U-Haul Holding Co /NV/ - Quarter Report: 2018 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, 2018

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)
	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 financial 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, 2018.

 

 

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	a) Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and March 31, 2018	1
	b) Condensed Consolidated Statements of Operations for the Quarters Ended June 30, 2018 and 2017 (unaudited)	2
	c) Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters Ended June 30, 2018 and 2017 (unaudited)	3
	d) Condensed Consolidated Statements of Cash Flows for the Quarters Ended June 30, 2018 and 2017 (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	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53

Part i Financial information

Item 1. Financial Statements

AMERCO AND CONSOLIDATED ENTITIES

CONDENSED CONSOLIDATED balance sheets

		June 30,		March 31,
		2018		2018
		(Unaudited)
		(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	650,339	$	759,388
Reinsurance recoverables and trade receivables, net		207,987		193,538
Inventories and parts, net		94,901		89,877
Prepaid expenses		183,536		166,129
Investments, fixed maturities and marketable equities		1,950,876		1,919,860
Investments, other		396,622		399,064
Deferred policy acquisition costs, net		134,133		124,767
Other assets		248,320		244,782
Related party assets		30,486		33,276
		3,897,200		3,930,681
Property, plant and equipment, at cost:
Land		849,042		827,649
Buildings and improvements		3,331,918		3,140,713
Furniture and equipment		641,730		632,803
Rental trailers and other rental equipment		547,291		545,968
Rental trucks		4,533,758		4,390,750
		9,903,739		9,537,883
Less: Accumulated depreciation		(2,799,455)		(2,721,142)
Total property, plant and equipment		7,104,284		6,816,741
Total assets	$	11,001,484	$	10,747,422
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses	$	518,033	$	511,115
Notes, loans and leases payable, net		3,586,127		3,513,076
Policy benefits and losses, claims and loss expenses payable		1,252,810		1,248,033
Liabilities from investment contracts		1,409,705		1,364,066
Other policyholders' funds and liabilities		9,857		10,040
Deferred income		41,963		34,276
Deferred income taxes, net		686,844		658,108
Total liabilities		7,505,339		7,338,714
Commitments and contingencies (notes 4, 9 and 10)
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, 2018		–		–
Series B preferred stock, with no par value, 100,000 shares authorized; none
issued and outstanding as of June 30 and March 31, 2018		–		–
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, 2018		–		–
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, 2018		10,497		10,497
Additional paid-in capital		452,862		452,746
Accumulated other comprehensive loss		(45,966)		(4,623)
Retained earnings		3,763,339		3,635,561
Cost of common shares in treasury, net (22,377,912 shares as of June 30 and March 31, 2018)		(525,653)		(525,653)
Cost of preferred shares in treasury, net (6,100,000 shares as of June 30 and March 31, 2018)		(151,997)		(151,997)
Unearned employee stock ownership plan shares		(6,937)		(7,823)
Total stockholders' equity		3,496,145		3,408,708
Total liabilities and stockholders' equity	$	11,001,484	$	10,747,422

 

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,
		2018		2017
		(Unaudited)
		(In thousands, except share and per share amounts)
Revenues:
Self-moving equipment rentals	$	716,602	$	669,858
Self-storage revenues		86,212		76,718
Self-moving and self-storage products and service sales		79,241		78,911
Property management fees		7,416		6,762
Life insurance premiums		36,888		39,091
Property and casualty insurance premiums		12,781		11,815
Net investment and interest income		24,605		27,217
Other revenue		55,832		47,553
Total revenues		1,019,577		957,925
Costs and expenses:
Operating expenses		496,554		416,692
Commission expenses		79,257		75,365
Cost of sales		49,881		47,595
Benefits and losses		48,554		47,720
Amortization of deferred policy acquisition costs		6,031		6,321
Lease expense		8,169		8,287
Depreciation, net of gains on disposal of ($16,295 and $5,088, respectively)		126,427		126,335
Net losses on disposal of real estate		–		347
Total costs and expenses		814,873		728,662
Earnings from operations		204,704		229,263
Other components of net periodic benefit costs		(253)		(232)
Interest expense		(35,254)		(30,345)
Pretax earnings		169,197		198,686
Income tax expense		(41,348)		(72,479)
Earnings available to common stockholders	$	127,849	$	126,207
Basic and diluted earnings per common share	$	6.53	$	6.44
Weighted average common shares outstanding: Basic and diluted		19,590,585		19,587,891

 

Related party revenues for the first quarter of fiscal 2019 and 2018, net of eliminations, were $7.4 million and $8.0 million, respectively.

