Business Context and Reporting Period
This filing is an unaudited Form 10-Q for AMERCO, the parent company of U-Haul International, for the quarter and nine months ended December 31, 2015, corresponding to the third quarter and first nine months of fiscal 2016. The request metadata identifies “2013 Q3,” but the filing text clearly reports fiscal 2016 results. AMERCO operates through Moving and Storage, Property and Casualty Insurance, and Life Insurance segments in the United States and Canada.
The Moving and Storage segment includes truck, trailer, portable storage and self-storage rentals, moving supplies, towing products, propane and related services. The insurance subsidiaries provide property and casualty coverage and life, health, Medicare supplement and annuity products.
Key Financial Metrics
| Metric | Quarter Ended December 31, 2015 | Quarter Ended December 31, 2014 | Nine Months Ended December 31, 2015 | Nine Months Ended December 31, 2014 |
|---|---|---|---|---|
| Revenue | $744.8 million | $706.4 million | $2.592 billion | $2.432 billion |
| Earnings from operations | $157.9 million | $133.2 million | $760.1 million | $628.2 million |
| Earnings available to common stockholders | $81.8 million | $66.5 million | $436.4 million | $347.3 million |
| Basic and diluted EPS | $4.17 | $3.40 | $22.27 | $17.73 |
| Operating margin | 21.2% | 18.9% | 29.3% | 25.8% |
| Net margin | 11.0% | 9.4% | 16.8% | 14.3% |
Quarterly revenue increased 5.4%, earnings from operations increased 18.6%, and earnings available to common stockholders increased 22.9%. For the nine-month period, revenue increased 6.6%, earnings from operations increased 21.0%, and earnings available to common stockholders increased 25.7%.
At December 31, 2015, total assets were $7.763 billion, stockholders’ equity was $2.225 billion and notes, loans and leases payable were $2.425 billion. Cash and cash equivalents were $674.6 million, compared with $441.9 million at March 31, 2015. Available borrowing capacity under existing credit facilities was $48.0 million.
For the first nine months, operating cash flow was $840.5 million, compared with $522.2 million in the prior-year period. Investing cash flow was negative $827.9 million, primarily reflecting $1.052 billion of property, plant and equipment purchases and $463.6 million of proceeds from property and equipment sales. Financing cash flow was positive $237.8 million and included $78.4 million of common stock dividends.
Material Changes Versus the Prior Comparable Period
- Self-moving equipment rental revenue increased $30.0 million in the quarter and $128.5 million in the nine-month period, supported by higher In-Town and one-way truck and trailer activity, fleet expansion and additional dealers and company-owned locations.
- Self-storage revenue increased $9.7 million in the quarter and $26.8 million for the nine months. Average occupied square footage increased 14.5% in the quarter and 13.5% for the nine months, although average occupancy based on room count declined to 78.4% from 81.1% in the quarter and to 81.5% from 82.5% for the nine months.
- Moving and Storage operating earnings before equity in insurance subsidiaries increased to $144.1 million from $117.9 million in the quarter and to $721.8 million from $589.1 million for the nine months.
- Total costs and expenses increased $13.6 million in the quarter and $28.8 million for the nine months. Personnel and overhead costs rose, while lower U-Box direct costs and reduced lease expense partially offset the increases.
- Lease expense declined $8.2 million in the quarter and $20.7 million for the nine months as the company financed more new equipment on balance sheet rather than through operating leases.
- Net depreciation expense was affected by higher depreciation but substantially higher gains on equipment disposals. The company reported a strong used-truck resale market.
- Interest expense declined to $25.4 million from $25.7 million in the quarter and to $71.5 million from $74.7 million for the nine months. The prior-year nine-month period included $4.1 million of early debt-extinguishment costs.
- Life Insurance operating earnings declined to $7.7 million from $8.5 million in the quarter and to $20.0 million from $21.6 million for the nine months, despite higher premiums, primarily because of higher benefits, acquisition-cost amortization and lower investment-related income.
Guidance, Outlook, Risks and Unusual Items
Management expects to continue emphasizing transaction volume, pricing, product availability and utilization in self-moving rentals; expanding self-storage capacity and occupancy; investing in U-Box; and growing insurance and senior-market life and annuity products. No specific earnings or revenue guidance was provided.
Management expects to reinvest approximately $350 million in the truck and trailer fleet during the remainder of fiscal 2016, net of equipment sales and excluding lease buyouts. Through nine months, approximately $127 million had been invested on this basis. The company also invested approximately $439 million in real estate acquisitions, construction, renovations and repairs during the first nine months.
Net capital expenditures were $588.2 million for the first nine months, compared with $403.8 million in the prior-year period. Management expects remaining fiscal 2016 investments to be funded primarily with debt financing, external lease financing and operating cash flow.
- PEI litigation: A jury judgment against U-Haul totaled $60.7 million. The trial court later awarded $4.9 million of prejudgment interest, $82,727 of costs and post-judgment interest at 0.25%, and entered a permanent injunction concerning use of the “pod” and “pods” terms in advertising and promotion. The judgment was stayed pending appeal, and U-Haul filed its opening appellate brief on December 17, 2015. The company accrued an additional $5.0 million of related expense during the nine months.
- Leverage and interest-rate risk: Notes, loans and leases payable totaled $2.425 billion. Variable-rate debt and a variable-rate operating lease totaled approximately $661.5 million before considering hedges. Management estimated that a 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $3.6 million after hedging.
- Lease commitments: The company had $166.1 million of operating lease commitments for leases longer than one year and guaranteed $39.1 million of rental-equipment residual values.
- Insurance liquidity restrictions: Insurance subsidiary assets are generally unavailable to satisfy Moving and Storage obligations, and dividends from insurance subsidiaries are subject to state regulatory restrictions.
- Related parties: The company had $92.7 million of related-party assets at December 31, 2015, including notes and receivables from entities controlled by significant stockholders or their affiliates. A Private Mini Storage note was repaid in July 2015 for $56.8 million.
- Other risks: Management identifies competition, economic conditions, fleet and facility costs, vehicle-manufacturer concentration, used-vehicle values, dealer dependence, liability claims, environmental compliance, insurance reserve development, reinsurance recoverability, automated systems, foreign exchange and concentrated stockholder control as material risks.
The filing states that there were no investment write-downs for the quarter or nine months and no subsequent events requiring adjustment or additional disclosure. Disclosure controls were considered effective, and no material changes in internal control over financial reporting were reported.
Investor Verification Checklist
- Confirm the applicable reporting period: the filing is for December 31, 2015, fiscal 2016, not 2013 Q3.
- Assess whether revenue growth in truck rentals and self-storage is sustainable relative to rising operating costs, capital spending and occupancy trends.
- Review the PEI appeal, injunction and final financial exposure, including accrued amounts and post-judgment interest.
- Reconcile the substantial increase in capital expenditures with fleet growth, used-equipment disposal gains, debt levels and future financing requirements.
- Evaluate the maturity schedule, including $440.6 million of notes, loans and leases payable due in 2016 and $401.5 million due in 2017.
- Assess liquidity separately for Moving and Storage versus the insurance subsidiaries because insurance assets are subject to regulatory restrictions.
- Monitor related-party notes, management agreements, dealer commissions and other transactions involving entities controlled by significant stockholders.
- Review insurance reserve adequacy, investment portfolio values, interest-rate exposure and the effect of future LIBOR changes.