20190331 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, 2019



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 every Interactive Data File required to be submitted 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 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



Emerging growth company



1


 

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   

Securities registered pursuant to Section 12(b) of the Act:

 

Le

 

 

Title of each class

Trading symbols

Name of exchange on which registered

Common Stock, par value $0.0001 per share

CAI

New York Stock Exchange

8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share

CAI-PA

New York Stock Exchange

8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share

CAI-PB

New York Stock Exchange



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

Common Stock

 

April 30, 2019

Common Stock, $0.0001 par value per share

 

 17,934,992 shares







 

2


 

Table of Contents

CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

 

Page No.

Part I — Financial Information

Item 1.

Financial Statements (Unaudited)

   

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018



Consolidated Statements of Income for the three months ended March 31, 2019 and 2018

   

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018



Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

   

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

10 

   

Notes to Unaudited Consolidated Financial Statements

12 

Item 2.

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

24 

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, 2018 filed with the Securities and Exchange Commission (SEC) on March 5, 2019 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,



 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

20,128 

 

$

20,104 

Cash held by variable interest entities

 

 

27,058 

 

 

25,211 

Accounts receivable, net of allowance for doubtful accounts of $2,839 and

 

 

 

 

 

 

$2,042 at March 31, 2019 and December 31, 2018, respectively

 

 

94,729 

 

 

95,942 

Current portion of net investment in sales-type and direct finance leases

 

 

74,895 

 

 

75,975 

Prepaid expenses and other current assets

 

 

4,422 

 

 

2,789 

Total current assets

 

 

221,232 

 

 

220,021 

Restricted cash

 

 

29,703 

 

 

30,668 

Rental equipment, net of accumulated depreciation of $613,838 and

 

 

 

 

 

 

$599,443 at March 31, 2019 and December 31, 2018, respectively

 

 

2,176,376 

 

 

2,265,260 

Net investment in sales-type and direct finance leases

 

 

465,041 

 

 

473,792 

Goodwill

 

 

15,794 

 

 

15,794 

Intangible assets, net of accumulated amortization of $5,799 and

 

 

 

 

 

 

$5,397 at March 31, 2019 and December 31, 2018, respectively

 

 

5,331 

 

 

5,733 

Operating lease right-of-use assets

 

 

3,181 

 

 

 -

Furniture, fixtures and equipment, net of accumulated depreciation of $2,657 and

 

 

 

 

 

 

$2,635 at March 31, 2019 and December 31, 2018, respectively

 

 

960 

 

 

964 

Other non-current assets

 

 

297 

 

 

385 

Total assets (1)

 

$

2,917,915 

 

$

3,012,617 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

7,361 

 

$

7,371 

Accrued expenses and other current liabilities

 

 

19,869 

 

 

22,460 

Due to container investors

 

 

670 

 

 

2,609 

Unearned revenue

 

 

5,216 

 

 

7,573 

Current portion of debt

 

 

318,664 

 

 

311,381 

Rental equipment payable

 

 

56,221 

 

 

74,139 

Total current liabilities

 

 

408,001 

 

 

425,533 

Debt

 

 

1,764,695 

 

 

1,847,633 

Deferred income tax liability

 

 

38,949 

 

 

38,319 

Operating lease liabilities

 

 

1,961 

 

 

 -

Total liabilities (2)

 

 

2,213,606 

 

 

2,311,485 



 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Preferred stock, par value $0.0001 per share; authorized 10,000,000

 

 

 

 

 

 

8.50% Series A fixed-to-floating rate cumulative redeemable perpetual preferred stock, issued and

 

 

 

 

 

 

outstanding 2,199,610 shares, at liquidation preference, at March 31, 2019 and December 31, 2018

 

 

54,990 

 

 

54,990 

8.50% Series B fixed-to-floating rate cumulative redeemable perpetual preferred stock, issued and

 

 

 

 

 

 

outstanding 1,955,000 shares, at liquidation preference, at March 31, 2019 and December 31, 2018

 

 

48,875 

 

 

48,875 

Common stock, par value $0.0001 per share; authorized 84,000,000 shares; issued and outstanding

 

 

 

 

 

 

18,207,676 and 18,764,459 shares at March 31, 2019 and December 31, 2018, respectively

 

 

 

 

Additional paid-in capital

 

 

119,557 

 

 

132,666 

Accumulated other comprehensive loss

 

 

(6,594)

 

 

(6,513)

Retained earnings

 

 

487,479 

 

 

471,112 

Total stockholders' equity

 

 

704,309 

 

 

701,132 

Total liabilities and stockholders' equity

 

$

2,917,915 

 

$

3,012,617 

5


 

Table of Contents



(1)

Total assets at March 31, 2019 and December 31, 2018 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $27,058 and $25,211; Net investment in direct finance leases, $13,486 and $13,862; and Rental equipment, net of accumulated depreciation, $126,305, and $71,958, respectively.

