Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 20, 2017)
  • 10-Q (Aug 1, 2017)
  • 10-Q (May 4, 2017)
  • 10-Q (Nov 9, 2016)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
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Cai International 10-Q 2017

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
20170930 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, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

(Do not check if a smaller reporting company)

Emerging growth company







If an emerging growth company, indicate by check mark of the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No   

 

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

 



 

 

Common

 

September 30, 2017

Common Stock, $.0001 par value per share

 

19,268,083 shares









 

2


 

 CAI INTERNATIONAL, INC.

INDEX

 



 

 

   

   

   

   

 

Page No.

Part I — Financial Information

   

   

   

Item 1.

Financial Statements (Unaudited)

   

   

   

   

Consolidated Balance Sheets at September 30, 2017 and December 31, 2016

   

   

   



Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016



 

 

   

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

   

   

   

   

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

   

   

   

   

Notes to Unaudited Consolidated Financial Statements

10 

   

   

   

Item 2.

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

21 

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28 

   

   

   

Item 4.

Controls and Procedures

29 

   

   

Part II — Other Information

29 

   

   

   

Item 1.

Legal Proceedings

29 

   

   

   

Item 1A.

Risk Factors

29 

   

   

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30 

   

   

   

Item 3.

Defaults Upon Senior Securities

30 

   

   

   

Item 4.

Mine Safety Disclosures

30 

   

   

   

Item 5.

Other Information

30 

   

   

   

Item 6.

Exhibits

30 

   

   

Signatures

31 



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, 2016 filed with the Securities and Exchange Commission (SEC) on March 13, 2017 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,



 

2017

 

2016

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

12,508 

 

$

15,685 

Cash held by variable interest entities

 

 

22,445 

 

 

30,449 

Accounts receivable, net of allowance for doubtful accounts of $1,636 and

 

 

 

 

 

 

$1,340 at September 30, 2017 and December 31, 2016, respectively

 

 

69,478 

 

 

63,745 

Current portion of net investment in direct finance leases

 

 

27,947 

 

 

19,959 

Prepaid expenses and other current assets

 

 

5,016 

 

 

5,315 

Total current assets

 

 

137,394 

 

 

135,153 

Restricted cash

 

 

12,217 

 

 

6,192 

Rental equipment, net of accumulated depreciation of $484,428 and

 

 

 

 

 

 

$421,153 at September 30, 2017 and December 31, 2016, respectively

 

 

1,979,012 

 

 

1,807,010 

Net investment in direct finance leases

 

 

199,994 

 

 

80,582 

Goodwill

 

 

15,794 

 

 

15,794 

Intangible assets, net of accumulated amortization of $2,974 and

 

 

 

 

 

 

$2,681 at September 30, 2017 and December 31, 2016, respectively

 

 

8,156 

 

 

9,691 

Furniture, fixtures and equipment, net of accumulated depreciation of $3,131 and

 

 

 

 

 

 

$2,833 at September 30, 2017 and December 31, 2016, respectively

 

 

370 

 

 

550 

Other non-current assets

 

 

3,220 

 

 

962 

Total assets (1)

 

$

2,356,157 

 

$

2,055,934 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

6,320 

 

$

13,804 

Accrued expenses and other current liabilities

 

 

13,540 

 

 

11,778 

Due to container investors

 

 

4,119 

 

 

7,077 

Unearned revenue

 

 

8,361 

 

 

10,613 

Current portion of debt

 

 

133,322 

 

 

95,527 

Rental equipment payable

 

 

190,180 

 

 

25,207 

Total current liabilities

 

 

355,842 

 

 

164,006 

Debt

 

 

1,450,588 

 

 

1,380,499 

Deferred income tax liability

 

 

51,193 

 

 

51,804 

Other long term liabilities

 

 

 -

 

 

2,121 

Total liabilities (2)

 

 

1,857,623 

 

 

1,598,430 



 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

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

 

 

 

 

 

 

19,268,083 and 19,057,217 shares at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

Additional paid-in capital

 

 

143,845 

 

 

141,058 

Accumulated other comprehensive loss

 

 

(6,390)

 

 

(8,132)

Retained earnings

 

 

361,077 

 

 

324,576 

Total stockholders' equity

 

 

498,534 

 

 

457,504 

Total liabilities and stockholders' equity

 

$

2,356,157 

 

$

2,055,934 

5


 



(1)

Total assets at September 30, 2017 and December 31, 2016 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash,  $22,445 and $30,449; Net investment in direct finance leases, $4,423 and $7,331; and Rental equipment, net of accumulated depreciation,  $58,075 and $62,477, respectively.



