AMERCO (U-Haul) Form 10-Q Summary
Business context and reporting period
AMERCO, the parent of U-Haul, Real Estate, Repwest Insurance and Oxford Life Insurance, filed this unaudited Form 10-Q for the quarter ended December 31, 2012, representing the third quarter and first nine months of fiscal 2013. Reportable segments are Moving and Storage, Property and Casualty Insurance, and Life Insurance. Insurance subsidiaries report on a calendar-quarter basis and are consolidated using their September 30, 2012 results.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2012 | Quarter ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $578.8 million | $633.1 million | $1,985.5 million | $1,979.2 million |
| Earnings from operations | $81.9 million | $24.9 million | $427.1 million | $357.7 million |
| Operating margin | 14.2% | 3.9% | 21.5% | 18.1% |
| Earnings available to common shareholders | $36.8 million | $0.7 million | $226.8 million | $171.1 million |
| Net margin | 6.4% | 0.1% | 11.4% | 8.6% |
| Diluted EPS | $1.89 | $0.04 | $11.62 | $8.79 |
| Operating cash flow | Not separately provided | Not separately provided | $576.3 million | $497.7 million |
- Moving and Storage revenue increased to $1.793 billion for the first nine months, from $1.698 billion, while segment earnings before equity in insurance subsidiaries increased to $407.6 million from $383.1 million.
- Self-moving equipment rental revenue increased 5.0% in the quarter and 5.0% for the first nine months. Self-storage revenue increased 15.6% in the quarter and 12.2% for the first nine months.
- At December 31, 2012, cash and cash equivalents were $586.1 million, up from $357.2 million at March 31, 2012. Total assets were $5.219 billion and stockholders’ equity was $1.190 billion.
- Notes, loans and leases payable totaled $1.667 billion, compared with $1.486 billion at March 31, 2012. The company reported $302.7 million of additional availability under existing Moving and Storage credit facilities.
- Net cash used in investing activities was $489.9 million, including $422.8 million of property, plant and equipment purchases. Net capital expenditures for Moving and Storage were $255.9 million, compared with $281.9 million in the prior-year period.
- Cash provided by financing activities was $142.9 million, compared with cash used of $56.8 million in the prior-year period. The current period included $97.4 million of common-stock dividends.
Material changes versus the prior comparable period
- Quarterly revenue declined 8.6% because the prior-year period included an $83.4 million one-time increase from a block of life insurance policies. Excluding that item, core Moving and Storage trends were stronger.
- Quarterly earnings improved substantially because the prior-year period included approximately $48.0 million of Property and Casualty Insurance charges for excess workers’ compensation reserves and reinsurance contracts. Those charges did not recur.
- Life insurance premiums declined $89.4 million in the quarter and $92.5 million for the first nine months, primarily because of the prior-year policy transaction. New annuity activity increased, but annuity deposits are recorded as balance-sheet deposits rather than premium revenue.
- Operating expenses in Moving and Storage increased, reflecting personnel, liability costs, legal expense and U-Box expansion. Depreciation increased while lease expense declined as the company financed more equipment on balance sheet rather than through operating leases.
- Cash flow from operations increased $78.7 million, aided by $127.3 million of repayments of notes and interest receivables from SAC Holdings and higher operating revenue. This benefit was partly offset by higher federal income tax payments.
- On November 30, 2012, the company paid a special cash dividend of $5.00 per common share.
Guidance, outlook, risks and unusual items
- Management expects to focus on increasing moving transactions, improving pricing and utilization, expanding self-storage occupancy, acquiring suitable storage locations and investing in the U-Box program.
- Management estimated fiscal 2013 reinvestment in the truck and trailer fleet of approximately $380 million, net of equipment sales, excluding lease buyouts; approximately $262.5 million had been reinvested through the first nine months.
- Hurricane Sandy temporarily disrupted approximately 100 stores. The company estimated approximately $0.8 million of destroyed rental-equipment losses and recorded a $0.3 million insurance deductible expense. Management considered the overall revenue effect immaterial.
- The company stated that liquidity was adequate for foreseeable needs, but noted risks from economic conditions, financing availability, debt refinancing, credit-facility compliance, used-equipment prices, demand, competition and regulatory changes.
- Insurance loss reserves remain subject to adverse development, particularly for long-tailed workers’ compensation claims. Medical inflation, claim duration, treatment costs and reporting practices could require additional reserve strengthening.
- Operating leases include approximately $124.3 million of guaranteed residual values for rental equipment. The company also reported $263.4 million of future lease commitments through periods thereafter.
- Interest-rate swaps hedge variable-rate debt and leases. The filing estimated that a 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $0.6 million after hedging effects.
- Related-party arrangements remain material. At December 31, 2012, related-party assets totaled $175.2 million, including notes and receivables from entities controlled by significant shareholders. The company reported $152.7 million of related-party cash flows during the first nine months, excluding dealer-agreement activity.
- The long-running shareholder derivative litigation was terminated with prejudice in October 2012 under a mutual release agreement. AMERCO paid none of the plaintiffs’ attorneys’ fees or costs; certain parties agreed not to sue AMERCO or other defendants for 20 years.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material updates to the previously disclosed risk factors were identified.
Most important facts for investors to verify
- Reconcile the sharp quarterly earnings improvement to the nonrecurrence of prior-year insurance reserve charges and the prior-year life-policy transaction.
- Assess whether Moving and Storage revenue and occupancy growth can offset higher operating expenses, depreciation and fleet-investment requirements.
- Review debt maturities, available credit capacity, lease obligations and the company’s ability to refinance or fund planned fleet and real-estate investment.
- Evaluate the liquidity restrictions applicable to the insurance subsidiaries and distinguish insurance-company assets from funds available to U-Haul operations.
- Monitor development of workers’ compensation and other insurance reserves, reinsurance recoverables and related-party receivables.
- Confirm the effect of the $5.00 special dividend on capital allocation, cash balances and future financing needs.