U-Haul Holding Co /NV/ - Quarter Report: 2017 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, 2017

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
	(Nevada Corporation)
	5555 Kietzke Lane, Ste. 100
	Reno, Nevada 89511
	Telephone (775) 688-6300
	N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer [x]   Accelerated filer [ ]  

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

Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised finanical accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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, 2017.

 

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	a) Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and March 31, 2017	1
	b) Condensed Consolidated Statements of Operations for the Quarters Ended June 30, 2017 and 2016 (unaudited)	2
	c) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters Ended June 30, 2017 and 2016 (unaudited)	3
	d) Condensed Consolidated Statements of Cash Flows for the Quarters Ended June 30, 2017 and 2016 (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	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51

Part i Financial information

ITEM 1. Financial Statements

AMERCO AND CONSOLIDATED ENTITIES

CONDENSED CONSOLIDATED balance sheets

		June 30,		March 31,
		2017		2017
		(Unaudited)
		(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	803,522	$	697,806
Reinsurance recoverables and trade receivables, net		187,037		178,081
Inventories, net		93,374		82,439
Prepaid expenses		80,118		124,728
Investments, fixed maturities and marketable equities		1,763,031		1,663,768
Investments, other		376,224		367,830
Deferred policy acquisition costs, net		128,878		130,213
Other assets		99,550		97,525
Related party assets		80,865		86,168
		3,612,599		3,428,558
Property, plant and equipment, at cost:
Land		661,622		648,757
Buildings and improvements		2,710,924		2,618,265
Furniture and equipment		529,374		510,415
Rental trailers and other rental equipment		515,733		492,280
Rental trucks		4,228,778		4,091,598
		8,646,431		8,361,315
Less: Accumulated depreciation		(2,457,890)		(2,384,033)
Total property, plant and equipment		6,188,541		5,977,282
Total assets	$	9,801,140	$	9,405,840
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses	$	432,122	$	450,541
Notes, loans and leases payable, net		3,386,851		3,262,880
Policy benefits and losses, claims and loss expenses payable		1,091,550		1,086,322
Liabilities from investment contracts		1,221,381		1,112,498
Other policyholders' funds and liabilities		14,232		10,150
Deferred income		37,135		28,696
Deferred income taxes, net		854,805		835,009
Total liabilities		7,038,076		6,786,096
Commitments and contingencies (Notes 4, 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, 2017		–		–
Series B preferred stock, with no par value, 100,000 shares authorized; none
issued and outstanding as of June 30 and March 31, 2017		–		–
Serial common stock, with or without par value, 250,000,000 shares authorized:
Serial common stock of $0.25 par value, 10,000,000 shares authorized;
none issued and outstanding as of June 30 and March 31, 2017		–		–
Common stock, with $0.25 par value, 250,000,000 shares authorized:
Common stock of $0.25 par value, 250,000,000 shares authorized; 41,985,700
issued and 19,607,788 outstanding as of June 30 and March 31, 2017		10,497		10,497
Additional paid-in capital		452,319		452,172
Accumulated other comprehensive loss		(35,098)		(51,236)
Retained earnings		3,019,100		2,892,893
Cost of common shares in treasury, net (22,377,912 shares as of June 30 and March 31, 2017)		(525,653)		(525,653)
Cost of preferred shares in treasury, net (6,100,000 shares as of June 30 and March 31, 2017)		(151,997)		(151,997)
Unearned employee stock ownership plan shares		(6,104)		(6,932)
Total stockholders' equity		2,763,064		2,619,744
Total liabilities and stockholders' equity	$	9,801,140	$	9,405,840

 