Related party costs and expenses for the first quarter of fiscal 2019 and 2018, net of eliminations, were $17.2 million and $16.6 million, respectively.

Please see Note 10, Related Party Transactions, of the Notes to Condensed Consolidated Financial Statements for more information on the related party revenues and costs and expenses.

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, 2018		Pre-tax		Tax		Net
		(Unaudited)
		(In thousands)
Comprehensive income:
Net earnings	$	169,197	$	(41,348)	$	127,849
Other comprehensive income (loss):
Foreign currency translation		(2,093)		–		(2,093)
Unrealized net loss on investments		(50,218)		10,546		(39,672)
Change in fair value of cash flow hedges		560		(138)		422
Total comprehensive income	$	117,446	$	(30,940)	$	86,506
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 (loss):
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

 

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,
		2018		2017
		(Unaudited)
		(In thousands)
Cash flows from operating activities:
Net earnings	$	127,849	$	126,207
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation		142,722		131,423
Amortization of deferred policy acquisition costs		6,031		6,321
Amortization of debt issuance costs		984		932
Interest credited to policyholders		8,060		7,651
Change in allowance for losses on trade receivables		38		(26)
Change in allowance for inventories and parts reserves		2,139		1,114
Net gains on disposal of personal property		(16,295)		(5,088)
Net losses on disposal of real estate		–		347
Net (gains) losses on sales of investments		506		(1,985)
Deferred income taxes		38,678		12,024
Net change in other operating assets and liabilities:
Reinsurance recoverables and trade receivables		(14,543)		(8,870)
Inventories and parts		(7,170)		(11,982)
Prepaid expenses		(17,999)		44,788
Capitalization of deferred policy acquisition costs		(5,808)		(8,228)
Other assets		(761)		(2,523)
Related party assets		2,205		7,836
Accounts payable and accrued expenses		89,348		61,704
Policy benefits and losses, claims and loss expenses payable		5,291		4,747
Other policyholders' funds and liabilities		(184)		4,083
Deferred income		7,732		8,393
Related party liabilities		474		(2,532)
Net cash provided by operating activities		369,297		376,336
Cash flows from investing activities:
Escrow deposits		(4,559)		23,005
Purchases of:
Property, plant and equipment		(548,147)		(480,259)
Short term investments		(14,390)		(16,491)
Fixed maturity investments		(103,121)		(123,090)
Equity securities		(46)		–
Preferred stock		(81)		–
Real estate		(80)		(505)
Mortgage loans		(8,262)		(24,382)
Proceeds from sales and paydowns of:
Property, plant and equipment		187,546		142,343
Short term investments		20,416		24,639
Fixed maturity investments		14,946		36,559
Preferred stock		500		–
Real estate		–		2,664
Mortgage loans		9,402		6,054
Net cash used by investing activities		(445,876)		(409,463)
Cash flows from financing activities:
Borrowings from credit facilities		103,641		155,367
Principal repayments on credit facilities		(73,770)		(64,819)
Payment of debt issuance costs		(1,420)		(1,734)
Capital lease payments		(84,374)		(56,522)
Employee stock ownership plan shares		(57)		3,516
Securitization deposits		–		49
Common stock dividends paid		(9,795)		–
Investment contract deposits		76,343		155,437
Investment contract withdrawals		(38,763)		(54,205)
Net cash provided (used) by financing activities		(28,195)		137,089
Effects of exchange rate on cash		(4,275)		4,424
Increase (decrease) in cash and cash equivalents		(109,049)		108,386
Cash and cash equivalents at the beginning of period		759,388		697,806
Cash and cash equivalents at the end of period	$	650,339	$	806,192

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 2018 and 2017 correspond to fiscal 2019 and 2018 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, 2018 and the related condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the first quarter of fiscal 2019 and 2018 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, 2018.

