, compared with $600.6 million at March 31, 2016.
- Notes, loans and leases payable were $3.198 billion, compared with $2.665 billion at March 31, 2016. Total assets were $9.287 billion and stockholders’ equity was $2.661 billion.
- Moving and Storage had $971.0 million of cash and $3.198 billion of debt at December 31, 2016. Available borrowing capacity under existing credit facilities was $96.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher moving transactions, a larger truck fleet and dealer network, self-storage rate and occupancy gains, additional storage capacity, and U-Box growth.
- Profitability declined despite revenue growth. Total costs and expenses increased $71.6 million in the quarter and $181.4 million for the nine-month period.
- Moving and Storage costs increased because of higher personnel, maintenance and property-tax costs, a change in the capitalization threshold for smaller assets, and higher depreciation.
- Quarterly depreciation, net of disposal gains, increased $30.4 million, reflecting a larger fleet, lower average sales proceeds per truck and lower disposal gains.
- Nine-month results benefited from a $24.6 million reversal of previously accrued PODS litigation costs. The company paid $41.4 million to settle the litigation in October 2016; the matter was fully resolved and appeals were dismissed.
- Interest expense increased to $29.0 million in the quarter from $25.4 million and to $83.9 million for the first nine months from $71.5 million, primarily because of increased borrowings.
- The company recorded a $0.5 million charge for early extinguishment of debt in the third quarter.
- Lease expense declined as the company financed more equipment on balance sheet rather than through operating leases.
Guidance, Outlook, Risks and Unusual Items
Management expects to continue pursuing higher moving transaction volume, improved pricing and fleet utilization, additional truck and trailer investment, storage acquisitions and development, increased storage occupancy, and continued investment in U-Box. The company estimated approximately $670 million of fiscal 2017 net truck and trailer fleet reinvestment, excluding lease buyouts, and had invested approximately $466 million through the first nine months.
Management stated that liquidity was adequate for foreseeable needs, but cautioned that future cash flows and liquidity could be affected by economic conditions, competition, capital availability, financing markets and other factors beyond its control.
- Interest-rate exposure remains material. A 100-basis-point increase in LIBOR was estimated to reduce annual earnings and cash flow by approximately $7.4 million after hedging effects.
- Variable-rate debt obligations totaled $939.4 million, with additional variable-rate operating-lease exposure of $8.2 million.
- Insurance assets are generally unavailable to satisfy non-insurance obligations because of regulatory restrictions on insurance-company dividends.
- Insurance reserves are subject to uncertainty, particularly long-tailed workers’ compensation claims, medical inflation, legal developments and adverse reserve development.
- Used-truck prices, fleet residual values, fleet maintenance costs and the limited number of truck manufacturers could affect depreciation, disposal gains and cash requirements.
- Operating leases carried $17.6 million of guaranteed residual values and $142.6 million of undiscounted future commitments.
- Related-party arrangements include management fees, dealership commissions, leases and a $48.4 million note receivable from SAC Holdings, an entity controlled by parties related to significant shareholders and directors.
- Environmental compliance, litigation, dealer dependence, information systems, foreign exchange and insurance financial strength are identified risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Confirm the intended issuer and period, because the supplied filing is AMERCO fiscal third quarter 2017 rather than U-Haul Holding Co. 2014 Q3.
- Reconcile reported revenue growth with the decline in operating margin and EPS, particularly the effects of depreciation, disposal gains and operating-cost inflation.
- Review debt maturities, capital-lease obligations, available credit capacity and the planned funding of fleet and storage investments.
- Assess self-storage occupancy trends and whether newly added capacity can reach targeted utilization.
- Separate recurring operating performance from the $24.6 million litigation-accrual reversal and the $0.5 million debt-extinguishment charge.
- Evaluate exposure to used-equipment values, LIBOR or other floating-rate changes, insurance reserve development and related-party transactions.