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,
		2017		2016
		(Unaudited)
		(In thousands, except share and per share data)
Revenues:
Self-moving equipment rentals	$	669,858	$	646,336
Self-storage revenues		76,718		67,722
Self-moving and self-storage products and service sales		78,911		77,303
Property management fees		6,762		6,604
Life insurance premiums		39,091		40,892
Property and casualty insurance premiums		11,815		11,255
Net investment and interest income		27,217		27,331
Other revenue		47,553		45,748
Total revenues		957,925		923,191
Costs and expenses:
Operating expenses		416,924		385,082
Commission expenses		75,365		73,816
Cost of sales		47,595		43,362
Benefits and losses		47,720		47,003
Amortization of deferred policy acquisition costs		6,321		7,942
Lease expense		8,287		11,048
Depreciation, net of (gains) losses on disposals of ($4,741) and ($18,640), respectively		126,682		95,381
Total costs and expenses		728,894		663,634
Earnings from operations		229,031		259,557
Interest expense		(30,345)		(26,426)
Pretax earnings		198,686		233,131
Income tax expense		(72,479)		(85,958)
Earnings available to common stockholders	$	126,207	$	147,173
Basic and diluted earnings per common share	$	6.44	$	7.51
Weighted average common shares outstanding: Basic and diluted		19,587,891		19,586,069

 

Related party revenues for the first quarter of fiscal 2018 and 2017, net of eliminations, were $8.0 million and $7.8 million, respectively.

Related party costs and expenses for the first quarter of fiscal 2018 and 2017, net of eliminations, were $16.6 million and $16.4 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, 2017		Pre-tax		Tax		Net
		(Unaudited)
		(In thousands)
Comprehensive income:
Net earnings	$	198,686	$	(72,479)	$	126,207
Other comprehensive income:
Foreign currency translation		8,267		–		8,267
Unrealized net gain on investments		10,631		(3,720)		6,911
Change in fair value of cash flow hedges		1,550		(590)		960
Total comprehensive income	$	219,134	$	(76,789)	$	142,345
Quarter Ended June 30, 2016		Pre-tax		Tax		Net
		(Unaudited)
		(In thousands)
Comprehensive income:
Net earnings	$	233,131	$	(85,958)	$	147,173
Other comprehensive income:
Foreign currency translation		(278)		–		(278)
Unrealized net gain on investments		29,828		(10,440)		19,388
Change in fair value of cash flow hedges		2,081		(791)		1,290
Total comprehensive income	$	264,762	$	(97,189)	$	167,573

 

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,
		2017		2016
		(Unaudited)
		(In thousands)
Cash flows from operating activities:
Net earnings	$	126,207	$	147,173
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation		131,423		114,021
Amortization of deferred policy acquisition costs		6,321		7,942
Amortization of debt issuance costs		932		961
Interest credited to policyholders		7,651		5,059
Change in allowance for losses on trade receivables		(26)		21
Change in allowance for inventory reserves		1,114		1,221
Net gain on sale of real and personal property		(4,741)		(18,640)
Net gain on sale of investments		(1,985)		(2,406)
Deferred income taxes		12,024		22,733
Net change in other operating assets and liabilities:
Reinsurance recoverables and trade receivables		(8,870)		(14,138)
Inventories		(11,982)		(4,391)
Prepaid expenses		44,788		39,828
Capitalization of deferred policy acquisition costs		(8,228)		(7,252)
Other assets		17,812		(3,392)
Related party assets		7,836		4,084
Accounts payable and accrued expenses		61,704		57,099
Policy benefits and losses, claims and loss expenses payable		4,747		1,373
Other policyholders' funds and liabilities		4,083		242
Deferred income		8,393		8,727
Related party liabilities		(2,532)		781
Net cash provided by operating activities		396,671		361,046
Cash flow from investing activities:
Purchase of:
Property, plant and equipment		(480,259)		(437,287)
Short term investments		(16,491)		(277,038)
Fixed maturity investments		(123,090)		(166,648)
Real estate		(505)		(3,495)
Mortgage loans		(24,382)		(62,572)
Proceeds from sales and paydowns of:
Property, plant and equipment		142,343		147,196
Short term investments		24,639		279,341
Fixed maturity investments		36,559		55,946
Preferred stock		–		2,000
Real estate		2,664		831
Mortgage loans		6,054		94,015
Net cash used by investing activities		(432,468)		(367,711)
Cash flow from financing activities:
Borrowings from credit facilities		155,367		103,338
Principal repayments on credit facilities		(64,819)		(48,326)
Payment of debt issuance costs		(1,734)		(223)
Capital lease payments		(56,522)		(37,405)
Employee Stock Ownership Plan		3,516		(1,393)
Securitization deposits		49		93
Common stock dividends paid		–		(19,586)
Investment contract deposits		155,437		74,157
Investment contract withdrawals		(54,205)		(14,051)
Net cash provided by financing activities		137,089		56,604
Effects of exchange rate on cash		4,424		(4,397)
Increase in cash and cash equivalents		105,716		45,542
Cash and cash equivalents at the beginning of period		697,806		600,646
Cash and cash equivalents at the end of period	$	803,522	$	646,188