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 insurance 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 16,828 and 19,533 as of June 30, 2018 and June 30, 2017, 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 $31.4 million and $32.4 million at June 30, 2018 and March 31, 2018, respectively.

Available-for-Sale Investments

Available-for-sale investments at June 30, 2018 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	$	123,420	$	1,858	$	(1,561)	$	(911)	$	122,806
U.S. government agency mortgage-backed securities		63,031		714		(1)		(662)		63,082
Obligations of states and political subdivisions		190,454		7,481		(236)		(538)		197,161
Corporate securities		1,423,091		26,369		(5,291)		(15,275)		1,428,894
Mortgage-backed securities		101,605		1,055		–		(765)		101,895
Redeemable preferred stocks		2,118		93		–		–		2,211
	$	1,903,719	$	37,570	$	(7,089)	$	(18,151)	$	1,916,049

 

Available-for-sale investments at March 31, 2018 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	$	123,557	$	3,595	$	(1,036)	$	(203)	$	125,913
U.S. government agency mortgage-backed securities		36,416		951		(1)		(93)		37,273
Obligations of states and political subdivisions		178,702		9,938		(217)		(18)		188,405
Corporate securities		1,388,300		50,056		(3,009)		(1,826)		1,433,521
Mortgage-backed securities		94,106		2,072		–		(153)		96,025
Redeemable preferred stocks		2,118		129		–		–		2,247
	$	1,823,199	$	66,741	$	(4,263)	$	(2,293)	$	1,883,384

As of March 31, 2018, equity investments were classified as available-for-sale on our balance sheet. However, upon adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments. As of June 30, 2018 and March 31, 2018 we had $8.0 million and $8.7 million of preferred stock and $26.9 million and $27.9 million of common stock, respectively that are included in Investments, fixed maturities and marketable equities on the balance sheet. The changes in the fair value of the equity investments are recognized through Net investment and interest income.

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 $14.0 million during the first quarter of fiscal 2019. The gross realized net gains on these sales totaled $0.2 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 2019 or 2018.

The investment portfolio primarily consists of corporate securities and obligations of states and political subdivisions. 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 any 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 2019 and fiscal 2018, respectively.

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

		June 30, 2018				March 31, 2018
		Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value
		(Unaudited)
		(In thousands)
Due in one year or less	$	42,372	$	42,546	$	36,446	$	36,674
Due after one year through five years		469,929		472,652		441,223		450,816
Due after five years through ten years		616,785		618,194		607,895		626,174
Due after ten years		670,910		678,551		641,411		671,448
		1,799,996		1,811,943		1,726,975		1,785,112
Mortgage backed securities		101,605		101,895		94,106		96,025
Redeemable preferred stocks		2,118		2,211		2,118		2,247
	$	1,903,719	$	1,916,049	$	1,823,199	$	1,883,384

4. Borrowings

Long Term Debt

Long term debt was as follows:

					June 30,		March 31,
	2019 Rate (a)		Maturities		2018		2018
					(Unaudited)
					(In thousands)
Real estate loan (amortizing term)	3.55% - 6.93%		2023	$	132,787	$	135,287
Senior mortgages	3.72% - 6.62%		2021 - 2038		1,519,614		1,487,645
Working capital loans (revolving credit)	3.36%		2021		75,000		55,000
Fleet loans (amortizing term)	1.95% - 4.66%		2018 - 2025		332,236		342,971
Fleet loans (revolving credit)	3.13%		2021 - 2022		450,000		460,000
Capital leases (rental equipment)	1.92% - 5.04%		2018 - 2025		1,029,405		984,217
Other obligations	2.75% - 8.00%		2018 - 2047		72,978		73,579
Notes, loans and leases payable					3,612,020		3,538,699
Less: Debt issuance costs					(25,893)		(25,623)
Total notes, loans and leases payable, net				$	3,586,127	$	3,513,076
(a) Interest rate as of June 30, 2018, including the effect of applicable hedging instruments.