(2)

Total liabilities at September 30, 2017 and December 31, 2016 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $23,365 and $30,980; Debt, $71,086 and $74,887, 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,



 

2017

 

2016

 

2017

 

2016

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Container lease income

 

$

61,870 

 

$

49,661 

 

$

169,784 

 

$

152,875 

Rail lease income

 

 

7,279 

 

 

7,614 

 

 

23,459 

 

 

22,462 

Logistics revenue

 

 

21,012 

 

 

21,197 

 

 

61,116 

 

 

41,743 

Total revenue

 

 

90,161 

 

 

78,472 

 

 

254,359 

 

 

217,080 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

 

27,788 

 

 

29,873 

 

 

82,814 

 

 

77,401 

Storage, handling and other expenses

 

 

3,506 

 

 

8,802 

 

 

16,651 

 

 

27,176 

Logistics transportation costs

 

 

17,855 

 

 

18,045 

 

 

51,608 

 

 

35,127 

(Gain) loss on sale of used rental equipment

 

 

(1,663)

 

 

3,323 

 

 

(2,539)

 

 

7,950 

Administrative expenses

 

 

10,781 

 

 

11,067 

 

 

31,212 

 

 

28,750 

Total operating expenses

 

 

58,267 

 

 

71,110 

 

 

179,746 

 

 

176,404 



 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

31,894 

 

 

7,362 

 

 

74,613 

 

 

40,676 



 

 

 

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

 

13,959 

 

 

10,902 

 

 

37,916 

 

 

31,535 

Other expense

 

 

449 

 

 

85 

 

 

651 

 

 

407 

Total other expenses

 

 

14,408 

 

 

10,987 

 

 

38,567 

 

 

31,942 



 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

17,486 

 

 

(3,625)

 

 

36,046 

 

 

8,734 

Income tax (benefit) expense

 

 

(101)

 

 

1,826 

 

 

549 

 

 

3,320 



 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

17,587 

 

 

(5,451)

 

 

35,497 

 

 

5,414 

Net income attributable to non-controlling interest

 

 

 -

 

 

 -

 

 

 -

 

 

37 

Net income (loss) attributable to CAI common stockholders

 

$

17,587 

 

$

(5,451)

 

$

35,497 

 

$

5,377 



 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to CAI common

 

 

 

 

 

 

 

 

 

 

 

 

stockholders

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.92 

 

$

(0.28)

 

$

1.86 

 

$

0.28 

Diluted

 

$

0.90 

 

$

(0.28)

 

$

1.83 

 

$

0.28 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,180 

 

 

19,130 

 

 

19,108 

 

 

19,427 

Diluted

 

 

19,633 

 

 

19,130 

 

 

19,422 

 

 

19,498 



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,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

17,587 

 

$

(5,451)

 

$

35,497 

 

$

5,414 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

698 

 

 

137 

 

 

1,742 

 

 

1,047 

Comprehensive income (loss)

 

 

18,285 

 

 

(5,314)

 

 

37,239 

 

 

6,461 

Comprehensive income attributable to non-controlling interest

 

 

 -

 

 

 -

 

 

 -

 

 

37 

Comprehensive income (loss) attributable to CAI common

 

 

 

 

 

 

 

 

 

 

 

 

stockholders

 

$

18,285 

 

$

(5,314)

 

$

37,239 

 

$

6,424 



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,



 

2017

 

2016

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

35,497 

 

$

5,414 

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

 

 

 

 

 

 

Depreciation

 

 

83,088 

 

 

77,636 

Amortization of debt issuance costs

 

 

2,400 

 

 

2,217 

Amortization of intangible assets

 

 

1,536 

 

 

682 

Stock-based compensation expense

 

 

1,539 

 

 

1,320 

Reduction in contingent consideration

 

 

(2,211)

 

 

(1,000)

Unrealized loss on foreign exchange

 

 

42 

 

 

82 

(Gain) loss on sale of used rental equipment

 

 

(2,539)

 

 

7,950 

Loss on disposal of subsidiary

 

 

 -

 

 

146 

Deferred income taxes

 

 

393 

 

 

2,193 

Bad debt expense

 

 

750 

 

 

2,458 

Changes in other operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(6,280)

 

 

(7,560)

Prepaid expenses and other assets

 

 

(72)

 

 

(191)

Accounts payable, accrued expenses and other current liabilities

 

 

(5,887)

 

 

1,540 

Due to container investors

 

 

(2,958)

 

 

(32)

Unearned revenue

 

 

(540)

 

 

1,013 

Net cash provided by operating activities

 

 

104,758 

 

