20180630 10Q Q2





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 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: 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   

 

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

 

July 31, 2018

Common Stock, $.0001 par value per share

 

 19,306,377 shares







 

1


 

Table of Contents

CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

 

Page No.

Part I — Financial Information

Item 1.

Financial Statements (Unaudited)

   

Consolidated Balance Sheets at June 30, 2018 and December 31, 2017



Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017

   

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017

   

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

   

Notes to Unaudited Consolidated Financial Statements

Item 2.

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

20 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31 

Item 4.

Controls and Procedures

31 

Part II — Other Information

32 

Item 1.

Legal Proceedings

32 

Item 1A.

Risk Factors

32 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32 

Item 3.

Defaults Upon Senior Securities

32 

Item 4.

Mine Safety Disclosures

32 

Item 5.

Other Information

32 

Item 6.

Exhibits

33 

Signatures

34 

 

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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)





 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

16,462 

 

$

14,735 

Cash held by variable interest entities

 

 

24,348 

 

 

20,685 

Accounts receivable, net of allowance for doubtful accounts of $2,110 and

 

 

 

 

 

 

$1,440 at June 30, 2018 and December 31, 2017, respectively

 

 

83,278 

 

 

68,324 

Current portion of net investment in direct finance leases

 

 

53,961 

 

 

30,063 

Prepaid expenses and other current assets

 

 

2,541 

 

 

4,258 

Total current assets

 

 

180,590 

 

 

138,065 

Restricted cash

 

 

21,066 

 

 

11,789 

Rental equipment, net of accumulated depreciation of $550,426 and

 

 

 

 

 

 

$505,546 at June 30, 2018 and December 31, 2017, respectively

 

 

2,218,212 

 

 

2,004,961 

Net investment in direct finance leases

 

 

275,826 

 

 

246,450 

Goodwill

 

 

15,794 

 

 

15,794 

Intangible assets, net of accumulated amortization of $4,495 and

 

 

 

 

 

 

$3,407 at June 30, 2018 and December 31, 2017, respectively

 

 

6,635 

 

 

7,723 

Furniture, fixtures and equipment, net of accumulated depreciation of $3,265 and

 

 

 

 

 

 

$3,201 at June 30, 2018 and December 31, 2017, respectively

 

 

464 

 

 

338 

Other non-current assets

 

 

1,871 

 

 

3,008 

Total assets (1)

 

$

2,720,458 

 

$

2,428,128 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

6,530 

 

$

7,831 

Accrued expenses and other current liabilities

 

 

17,206 

 

 

15,706 

Due to container investors

 

 

 -

 

 

1,845 

Unearned revenue

 

 

7,526 

 

 

7,811 

Current portion of debt

 

 

159,599 

 

 

132,049 

Rental equipment payable

 

 

184,258 

 

 

92,415 

Total current liabilities

 

 

375,119 

 

 

257,657 

Debt

 

 

1,679,492 

 

 

1,570,773 

Deferred income tax liability

 

 

37,099 

 

 

35,853 

Total liabilities (2)

 

 

2,091,710 

 

 

1,864,283 



 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Preferred stock, par value $.0001 per share; authorized 10,000,000 and 5,000,000 at

 

 

 

 

 

 

June 30, 2018 and December 31, 2017, respectively; 8.50% Series A fixed-to-floating rate

 

 

 

 

 

 

cumulative redeemable perpetual preferred stock, issued and outstanding 2,199,610 and 0 shares

 

 

 

 

 

 

at June 30, 2018 and December 31, 2017, respectively, at liquidation preference

 

 

54,990 

 

 

 -

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

 

 

 

 

 

 

19,306,377 and 20,390,622 shares at June 30, 2018 and December 31, 2017, respectively

 

 

 

 

Additional paid-in capital

 

 

146,210 

 

 

172,325 

Accumulated other comprehensive loss

 

 

(6,360)

 

 

(6,122)

Retained earnings

 

 

433,906 

 

 

397,640 

Total stockholders' equity

 

 

628,748 

 

 

563,845 

Total liabilities and stockholders' equity

 

$

2,720,458 

 

$

2,428,128 

(1)

Total assets at June 30, 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, $24,348 and $20,685; Net investment in direct finance leases, $9,004 and $4,423; and Rental equipment, net of accumulated depreciation, $62,320 and $61,842, respectively.

