20200331 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, 2020



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 2400

 

 

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:

 

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 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. 



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

 

April 24, 2020

Common Stock, $0.0001 par value per share

 

 17,506,453 shares







 

1


 

Table of Contents

CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

 

Page No.

Part I — Financial Information

Item 1.

Financial Statements (Unaudited)

   

Consolidated Balance Sheets at March 31, 2020 and December 31, 2019



Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

   

Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2020 and 2019



Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019

   

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

   

Notes to Unaudited Consolidated Financial Statements

11 

Item 2.

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

22 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29 

Item 4.

Controls and Procedures

30 

Part II — Other Information

30 

Item 1.

Legal Proceedings

30 

Item 1A.

Risk Factors

30 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31 

Item 3.

Defaults Upon Senior Securities

31 

Item 4.

Mine Safety Disclosures

31 

Item 5.

Other Information

32 

Item 6.

Exhibits

33 

Signatures

34 

 

2


 

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, 2019 filed with the Securities and Exchange Commission (SEC) on March 5, 2020, this Quarterly Report on Form 10-Q 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.



3


 

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,



 

2020

 

2019

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

87,727 

 

$

19,870 

Cash held by variable interest entities

 

 

21,016 

 

 

26,594 

Accounts receivable, net of allowance for doubtful accounts of $6,877 and

 

 

 

 

 

 

$8,171 at March 31, 2020 and December 31, 2019, respectively

 

 

86,177 

 

 

88,452 

Current portion of net investment in finance leases

 

 

75,730 

 

 

71,274 

Prepaid expenses and other current assets

 

 

9,638 

 

 

10,228 

Total current assets

 

 

280,288 

 

 

216,418 

Restricted cash

 

 

25,799 

 

 

26,775 

Rental equipment, net of accumulated depreciation of $640,118 and

 

 

 

 

 

 

$620,990 at March 31, 2020 and December 31, 2019, respectively

 

 

2,035,342 

 

 

2,102,839 

Net investment in finance leases

 

 

479,276 

 

 

496,094 

Financing receivable

 

 

29,739 

 

 

30,693 

Goodwill

 

 

15,794 

 

 

15,794 

Intangible assets, net of accumulated amortization of $5,624 and

 

 

 

 

 

 

$5,221 at March 31, 2020 and December 31, 2019, respectively

 

 

3,720 

 

 

4,123 

Other non-current assets

 

 

8,520 

 

 

9,029 

Total assets (1)

 

$

2,878,478 

 

$

2,901,765 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

8,928 

 

$

7,291 

Accrued expenses and other current liabilities

 

 

26,180 

 

 

30,479 

Unearned revenue

 

 

6,478 

 

 

6,405 

Current portion of debt

 

 

216,519 

 

 

218,094 

Rental equipment payable

 

 

4,596 

 

 

25,137 

Total current liabilities

 

 

262,701 

 

 

287,406 

Debt

 

 

1,888,634 

 

 

1,880,122 

Deferred income tax liability

 

 

31,872 

 

 

35,376 

Other non-current liabilities

 

 

5,124 

 

 

5,621 

Total liabilities (2)

 

 

2,188,331 

 

 

2,208,525 



 

 

 

 

 

 

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

 

 

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

 

 

48,875 

 

 

48,875 

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

 

 

 

 

 

 

17,506,453 and 17,479,127 shares at March 31, 2020 and December 31, 2019, respectively

 

 

 

 

Additional paid-in capital

 

 

103,290 

 

 

102,709 

Accumulated other comprehensive loss

 

 

(6,767)

 

 

(6,630)

Retained earnings

 

 

489,757 

 

 

493,294 

Total stockholders' equity

 

 

690,147 

 

 

693,240 

Total liabilities and stockholders' equity

 

$

2,878,478 

 

$

2,901,765 

4


 

Table of Contents



(1)

Total assets at March 31, 2020 and December 31, 2019 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $21,016 and $26,594; Net investment in direct finance leases, $4,614 and $4,790; and Rental equipment, net of accumulated depreciation, $98,758, and $101,907, respectively.

