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Cai International 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
20140930 10Q Q3

 

 

 

 

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 September 30, 2014

 

or

 

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

 For the transition period from          to

 

Commission file number: 001-33388

 

 

 

 

 

CAI International, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

Delaware

 

94-3109229

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

Steuart Tower, 1 Market Plaza, Suite 900

 

 

San Francisco, California

 

94105

(Address of principal executive offices)

 

(Zip Code)

 

 

415-788-0100

(Registrant’s telephone number, including area code)

 

 None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No   

 

1


 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

(Do not check if a smaller reporting company)

 

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

 

October 31, 2014

Common Stock, $.0001 par value per share

 

20,782,776 shares

 

 

 

 

 

2


 

 

 CAI INTERNATIONAL, INC.

INDEX

 

 

 

 

 

   

   

   

   

 

Page No.

Part I — Financial Information 

   

   

   

Item 1.

Financial Statements (Unaudited)

   

   

   

   

Consolidated Balance Sheets at September 30, 2014 and December 31, 2013

   

   

   

 

Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013

 

 

 

   

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

   

   

   

   

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

   

   

   

   

Notes to Unaudited Consolidated Financial Statements

10 

   

   

   

Item 2.

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

23 

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34 

   

   

   

Item 4.

Controls and Procedures

34 

   

   

Part II — Other Information 

35 

   

   

   

Item 1.

Legal Proceedings

35 

   

   

   

Item 1A.

Risk Factors

35 

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35 

   

   

   

Item 3.

Defaults Upon Senior Securities

35 

   

   

   

Item 4.

Mine Safety Disclosures

35 

   

   

   

Item 5.

Other Information

35 

   

   

   

Item 6.

Exhibits

35 

   

   

Signatures 

36 

 

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, 2013 filed with the Securities and Exchange Commission (SEC) on February 28, 2014 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

 

ITEM 1.FINANCIAL STATEMENTS

 

 CAI INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

19,048 

 

$

31,141 

Cash held by variable interest entities

 

31,402 

 

 

14,600 

Accounts receivable (owned fleet), net of allowance for doubtful accounts

 

 

 

 

 

of $504 and $503 at September 30, 2014 and December 31, 2013, respectively

 

46,220 

 

 

41,226 

Accounts receivable (managed fleet)

 

8,619 

 

 

10,646 

Current portion of direct finance leases

 

17,466 

 

 

12,998 

Prepaid expenses

 

14,712 

 

 

14,803 

Other current assets

 

555 

 

 

5,553 

Total current assets

 

138,022 

 

 

130,967 

Restricted cash

 

8,488 

 

 

9,253 

Rental equipment, net of accumulated depreciation of $260,290 and

 

 

 

 

 

$210,165 at September 30, 2014 and December 31, 2013, respectively

 

1,565,149 

 

 

1,465,092 

Net investment in direct finance leases

 

79,890 

 

 

68,210 

Furniture, fixtures and equipment, net of accumulated depreciation of

 

 

 

 

 

$1,987 and $1,697 at September 30, 2014 and December 31, 2013, respectively

 

1,058 

 

 

1,390 

Intangible assets, net of accumulated amortization of $4,797 and $4,638

 

 

 

 

 

at September 30, 2014 and December 31, 2013, respectively

 

368 

 

 

677 

Total assets (1)

$

1,792,975 

 

$

1,675,589 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

6,785 

 

$

8,002 

Accrued expenses and other current liabilities

 

8,641 

 

 

6,230 

Due to container investors

 

13,815 

 

 

14,815 

Unearned revenue

 

8,199 

 

 

6,862 

Current portion of debt

 

183,216 

 

 

74,080 

Current portion of capital lease obligations

 

1,215 

 

 

1,921 

Rental equipment payable

 

44,792 

 

 

45,181 

Total current liabilities

 

266,663 

 

 

157,091 

Debt

 

1,055,335 

 

 

1,058,628 

Deferred income tax liability

 

41,751 

 

 

41,378 

Capital lease obligations

 

1,817 

 

 