(2)

Total liabilities at June 30, 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, $30,237 and $22,549; Debt, $68,560 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 June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease revenue

$

68,333 

 

$

54,960 

 

$

132,967 

 

$

107,914 

Rail lease revenue

 

9,119 

 

 

8,127 

 

 

18,223 

 

 

16,180 

Logistics revenue

 

28,253 

 

 

19,605 

 

 

49,889 

 

 

40,104 

Total revenue

 

105,705 

 

 

82,692 

 

 

201,079 

 

 

164,198 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

29,402 

 

 

27,054 

 

 

58,249 

 

 

55,026 

Storage, handling and other expenses

 

2,613 

 

 

6,192 

 

 

6,713 

 

 

13,145 

Logistics transportation costs

 

24,330 

 

 

16,682 

 

 

42,995 

 

 

33,753 

Gain on sale of used rental equipment

 

(2,719)

 

 

(1,749)

 

 

(4,914)

 

 

(876)

Administrative expenses

 

12,160 

 

 

9,745 

 

 

23,401 

 

 

20,431 

Total operating expenses

 

65,786 

 

 

57,924 

 

 

126,444 

 

 

121,479 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

39,919 

 

 

24,768 

 

 

74,635 

 

 

42,719 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

18,440 

 

 

12,285 

 

 

35,339 

 

 

23,957 

Other expense (income)

 

429 

 

 

(112)

 

 

394 

 

 

202 

Total other expenses

 

18,869 

 

 

12,173 

 

 

35,733 

 

 

24,159 



 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

21,050 

 

 

12,595 

 

 

38,902 

 

 

18,560 

Income tax expense (benefit)

 

753 

 

 

(43)

 

 

1,467 

 

 

650 



 

 

 

 

 

 

 

 

 

 

 

Net income

 

20,297 

 

 

12,638 

 

 

37,435 

 

 

17,910 

Preferred stock dividends

 

1,148 

 

 

 -

 

 

1,169 

 

 

 -

Net income attributable to CAI common stockholders

$

19,149 

 

$

12,638 

 

$

36,266 

 

$

17,910 



 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CAI common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.98 

 

$

0.66 

 

$

1.81 

 

$

0.94 

Diluted

$

0.97 

 

$

0.65 

 

$

1.79 

 

$

0.93 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

19,613 

 

 

19,131 

 

 

20,013 

 

 

19,071 

Diluted

 

19,843 

 

 

19,419 

 

 

20,259 

 

 

19,332 



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 June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,297 

 

$

12,638 

 

$

37,435 

 

$

17,910 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(548)

 

 

793 

 

 

(238)

 

 

1,044 

Comprehensive income before preferred stock dividends

 

 

19,749 

 

 

13,431 

 

 

37,197 

 

 

18,954 

Dividends on preferred stock

 

 

(1,148)

 

 

 -

 

 

(1,169)

 

 

 -

Comprehensive income available to CAI common stockholders

 

$

18,601 

 

$

13,431 

 

$

36,028 

 

$

18,954 



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)





 

 

 

 

 

 



 

 

 

 

 

 



 

Six Months Ended June 30,



 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

37,435 

 

$

17,910 

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

 

 

 

 

 

 

Depreciation

 

 

58,319 

 

 

55,211 

Amortization of debt issuance costs

 

 

2,158 

 

 

1,498 

Amortization of intangible assets

 

 

1,087 

 

 

1,102 

Stock-based compensation expense

 

 

1,350 

 

 

995 

Reduction in contingent consideration

 

 

 -

 

 

(631)

Unrealized loss on foreign exchange

 

 

266 

 

 

109 

Gain on sale of used rental equipment

 

 

(4,914)

 

 

(876)

Deferred income taxes

 

 

1,248 

 

 

411 

Bad debt expense (recovery)

 

 

317 

 

 

(12)

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(14,211)

 

