20180331 10Q Q1









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q

  

 

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

 For the quarterly period ended March 31, 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: 001-33388



 





 

CAI International, Inc.

(Exact name of registrant as specified in its charter)





 

 



 

 

Delaware

 

94-3109229

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Steuart Tower, 1 Market Plaza, Suite 900

 

 

San Francisco, California

 

94105

(Address of principal executive offices)

 

(Zip Code)



 

415-788-0100

(Registrant’s telephone number, including area code)



 None

(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      No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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      No   

 

1


 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

(Do not check if a smaller reporting company)

Emerging growth company







If an emerging growth company, indicate by check mark of 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   

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 



 

 

Common

 

April 30, 2018

Common Stock, $.0001 par value per share

 

20,494,333 shares









 

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Table of Contents

 CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

   

   

   

 

Page No.

Part I — Financial Information

   

   

   

Item 1.

Financial Statements (Unaudited)

   

   

   

   

Consolidated Balance Sheets at March 31, 2018 and December 31, 2017

   

   

   



Consolidated Statements of Income for the three months ended March 31,  2018 and 2017



 

 

   

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

   

   

   

   

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

   

   

   

   

Notes to Unaudited Consolidated Financial Statements

10 

   

   

   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28 

   

   

   

Item 4.

Controls and Procedures

29 

   

   

Part II — Other Information

29 

   

   

   

Item 1.

Legal Proceedings

29 

   

   

   

Item 1A.

Risk Factors

29 

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29 

   

   

   

Item 3.

Defaults Upon Senior Securities

29 

   

   

   

Item 4.

Mine Safety Disclosures

29 

   

   

   

Item 5.

Other Information

29 

   

   

   

Item 6.

Exhibits

30 

   

   

Signatures

31 



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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business, operations, growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (SEC) on February 27, 2018 and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC.



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Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS



 CAI INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

21,564 

 

$

14,735 

Cash held by variable interest entities

 

 

22,765 

 

 

20,685 

Accounts receivable, net of allowance for doubtful accounts of $1,717 and

 

 

 

 

 

 

$1,440 at March 31, 2018 and December 31, 2017, respectively

 

 

67,703 

 

 

68,324 

Current portion of net investment in direct finance leases

 

 

35,135 

 

 

30,063 

Prepaid expenses and other current assets

 

 

4,057 

 

 

4,258 

Total current assets

 

 

151,224 

 

 

138,065 

Restricted cash

 

 

21,742 

 

 

11,789 

Rental equipment, net of accumulated depreciation of $529,866 and

 

 

 

 

 

 

$505,546 at March 31, 2018 and December 31, 2017, respectively

 

 

2,106,515 

 

 

2,004,961 

Net investment in direct finance leases

 

 

249,665 

 

 

246,450 

Goodwill

 

 

15,794 

 

 

15,794 

Intangible assets, net of accumulated amortization of $3,951 and

 

 

 

 

 

 

$3,407 at March 31, 2018 and December 31, 2017, respectively

 

 

7,179 

 

 

7,723 

Furniture, fixtures and equipment, net of accumulated depreciation of $3,246 and

 

 

 

 

 

 

$3,201 at March 31, 2018 and December 31, 2017, respectively

 

 

365 

 

 

338 

Other non-current assets

 

 

2,647 

 

 

3,008 

Total assets (1)

 

$

2,555,131 

 

$

2,428,128 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

6,845 

 

$

7,831 

Accrued expenses and other current liabilities

 

 

11,245 

 

 

15,706 

Due to container investors

 

 

387 

 

 

1,845 

Unearned revenue

 

 

7,248 

 

 

7,811 

Current portion of debt

 

 

168,928 

 

 

132,049 

Rental equipment payable

 

 

133,714 

 

 

92,415 

Total current liabilities

 

 

328,367 

 

 

257,657 

Debt

 

 

1,567,339 

 

 

1,570,773 

Deferred income tax liability

 

 

36,605 

 

 

35,853 

Total liabilities (2)

 

 

1,932,311 

 

 

1,864,283 



 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

8.50% Series A fixed-to-floating rate cumulative redeemable perpetual preferred stock: par value $.0001 per share;

 

 

 

 

 