(2)

Total liabilities at March 31, 2019 and December 31, 2018 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $47,816 and $41,066;  Debt, $117,625 and $67,615, 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,



 

 

 

 

2019

 

2018

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease revenue

 

 

 

 

 

 

$

75,511 

 

$

64,634 

Rail lease revenue

 

 

 

 

 

 

 

7,881 

 

 

9,104 

Logistics revenue

 

 

 

 

 

 

 

27,716 

 

 

21,636 

Total revenue

 

 

 

 

 

 

 

111,108 

 

 

95,374 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

 

 

 

 

 

 

31,784 

 

 

28,847 

Storage, handling and other expenses

 

 

 

 

 

 

 

5,120 

 

 

4,100 

Logistics transportation costs

 

 

 

 

 

 

 

24,519 

 

 

18,665 

Gain on sale of used rental equipment

 

 

 

 

 

 

 

(8,832)

 

 

(2,195)

Administrative expenses

 

 

 

 

 

 

 

14,396 

 

 

11,241 

Total operating expenses

 

 

 

 

 

 

 

66,987 

 

 

60,658 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

44,121 

 

 

34,716 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

 

 

 

 

 

 

23,850 

 

 

16,899 

Other expense (income)

 

 

 

 

 

 

 

38 

 

 

(35)

Total other expenses

 

 

 

 

 

 

 

23,888 

 

 

16,864 



 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

20,233 

 

 

17,852 

Income tax expense

 

 

 

 

 

 

 

1,659 

 

 

714 



 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

18,574 

 

 

17,138 

Preferred stock dividends

 

 

 

 

 

 

 

2,207 

 

 

21 

Net income attributable to CAI common stockholders

 

 

 

 

 

 

$

16,367 

 

$

17,117 



 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CAI common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

$

0.88 

 

$

0.84 

Diluted

 

 

 

 

 

 

$

0.87 

 

$

0.83 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

18,555 

 

 

20,414 

Diluted

 

 

 

 

 

 

 

18,870 

 

 

20,672 



See accompanying notes to unaudited consolidated financial statements.

7


 

Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended March 31,



 

 

 

 

 

2019

 

2018



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

$

18,574 

 

$

17,138 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

(81)

 

 

310 

Comprehensive income before preferred stock dividends

 

 

 

 

 

 

 

 

18,493 

 

 

17,448 

Dividends on preferred stock

 

 

 

 

 

 

 

 

(2,207)

 

 

(21)

Comprehensive income available to CAI common stockholders

 

 

 

 

 

 

 

$

16,286 

 

$

17,427 



See accompanying notes to unaudited consolidated financial statements.

8


 

Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 



 

Preferred Stock

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Total



 

Shares

 

 

Amount

 

Shares

 

 

Amount

 

Capital

 

Loss

 

Earnings

 

Equity

Balances as of December 31, 2018

 

4,155 

 

$

103,865 

 

18,764 

 

$

 

$

132,666 

 

$

(6,513)

 

$

471,112 

 

$

701,132 

Net income

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,574 

 

 

18,574 

Preferred stock dividends, $0.53125/share

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,207)

 

 

(2,207)

Foreign currency translation adjustment

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(81)

 

 

 -

 

 

(81)

Repurchase of common stock

 

 -

 

 

 -

 

(595)

 

 

 -

 

 

(13,946)

 

 

 -

 

 

 -

 

 

(13,946)

Exercise of stock options

 

 -

 

 

 -

 

27 

 

 

 -

 

 

107 

 

 

 -

 

 

 -

 

 

107 

Stock based compensation - options

 

 -

 

 

 -

 

 -

 

 

 -

 

 

221 

 

 

 -

 

 

 -

 

 

221 

Stock based compensation - restricted stock

 

 -

 

 

 -

 

14 

 

 

 -

 

 

618 

 

 

 -

 

 

 -

 

 