(2)

Total liabilities at March 31, 2020 and December 31, 2019 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $25,906 and $26,931;  Debt, $91,501 and $100,849, respectively. 



See accompanying notes to unaudited consolidated financial statements. 

5


 

Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended March 31,



 

 

 

 

2020

 

2019

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease revenue

 

 

 

 

 

 

$

69,113 

 

$

75,511 

Rail lease revenue

 

 

 

 

 

 

 

5,803 

 

 

7,881 

Logistics revenue

 

 

 

 

 

 

 

30,106 

 

 

27,716 

Total revenue

 

 

 

 

 

 

 

105,022 

 

 

111,108 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

 

 

 

 

 

 

27,048 

 

 

31,784 

Impairment of rental equipment

 

 

 

 

 

 

 

19,167 

 

 

 -

Storage, handling and other expenses

 

 

 

 

 

 

 

5,748 

 

 

5,120 

Logistics transportation costs

 

 

 

 

 

 

 

26,815 

 

 

24,519 

Gain on sale of rental equipment

 

 

 

 

 

 

 

(1,614)

 

 

(8,832)

Administrative expenses

 

 

 

 

 

 

 

11,826 

 

 

14,396 

Total operating expenses

 

 

 

 

 

 

 

88,990 

 

 

66,987 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

16,032 

 

 

44,121 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

 

 

 

 

 

 

20,376 

 

 

23,850 

Other expense

 

 

 

 

 

 

 

246 

 

 

38 

Total other expenses

 

 

 

 

 

 

 

20,622 

 

 

23,888 



 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

 

 

 

 

 

(4,590)

 

 

20,233 

Income tax (benefit) expense

 

 

 

 

 

 

 

(3,260)

 

 

1,659 



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

(1,330)

 

 

18,574 

Preferred stock dividends

 

 

 

 

 

 

 

2,207 

 

 

2,207 

Net (loss) income attributable to CAI common stockholders

 

 

 

 

 

 

$

(3,537)

 

$

16,367 



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to CAI

 

 

 

 

 

 

 

 

 

 

 

common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

$

(0.20)

 

$

0.88 

Diluted

 

 

 

 

 

 

$

(0.20)

 

$

0.87 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

17,433 

 

 

18,555 

Diluted

 

 

 

 

 

 

 

17,433 

 

 

18,870 



See accompanying notes to unaudited consolidated financial statements.

6


 

Table of Contents

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended March 31,



 

 

 

 

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

$

(1,330)

 

$

18,574 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

(137)

 

 

(81)

Comprehensive (loss) income before preferred stock dividends

 

 

 

 

 

 

 

 

(1,467)

 

 

18,493 

Dividends on preferred stock

 

 

 

 

 

 

 

 

(2,207)

 

 

(2,207)

Comprehensive (loss) income available to CAI

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

 

 

 

 

 

 

 

$

(3,674)

 

$

16,286 



See accompanying notes to unaudited consolidated financial statements.

7


 

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, 2019

 

4,155 

 

$

103,865 

 

17,479 

 

$

 

$

102,709 

 

$

(6,630)

 

$

493,294 

 

$

693,240 

Net loss

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,330)

 

 

(1,330)

Preferred stock dividends, $0.53125/share

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,207)

 

 

(2,207)

Foreign currency translation adjustment

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(137)

 

 

 -

 

 

(137)

Exercise of stock options

 

 -

 

 

 -

 

 

 

 -

 

 

113 

 

 

 -

 

 

 -

 

 

113 

Stock-based compensation, net of taxes

 

 -

 

 

 -

 

19 

 

 

 -

 

 

468 

 

 

 -

 

 

 -

 

 

468 

Balances as of March 31, 2020

 

4,155 

 

$

103,865 

 

17,506 

 

$

 

$

103,290 

 

$

(6,767)

 

$

489,757 

 

$

690,147 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, net of taxes

 

 -

 

 

 -

 

12 

 

 

 -

 

 

730 

 

 

 -

 

 

 -

 

 

730 

Balances as of March 31, 2019

 

4,155 

 

$

103,865 

 

18,208 

 

$

 

$

119,557 

 

$

(6,594)

 

$

487,479 

 

$

704,309 



See accompanying notes to unaudited consolidated financial statements.