 

(5,627)

Prepaid expenses and other assets

 

 

(2,096)

 

 

(1,807)

Accounts payable, accrued expenses and other current liabilities

 

 

(1,931)

 

 

(3,613)

Due to container investors

 

 

(540)

 

 

72 

Unearned revenue

 

 

(76)

 

 

(1,696)

Net cash provided by operating activities

 

 

78,412 

 

 

63,046 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(271,961)

 

 

(128,593)

Proceeds from sale of used rental equipment

 

 

25,458 

 

 

35,660 

Purchase of furniture, fixtures and equipment

 

 

(196)

 

 

(85)

Receipt of principal payments from direct finance leases

 

 

19,046 

 

 

8,942 

Net cash used in investing activities

 

 

(227,653)

 

 

(84,076)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

708,289 

 

 

155,131 

Principal payments on debt

 

 

(566,937)

 

 

(156,036)

Debt issuance costs

 

 

(6,201)

 

 

(463)

Proceeds from issuance of common and preferred stock

 

 

56,699 

 

 

 -

Repurchase of common stock

 

 

(27,946)

 

 

 -

Exercise of stock options

 

 

24 

 

 

1,215 

Net cash provided by (used in) financing activities

 

 

163,928 

 

 

(153)

Effect on cash of foreign currency translation

 

 

(20)

 

 

35 

Net increase (decrease) in cash and restricted cash

 

 

14,667 

 

 

(21,148)

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

 

 

47,209 

 

 

52,326 

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

 

$

61,876 

 

$

31,178 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

172 

 

$

134 

Interest

 

 

27,651 

 

 

21,638 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to direct finance lease

 

$

71,807 

 

$

23,912 

Transfer of direct finance lease to rental equipment

 

 

 -

 

 

291 

Rental equipment payable

 

 

184,258 

 

 

65,336 

(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 $16,462 and $10,034, cash held by variable interest entities of $24,348 and $15,461, and restricted cash of $21,066 and $5,683 at June 30, 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

 

(1)  The 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 June 30, 2018 and December 31, 2017, the Company’s results of operations for the three and six months ended June 30, 2018 and 2017, and the Company’s cash flows for the six months ended June 30, 2018 and 2017. The 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 the Company’s 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 for 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.



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Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Except as described above, there were no changes to the Company’s accounting policies during the six months ended June 30, 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.



(b)  Revenue 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, and repairs, 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.



9


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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.

 

(3)  Consolidation 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 and six months ended June 30, 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 June 30, 2018, and December 31, 2017, and the results of the VIEs’ operations and cash flows for the three and six months ended June 30, 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 $76.3 million as of June 30, 2018. The container equipment, together with $24.3 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 $96.4 million and term loans held by VIE of $2.4 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 June 30, 2018 and 2017, had a net book value of $7.3 million and $7.2 million,

10


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

respectively. Containers sold to the Japanese investor funds during the six months ended June 30, 2018 and 2017, had a net book value of $15.2 million and $7.2 million, respectively.

 

(4)  Rental Equipment



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







 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Dry containers

 

$

1,727,678 

 

$

1,533,063 

Refrigerated containers

 

 

344,831 

 

 

345,744 

Other specialized equipment

 

 

202,730 

 

 

160,529 

Railcars

 

 

493,399 

 

 

471,171 



 

 

2,768,638 

 

 

2,510,507 

Accumulated depreciation

 

 

(550,426)

 

 

(505,546)

Rental equipment, net of accumulated depreciation

 

$

2,218,212 

 

$

2,004,961 

 

(5)  Net Investment in Direct Finance Leases 



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

 



 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Gross finance lease receivables (1)

 

$

473,327 

 

$

412,489 

Unearned income (2)

 

 

(143,540)

 

 

(135,976)

Net investment in direct finance leases

 

$

329,787 

 

$

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 $37.9 million and $34.4 million unguaranteed residual value at June 30, 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 June 30, 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 June 30, 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.