 

93,868 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of rental equipment

 

 

(277,769)

 

 

(170,582)

Acquisitions, net of cash acquired

 

 

 -

 

 

(15,620)

Proceeds from sale of used rental equipment

 

 

48,863 

 

 

46,137 

Disposal of subsidiary, net of cash disposed of

 

 

 -

 

 

(460)

Purchase of furniture, fixtures and equipment

 

 

(91)

 

 

(92)

Receipt of principal payments from direct financing leases

 

 

12,362 

 

 

17,368 

Net cash used in investing activities

 

 

(216,635)

 

 

(123,249)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

556,544 

 

 

432,540 

Principal payments on debt

 

 

(448,436)

 

 

(408,375)

Debt issuance costs

 

 

(3,129)

 

 

(1,461)

(Increase) decrease in restricted cash

 

 

(6,025)

 

 

765 

Repurchase of stock

 

 

 -

 

 

(9,176)

Exercise of stock options

 

 

1,362 

 

 

 -

Net cash provided by financing activities

 

 

100,316 

 

 

14,293 

Effect on cash of foreign currency translation

 

 

380 

 

 

Net decrease in cash

 

 

(11,181)

 

 

(15,087)

Cash at beginning of the period

 

 

46,134 

 

 

52,553 

Cash at end of the period

 

$

34,953 

 

$

37,466 



 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

 

$

174 

 

$

752 

Interest

 

 

35,014 

 

 

29,617 

Supplemental disclosure of non-cash investing and financing activity

 

 

 

 

 

 

Transfer of rental equipment to direct finance lease

 

$

144,907 

 

$

14,816 

Transfer of direct finance lease to rental equipment

 

 

291 

 

 

 -



See accompanying notes to unaudited consolidated financial statements.

9


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



(1The 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 February 2016, the Company purchased Challenger Overseas LLC (Challenger), a Non-Vessel Operating Common Carrier, for approximately $10.8 million. 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. 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 normal, recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2017 and December 31, 2016, the Company’s results of operations for the three and nine months ended September 30, 2017 and 2016, and the Company’s cash flows for the nine months ended September 30, 2017 and 2016The 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 2017 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, 2016, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 13, 2017.

 

(2)  Accounting Policies and Recent Accounting Pronouncements

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 sustained changes have taken place in the useful lives of equipment or assigned residual values, which would suggest that a change in depreciation estimates is warranted.

After the Company conducted its regular depreciation policy review for 2016, 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 $4.4 million, decreased net income by $4.3 million, and decreased diluted earnings per share by $0.22, for the nine months ended September 30, 2017.

The Company continuously monitors disposal prices across its entire portfolio for indications of a sustained market downturn. The Company will adjust its residual value estimates as and when conditions warrant.

Except as described below in “Recent Accounting Pronouncements,” there were no changes to the Company’s accounting policies during the nine months ended September 30, 2017. See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 13, 2017, for a description of the Company’s significant accounting policies. 

10


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new standard simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. The new guidance also allows an entity to make a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 effective January 1, 2017. Accordingly, excess tax benefits or deficiencies from stock-based compensation are now reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they were previously recognized in equity. As a result of the adoption of ASU 2016-09, the Company recognized $1.0 million in deferred tax assets associated with excess tax benefits not previously recognized in deferred taxes as a cumulative-effect adjustment to retained earnings as of January 1, 2017. Adoption of the new standard did not have a material impact on our provision for income taxes for the three and nine months ended September 30, 2017. The Company elected to apply the change in presentation to the statements of cash flows prospectively and elected to account for forfeitures as they occur, rather than estimate expected forfeitures, which did not have a material impact on the Company’s consolidated financial statements. 



(3Insurance Receivable and Impairment

In August 2016, Hanjin Shipping Co., Ltd. (Hanjin) filed for bankruptcy protection from its creditors. Based on the recovery of Hanjin containers to date and prior experience, the Company believes that most of its containers will be recovered. As of September 30, 2017, the Company has recovered approximately 92% of the containers that were on lease to Hanjin. The Company maintains insurance to cover the value of containers that are unlikely to be recovered from its customers, the cost to recover and repair containers, and up to 180 days of lost lease rental income, subject to deductibles of $0.5 million and $2.0 million.