8


 

Table of Contents



CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2020

 

2019

Cash flows from operating activities

 

 

 

 

 

 

Net (loss) income

 

$

(1,330)

 

$

18,574 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

27,314 

 

 

31,839 

Impairment of rental equipment

 

 

19,167 

 

 

 -

Amortization of debt issuance costs

 

 

988 

 

 

1,202 

Amortization of intangible assets

 

 

403 

 

 

403 

Stock-based compensation expense

 

 

874 

 

 

839 

Unrealized loss on foreign exchange

 

 

220 

 

 

26 

Gain on sale of rental equipment

 

 

(1,614)

 

 

(8,832)

Deferred income taxes

 

 

(3,504)

 

 

630 

Bad debt (recovery) expense

 

 

(1,076)

 

 

738 

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

4,409 

 

 

1,158 

Prepaid expenses and other assets

 

 

830 

 

 

(1,132)

Net investment in finance leases

 

 

17,113 

 

 

16,442 

Accounts payable, accrued expenses and other liabilities

 

 

(3,231)

 

 

(5,520)

Unearned revenue

 

 

(438)

 

 

(2,038)

Net cash provided by operating activities

 

 

60,125 

 

 

54,329 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(27,500)

 

 

(141,212)

Proceeds from sale of rental equipment

 

 

24,576 

 

 

180,331 

Receipt of principal payments from financing receivable

 

 

325 

 

 

 -

Purchase of furniture, fixtures and equipment

 

 

(310)

 

 

(50)

Net cash (used in) provided by investing activities

 

 

(2,909)

 

 

39,069 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

110,000 

 

 

306,582 

Principal payments on debt

 

 

(103,742)

 

 

(382,847)

Debt issuance costs

 

 

 -

 

 

(419)

Repurchase of common stock

 

 

 -

 

 

(13,946)

Dividends paid to preferred stockholders

 

 

(2,207)

 

 

(2,207)

Exercise of stock options

 

 

113 

 

 

107 

Net cash provided by (used in) financing activities

 

 

4,164 

 

 

(92,730)

Effect on cash of foreign currency translation

 

 

(77)

 

 

238 

Net increase in cash and restricted cash

 

 

61,303 

 

 

906 

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

 

 

73,239 

 

 

75,983 

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

 

$

134,542 

 

$

76,889 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

111 

 

$

91 

Interest

 

 

19,736 

 

 

22,544 



 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to finance lease

 

$

5,760 

 

$

8,349 

Rental equipment payable

 

 

4,596 

 

 

56,221 

9


 

Table of Contents



(1)

Includes cash of $19,870 and $20,104, cash held by variable interest entities of $26,594 and $25,211, and restricted cash of $26,775 and $30,668 at December 31, 2019 and 2018, respectively.

(2)

Includes cash of $87,727 and $20,128, cash held by variable interest entities of $21,016 and $27,058, and restricted cash of $25,799 and $29,703 at March 31, 2020 and 2019, respectively.



See accompanying notes to unaudited consolidated financial statements.



 

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)  Description of Business and Significant Accounting Policies



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, 2020 and December 31, 2019, the Company’s results of operations for the three months ended March 31, 2020 and 2019, and the Company’s cash flows for the three months ended March 31, 2020 and 2019Certain 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 2020 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, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 5, 2020.

Due to market conditions, the Company decided during the three months ended March 31, 2020 to terminate the sale process for its rail business. As a result, the railcar assets have been reclassified as held for use as of March 31, 2020 and the rail business reclassified as a continuing operation. All prior periods presented in the unaudited consolidated financial statements have been restated to reflect the reclassification. See Note 3Rental Equipment for further information over the reclassification of the railcar assets as held for use.

Concentration of Credit Risk

The Company’s equipment leases and trade receivables subject it to potential credit risk. The Company extends credit to its customers based upon an evaluation of each customer’s financial condition and credit history. Evaluations of the financial condition and associated credit risk of customers are performed an on ongoing basis. The Company’s largest customer accounted for 13% of the Company’s total billings during the three months ended March 31, 2020.