11


 

Table of Contents

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):

 



 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Tier 1

 

$

414,440 

 

$

366,629 

Tier 2

 

 

58,887 

 

 

45,860 

Tier 3

 

 

 -

 

 

 -



 

$

473,327 

 

$

412,489 



Contractual maturities of the Company's gross finance lease receivables subsequent to June 30, 2018 for the years ending June 30 are as follows (in thousands):







 

 

 

 

 

 

2019

 

 

 

 

$

80,710 

2020

 

 

 

 

 

63,856 

2021

 

 

 

 

 

53,202 

2022

 

 

 

 

 

47,925 

2023

 

 

 

 

 

40,583 

2024 and thereafter

 

 

 

 

 

187,051 



 

 

 

 

$

473,327 

 

(6)  Intangible 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 June 30, 2018 and December 31, 2017 were as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,691)

 

$

95 

Customer relationships

 

 

 

 

 

9,344 

 

 

(2,804)

 

 

6,540 



 

 

 

 

$

11,130 

 

$

(4,495)

 

$

6,635 

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 was $0.5 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively, and $1.1 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively, and was included in administrative expenses in the consolidated statements of income.



As of June 30, 2018, estimated future amortization expenses are as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

$

1,702 

2020

 

 

 

 

 

 

 

 

 

 

 

1,609 

2021

 

 

 

 

 

 

 

 

 

 

 

1,609 

2022

 

 

 

 

 

 

 

 

 

 

 

950 

2023

 

 

 

 

 

 

 

 

 

 

 

474 

2024 and thereafter

 

 

 

 

 

 

 

 

 

 

 

291 



 

 

 

 

 

 

 

 

 

 

$

6,635 

 

12


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(7)  Debt



Details of the Company’s debt as of June 30, 2018 and December 31, 2017 were as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



June 30, 2018

 

December 31, 2017

 

 



Outstanding

 

Average

 

Outstanding

 

Average

 

 



Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Maturity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit

$

5,500 

 

$

322,000 

 

3.8%

 

$

 -

 

$

528,000 

 

3.2%

 

June 2023

Revolving credit facility - Rail

 

 -

 

 

305,000 

 

3.6%

 

 

 -

 

 

272,000 

 

3.2%

 

October 2020

Revolving credit facility - Euro

 

 -

 

 

19,867 

 

2.0%

 

 

 -

 

 

14,736 

 

2.0%

 

September 2020

Term loan

 

1,800 

 

 

28,200 

 

4.4%

 

 

21,900 

 

 

 -

 

3.4%

 

April 2023

Term loan

 

9,000 

 

 

107,250 

 

3.7%

 

 

9,000 

 

 

111,750 

 

3.1%

 

October 2019

Term loan

 

7,000 

 

 

79,000 

 

3.8%

 

 

7,000 

 

 

82,500 

 

3.3%

 

June 2021

Term loan

 

1,219 

 

 

15,909 

 

3.4%

 

 

1,198 

 

 

16,524 

 

3.4%

 

December 2020

Term loan

 

2,856 

 

 

42,119 

 

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 

 

 

647,711 

 

3.8%

 

 

65,307 

 

 

377,984 

 

3.5%

 

June 2042

Collateralized financing obligations

 

28,408 

 

 

68,018 

 

1.2%

 

 

22,549 

 

 

69,441 

 

1.2%

 

March 2021

Term loans held by VIE

 

1,829 

 

 

542 

 

3.0%

 

 

 -

 

 

3,286 

 

2.7%

 

June 2019



 

163,919 

 

 

1,691,446 

 

 

 

 

135,869 

 

 

1,578,666 

 

 

 

 

Debt issuance costs

 

(4,320)

 

 

(11,954)

 

 

 

 

(3,820)

 

 

(7,893)

 

 

 

 

Total Debt

$

159,599 

 

$

1,679,492 

 

 

 

$

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 June 30, 2018, the Company had $976.7 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 June 30, 2018, the borrowing availability under the Company’s revolving credit facilities was $117.1 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 2018-1 Asset-Backed Notes). Principal and interest on the Series 2018-1 Asset-Backed Notes is payable monthly commencing on March 26, 2018, with the Series 2018-1 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.



