U-Haul Holding Co /NV/ - Quarter Report: 2013 June (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2013

or

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from __________________ to __________________

Commission File Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.
1-11255	AMERCO	88-0106815
	(A Nevada Corporation)
	1325 Airmotive Way, Ste. 100
	Reno, Nevada 89502-3239
	Telephone (775) 688-6300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]  No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer [ ]   Accelerated filer [x]  

Non-accelerated filer [ ] (Do not check if a smaller reporting company)    Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

19,607,788 shares of AMERCO Common Stock, $0.25 par value, were outstanding at August 1, 2013.

 

 

 

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	a) Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and March 31, 2013	1
	b) Condensed Consolidated Statements of Operations for the Quarters ended June 30, 2013 and 2012 (unaudited)	2
	c) Condensed Consolidated Statements of Comprehensive Income for the Quarters ended June 30, 2013 and 2012 (unaudited)	3
	d) Condensed Consolidated Statements of Cash Flows for the Quarters ended June 31, 2013 and 2012 (unaudited)	4
	e) Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine and Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49

Part i Financial information

ITEM 1. Financial Statements

AMERCO AND CONSOLIDATED ENTITIES

CONDENSED CONSOLIDATED balance sheets

		June 30,		March 31,
		2013		2013
		(Unaudited)
		(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	552,587	$	463,744
Reinsurance recoverables and trade receivables, net		284,518		261,789
Inventories, net		58,304		56,396
Prepaid expenses		43,378		57,451
Investments, fixed maturities and marketable equities		1,117,008		1,095,338
Investments, other		231,418		241,765
Deferred policy acquisition costs, net		97,823		93,043
Other assets		104,744		99,986
Related party assets		151,127		182,035
		2,640,907		2,551,547
Property, plant and equipment, at cost:
Land		348,234		333,228
Buildings and improvements		1,278,622		1,197,875
Furniture and equipment		313,796		311,142
Rental trailers and other rental equipment		331,433		317,476
Rental trucks		2,263,692		2,154,688
		4,535,777		4,314,409
Less: Accumulated depreciation		(1,597,922)		(1,559,355)
Total property, plant and equipment		2,937,855		2,755,054
Total assets	$	5,578,762	$	5,306,601
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses	$	366,302	$	358,491
Notes, loans and leases payable		1,737,277		1,661,845
Policy benefits and losses, claims and loss expenses payable		1,115,821		1,115,048
Liabilities from investment contracts		538,777		510,789
Other policyholders' funds and liabilities		7,114		7,294
Deferred income		37,752		30,217
Deferred income taxes		429,428		393,658
Total liabilities		4,232,471		4,077,342
Commitments and contingencies (notes 4, 7, 8 and 9)		–		–
Stockholders' equity:
Series preferred stock, with or without par value, 50,000,000 shares authorized:
Series A preferred stock, with no par value, 6,100,000 shares authorized;
6,100,000 shares issued and none outstanding as of June 30 and March 31, 2013		–		–
Series B preferred stock, with no par value, 100,000 shares authorized; none
issued and outstanding as of June 30 and March 31, 2013		–		–
Series common stock, with or without par value, 150,000,000 shares authorized:
Series A common stock of $0.25 par value, 10,000,000 shares authorized;
none issued and outstanding as of June 30 and March 31, 2013		–		–
Common stock of $0.25 par value, 150,000,000 shares authorized; 41,985,700
issued and 19,607,788 outstanding as of June 30 and March 31, 2013		10,497		10,497
Additional paid-in capital		439,524		438,168
Accumulated other comprehensive loss		(20,099)		(22,680)
Retained earnings		1,595,598		1,482,630
Cost of common shares in treasury, net (22,377,912 shares as of June 30 and March 31, 2013)		(525,653)		(525,653)
Cost of preferred shares in treasury, net (6,100,000 shares as of June 30 and March 31, 2013)		(151,997)		(151,997)
Unearned employee stock ownership plan shares		(1,579)		(1,706)
Total stockholders' equity		1,346,291		1,229,259
Total liabilities and stockholders' equity	$	5,578,762	$	5,306,601

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERCO AND CONSOLIDATED ENTITIES