During the year ended December 31, 2016, the Company recorded an impairment of $3.2 million representing the book value of containers the Company estimated would not be recovered from Hanjin. As of December 31, 2016, an insurance receivable of $3.8 million was recorded for $1.2 million of estimated unrecoverable containers in excess of the insurance deductible, which was recorded in depreciation expense, and $2.6 million of recovery costs, which was recorded as a reduction to storage, handling and other expenses for the year ended December 31, 2016. During the nine months ended September 30, 2017, the Company recorded an additional insurance receivable of $7.4 million for $2.2 million of lost lease rental income, recognized as container lease income, and $1.5 million of repair costs and $3.7 million of recovery costs, recorded as a reduction to storage, handling and other expenses. The Company also received insurance proceeds of $8.0 million, which was recorded as a reduction to the insurance receivable. As of September 30, 2017, the insurance receivable related to this customer was $3.2 million, of which payment of $1.5 million was received in October 2017.



(4Consolidation of Variable Interest Entities

The Company regularly performs a review of its container fund arrangements with investors to determine whether or not it has a variable interest in the fund and if the fund is a variable interest entity (VIE). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund and the fund is a VIE, a  further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under FASB ASC Topic 810:

·

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

·

it has the obligation to absorb losses of the VIE that could be potentially significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under FASB ASC Topic 810, Consolidation.  

The Company currently enters into two types of container fund arrangements with investors which are reviewed under FASB ASC Topic 810, Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors. 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, 2017 and 2016.  

11


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Collateralized Financing Obligations

The Company has transferred containers to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. In accordance with FASB 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 FASB ASC Topic 810, Consolidation, because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance, including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of September 30, 2017, and December 31, 2016, and the results of the VIEs’ operations and cash flows for the three and nine months ended September 30, 2017 and 2016, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $66.1 million as of September 30, 2017. The container equipment, together with $22.4 million of cash held by the investor funds that can only be used to settle the liabilities of the VIEs, has been included on the Company’s consolidated balance sheets with the related liability presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $90.7 million and term loans held by VIE of $3.7 million.  No gain or loss was recognized by the Company on the initial consolidation of the VIEs. Containers sold to the Japanese investor funds during the three months ended September 30, 2017 and 2016, had a net book value of $6.0 million and $9.2 million, respectively. Containers sold to the Japanese investor funds during the nine months ended September 30, 2017 and 2016, had a  book value of $13.2 million and $26.1 million, respectively.



(5)  Acquisitions

In 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. The aggregate allocation of the combined purchase price included $1.2 million of cash, $9.9 million of identifiable intangible assets, $12.9 million of residual goodwill, and $1.2 million of net liabilities assumed.

The contingent consideration liability was $2.2 million as of December 31, 2016. Expected future payments of $2.1 million and $0.1 million were recorded in Other long-term liabilities and Accrued expenses and Other current liabilities, respectively, in the Company’s consolidated balance sheets at December 31, 2016. Based on the forecasted future performance of Challenger and Hybrid, it has been estimated that there will be no future payments made and, as a result, the fair value of the contingent consideration liability has been estimated to be zero at September 30, 2017. The following table provides a reconciliation of the contingent consideration liability measured at estimated fair value based on the balance as of December 31, 2016 and updated quarterly for the nine months ended September 30, 2017 (in thousands):







 

 

 

 

 

 



 

 

 

 

2017

January 1

 

 

 

 

$

2,211 

Net decrease in estimated fair value of contingent consideration

 

 

 

 

 

 

included in Administrative expenses

 

 

 

 

 

 

Three months ended March 31, 2017

 

 

 

 

 

 -

Three months ended June 30, 2017

 

 

 

 

 

(631)

Three months ended September 30, 2017

 

 

 

 

 

(1,580)

September 30

 

 

 

 

$

 -









12


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(6)  Rental Equipment

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







 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

Dry containers

 

$

1,529,405 

 

$

1,322,508 

Refrigerated containers

 

 

346,996 

 

 

350,776 

Other specialized equipment

 

 

162,357 

 

 

164,934 

Railcars

 

 

424,682 

 

 

389,945 



 

 

2,463,440 

 

 

2,228,163 

Accumulated depreciation

 

 

(484,428)

 

 

(421,153)

Rental equipment, net of accumulated depreciation

 

$

1,979,012 

 

$

1,807,010 





(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,



 

2017

 

2016

Gross finance lease receivables (1)

 

$

329,223 

 

$

123,563 

Unearned income (2)

 

 

(101,282)

 

 

(23,022)

Net investment in direct finance leases

 

$

227,941 

 

$

100,541 



(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 $21.9 million and $2.1 million unguaranteed residual value at September 30, 2017 and December 31, 2016, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of September 30, 2017 and December 31, 2016.



(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, 2017 and December 31, 2016.



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.