Real Estate Backed Loans

Real Estate Loan

Real Estate and certain of its subsidiaries and U-Haul Company of Florida are borrowers under a Real Estate Loan. As of June 30, 2018, the outstanding balance on the Real Estate Loan was $132.8 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. As of June 30, 2018, the applicable LIBOR was 2.05% and the applicable margin was 1.50%, the sum of which was 3.55%, which was applied to $72.2 million of the Real Estate Loan. The rate of the remaining balance of $60.6 million of the Real Estate Loan is hedged with an interest rate swap fixing the rate at 6.93% based on the 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 Real Estate and U-Haul are borrowers under certain senior mortgages. These senior mortgage loan balances as of June 30, 2018 were in the aggregate amount of $1,519.6 million and mature between 2021 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 6.62%. 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. Real Estate and U-Haul 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

Various subsidiaries of Real Estate and U-Haul are borrowers under an asset backed working capital loan. This loan was amended in June 2018, to extend the maturity date and reduce the applicable margin. The maximum amount that can be drawn at any one time is $85.0 million. As of June 30, 2018, the outstanding balance was $75.0 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 June 2021. 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. As of June 30, 2018, the applicable LIBOR was 1.98% and the margin was 1.38%, the sum of which was 3.36%. 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.

AMERCO is a borrower under a working capital loan. The current maximum credit commitment is $150.0 million, which can be increased to $300.0 million by bringing in other lenders. As of June 30, 2018, the full $150.0 million was available to be drawn. This loan agreement provides for revolving loans, subject to the terms of the loan agreement. The final maturity of this loan is September 2020. 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 between 1.38% and 1.50% depending on the amount outstanding. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There is a 0.30% fee charged for unused capacity.

Fleet Loans

Rental Truck Amortizing Loans

U-Haul and several of its subsidiaries are borrowers under amortizing term loans. The aggregate balance of the loans as of June 30, 2018 was $332.2 million with the final maturities between September 2018 and June 2025.

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. As of June 30, 2018, the applicable LIBOR was between 1.98% and 2.07% and applicable margins were between 1.72% and 2.25%. The interest rates are hedged with interest rate swaps fixing the rates between 2.82% and 4.11% based on current margins. Additionally, $286.6 million of these loans are carried at fixed rates ranging between 1.95% and 4.66%.

AMERCO and, in some cases, U-Haul 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 Revolvers

Various subsidiaries of U-Haul entered into three revolving fleet loans in aggregate for $510.0 million, which can be increased to a maximum of $565.0 million. These loans mature between January 2021 and July 2022. The interest rate, per the provision of the loan agreements, is the applicable LIBOR plus the applicable margin. As of June 30, 2018, the applicable LIBOR was 1.98% and the margin was 1.15%, the sum of which was 3.13%. Only interest is paid on the loans until the last nine months when principal is due monthly. As of June 30, 2018, the aggregate outstanding balance of the loans was $450.0 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 2019, we entered into $126.9 million of new capital leases. As of June 30, 2018 and March 31, 2018, the balance of our capital leases was $1,029.4 million and $984.2 million, respectively. The net book value of the corresponding capitalized assets was $1,479.4 million and $1,407.6 million as of June 30, 2018 and March 31, 2018, 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.

As of June 30, 2018, the aggregate outstanding principal balance of the U-Notes® issued was $76.5 million, of which $3.5 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 2018 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, 2018, the deposits had an aggregate balance of $60.0 million, for which Oxford pays fixed interest rates between 1.48% and 2.67% with maturities between September 29, 2018 and March 29, 2021. As of March 31, 2018, available-for-sale investments held with the FHLB totaled $125.0 million, of which $72.4 million were pledged as collateral to secure the outstanding deposits. The balances of these deposits are included within Liabilities from investment contracts on the condensed consolidated balance sheets.

Annual Maturities of Notes, Loans and Leases Payable

The annual maturities of long term debt, including capital leases, as of June 30, 2018 for the next five years and thereafter are as follows:

		Year Ended June 30,
		2019		2020		2021		2022		2023		Thereafter
		(Unaudited)
		(In thousands)
Notes, loans and leases payable, secured	$	483,563	$	433,620	$	526,913	$	534,647	$	259,432	$	1,373,845

Interest on Borrowings

Interest Expense

Components of interest expense include the following:

		Quarter Ended June 30,
		2018		2017
		(Unaudited)
		(In thousands)
Interest expense	$	34,196	$	29,629
Capitalized interest		(419)		(1,765)
Amortization of transaction costs		961		932
Interest expense resulting from derivatives		516		1,549
Total interest expense		35,254		30,345

Interest paid in cash, including payments related to derivative contracts, amounted to $34.4 million and $31.0 million for the first quarter of fiscal 2019 and 2018, respectively.

