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, 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)
Securities registered pursuant to Section 12(b) of the Act:
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 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 |
☐ |
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. ☐
1
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 Stock |
July 31, 2019 |
|
Common Stock, $0.0001 par value per share |
|
17,419,585 shares |
2
CAI INTERNATIONAL, INC.
|
|
Page No. |
5 | ||
Item 1. |
5 | |
|
Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 |
5 |
|
Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018 |
7 |
|
8 | |
|
9 | |
|
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 |
10 |
|
12 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
35 | |
Item 4. |
36 | |
36 | ||
Item 1. |
36 | |
Item 1A. |
36 | |
Item 2. |
36 | |
Item 3. |
36 | |
Item 4. |
37 | |
Item 5. |
37 | |
Item 6. |
38 | |
39 |
3
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.
4
PART I — FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
(UNAUDITED)
|
||||||
|
June 30, |
December 31, |
||||
|
2019 |
2018 |
||||
Assets |
||||||
Current assets |
||||||
Cash |
$ |
22,183 |
$ |
20,104 | ||
Cash held by variable interest entities |
35,105 | 25,211 | ||||
Accounts receivable, net of allowance for doubtful accounts of $3,049 and |
||||||
$2,042 at June 30, 2019 and December 31, 2018, respectively |
97,070 | 95,942 | ||||
Current portion of net investment in sales-type and direct finance leases |
75,174 | 75,975 | ||||
Assets held for sale |
320,793 | 449,730 | ||||
Prepaid expenses and other current assets |
6,783 | 1,525 | ||||
Total current assets |
557,108 | 668,487 | ||||
Restricted cash |
28,733 | 30,668 | ||||
Rental equipment, net of accumulated depreciation of $604,417 and |
||||||
$557,559 at June 30, 2019 and December 31, 2018, respectively |
1,882,452 | 1,816,794 | ||||
Net investment in sales-type and direct finance leases |
460,235 | 473,792 | ||||
Financing receivable |
31,948 |
- |
||||
Goodwill |
15,794 | 15,794 | ||||
Intangible assets, net of accumulated amortization of $6,202 and |
||||||
$5,397 at June 30, 2019 and December 31, 2018, respectively |
4,928 | 5,733 | ||||
Other non-current assets |
3,692 | 1,349 | ||||
Total assets (1) |
$ |
2,984,890 |
$ |
3,012,617 | ||
|
||||||
Liabilities and Stockholders' Equity |
||||||
Current liabilities |
||||||
Accounts payable |
$ |
8,225 |
$ |
7,371 | ||
Accrued expenses and other current liabilities |
21,509 | 25,069 | ||||
Unearned revenue |
6,448 | 7,573 | ||||
Current portion of debt |
313,064 | 311,381 | ||||
Rental equipment payable |
75,810 | 74,139 | ||||
Total current liabilities |
425,056 | 425,533 | ||||
Debt |
1,825,858 | 1,847,633 | ||||
Deferred income tax liability |
40,006 | 38,319 | ||||
Other non-current liabilities |
1,784 |
- |
||||
Total liabilities (2) |
2,292,704 | 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 June 30, 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 June 30, 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 |
||||||
17,419,585 and 18,764,459 shares at June 30, 2019 and December 31, 2018, respectively |
2 | 2 | ||||
Additional paid-in capital |
100,301 | 132,666 | ||||
Accumulated other comprehensive loss |
(6,589) | (6,513) | ||||
Retained earnings |
494,607 | 471,112 | ||||
Total stockholders' equity |
692,186 | 701,132 | ||||
Total liabilities and stockholders' equity |
$ |
2,984,890 |
$ |
3,012,617 |
5
(1) |
Total assets at June 30, 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, $35,105 and $25,211; Net investment in direct finance leases, $9,959 and $13,862; and Rental equipment, net of accumulated depreciation, $113,995, and $71,958, respectively. |
(2) |