Accounting Policy Updates

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13) and subsequently issued amendments. The guidance affects the Company’s net investment in finance leases, financing receivable and accounts receivable for sales of rental equipment and logistics operations. Topic 326 requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectability. The Company adopted ASU 2016-13 effective January 1, 2020, using the modified retrospective method, which did not have a significant impact on the consolidated financial statements as credit losses are not expected to be significant based on historical loss trends, the financial condition of customers, and external market factors. 

Allowance for credit losses – Net investment in finance leases and financing receivable

The allowance for credit losses on net investment in finance leases and financing receivable is estimated on a collective basis by internal customer rating (see Note 4 – Net investment in finance leases for descriptions of ratings). Expected credit losses for these financial assets are estimated using a loss-rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

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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 three months ended March 31, 2020. 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, 2019, filed with the SEC on March 5, 2020, for a description of the Company’s significant accounting policies.



(2)  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 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, 2020 and 2019.  

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, 2020 and December 31, 2019, and the results of the VIEs’ operations and cash flows for the three months ended March 31, 2020 and 2019, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $103.4 million as of March 31, 2020. The container equipment, together with $21.0 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 $82.2 million and term loans held by VIE of $35.2 million.  No gain or loss was recognized by the Company on the initial consolidation of the VIEs. No containers were sold to the Japanese investor during the three months ended March 31, 2020. Containers sold to the Japanese investor funds during the three months ended March 31, 2019 had a net book value of $65.0 million.



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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(3)  Rental Equipment



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









 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

Dry containers

 

$

1,881,637 

 

$

1,902,471 

Refrigerated containers

 

 

277,013 

 

 

282,155 

Other specialized equipment

 

 

221,935 

 

 

224,924 

Railcars

 

 

294,875 

 

 

314,279 



 

 

2,675,460 

 

 

2,723,829 

Accumulated depreciation

 

 

(640,118)

 

 

(620,990)

Rental equipment, net of accumulated depreciation

 

$

2,035,342 

 

$

2,102,839 



Impairment of railcar assets

During the three months ended March 31, 2020, an impairment charge of $19.2 million was recognized to reduce the book value of the railcar portfolio, on an individual basis, to the lower of its net book value had the assets not been classified as held for sale, or its estimated fair value at the date when the decision was made not to sell the assets of the railcar business. To assist in the Company’s assessment of fair value, a third-party appraisal was carried out on the railcar fleet using a combination of cost and market approaches.   The cost approach utilizes the current replacement cost for a particular car type and calculates an estimated depreciation based on a railcar having a 40-year life and residual value being 10% of the estimated purchase price. The market approach estimates value based on recent market transactions involving similar railcars. The railcars were classified within Level 3 of the fair value hierarchy.







(4)  Leases 



The Company leases its rental equipment on either short-term operating leases through master lease agreements, long-term non-cancelable operating leases, or finance leases. The following table summarizes the components of lease revenue (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Three Months Ended March 31,



 

 

 

 

 

 

 

2020

 

2019

Lease revenue - operating leases

 

 

 

 

 

 

 

$

60,399 

 

$

69,197 

Interest income on finance leases

 

 

 

 

 

 

 

 

11,623 

 

 

11,390 

Other revenue

 

 

 

 

 

 

 

 

2,217 

 

 

2,805 

Interest income on financing receivable

 

 

 

 

 

 

 

 

677 

 

 

 -

Total lease revenue

 

 

 

 

 

 

 

$

74,916 

 

$

83,392 



Net investment in finance leases

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





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

Gross finance lease receivables (1)

 

$

783,471 

 

$

806,019 

Unearned income (2)

 

 

(228,420)

 

 

(238,651)

Net investment in finance leases

 

 

555,051 

 

 

567,368 

Allowance for credit losses

 

 

(45)

 

 

 -

Net investment in finance leases, net of allowance for credit losses

 

$

555,006 

 

$

567,368 



(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 $74.3 million of unguaranteed residual value at March 31, 2020 and December 31, 2019, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of March 31, 2020 and December 31, 2019.

