AMERCO Form 10-Q Summary
Reporting period: Quarter ended June 30, 2017, representing the first quarter of fiscal 2018. The source filing is for AMERCO, the parent company of U-Haul, rather than an entity named U-Haul Holding Co. The filing is unaudited and compares with the quarter ended June 30, 2016. Insurance subsidiaries report on a calendar-quarter basis, creating a three-month reporting difference.
Business Context
AMERCO operates through three reportable segments: Moving and Storage, Property and Casualty Insurance, and Life Insurance. Moving and Storage includes U-Haul truck, trailer, portable storage, self-storage, moving-supply and related services in the United States and Canada.
Financial Highlights
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $957.9 million | $923.2 million | +3.8% |
| Earnings from operations | $229.0 million | $259.6 million | -11.8% |
| Operating margin | 23.9% | 28.1% | -4.2 percentage points |
| Pretax earnings | $198.7 million | $233.1 million | -14.8% |
| Net earnings available to common shareholders | $126.2 million | $147.2 million | -14.2% |
| Net margin | 13.2% | 15.9% | -2.8 percentage points |
| Basic and diluted EPS | $6.44 | $7.51 | -14.2% |
| Cash flow from operations | $396.7 million | $361.0 million | +9.9% |
| Net cash used in investing | $432.5 million | $367.7 million | Use increased $64.8 million |
| Cash and cash equivalents at period end | $803.5 million | $646.2 million | +24.3% |
Revenue and Segment Trends
- Self-moving equipment rental revenue increased $23.5 million to $669.9 million, driven by higher one-way and in-town transactions, fleet expansion, more independent dealers and additional company-owned locations.
- Self-storage revenue increased $9.0 million to $76.7 million. Average monthly occupied square feet increased 8.1%, while approximately 3.1 million net rentable square feet was added over the preceding twelve months.
- Moving and Storage revenue increased to $882.5 million from $845.8 million, but segment earnings before equity in insurance-subsidiary earnings declined to $220.5 million from $248.5 million.
- Property and Casualty Insurance revenue declined to $16.1 million from $16.9 million, and operating earnings declined to $5.4 million from $7.5 million.
- Life Insurance revenue declined to $60.7 million from $61.8 million, and operating earnings declined to $3.4 million from $3.9 million.
Material Changes Versus Prior Comparable Period
- Total costs and expenses increased $65.3 million. Moving and Storage operating expenses increased $30.4 million, primarily from personnel, equipment maintenance and property taxes.
- Depreciation increased $31.3 million on a consolidated basis, including a $17.4 million increase in Moving and Storage, reflecting the larger rental fleet.
- Gains on property and equipment disposals were lower by approximately $13.9 million because sold trucks had higher average costs and generated lower average proceeds per unit.
- Interest expense increased to $30.3 million from $26.4 million, primarily due to higher borrowings.
- Lease expense declined $2.8 million as the company financed more new equipment on balance sheet rather than through operating leases.
- Net capital expenditures increased to $337.9 million from $290.1 million. Gross capital expenditures were $567.7 million, partially offset by $87.4 million of lease proceeds and $142.3 million of equipment-sale proceeds.
Liquidity, Debt and Capital Resources
- Total assets were $9.80 billion at June 30, 2017, up from $9.41 billion at March 31, 2017. Stockholders’ equity was $2.76 billion, up from $2.62 billion.
- Notes, loans and leases payable, net, were $3.39 billion, up from $3.26 billion at March 31, 2017. Capital leases were $909.4 million, compared with $876.8 million at fiscal year-end.
- Moving and Storage held $748.8 million of cash and had $77.0 million of additional borrowing capacity under existing credit facilities. Insurance-subsidiary assets are generally unavailable to fund non-insurance operations because of regulatory restrictions.
- Operating cash flow exceeded investing cash use, resulting in a $105.7 million increase in consolidated cash during the quarter. Financing activities provided $137.1 million, including net credit-facility borrowings and increased investment-contract deposits.
- Management estimated approximately $440 million of fiscal 2018 net truck and trailer fleet investment, excluding lease buyouts. Through the first quarter, $256 million had been invested before lease buyouts.
- Variable-rate debt and lease exposure totaled approximately $740.1 million and $7.4 million, respectively. Management estimated that a 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $5.5 million after hedging effects.
Outlook, Risks and Unusual Items
- Management plans to increase transaction volume and improve pricing, product availability and utilization for self-moving equipment, while continuing fleet investment and expansion of self-storage and U-Box operations.
- Fiscal 2018 plans included approximately $440 million of net fleet investment and continued investment in storage acquisitions, construction, renovations and U-Box.
- Management stated that liquidity was adequate for expected needs but cautioned that future cash flows may be affected by economic conditions, competition, financing availability and other factors beyond its control.
- Key risks include leverage, interest-rate movements, used-vehicle resale values, limited truck manufacturers, dealer-network dependence, liability and insurance claims, environmental compliance, seasonality, regulatory changes and risks relating to the SAC Holdings note receivable.
- The company reported $16.5 million of guaranteed residual values on certain rental-equipment operating leases and total operating and ground lease commitments of $178.8 million.
- The company had a $47.8 million note receivable from SAC Holdings, with scheduled maturity in 2017, and was negotiating an extension. Related-party transactions included management-fee revenue, dealer commissions and lease payments.
- No material litigation, environmental liability or risk-factor update was reported. Management concluded that disclosure controls were effective at a reasonable-assurance level.
- Subsequent events included a planned September 2017 closing, potentially extendable to October 2017, for the sale of part of a Manhattan property, and an August 2017 upgrade in Repwest’s A.M. Best financial-strength rating to B++ from B+.
Investor Verification Checklist
- Verify the filing identity and period: the source is AMERCO’s June 30, 2017 Form 10-Q, not a 2015 first-quarter filing or a filing under the exact name U-Haul Holding Co.
- Assess whether revenue growth can offset rising operating costs, depreciation, fleet investment and interest expense.
- Review debt maturities, capital-lease obligations, refinancing needs and available borrowing capacity.
- Evaluate the sustainability of equipment-sale proceeds and the assumptions used for rental-fleet residual values.
- Monitor self-storage occupancy, newly added capacity and the economics of future acquisitions and development.
- Review insurance reserve adequacy, policyholder obligations and restrictions on transferring insurance-subsidiary liquidity to other operations.
- Examine related-party arrangements, including SAC Holdings receivables, management agreements, dealer commissions and leases.