On June 27, 2018, the Company entered into an amendment to its Third Amended and Restated Revolving Credit Agreement, pursuant to which the Company’s senior revolving credit facility was amended to, among other things, increase the commitment level from $960 million to $1.1 billion with the ability to increase the revolving credit facility by an additional $250 million without lender approval, subject to certain conditions. The amendment also extended the maturity date of the revolving credit facility to June 26, 2023 and revised certain covenants, restrictions and events of default to provide the Company with additional flexibility, including an increase in the maximum total leverage ratio from 3.75:1.00 to 4.00:1.00, subject to certain conditions.



The agreements relating to all of the Company’s debt contain various financial and other covenants. As of June 30, 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.

 

13


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(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 the 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.



The following table summarizes the Company’s stock option activities for the six months ended June 30, 2018 and 2017:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30,



 

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

 

 

 -

 

$

 -

 

 

230,500 

 

$

16.80 

Options exercised

 

 

(9,393)

 

$

14.76 

 

 

(205,100)

 

$

10.30 

Options outstanding at June 30

 

 

850,167 

 

$

16.46 

 

 

1,453,655 

 

$

17.24 

Options exercisable

 

 

593,043 

 

$

17.71 

 

 

982,531 

 

$

18.30 

Weighted average remaining term

 

 

6.1 years

 

 

 

 

 

4.8 years

 

 

 



The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2018 and 2017 was less than $0.1 million and $1.8 million, respectively. The aggregate intrinsic value of all options outstanding as of June 30, 2018 was $5.9 million based on the closing price of the Company’s common stock of $23.24 per share on June 29, 2018, the last trading day of the quarter.



The Company recognized stock-based compensation expense relating to stock options of $0.4 million for the three months ended June 30, 2018 and 2017, and $0.8 million and $0.7 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $1.6 million, which is to be recognized over the remaining weighted average vesting period of approximately 2.2 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:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Six Months Ended June 30,



 

 

 

 

 

2018

 

2017

Stock price

 

 

 

 

 

 

 

$

 -

 

$

16.80 

Exercise price

 

 

 

 

 

 

 

$

 -

 

$

16.80 



 

 

 

 

 

 

 

 

 

 

 

 

Expected term (years)

 

 

 

 

 

 

 

 

 -

 

 

5.50 - 6.25

Expected volatility (%)

 

 

 

 

 

 

 

 

 -

 

 

56.40 - 57.50

Risk-free interest rate (%)

 

 

 

 

 

 

 

 

 -

 

 

1.77 - 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 common 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 six months ended June 30, 2017, as the Company accounts for forfeitures as they occur.



14


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Restricted Stock and Performance Stock



The Company grants restricted stock, comprising restricted stock units and restricted stock awards, 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 common 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 common stock on the date of grant.



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Weighted



 

 

 

 

 

 

 

 

 

Average



 

 

 

 

 

 

 

Number of

 

Grant Date



 

 

 

 

 

 

 

Shares

 

Fair Value

Outstanding at December 31, 2017

 

 

 

 

 

 

 

 

78,542 

 

$

14.92 

Granted

 

 

 

 

 

 

 

 

154,165 

 

$

22.48 

Vested

 

 

 

 

 

 

 

 

(28,359)

 

$

15.96 

Outstanding at June 30, 2018

 

 

 

 

 

 

 

 

204,348 

 

$

20.48 



The Company recognized $0.4 million and $0.1 million of stock-based compensation expense relating to restricted stock and performance stock awards for the three months ended June 30, 2018 and 2017, respectively, and $0.6 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, unamortized stock-based compensation expense relating to restricted stock and performance stock was $3.7 million, which will be recognized over the remaining average vesting period of 2.5 years.



Stock-based compensation expense is recorded as a component of administrative expenses in the Company’s consolidated statements of income with a corresponding credit to additional paid-in capital in the Company’s consolidated balance sheets.

 

(9)  Income Taxes



The consolidated income tax expense for the three and six months ended June 30, 2018 and 2017, was determined based upon estimates of the Company’s consolidated annual effective income tax rate for the years ending December 31, 2018 and 2017, respectively. The difference between the consolidated annual effective income tax rate and the U.S. federal statutory rate is primarily attributable to foreign income taxes, state income taxes and the effect of certain permanent differences.



