AMERCO Form 10-Q Summary
Reporting period: The source filing is for the quarter ended September 30, 2017, corresponding to AMERCO’s fiscal second quarter of fiscal 2018, with six-month results through September 30, 2017. The request metadata identifies “2015 Q2,” which does not match the filing text. Financial statements are unaudited. Insurance subsidiaries report on a calendar-year basis and are consolidated using June 30, 2017 balances and results for the comparable quarter.
Business Context
AMERCO is the holding company for U-Haul, Amerco Real Estate, Repwest Insurance and Oxford Life Insurance. Its principal activities are do-it-yourself moving and storage rentals, related products and services, property and casualty insurance, and life and health insurance products. Reportable segments are Moving and Storage, Property and Casualty Insurance, and Life Insurance.
Financial Results and Key Metrics
| Metric | Quarter ended Sept. 30, 2017 | Quarter ended Sept. 30, 2016 | Six months ended Sept. 30, 2017 | Six months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Revenue | $1,042.7 million | $998.7 million | $2,000.6 million | $1,921.9 million |
| Earnings from operations | $229.4 million | $307.0 million | $458.4 million | $566.5 million |
| Pretax earnings | $197.4 million | $279.0 million | $396.0 million | $512.1 million |
| Earnings available to common shareholders | $124.6 million | $176.5 million | $250.8 million | $323.6 million |
| Basic and diluted EPS | $6.36 | $9.01 | $12.81 | $16.52 |
| Operating margin | 22.0% | 30.7% | 22.9% | 29.5% |
Revenue increased 4.4% for the quarter and 4.1% for the six-month period. Earnings available to common shareholders decreased 29.4% for the quarter and 22.5% for the six months. Net margins were approximately 12.0% and 17.7% for the quarters, and 12.5% and 16.8% for the six-month periods, respectively.
- Quarterly self-moving equipment rental revenue increased $28.8 million, self-storage revenue increased $8.3 million, and products and services revenue increased $2.9 million.
- Average occupied self-storage square footage increased 8.1% year over year. Approximately 3.6 million net rentable square feet was added over the preceding twelve months, a 14.2% increase, although reported occupancy rates declined because of newly added capacity.
- Life insurance premiums declined $2.0 million for the quarter and $3.8 million for the six months, primarily due to lower Medicare Supplement premiums.
- Property and casualty premiums increased $1.0 million for the quarter and $1.6 million for the six months, principally reflecting higher Safetow and Safestor sales.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $709.7 million for the first six months of fiscal 2018, compared with $753.1 million in the prior-year period.
- Cash used in investing activities was $678.6 million, including $754.1 million of property, plant and equipment purchases.
- Net capital expenditures were $494.6 million, compared with $450.9 million in the prior-year period. Management expected approximately $470 million of net fleet reinvestment for fiscal 2018, excluding lease buyouts, and reported approximately $409 million invested through six months.
- Cash and cash equivalents were $768.4 million at September 30, 2017, compared with $697.8 million at March 31, 2017. The MD&A separately cites $779.1 million, so the filing text contains an apparent cash-balance discrepancy that should be reconciled.
- Total assets were $10.08 billion and stockholders’ equity was $2.89 billion at September 30, 2017.
- Notes, loans and leases payable were $3.42 billion, up from $3.26 billion at March 31, 2017. Debt increased primarily because of fleet financing and capital leases; capital lease balances increased to $962.1 million from $876.8 million.
- Available borrowing capacity under existing credit facilities was $194.0 million. AMERCO stated that cash, operating cash flow and available facilities were adequate for expected needs, while noting that lending availability and future cash flows are not assured.
- Investment contract liabilities were $1.26 billion, primarily associated with the Life Insurance segment. Insurance-company assets are generally restricted from funding non-insurance operations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was more than offset by substantially higher operating costs, depreciation and financing costs.
- Quarterly operating expenses increased $94.3 million; Moving and Storage operating expenses increased $93.9 million. Personnel costs, equipment maintenance and property taxes were cited as major drivers.
- The prior-year quarter included a $24.6 million reduction in operating expenses from the settlement of the PODS case. Excluding that item, current-year Moving and Storage operating expenses still increased approximately $69.3 million.
- Quarterly depreciation increased $18.6 million, and six-month depreciation increased $36.0 million, reflecting fleet growth and a shift toward financing equipment on the balance sheet rather than through operating leases.
- Interest expense increased to $32.0 million for the quarter and $62.4 million for the six months, from $28.0 million and $54.4 million, respectively.
- Net capital investment increased despite lower proceeds from equipment sales, as the company sold fewer used trucks.
Outlook, Risks and Unusual Items
- Management planned to increase moving transaction volume and improve pricing, product offerings and fleet utilization, while continuing investment in trucks, storage facilities and the U-Box program.
- Management expected to pursue storage acquisitions, development and renovations when consistent with long-term plans and financial objectives. Timing depends on capital availability, entitlements, weather and acquisition opportunities.
- Management provided no quantitative earnings or revenue guidance. It cautioned that economic conditions, competition and execution risks could reduce revenue and cash flow.
- On October 10, 2017, after the reporting date, a Chelsea, New York property transaction generated net sales proceeds of $194.2 million. Management expected to record an approximately $188.0 million gain in the third quarter, subject to completion of the related exchange transactions.
- A $47.5 million note receivable from related-party SAC Holding Corporation was scheduled to mature in 2017, and the company was negotiating an extension. This is a material related-party credit exposure.
- Related-party transactions included $16.0 million of revenue and $34.8 million of costs and expenses for the first six months, including $33.4 million of dealer commissions to entities associated with significant shareholders.
- Key risks include leverage, variable interest rates, used-truck residual values, fleet and facility costs, competition, dependence on independent dealers and truck manufacturers, insurance reserve adequacy, environmental compliance, litigation, related-party exposures and restricted insurance-company liquidity.
- At September 30, 2017, variable-rate debt and a variable-rate operating lease totaled approximately $700.2 million and $7.0 million, respectively. A 100-basis-point increase in LIBOR was estimated to reduce annual earnings and cash flow by approximately $5.8 million after hedging.
- The company reported no material updates to the risk factors in its fiscal 2017 Form 10-K, no investment write-downs, and effective disclosure controls as of the quarter end.
Investor Verification Checklist
- Reconcile the $768.4 million balance-sheet cash figure with the $779.1 million amount cited in MD&A.
- Assess whether revenue growth can offset higher fleet depreciation, personnel, maintenance, property-tax and financing costs.
- Verify the timing, tax treatment and final gain from the post-quarter-end Chelsea property and 1031 exchange transaction.
- Review debt maturities, capital lease commitments, borrowing capacity and sensitivity to LIBOR and refinancing conditions.
- Evaluate self-storage occupancy and the effect of newly added low-occupancy capacity on near-term margins.
- Review the collectability and extension status of the SAC Holding Corporation note and the broader related-party arrangements.
- Monitor insurance reserve development, policyholder obligations and restrictions on transferring insurance-company cash to AMERCO’s non-insurance operations.