3,366 

Total liabilities (2)

 

1,365,566 

 

 

1,260,463 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

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

 

 

 

 

 

20,782,776 and 22,240,673 shares at September 30, 2014 and December 31, 2013, respectively

 

 

 

Additional paid-in capital

 

154,265 

 

 

184,263 

Accumulated other comprehensive loss

 

(4,317)

 

 

(2,356)

Retained earnings

 

276,735 

 

 

232,623 

Total CAI stockholders' equity

 

426,685 

 

 

414,532 

Non-controlling interest

 

724 

 

 

594 

Total stockholders' equity

 

427,409 

 

 

415,126 

Total liabilities and stockholders' equity

$

1,792,975 

 

$

1,675,589 

 

 

5


 

 

(1)

Total assets at September 30, 2014 and December 31, 2013 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $31,402 and $14,600; Net investment in direct finance leases, $154 and $137; and Rental equipment net of accumulated depreciation, $101,893  and $84,107, respectively.

 

(2)

Total liabilities at September 30, 2014 and December 31, 2013 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Debt, $132,082  and $101,269, respectively. 

 

See accompanying notes to unaudited consolidated financial statements. 

 

6


 

 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

Revenue

 

 

 

 

 

 

 

 

 

 

 

Rental revenue

$

55,380 

 

$

50,711 

 

$

157,557 

 

$

145,721 

Management fee revenue

 

1,561 

 

 

1,503 

 

 

4,681 

 

 

6,027 

Finance lease income

 

2,262 

 

 

1,684 

 

 

6,541 

 

 

6,096 

Total revenue

 

59,203 

 

 

53,898 

 

 

168,779 

 

 

157,844 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

19,888 

 

 

17,389 

 

 

57,607 

 

 

49,007 

Amortization of intangible assets

 

95 

 

 

227 

 

 

293 

 

 

681 

Gain on disposition of used rental equipment

 

(1,237)

 

 

(1,329)

 

 

(4,561)

 

 

(5,822)

Storage, handling and other expenses

 

6,532 

 

 

4,979 

 

 

19,322 

 

 

13,611 

Marketing, general and administrative expenses

 

6,676 

 

 

6,055 

 

 

19,779 

 

 

18,274 

Loss on foreign exchange

 

70 

 

 

374 

 

 

387 

 

 

199 

Total operating expenses

 

32,024 

 

 

27,695 

 

 

92,827 

 

 

75,950 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

27,179 

 

 

26,203 

 

 

75,952 

 

 

81,894 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

9,265 

 

 

9,546 

 

 

26,943 

 

 

26,905 

Write-off of deferred financing costs

 

 -

 

 

 -

 

 

 -

 

 

1,108 

Interest income

 

(1)

 

 

 -

 

 

(6)

 

 

(4)

Net interest expense

 

9,264 

 

 

9,546 

 

 

26,937 

 

 

28,009 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before income taxes and non-controlling interest

 

17,915 

 

 

16,657 

 

 

49,015 

 

 

53,885 

Income tax expense

 

1,482 

 

 

1,320 

 

 

4,857 

 

 

5,550 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

16,433 

 

 

15,337 

 

 

44,158 

 

 

48,335 

Net income attributable to non-controlling interest

 

(38)

 

 

 -

 

 

(46)

 

 

 -

Net income attributable to CAI common stockholders

$

16,395 

 

$

15,337 

 

$

44,112 

 

$

48,335 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CAI common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.78 

 

$

0.69 

 

$

2.08 

 

$

2.18 

Diluted

$

0.77 

 

$

0.68 

 

$

2.04 

 

$

2.13 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

20,936 

 

 

22,186 

 

 

21,193 

 

 

22,139 

Diluted

 

21,329 

 

 

22,645 

 

 

21,622 

 

 

22,674 

 

 

See accompanying notes to unaudited consolidated financial statements.

