AMERCO Form 10-Q Summary
Business context and reporting period
The filing is for AMERCO, the parent of U-Haul International, Amerco Real Estate, Repwest Insurance and Oxford Life Insurance. It covers the quarter and nine months ended December 31, 2011, representing fiscal 2012 third-quarter results. The insurance subsidiaries report on a calendar-year basis and were consolidated using results through September 30, 2011. The company operates in Moving and Storage, Property and Casualty Insurance, and Life Insurance.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2011 | Quarter ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Total revenue | $633.1 million | $530.0 million | $1,979.2 million | $1,752.9 million |
| Earnings from operations | $24.9 million | $51.3 million | $357.7 million | $337.5 million |
| Pretax earnings | $2.1 million | $29.0 million | $289.3 million | $272.0 million |
| Net earnings | $0.7 million | $18.6 million | $180.0 million | $170.3 million |
| Earnings available to common shareholders | $0.7 million | $15.5 million | $171.1 million | $160.8 million |
| Basic and diluted EPS | $0.04 | $0.80 | $8.79 | $8.28 |
| Operating margin | 3.9% | 9.7% | 18.1% | 19.3% |
Quarterly revenue increased approximately 19.5%, while quarterly earnings from operations fell approximately 51.5% because of workers’ compensation reserve strengthening and higher operating costs. Nine-month revenue increased approximately 12.9%, and earnings from operations increased approximately 6.0%.
- Moving and Storage revenue was $483.1 million for the quarter and $1,697.7 million for the nine months. Truck rental revenue benefited from a larger fleet, higher transaction volume and improved utilization.
- Life Insurance revenue was $139.6 million for the quarter and $252.8 million for the nine months, including the effect of a new coinsurance arrangement and higher Medicare supplement premiums.
- Property and Casualty Insurance generated a quarterly operating loss of $43.4 million and a nine-month operating loss of $39.3 million, compared with operating earnings in the prior periods.
- Net cash provided by operating activities was $491.7 million for the nine months, compared with $464.4 million in the prior-year period.
- Net cash used in investing activities was $377.8 million, including $421.7 million of property, plant and equipment purchases.
- Net cash used in financing activities was $50.9 million. Cash and cash equivalents increased to $438.3 million from $375.5 million at March 31, 2011.
- Total notes, loans and leases payable were $1.508 billion at December 31, 2011, compared with $1.398 billion at March 31, 2011.
- Total assets were $4.634 billion and stockholders’ equity was $1.001 billion at December 31, 2011.
- The Moving and Storage segment had $299.9 million of available credit capacity and $12.7 million available under a term loan for equipment purchases.
Material changes versus the prior comparable period
- Repwest strengthened excess workers’ compensation reserves by $48.3 million in the quarter, reducing net earnings by $31.4 million, or approximately $1.61 per share. The filing attributes the adjustment to medical inflation, additional treatments, longer claim terms, and changes in reporting practices.
- Property and Casualty Insurance benefits and losses increased to $51.6 million from $5.3 million in the comparable insurance quarter, producing a $43.4 million operating loss.
- Life Insurance premiums and benefits each increased by $83.5 million due to a coinsurance arrangement involving a block of whole-life policies; the filing characterizes the related revenue and benefit increases as one-time effects.
- Moving and Storage operating expenses rose, partly because of personnel, maintenance and U-Box program costs. Depreciation increased as the company relied more on term debt and securitizations and less on equipment leases.
- All 6.1 million Series A preferred shares were redeemed on June 1, 2011 for $152.5 million, eliminating preferred dividends thereafter. A $5.9 million redemption-related charge reduced nine-month earnings available to common shareholders.
- The company declared a special common-stock dividend of $1.00 per share, or approximately $19.6 million, paid January 3, 2012.
Guidance, outlook, risks and unusual items
- Management plans to focus on transaction volume, pricing, product availability and fleet utilization, while investing approximately $315 million in the truck and trailer fleet during fiscal 2012, net of equipment sales; approximately $197 million had been invested through the first nine months.
- The company expects to complete storage projects, improve occupancy, and continue investing in the U-Box program. New storage projects and acquisitions will depend on capital availability, entitlements, weather and suitable properties.
- Management states that liquidity is adequate for foreseeable needs, but notes that future cash flows, access to credit, refinancing ability and financing costs could be affected by factors outside its control.
- Key risks include adverse insurance reserve development, economic conditions, used-vehicle values, fleet and facility costs, credit availability, debt refinancing, interest rates, environmental requirements, competition, regulatory changes and pending litigation.
- The company has $139.4 million of guaranteed residual values on operating leases for rental equipment. The filing reports no material historical losses on these guarantees.
- The company has approximately $562.1 million of variable-rate interest-rate swaps. A 100-basis-point increase in LIBOR would reduce future earnings and cash flow by approximately $0.4 million annually after hedging effects.
- A shareholder derivative lawsuit involving historical transactions with SAC-related entities remains pending. The trial court denied AMERCO’s summary judgment motion in December 2011, and an evidentiary hearing on demand futility was scheduled for August 20, 2012.
- Related-party exposure includes approximately $195.6 million of notes receivable from SAC Holdings and $66.4 million of notes receivable from Private Mini at December 31, 2011. These entities are substantially controlled by significant shareholders or related parties and are not consolidated.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material updates were reported to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Reconcile the $48.3 million workers’ compensation reserve strengthening, its $31.4 million after-tax earnings effect, and the potential for additional adverse development.
- Assess the sustainability of Moving and Storage revenue growth, fleet expansion, utilization gains and U-Box spending.
- Review the maturity schedule for the $1.508 billion debt balance, particularly the $213.7 million due in 2012 and $492.4 million due in 2015.
- Evaluate liquidity available to the operating businesses because insurance subsidiary assets are generally restricted from funding non-insurance obligations.
- Review related-party notes, dealer commissions, management fees and lease arrangements involving SAC Holdings, Private Mini and other affiliated entities.
- Consider the effects of the Series A preferred redemption and the special common dividend on future capital allocation and liquidity.
- Monitor the pending derivative litigation, environmental matters, lease residual guarantees and potential future insurance reserve changes.