618 

Payment of income tax withheld on vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock

 

 -

 

 

 -

 

(2)

 

 

 -

 

 

(109)

 

 

 -

 

 

 -

 

 

(109)

Balances as of March 31, 2019

 

4,155 

 

$

103,865 

 

18,208 

 

$

 

$

119,557 

 

$

(6,594)

 

$

487,479 

 

$

704,309 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 



 

Preferred Stock

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Total



 

Shares

 

 

Amount

 

Shares

 

 

Amount

 

Capital

 

Loss

 

Earnings

 

Equity

Balances as of December 31, 2017

 

 -

 

$

 -

 

20,391 

 

$

 

$

172,325 

 

$

(6,122)

 

$

397,640 

 

$

563,845 

Net income

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

17,138 

 

 

17,138 

Preferred stock dividends, $0.01181/share

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(21)

 

 

(21)

Foreign currency translation adjustment

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

310 

 

 

 -

 

 

310 

Issuance of common and preferred stock,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of offering costs

 

1,600 

 

 

40,000 

 

100 

 

 

 -

 

 

956 

 

 

 -

 

 

 -

 

 

40,956 

Exercise of stock options

 

 -

 

 

 -

 

 

 

 -

 

 

24 

 

 

 -

 

 

 -

 

 

24 

Stock based compensation - options

 

 -

 

 

 -

 

 -

 

 

 -

 

 

416 

 

 

 -

 

 

 -

 

 

416 

Stock based compensation - restricted stock

 

 -

 

 

 -

 

 

 

 -

 

 

188 

 

 

 -

 

 

 -

 

 

188 

Payment of income tax withheld on vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock

 

 -

 

 

 -

 

(2)

 

 

 -

 

 

(36)

 

 

 -

 

 

 -

 

 

(36)

Balances as of March 31, 2018

 

1,600 

 

$

40,000 

 

20,493 

 

$

 

$

173,873 

 

$

(5,812)

 

$

414,757 

 

$

622,820 



See accompanying notes to unaudited consolidated financial statements.









9


 

Table of Contents



CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

18,574 

 

$

17,138 

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

 

 

 

 

 

 

Depreciation

 

 

31,839 

 

 

28,879 

Amortization of debt issuance costs

 

 

1,202 

 

 

945 

Amortization of intangible assets

 

 

403 

 

 

544 

Stock-based compensation expense

 

 

839 

 

 

604 

Unrealized (gain) loss on foreign exchange

 

 

26 

 

 

(80)

Gain on sale of used rental equipment

 

 

(8,832)

 

 

(2,195)

Deferred income taxes

 

 

630 

 

 

752 

Bad debt expense

 

 

738 

 

 

124 

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

1,158 

 

 

671 

Prepaid expenses and other assets

 

 

(1,132)

 

 

(27)

Net investment in sales-type and direct financing leases

 

 

16,442 

 

 

 -

Accounts payable, accrued expenses and other liabilities

 

 

(3,580)

 

 

(6,288)

Due to container investors

 

 

(1,940)

 

 

(1,458)

Unearned revenue

 

 

(2,038)

 

 

(362)

Net cash provided by operating activities

 

 

54,329 

 

 

39,247 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(141,212)

 

 

(112,763)

Proceeds from sale of used rental equipment

 

 

180,331 

 

 

9,671 

Purchase of furniture, fixtures and equipment

 

 

(50)

 

 

(58)

Receipt of principal payments from sales-type and direct financing leases

 

 

 -

 

 

8,336 

Net cash provided by (used in) investing activities

 

 

39,069 

 

 

(94,814)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

306,582 

 

 

477,600 

Principal payments on debt

 

 

(382,847)

 

 

(441,884)

Debt issuance costs

 

 

(419)

 

 

(3,485)

Proceeds from issuance of common and preferred stock

 

 

 -

 

 

42,076 

Repurchase of common stock

 

 

(13,946)

 

 

 -

Dividends paid to preferred stockholders

 

 

(2,207)

 

 

 -

Exercise of stock options

 

 

107 

 

 

24 

Net cash (used in) provided by financing activities

 

 

(92,730)

 

 

74,331 

Effect on cash of foreign currency translation

 

 

238 

 

 

98 

Net increase in cash and restricted cash

 

 

906 

 

 

18,862 

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

 

 

75,983 

 

 

47,209 

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

 

$

76,889 

 

$

66,071 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

91 

 

$

174 

Interest

 

 

22,544 

 

 

16,654 



 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to direct finance lease

 

$

8,349 

 

$

15,956 

Rental equipment payable

 

 

56,221 

 

 

133,714 

10


 

Table of Contents



(1)

Includes cash of $20,104 and $14,735, cash held by variable interest entities of $25,211 and $20,685, and restricted cash of $30,668 and $11,789 at December 31, 2018 and 2017, respectively.