 

authorized 4,000,000 shares; issued and outstanding 1,600,000 and 0 shares at March 31, 2018 and

 

 

 

 

 

 

December 31, 2017, respectively ($40,000 aggregate liquidation preference)

 

 

 -

 

 

 -

Common stock: par value $.0001 per share; authorized 84,000,000 shares; issued and outstanding

 

 

 

 

 

 

20,492,519 and 20,390,622 shares at March 31, 2018 and December 31, 2017, respectively

 

 

 

 

Additional paid-in capital

 

 

213,873 

 

 

172,325 

Accumulated other comprehensive loss

 

 

(5,812)

 

 

(6,122)

Retained earnings

 

 

414,757 

 

 

397,640 

Total stockholders' equity

 

 

622,820 

 

 

563,845 

Total liabilities and stockholders' equity

 

$

2,555,131 

 

$

2,428,128 

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Table of Contents



(1)

Total assets at March 31, 2018 and December 31, 2017 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash,  $22,765 and $20,685; Net investment in direct finance leases, $7,052 and $4,423; and Rental equipment, net of accumulated depreciation, $61,920 and $61,842, respectively.



(2)

Total liabilities at March 31, 2018 and December 31, 2017 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $25,448 and $22,549; Debt, $72,447 and $72,727, respectively. 



See accompanying notes to unaudited consolidated financial statements. 

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Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(UNAUDITED)

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Three Months Ended March 31,



 

 

 

 

 

 

2018

 

2017

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease revenue

 

 

 

 

 

 

$

64,634 

 

$

52,954 

Rail lease revenue

 

 

 

 

 

 

 

9,104 

 

 

8,053 

Logistics revenue

 

 

 

 

 

 

 

21,636 

 

 

20,499 

Total revenue

 

 

 

 

 

 

 

95,374 

 

 

81,506 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

 

 

 

 

 

 

28,847 

 

 

27,972 

Storage, handling and other expenses

 

 

 

 

 

 

 

4,100 

 

 

6,953 

Logistics transportation costs

 

 

 

 

 

 

 

18,665 

 

 

17,071 

(Gain) loss on sale of used rental equipment

 

 

 

 

 

 

 

(2,195)

 

 

873 

Administrative expenses

 

 

 

 

 

 

 

11,241 

 

 

10,686 

Total operating expenses

 

 

 

 

 

 

 

60,658 

 

 

63,555 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

34,716 

 

 

17,951 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

 

 

 

 

 

 

16,899 

 

 

11,672 

Other (income) expense

 

 

 

 

 

 

 

(35)

 

 

314 

Total other expenses

 

 

 

 

 

 

 

16,864 

 

 

11,986 



 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

17,852 

 

 

5,965 

Income tax expense

 

 

 

 

 

 

 

714 

 

 

693 



 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

17,138 

 

 

5,272 

Preferred stock dividends

 

 

 

 

 

 

 

21 

 

 

 -

Net income attributable to CAI common stockholders

 

 

 

 

 

 

$

17,117 

 

$

5,272 



 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CAI common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

$

0.84 

 

$

0.28 

Diluted

 

 

 

 

 

 

$

0.83 

 

$

0.27 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

20,414 

 

 

19,010 

Diluted

 

 

 

 

 

 

 

20,672 

 

 

19,231 



See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Three Months Ended March 31,



 

 

 

 

 

 

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

$

17,138 

 

$

5,272 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

310 

 

 

251 

Comprehensive income before preferred stock dividends

 

 

 

 

 

 

 

 

17,448 

 

 

5,523 

Dividends declared on preferred stock

 

 

 

 

 

 

 

 

(21)

 

 

 -

Comprehensive income available to CAI common stockholders

 

 

 

 

 

 

 

$

17,427 

 

$

5,523 



See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

17,138 

 

$

5,272 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

28,879 

 

 

28,058 

Amortization of debt issuance costs

 

 

945 

 

 

747 

Amortization of intangible assets

 

 

544 

 

 

669 

Stock-based compensation expense

 

 

604 

 

 

461 

Unrealized (gain) loss on foreign exchange

 

 

(80)

 

 

236 

(Gain) loss on sale of used rental equipment

 

 

(2,195)

 

 

873 

Deferred income taxes

 

