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Cai International 10-Q 2016

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
20160930 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, 2016



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, 2016

Common Stock, $.0001 par value per share

 

19,057,453  shares









 

2


 



 CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

   

   

   

 

Page No.

Part I — Financial Information

   

   

   

Item 1.

Financial Statements (Unaudited)

   

   

   

   

Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

   

   

   



Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015



 

 

   

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015

   

   

   

   

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

   

   

   

   

Notes to Unaudited Consolidated Financial Statements

10 

   

   

   

Item 2.

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

25 

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36 

   

   

   

Item 4.

Controls and Procedures

36 

   

   

Part II — Other Information

37 

   

   

   

Item 1.

Legal Proceedings

37 

   

   

   

Item 1A.

Risk Factors

37 

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37 

   

   

   

Item 3.

Defaults Upon Senior Securities

37 

   

   

   

Item 4.

Mine Safety Disclosures

37 

   

   

   

Item 5.

Other Information

37 

   

   

   

Item 6.

Exhibits

37 

   

   

Signatures

38 



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, 2015 filed with the Securities and Exchange Commission (SEC) on March 3, 2016 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,



2016

 

2015

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

15,450 

 

$

17,447 

Cash held by variable interest entities

 

22,016 

 

 

35,106 

Accounts receivable, net of allowance for doubtful accounts of $805 and

 

 

 

 

 

and $548 at September 30, 2016 and December 31, 2015, respectively

 

67,199 

 

 

55,284 

Current portion of direct finance leases

 

31,129 

 

 

21,158 

Prepaid expenses and other current assets

 

2,183 

 

 

2,155 

Total current assets

 

137,977 

 

 

131,150 

Restricted cash

 

6,447 

 

 

7,212 

Rental equipment, net of accumulated depreciation of $406,081 and

 

 

 

 

 

$349,810 at September 30, 2016 and December 31, 2015, respectively

 

1,786,374 

 

 

1,748,211 

Net investment in direct finance leases

 

69,705 

 

 

82,210 

Goodwill

 

15,579 

 

 

2,905 

Intangible assets, net of accumulated amortization of $1,919 and

 

 

 

 

 

$1,237 at September 30, 2016 and December 31, 2015, respectively

 

10,453 

 

 

1,223 

Furniture, fixtures and equipment, net of accumulated depreciation of $2,876 and

 

 

 

 

 

$2,027 at September 30, 2016 and December 31, 2015, respectively

 

667 

 

 

674 

Total assets (1)

$

2,027,202 

 

$

1,973,585 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

13,237 

 

$

11,962 

Accrued expenses and other current liabilities

 

12,623 

 

 

4,813 

Due to container investors

 

5,769 

 

 

5,801 

Unearned revenue

 

13,011 

 

 

11,990 

Current portion of debt

 

99,751 

 

 

169,596 

Rental equipment payable

 

24,435 

 

 

10,901 

Total current liabilities

 

168,826 

 

 

215,063 

Debt

 

1,343,276 

 

 

1,249,057 

Deferred income tax liability

 

52,581 

 

 

48,204 

Other long term liabilities

 

3,500 

 

 

 -

Total liabilities (2)

 

1,568,183 

 

 

1,512,324 



 

 

 

 

 

Stockholders' equity

 

 

 

 

 

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

 

 

 

 

 

19,057,453 and 20,132,706 shares at September 30, 2016 and December 31, 2015, respectively

 

 

 

Additional paid-in capital

 

140,649 

 

 

148,523 

Accumulated other comprehensive loss

 

(6,875)

 

 

(7,922)

Retained earnings

 

325,243 

 

 

319,735 

Total CAI stockholders' equity

 

459,019 

 

 

460,338 

Non-controlling interest

 

 -

 

 

923 

Total stockholders' equity

 

459,019 

 

 

461,261 

Total liabilities and stockholders' equity

$

2,027,202 

 

$

1,973,585 

5


 



(1)

Total assets at September 30, 2016 and December 31, 2015 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $22,016 and $35,106; Net investment in direct finance leases, $5,705 and $1,915; and Rental equipment, net of accumulated depreciation, $63,939 and $85,101, respectively.