(2)

Includes cash of $20,128 and $21,564, cash held by variable interest entities of $27,058 and $22,765, and restricted cash of $29,703 and $21,742 at March 31, 2019 and 2018, respectively.



See accompanying notes to unaudited consolidated financial statements.



 

11


 

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, 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock and 8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock are traded on the New York Stock Exchange under the symbols “CAI,” “CAI-PA” and “CAI-PB,” 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, 2019 and December 31, 2018, the Company’s results of operations for the three months ended March 31, 2019 and 2018, and the Company’s cash flows for the three months ended March 31, 2019 and 2018. 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 2019 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, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 5, 2019.

 

(2)  Accounting Policies and Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), and subsequently issued amendments thereto, that replaced existing lease accounting guidance. The new standard requires lessors to classify leases as a sales-type, direct financing, or operating lease. A lease is a sales-type lease if any of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all of the risks and benefits of the underlying asset to the lessee and a third-party, the lease is a direct financing lease. All leases that are not sales-type or direct financing leases are operating leases. The new standard also established a right-of-use model (ROU) that requires lessees to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months.

The Company adopted ASU 2016-02, as amended, effective January 1, 2019, using the modified retrospective approach and the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. In addition, the Company elected the following practical expedients permitted under the transition guidance within the new standard: (1) the “package of practical expedients,” which does not require the Company to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs, (2) the short-term lease recognition exemption for its office space leases of twelve months or less, which resulted in the Company not recognizing an ROU asset or lease liability for these leases, and (3) the practical expedient to not separate lease and non-lease components for leases that qualify for the practical expedient.  

Adoption of the new standard resulted in the recognition of operating lease ROU assets of $3.7 million and operating lease liabilities of $4.1 million as of January 1, 2019. Adoption did not have an impact on the Company’s consolidated statements of income or cash flows. 

Except as described above, there were no changes to the Company’s accounting policies during the three months ended March 31, 2019. 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, 2018, filed with the SEC on March 5, 2019, for a description of the Company’s significant accounting policies.



12


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Accounting Policies

(aContainer and Rail Lease Revenue

The Company recognizes revenue from operating leases of its 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. Sales-type and finance lease income is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease. 

Certain leases include one or more options to renew or purchase the leased rental equipment. The exercise of lease renewal or equipment purchase options is at the sole discretion of the customer.

Included in lease revenue is revenue consisting primarily of fees charged to the lessee for handling, delivery, and repairs. These activities are considered non-lease components of the contract, which are generally accounted for separately from the lease component, and revenue is recognized as earned in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue Recognition.  For certain leases of railcar equipment, the Company is responsible for the repair and maintenance of the railcars throughout the lease term. For such leases, the lease and non-lease component are combined as a single lease component,  and revenue is recognized as earned in accordance with ASC Topic 842, Leases.

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.

 (b)  Leases

The Company leases office space under operating leases with expiration dates through 2024. The Company determines whether an arrangement constitutes a lease and records lease liabilities and ROU assets on its consolidated balance sheets at lease commencement. Operating leases under ASC 842 are included in operating lease right-of-use assets, accrued expenses and other current liabilities, and operating lease liabilities in the Company’s consolidated balance sheets.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease pre-payments made and exclude lease incentives. Certain of the Company’s leases include one or more options to renew, which are included in the lease term only when it is reasonably certain that the Company will exercise that option. The Company’s office space leases often include lease and non-lease components, which are combined and accounted for as a single lease component. 

For short-term leases, the Company records rent expense in its consolidated statements of income on a straight-line basis over the lease term and records variable lease payments as incurred.

 

(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.

13


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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 the arrangements include only terms and conditions that are customarily present in arrangements for similar services. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. No container portfolios were sold to the funds during the three months ended March 31, 2019 and 2018.  