Total liabilities at June 30, 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, $38,070 and $41,066; Debt, $116,311 and $67,615, respectively. |
See accompanying notes to unaudited consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)
|
|||||||||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||
Revenue |
|||||||||||
Container lease revenue |
$ |
75,774 |
$ |
68,333 |
$ |
151,285 |
$ |
132,967 | |||
Logistics revenue |
29,802 | 28,253 | 57,518 | 49,889 | |||||||
Total revenue |
105,576 | 96,586 | 208,803 | 182,856 | |||||||
|
|||||||||||
Operating expenses |
|||||||||||
Depreciation of rental equipment |
28,657 | 26,103 | 57,069 | 51,281 | |||||||
Storage, handling and other expenses |
4,063 | 969 | 7,959 | 3,297 | |||||||
Logistics transportation costs |
26,091 | 24,330 | 50,610 | 42,995 | |||||||
Gain on sale of rental equipment |
(1,583) | (2,662) | (3,025) | (4,897) | |||||||
Administrative expenses |
12,338 | 11,325 | 25,408 | 21,550 | |||||||
Total operating expenses |
69,566 | 60,065 | 138,021 | 114,226 | |||||||
|
|||||||||||
Operating income |
36,010 | 36,521 | 70,782 | 68,630 | |||||||
|
|||||||||||
Other expenses |
|||||||||||
Net interest expense |
20,021 | 14,594 | 39,926 | 27,948 | |||||||
Other expense |
119 | 429 | 157 | 394 | |||||||
Total other expenses |
20,140 | 15,023 | 40,083 | 28,342 | |||||||
|
|||||||||||
Income before income taxes |
15,870 | 21,498 | 30,699 | 40,288 | |||||||
Income tax expense |
1,335 | 847 | 1,719 | 1,758 | |||||||
|
|||||||||||
Income from continuing operations |
14,535 | 20,651 | 28,980 | 38,530 | |||||||
Loss from discontinued operations, net of income taxes |
(5,200) | (354) | (1,071) | (1,095) | |||||||
Net income |
9,335 | 20,297 | 27,909 | 37,435 | |||||||
Preferred stock dividends |
2,207 | 1,148 | 4,414 | 1,169 | |||||||
Net income attributable to CAI common stockholders |
$ |
7,128 |
$ |
19,149 |
$ |
23,495 |
$ |
36,266 | |||
|
|||||||||||
Amounts attributable to CAI common stockholders |
|||||||||||
Net income from continuing operations |
$ |
12,328 |
$ |
19,503 |
$ |
24,566 |
$ |
37,361 | |||
Net loss from discontinued operations |
(5,200) | (354) | (1,071) | (1,095) | |||||||
Net income attributable to CAI common stockholders |
$ |
7,128 |
$ |
19,149 |
$ |
23,495 |
$ |
36,266 | |||
|
|||||||||||
Net income (loss) per share attributable to CAI common |
|||||||||||
stockholders |
|||||||||||
Basic |
|||||||||||
Continuing operations |
$ |
0.70 |
$ |
1.00 |
$ |
1.36 |
$ |
1.86 | |||
Discontinued operations |
(0.30) | (0.02) | (0.06) | (0.05) | |||||||
Total basic |
$ |
0.40 |
$ |
0.98 |
$ |
1.30 |
$ |
1.81 | |||
Diluted |
|||||||||||
Continuing operations |
$ |
0.69 |
$ |
0.99 |
$ |
1.34 |
$ |
1.84 | |||
Discontinued operations |
(0.29) | (0.02) | (0.06) | (0.05) | |||||||
Total diluted |
$ |
0.40 |
$ |
0.97 |
$ |
1.28 |
$ |
1.79 | |||
|
|||||||||||
Weighted average shares outstanding |
|||||||||||
Basic |
17,648 | 19,613 | 18,098 | 20,013 | |||||||
Diluted |
17,926 | 19,843 | 18,401 | 20,258 |
See accompanying notes to unaudited consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(UNAUDITED)
|
||||||||||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||
|
2019 |
2018 |
2019 |
2018 |
||||||||
|
||||||||||||
Net income |
$ |
9,335 |
$ |
20,297 |
$ |
27,909 |
$ |
37,435 | ||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Foreign currency translation adjustments |
5 | (548) | (76) | (238) | ||||||||
Comprehensive income before preferred stock dividends |
9,340 | 19,749 | 27,833 | 37,197 | ||||||||
Dividends on preferred stock |
(2,207) | (1,148) | (4,414) | (1,169) | ||||||||
Comprehensive income available to CAI common stockholders |
$ |
7,133 |
$ |
18,601 |
$ |
23,419 |
$ |
36,028 |
See accompanying notes to unaudited consolidated financial statements.