 

752 

 

 

601 

Bad debt expense

 

 

124 

 

 

187 

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

671 

 

 

(2,653)

Prepaid expenses and other assets

 

 

(27)

 

 

(4,134)

Accounts payable, accrued expenses and other current liabilities

 

 

(6,288)

 

 

(4,763)

Due to container investors

 

 

(1,458)

 

 

(621)

Unearned revenue

 

 

(362)

 

 

(648)

Net cash provided by operating activities

 

 

39,247 

 

 

24,285 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(112,763)

 

 

(48,116)

Proceeds from sale of used rental equipment

 

 

9,671 

 

 

19,325 

Purchase of furniture, fixtures and equipment

 

 

(58)

 

 

(44)

Receipt of principal payments from direct financing leases

 

 

8,336 

 

 

4,114 

Net cash used in investing activities

 

 

(94,814)

 

 

(24,721)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

477,600 

 

 

85,787 

Principal payments on debt

 

 

(441,884)

 

 

(100,541)

Debt issuance costs

 

 

(3,485)

 

 

 -

Proceeds from issuance of stock

 

 

42,076 

 

 

 -

Exercise of stock options

 

 

24 

 

 

327 

Net cash provided by (used in) financing activities

 

 

74,331 

 

 

(14,427)

Effect on cash of foreign currency translation

 

 

98 

 

 

997 

Net increase (decrease) in cash and restricted cash

 

 

18,862 

 

 

(13,866)

Cash and restricted cash at beginning of the period (1)

 

 

47,209 

 

 

52,326 

Cash and restricted cash at end of the period (2)

 

$

66,071 

 

$

38,460 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

174 

 

$

97 

Interest

 

 

16,654 

 

 

11,504 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to direct finance lease

 

$

15,956 

 

$

1,806 

Transfer of direct finance lease to rental equipment

 

 

 -

 

 

291 

Rental equipment payable

 

 

133,714 

 

 

51,357 



(1)

Includes cash of $14,735 and $15,685, cash held by variable interest entities of $20,685 and $30,449, and restricted cash of $11,789 and $6,192 at December 31, 2017 and 2016, respectively.



(2)

Includes cash of $21,564 and $12,141, cash held by variable interest entities of $22,765 and $20,382, and restricted cash of $21,742 and $5,937 at March 31, 2018 and 2017, respectively.



See accompanying notes to unaudited consolidated financial statements.



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Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(1The Company and Nature of Operations

Organization

CAI International, Inc., together with its subsidiaries (collectively, CAI or the Company), is a transportation finance and logistics company. The Company purchases equipment, primarily intermodal shipping containers and railcars, which it leases to its customers. The Company also manages equipment for third-party investors. In operating its fleet, the Company leases, re-leases and disposes of equipment and contracts for the repair, repositioning and storage of equipment. The Company also provides domestic and international logistics services.

The Company’s common stock and 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock are traded on the New York Stock Exchange under the symbols “CAI” and “CAI-PA,” respectively. The Company’s corporate headquarters are located in San Francisco, California.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the financial statements of CAI International, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2018 and December 31, 2017, the Company’s results of operations for the three months ended March 31, 2018 and 2017, and the Company’s cash flows for the three months ended March 31, 2018 and 2017The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2018 or in any future period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2018.

 

(2)  Accounting Policies and Recent Accounting Pronouncements

(a)  Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes previous revenue recognition guidance. Leasing revenue recognition is specifically excluded, and therefore, the new standard is only applicable to logistics services agreements, management services agreements, and the sale of used rental equipment. The new standard defines a five-step process to achieve the core principle of ASU 2014-09, which is to recognize revenue when promised goods or services are transferred to customers in amounts that reflect the consideration the Company expects to receive in exchange for those goods or services. The Company adopted ASU 2014-09 effective January 1, 2018, which did not have a material impact on the Company’s consolidated financial statements and related disclosures. See note 2(b) for further details.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination and insurance settlement proceeds. The Company adopted ASU 2016-15 effective January 1, 2018, which did not result in any changes to the presentation of amounts shown on the Company’s consolidated statements of cash flows to all periods presented.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), that requires the inclusion of restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 effective January 1, 2018, which resulted in the inclusion of the Company’s restricted cash balances along with cash in the Company’s consolidated statements of cash flows and separate line items showing changes in restricted cash balances were eliminated from the Company’s consolidated statements of cash flows. ASU 2016-18 was applied retrospectively to all periods presented.