CONDENSED CONSOLIDATED Statements of operations

		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands, except share and per share amounts)
Revenues:
Self-moving equipment rentals	$	521,649	$	466,994
Self-storage revenues		42,099		34,736
Self-moving and self-storage products and service sales		70,691		67,178
Property management fees		5,161		4,860
Life insurance premiums		41,062		46,426
Property and casualty insurance premiums		7,966		7,243
Net investment and interest income		18,989		14,517
Other revenue		39,214		25,722
Total revenues		746,831		667,676
Costs and expenses:
Operating expenses		309,501		283,393
Commission expenses		68,627		61,107
Cost of sales		35,570		32,227
Benefits and losses		42,633		48,338
Amortization of deferred policy acquisition costs		3,683		2,811
Lease expense		27,007		32,796
Depreciation, net of (gains) on disposals of (($11,565) and ($7,516), respectively)		57,434		56,125
Total costs and expenses		544,455		516,797
Earnings from operations		202,376		150,879
Interest expense		(23,328)		(23,491)
Pretax earnings		179,048		127,388
Income tax expense		(66,080)		(46,819)
Earnings available to common stockholders	$	112,968	$	80,569
Basic and diluted earnings per common share	$	5.78	$	4.13
Weighted average common shares outstanding: Basic and diluted		19,545,618		19,502,369

 

Related party revenues for the first quarter of fiscal 2014 and 2013, net of eliminations, were $8.4 million and $8.7 million, respectively.

Related party costs and expenses for the first quarter of fiscal 2014 and 2013, net of eliminations, were $14.0 million and $12.3 million, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERCO AND CONSOLIDATED ENTITIES

Condensed consolidatED statements of COMPREHENSIVE INCOME (loss)

Quarter Ended June 30, 2013		Pre-tax		Tax		Net
		(Unaudited)
		(In thousands)
Comprehensive income:
Net earnings	$	179,048	$	(66,080)	$	112,968
Other comprehensive income (loss):
Foreign currency translation		(3,762)		–		(3,762)
Unrealized net gain on investments		89		(68)		21
Change in fair value of cash flow hedges		10,196		(3,874)		6,322
Total comprehensive income	$	185,571	$	(70,022)	$	115,549
Quarter Ended June 30, 2012		Pre-tax		Tax		Net
		(Unaudited)
		(In thousands)
Comprehensive income:
Net earnings	$	127,388	$	(46,819)	$	80,569
Other comprehensive income (loss):
Foreign currency translation		(1,929)		–		(1,929)
Unrealized net gain on investments		1,873		(580)		1,293
Change in fair value of cash flow hedges		(515)		196		(319)
Total comprehensive income	$	126,817	$	(47,203)	$	79,614

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

AMERCO AND CONSOLIDATED ENTITIES

Condensed consolidatED statements of cash flows

		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands)
Cash flow from operating activities:
Net earnings	$	112,968	$	80,569
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation		68,999		63,641
Amortization of deferred policy acquisition costs		3,683		2,811
Change in allowance for losses on trade receivables		(14)		(102)
Change in allowance for inventory reserves		(935)		695
Net gain on sale of real and personal property		(11,565)		(7,516)
Net (gain)loss on sale of investments		(1,776)		39
Deferred income taxes		31,828		4,641
Net change in other operating assets and liabilities:
Reinsurance recoverables and trade receivables		(22,715)		23,486
Inventories		(973)		(5,398)
Prepaid expenses		14,098		267
Capitalization of deferred policy acquisition costs		(7,808)		(5,420)
Other assets		(4,532)		20,518
Related party assets		24,878		144,890
Accounts payable and accrued expenses		18,162		47,981
Policy benefits and losses, claims and loss expenses payable		1,609		(24,242)
Other policyholders' funds and liabilities		(180)		(1,884)
Deferred income		7,584		6,457
Related party liabilities		5,962		1,448
Net cash provided by operating activities		239,273		352,881
Cash flows from investing activities:
Purchases of:
Property, plant and equipment		(275,156)		(157,786)
Short term investments		(64,652)		(60,395)
Fixed maturities investments		(66,855)		(50,553)
Equity securities		(388)		–
Preferred stock		(634)		–
Real estate		(131)		–
Mortgage loans		(12,904)		(14,452)
Proceeds from sale of:
Property, plant and equipment		93,239		62,426
Short term investments		64,818		59,421
Fixed maturities investments		41,491		23,978
Equity securities		904		–
Preferred stock		3,295		1,003
Real estate		–		4
Mortgage loans		23,258		11,547
Net cash used by investing activities		(193,715)		(124,807)
Cash flows from financing activities:
Borrowings from credit facilities		88,182		26,187
Principal repayments on credit facilities		(61,996)		(61,142)
Debt issuance costs		(232)		–
Capital lease payments		(10,449)		(3,888)
Leveraged Employee Stock Ownership Plan - repayments from loan		127		162
Securitization deposits		–		(908)
Investment contract deposits		34,742		28,993
Investment contract withdrawals		(6,754)		(7,967)
Net cash provided (used) by financing activities		43,620		(18,563)
Effects of exchange rate on cash		(335)		(376)
Increase in cash and cash equivalents		88,843		209,135
Cash and cash equivalents at the beginning of period		463,744		357,180
Cash and cash equivalents at the end of period	$	552,587	$	566,315