The Company’s estimated effective tax rate was 3.8% at June 30, 2018, compared to 3.5% at June 30, 2017.  



The Company accounts for uncertain tax positions based on an evaluation as to whether it is more likely than not that a position will be sustained on audit, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the appropriate tax authorities have full knowledge of all relevant information concerning the tax position. Once it has been determined that a tax position is more likely than not to be sustained on its technical merits, the tax benefit recognized is based on the largest amount that is greater than 50% likely of being realized upon ultimate settlement. As of June 30, 2018, the Company had unrecognized tax benefits of $0.3 million, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was less than $0.1 million as of June 30, 2018. The Company does not believe the total amount of unrecognized tax benefits as of June 30, 2018 will change for the remainder of 2018.



The Company was notified on May 1, 2017 that its 2015 federal income tax return was selected for examination. The examination was concluded on June 20, 2018 with no impact to tax expense.

 

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(10)  Fair Value of Financial Instruments 



The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company’s asset-backed notes of $747.9 million and collateralized financing obligations of $96.4 million as of June 30, 2018 were estimated to have a fair value of approximately $763.1 million and $97.7 million, respectively, based on the fair value of estimated future payments calculated using prevailing interest rates. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy. Management believes that the balances of the Company’s revolving credit facilities of $652.4 million, variable-rate term loans of $232.3 million, fixed-rate term loans of $62.1 million, senior secured notes of $61.9 million, term loans held by VIE of $2.4 million and net investment in direct finance leases of $329.8 million approximate their fair values as of June 30, 2018. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy.

 

(11)  Commitments and Contingencies 



In addition to its debt obligations described in Note 7 above, the Company had commitments to purchase approximately $179.7 million of containers and $61.4 million of railcars as of June 30, 2018, all in the twelve months ending June 30, 2019. The Company also utilizes certain office facilities and equipment under long-term non-cancellable operating lease agreements with total future minimum lease payments of approximately $4.5 million as of June 30, 2018.

 

(12)  Stockholders’ Equity



Common Stock At-the-Market (ATM) Offering Program



In October 2017, the Company commenced an ATM offering program with respect to its common stock, which allows the Company to issue and sell up to 2.0 million shares of its common stock. During the six months ended June 30, 2018, the Company issued 100,000 shares of common stock under the ATM offering program for net proceeds of $2.8 million. The Company paid commissions to the sales agent of $0.1 million in connection with the sales of common stock under this ATM offering program during the six months ended June 30, 2018. The net proceeds were used for general corporate purposes. The Company has remaining capacity to issue up to approximately 1.0 million of additional shares of common stock under this ATM offering program.



Series A Preferred Stock Underwritten Offering



In March 2018, the Company completed an underwritten public offering of 1,600,000 shares of its 8.5% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share and liquidation preference $25.00 per share (Series A Preferred Stock), resulting in net proceeds to the Company of approximately $38.3 million, after deducting the underwriting discount and other offering expenses. Dividends on the Series A Preferred Stock accrue daily and are cumulative from and including the date of original issuance and are payable quarterly in arrears on the 15th day of each April, July, October and January. Dividends accrue at the Fixed Dividend Rate (as defined in the certificate of designations for the Series A Preferred Stock (Certificate of Designations)) at an annual rate of 8.5% of the $25.00 liquidation preference per annum from, and including, the date of original issuance to, but not including, April 15, 2023. On and after April 15, 2023, dividends on the Series A Preferred Stock shall accrue at an annual rate equal to the sum of (a) Three-Month LIBOR (as defined in the Certificate of Designations) as calculated on each applicable date and (b) 5.82% of the $25.00 liquidation preference per share of Series A Preferred Stock.  The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up.