7


 

 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

16,433 

 

$

15,337 

 

$

44,158 

 

$

48,335 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(1,950)

 

 

1,208 

 

 

(1,961)

 

 

218 

Comprehensive income

 

14,483 

 

 

16,545 

 

 

42,197 

 

 

48,553 

Comprehensive loss attributable to non-controlling interest

 

(38)

 

 

 -

 

 

(46)

 

 

 -

Comprehensive income attributable to CAI common stockholders

$

14,445 

 

$

16,545 

 

$

42,151 

 

$

48,553 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8


 

 

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

2013

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

44,158 

 

$

48,335 

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

 

 

 

 

 

 

Depreciation

 

 

57,972 

 

 

49,400 

Amortization of debt issuance costs

 

 

2,236 

 

 

3,090 

Amortization of intangible assets

 

 

293 

 

 

681 

Stock-based compensation expense

 

 

1,364 

 

 

1,111 

Loss (gain) on foreign exchange

 

 

114 

 

 

(20)

Gain on disposition of used rental equipment

 

 

(4,561)

 

 

(5,822)

Deferred income taxes

 

 

373 

 

 

42 

Bad debt expense

 

 

47 

 

 

120 

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(3,723)

 

 

788 

Prepaid expenses and other assets

 

 

4,399 

 

 

(24)

Accounts payable, accrued expenses and other current liabilities

 

 

1,779 

 

 

(1,284)

Due to container investors

 

 

(1,000)

 

 

(5,374)

Unearned revenue

 

 

1,383 

 

 

(1,252)

Net cash provided by operating activities

 

 

104,834 

 

 

89,791 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(226,118)

 

 

(287,959)

Net proceeds from disposition of used rental equipment

 

 

43,014 

 

 

22,512 

Purchase of furniture, fixtures and equipment

 

 

(31)

 

 

(59)

Receipt of principal payments from direct financing leases

 

 

11,602 

 

 

9,142 

Net cash used in investing activities

 

 

(171,533)

 

 

(256,364)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

316,853 

 

 

536,170 

Principal payments on debt

 

 

(212,783)

 

 

(340,154)

Debt issuance costs

 

 

(1,546)

 

 

(6,529)

Decrease (increase) in restricted cash

 

 

510 

 

 

(5,132)

Repurchase of stock

 

 

(31,390)

 

 

 -

Stock issuance costs

 

 

 -

 

 

(155)

Exercise of stock options

 

 

28 

 

 

1,500 

Net cash provided by financing activities

 

 

71,672 

 

 

185,700 

Effect on cash of foreign currency translation

 

 

(264)

 

 

(1,180)

Net increase in cash

 

 

4,709 

 

 

17,947 

Cash at beginning of the period

 

 

45,741 

 

 

17,671 

Cash at end of the period

 

$

50,450 

 

$

35,618 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

959 

 

$

4,791 

Interest

 

 

25,767 

 

 

25,173 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to direct finance lease

 

$

27,826 

 

$

29,091 

Transfer of direct finance lease to rental equipment

 

 

 -

 

 

30,118 

 

See accompanying notes to unaudited consolidated financial statements.

9


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)The Company and Nature of Operations

 

Organization

CAI International, Inc. and its subsidiaries (collectively, CAI or the Company) operate primarily in the international intermodal marine cargo container leasing business. The Company purchases and leases containers principally to international container shipping lines located throughout the world. The Company also owns a fleet of railcars, which it leases in North America. The Company generates revenue from two reportable segments: equipment leasing and equipment management. The equipment leasing segment specializes in the ownership and leasing of intermodal containers and rail cars. The equipment management segment purchases and sells equipment to third-party investor groups, and provides management services to those investors in return for a management fee.

The Company’s common stock is traded on the New York Stock Exchange under the symbol “CAP”. 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 the Company, its wholly-owned subsidiaries, and its 80% owned subsidiary, CAIJ, Inc. (CAIJ). The equity attributable to the minority interest in CAIJ is shown as a non-controlling interest on the Company’s consolidated balance sheets as of September 30, 2014 and December 31, 2013, and the related net income is presented as net income attributable to non-controlling interest on the Company’s consolidated statement of income for the three and nine months ended September 30, 2014. The non-controlling interest in CAIJ was immaterial and not included in the consolidated statements of income for the three and nine months ended September 30, 2013.  All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of September 30, 2014 and December 31, 2013, the Company’s results of operations for the three and nine months ended September 30, 2014 and 2013, and the Company’s cash flows for the nine months ended September 30, 2014 and 2013.  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 2014 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 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, 2013, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2014.

 

(2)Accounting Policies and Recent Accounting Pronouncements

 

(a)Accounting Policies

There were no changes to the Company’s accounting policies during the nine months ended September 30, 2014. See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014, for a description of the Company’s significant accounting policies. 

(b)Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU No. 2014-09). This new standard will replace all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. Leasing revenue recognition is specifically excluded from this ASU, and therefore, the new standard will only apply to sales of equipment portfolios and dispositions of used equipment. The guidance is effective for interim and annual periods beginning after December 15, 2016, with early application prohibited. Adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements.  

10


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

(3)Consolidation of Variable Interest Entities as a Non-Controlling Interest

 

The Company regularly performs a review of its container fund arrangements with investors to determine whether a fund is a variable interest entity (VIE) and whether the Company has a variable interest that provides it with a controlling financial interest and is the primary beneficiary of the VIE in accordance with ASC 810, Consolidation. If the fund is determined to be 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 Paragraph 14A of ASC 810:

·

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

·

It has the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity 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 ASC 810. The equity attributable to the VIE is shown as a non-controlling interest on the Company’s consolidated balance sheet and the after tax result attributable to its operations is shown as a net income or loss attributable to non-controlling interest on the Company’s consolidated statement of income.

The Company currently enters into two types of container fund arrangements with investors which are reviewed under ASC 810,  Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors. Several of the funds that the Company manages, and all of the funds under financing arrangements, are Japanese container funds that were established by a related party under separate investment agreements allowed under Japanese commercial laws (see Note 11). Each of the funds is financed by unrelated Japanese third party investors.

Managed Container Funds

All container funds under management by the Company are considered VIEs because as manager of the funds, the Company has the power to direct the activities that most significantly impact the entity’s economic performance including the leasing and managing of containers owned by the funds. The fees earned for arranging, managing and establishing the funds are not significant to the expected returns of the funds so the Company does not have a variable interest in the funds. The rights to receive benefits and obligations to absorb losses that could potentially be significant to the funds belong to the third party investors, so the Company concluded that it is not the primary beneficiary of the funds. The Company recognizes gain on sale of containers to the unconsolidated VIEs as sales in the ordinary course of business. For the three and nine months ended September 30, 2014 and 2013, the Company sold no container portfolios to the Japanese VIEs. 

Collateralized Financing Obligations

As of September 30, 2014, the Company has transferred containers with a total net book value of $130.8  million at the time of transfer to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors.  In accordance with ASC 840, Sale-Leaseback Transactions, the Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.

The container funds under financing arrangements are considered VIEs under ASC 810 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. The terms of the transactions 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. 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 September 30, 2014 and December 31, 2013, the results of the VIEs operations for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013, in the Company’s consolidated financial statements.

11


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The containers that were transferred to the Japanese investor funds had a net book value of  $102.0  million as of September 30, 2014.  The container equipment, together with $31.4 million of cash held by the investor funds, has been included on the Company’s consolidated balance sheet with the offsetting liability related to the funds presented in the debt section of the Company’s consolidated balance sheet as collateralized financing obligations of $121.8 million and term loan held by VIE of $10.3  million.  See Note 6(e) and 6(f) for additional information. No gain or loss was recognized by the Company on the initial consolidation of the VIEs.

 

(4)Net Investment in Direct Finance Leases

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

Gross finance lease receivables (1)

 

$

121,141 

 

$

103,887 

Unearned income (2)

 

 

(23,785)

 

 

(22,679)

Net investment in direct finance leases

 

$

97,356 

 

$

81,208 

 

(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 no unguaranteed residual value at September 30, 2014 and approximately $0.1 million at December 31, 2013 included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of September 30, 2014 and December 31, 2013.

 

(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 September 30, 2014 and December 31, 2013.

 

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

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

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

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.

12


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

Tier 1

 

$

92,968 

 

$

85,990 

Tier 2

 

 

28,173 

 

 

17,897 

Tier 3

 

 

 -

 

 

 -

 

 

$

121,141 

 

$

103,887 

 

Contractual maturities of the Company's gross finance lease receivables subsequent to and as of September 30, 2014 for the years ending September 30 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

$

25,802 

2016

 

 

 

 

24,336 

2017

 

 

 

 

31,408 

2018

 

 

 

 

21,756 

2019

 

 

 

 

11,369 

2020 and thereafter

 

 

 

 

6,470 

 

 

 

 

$

121,141 

 

 

 

 

 

 

(5)Intangible Assets

 

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

 

 

 

Trademarks

                 1-10 years

Contracts – owned equipment

  5-7 years

 

Total amortization expense was $0.1 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively, and $0.3 million and $0.7 million for the nine months ended September 30, 2014 and 2013, respectively.

Intangible assets as of September 30, 2014 and December 31, 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

September 30, 2014

 

 

 

 

 

 

 

 

Trademarks

$

1,278 

 

$

(1,055)

 

$

223 

Contracts- owned equipment

 

3,887 

 

 

(3,742)

 

 

145 

 

$

5,165 

 

$

(4,797)

 

$

368 

December 31, 2013

 

 

 

 

 

 

 

 

Trademarks

$

1,278 

 

$

(962)

 

$

316 

Contracts- owned equipment

 

4,037 

 

 

(3,676)

 

 

361 

 

$

5,315 

 

$

(4,638)

 

$

677 

     

13


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  Debt, Short Term Line of Credit and Capital Lease Obligations

 

Debt

Details of the Company’s debt as of September 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

Outstanding

 

Average

 

Outstanding

 

Average

 

Agreement

Reference

 

Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Terminates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)(i)

Revolving credit facility

$

 -

 

$

287,000 

 

1.9%

 

$

 -

 

$

235,000 

 

1.9%

 

March 2018

(a)(ii)

Revolving credit facility - Rail

 

 -

 

 

61,769 

 

1.9%

 

 

 -

 

 

54,469 

 

2.4%

 

July 2019

(b)(i)

Term loan

 

1,800 

 

 

25,950 

 

2.2%

 

 

8,400 

 

 

27,300 

 

2.3%

 

April 2018

(b)(ii)

Term loan

 

7,500 

 

 

106,250 

 

2.5%

 

 

7,500 

 

 

111,875 

 

2.5%

 

December 2016

(b)(iii)

Term loan

 

9,940 

 

 

111,865 

 

1.9%

 

 

9,940 

 

 

119,320 

 

2.2%

 

April 2017

(c)

Senior secured notes

 

8,240 

 

 

78,280 

 

4.9%

 

 

8,240 

 

 

86,520 

 

4.9%

 

September 2022

(d)

Asset backed notes

 

40,000 

 

 

292,875 

 

3.4%

 

 

40,000 

 

 

322,875 

 

3.4%

 

March 2028

(e)

Collateralized financing obligations

 

38,907 

 

 

82,872 

 

1.0%

 

 

 -

 

 

101,269 

 

1.0%

 

June 2019

(f)

Term loans held by VIE

 

1,829 

 

 

8,474 

 

2.6%

 

 

 -

 

 

 -

 

-

 

June 2019

(g)

Short term line of credit

 

75,000 

 

 

 -

 

1.5%

 

 

 -

 

 

 -

 

-

 

May 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Debt

$

183,216 

 

$

1,055,335 

 

 

 

$

74,080 

 

$

1,058,628 

 

 

 

 

 

(a)Revolving Credit Facilities

 

Revolving credit facilities consist of the following:

(i) On March 15, 2013, the Company entered into a Third Amended and Restated Revolving Credit Agreement with a syndicate of banks to finance the acquisition of container rental equipment and for general working capital purposes.  As of September 30, 2014, the maximum commitment under the revolving credit facility was $760.0 million.  The revolving credit facility may be increased up to a maximum of $960.0 million, in accordance with the terms of the agreement, so long as no default or event of default exists either before or immediately after giving effect to the increase. There is a commitment fee on the unused amount of the total commitment, payable quarterly in arrears. The revolving credit facility provides that swing line loans (short-term borrowings of up to $10.0 million in the aggregate that are payable within 10 business days or at maturity date, whichever comes earlier) and standby letters of credit (up to $15.0 million in the aggregate) will be available to the Company. These credit commitments are part of, and not in addition to, the total commitment provided under the revolving credit facility. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit agreement.  In addition to various financial and other covenants, the Company’s revolving credit facility also includes certain restrictions on the Company’s ability to incur other indebtedness or pay dividends to stockholders.  As of September 30, 2014, the Company was in compliance with the terms of the revolving credit facility.

As of September 30, 2014, the Company had  $472.9 million in availability under the revolving credit facility (net of $0.1 million in letters of credit) subject to its ability to meet the collateral requirements under the agreement governing borrowing under the facility. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.

The revolving credit facility, including any amounts drawn on the facility, is secured by substantially all of the assets of the Company (not otherwise used as security for its other credit facilities) including the equipment owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.

(ii) On July 25, 2014, the Company and CAI Rail Inc. (CAI Rail), a wholly-owned subsidiary of the Company, entered into an Amended and Restated Revolving Credit Agreement with a consortium of banks to finance the acquisition of railcars.  As of September 30, 2014, the maximum credit commitment under the revolving credit facility was $250.0 million. CAI Rail’s revolving credit facility may be increased up to a maximum of $325.0 million, in accordance with the terms of the agreement, subject to certain conditions.

14


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Borrowings under the credit facility bear interest at a variable rate. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit agreement.  For domestic base rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as published by the Federal Reserve Bank of New York and (ii) the administrative agent’s published “Reference Rate”, in each case plus a margin based on certain conditions.

As of September 30, 2014, CAI Rail had $188.2 million in availability under the revolving credit facility, subject to its ability to meet the collateral requirements under the agreement governing the facility. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.

The agreement governing CAI Rail’s revolving credit facility contains various financial and other covenants.  As of September 30, 2014, CAI Rail was in compliance with the terms of the revolving credit facility.  CAI Rail’s revolving credit facility, including any amounts drawn on the facility, is secured by all of the assets of CAI Rail and is guaranteed by the Company.

(b)Term Loans

 

Term loans consist of the following:

(iOn March 22, 2013, the Company entered into a $30.0 million five-year loan agreement with Development Bank of Japan (DBJ). The loan is payable in 19 quarterly installments of $0.5 million starting July 31, 2013 and a final payment of $21.5 million on April 30, 2018. The loan bears interest at a variable rate based on LIBOR. As of September 30, 2014, the loan had a balance of  $27.8 million.

(ii)  On December 20, 2010, the Company entered into a term loan agreement with a consortium of banks. Under this loan agreement, the Company was eligible to borrow up to $300.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company’s wholly-owned foreign subsidiaries.  The loan agreement is an amortizing facility with a term of six years. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the term loan agreement. The loan bears a variable interest rate based on LIBOR for Eurodollar loans, and Base Rate for base rate loans.  The Base Rate is defined as the highest of (i) the federal funds rate plus 1/2 of 1.0%, (ii) the prime rate (as published in The Wall Street Journal), and (iii) the Eurodollar rate (for three-month loans) plus 1.0%.

On March 28, 2013, the term loan agreement was amended to: (a) reduce the principal balance of the loan from $249.4 million to $125.0 million through payment of $124.4 million from the proceeds of the $229.0 million fixed-rate asset-backed notes issued by the Company’s indirect wholly-owned subsidiary, CAL Funding II Limited (see Note 6(d) below); (b) reduce the interest rate on the remaining loan balance; and (c) revise certain covenants under the term loan agreement to provide increased flexibility to the Company. Quarterly payments of principal have been reduced to $1.9 million with the balance of the unpaid principal due on December 20, 2016. As of September 30, 2014, the term loan had a balance of $113.8  million.

On October 1, 2014, the Company entered into an Amended and Restated Term Loan Agreement with a consortium of banks, pursuant to which the prior loan agreement was refinanced. The amended and restated term loan agreement, which contains similar terms to the prior loan agreement, was amended to, among other things: (a) reduce the borrowing rates from LIBOR plus 2.25% to LIBOR plus 1.6% (per annum) for Eurodollar loans, (b) increase the outstanding loan commitment from $115.0 million to $150.0 million, (c) extend the maturity date to October 1, 2019, and (d) revise certain of the covenants and restrictions under the prior loan agreement to provide the Company with additional flexibility.

(iii) On April 11, 2012, the Company entered into a term loan agreement with a consortium of banks. The agreement, which was amended on August 31, 2012, May 30, 2013, and July 25, 2014, provides for a five year term loan of up to $142.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company. The commitment under the loan may be increased to a maximum of $200.0 million under certain conditions described in the agreement. The outstanding principal amounts under the term loan bear interest based on LIBOR, amortized quarterly, and require quarterly payments equal to 1.75% multiplied by the outstanding principal amount at such time. The facility contains various financial and other covenants. The full $142.0 million has been drawn and was primarily used to repay outstanding amounts under the Company’s senior revolving credit facility. All unpaid amounts then outstanding are due and payable on April 11, 2017.  As of September 30, 2014, the loan had a balance of  $121.8 million.

(c)Senior Secured Notes

 

On September 13, 2012, Container Applications Limited (CAL), a wholly-owned subsidiary of the Company, entered into a Note Purchase Agreement with certain institutional investors, pursuant to which CAL issued $103.0 million of its 4.90% Senior Secured Notes due September 13, 2022 (the Notes) to the investors. The Notes are guaranteed by the Company and secured by certain assets of CAL and the Company.

15


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Notes bear interest at 4.9% per annum, due and payable semiannually on March 13 and September 13 of each year, commencing on March 13, 2013.  In addition, CAL is required to make certain principal payments on March 13 and September 13 of each year, commencing on March 13, 2013.  Any unpaid principal and interest is due and payable on September 13, 2022. The Note Purchase Agreement provides that CAL may prepay at any time all or any part of the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding. As of September 30, 2014, the Notes had a balance of  $86.5  million.

(d)Asset-Backed Notes

 

On October 18, 2012, CAL Funding II Limited (CAL II), a wholly-owned indirect subsidiary of CAI, issued $171.0 million of 3.47% fixed rate asset-backed notes (Series 2012-1 Asset-Backed Notes).  Principal and interest on the Series 2012-1 Asset-Backed Notes is payable monthly commencing on November 26, 2012, and the Series 2012-1 Asset-Backed Notes mature in October 2027.  The proceeds from the Series 2012-1 Asset-Backed Notes were used to repay part of the Company’s borrowings under its senior revolving credit facility. As of September 30, 2014, the Series 2012-1 Asset-Backed Notes had a balance of  $138.2 million.

On March 28, 2013, CAL II issued $229.0 million of 3.35% fixed rate asset-backed notes (Series 2013-1 Asset-Backed Notes). Principal and interest on the Series 2013-1 Asset-Backed Notes is payable monthly commencing on April 25, 2013, and the Series 2013-1 Asset-Backed Notes mature in March 2028. The proceeds from the Series 2013-1 Asset-Backed Notes were used partly to reduce the balance of the Company’s term loan as described in Note 6 (b)(ii) above, and to partially pay down the Company’s senior revolving credit facility. The Series 2013-1 Asset-Backed Notes had a balance of  $194.7 million as of September 30, 2014.

          The agreements under each of the asset-backed notes described above require the Company to maintain a restricted cash account to cover payment of the obligations. As of September 30, 2014, the restricted cash account had a balance of $8.5 million.

(e)Collateralized Financing Obligations

 

As of September 30, 2014, the Company had collateralized financing obligations of $121.8  million (see Note 3). The obligations had an average interest rate of  1.0% as of September 30, 2014 with maturity dates between June 2015 and June 2019. The debt is secured by a pool of containers covered under the financing arrangements.

(f)Term Loans Held by VIE

 

On June 25, 2014, one of the Japanese investor funds that is consolidated by the Company as a VIE (see Note 3) entered into a term loan agreement with a bank.   Under the terms of the agreement, the Japanese investor fund entered into two loans; a five year, amortizing loan of $9.2 million at a fixed interest rate of 2.7%, and a five year, non-amortizing loan of $1.6 million at a variable interest rate based on LIBOR.  The debt is secured by assets of the Japanese investor fund, and is subject to certain borrowing conditions set out in the loan agreement.   As of September 30, 2014, the term loans held by the Japanese investor fund totaled $10.3 million and had an average interest rate of 2.6%.

The Company's term loans, senior secured notes, asset-backed notes, collateralized financing obligations and term loans held by VIEs are each secured by specific pools of rental equipment and other assets owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts. The agreements relating to all of the Company’s debt contain various financial and other covenants. As of September 30, 2014, the Company was in compliance with all of its debt covenants.

(g)Short Term Line of Credit

On May 8, 2014, CAL entered into a short term uncommitted line of credit agreement.  Under this credit agreement, CAL is eligible to borrow up to $75.0 million, subject to certain borrowing conditions.  Loans made under the line of credit are repayable on the earlier of (a) 3 months after the loan is made, and (b) the facility termination date of May 8, 2015. Outstanding loans bear a variable interest rate based on LIBOR.  The full $75.0 million has been drawn and was primarily used to repay outstanding amounts under the Company’s senior revolving credit facility. As of September 30, 2014, the loan had a balance of $75.0 million, which is due and payable on December 24, 2014.  The Company intends to renew the loan upon its maturity dates. Interest is charged on the outstanding loan at an annual rate of 1.5%.  

Capital Lease Obligations

As of September 30, 2014, the Company had capital lease obligations of $3.0 million. The underlying obligations are denominated in U.S. Dollars and Euros at floating interest rates averaging 2.4% as of September 30, 2014 with maturity dates between December 2014 and June 2019. The loans are secured by containers covered by the lease obligations.

16


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) Stock–Based Compensation Plan

 

Stock Options

The following table summarizes the Company’s stock option activities for the nine months ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2014

 

2013

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Average

 

 

 

Average

 

Number of

 

Exercise

 

Number of

 

Exercise

 

Shares

 

Price

 

Shares

 

Price

Options outstanding at January 1

1,263,485 

 

$

14.84 

 

1,335,680 

 

$

13.41 

Options granted - employees

120,000 

 

$

22.09 

 

51,300 

 

$

26.41 

Options granted - directors

50,000 

 

$

22.09 

 

40,000 

 

$

26.41 

Options forfeited - employees

(5,417)

 

$

22.55 

 

(834)

 

$

5.60 

Options exercised - employees

(1,583)

 

$

17.77 

 

(158,661)

 

$

9.46 

 

 

 

 

 

 

 

 

 

 

Options outstanding at September 30

1,426,485 

 

$

15.67 

 

1,267,485 

 

$

14.85 

Options exercisable

1,154,844 

 

$

14.13 

 

1,033,498 

 

$

12.93 

Weighted average remaining term

4.8 years

 

 

 

 

5.5 years

 

 

 

 

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

The Company recorded stock-based compensation expense of  $0.4 million for each of the three months ended September 30, 2014 and 2013, and $1.2 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.  As of September 30, 2014, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $2.8 million which is to be recognized over the remaining weighted average vesting period of approximately 2.6 years. 

The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2014 was less than $0.1 million. The aggregate intrinsic value of all options outstanding as of September 30, 2014 was  $7.4 million based on the closing price of the Company’s common stock of $19.35 per share on September 30, 2014, the last trading day of the quarter.

 

17


 

 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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