Except as described above, there were no changes to the Company’s accounting policies during the three months ended March 31, 2018. See Note 2 to the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2018, for a description of the Company’s significant accounting policies.

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Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(bRevenue Recognition

The Company provides a range of services to its customers incorporating the rental, sale and management of equipment and the provision of logistics services. Revenue for all forms of service is recognized when earned following the guidelines under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue Recognition and FASB ASC Topic 840, Leases. Revenue is reported net of any related sales tax.

Container and Rail Lease Revenue

The Company recognizes revenue from operating leases of its owned equipment as earned over the term of the lease. Where minimum lease payments vary over the lease term, revenue is recognized on a straight-line basis over the term of the lease. The Company recognizes revenue on a cash basis for certain railcar leases that are billed on an hourly or mileage basis through a third-party railcar manager. Early termination of the rental contracts subjects the lessee to a penalty, which is included in lease revenue upon such termination. Finance lease income is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease.

Included in lease revenue is revenue consisting primarily of fees charged to the lessee for handling, delivery, repairs, and fees relating to the Company’s damage protection plan, which are recognized as earned.

Also included in lease revenue is revenue from management fees earned under equipment management agreements. Management fees are generally calculated as a percentage of the monthly net operating income for an investor’s portfolio and recognized as revenue in the month of service.

Logistics Revenue

The Company’s logistics business derives its revenue from three principal sources: (1) truck brokerage services, (2) intermodal transportation services, and (3) international ocean freight and freight forwarding services. For truck brokerage services, which typically involve a short transit time, revenue is recognized when delivery has been completed due to the lack of reliable information to reasonably measure progress toward complete satisfaction of the performance obligation.  For intermodal transportation services, which can take a longer time to complete, revenue is recognized over time by measuring progress toward complete satisfaction of the performance obligation, utilizing input methods. For any such services completed as of the end of a reporting period, a percentage of completion method based on costs incurred to date is used to allocate the appropriate revenue to each separate reporting period. The Company provides international freight forwarding services as an indirect carrier, sometimes referred to as a Non-Vessel Operating Common Carrier (NVOCC). Due to the lack of reliable information to reasonably measure progress toward complete satisfaction of the performance obligation, revenue for these shipments is recognized at the time the freight departs the terminal of origin, which is when the customer is billed and the Company has no further obligation to the customer.

The Company reports logistics revenue on a gross basis as it is primarily responsible for fulfilling the promise to provide the specified service desired by the customer and has discretion in establishing the price for the specified service.

Unearned Revenue

The Company records unearned revenue when cash payments are received in advance of the Company satisfying its performance obligations.

Payment terms vary by customer and type of service. The term between invoicing and when payment is due is not significant. For certain customers or services, the Company may require payment before the services are delivered to the customer.

Practical Expedients

The Company expenses sales commissions when incurred because the amortization would have been one year or less. These costs are recorded within administrative expenses.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts with variable consideration for a distinct good or service that forms part of a single performance obligation.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(3Consolidation of Variable Interest Entities

The Company regularly performs a review of its container fund arrangements with investors to determine whether or not it has a variable interest in the fund and if the fund is a variable interest entity (VIE). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund and the fund is a VIE, a  further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under FASB ASC Topic 810,  Consolidation:

·

it has power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and

·

it has the obligation to absorb losses of the VIE that could be potentially significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under FASB ASC Topic 810, Consolidation.  

The Company currently enters into two types of container fund arrangements with investors which are reviewed under FASB ASC Topic 810, Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors.  All of the funds under financing arrangements are Japanese container funds that were established under separate investment agreements allowed under Japanese commercial laws. Each of the funds is financed by unrelated Japanese third-party investors.

Managed Container Funds

The fees earned by the Company for arranging, managing and establishing container funds are commensurate with the level of effort required to provide those services, and are at or above the same level of seniority as other operating liabilities of the funds that are incurred in the normal course of business. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. The Company recognizes gain on sale of containers to the unconsolidated funds as sales in the ordinary course of business. No container portfolios were sold to the funds during the three months ended March 31, 2018 and 2017.  