(2)The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of March 31, 2020 and December 31, 2019.

(3)One major customer represented 65% of the Company’s finance lease portfolio as of March 31, 2020 and December 31, 2019.  No other customer represented more than 10% of the Company’s finance lease portfolio in each of those periods.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

Contractual maturities of the Company's gross finance lease receivables subsequent to March 31, 2020 for the years ending March 31 are as follows (in thousands):









 

 

 

 

 

 

2021

 

 

 

 

$

116,727 

2022

 

 

 

 

 

109,491 

2023

 

 

 

 

 

105,485 

2024

 

 

 

 

 

85,857 

2025

 

 

 

 

 

60,034 

2026 and thereafter

 

 

 

 

 

305,877 



 

 

 

 

$

783,471 



Financing receivable 

During 2019, the Company purchased containers and leased back the containers to the seller-lessees through finance leaseback arrangements. As control of the equipment was retained by the customers, the Company concluded that sale-leaseback accounting was not applicable and treated the arrangements as financing transactions. The Company recorded a financing receivable in the amount paid for the containers. Payments made by the seller-lessee are recorded as a reduction to the financing receivable and as interest income, calculated using the effective interest method.

The following table summarizes the components of the Company’s financing receivable (in thousands):







 

 

 

 

 

 

 



 

 

March 31,

 

December 31,



 

 

2020

 

2019

Gross financing receivable

 

 

$

43,957 

 

$

45,530 

Unearned income

 

 

 

(10,434)

 

 

(11,111)



 

 

 

33,523 

 

 

34,419 

Allowance for credit losses

 

 

 

(1)

 

 

 -

Total financing receivable

 

 

$

33,522 

 

$

34,419 

Amounts due within one year (1)

 

 

 

3,783 

 

 

3,726 

Amounts due beyond one year (2)

 

 

 

29,739 

 

 

30,693 

Total financing receivable

 

 

$

33,522 

 

$

34,419 



(1)Included in prepaid expenses and other current assets in the consolidated balance sheets.

(2)Included in financing receivable in the consolidated balance sheets.



Credit quality information

In order to estimate the allowance for losses contained in net investment in finance leases and financing receivable, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, historical credit loss activity, current market and economic conditions, and reasonable and supportable forecasts.

The Company uses the following definitions for risk ratings:

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

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

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

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

As of March 31, 2020 and December 31, 2019, based on the most recent analysis performed, the risk category of the Company’s net investment in finance leases and financing receivable, based on year of origination is as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Total

Net investment in finance leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1

 

$

2,880 

 

$

59,580 

 

$

248,821 

 

$

171,092 

 

$

7,200 

 

$

1,654 

 

$

491,227 

Tier 2

 

 

2,012 

 

 

31,521 

 

 

14,473 

 

 

7,092 

 

 

2,320 

 

 

6,406 

 

 

63,824 

Tier 3

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total net investment in finance leases

 

$

4,892 

 

$

91,101 

 

$

263,294 

 

$

178,184 

 

$

9,520 

 

$

8,060 

 

$

555,051 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1

 

$

 -

 

$

32,830 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

32,830 

Tier 2

 

 

 -

 

 

693 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

693 

Tier 3

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total financing receivable

 

$

 -

 

$

33,523 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

33,523 







 

 

 

 

 

 



 

 

 

 

 

 



 

Net investment in

 

Financing

December 31, 2019

 

finance leases

 

receivable

Tier 1

 

$

502,265 

 

$

33,694 

Tier 2

 

 

65,103 

 

 

725 

Tier 3

 

 

 -

 

 

 -



 

$

567,368 

 

$

34,419 

 





(5Intangible Assets



The Company’s intangible assets as of March 31, 2020 and December 31, 2019 consist of customer relationships. The following table summarizes the estimated future amortization expense as of March 31, 2020 (in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

$

1,609 

2022

 

 

 

 

 

 

 

 

 

 

 

1,231 

2023

 

 

 

 

 

 

 

 

 

 

 

474 

2024

 

 

 

 

 

 

 

 

 

 

 

406 

Total intangible assets