Interest Rates

Interest rates and Company borrowings were as follows:

		Revolving Credit Activity
		Quarter Ended June 30,
		2018		2017
		(Unaudited)
		(In thousands, except interest rates)
Weighted average interest rate during the quarter		3.11%		2.24%
Interest rate at the end of the quarter		3.16%		2.25%
Maximum amount outstanding during the quarter	$	525,000	$	508,000
Average amount outstanding during the quarter	$	497,967	$	499,659
Facility fees	$	144	$	76

 

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. The following is a summary of our interest rate swap agreements as of June 30, 2018:

	Original variable rate debt 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
	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, 2018, the total notional amount of our variable interest rate swaps on debt and an operating lease was $107.4 million and $5.8 million, respectively.

The derivative fair values were as follows:

		Derivatives Fair Values as of
		June 30, 2018		March 31, 2018
		(Unaudited)
		(In thousands)
Interest rate contracts designated as hedging instruments:	$		$
Assets		422		437
Liabilities		(338)		(897)

 

		The Effect of Interest Rate Contracts on the Statements of Operations for the Quarters Ended
		June 30, 2018		June 30, 2017
		(Unaudited)
		(In thousands)
Loss recognized in income on interest rate contracts	$	516	$	1,549
Gain recognized in AOCI on interest rate contracts (effective portion)	$	(560)	$	(1,550)
Loss reclassified from AOCI into income (effective portion)	$	500	$	1,550
(Gain) loss recognized in income on interest rate contracts (ineffective portion and amount excluded from effectiveness testing)	$	16	$	(1)

 

Gains or losses recognized in income on derivatives are recorded as interest expense in the statements of operations. During the first quarter of fiscal 2019, we recognized an increase in the fair value of our cash flow hedges of $0.4 million, net of taxes. Embedded in this change was $0.5 million of losses reclassified from accumulated other comprehensive income (loss) to interest expense during the first quarter of fiscal 2019. As of June 30, 2018, we expect to reclassify $18 thousand of net gains on interest rate contracts from accumulated other comprehensive income (loss) 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, 2018	$	(54,853)	$	52,509	$	(370)	$	(1,909)	$	(4,623)
Foreign currency translation		(2,093)		–		–		–		(2,093)
Unrealized net loss on investments		–		(39,672)		–		–		(39,672)
Change in fair value of cash flow hedges		–		–		922		–		922
Amounts reclassified from AOCI		–		–		(500)		–		(500)
Other comprehensive income (loss)		(2,093)		(39,672)		422		–		(41,343)
Balance at June 30, 2018	$	(56,946)	$	12,837	$	52	$	(1,909)	$	(45,966)

7. Stockholders’ Equity

On March 8, 2018, we declared a cash dividend on our Common Stock of $0.50 per share to holders of record on March 23, 2018. The dividend was paid on April 6, 2018.

On June 6, 2018, we declared a cash dividend on our Common Stock of $0.50 per share to holders of record on June 21, 2018. The dividend was paid on July 5, 2018.

On June 8, 2016, the stockholder’s approved the 2016 AMERCO Stock Option Plan (Shelf Stock Option Plan). As of June 30, 2018, 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 2024. As of June 30, 2018, we have guaranteed $14.2 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:
2019	$	1,008	$	17,032	$	7,287	$	25,327
2020		1,024		17,376		428		18,828
2021		1,025		16,213		–		17,238
2022		1,030		15,051		–		16,081
2023		1,030		14,561		–		15,591
Thereafter		49,391		16,579		–		65,970
Total	$	54,508	$	96,812	$	7,715	$	159,035