Collateralized Financing Obligations

The Company has transferred containers to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. In accordance with FASB ASC Topic 840, Sale-Leaseback Transactions, the Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.

The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under FASB ASC Topic 810, Consolidation, because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance, including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of March 31, 2018, and December 31, 2017, and the results of the VIEs’ operations and cash flows for the three months ended March 31, 2018 and 2017, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $73.8 million as of March 31, 2018. The container equipment, together with $22.8 million of cash held by the investor funds that can only be used to settle the liabilities of the VIEs, has been included on the Company’s consolidated balance sheets with the related liability presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $95.1 million and term loans held by VIE of $2.8 million. No gain or loss was recognized by the Company on the initial consolidation of the VIEs. Containers sold to the Japanese investor funds during the three months ended March 31, 2018, had a net book value of $7.9 million.  No containers were sold to Japanese investor funds during the three months ended March 31, 2017.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(4Rental Equipment

The following table provides a summary of the Company’s rental equipment (in thousands):







 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Dry containers

 

$

1,627,517 

 

$

1,533,063 

Refrigerated containers

 

 

345,037 

 

 

345,744 

Other specialized equipment

 

 

180,176 

 

 

160,529 

Railcars

 

 

483,651 

 

 

471,171 



 

 

2,636,381 

 

 

2,510,507 

Accumulated depreciation

 

 

(529,866)

 

 

(505,546)

Rental equipment, net of accumulated depreciation

 

$

2,106,515 

 

$

2,004,961 







(5Net Investment in Direct Finance Leases 

The following table represents the components of the Company’s net investment in direct finance leases (in thousands):

 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Gross finance lease receivables (1)

 

$

418,453 

 

$

412,489 

Unearned income (2)

 

 

(133,653)

 

 

(135,976)

Net investment in direct finance leases

 

$

284,800 

 

$

276,513 



(1)

At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received. There was $34.8 million and $34.4 million unguaranteed residual value at March 31, 2018 and December 31, 2017, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of March 31, 2018 and December 31, 2017.



(2)

The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of March 31, 2018 and December 31, 2017.



In order to estimate the allowance for losses contained in gross finance lease receivables, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, the aging of customer receivables and general economic conditions.

The categories of gross finance lease receivables based on the Company's internal customer credit ratings can be described as follows:

Tier 1— These customers are typically large international shipping lines that have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to moderate.

Tier 2— These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.

Tier 3— Customers in this category exhibit volatility in payments on a regular basis.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Based on the above categories, the Company's gross finance lease receivables were as follows (in thousands):

 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Tier 1

 

$

372,524 

 

$

366,629 

Tier 2

 

 

45,929 

 

 

45,860 

Tier 3

 

 

 -

 

 

 -



 

$

418,453 

 

$

412,489 



Contractual maturities of the Company's gross finance lease receivables subsequent to March 31, 2018 for the years ending March 31 are as follows (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 

2019

 

 

 

 

$

58,458 

2020

 

 

 

 

 

66,212 

2021

 

 

 

 

 

41,504 

2022

 

 

 

 

 

39,931 

2023

 

 

 

 

 

32,138 

2024 and thereafter

 

 

 

 

 

180,210 



 

 

 

 

$

418,453 













(6Intangible Assets

The Company amortizes intangible assets on a straight line-basis over their estimated useful lives as follows:





 

Trademarks and tradenames

                 2-3 years

Customer relationships

5-8 years



The Company’s intangible assets as of March 31, 2018 and December 31, 2017 were as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,552)

 

$

234 

Customer relationships

 

 

 

 

 

9,344 

 

 

(2,399)

 

 

6,945 



 

 

 

 

$

11,130 

 

$

(3,951)

 

$

7,179 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,411)

 

$

375 

Customer relationships

 

 

 

 

 

9,344 

 

 

(1,996)

 

 

7,348 



 

 

 

 

$

11,130 

 

$

(3,407)

 

$

7,723 

     





Amortization expense recorded for the three months ended March 31, 2018 and 2017 was $0.5 million and $0.7 million, respectively, and was included in administrative expenses in the consolidated statements of income.

