AMERCO (U-Haul) Form 10-Q Summary
Business context and reporting period
AMERCO, the parent of U-Haul, Amerco Real Estate, Repwest Insurance and Oxford Life Insurance, filed this unaudited Form 10-Q for the quarter ended September 30, 2011, corresponding to fiscal 2012 second quarter. The report covers Moving and Storage, Property and Casualty Insurance, and Life Insurance. Insurance subsidiaries report on calendar-year periods, so their comparable second quarter ended June 30, 2011.
Key financial metrics
| Metric | Quarter ended September 30, 2011 | Quarter ended September 30, 2010 | Six months ended September 30, 2011 | Six months ended September 30, 2010 |
|---|---|---|---|---|
| Total revenue | $703.2 million | $637.0 million | $1.346 billion | $1.223 billion |
| Earnings from operations | $184.4 million | $158.1 million | $332.8 million | $286.2 million |
| Net earnings | $101.0 million | $85.2 million | $179.2 million | $151.7 million |
| Earnings available to common shareholders | $101.2 million | $82.0 million | $170.4 million | $145.3 million |
| Basic and diluted EPS | $5.20 | $4.22 | $8.75 | $7.48 |
| Operating margin | 26.2% | 24.8% | 24.7% | 23.4% |
| Net margin | 14.4% | 13.4% | 13.3% | 12.4% |
- Six-month operating cash flow was $418.8 million, compared with $357.7 million in the prior-year period.
- Six-month investing cash use was $302.7 million, including $348.3 million of property, plant and equipment purchases.
- Six-month financing cash use was $43.0 million. The company borrowed $178.3 million, repaid $99.1 million of credit facilities, and paid $144.3 million to redeem preferred stock.
- Cash and cash equivalents increased to $448.2 million at September 30, 2011, from $375.5 million at March 31, 2011.
- Notes, loans and leases payable totaled $1.479 billion at September 30, 2011, versus $1.398 billion at March 31, 2011.
- Moving and Storage had $300.2 million of available capacity under existing credit facilities.
- Total assets were $4.403 billion and stockholders’ equity was $1.006 billion at September 30, 2011.
Material changes versus the prior comparable period
- Quarterly revenue increased 10.4%, while six-month revenue increased 10.1%. Self-moving equipment rental revenue increased 9.5% for the quarter and 8.1% for the six months.
- Moving and Storage revenue increased to $639.6 million from $582.6 million in the quarter and to $1.215 billion from $1.118 billion for the six months.
- The truck fleet increased approximately 4%, and management reported improved utilization and higher transaction volumes.
- Self-storage revenue growth reflected more rooms rented, modestly higher rates and increased occupied square footage. The owned portfolio reached 160 locations and 13.248 million square feet, compared with 148 locations and 12.032 million square feet a year earlier.
- Life Insurance revenue increased substantially, primarily because of Medicare supplement business acquired in September 2010. Life Insurance operating earnings increased to $5.8 million from $3.4 million for the quarter and to $7.8 million from $6.8 million for the six months.
- Operating expenses increased because of rental equipment maintenance, personnel and U-Box-related costs. Depreciation increased, while lease expense declined as the company shifted equipment financing toward term loans and securitizations.
- Interest expense increased to $23.0 million from $21.8 million for the quarter and to $45.6 million from $43.3 million for the six months, primarily due to higher average borrowings.
- The company redeemed all 6.1 million shares of Series A 8.5% preferred stock on June 1, 2011, for approximately $152.5 million including accrued dividends. The redemption reduced six-month earnings available to common shareholders by $5.9 million for EPS purposes but eliminated future preferred dividends.
Guidance, outlook, risks and unusual items
- Management expects to focus on transaction volume, pricing, product availability and fleet utilization. No specific revenue or earnings guidance was provided.
- U-Haul estimates approximately $315 million of fiscal 2012 reinvestment in the truck and trailer fleet, net of equipment sales; approximately $149 million had been invested through six months.
- The company expects to complete current storage projects, increase occupancy and continue investing in the U-Box program. New projects will depend on capital availability, weather, entitlement processes and acquisition opportunities.
- Management stated that adverse economic conditions could reduce revenue even if operating plans are executed successfully.
- Interest-rate risk remains material: variable-rate debt was approximately $690.7 million, and a 100-basis-point increase in LIBOR would reduce annual earnings and cash flow by approximately $1.3 million after hedging.
- Interest-rate swaps had a liability fair value of $66.8 million and total notional amounts of approximately $555.7 million. The company expected to reclassify $21.1 million of net hedge losses from accumulated other comprehensive income into earnings over the next 12 months.
- Operating leases included approximately $143.1 million of guaranteed residual values for rental equipment. Total lease commitments were $344.7 million, including $301.5 million for rental equipment.
- A long-running shareholder derivative lawsuit involving alleged self-dealing and transactions with SAC Holdings was remanded for further proceedings by the Nevada Supreme Court in May 2011. AMERCO filed a summary judgment motion in July 2011. The filing does not provide a clear estimate of potential loss.
- Related-party exposure included approximately $195.8 million of notes receivable from SAC Holdings and total related-party assets of $296.0 million. Related-party transactions generated $21.1 million of revenue, $1.1 million of expenses and $23.9 million of cash flows during the first six months.
- The company recognized approximately $0.1 million of other-than-temporary investment impairments during the quarter and six months. Management stated that no subsequent event required adjustment or additional disclosure through issuance of the financial statements.
Most important facts for investors to verify
- Whether higher rental demand, fleet utilization and pricing persist beyond the seasonal second quarter.
- How the planned fleet and storage investments affect leverage, depreciation, free cash generation and refinancing needs.
- The timing and terms of debt maturities, including approximately $226.5 million due in the year ending September 30, 2012 and $474.3 million due in the year ending September 30, 2015.
- The availability and reliability of the $300.2 million of unused credit capacity, particularly under changing credit-market conditions.
- Potential effects of the SAC-related litigation, related-party receivables and ongoing dealer, lease and management arrangements.
- Insurance reserve adequacy, investment portfolio losses and the effect of the Medicare supplement block on future premiums, benefits and acquisition-cost amortization.
- Management’s statement that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.