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 presentation of financial position or results of operations. We disclose any material events, if any, occurring during the intervening period. Consequently, all references to our insurance subsidiaries’ years 2017 and 2016 correspond to fiscal 2018 and 2017 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, 2017 and the related condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the first quarter of fiscal 2018 and 2017 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, 2017.

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 terms “Company,” “we,” “us” or “our” refer 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 (“Moving and Storage”) 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 portable moving and storage units 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 (“Property and Casualty Insurance”) includes Repwest and its wholly-owned subsidiaries and ARCOA Risk Retention Group (“ARCOA”). Property and Casualty Insurance provides loss adjusting and claims handling for U-Haul® through regional offices in the United States and Canada. Property and Casualty Insurance also underwrites components of the Safemove®, Safetow®, Safemove Plus®, Safestor® and Safestor Mobile® protection packages to U-Haul customers. The business plan for Property and Casualty Insurance 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 our moving and storage business.

The Life Insurance operating segment (“Life Insurance”) includes Oxford and its wholly-owned subsidiaries. Life Insurance 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 19,553 and 21,548 as of June 30, 2017 and June 30, 2016, 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 $28.1 million and $16.8 million at June 30, 2017 and March 31, 2017, respectively.

Available-for-Sale Investments

Available-for-sale investments at June 30, 2017 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	$	123,328	$	3,169	$	–	$	(1,605)	$	124,892
U.S. government agency mortgage-backed securities		27,330		1,005		(6)		(327)		28,002
Obligations of states and political subdivisions		165,559		9,917		(19)		(308)		175,149
Corporate securities		1,289,221		38,855		(5,322)		(7,744)		1,315,010
Mortgage-backed securities		81,009		550		–		(282)		81,277
Redeemable preferred stocks		13,789		348		–		(46)		14,091
Common stocks		15,732		8,890		(10)		(2)		24,610
	$	1,715,968	$	62,734	$	(5,357)	$	(10,314)	$	1,763,031

 

Available-for-sale investments at March 31, 2017 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
		(In thousands)
U.S. treasury securities and government obligations	$	123,474	$	2,892	$	–	$	(1,675)	$	124,691
U.S. government agency mortgage-backed securities		27,908		1,070		(6)		(377)		28,595
Obligations of states and political subdivisions		159,417		9,466		(23)		(424)		168,436
Corporate securities		1,263,703		32,901		(5,731)		(13,837)		1,277,036
Mortgage-backed securities		26,577		515		–		(5)		27,087
Redeemable preferred stocks		13,789		168		–		(468)		13,489
Common stocks		15,732		8,728		(10)		(16)		24,434
	$	1,630,600	$	55,740	$	(5,770)	$	(16,802)	$	1,663,768

The available-for-sale tables include 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 $35.6 million during the first quarter of fiscal 2018. The gross realized net gains on these sales totaled $1.6 million.

The unrealized losses of more than twelve months in the available-for-sale tables are considered temporary declines. 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 recognize these write-downs, if any, through earnings. There were no write downs in the first quarter of fiscal 2018 or 2017.

