AMERCO (U-Haul) Form 10-Q Summary
Business context and reporting period
The supplied filing is AMERCO’s Form 10-Q for the quarter ended December 31, 2018, filed February 6, 2019. It reports fiscal 2019 third-quarter and nine-month results, not 2016 Q3 as indicated in the request. AMERCO operates U-Haul’s moving and storage businesses and has Property and Casualty Insurance and Life Insurance segments. Insurance subsidiaries report on a September 30 quarter-end and are consolidated into AMERCO’s December 31 reporting period.
Financial performance and key metrics
| Metric | Quarter ended Dec. 31, 2018 | Quarter ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $919.1 million | $842.9 million | $3.043 billion | $2.843 billion |
| Earnings from operations | $138.1 million | $303.4 million | $593.8 million | $762.2 million |
| Operating margin | 15.0% | 36.0% | 19.5% | 26.8% |
| Earnings available to common stockholders | $78.6 million | $528.9 million | $370.0 million | $779.7 million |
| Basic and diluted EPS | $4.01 | $27.00 | $18.89 | $39.81 |
| Net margin | 8.6% | 62.7% | 12.2% | 27.4% |
| Cash flow from operations | Not separately provided | Not separately provided | $877.7 million | $839.0 million |
- Revenue increased 9.0% in the quarter and 7.0% for the nine-month period. Self-moving equipment rentals, self-storage, U-Box and related services were the principal growth drivers.
- Self-moving equipment rental revenue increased 8.9% in the quarter and 7.0% for the nine months. Management cited higher transaction volume, improved revenue per transaction, more company-owned locations and a larger rental fleet.
- Self-storage revenue increased 13.7% in the quarter and 13.3% for the nine months. Average occupied square footage increased 12.2% and 11.3%, respectively, year over year.
- Operating expenses increased materially, including personnel, U-Box shipping, building maintenance, property taxes and fleet repairs. Depreciation also increased as the asset base expanded.
- Cash and cash equivalents were $984.4 million at December 31, 2018, compared with $759.4 million at March 31, 2018.
- Net capital expenditures were $763.5 million for the first nine months, compared with $379.4 million in the prior-year period. Gross capital expenditures were $1.581 billion, partially offset by $255.3 million of lease proceeds and $561.8 million of property and equipment sales.
- Notes, loans and leases payable, net, were $3.976 billion at December 31, 2018, up from $3.513 billion at March 31, 2018. The company reported $75.0 million of additional borrowing capacity under existing credit facilities.
Material changes versus the prior comparable period
- Quarterly and nine-month earnings declined sharply despite revenue growth. The prior-year periods benefited from a pre-tax gain of approximately $190.7 million on the sale of part of the Chelsea, New York property; no comparable gain occurred in 2018.
- The prior-year quarter and nine months also benefited from a $349.2 million deferred-tax reduction associated with the Tax Cuts and Jobs Act, partially offset by a $10.0 million one-time deemed-repatriation tax. The current-year effective tax rates were 23.7% for the quarter and 24.2% for the nine months, compared with tax benefits in the prior-year periods.
- Moving and Storage revenue increased, but earnings from operations before equity in insurance subsidiaries fell to $120.0 million from $285.7 million for the quarter and to $556.2 million from $723.6 million for the nine months, primarily because of the prior-year real-estate gain and higher operating costs.
- Property and Casualty Insurance operating earnings improved to $11.0 million from $7.6 million for the quarter and to $21.6 million from $19.1 million for the nine months, aided by favorable loss experience and higher premiums.
- Life Insurance operating earnings declined to $7.4 million from $10.4 million for the quarter and to $16.8 million from $20.5 million for the nine months, primarily reflecting lower Medicare supplement and other premiums.
- AMERCO adopted ASU 2016-01, resulting in an approximately $9.7 million reclassification from accumulated other comprehensive income to retained earnings. It also adopted revenue-recognition and other accounting updates without a material reported impact.
Outlook, risks, contingencies and unusual items
- Management planned to continue investing in the truck and trailer fleet, self-storage properties and U-Box. Fiscal 2019 planned net investment in the truck and trailer fleet was approximately $570 million, excluding lease buyouts; approximately $323 million had been invested through nine months.
- Management expected remaining capital investments to be funded primarily through debt financing, external leases and operating cash flow, while noting that financing availability, economic conditions, competition, weather, entitlements and used-truck prices could affect execution.
- Management identified leverage, variable interest rates, fleet and facility costs, dependence on a limited number of truck manufacturers, seasonality, competition, regulatory and environmental requirements, litigation, liability claims, third-party dealers, insurance reserve development and reliance on automated systems as material risks.
- The company had approximately $993.1 million of variable-rate debt. A 100-basis-point increase in applicable rates was estimated to reduce annual earnings and cash flow by approximately $9.7 million after hedging effects.
- In April 2018, the company paid $27.7 million to settle civil claims related to a 2014 propane-cylinder explosion. A subsidiary pleaded guilty to two employee-training violations; sentencing was scheduled for May 7, 2019. The filing states that other counts were agreed to be dismissed.
- Oxford terminated a reinsurance agreement effective November 30, 2018 and transferred net cash of $64.6 million to State Mutual on December 1, 2018.
- Beginning April 1, 2019, the company expected to adopt the new lease standard, which it stated would materially increase reported assets and liabilities. The filing did not provide a quantified expected adjustment.
- Related-party arrangements with entities controlled by significant stockholders generated $22.5 million of revenue and $51.1 million of costs and expenses during the first nine months. Management stated that the arrangements were substantially equivalent to arm’s-length terms.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for December 31, 2018 and fiscal 2019 Q3, not 2016 Q3.
- Assess recurring operating performance separately from the prior-year Chelsea property gain and Tax Cuts and Jobs Act tax benefit.
- Review whether elevated capital expenditures and debt-funded fleet and storage expansion generate the expected utilization, pricing and occupancy improvements.
- Verify debt maturities, variable-rate exposure, available borrowing capacity and the effect of future interest-rate changes.
- Monitor adoption of ASC 842 and its effect on leverage, assets, liabilities and covenant calculations.
- Review the propane-related criminal proceeding, insurance reserves, environmental matters and other litigation for possible additional costs.
- Evaluate the concentration and terms of related-party management, lease, dealer and commission arrangements.