(2)

Total liabilities at September 30, 2016 and December 31, 2015 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $31,056 and $60,382; Debt, $66,347  and $59,445, 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,



2016

 

2015

 

2016

 

2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

Container lease income

$

49,196 

 

$

54,696 

 

$

151,270 

 

$

164,274 

Rail lease income

 

7,614 

 

 

5,102 

 

 

22,462 

 

 

11,770 

Logistics revenue

 

21,197 

 

 

5,406 

 

 

41,743 

 

 

5,474 

Management fee revenue

 

465 

 

 

913 

 

 

1,605 

 

 

2,457 

Total revenue

 

78,472 

 

 

66,117 

 

 

217,080 

 

 

183,975 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

29,873 

 

 

22,655 

 

 

77,401 

 

 

65,907 

Storage, handling and other expenses

 

8,802 

 

 

8,148 

 

 

27,176 

 

 

21,837 

Logistics transportation costs

 

18,045 

 

 

4,818 

 

 

35,127 

 

 

4,888 

Loss (gain) on sale of used rental equipment

 

3,323 

 

 

(72)

 

 

7,950 

 

 

(237)

Administrative expenses

 

11,067 

 

 

7,312 

 

 

28,750 

 

 

21,540 

Total operating expenses

 

71,110 

 

 

42,861 

 

 

176,404 

 

 

113,935 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

7,362 

 

 

23,256 

 

 

40,676 

 

 

70,040 



 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

10,866 

 

 

8,967 

 

 

31,404 

 

 

26,792 

Other expense

 

85 

 

 

 

 

407 

 

 

61 

Total other expenses

 

10,951 

 

 

8,969 

 

 

31,811 

 

 

26,853 



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income before income taxes and non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

non-controlling interest

 

(3,589)

 

 

14,287 

 

 

8,865 

 

 

43,187 

Income tax expense

 

1,826 

 

 

1,272 

 

 

3,320 

 

 

3,671 



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(5,415)

 

 

13,015 

 

 

5,545 

 

 

39,516 

Net income attributable to non-controlling interest

 

 -

 

 

26 

 

 

37 

 

 

96 

Net (loss) income attributable to CAI common stockholders

$

(5,415)

 

$

12,989 

 

$

5,508 

 

$

39,420 



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to CAI common

 

 

 

 

 

 

 

 

 

 

 

stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.28)

 

$

0.62 

 

$

0.28 

 

$

1.88 

Diluted

$

(0.28)

 

$

0.62 

 

$

0.28 

 

$

1.86 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

19,130 

 

 

20,920 

 

 

19,427 

 

 

20,973 

Diluted

 

19,130 

 

 

21,059 

 

 

19,498 

 

 

21,236 



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,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(5,415)

 

$

13,015 

 

$

5,545 

 

$

39,516 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

137 

 

 

224 

 

 

1,047 

 

 

(1,737)

Comprehensive (loss) income

 

(5,278)

 

 

13,239 

 

 

6,592 

 

 

37,779 

Comprehensive income attributable to non-controlling interest

 

 -

 

 

26 

 

 

37 

 

 

96 

Comprehensive (loss) income attributable to CAI common

 

 

 

 

 

 

 

 

 

 

 

stockholders

$

(5,278)

 

$

13,213 

 

$

6,555 

 

$

37,683 



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,



2016

 

2015

Cash flows from operating activities

 

 

 

 

 

Net income

$

5,545 

 

$

39,516 

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

 

 

 

 

 

Depreciation

 

77,636 

 

 

66,228 

Amortization of debt issuance costs

 

2,086 

 

 

1,983 

Amortization of intangible assets

 

682 

 

 

157 

Stock-based compensation expense

 

1,320 

 

 

1,436 

Reduction in contingent consideration

 

(1,000)

 

 

 -

Unrealized loss on foreign exchange

 

82 

 

 

185 

Loss (gain) on sale of used rental equipment

 

7,950 

 

 

(237)

Loss on disposal of subsidiary

 

146 

 

 

 -

Deferred income taxes

 

2,193 

 

 

458 

Bad debt expense

 

2,458 

 

 

326 

Changes in other operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(7,560)

 

 

2,692 

Prepaid expenses and other assets

 

(191)

 

 

822 

Accounts payable, accrued expenses and other current liabilities

 

1,540 

 

 

(594)

Due to container investors

 

(32)

 

 

(5,369)

Unearned revenue

 

1,013 

 

 

2,263 

Net cash provided by operating activities

 

93,868 

 

 

109,866 

Cash flows from investing activities

 

 

 

 

 

Purchase of rental equipment

 

(170,582)

 

 

(304,588)

Acquisitions, net of cash acquired

 

(15,620)

 

 

(4,100)

Net proceeds from sale of used rental equipment

 

46,137 

 

 

51,188 

Disposal of subsidiary, net of cash disposed of

 

(460)

 

 

 -

Purchase of furniture, fixtures and equipment

 

(92)

 

 

(73)

Receipt of principal payments from direct financing leases

 

17,368 

 

 

16,071 

Net cash used in investing activities

 

(123,249)

 

 

(241,502)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt

 

432,540 

 

 

450,731 

Principal payments on debt

 

(408,375)

 

 

(301,234)

Debt issuance costs

 

(1,461)

 

 

(1,662)

Decrease in restricted cash

 

765 

 

 

765 

Repurchase of stock

 

(9,176)

 

 

(12,158)

Exercise of stock options

 

 -

 

 

4,744 

Excess tax benefit from share-based compensation awards

 

 -

 

 

1,006 

Net cash provided by financing activities

 

14,293 

 

 

142,192 

Effect on cash of foreign currency translation

 

 

 

(209)

Net (decrease) increase in cash

 

(15,087)

 

 

10,347 

Cash at beginning of the period

 

52,553 

 

 

53,821 

Cash at end of the period

$

37,466 

 

$

64,168 



 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

$

752 

 

$

2,114 

Interest

 

29,617 

 

 

25,840 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

Transfer of rental equipment to direct finance lease

$

14,816 

 

$

24,505 



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., 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.

In July 2015, the Company purchased ClearPointt Logistics LLC (ClearPointt), an intermodal logistics company focused on the domestic intermodal market, for approximately $4.1 million. ClearPointt is headquartered in Everett, Washington. 

In February 2016, the Company purchased Challenger Overseas LLC (Challenger), a Non-Vessel Operating Common Carrier (NVOCC), for approximately $10.8 million (see Note 5). Challenger is headquartered in Eatontown, New Jersey.

In June 2016, the Company purchased Hybrid Logistics, Inc. and its affiliate, General Transportation Services, Inc. (collectively, Hybrid), asset light truck brokers, for approximately $12.0 million (see Note 5). Hybrid is headquartered in Portland, Oregon.

The Company’s common stock is traded on the New York Stock Exchange under the symbol “CAI.” 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., its wholly-owned subsidiaries, and its previously 80%-owned subsidiary, CAIJ, Inc. (CAIJ), up to its date of disposal in April 2016. 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, 2016 and December 31, 2015, the Company’s results of operations for the three and nine months ended September 30, 2016 and 2015, and the Company’s cash flows for the nine months ended September 30, 2016 and 2015. 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 2016 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, 2015, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 3, 2016.

 

(2)Accounting Policies and Recent Accounting Pronouncements

(a)Accounting Policies

Container rental equipment is recorded at original cost and depreciated to an estimated residual value on a straight-line basis over its estimated useful life. The estimated useful lives and residual values of the Company’s container equipment are based on historical disposal experience and the Company’s expectations for future used container sale prices. Depreciation estimates are reviewed on a regular basis to determine whether changes have taken place that would suggest that a change in depreciation estimates, useful lives of its equipment or the assigned residual values, is warranted.

After the Company conducted its regular depreciation policy review, it concluded that a change in the estimated residual value for 40-foot high cube dry van containers from $1,650 to $1,400 per container, effective July 1, 2016, was appropriate.  The change increased the Company’s depreciation expense by $3.4 million, decreased net income by $3.2 million, and decreased diluted earnings per share by $0.17 for the three and nine months ended September 30, 2016.

Depreciation estimates were last changed for 40-foot high cube dry van containers (and other container types within the Company’s fleet) during 2012. Since that time, disposal prices for 40-foot high cube dry van containers have declined and the Company experienced losses when selling certain of these assets during 2015 and 2016. The change in residual value estimate was made to better align residual value with expectations for future used container sale prices.

In considering changes to residual values for the three major dry van categories, the Company reviewed 3-year, 5-year, 7-year, and 11-year average disposition pricings trends. As with all estimates, particularly related to long-lived assets, current market performance may not necessarily be indicative of long-term residual values, so the Company does not adjust residual values to point-in-time prices. Rather, the Company considers the mix of data shown in the following table and uses the average over time to either confirm residual value estimates or support revisions to those estimates.

10


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The sale-related unit proceeds by dry van container category that we considered as of September 30, 2016 are shown below:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Category

3-year Avg.

 

5-year Avg.

 

7-year Avg.

 

11-year Avg.

20-ft. standard dry van containers

$

989 

 

$

1,112 

 

$

1,158 

 

$

1,133 

40-ft. standard dry van containers

 

1,229 

 

 

1,399 

 

 

1,458 

 

 

1,394 

40-ft. high cube dry van containers

 

1,262 

 

 

1,440 

 

 

1,532 

 

 

1,529 



The Company’s residual value estimates ($1,050 for a 20-ft. dry van, $1,300 for a 40-ft. dry van, and $1,400 for a 40-ft. high cube dry van) are lower in each instance than the historical averages, with the exception of the 3-year average. While the Company experienced losses when selling certain of these assets during 2015 and 2016, the Company does not adjust long-term residual value estimates based on short-term data points, such as current year sale results and the 3-year average shown above, as the Company does not believe they are indicative of a change in the long-term market value for these containers. The Company does regularly review this data and updates the analysis, and will make further revisions to residual value estimates as and when conditions warrant.

The largest segment of the Company’s non-dry van container fleet consists of 20-ft. refrigerated containers and 40-ft. high cube refrigerated containers. The Company regularly reviews the residual value estimates associated with its refrigerated containers. Given the specific nature of these assets and the lower volumes of containers that are sold each year in the secondary market, there is less variability in asset pricing. Similar to the Company’s dry van containers, the Company evaluates the relationship between sales prices and residual values over a long-term horizon. When measured at September 30, 2016, sales proceeds for 20-ft. refrigerated and 40-ft. high cube refrigerated containers averaged $3,180 and $4,065, respectively, over the prior 3-year period, and $3,219 and $4,111, respectively, over the prior 5-year period. The Company excluded 7-year and 11-year historical averages from its analysis as it does not have a long enough history of sales for refrigerated containers. The current residual values for 20-ft. refrigerated and 40-ft. high cube refrigerated containers are set at $2,750 and $3,500, respectively. Based on the data trends, the Company believes that the residual value estimates for its refrigerated containers are appropriate and do not warrant revision.

The Company continuously monitors disposal prices across its entire portfolio for indications of a deeper, more sustained market downturn. If necessary, the Company will adjust its estimates if there are indicators that the current weak market for containers will be sustained over a longer time horizon.

There were no other changes to the Company’s accounting policies during the nine months ended September 30, 2016. See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 3, 2016, 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 eliminates industry-specific guidance. Leasing revenue recognition is specifically excluded from this ASU, and therefore, the new standard will only apply to management fee revenue, sales of equipment portfolios, sales of used equipment and the provision of logistics services. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. Adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements.  

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (ASU No. 2015-02). The new guidance changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity (VIE) characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU No. 2015-02 effective January 1, 2016, and adoption had no impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU No. 2015-03).  The new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU No. 2015-03 effective January 1, 2016. Adoption of the guidance resulted in the reclassification of unamortized debt issuance costs of $12.7 million and $13.0 million as of September 30, 2016 and December 31, 2015, respectively, from prepaid expenses and other current assets to a reduction of debt on the Company’s consolidated balance sheets.

11


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU No. 2015-17). The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. The new guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. The Company early adopted ASU No. 2015-07 effective December 31, 2015 on a prospective basis. No prior periods were retrospectively adjusted, and adoption did not have an impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU No. 2016-02). The new standard will replace all current U.S. GAAP guidance on this topic. The new guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases, with the exception of leases that meet the definition of a short-term lease. Lessor accounting will remain similar to the current model. The guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition and is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU No. 2016-09), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The guidance is effective beginning in the first quarter of 2017, with early adoption permitted. The Company is currently evaluating the impact that the new guidance will have on the Company’s consolidated financial statements and related disclosures.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flow (Topic 230) (ASU No. 2016-15). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims, among others. The guidance is effective for financial statements issued for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period, and must be applied using a retrospective transition method. Adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements.



(3)Insurance Receivable and Impairment

In August 2016, Hanjin Shipping Co., Ltd. filed for court protection from its creditors. Based on prior experience, the Company believes that most of its containers will be recovered. The Company maintains insurance to cover the value of containers that are unlikely to be recovered from its customers, the cost to recover containers and up to 180 days of lost lease rental income. Accordingly, during the three months ended September 30, 2016, an impairment charge was recorded to write off containers with a  book value of $3.2 million, which the Company does not expect to recover. An insurance receivable of $1.4 million was recorded for $1.2 million of estimated proceeds for irrecoverable containers and $0.2 million of recovery costs recorded as a reduction to storage, handling and other expenses. The impairment, net of estimated insurance proceeds of $2.0 million, was recorded in depreciation expense in the consolidated statements of income for the three and nine months ended September 30, 2016. In addition, bad debt expense of $2.5 million was recorded in the consolidated statements of income for the three and nine months ended September 30, 2016, to fully reserve for the customer’s outstanding accounts receivable.



(4)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 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 ASC Topic 810:

·

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 ASC Topic 810, Consolidation.  

12


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The Company currently enters into two types of container fund arrangements with investors which are reviewed under 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. Several of the funds that the Company manages and funds under financing arrangements are Japanese container funds that were established under separate investment agreements allowed under Japanese commercial laws (see Note 14). Each of the funds is financed by unrelated Japanese third party investors.

Managed Container Funds

The fees earned by the Company for arranging, managing and establishing container funds are commensurate with the level of effort required to provide those services, and are at or above the same level of seniority as other operating liabilities of the funds that are incurred in the normal course of business. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. The Company recognizes gain on sale of containers to the unconsolidated funds as sales in the ordinary course of business. No container portfolios were sold to the Japanese funds in the three and nine months ended September 30, 2016 and 2015.

Collateralized Financing Obligations

As of September 30, 2016, the Company has transferred containers, with a total net book value of  $191.8 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 Topic 840, Sale-Leaseback Transactions, the Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.

The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under 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 September 30, 2016, and December 31, 2015, and the results of the VIEs’ operations and cash flows for the three and nine months ended September 30, 2016 and 2015, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $69.6 million as of September 30, 2016. The container equipment, together with $22.0 million of cash held by the investor funds, has been included on the Company’s consolidated balance sheets with the offsetting liability related to the funds presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $91.6 million and term loans held by VIE of $5.8 million. See Note 9(e) and 9(f) for additional information. No gain or loss was recognized by the Company on the initial consolidation of the VIEs. Containers sold to the Japanese investor funds during the three months ended September 30, 2016 and 2015, had book values of $9.2 million and $6.8 million, respectively. Containers sold to the Japanese investor funds during the nine months ended September 30, 2016 and 2015, had book values of $26.1 million and $21.6 million, respectively.



(5)Acquisitions

During the nine months ended September 30, 2016, the Company completed the acquisitions of Challenger and Hybrid, for total consideration of $22.8 million, $6.0 million of which was contingent and based on their future performance. During the three months ended September 30, 2016, the Company decreased its estimate of the acquired companies’ future performance, and as a result reduced  the contingent consideration by $1.0 million. Expected future payments of $3.5 million and $1.5 million are recorded in Other long-term liabilities and Accrued expenses and Other current liabilities, respectively, in the Company’s consolidated balance sheet at September 30, 2016. The acquisitions were not material to the Company’s consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma results of operations related to these business acquisitions during the nine months ended September 30, 2016 have not been presented. The Company has included the financial results of these business acquisitions in its consolidated financial statements from their respective date of acquisition.

13


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following table summarizes the allocation of the total consideration transferred (in thousands):







 

 

 

 

 

Cash

 

 

 

$

1,186 

Accounts receivable

 

 

 

 

5,840 

Property and equipment

 

 

 

 

145 

Goodwill

 

 

 

 

12,674 

Intangible assets

 

 

 

 

9,912 

Other assets

 

 

 

 

276 

Total assets

 

 

 

 

30,033 



 

 

 

 

 

Accounts payable

 

 

 

 

4,437 

Deferred tax liability

 

 

 

 

2,184 

Other liabilities

 

 

 

 

605 

Total liabilities

 

 

 

 

7,226 



 

 

 

 

 

Purchase price

 

 

 

$

22,807 



Adjustments to record the assets acquired and liabilities assumed at fair value include the recognition of $9.9 million of intangible assets as follows:









 

 

 

 

 



Amount

 

Estimated Life

Tradenames

$

1,188 

 

 

5 years

Customer relationships

 

8,724 

 

 

8 years





(6)Rental Equipment

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







 

 

 

 

 



September 30,

 

December 31,



2016

 

2015

Dry containers

$

1,348,207 

 

$

1,392,825 

Refrigerated containers

 

327,116 

 

 

308,374 

Other specialized equipment

 

164,212 

 

 

152,310 

Railcars

 

352,920 

 

 

244,512 



 

2,192,455 

 

 

2,098,021 

Accumulated depreciation

 

(406,081)

 

 

(349,810)

Rental equipment, net of accumulated depreciation

$

1,786,374 

 

$

1,748,211 









(7)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,



2016

 

2015

Gross finance lease receivables (1)

$

121,103 

 

$

124,747 

Unearned income (2)

 

(20,269)

 

 

(21,379)

Net investment in direct finance leases

$

100,834 

 

$

103,368 



(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 no unguaranteed residual value at September 30, 2016 and December 31, 2015 included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of September 30, 2016 and December 31, 2015.

14


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(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, 2016 and December 31, 2015.



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

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

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

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

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

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

 



 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,



2016

 

2015

Tier 1

$

76,535 

 

$

86,981 

Tier 2

 

44,568 

 

 

37,766 

Tier 3

 

 -

 

 

 -



$

121,103 

 

$

124,747 



Contractual maturities of the Company's gross finance lease receivables subsequent to and as of September 30, 2016 for the years ending September 30 were as follows (in thousands):





 

 

 

 

 



 

 

 

 

 

2017

 

 

 

$

39,070 

2018

 

 

 

 

30,819 

2019

 

 

 

 

20,222 

2020

 

 

 

 

11,697 

2021

 

 

 

 

9,594 

2022 and thereafter

 

 

 

 

9,701 



 

 

 

$

121,103 











(8)Intangible Assets

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





 

Trademarks and tradenames

                 1-10 years

Customer relationships

8 years



Total amortization expense was $0.4 million and less than $0.1 million for the three months ended September 30, 2016 and 2015, respectively, and $0.7  million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

15


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Intangible assets as of September 30, 2016 and December 31, 2015 were as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

September 30, 2016

 

 

 

 

 

 

 

 

Trademarks and tradenames

$

3,028 

 

$

(1,470)

 

$

1,558 

Customer relationships

 

9,344 

 

 

(449)

 

 

8,895 



$

12,372 

 

$

(1,919)

 

$

10,453 

December 31, 2015

 

 

 

 

 

 

 

 

Trademarks and tradenames

$

1,840 

 

$

(1,218)

 

$

622 

Customer relationships

 

620 

 

 

(19)

 

 

601 



$

2,460 

 

$

(1,237)

 

$

1,223 

     





As of September 30, 2016,  estimated future amortization expenses are as follows (in thousands):







 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

$

1,519 

2018

 

 

 

 

 

 

 

1,519 

2019

 

 

 

 

 

 

 

1,519 

2020

 

 

 

 

 

 

 

1,517 

2021

 

 

 

 

 

 

 

1,318 

2022 and thereafter

 

 

 

 

 

 

 

3,061 



 

 

 

 

 

 

$

10,453 









(9Debt

Details of the Company’s debt as of September 30, 2016 and December 31, 2015 were as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015

 

 



 

Outstanding

 

Average

 

Outstanding

 

Average

 

 

Reference

 

Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Maturity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)(i)

Revolving credit facility

$

4,500 

 

$

504,000 

 

2.3%

 

$

8,500 

 

$

488,000 

 

1.8%

 

March 2020

(a)(ii)

Revolving credit facility - Rail

 

 -

 

 

202,500 

 

2.0%

 

 

34,500 

 

 

126,000 

 

1.9%

 

October 2020

(b)(i)

Term loan

 

1,800 

 

 

22,350 

 

2.6%

 

 

1,800 

 

 

23,700 

 

2.3%

 

April 2018

(b)(ii)

Term loan

 

9,000 

 

 

123,000 

 

2.2%

 

 

9,000 

 

 

129,750 

 

2.2%

 

October 2019

(b)(iii)

Term loan

 

7,000 

 

 

91,250 

 

2.4%

 

 

9,940 

 

 

99,440 

 

1.9%

 

June 2021

(b)(iv)

Term loan

 

1,148 

 

 

18,016 

 

3.4%

 

 

1,119 

 

 

18,881 

 

3.4%

 

December 2020

(b)(v)

Term loan

 

2,681 

 

 

47,050 

 

3.6%

 

 

 -

 

 

 -

 

-

 

August 2021

(c)

Senior secured notes

 

6,110 

 

 

64,995 

 

4.9%

 

 

7,175 

 

 

71,105 

 

4.9%

 

September 2022

(d)

Asset backed notes

 

40,000 

 

 

212,875 

 

3.4%

 

 

40,000 

 

 

242,875 

 

3.4%

 

March 2028

(e)

Collateralized financing obligations

 

29,227 

 

 

62,349 

 

1.0%

 

 

58,553 

 

 

53,697 

 

0.7%

 

June 2019

(f)

Term loans held by VIE

 

1,829 

 

 

3,998 

 

2.7%

 

 

1,829 

 

 

5,748 

 

2.6%

 

June 2019



 

 

103,295 

 

 

1,352,383 

 

 

 

 

172,416 

 

 

1,259,196 

 

 

 

 



Debt issuance costs

 

(3,544)

 

 

(9,107)

 

 

 

 

(2,820)

 

 

(10,139)

 

 

 

 



Total Debt

$

99,751 

 

$

1,343,276 

 

 

 

$

169,596&n