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.

There were no credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income (loss) for the first quarter of fiscal 2018.

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

		June 30, 2017				March 31, 2017
		Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value
		(Unaudited)
		(In thousands)
Due in one year or less	$	33,197	$	33,448	$	35,399	$	35,795
Due after one year through five years		355,226		365,085		324,286		333,016
Due after five years through ten years		608,698		622,859		598,232		607,184
Due after ten years		608,317		621,661		616,585		622,763
		1,605,438		1,643,053		1,574,502		1,598,758
Mortgage backed securities		81,009		81,277		26,577		27,087
Redeemable preferred stocks		13,789		14,091		13,789		13,489
Equity securities		15,732		24,610		15,732		24,434
	$	1,715,968	$	1,763,031	$	1,630,600	$	1,663,768

4. Borrowings

Long Term Debt

Long term debt was as follows:

					June 30,		March 31,
	2018 Rate (a)		Maturities		2017		2017
					(Unaudited)
					(In thousands)
Real estate loan (amortizing term)	2.62% - 6.93%		2023	$	166,789	$	169,289
Senior mortgages	3.72% - 5.50%		2022 - 2038		1,366,248		1,292,160
Working capital loan (revolving credit)	2.51%		2018		85,000		85,000
Fleet loans (amortizing term)	1.95% - 4.76%		2017 - 2024		341,313		324,977
Fleet loan (securitization)	4.90%		2017		50,055		52,112
Fleet loans (revolving credit)	2.19% - 2.20%		2018 - 2021		423,000		417,000
Capital leases (rental equipment)	1.92% - 4.86%		2017 - 2024		909,406		876,828
Other obligations	2.75% - 8.00%		2017 - 2047		70,216		69,867
Notes, loans and leases payable					3,412,027		3,287,233
Less: Debt issuance costs					(25,176)		(24,353)
Total notes, loans and leases payable, net				$	3,386,851	$	3,262,880
(a) Interest rate as of June 30, 2017, 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. As of June 30, 2017, the outstanding balance on the Real Estate Loan was $166.8 million. 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 final maturity of the term loan is April 2023.  

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, 2017, the applicable LIBOR was 1.12% and the applicable margin was 1.50%, the sum of which was 2.62%, which was applied to $39.0 million of the Real Estate Loan. The rate of the remaining balance of $127.8 million of the Real Estate Loan is hedged with an interest rate swap fixing the rate at 6.93% based on current margin. The interest rate swap expires in August 2018, after which date the remaining balance will incur interest at a rate of LIBOR plus a margin of 1.50%. 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.

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, 2017 were in the aggregate amount of $1,366.2 million and mature between 2022 and 2038. The senior mortgages require monthly principal and interest payments. The senior mortgages are secured by certain properties owned by the borrowers. The fixed interest rates, per the provisions of the senior mortgages, range between 3.72% and 5.50%. Certain senior mortgages have an anticipated repayment date and a maturity date. If these senior mortgages are not repaid by the anticipated repayment date, the interest rate on these mortgages would increase from the current fixed rate. We are using the anticipated repayment date for our maturity schedule. 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 $50.0 million. At June 30, 2017, the full $50.0 million was 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. The final maturity of this loan is September 2018. This loan requires monthly interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. The interest rate is the applicable LIBOR plus a margin of 1.25%. AMERCO is the guarantor 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.

Various subsidiaries of Amerco Real Estate Company and U-Haul International, Inc. are borrowers under an asset backed working capital loan. The maximum amount that can be drawn at any one time is $85.0 million. At June 30, 2017, the outstanding balance was $85.0 million. This loan is secured by certain properties owned by the borrowers. This loan agreement provides for term loans, subject to the terms of the loan agreement. The final maturity of the loan is November 2018. This loan requires monthly interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. The interest rate, per the provision of the loan agreement, is the applicable LIBOR plus the applicable margin. At June 30, 2017, the applicable LIBOR was 1.01% and the margin was 1.50%, the sum of which was 2.51%. AMERCO is the guarantor 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.