9. Contingencies

Litigation

On July 1, 2014, a 100-pound propane cylinder allegedly filled at a Philadelphia-area U-Haul Co. of Pennsylvania (“UHPA”) center exploded while in use on a food truck. The explosion killed two people and injured eleven. Following the incident, the injured parties and their estates filed a number of lawsuits against U-Haul and its subsidiary, UHPA, both of which denied the allegations. One plaintiff sued AMERCO, which also denied the allegations. All suits were filed in the Philadelphia Court of Common Pleas. The plaintiffs alleged, among other things, that UHPA should not have refilled the propane cylinder at issue because it was out-of-date and improperly fitted with an incorrect valve, which allegedly caused the explosion. The plaintiffs sought compensatory and punitive damages.

After several settlements with the less-injured plaintiffs, in April 2018, the parties reached an agreement, in principle, to settle the remaining cases. We will pay our self-insured retention and attorney’s fees. Together, these amounts are currently estimated to be $27.3 million, of which $26.8 million has already been paid.  The balance of the settlement amount is accrued on our balance sheet in Policy benefits and losses, claims and loss expenses payable with offsetting insurance recoveries from our insurance carriers in Other assets.

Following the resolution of the civil claims in April 2018, the U.S. Attorney’s Office for the Eastern District of Pennsylvania advised the Company that UHPA was a target of an investigation. On June 12, 2018, UHPA was indicted by a grand jury in the U.S. District Court for the Eastern District of Pennsylvania.  The six-count indictment charged UHPA with allegedly improperly filling propane cylinders that were overdue for periodic requalification, offering such cylinders for transportation, and failing to train and certify a UHPA employee dispensing propane. UHPA will vigorously defend itself against the charges.

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. SAC Holdings, 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”) are substantially controlled by Blackwater Investments, Inc. (“Blackwater”). Blackwater is wholly-owned by Willow Grove Holdings LP (“WGHLP”), 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.

Related Party Revenue

		Quarter Ended June 30,
		2018		2017
		(Unaudited)
		(In thousands)
U-Haul interest income revenue from Blackwater	$	–	$	1,205
U-Haul management fee revenue from Blackwater		6,200		6,162
U-Haul management fee revenue from Mercury		1,216		600
	$	7,416	$	7,967

We currently manage the self-storage properties owned or leased by Blackwater and Mercury Partners, L.P. (“Mercury”), 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 $10.0 million from the above mentioned entities during the first quarter of fiscal 2019 and 2018, respectively. This management fee is consistent with the fee received for other properties we previously managed for third parties. 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 grandchildren of Edward J. Shoen.

Related Party Costs and Expenses

		Quarter Ended June 30,
		2018		2017
		(Unaudited)
		(In thousands)
U-Haul lease expenses to Blackwater	$	670	$	681
U-Haul commission expenses to Blackwater		16,485		15,886
	$	17,155	$	16,567

We lease space for marketing company offices, vehicle repair shops and hitch installation centers from subsidiaries of SAC Holdings, 5 SAC and Galaxy. The terms of the leases are similar to the terms of leases for other properties owned by unrelated parties that are leased to us.

As of June 30, 2018, subsidiaries of Blackwater acted as U-Haul independent dealers. The financial and other terms of the dealership contracts with the aforementioned companies and their subsidiaries are substantially identical to the terms of those with our other independent dealers whereby commissions are paid by us based upon equipment rental revenues.

These agreements with subsidiaries of Blackwater, excluding Dealer Agreements, provided revenues of $6.2 million, expenses of $0.7 million and cash flows of $5.4 million during the first quarter of fiscal 2019. Revenues and commission expenses related to the Dealer Agreements were $75.4 million and $16.5 million, respectively during the first quarter of fiscal 2019.

Pursuant to the variable interest entity (“VIE”) model under Accounting Standards Codification (“ASC”) 810 – Consolidation (“ASC 810”), management determined that the management agreements with subsidiaries of Blackwater represent potential variable interests for us. Management evaluated whether it should be identified as the primary beneficiary of one or more of these VIEs using a two-step approach in which management (i) identified all other parties that hold interests in the VIEs, and (ii) determined if any variable interest holder has the power to direct the activities of the VIEs that most significantly impact their economic performance.