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERCO and consolidated entities

notes to condensed consolidatED financial statements

1.Basis of Presentation

AMERCO, a Nevada corporation (“AMERCO”), has a first fiscal quarter that ends on the 30th of June for each year that is referenced. Our insurance company subsidiaries have a first quarter that ends on the 31st of March for each year that is referenced. They have been consolidated on that basis. Our insurance companies’ financial reporting processes conform to calendar year reporting as required by state insurance departments. Management believes that consolidating their calendar year into our fiscal year financial statements does not materially affect the financial position or results of operations. The Company discloses any material events occurring during the intervening period. Consequently, all references to our insurance subsidiaries’ years 2013 and 2012 correspond to fiscal 2014 and 2013 for AMERCO.

Accounts denominated in non-U.S. currencies have been translated into U.S. dollars. Certain amounts reported in previous years have been reclassified to conform to the current presentation.

The condensed consolidated balance sheet as of June 30, 2013 and the related condensed consolidated statements of operations, comprehensive income and cash flows for the first quarter of fiscal 2014 and 2013 are unaudited.

In our opinion, all adjustments necessary for the fair presentation of such condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The information in this Quarterly Report on Form 10-Q (“Quarterly Report”) should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

Intercompany accounts and transactions have been eliminated.

Description of Legal Entities

AMERCO is the holding company for:

U-Haul International, Inc. (“U-Haul”),

Amerco Real Estate Company (“Real Estate”),

Repwest Insurance Company (“Repwest”), and

Oxford Life Insurance Company (“Oxford”).

Unless the context otherwise requires, the term “Company,” “we,” “us” or “our” refers to AMERCO and all of its legal subsidiaries.

Description of Operating Segments

AMERCO has three reportable segments. They are Moving and Storage, Property and Casualty Insurance and Life Insurance.

The Moving and Storage operating segment includes AMERCO, U-Haul, and Real Estate and the wholly-owned subsidiaries of U-Haul and Real Estate. Operations consist of the rental of trucks and trailers, sales of moving supplies, sales of towing accessories, sales of propane, and the rental of fixed and mobile self-storage spaces to the “do-it-yourself” mover and management of self-storage properties owned by others. Operations are conducted under the registered trade name U-Haul® throughout the United States and Canada.

AMERCO and consolidated entities

notes to condensed consolidatED financial statements (Continued)

The Property and Casualty Insurance operating segment includes Repwest and its wholly-owned subsidiaries and ARCOA risk retention group (“ARCOA”). The Property and Casualty Insurance operating segment provides loss adjusting and claims handling for U-Haul through regional offices across North America. The Property and Casualty Insurance operating segment also underwrites components of the Safemove, Safetow, Safemove Plus, Safestor and Safestor Mobile protection packages to U-Haul customers. The business plan for the Property and Casualty Insurance operating segment includes offering property and casualty products in other U-Haul related programs. ARCOA is a group captive insurer owned by us and our wholly-owned subsidiaries whose purpose is to provide insurance products related to the moving and storage business.

The Life Insurance operating segment includes Oxford and its wholly-owned subsidiaries. The Life Insurance operating segment provides life and health insurance products primarily to the senior market through the direct writing and reinsuring of life insurance, Medicare supplement and annuity policies.

2. Earnings per Share

Our earnings per share is calculated by dividing our earnings available to common stockholders by the weighted average common shares outstanding, basic and diluted.

The weighted average common shares outstanding exclude post-1992 shares of the employee stock ownership plan that have not been committed to be released. The unreleased shares, net of shares committed to be released, were 57,681 and 100,302 as of June 30, 2013 and June 30, 2012, respectively.

3. Investments

Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

We deposit bonds with insurance regulatory authorities to meet statutory requirements. The adjusted cost of bonds on deposit with insurance regulatory authorities was $16.4 million at June 30, 2013.

Available-for-Sale Investments

Available-for-sale investments at June 30, 2013 were as follows:

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses More than 12 Months		Gross Unrealized Losses Less than 12 Months		Estimated Market Value
		(Unaudited)
		(In thousands)
U.S. treasury securities and government obligations	$	28,083	$	2,568	$	(3)	$	(3)	$	30,645
U.S. government agency mortgage-backed securities		42,332		3,627		(5)		(34)		45,920
Obligations of states and political subdivisions		154,644		16,482		–		(382)		170,744
Corporate securities		754,664		49,736		(195)		(4,276)		799,929
Mortgage-backed securities		6,117		251		(28)		–		6,340
Redeemable preferred stocks		21,163		871		(28)		(6)		22,000
Common stocks		43,219		1,660		(3,405)		(44)		41,430
	$	1,050,222	$	75,195	$	(3,664)	$	(4,745)	$	1,117,008

The table above includes gross unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

We sold available-for-sale securities with a fair value of $44.2 million during the first quarter of fiscal 2014. The gross realized gains on these sales totaled $1.2 million. There were no gross realized losses on these sales.