Fleet Loans

Rental Truck Amortizing Loans

U-Haul International, Inc. and several of its subsidiaries are borrowers under amortizing term loans. The aggregate balance of the loans as of June 30, 2017 was $341.3 million with the final maturities between July 2017 and June 2024.

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 the applicable margins. At June 30, 2017, the applicable LIBOR was between 1.05% and 1.16% and applicable margins were between 1.72% and 2.50%. The interest rates are hedged with interest rate swaps fixing the rates between 2.82% and 4.76% based on current margins. Additionally, $276.0 million of these loans are carried at fixed rates ranging between 1.95% and 3.94%.

AMERCO and, in some cases, 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

2010 U-Haul S Fleet and its subsidiaries (collectively, “2010 USF”) issued a $155.0 million asset-backed note (“2010 Box Truck Note”). 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, 2017, the outstanding balance was $50.1 million. The note is secured by the box trucks purchased and the corresponding operating cash flows associated with their operation.

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

Rental Truck Revolvers

Various subsidiaries of U-Haul International, Inc. entered into a revolving fleet loan for $150 million, which can be increased to a maximum of $225 million. This loan matures in September 2018. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus the applicable margin. At June 30, 2017, the applicable LIBOR was 1.04% and the margin was 1.15%, the sum of which was 2.19%. Only interest is paid on the loan until the last nine months when principal is due monthly. As of June 30, 2017, the outstanding balance was $150.0 million.

Various subsidiaries of U-Haul International, Inc. entered into a revolving fleet loan for $150 million, which can be increased to a maximum of $190 million. This loan matures in March 2020. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus the applicable margin. At June 30, 2017, the applicable LIBOR was 1.05% and the margin was 1.15%, the sum of which was 2.20%. Only interest is paid on the loan until the last nine months when principal is due monthly. As of June 30, 2017, the outstanding balance was $150.0 million.

Various subsidiaries of U-Haul International, Inc. entered into a revolving fleet loan for $150 million. The loan matures in November 2021. The interest rate, per the provision of the Loan Agreement is the applicable LIBOR plus the applicable margin. At June 30, 2017, the applicable LIBOR was 1.05% and the margin was 1.15%, the sum of which was 2.20%. Only interest is paid on the loan until the last nine months when principal is due monthly. As of June 30, 2017, the outstanding balance was $123.0 million.

Capital Leases

We regularly enter into capital leases for new equipment with the terms of the leases between five and seven years. During the first quarter of fiscal 2018, we entered into $87.4 million of new capital leases. At June 30, 2017 and March 31, 2017, the balance of our capital leases was $909.4 million and $876.8 million, respectively. The net book value of the corresponding capitalized assets was $1,259.1 million and $1,233.3 million at June 30, 2017 and March 31, 2017, respectively.

Other Obligations

In February 2011, AMERCO and U.S. Bank, NA (the “Trustee”) entered into the U-Haul Investors Club® Indenture.  AMERCO and the Trustee entered into this indenture to provide for the issuance of notes by us directly to investors over our proprietary website, uhaulinvestorsclub.com (“U-Notes®”). The U-Notes® are secured by various types of collateral including, but not limited to, 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, 2017, the aggregate outstanding principal balance of the U-Notes® issued was $74.4 million of which $4.2 million is held by our insurance subsidiaries and eliminated in consolidation. Interest rates range between 2.75% and 8.00% and maturity dates range between 2017 and 2047.

Oxford is a member of the Federal Home Loan Bank (“FHLB”) and, as such, the FHLB has made deposits with Oxford. As of March 31, 2017, one deposit balance was $45.0 million, for which Oxford pays a fixed interest rate of 1.00%, due on the maturity date of September 29, 2017. As of March 31, 2017, the other deposit amount was $15.0 million with a maturity of March 30, 2020 at an interest rate of 1.75%. As of March 31, 2017, available-for-sale investments held with the FHLB totaled $129.0 million, of which $68.6 million was pledged as collateral to secure the outstanding deposits. The balances of these deposits are included within Liabilities from investment contracts on the consolidated balance sheet.

Annual Maturities of Notes, Loans and Leases Payable

The annual maturities of long term debt, including capital leases, as of June 30, 2017 for the next five years and thereafter are as follows:

		Year Ended June 30,
		2018		2019		2020		2021		2022		Thereafter
		(Unaudited)
		(In thousands)
Notes, loans and leases payable, secured	$	539,396	$	536,031	$	470,174	$	294,609	$	259,118	$	1,312,699

Interest on Borrowings

Interest Expense

Components of interest expense include the following:

		Quarter Ended June 30,
		2017		2016
		(Unaudited)
		(In thousands)
Interest expense	$	29,629	$	24,085
Capitalized interest		(1,765)		(1,313)
Amortization of transaction costs		932		843
Interest expense resulting from derivatives		1,549		2,811
Total interest expense	$	30,345	$	26,426

Interest paid in cash, including payments related to derivative contracts, amounted to $31.0 million and $27.2 million for the first quarter of fiscal 2018 and 2017, respectively.

Interest Rates

Interest rates and Company borrowings were as follows:

		Revolving Credit Activity
		Quarter Ended June 30,
		2017		2016
		(Unaudited)
		(In thousands, except interest rates)
Weighted average interest rate during the quarter		2.24%		1.73%
Interest rate at quarter end		2.25%		1.72%
Maximum amount outstanding during the quarter	$	508,000	$	410,000
Average amount outstanding during the quarter	$	499,659	$	369,637
Facility fees	$	76	$	41

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. Following is a summary of our interest rate swap agreements at June 30, 2017:

	Original variable rate debt and lease amount			Agreement Date		Effective Date		Expiration Date		Designated cash flow hedge date
	(Unaudited)
	(In millions)
$	300.0			8/16/2006		8/18/2006		8/10/2018		8/4/2006
	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		6/1/2011
	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, 2017, the total notional amount of our variable interest rate swaps on debt and an operating lease was $194.4 million and $7.4 million, respectively

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

		Net Liability Derivative Fair Value as of
		June 30, 2017		March 31, 2017
		(Unaudited)
		(In thousands)
Interest rate contracts designated as hedging instruments	$	3,353	$	4,903

 

		The Effect of Interest Rate
		Contracts on the Statements of Operations
		Quarter Ended June 30,
		2017		2016
		(Unaudited)
		(In thousands)
Loss recognized in income on interest rate contracts	$	1,549	$	2,811
Gain recognized in AOCI on interest rate contracts (effective portion)	$	(1,550)	$	(2,081)
Loss reclassified from AOCI into income (effective portion)	$	1,550	$	2,809
(Gain) loss recognized in income on interest rate contracts (ineffective portion and amount excluded from effectiveness testing)	$	(1)	$	2

Gains or losses recognized in income on derivatives are recorded as interest expense in the statements of operations. During the first quarter of fiscal 2018, we recognized an increase in the fair value of our cash flow hedges of $1.0 million, net of taxes. Embedded in this change was $1.6 million of losses reclassified from accumulated other comprehensive income (loss) to interest expense during the first quarter of fiscal 2018. At June 30, 2017, we expect to reclassify $3.4 million of net losses on interest rate contracts from accumulated other comprehensive income to earnings as interest expense over the next twelve months.