As of March 31, 2018, estimated future amortization expenses are as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

$

1,843 

2020

 

 

 

 

 

 

 

 

 

 

 

1,609 

2021

 

 

 

 

 

 

 

 

 

 

 

1,609 

2022

 

 

 

 

 

 

 

 

 

 

 

1,234 

2023

 

 

 

 

 

 

 

 

 

 

 

474 

2024 and thereafter

 

 

 

 

 

 

 

 

 

 

 

410 



 

 

 

 

 

 

 

 

 

 

$

7,179 









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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(7)  Debt

Details of the Company’s debt as of March 31, 2018 and December 31, 2017 were as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2018

 

December 31, 2017

 

 



Outstanding

 

Average

 

Outstanding

 

Average

 

 



Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Maturity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

$

 -

 

$

215,000 

 

3.6%

 

$

 -

 

$

528,000 

 

3.2%

 

March 2020

Revolving credit facility - Rail

 

 -

 

 

297,000 

 

3.5%

 

 

 -

 

 

272,000 

 

3.2%

 

October 2020

Revolving credit facility - Euro

 

 -

 

 

15,163 

 

2.0%

 

 

 -

 

 

14,736 

 

2.0%

 

September 2020

Term loan

 

21,450 

 

 

 -

 

3.8%

 

 

21,900 

 

 

 -

 

3.4%

 

April 2018

Term loan

 

9,000 

 

 

109,500 

 

3.4%

 

 

9,000 

 

 

111,750 

 

3.1%

 

October 2019

Term loan

 

7,000 

 

 

80,750 

 

3.6%

 

 

7,000 

 

 

82,500 

 

3.3%

 

June 2021

Term loan

 

1,209 

 

 

16,218 

 

3.4%

 

 

1,198 

 

 

16,524 

 

3.4%

 

December 2020

Term loan

 

2,831 

 

 

42,842 

 

3.6%

 

 

2,805 

 

 

43,560 

 

3.6%

 

August 2021

Senior secured notes

 

6,110 

 

 

55,830 

 

4.9%

 

 

6,110 

 

 

58,885 

 

4.9%

 

September 2022

Asset-backed notes

 

100,197 

 

 

672,760 

 

3.7%

 

 

65,307 

 

 

377,984 

 

3.5%

 

June 2042

Collateralized financing obligations

 

25,448 

 

 

69,619 

 

1.1%

 

 

22,549 

 

 

69,441 

 

1.2%

 

March 2021

Term loans held by VIE

 

 -

 

 

2,828 

 

2.9%

 

 

 -

 

 

3,286 

 

2.7%

 

June 2019



 

173,245 

 

 

1,577,510 

 

 

 

 

135,869 

 

 

1,578,666 

 

 

 

 

Debt issuance costs

 

(4,317)

 

 

(10,171)

 

 

 

 

(3,820)

 

 

(7,893)

 

 

 

 

Total Debt

$

168,928 

 

$

1,567,339 

 

 

 

$

132,049 

 

$

1,570,773 

 

 

 

 



The Company maintains its revolving credit facilities to finance the acquisition of rental equipment and for general working capital purposes. As of March 31, 2018, the Company had $963.5 million in total availability under its revolving credit facilities (net of $0.1 million in letters of credit) subject to the Company’s ability to meet the collateral requirements under the agreements governing the facilities. Based on the borrowing base and collateral requirements at March 31, 2018, the borrowing availability under the Company’s revolving credit facilities was $136.7 million, assuming no additional contributions of assets. 

On February 28, 2018, CAL Funding III Limited (CAL Funding III), a wholly-owned indirect subsidiary of CAI, issued $332.0 million of 4.0% Class A fixed rate asset-backed notes and $16.9 million of 4.8% Class B fixed rate asset-backed notes (collectively, the Series 2018-01 Asset-Backed Notes). Principal and interest on the Series 2018-01 Asset-Backed Notes is payable monthly commencing on March 26, 2018, with the Series 2018-01 Asset-Backed Notes maturing in February 2028. The proceeds were used for general corporate purposes, including repayment of debt by the Company.