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. 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, 2019 and December 31, 2018, and the results of the VIEs’ operations and cash flows for the three months ended March 31, 2019 and 2018, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $139.8 million as of March 31, 2019. The container equipment, together with $27.1 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 $124.2 million and term loans held by VIE of $41.3 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, 2019 and 2018, had a net book value of $65.0 million and $7.9 million, respectively.

 

(4)  Rental Equipment



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









 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

Dry containers

 

$

1,885,018 

 

$

1,840,304 

Refrigerated containers

 

 

340,495 

 

 

341,983 

Other specialized equipment

 

 

206,282 

 

 

192,035 

Railcars

 

 

358,419 

 

 

490,381 



 

 

2,790,214 

 

 

2,864,703 

Accumulated depreciation

 

 

(613,838)

 

 

(599,443)

Rental equipment, net of accumulated depreciation

 

$

2,176,376 

 

$

2,265,260 



On February 26, 2019, the Company entered into an agreement to sell 2,146 railcars. The sale of 1,946 railcars for consideration of $165.3 million was completed in February 2019, which resulted in a $7.0 million gain on sale of rental equipment. The sale of the remaining 200 railcars is expected to complete in the second quarter of 2019.





14


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(5)  Net Investment in Sales-Type and Direct Finance Leases 



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





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

Gross sales-type and finance lease receivables (1)

 

$

785,149 

 

$

804,511 

Unearned income (2)

 

 

(245,213)

 

 

(254,744)

Net investment in sales-type and direct finance leases

 

$

539,936 

 

$

549,767 



(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 sales-type and finance lease receivables. The gross sales-type and finance lease receivables are reduced as customer payments are received. There was $74.4 million unguaranteed residual value at March 31, 2019 and December 31, 2018, included in gross sales-type and finance lease receivables. There were no executory costs included in gross sales-type and finance lease receivables as of March 31, 2019 and December 31, 2018.

(2)

The difference between the gross sales-type and 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, 2019 and December 31, 2018.

In order to estimate the allowance for losses contained in gross sales-type and 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.

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





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

Tier 1

 

$

677,220 

 

$

698,014 

Tier 2

 

 

107,929 

 

 

106,497 

Tier 3

 

 

 -

 

 

 -



 

$

785,149 

 

$

804,511 

 



15


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Contractual maturities of the Company's gross sales-type and finance lease receivables subsequent to March 31, 2019 for the years ending March 31 are as follows (in thousands):









 

 

 

 

 

 

2020

 

 

 

 

$

115,179 

2021

 

 

 

 

 

91,343 

2022

 

 

 

 

 

83,364 

2023

 

 

 

 

 

77,814 

2024

 

 

 

 

 

69,955 

2025 and thereafter

 

 

 

 

 

347,494 



 

 

 

 

$

785,149 

 

(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 March 31, 2019 and December 31, 2018 were as follows (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,786)

 

$

 -

Customer relationships

 

 

 

 

 

9,344 

 

 

(4,013)

 

 

5,331 



 

 

 

 

$

11,130 

 

$

(5,799)

 

$

5,331 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,786)

 

$

 -

Customer relationships

 

 

 

 

 

9,344 

 

 

(3,611)

 

 

5,733 



 

 

 

 

$

11,130 

 

$

(5,397)

 

$

5,733 



Amortization expense was $0.4 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively, and was included in administrative expenses in the consolidated statements of income.

As of March 31, 2019, estimated future amortization expenses are as follows (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

 

$

1,609 

2021

 

 

 

 

 

 

 

 

 

 

 

1,609 

2022

 

 

 

 

 

 

 

 

 

 

 

1,232 

2023

 

 

 

 

 

 

 

 

 

 

 

474 

2024

 

 

 

 

 

 

 

 

 

 

 

407 



 

 

 

 

 

 

 

 

 

 

$

5,331 







(7)  Leases



Lessee

The Company has entered into various non-cancelable office space leases with original lease periods expiring between 2019 and 2024. The components of lease expense for the three months ended March 31, 2019 were as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Operating lease cost

 

 

 

 

 

 

 

 

 

 

$

600 

Short-term lease cost

 

 

 

 

 

 

 

 

 

 

 

15 

Variable lease cost

 

 

 

 

 

 

 

 

 

 

 

73 

Total lease cost

 

 

 

 

 

 

 

 

 

 

$

688 

16


 

Table of Contents

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

The weighted-average remaining term of the Company’s operating leases was 3.2 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 4.2% as of March 31, 2019.



Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of March 31, 2019 were as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

 

$