8
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 |
$ |
2 |
$ |
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) | ||||||||||||||
Stock-based compensation |
- |
- |
39 |
- |
837 |
- |
- |
837 | ||||||||||||||
Balances as of March 31, 2019 |
4,155 |
$ |
103,865 | 18,208 |
$ |
2 |
$ |
119,557 |
$ |
(6,594) |
$ |
487,479 |
$ |
704,309 | ||||||||
Net income |
- |
- |
- |
- |
- |
- |
9,335 | 9,335 | ||||||||||||||
Preferred stock dividends, $0.53125/share |
- |
- |
- |
- |
- |
- |
(2,207) | (2,207) | ||||||||||||||
Foreign currency translation adjustment |
- |
- |
- |
- |
- |
5 |
- |
5 | ||||||||||||||
Repurchase of common stock |
- |
- |
(863) |
- |
(20,172) |
- |
- |
(20,172) | ||||||||||||||
Stock-based compensation |
- |
- |
75 |
- |
916 |
- |
- |
916 | ||||||||||||||
Balances as of June 30, 2019 |
4,155 |
$ |
103,865 | 17,420 |
$ |
2 |
$ |
100,301 |
$ |
(6,589) |
$ |
494,607 |
$ |
692,186 |
|
||||||||||||||||||||||
|
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 |
$ |
2 |
$ |
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 | ||||||||||||||
Stock-based compensation |
- |
- |
2 |
- |
592 |
- |
- |
592 | ||||||||||||||
Balances as of March 31, 2018 |
1,600 |
$ |
40,000 | 20,493 |
$ |
2 |
$ |
173,873 |
$ |
(5,812) |
$ |
414,757 |
$ |
622,820 | ||||||||
Net income |
- |
- |
- |
- |
- |
- |
20,297 | 20,297 | ||||||||||||||
Preferred stock dividends, $0.53125/share |
- |
- |
- |
- |
- |
- |
(1,148) | (1,148) | ||||||||||||||
Foreign currency translation adjustment |
- |
- |
- |
- |
- |
(548) |
- |
(548) | ||||||||||||||
Issuance of common and preferred stock, |
||||||||||||||||||||||
net of offering costs |
600 | 14,990 |
- |
- |
(370) |
- |
- |
14,620 | ||||||||||||||
Repurchase of common stock |
- |
- |
(1,225) | (27,946) | (27,946) | |||||||||||||||||
Stock-based compensation |
- |
- |
38 |
- |
653 |
- |
- |
653 | ||||||||||||||
Balances as of June 30, 2018 |
2,200 |
$ |
54,990 | 19,306 |
$ |
2 |
$ |
146,210 |
$ |
(6,360) |
$ |
433,906 |
$ |
628,748 |
See accompanying notes to unaudited consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
||||||
|
Six Months Ended June 30, |
|||||
|
2019 |
2018 |
||||
Cash flows from operating activities |
||||||
Net income |
$ |
27,909 |
$ |
37,435 | ||
Loss from discontinued operations, net of income taxes |
(1,071) | (1,095) | ||||
Income from continuing operations |
28,980 | 38,530 | ||||
Adjustments to reconcile net income from continuing operations to net cash provided by |
||||||
operating activities: |
||||||
Depreciation |
57,179 | 51,350 | ||||
Amortization of debt issuance costs |
2,011 | 1,808 | ||||
Amortization of intangible assets |
805 | 1,087 | ||||
Stock-based compensation expense |
1,401 | 1,206 | ||||
Unrealized loss on foreign exchange |
90 | 266 | ||||
Gain on sale of rental equipment |
(3,025) | (4,897) | ||||
Deferred income taxes |
1,652 | 1,248 | ||||
Bad debt expense |
529 | 315 | ||||
Changes in other operating assets and liabilities: |
||||||
Accounts receivable |
(922) | (14,567) | ||||
Prepaid expenses and other assets |
(654) | (2,121) | ||||
Net investment in sales-type and direct financing leases |
31,336 |
- |
||||
Accounts payable, accrued expenses and other liabilities |
(2,279) | (1,115) | ||||
Unearned revenue |
(129) | 14 | ||||
Net cash provided by operating activities of continuing operations |
116,974 | 73,124 | ||||
Net cash provided by operating activities of discontinued operations |
919 | 5,288 | ||||
Net cash provided by operating activities |
117,893 | 78,412 | ||||
Cash flows from investing activities |
||||||
Purchase of rental equipment |
(167,442) | (226,033) | ||||
Purchase of financing receivable |
(36,379) |
- |
||||
Proceeds from sale of rental equipment |
33,479 | 25,124 | ||||
Purchase of furniture, fixtures and equipment |
(249) | (196) | ||||
Receipt of principal payments from financing receivable |
973 |
- |
||||
Receipt of principal payments from sales-type and direct financing leases |
- |
19,046 | ||||
Net cash used in investing activities of continuing operations |
(169,618) | (182,059) | ||||
Net cash provided by (used in) investing activities of discontinued operations |
122,770 | (45,594) | ||||
Net cash used in investing activities |
(46,848) | (227,653) | ||||
Cash flows from financing activities |
||||||
Proceeds from debt |
387,082 | 675,289 | ||||
Principal payments on debt |
(324,263) | (564,953) | ||||
Debt issuance costs |
(496) | (6,201) | ||||
Proceeds from issuance of common and preferred stock |
- |
56,699 | ||||
Repurchase of common stock |
(34,118) | (27,946) | ||||
Dividends paid to preferred stockholders |
(4,414) |
- |
||||
Exercise of stock options |
335 | 24 | ||||
Net cash provided by financing activities of continuing operations |
24,126 | 132,912 | ||||
Net cash (used in) provided by financing activities of discontinued operations |
(85,056) | 31,016 | ||||
Net cash (used in) provided by financing activities |
(60,930) | 163,928 | ||||
Effect on cash of foreign currency translation |
(77) | (20) | ||||
Net increase in cash and restricted cash |
10,038 | 14,667 | ||||
Cash and restricted cash at beginning of the period (1) |
75,983 | 47,209 | ||||
Cash and restricted cash at end of the period (2) |
$ |
86,021 |
$ |
61,876 |
10
Supplemental disclosure of cash flow information |
||||||
Cash paid during the period for: |
||||||
Income taxes |
$ |
441 |
$ |
172 | ||
Interest |
43,327 | 27,651 | ||||
|
||||||
Supplemental disclosure of non-cash investing and financing activity |
||||||
Transfer of rental equipment to direct finance lease |
$ |
19,153 |
$ |
71,807 | ||
Rental equipment payable |
75,810 | 184,258 |
(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 $22,183 and $16,462, cash held by variable interest entities of $35,105 and $24,348, and restricted cash of $28,733 and $21,066 at June 30, 2019 and 2018, respectively. |
See accompanying notes to unaudited consolidated financial statements.