On April 19, 2018, the Company entered into a $30.0 million five-year term loan agreement with a bank. The loan is payable in 19 quarterly installments of $0.5 million starting July 31, 2018 and a final payment of $21.5 million on April 30, 2023. The loan bears interest at a variable rate based on LIBOR.

The agreements relating to all of the Company’s debt contain various financial and other covenants. As of March 31, 2018, the Company was in compliance with all of its debt covenants.

For further information on the Company’s debt instruments, see Note 10 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2018.



(8)  Stock–Based Compensation Plan

Stock Options

The Company grants stock options from time to time to certain employees and independent directors pursuant to its 2007 Equity Incentive Plan, as amended (Plan). Under the Plan, a maximum of 3,421,980 share awards may be granted.

Stock options granted to employees have a vesting period of four years from grant date, with 25% vesting after one year, and 1/48th vesting each month thereafter until fully vested. Stock options granted to independent directors vest in one year. All of the stock options have a contractual term of ten years.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following table summarizes the Company’s stock option activities for the three months ended March 31, 2018 and 2017:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended March 31,



 

2018

 

2017



 

 

 

 

Weighted

 

 

 

 

Weighted



 

 

 

 

Average

 

 

 

 

Average



 

Number of

 

Exercise

 

Number of

 

Exercise



 

Shares

 

Price

 

Shares

 

Price

Options outstanding at January 1

 

 

859,560 

 

$

16.44 

 

 

1,428,255 

 

$

16.31 

Options granted

 

 

 -

 

$

 -

 

 

190,500 

 

$

15.89 

Options exercised

 

 

(1,893)

 

$

12.64 

 

 

(60,875)

 

$

8.44 

Options outstanding at March 31

 

 

857,667 

 

$

16.45 

 

 

1,557,880 

 

$

16.57 

Options exercisable

 

 

521,021 

 

$

17.56 

 

 

1,009,555 

 

$

18.21 

Weighted average remaining term

 

 

6.1 years

 

 

 

 

 

4.5 years

 

 

 



The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017 was less than $0.1 million and $0.4 million, respectively. The aggregate intrinsic value of all options outstanding as of March 31, 2018 was $4.6 million based on the closing price of the Company’s common stock of $21.26 per share on March 29, 2018, the last trading day of the quarter.

The Company recognized stock-based compensation expense relating to stock options of $0.4 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $2.1 million, which is to be recognized over the remaining weighted average vesting period of approximately 2.3 years.

The fair value of stock options granted to the Company’s employees and independent directors was estimated using the Black-Scholes-Merton pricing model using the following weighted average assumptions:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended March 31,



 

 

 

 

 

2018

 

2017

Stock price

 

 

 

 

 

 

 

$

 -

 

$

15.89 

Exercise price

 

 

 

 

 

 

 

$

 -

 

$

15.89 



 

 

 

 

 

 

 

 

 

 

 

 

Expected term (years)

 

 

 

 

 

 

 

 

 -

 

 

6.25 

Expected volatility (%)

 

 

 

 

 

 

 

 

 -

 

 

56.40 

Risk-free interest rate (%)

 

 

 

 

 

 

 

 

 -

 

 

2.14 

Dividend yield (%)

 

 

 

 

 

 

 

 

 -

 

 

 -



The expected option term is calculated using the simplified method in accordance with SEC guidance. The expected volatility was derived from the average volatility of the Company’s stock over a period approximating the expected term of the options. The risk-free rate is based on the daily U.S. Treasury yield curve with a term approximating the expected term of the options. No forfeiture rate was estimated on all options granted during the three months ended March 31, 2017, as the Company accounts for forfeitures as they occur.



Restricted Stock and Performance Stock

The Company grants restricted stock from time to time to certain employees and non-employee directors pursuant to the Plan. The Company recognizes the compensation cost associated with restricted stock over a specified award vesting period based on the closing price of the Company’s stock on the date of grant.

The Company grants performance stock to selected executives and other key employees. The performance stock vests at the end of a 3-year performance cycle if certain financial performance targets are met. The Company recognizes compensation cost associated with the performance stock ratably over the 3-year term based on the likelihood of performance targets being met. Compensation cost is based on the closing price of the Company’s stock on the date of grant.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following table summarizes the activity of restricted stock and performance stock under the Plan: