AMERCO (U-Haul) Form 10-Q Summary
Business context and reporting period
The filing is for AMERCO, the parent of U-Haul International and related insurance and real-estate businesses. It covers the quarter ended June 30, 2016, representing the first quarter of fiscal 2017; the insurance subsidiaries’ comparable reporting period ended March 31, 2016. The filing is unaudited. Reportable segments are Moving and Storage, Property and Casualty Insurance, and Life Insurance.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $923.4 million | $884.8 million | +4.4% |
| Earnings from operations | $259.8 million | $291.1 million | -10.8% |
| Operating margin | 28.1% | 32.9% | Down 4.8 percentage points |
| Pretax earnings | $233.1 million | $269.0 million | -13.3% |
| Net earnings available to common stockholders | $147.2 million | $171.3 million | -14.1% |
| Net margin | 15.9% | 19.4% | Down 3.5 percentage points |
| Basic and diluted EPS | $7.51 | $8.74 | -14.1% |
| Cash flow from operations | $361.0 million | $375.6 million | -3.9% |
| Net cash used in investing | $367.7 million | $329.1 million | More cash used |
| Cash and cash equivalents | $646.2 million | $475.6 million at prior-year quarter-end | Current-quarter ending cash |
Revenue growth was led by self-moving equipment rentals of $646.3 million, self-storage revenue of $67.7 million, and products and services of $77.3 million. Self-storage revenue increased $10.5 million, with average occupied square footage up 14.2% year over year. The company added approximately 4.2 million net rentable square feet over the preceding twelve months.
Total costs and expenses increased $69.9 million. Depreciation increased substantially because of fleet growth and fewer, higher-cost used-truck sales; gains on disposals were $18.6 million versus $46.0 million in the prior-year quarter. Operating expenses also increased due to personnel, maintenance, property taxes, and a policy change expensing smaller capital items. Interest expense rose to $26.6 million from $22.1 million.
At June 30, 2016, total assets were $8.54 billion, total liabilities were $6.12 billion, and stockholders’ equity was $2.42 billion. Notes, loans, and leases payable totaled $2.83 billion, up from $2.67 billion at March 31, 2016. The company reported $85.0 million of additional borrowing capacity under existing credit facilities. Insurance-company assets are generally restricted from satisfying non-insurance obligations.
Material changes versus the prior comparable period
- Moving and Storage revenue increased to $845.8 million from $814.8 million, but earnings from operations before equity in insurance subsidiaries declined to $248.5 million from $280.6 million.
- Property and Casualty Insurance revenue increased to $16.9 million from $14.9 million, and operating earnings increased to $7.5 million from $6.5 million.
- Life Insurance revenue increased to $61.8 million from $56.1 million, while operating earnings declined to $3.9 million from $4.2 million.
- Net capital expenditures increased to $290.1 million from $258.4 million. Gross capital expenditures were $580.7 million, partially offset by $143.4 million of lease proceeds and $147.2 million of equipment-sale proceeds.
- The company entered into approximately $143.5 million of new capital leases during the quarter. Capital lease liabilities totaled $778.7 million at June 30, 2016.
- A $19.6 million common-stock dividend was paid during the quarter; no common-stock dividend was reported as paid in the prior-year quarter.
- Available-for-sale investments increased to $1.66 billion from $1.51 billion at March 31, 2016. No other-than-temporary investment impairments were recognized in either comparable quarter.
Guidance, outlook, risks, contingencies, and unusual items
Management expects to continue expanding transaction volume, pricing, utilization, the truck fleet, self-storage capacity, and the U-Box program. U-Haul expects to reinvest approximately $625 million in its truck and trailer fleet during fiscal 2017, excluding lease buyouts; approximately $273 million had been invested through the first quarter. The company also invested approximately $124 million in real-estate acquisitions, construction, renovations, and major repairs during the quarter.
Management states that current cash, operating cash flow, and available borrowing capacity should meet anticipated needs, but cautions that liquidity could be affected by economic conditions, financing availability, used-vehicle prices, competition, fleet costs, and other factors. A 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $5.4 million after hedging effects.
The principal legal contingency is the PODS trademark litigation. A judgment of $60.7 million, plus $4.9 million of prejudgment interest, $82,727 of costs, and post-judgment interest was accrued. Execution is stayed pending appeal, and oral argument before the Eleventh Circuit was scheduled for September 13, 2016. Management continues to dispute the claims.
Other risks include insurance-reserve uncertainty, environmental compliance and remediation, related-party transactions and notes receivable, reliance on independent dealers and a limited number of vehicle manufacturers, leverage, interest-rate exposure, seasonality, and potential adverse changes in used-truck values. The filing states that no material updates were identified to the risk factors in the prior Form 10-K.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy in the request metadata: the supplied filing is dated August 3, 2016 and covers June 30, 2016, not 2014 Q1.
- Assess whether fleet expansion and self-storage growth can offset the pressure from higher depreciation, operating costs, and reduced used-equipment gains.
- Review debt maturities, capital-lease obligations, borrowing capacity, and the company’s planned fiscal 2017 capital investment.
- Monitor the PODS appeal and the potential cash, injunction, and operating effects of the accrued judgment.
- Evaluate the availability of insurance-subsidiary liquidity, insurance-reserve development, and investment-portfolio sensitivity to interest rates.
- Review related-party notes, management agreements, leases, and dealer commissions involving entities controlled by significant shareholders.