11
(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 June 30, 2019 and December 31, 2018, the Company’s results of operations for the three and six months ended June 30, 2019 and 2018, and the Company’s cash flows for the six months ended June 30, 2019 and 2018. Certain reclassifications have been made to prior year financial statements to conform to the current presentation. 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.
Discontinued Operations
In the quarter ended June 30, 2019, the Company committed to a plan to sell its railcar assets and to reallocate the capital invested in its rail business to other investments. The Company expects a sale to be completed before the end of 2019. As a result, the railcar assets have been reclassified as held for sale in the accompanying unaudited consolidated balance sheets and the operations of the rail business have been reclassified as discontinued operations in the accompanying unaudited consolidated statements of income and cash flows. All prior periods presented in these unaudited consolidated financial statements have been restated to reflect the reclassification of the railcar business as discontinued operations and assets held for sale. See Note 3 – Discontinued Operations for more information.
(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.
12
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 six months ended June 30, 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.
Accounting Policies
(a) Container 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, and interest earned on financing receivables are recognized using the effective interest method, which generates a constant rate of interest over the term of the arrangement.
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 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) Discontinued Operations
As discussed in Note 1, railcar assets of $320.8 million and $449.7 million were reclassified as held for sale as of June 30, 2019 and December 31, 2018, respectively, and the related operations of the rail business as discontinued operations in the accompanying unaudited consolidated statements of income and cash flows. The railcar assets are expected to be sold before the end of 2019.
The Company’s held for sale railcar assets as of the dates indicated are made up as follows (in thousands):
|
June 30, |
December 31, |
|||||||||
|
2019 |
2018 |
|||||||||
Rental equipment |
$ |
326,058 |
$ |
448,466 | |||||||
Other assets |
2,058 | 1,264 | |||||||||
Loss on classification as held for sale |
(7,323) |
- |
|||||||||
Assets held for sale |
$ |
320,793 |
$ |
449,730 |
13
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other assets and liabilities of the rail business, including accounts receivable, accrued expenses and other liabilities, deferred tax liabilities and debt, have not been classified as held for sale in the consolidated balance sheets as of June 30, 2019 and December 31, 2018 as they will not be sold by the Company. The rail debt will be repaid upon the sale of the railcar assets.
The following table summarizes the components of income (loss) from discontinued operations in the accompanying unaudited consolidated statements of income for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||
Revenue |
|||||||||||
Rail lease revenue |
$ |
6,462 |
$ |
9,119 |
$ |
14,343 |
$ |
18,223 | |||
|
|||||||||||
Operating expenses |
|||||||||||
Depreciation of rental equipment |
1,878 | 3,299 | 5,249 | 6,968 | |||||||
Storage, handling and other expenses |
1,136 | 1,644 | 2,360 | 3,416 | |||||||
Gain on sale of rental equipment |
(1,271) | (57) | (8,661) | (17) | |||||||
Administrative expenses |
1,030 | 835 | 2,356 | 1,851 | |||||||
Total operating expenses |
2,773 | 5,721 | 1,304 | 12,218 | |||||||
|
|||||||||||
Operating income |
3,689 | 3,398 | 13,039 | 6,005 | |||||||
|
|||||||||||
Interest expense |
3,184 | 3,846 | 7,129 | 7,391 | |||||||
Income (loss) before income taxes |
505 | (448) | 5,910 | (1,386) | |||||||
|
|||||||||||
Loss on classification as held for sale |
7,323 |
- |