6. Accumulated Other 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 Net Loss		Accumulated Other Comprehensive Income (Loss)
		(Unaudited)
		(In thousands)
Balance at March 31, 2017	$	(69,505)	$	23,099	$	(3,059)	$	(1,771)	$	(51,236)
Foreign currency translation		8,267		–		–		–		8,267
Unrealized net gain on investments		–		6,911		–		–		6,911
Change in fair value of cash flow hedges		–		–		2,510		–		2,510
Amounts reclassified from AOCI		–		–		(1,550)		–		(1,550)
Other comprehensive income (loss)		8,267		6,911		960		–		16,138
Balance at June 30, 2017	$	(61,238)	$	30,010	$	(2,099)	$	(1,771)	$	(35,098)

7. Stockholders’ Equity

On July 5, 2017, we declared a cash dividend on our Common Stock of $1.00 per share to holders of record on July 20, 2017. The dividend was paid on August 3, 2017.

On June 8, 2016, the stockholder’s approved the 2016 AMERCO Stock Option Plan (Shelf Stock Option Plan). As of June 30, 2017, no awards had been issued under this plan.

8. 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, 2017, we have guaranteed $16.5 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.

Operating and ground lease commitments for leases having terms of more than one year were as follows:

		Property, Plant and Equipment				Rental Equipment
		Ground		Operating		Operating		Total
		(Unaudited)
		(In thousands)
Year ended June 30:
2018	$	957	$	16,616	$	10,808	$	28,381
2019		1,008		15,235		7,315		23,558
2020		1,024		15,873		429		17,326
2021		1,025		15,216		–		16,241
2022		1,030		14,963		–		15,993
Thereafter		46,653		30,640		–		77,293
Total	$	51,697	$	108,543	$	18,552	$	178,792

9. 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.

10. Related Party Transactions

As set forth in the Company’s 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 and in accordance with generally accepted accounting principles (“GAAP”). Accordingly, all such related party transactions are submitted to the Audit Committee for ongoing review and oversight. Our internal processes are designed to ensure that our legal and finance departments identify and monitor potential related party transactions that 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 and develop self-storage properties. These properties are being managed by us pursuant to management agreements. In the past, we sold real estate and various self-storage properties to SAC Holdings, and such sales provided significant cash flows to us.

Related Party Revenue

		Quarter Ended June 30,
		2017		2016
		(Unaudited)
		(In thousands)
U-Haul interest income revenue from SAC Holdings	$	1,205	$	1,223
U-Haul management fee revenue from SAC Holdings		5,201		5,118
U-Haul management fee revenue from Private Mini		961		902
U-Haul management fee revenue from Mercury		600		584
	$	7,967	$	7,827

During the first quarter of fiscal 2018, a subsidiary of ours held a junior unsecured note from SAC Holdings. Substantially all of the equity interest of SAC Holdings is controlled by Blackwater Investments, Inc. (“Blackwater”). Blackwater is wholly-owned by Willow Grove Holdings LP, which is owned by Mark V. Shoen (a significant shareholder), and various trusts associated with Edward J. Shoen (our Chairman of the Board, President and a significant shareholder) and Mark V. Shoen. We do not have an equity ownership interest in SAC Holdings. We received cash interest payments of $1.1 million from SAC Holdings during the first quarter of both fiscal 2018 and 2017. The largest aggregate amount of the note receivable outstanding during the first quarter of fiscal 2018 was $48.1 million and the aggregate note receivable balance at June 30, 2017 was $47.8 million. In accordance with the terms of this note, SAC Holdings may prepay the note without penalty or premium at any time. We are currently negotiating to extend this note. The scheduled maturity of this note is 2017.

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 Storage Realty, L.P. (“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 $10.0 million and $8.7 million from the above mentioned entities during the first quarter of fiscal 2018 and 2017, respectively. This management fee is consistent with the fee received for other properties we previously managed for third parties. SAC Holdings, 4 SAC, 5 SAC, Galaxy and Private Mini are substantially controlled by Blackwater. Mark V. Shoen controls the general partner of Mercury. The limited partner interests of Mercury are indirectly owned by Mark V. Shoen, James P. Shoen (a significant shareholder) and a trust benefitting the children and grandchild of Edward J. Shoen.