Business Context and Reporting Period
The filing is AMERCO’s Form 10-Q for the quarter ended September 30, 2018, representing the second quarter and first six months of fiscal 2019. AMERCO operates U-Haul’s moving and storage businesses and three reportable segments: Moving and Storage, Property and Casualty Insurance, and Life Insurance. The insurance subsidiaries report on a calendar-year basis and are consolidated using results through June 30, 2018.
Metadata discrepancy: The request identifies “U-Haul Holding Co” and “2016 Q2,” but the provided filing identifies AMERCO and reports September 30, 2018 results.
Financial Performance and Key Metrics
| Metric | Quarter Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Revenue | $1.105 billion, up 5.9% year over year | $2.124 billion, up 6.2% |
| Earnings from operations | $250.9 million, up 9.3% | $455.6 million, down 0.7% |
| Earnings available to common stockholders | $163.5 million, up 31.2% | $291.4 million, up 16.2% |
| Basic and diluted EPS | $8.35 versus $6.36 | $14.87 versus $12.81 |
| Operating margin | 22.7% versus 22.0% | 21.5% versus 22.9% |
| Net margin | 14.8% versus 12.0% | 13.7% versus 12.5% |
| Net cash from operating activities | Not separately provided | $702.1 million versus $682.6 million |
Quarterly revenue growth was led by self-moving equipment rentals of $781.7 million, up $41.2 million; self-storage revenue of $91.5 million, up $11.0 million; and other revenue of $70.8 million, up $9.6 million, primarily from U-Box. Six-month self-moving rental revenue increased $87.9 million and self-storage revenue increased $20.5 million.
Quarterly interest expense increased to $35.0 million from $32.0 million, while six-month interest expense increased to $70.3 million from $62.4 million, primarily due to increased borrowings. The effective tax rate declined to 24.2% from 36.9% for the quarter and to 24.3% from 36.7% for the six-month period, materially benefiting net earnings.
As of September 30, 2018, total assets were $11.324 billion, including $7.414 billion of net property, plant and equipment. Cash and cash equivalents were $652.4 million, down from $759.4 million at March 31, 2018. Notes, loans and leases payable, net, were $3.687 billion, up from $3.513 billion. Stockholders’ equity was $3.633 billion.
Cash Flow, Capital Expenditures, Debt and Liquidity
- Operating cash flow increased $19.4 million year over year to $702.1 million for the first six months.
- Investing cash flow was negative $867.1 million, compared with negative $651.6 million, reflecting significantly higher property, plant and equipment purchases.
- Net capital expenditures increased to $684.6 million from $494.6 million. Gross capital expenditures included $787.2 million for rental equipment and $481.0 million for real estate, construction and renovations.
- Financing cash flow was positive $59.9 million, including $313.3 million of borrowings, $183.0 million of credit-facility repayments, $147.9 million of capital-lease payments, and $29.4 million of common-stock dividends.
- Moving and Storage had approximately $60.0 million of additional borrowing capacity under existing credit facilities at September 30, 2018.
- Debt maturities for the twelve months ending September 30 were $458.6 million in 2019, $595.5 million in 2020, $552.2 million in 2021, $539.7 million in 2022, $211.9 million in 2023, and $1.354 billion thereafter.
- The company estimates that a 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $8.1 million after hedging effects. Variable-rate debt was $836.5 million at September 30, 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 5.9%, but six-month operating earnings declined slightly because operating expenses increased substantially, particularly equipment maintenance, personnel, U-Box shipping, building maintenance, property taxes and fleet repairs.
- Moving and Storage revenue increased 6.4% for the quarter and 6.9% for the six-month period. Moving and Storage operating earnings before equity in insurance subsidiaries increased quarterly but declined modestly for the six-month period.
- Average occupied self-storage square footage increased 11.0% in the quarter and 10.8% for the six-month period. The company added approximately 4.4 million net rentable square feet over twelve months, although average occupancy rates declined to 70.6% from 73.9% quarterly and to 70.1% from 73.5% for six months as newly added capacity was absorbed.
- Property and Casualty Insurance revenue increased, but six-month operating earnings declined to $10.6 million from $11.5 million, primarily reflecting higher benefits and losses and lower investment income.
- Life Insurance revenue and operating earnings declined for the six-month period, reflecting lower Medicare supplement premiums, partly offset by higher investment income and lower benefits.
- Unrealized investment losses reduced other comprehensive income by $57.3 million after tax for the six-month period, compared with a $17.0 million after-tax gain in the prior year. Accumulated other comprehensive loss increased to $62.2 million from $4.6 million.
- The company adopted new revenue-recognition guidance and several other accounting standards in fiscal 2019. Revenue-recognition adoption had no material financial statement impact. Adoption of ASU 2016-01 increased retained earnings by approximately $9.7 million and reduced accumulated other comprehensive income by the same amount.
Guidance, Outlook, Risks and Unusual Items
Management expects to focus on increasing transaction volume, pricing, product offerings and utilization for self-moving equipment. It expects to invest approximately $590 million in the truck and trailer fleet during fiscal 2019, net of equipment sales and excluding lease buyouts; approximately $359 million had been invested through the first six months. Management also expects continued investment in self-storage acquisitions, development and renovation and the U-Box program.
The company does not provide specific revenue or earnings guidance. Management cautions that adverse economic conditions, competition, fleet and facility costs, limited truck manufacturers, dealer-network reliance, leverage, interest rates, environmental regulation, liability claims, insurance reserve development and used-vehicle pricing could materially affect results.
A significant contingency relates to a 2014 propane-cylinder explosion in Philadelphia that resulted in two deaths and eleven injuries. Civil settlements were substantially resolved, with estimated self-insured retention and legal costs of $27.8 million, of which $27.6 million had been paid. In June 2018, a subsidiary was indicted on six federal charges related to propane-cylinder filling, transportation and employee training. Trial was scheduled for January 22, 2019.
Related-party transactions remain material. For the first six months, management fees from entities associated with significant stockholders were $17.4 million, while commissions paid under related-party dealer agreements were $34.8 million. The company reported related-party assets of $30.3 million and stated that it had no current plan to provide additional financial support to the related entities.
The company guarantees $14.2 million of residual values on certain leased rental equipment. It also expects the forthcoming lease standard to increase reported assets and liabilities, although the ultimate impact was still being evaluated.
Most Important Facts to Verify
- Confirm the filing identity and period: the source is AMERCO’s September 30, 2018 Form 10-Q, not a 2016 second-quarter filing.
- Assess whether higher fleet maintenance, repair and real-estate costs could continue to pressure operating margins despite revenue growth.
- Review debt maturities, capital-lease obligations, variable-rate exposure and the relatively limited $60.0 million of disclosed unused credit capacity.
- Evaluate the effect of continued self-storage expansion on occupancy, returns on invested capital and liquidity.
- Monitor the federal propane-related criminal proceeding and any additional civil, insurance or regulatory consequences.
- Review the impact of investment-market losses on insurance-segment equity and available capital, including restrictions on upstreaming insurance-company assets.
- Reconcile related-party management fees, leases, dealer commissions and maximum exposure to loss.