Management determined that we do not have a variable interest in the holding entities of Blackwater based upon management agreements which are with the individual operating entities; therefore, we are precluded from consolidating these entities.

We do not have the power to direct the activities that most significantly impact the economic performance of the individual operating entities which have management agreements with U-Haul. There are no fees or penalties disclosed in the management agreement for termination of the agreement. Through control of the holding entities' assets, and its ability and history of making key decisions relating to the entity and its assets, Blackwater, and its owner, are the variable interest holder with the power to direct the activities that most significantly impact each of the individual holding entities and the individual operating entities’ performance.  As a result, we have no basis under ASC 810 to consolidate these entities.

We have not provided financial or other support explicitly or implicitly during the quarter ended June 30, 2018 to any of these entities that we were not previously contractually required to provide. In addition, we currently have no plan to provide any financial support to any of these entities in the future. The carrying amount and classification of the assets and liabilities in our balance sheets that relate to our variable interests in the aforementioned entities are as follows, which approximate the maximum exposure to loss as a result of our involvement with these entities:

Related Party Assets

		June 30,		March 31,
		2018		2018
		(Unaudited)
		(In thousands)
U-Haul receivable from Blackwater		25,801		24,034
U-Haul receivable from Mercury		6,364		10,357
Other (a)		(1,679)		(1,115)
	$	30,486	$	33,276

(a) Timing differences for intercompany balances with insurance subsidiaries resulting from the three month difference in reporting periods.

 

11. Consolidating Financial Information by Industry Segment

AMERCO’s three reportable segments are:

• Moving and Storage, comprised of AMERCO, U-Haul, and Real Estate and the subsidiaries of U-Haul and Real Estate,
• Property and Casualty Insurance, comprised of Repwest and its subsidiaries and ARCOA, and
• Life Insurance, comprised of Oxford and its subsidiaries.

Management tracks revenues separately, but does not report any separate measure of the profitability for rental vehicles, rentals of self-storage spaces and sales of products that are required to be classified as a separate operating segment and accordingly does not present these as separate reportable segments. Deferred income taxes are shown as liabilities on the condensed consolidating statements.

The information includes elimination entries necessary to consolidate AMERCO, the parent, with its subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting.

 

 

11. Financial Information by Consolidating Industry Segment:

Consolidating balance sheets by industry segment as of June 30, 2018 are as follows:

		Moving & Storage Consolidated		Property & Casualty Insurance (a)		Life Insurance (a)		Eliminations			AMERCO Consolidated
		(Unaudited)
		(In thousands)
Assets:
Cash and cash equivalents	$	618,300	$	5,119	$	26,920	$	–		$	650,339
Reinsurance recoverables and trade receivables, net		79,460		97,351		31,176		–			207,987
Inventories and parts, net		94,901		–		–		–			94,901
Prepaid expenses		183,536		–		–		–			183,536
Investments, fixed maturities and marketable equities		–		287,278		1,663,598		–			1,950,876
Investments, other		22,993		61,557		312,072		–			396,622
Deferred policy acquisition costs, net		–		–		134,133		–			134,133
Other assets		244,325		1,004		2,991		–			248,320
Related party assets		35,211		9,452		18,304		(32,481)	(c)		30,486
		1,278,726		461,761		2,189,194		(32,481)			3,897,200
Investment in subsidiaries		517,861		–		–		(517,861)	(b)		–
Property, plant and equipment, at cost:
Land		849,042		–		–		–			849,042
Buildings and improvements		3,331,918		–		–		–			3,331,918
Furniture and equipment		641,730		–		–		–			641,730
Rental trailers and other rental equipment		547,291		–		–		–			547,291
Rental trucks		4,533,758		–		–		–			4,533,758
		9,903,739		–		–		–			9,903,739
Less:  Accumulated depreciation		(2,799,455)		–		–		–			(2,799,455)
Total property, plant and equipment		7,104,284		–		–		–			7,104,284
Total assets	$	8,900,871	$	461,761	$	2,189,194	$	(550,342)		$	11,001,484
(a) Balances as of March 31, 2018
(b) Eliminate investment in subsidiaries
(c) Eliminate intercompany receivables and payables