13


 

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,



 

2017

 

2016

Tier 1

 

$

273,742 

 

$

74,777 

Tier 2

 

 

55,481 

 

 

48,786 

Tier 3

 

 

 -

 

 

 -



 

$

329,223 

 

$

123,563 



Contractual maturities of the Company's gross finance lease receivables subsequent to and as of September 30, 2017 for the years ending September 30 were as follows (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 

2018

 

 

 

 

$

46,735 

2019

 

 

 

 

 

62,606 

2020

 

 

 

 

 

32,929 

2021

 

 

 

 

 

30,873 

2022

 

 

 

 

 

27,974 

2023 and thereafter

 

 

 

 

 

128,106 



 

 

 

 

$

329,223 











(8)  Intangible Assets

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





 

Trademarks and tradenames

                 2-3 years

Customer relationships

8 years



The Company’s intangible assets as of September 30, 2017 and December 31, 2016 were as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

1,786 

 

$

(1,269)

 

$

517 

Customer relationships

 

 

 

 

 

9,344 

 

 

(1,705)

 

 

7,639 



 

 

 

 

$

11,130 

 

$

(2,974)

 

$

8,156 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

 

 

 

$

3,028 

 

$

(1,850)

 

$

1,178 

Customer relationships

 

 

 

 

 

9,344 

 

 

(831)

 

 

8,513 



 

 

 

 

$

12,372 

 

$

(2,681)

 

$

9,691 

     





Total amortization expense was $0.4 million for both the three months ended September 30, 2017 and 2016, respectively, and $1.5 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively, and was included in administrative expenses in the consolidated statements of income.

As of September 30, 2017, estimated future amortization expenses are as follows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

$

1,637 

2019

 

 

 

 

 

 

 

 

 

 

 

1,213 

2020

 

 

 

 

 

 

 

 

 

 

 

1,167 

2021

 

 

 

 

 

 

 

 

 

 

 

1,167 

2022

 

 

 

 

 

 

 

 

 

 

 

1,167 

2023 and thereafter

 

 

 

 

 

 

 

 

 

 

 

1,805 



 

 

 

 

 

 

 

 

 

 

$

8,156 



















14


 

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(9)  Debt

Details of the Company’s debt as of September 30, 2017 and December 31, 2016 were as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



September 30, 2017

 

December 31, 2016

 

 



Outstanding

 

Average

 

Outstanding

 

Average

 

 



Current

 

Long-term

 

Interest

 

Current

 

Long-term

 

Interest

 

Maturity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

$

 -

 

$

407,000 

 

3.0%

 

$

 -

 

$

526,000 

 

2.5%

 

March 2020

Revolving credit facility - Rail

 

 -

 

 

254,000 

 

2.7%

 

 

 -

 

 

223,500 

 

2.4%

 

October 2020

Revolving credit facility - Euro

 

 -

 

 

14,534 

 

2.0%

 

 

 -

 

 

 -

 

 -

 

September 2020

Term loan

 

22,350 

 

 

 -

 

3.2%

 

 

1,800 

 

 

21,900 

 

2.9%

 

April 2018

Term loan

 

9,000 

 

 

114,000 

 

2.8%

 

 

9,000 

 

 

120,750 

 

2.3%

 

October 2019

Term loan

 

7,000 

 

 

84,250 

 

3.0%

 

 

7,000 

 

 

89,500 

 

2.5%

 

June 2021

Term loan

 

1,188 

 

 

16,827 

 

3.4%

 

 

1,158 

 

 

17,723 

 

3.4%

 

December 2020

Term loan

 

2,780 

 

 

44,270 

 

3.6%

 

 

2,705 

 

 

46,365 

 

3.6%

 

August 2021

Senior secured notes

 

6,110 

 

 

58,885 

 

4.9%

 

 

6,110 

 

 

64,995 

 

4.9%

 

September 2022

Asset-backed notes

 

65,307 

 

 

394,311 

 

3.5%

 

 

40,000 

 

 

202,875 

 

3.4%

 

June 2042

Collateralized financing obligations

 

23,365 

 

 

67,343 

 

1.3%

 

 

28,693 

 

 

71,346 

 

1.1%

 

September 2020

Term loans held by VIE

 

 -

 

 

3,743 

 

2.7%

 

 

2,287 

 

 

3,541 

 

2.5%

 

June 2019



 

137,100 

 

 

1,459,163 

 

 

 

 

98,753 

 

 

1,388,495 

 

 

 

 

Debt issuance costs

 

(3,778)

 

 

(8,575)

 

 

 

 

(3,226)

 

 

(7,996)

 

 

 

 

Total Debt

$

133,322 

 

$

1,450,588 

 

 

 

$

95,527