The Series A Preferred Stock becomes redeemable by the Company beginning April 25, 2023 for cash at a redemption price of $25.00 per share of Series A Preferred Stock, plus accrued but unpaid dividends thereon to, but not including, the date fixed for redemption. In addition, upon the occurrence of a Change of Control (as defined in the Certificate of Designations), subject to certain restrictions, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice, redeem the Series A Preferred Stock, in whole or in part, within one hundred twenty (120) days after the first date on which such Change of Control occurred, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon to, but not including, the date fixed for redemption. There is no mandatory redemption of the Series A Preferred Stock or redemption at the option of the holders. Holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive) or the Company fails to maintain the listing of the Series A Preferred Stock on a National Exchange (as defined in the Certificate of Designations) for a period of 180 consecutive days.



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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

In April 2018, the Company sold an additional 170,900 shares of Series A Preferred Stock upon the partial exercise by the underwriters of their option to purchase additional Series A Preferred Stock, resulting in net proceeds to the Company of approximately $4.1 million, after deducting the underwriting discount of $0.1 million.



Series A Preferred Stock ATM Offering Program



In May 2018, the Company commenced an ATM offering program with respect to its Series A Preferred Stock, which allows the Company to issue and sell up to 2.2 million shares of its Series A Preferred Stock. During the three months ended June 30, 2018, the Company issued 428,710 shares of Series A Preferred Stock under the ATM offering program for net proceeds of $10.5 million. The Company paid commissions to the sales agent of $0.2 million in connection with the sales of Series A Preferred Stock under this ATM offering program during the three months ended June 30, 2018. The net proceeds were used for repayment of debt and general corporate purposes. The Company has remaining capacity to issue up to approximately 1.8 million of additional shares of Series A Preferred Stock under this ATM offering program.

 

(13)  Related Party Transactions 



In May 2018, the Company purchased, and subsequently cancelled, 1,225,214 shares of its common stock, from an affiliate of Andrew S. Ogawa in a privately-negotiated transaction. Mr. Ogawa is a member of the Company’s Board of Directors. The stock was purchased at a price of $22.81 per share, which represented a 2% discount to the closing price on the date of purchase.

 

(14)  Segment and Geographic Information



The Company organizes itself by the nature of the services it provides which includes equipment leasing (consisting of container leasing and rail leasing) and logistics.



The container leasing segment is aggregated with equipment management and derives its revenue from the ownership and leasing of containers and fees earned for managing container portfolios on behalf of third party investors. The rail leasing segment derives its revenue from the ownership and leasing of railcars. The logistics segment derives its revenue from the provision of logistics services. There are no inter-segment revenues.



With the exception of administrative expenses, operating expenses are directly attributable to each segment. Administrative expenses that are not directly attributable to a segment are allocated to the segments based upon relative asset values or revenue.



The following tables show condensed segment information for the three and six months ended June 30, 2018 and 2017, reconciled to the Company’s income before income taxes as shown in its consolidated statements of income for such periods (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30, 2018



 

Container Leasing

 

Rail Leasing

 

Logistics

 

Total

Total revenue

 

$

68,333 

 

$

9,119 

 

$

28,253 

 

$

105,705 

Total operating expenses

 

 

31,081 

 

 

6,026 

 

 

28,679 

 

 

65,786 

Operating income (loss)

 

 

37,252 

 

 

3,093 

 

 

(426)

 

 

39,919 

Net interest and other expenses (income)

 

 

15,031 

 

 

3,846 

 

 

(8)

 

 

18,869 

Income (loss) before income taxes

 

$

22,221 

 

$

(753)

 

$

(418)

 

$

21,050 

Goodwill

 

$

 -

 

$

 -

 

$

15,794 

 

$

15,794 

Total assets

 

$

2,211,492 

 

$

465,513 

 

$

43,453 

 

$

2,720,458 

Purchase of rental equipment (1)

 

$

148,777 

 

$

10,421 

 

$

 -

 

$

159,198 



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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30, 2017



 

Container Leasing

 

Rail Leasing

 

Logistics

 

Total

Total revenue

 

$

54,960 

 

$

8,127 

 

$

19,605 

 

$

82,692 

Total operating expenses

 

 

32,234 

 

 

5,375 

 

 

20,315 

 

 

57,924 

Operating income (loss)

 

 

22,726 

 

 

2,752&nb