The unrealized losses of more than twelve months in the available-for-sale table are considered temporary declines. The majority of this unrealized loss is related to our long term investments in 1.8 million shares of Bank of America common stock. We track each investment with an unrealized loss and evaluate them on an individual basis for other-than-temporary impairments including obtaining corroborating opinions from third party sources, performing trend analysis and reviewing management’s future plans. Certain of these investments may have declines determined by management to be other-than-temporary and we recognized these write-downs through earnings. There were no write downs in the first quarter of fiscal 2014 and 2013.

The investment portfolio primarily consists of corporate securities and U.S. government securities. We believe we monitor our investments as appropriate. Our methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity, the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. Nothing has come to management’s attention that would lead to the belief that each issuer would not have the ability to meet the remaining contractual obligations of the security, including payment at maturity. We have the ability and intent not to sell our fixed maturity and common stock investments for a period of time sufficient to allow us to recover our costs.

The portion of other-than-temporary impairment related to a credit loss is recognized in earnings. The significant inputs utilized in the evaluation of mortgage backed securities credit losses include ratings, delinquency rates, and prepayment activity. The significant inputs utilized in the evaluation of asset backed securities credit losses include the time frame for principal recovery and the subordination and value of the underlying collateral.

Credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income were as follows:

		Credit Loss
		(Unaudited)
		(In thousands)
Balance at March 31, 2013	$	552
Additions:
Other-than-temporary impairment not previously recognized		–
Balance at June 30, 2013	$	552

 

The adjusted cost and estimated market value of available-for-sale investments at June 30, 2013, by contractual maturity, were as follows:

		Amortized Cost		Estimated Market Value
		(Unaudited)
		(In thousands)
Due in one year or less	$	40,195	$	40,825
Due after one year through five years		172,665		183,996
Due after five years through ten years		293,659		315,929
Due after ten years		473,204		506,488
		979,723		1,047,238
Mortgage backed securities		6,117		6,340
Redeemable preferred stocks		21,163		22,000
Common stocks		43,219		41,430
	$	1,050,222	$	1,117,008

 

4. Borrowings

Long-Term Debt

Long-term debt was as follows:

					June 30,		March 31,
	2014 Rate (a)		Maturities		2013		2013
					(Unaudited)
					(In thousands)
Real estate loan (amortizing term)	6.93%		2023	$	257,500	$	235,000
Real estate loan (amortizing term)	2.09%		2016		24,406		24,630
Real estate loan (revolving credit)	-		2014		–		–
Senior mortgages	4.90% - 5.75%		2015 - 2038		550,926		556,522
Working capital loan (revolving credit)	-		2015		–		–
Fleet loans (amortizing term)	1.95% - 6.92%		2013 - 2020		369,761		361,079
Fleet loans (securitization)	4.90% - 5.56%		2014 - 2017		182,466		190,801
Capital leases (rental equipment)	2.23% - 9.58%		2015 - 2020		323,009		273,458
Other obligations	3.00% - 8.00%		2013 - 2043		29,209		20,355
Total notes, loans and leases payable				$	1,737,277	$	1,661,845
(a) Interest rate as of June 30, 2013, including the effect of applicable hedging instruments.

 

Real Estate Backed Loans

Real Estate Loan

Amerco Real Estate Company and certain of its subsidiaries and U-Haul Company of Florida are borrowers under a Real Estate Loan. During the first quarter of fiscal 2014 this loan was amended. As part of the amendment the revolver component of the agreement was terminated and certain collateral was released. The final maturity date of the term loan was extended to April 2023. As of June 30, 2013, the outstanding balance on the Real Estate Loan was $257.5 million. U-Haul International, Inc. is a guarantor of this loan.  The Real Estate Loan requires monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The Real Estate Loan is secured by various properties owned by the borrowers. 

The interest rate, per the provisions of the amended loan agreement, is the applicable London Inter-Bank Offer Rate (“LIBOR”) plus the applicable margin. At June 30, 2013, the applicable LIBOR was 0.20% and the applicable margin was 1.50%, the sum of which was 1.70%. The rate on the term facility portion of the Real Estate Loan is hedged with an interest rate swap fixing the rate at 6.93% based on current margin.The default provisions of the Real Estate Loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.

Amerco Real Estate Company and a subsidiary of U-Haul International, Inc. entered into a revolving credit construction loan effective June 29, 2006. This loan was modified and extended on June 27, 2011. The loan is now comprised of a term loan facility with an initial availability of $26.1 million and a final maturity of June 2016. As of June 30, 2013, the outstanding balance was $24.4 million.

This Real Estate Loan requires monthly principal and interest payments, with the unpaid loan balance and any accrued and unpaid interest due at maturity. The interest rate, per the provision of this loan agreement, is the applicable LIBOR plus a margin of 1.90%. At June 30, 2013, the applicable LIBOR was 0.19% and the margin was 1.90%, the sum of which was 2.09%. U-Haul International, Inc. and AMERCO are guarantors of this loan. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.

On April 29, 2011, Amerco Real Estate Company and U-Haul Company of Florida entered into a revolving credit agreement for $100.0 million. This agreement was amended in February 2013 and the maturity extended to April 2014 with an option for a one year extension and the revolver balance reduced to $50.0 million. As of June 30, 2013, we had the full $50.0 million available to be drawn. The interest rate is the applicable LIBOR plus a margin of 1.25%. AMERCO and U-Haul International, Inc. are guarantors of this facility. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.

Senior Mortgages

Various subsidiaries of Amerco Real Estate Company and U-Haul International, Inc. are borrowers under certain senior mortgages. These senior mortgage loan balances as of June 30, 2013 were in the aggregate amount of $550.9 million and mature between 2015 and 2038. The senior mortgages require average monthly principal and interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. The senior mortgages are secured by certain properties owned by the borrowers. The interest rates, per the provisions of the senior mortgages, range between 4.90% and 5.75%. Amerco Real Estate Company and U-Haul International, Inc. have provided limited guarantees of the senior mortgages. The default provisions of the senior mortgages include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds. 

Working Capital Loans

Amerco Real Estate Company is a borrower under an asset backed working capital loan. The maximum amount that can be drawn at any one time is $25.0 million. At June 30, 2013, we had the full $25.0 million available to be drawn. This loan is secured by certain properties owned by the borrower. This loan agreement provides for revolving loans, subject to the terms of the loan agreement. This agreement was amended in February 2013 and the maturity extended to April 2015. This loan requires monthly interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. U-Haul International, Inc. and AMERCO are the guarantors of this loan. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. The interest rate, per the provision of this loan agreement, is the applicable LIBOR plus a margin of 1.25%.

Fleet Loans

Rental Truck Amortizing Loans

U-Haul International, Inc. and several of its subsidiaries are borrowers under amortizing term loans. The balance of the loans as of June 30, 2013 was $254.8 million with the final maturities between July 2013 and May 2020.

The Amortizing Loans require monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. These loans were used to purchase new trucks. The interest rates, per the provision of the Loan Agreements, are the applicable LIBOR plus a margin between 0.90% and 2.63%. At June 30, 2013, the applicable LIBOR was between 0.19% and 0.20% and applicable margins were between 0.90% and 2.63%. The interest rates are hedged with interest rate swaps fixing the rates between 2.82% and 6.92% based on current margins. Additionally, $59.8 million of these loans are carried at fixed rates ranging between 1.95% and 3.94%.

AMERCO and U-Haul International, Inc. are guarantors of these loans. The default provisions of these loans include non-payment of principal or interest and other standard reporting and change-in-control covenants.

On December 31, 2009, a subsidiary of U-Haul International, Inc. entered into an $85.0 million term note that was used to fund cargo van and pickup acquisitions for the past two years. This term note was amended on August 26, 2011. The amount of the term note was increased to $95.0 million. On December 22, 2011, we entered into another term loan for $20.0 million. The final maturity date of these notes is August 2016.  The agreements contain options to extend the maturity through May 2017. These notes are secured by the purchased equipment and the corresponding operating cash flows associated with their operation.  These notes have fixed interest rates between 3.52% and 3.53%. At June 30, 2013, the outstanding balance was $115.0 million.

AMERCO and U-Haul International, Inc. are guarantors of these loans. The default provisions of these loans include non-payment of principal or interest and other standard reporting and change-in-control covenants.

Rental Truck Securitizations

U-Haul S Fleet and its subsidiaries (collectively, “USF”) issued a $217.0 million asset-backed note (“2007 Box Truck Note”) on June 1, 2007. USF is a bankruptcy-remote special purpose entity wholly-owned by U-Haul International, Inc. The net proceeds from the securitized transaction were used to finance new box truck purchases throughout fiscal 2008. U.S. Bank, NA acts as the trustee for this securitization.

The 2007 Box Truck Note has a fixed interest rate of 5.56% with an expected final maturity of February 2014. At June 30, 2013, the outstanding balance was $78.6 million. The note is secured by the box trucks that were purchased and the corresponding operating cash flows associated with their operation.

The 2007 Box Truck Note has the benefit of a financial guaranty insurance policy which guarantees the timely payment of interest on and the ultimate payment of the principal of this note.

2010 U-Haul S Fleet and its subsidiaries (collectively, “2010 USF”) issued a $155.0 million asset-backed note (“2010 Box Truck Note”) on October 28, 2010. 2010 USF is a bankruptcy-remote special purpose entity wholly-owned by U-Haul International, Inc. The net proceeds from the securitized transaction were used to finance new box truck purchases. U.S. Bank, NA acts as the trustee for this securitization.

The 2010 Box Truck Note has a fixed interest rate of 4.90% with an expected final maturity of October 2017. At June 30, 2013, the outstanding balance was $103.8 million. The note is secured by the box trucks being purchased and the corresponding operating cash flows associated with their operation.

The 2007 Box Truck Note and 2010 Box Truck Note are subject to certain covenants with respect to liens, additional indebtedness of the special purpose entities, the disposition of assets and other customary covenants of bankruptcy-remote special purpose entities. The default provisions of these notes include non-payment of principal or interest and other standard reporting and change-in-control covenants.

Capital Leases

We entered into capital leases for new equipment between April 2008 and May 2013, with terms of the leases between 3 and 7 years. At June 30, 2013, the balance of these leases was $323.0 million.

Other Obligations

In February 2011, the Company and US Bank, National Association (the “Trustee”) entered into the U-Haul Investors Club Indenture.  The Company and the Trustee entered into this indenture to provide for the issuance of notes (“U-Notes”) by us directly to investors over our proprietary website, uhaulinvestorsclub.com. The U-Notes are secured by various types of collateral including rental equipment and real estate.  U-Notes are issued in smaller series that vary as to principal amount, interest rate and maturity.  U-Notes are obligations of the Company and secured by the associated collateral; they are not guaranteed by any of the Company’s affiliates or subsidiaries.

At June 30, 2013, the aggregate outstanding principal balance of the U-Notes issued was $35.7 million of which $6.4 million is with our insurance subsidiaries with interest rates between 3.00% and 8.00% and maturity dates between 2013 and 2043.

Annual Maturities of Notes, Loans and Leases Payable

The annual maturities of long-term debt as of June 30, 2013 for the next five years and thereafter are as follows:

		Year Ending June 30,
		2014		2015		2016		2017		2018		Thereafter
		(Unaudited)
		(In thousands)
Notes, loans and leases payable, secured	$	260,964	$	129,895	$	544,926	$	259,114	$	180,359	$	362,019

Interest on Borrowings

Interest Expense

Components of interest expense include the following:

		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands)
Interest expense	$	17,814	$	15,646
Capitalized interest		(142)		(77)
Amortization of transaction costs		851		1,085
Interest expense resulting from derivatives		4,805		6,837
Total interest expense	$	23,328	$	23,491

 

Interest paid in cash, including payments related to derivative contracts, amounted to $22.0 million and $21.2 million for the first quarter of fiscal 2014 and 2013, respectively.

Interest Rates

Interest rates and Company borrowings were as follows:

		Revolving Credit Activity
		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands, except interest rates)
Weighted average interest rate during the quarter		1.48%		1.74%
Interest rate at the end of the quarter		-		1.74%
Maximum amount outstanding during the quarter	$	25,000	$	23,920
Average amount outstanding during the quarter	$	24,176	$	23,920
Facility fees	$	92	$	178

 

5. Derivatives

We manage exposure to changes in market interest rates. Our use of derivative instruments is limited to highly effective interest rate swaps to hedge the risk of changes in cash flows (future interest payments) attributable to changes in LIBOR swap rates, the designated benchmark interest rate being hedged on certain of our LIBOR indexed variable rate debt and a variable rate operating lease. The interest rate swaps effectively fix our interest payments on certain LIBOR indexed variable rate debt. We monitor our positions and the credit ratings of our counterparties and do not currently anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes.

	Original variable rate debt amount			Agreement Date		Effective Date		Expiration Date		Designated cash flow hedge date
	(Unaudited)
	(In millions)
$	50.0			6/21/2006		7/10/2006		7/10/2013		6/9/2006
	300.0			8/16/2006		8/18/2006		8/10/2018		8/4/2006
	30.0			2/9/2007		2/12/2007		2/10/2014		2/9/2007
	20.0			3/8/2007		3/12/2007		3/10/2014		3/8/2007
	20.0			3/8/2007		3/12/2007		3/10/2014		3/8/2007
	19.3	(a)		4/8/2008		8/15/2008		6/15/2015		3/31/2008
	19.0			8/27/2008		8/29/2008		7/10/2015		4/10/2008
	30.0			9/24/2008		9/30/2008		9/10/2015		9/24/2008
	15.0	(a)		3/24/2009		3/30/2009		3/30/2016		3/25/2009
	14.7	(a)		7/6/2010		8/15/2010		7/15/2017		7/6/2010
	25.0	(a)		4/26/2011		6/1/2011		6/1/2018		7/1/2011
	50.0	(a)		7/29/2011		8/15/2011		8/15/2018		7/29/2011
	20.0	(a)		8/3/2011		9/12/2011		9/10/2018		8/3/2011
	15.1	(b)		3/27/2012		3/28/2012		3/28/2019		3/26/2012
	25.0			4/13/2012		4/16/2012		4/1/2019		4/12/2012
	44.3			1/11/2013		1/15/2013		12/15/2019		1/11/2013
	(a) forward swap
	(b) operating lease

 

As of June 30, 2013, the total notional amount of our variable interest rate swaps on debt and an operating lease was $437.9 million and $13.4 million, respectively.

The derivative fair values located in Accounts payable and accrued expenses in the balance sheets were as follows:

		Liability Derivatives Fair Values as of
		June 30, 2013		March 31, 2013
		(Unaudited)
		(In thousands)
Interest rate contracts designated as hedging instruments	$	41,749	$	51,550

 

		The Effect of Interest Rate Contracts on the Statements of Operations
		June 30, 2013		June 30, 2012
		(Unaudited)
		(In thousands)
Loss recognized in income on interest rate contracts	$	4,805	$	6,837
(Gain) loss recognized in AOCI on interest rate contracts (effective portion)	$	(10,196)	$	515
Loss reclassified from AOCI into income (effective portion)	$	4,410	$	5,269
(Gain) loss recognized in income on interest rate contracts (ineffective portion and amount excluded from effectiveness testing)	$	395	$	1,568

 

Gains or losses recognized in income on derivatives are recorded as interest expense in the statements of operations. At June 30, 2013, we expect to reclassify $15.6 million of net losses on interest rate contracts from accumulated other comprehensive income to earnings as interest expense over the next twelve months. During the first quarter of fiscal 2014, we reclassified $4.4 million of net losses on interest rate contracts from accumulated other comprehensive income to interest expense.

6. Comprehensive Income (Loss)

A summary of accumulated other comprehensive income (loss) components, net of tax, were as follows:

		Foreign Currency Translation		Unrealized Net Gain on Investments		Fair Market Value of Cash Flow Hedges		Postretirement Benefit Obligation Gain		Accumulated Other Comprehensive Income (Loss)
		(Unaudited)
		(In thousands)
Balance at March 31, 2013	$	(30,153)	$	39,645	$	(32,298)	$	126	$	(22,680)
Foreign currency translation		(3,762)		–		–		–		(3,762)
Unrealized net gain on investments		–		21		–		–		21
Change in fair value of cash flow hedges		–		–		1,912		–		1,912
Amounts reclassified from AOCI		–		–		4,410		–		4,410
Other comprehenive income (loss)		(3,762)		21		6,322		–		2,581
Balance at June 30, 2013	$	(33,915)	$	39,666	$	(25,976)	$	126	$	(20,099)

 

7. Contingent Liabilities and Commitments

We lease a portion of our rental equipment and certain of our facilities under operating leases with terms that expire at various dates substantially through 2019. As of June 30, 2013, we have guaranteed $111.8 million of residual values for these rental equipment assets at the end of the respective lease terms. Certain leases contain renewal and fair market value purchase options as well as mileage and other restrictions. At the expiration of the lease, we have the option to renew the lease, purchase the asset for fair market value, or sell the asset to a third party on behalf of the lessor. We have been leasing equipment since 1987 and have experienced no material losses relating to these types of residual value guarantees.

Lease commitments for leases having terms of more than one year were as follows:

		Property, Plant and Equipment		Rental Equipment		Total
		(Unaudited)
				(In thousands)
Year-ended June 30:
2014	$	13,579	$	79,078	$	92,657
2015		2,017		55,621		57,638
2016		1,856		23,017		24,873
2017		1,767		13,279		15,046
2018		1,285		10,907		12,192
Thereafter		4,893		7,757		12,650
Total	$	25,397	$	189,659	$	215,056

 

8. Contingencies

Environmental

Compliance with environmental requirements of federal, state and local governments may significantly affect Real Estate’s business operations. Among other things, these requirements regulate the discharge of materials into the air, land and water and govern the use and disposal of hazardous substances. Real Estate is aware of issues regarding hazardous substances on some of its properties. Real Estate regularly makes capital and operating expenditures to stay in compliance with environmental laws and has put in place a remedial plan at each site where it believes such a plan is necessary. Since 1988, Real Estate has managed a testing and removal program for underground storage tanks.

Based upon the information currently available to Real Estate, compliance with the environmental laws and its share of the costs of investigation and cleanup of known hazardous waste sites are not expected to result in a material adverse effect on AMERCO’s financial position or results of operations.

Other

We are named as a defendant in various other litigation and claims arising out of the normal course of business. In management’s opinion, none of these other matters will have a material effect on our financial position and results of operations.

 

9. Related Party Transactions

As set forth in the Audit Committee Charter and consistent with Nasdaq Listing Rules, our Audit Committee (the “Audit Committee”) reviews and maintains oversight over related party transactions which are required to be disclosed under the Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, all such related party transactions are submitted to the Audit Committee for ongoing review and oversight. Our internal processes ensure that our legal and finance departments identify and monitor potential related party transactions which may require disclosure and Audit Committee oversight.

AMERCO has engaged in related party transactions and has continuing related party interests with certain major stockholders, directors and officers of the consolidated group as disclosed below. Management believes that the transactions described below and in the related notes were completed on terms substantially equivalent to those that would prevail in arm’s-length transactions.

SAC Holding Corporation and SAC Holding II Corporation, (collectively “SAC Holdings”) were established in order to acquire self-storage properties. These properties are being managed by us pursuant to management agreements. In the past, we have sold various self-storage properties to SAC Holdings, and such sales provided significant cash flows to the Company.

Management believes that the sales of self-storage properties to SAC Holdings has provided a unique structure for the Company to earn moving equipment rental revenues and property management fee revenues from the SAC Holdings self-storage properties that the Company manages.

Related Party Revenue

		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands)
U-Haul interest income revenue from SAC Holdings	$	1,919	$	2,476
U-Haul interest income revenue from Private Mini		1,337		1,345
U-Haul management fee revenue from SAC Holdings		4,074		3,829
U-Haul management fee revenue from Private Mini		594		567
U-Haul management fee revenue from Mercury		493		464
	$	8,417	$	8,681

During the first quarter of fiscal 2014, subsidiaries of the Company held various junior unsecured notes of SAC Holdings. Substantially all of the equity interest of SAC Holdings is controlled by Blackwater Investments, Inc. (“Blackwater”). Blackwater is wholly-owned by Mark V. Shoen, a significant stockholder of AMERCO. We do not have an equity ownership interest in SAC Holdings. We received cash interest payments of $12.3 million and $7.2 million from SAC Holdings during the first quarter of fiscal 2014 and 2013, respectively. The largest aggregate amount of notes receivable outstanding during the first quarter of fiscal 2014 was $72.4 million and the aggregate notes receivable balance at June 30, 2013 was $72.2 million. In accordance with the terms of these notes, SAC Holdings may prepay the notes without penalty or premium at any time. The scheduled maturities of these notes are between 2017 and 2019.

During the first quarter of fiscal 2014, AMERCO and U-Haul held various junior notes issued by Private Mini Storage Realty, L.P. (“Private Mini”). The equity interests of Private Mini are ultimately controlled by Blackwater. We received cash interest payments of $1.4 million from Private Mini during the first quarters of both fiscal 2014 and 2013. The largest aggregate amount outstanding during the first quarter of fiscal 2014 was $65.9 million and the aggregate notes receivable balance at June 30, 2013 was $65.8 million.

We currently manage the self-storage properties owned or leased by SAC Holdings, Mercury Partners, L.P. (“Mercury”), Four SAC Self-Storage Corporation (“4 SAC”), Five SAC Self-Storage Corporation (“5 SAC”), Galaxy Investments, L.P. (“Galaxy”) and Private Mini pursuant to a standard form of management agreement, under which we receive a management fee of between 4% and 10% of the gross receipts plus reimbursement for certain expenses. We received management fees, exclusive of reimbursed expenses, of $10.3 million and $9.4 million from the above mentioned entities during the first quarter of fiscal 2014 and 2013, respectively. This management fee is consistent with the fee received for other properties the Company previously managed for third parties. SAC Holdings, 4 SAC, 5 SAC, Galaxy and Private Mini are substantially controlled by Blackwater. Mercury is substantially controlled by Mark V. Shoen. James P. Shoen, a significant stockholder and director of AMERCO and an estate planning trust benefitting the Shoen children have an interest in Mercury.

Related Party Costs and Expenses

		Quarter Ended June 30,
		2013		2012
		(Unaudited)
		(In thousands)
U-Haul lease expenses to SAC Holdings	$	655	$	661
U-Haul commission expenses to SAC Holdings		12,520		10,934
U-Haul commission expenses to Private Mini		795		695
	$	13,970	$	12,290