Business Context and Reporting Period
The filing is AMERCO’s Form 10-Q for the quarter ended September 30, 2015, representing the second quarter and first six months of fiscal 2016. AMERCO is the parent of U-Haul International, Amerco Real Estate, Repwest Insurance and Oxford Life Insurance. Its reportable segments are Moving and Storage, Property and Casualty Insurance, and Life Insurance. The insurance subsidiaries report on a calendar-year basis, with the comparable insurance periods ending June 30.
The filing is unaudited. Although the request metadata identifies “2013 Q2,” the source filing clearly relates to September 30, 2015 and fiscal 2016.
Key Financial Metrics
| Metric | Quarter ended September 30, 2015 | Quarter ended September 30, 2014 | Change |
|---|---|---|---|
| Revenue | $962.9 million | $906.5 million | 6.2% increase |
| Earnings from operations | $311.1 million | $275.8 million | 12.8% increase |
| Pretax earnings | $287.1 million | $246.9 million | 16.3% increase |
| Net earnings available to common stockholders | $183.4 million | $156.2 million | 17.4% increase |
| Basic and diluted EPS | $9.36 | $7.98 | 17.3% increase |
| Operating margin | 32.3% | 30.4% | Improved |
| Net margin | 19.1% | 17.2% | Improved |
| Metric | Six months ended September 30, 2015 | Six months ended September 30, 2014 | Change |
|---|---|---|---|
| Revenue | $1.848 billion | $1.725 billion | 7.1% increase |
| Earnings from operations | $602.2 million | $495.0 million | 21.6% increase |
| Pretax earnings | $556.1 million | $441.9 million | 25.8% increase |
| Net earnings available to common stockholders | $354.7 million | $280.7 million | 26.3% increase |
| Basic and diluted EPS | $18.10 | $14.34 | 26.2% increase |
| Operating margin | 32.6% | 28.7% | Improved |
| Net margin | 19.2% | 16.3% | Improved |
Revenue Drivers
- Quarterly self-moving equipment rental revenue increased to $698.2 million from $653.5 million, supported by higher In-Town and one-way truck and trailer activity.
- Self-storage revenue increased 17.1% to $62.1 million. Average occupied square footage increased 13%, while the company added approximately 2.7 million net rentable square feet over the preceding twelve months.
- Moving and self-storage products and service sales increased to $70.7 million from $68.0 million.
- Life insurance premiums increased to $40.5 million from $39.0 million, and property and casualty premiums increased to $13.4 million from $12.5 million.
- Other revenue declined to $49.6 million from $52.8 million, primarily because of lower U-Box revenue.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $722.7 million, compared with $479.2 million in the prior-year period.
- Investing cash outflow was $484.3 million, including $720.3 million of property, plant and equipment purchases and $379.2 million of proceeds from property and equipment sales.
- Financing cash inflow was $294.0 million, including $461.7 million of borrowings and $188.0 million of principal repayments. The company paid $19.6 million of common-stock dividends.
- Cash and cash equivalents increased to $961.6 million at September 30, 2015 from $441.9 million at March 31, 2015.
- Notes, loans and leases payable totaled $2.483 billion, up from $2.191 billion at March 31, 2015. Capital leases represented $621.1 million of the balance.
- Available borrowing capacity under existing credit facilities was $20.0 million at September 30, 2015.
- Net capital expenditures were $341.1 million for the first six months, compared with $338.7 million in the prior-year period. Management expected approximately $400 million of fiscal 2016 net fleet reinvestment, excluding lease buyouts.
- The company reported $7.601 billion of total assets and $2.144 billion of stockholders’ equity at September 30, 2015.
Material Changes Versus the Prior Comparable Period
- Profitability improved materially, with six-month operating earnings increasing 21.6% and net earnings increasing 26.3%.
- Growth in rental transactions, fleet capacity, dealer locations and self-storage capacity drove revenue growth.
- Operating expenses increased, including personnel and overhead costs and a $5.0 million additional accrual for PEI litigation during the quarter and six-month period.
- Net depreciation expense declined despite higher gross depreciation because gains on equipment disposals increased. Management attributed the gains to higher truck sales and a strong used-truck resale market.
- Lease expense declined as the company financed more new equipment on its balance sheet rather than through operating leases.
- Interest expense declined to $24.0 million for the quarter and $46.1 million for the six months, partly due to lower borrowing costs. The prior-year six-month period included $4.1 million of early debt-extinguishment costs.
- Private Mini repaid its note and accrued interest to AMERCO totaling $56.8 million in July 2015, reducing related-party assets and contributing to higher operating cash flow.
- Self-storage room count increased to 252 from 219, while average occupancy based on room count remained approximately 84% for the quarter and 83.2% for the six-month period.
Outlook, Risks and Unusual Items
Management planned to continue increasing self-moving transaction volume, improving pricing and utilization, expanding the truck fleet, adding self-storage locations and investing in the U-Box program. Management stated that available cash and credit facilities were expected to support foreseeable needs, but cautioned that future liquidity could be affected by economic conditions, competition, financing availability and other factors beyond its control.
- PEI litigation: A jury awarded PODS Enterprises $60.7 million, later supplemented by $4.9 million of prejudgment interest and $82,727 of costs. The court entered a permanent injunction concerning use of “pod” and “pods.” Execution of the judgment was stayed pending appeal, and U-Haul had filed an appeal as of the filing date.
- Leverage and refinancing: Debt and lease obligations were $2.483 billion, with $379.6 million of secured maturities due in the twelve months ending September 30, 2016 and $430.0 million due in the following twelve months.
- Interest-rate exposure: The company had $687.6 million of variable-rate debt and $10.1 million of variable-rate operating leases. A 100-basis-point increase in LIBOR was estimated to reduce annual earnings and cash flow by $3.9 million after hedging.
- Insurance reserves: Future policy benefits and claims liabilities depend on actuarial estimates, including long-tailed workers’ compensation claims. Medical inflation, legal developments or adverse claims development could require additional reserve strengthening.
- Operating lease commitments: The company guaranteed $44.7 million of residual values for certain rental-equipment leases and reported $172.9 million of total future operating lease commitments.
- Related parties: AMERCO had management, leasing, dealership, commission and note-receivable relationships with entities controlled by significant stockholders or their affiliates. Six-month related-party revenue was $16.0 million and related-party costs and expenses were $32.6 million.
- Other risks: Management identified competition, seasonality, economic conditions, fleet costs, dependence on vehicle manufacturers and independent dealers, environmental compliance, vehicle liability claims, technology dependence, reinsurance recoverability and foreign exchange exposure as important risks.
Investor Verification Checklist
- Confirm that the intended reporting period is fiscal 2016, quarter ended September 30, 2015, rather than 2013 Q2.
- Review the final outcome and financial impact of the PEI trademark litigation, including the permanent injunction, appeal and judgment-related accruals or payments.
- Reconcile debt maturities, available borrowing capacity and the company’s planned fleet and self-storage capital spending.
- Assess whether revenue growth and margins are sustainable after considering seasonality, used-truck sale gains and the $5.0 million litigation accrual.
- Evaluate insurance reserve adequacy and the accessibility of insurance-subsidiary cash and investments, which are generally restricted by regulation.
- Review related-party transactions and the company’s exposure to notes receivable from entities controlled by significant stockholders.
- Monitor interest-rate sensitivity, hedge maturities and the effect of changes in LIBOR on future cash flow.