ITEM 1.
FINANCIAL STATEMENTS
CAI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
(UNAUDITED)
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September 30,
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December 31,
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2017
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|
2016
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Assets
|
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|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
12,508
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|
$
|
15,685
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Cash held by variable interest entities
|
|
|
22,445
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|
30,449
|
Accounts receivable, net of allowance for doubtful accounts of $1,636 and
|
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|
|
|
|
|
$1,340 at September 30, 2017 and December 31, 2016, respectively
|
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|
69,478
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|
|
63,745
|
Current portion of net investment in direct finance leases
|
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|
27,947
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|
19,959
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Prepaid expenses and other current assets
|
|
|
5,016
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|
|
5,315
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Total current assets
|
|
|
137,394
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|
135,153
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Restricted cash
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|
|
12,217
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|
6,192
|
Rental equipment, net of accumulated depreciation of $484,428 and
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$421,153 at September 30, 2017 and December 31, 2016, respectively
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|
1,979,012
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|
1,807,010
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Net investment in direct finance leases
|
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|
199,994
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|
80,582
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Goodwill
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|
15,794
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|
15,794
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Intangible assets, net of accumulated amortization of $2,974 and
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$2,681 at September 30, 2017 and December 31, 2016, respectively
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8,156
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9,691
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Furniture, fixtures and equipment, net of accumulated depreciation of $3,131 and
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$2,833 at September 30, 2017 and December 31, 2016, respectively
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|
370
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|
|
550
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Other non-current assets
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|
3,220
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|
|
962
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Total assets (1)
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|
$
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2,356,157
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$
|
2,055,934
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Liabilities and Stockholders' Equity
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Current liabilities
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Accounts payable
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$
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6,320
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|
$
|
13,804
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Accrued expenses and other current liabilities
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|
13,540
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|
11,778
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Due to container investors
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4,119
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|
7,077
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Unearned revenue
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|
8,361
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|
10,613
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Current portion of debt
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133,322
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95,527
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Rental equipment payable
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190,180
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25,207
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Total current liabilities
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355,842
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164,006
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Debt
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1,450,588
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1,380,499
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Deferred income tax liability
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51,193
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51,804
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Other long term liabilities
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-
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2,121
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Total liabilities (2)
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1,857,623
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1,598,430
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Stockholders' equity
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Common stock: par value $.0001 per share; authorized 84,000,000 shares; issued and outstanding
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19,268,083 and 19,057,217 shares at September 30, 2017 and December 31, 2016, respectively
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2
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2
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Additional paid-in capital
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143,845
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|
141,058
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Accumulated other comprehensive loss
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(6,390)
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(8,132)
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Retained earnings
|
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361,077
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324,576
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Total stockholders' equity
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498,534
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|
457,504
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Total liabilities and stockholders' equity
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$
|
2,356,157
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$
|
2,055,934
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(1)
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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.
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|
(2)
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|
Total liabilities at
September 30, 2017
and December 31, 201
6
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
$74,887
, respectively.
|
See accompanying notes to unaudited consolidated financial statements.
CAI INTERN
ATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
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2017
|
|
2016
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|
2017
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|
2016
|
Revenue
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Container lease income
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$
|
61,870
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|
$
|
49,661
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|
$
|
169,784
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$
|
152,875
|
Rail lease income
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|
7,279
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|
|
7,614
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|
|
23,459
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|
|
22,462
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Logistics revenue
|
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|
21,012
|
|
|
21,197
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|
|
61,116
|
|
|
41,743
|
Total revenue
|
|
|
90,161
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|
78,472
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|
254,359
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|
217,080
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Operating expenses
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Depreciation of rental equipment
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|
27,788
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|
|
29,873
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|
82,814
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|
77,401
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Storage, handling and other expenses
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|
3,506
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|
8,802
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|
16,651
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|
27,176
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Logistics transportation costs
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|
17,855
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|
18,045
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|
51,608
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|
35,127
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(Gain) loss on sale of used rental equipment
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|
(1,663)
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3,323
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|
(2,539)
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|
7,950
|
Administrative expenses
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|
10,781
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|
11,067
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|
|
31,212
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|
28,750
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Total operating expenses
|
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|
58,267
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|
71,110
|
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|
179,746
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|
176,404
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Operating income
|
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|
31,894
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|
|
7,362
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|
74,613
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|
40,676
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Other expenses
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|
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Net interest expense
|
|
|
13,959
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|
|
10,902
|
|
|
37,916
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|
|
31,535
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Other expense
|
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|
449
|
|
|
85
|
|
|
651
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|
|
407
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Total other expenses
|
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|
14,408
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|
10,987
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|
38,567
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|
31,942
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Income (loss) before income taxes and non-controlling interest
|
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17,486
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|
(3,625)
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36,046
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|
8,734
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Income tax (benefit) expense
|
|
|
(101)
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|
1,826
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|
549
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|
3,320
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Net income (loss)
|
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|
17,587
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|
(5,451)
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|
35,497
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|
5,414
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Net income attributable to non-controlling interest
|
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|
-
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-
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-
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|
37
|
Net income (loss) attributable to CAI common stockholders
|
|
$
|
17,587
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|
$
|
(5,451)
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$
|
35,497
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|
$
|
5,377
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Net income (loss) per share attributable to CAI common
|
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stockholders
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Basic
|
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$
|
0.92
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|
$
|
(0.28)
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$
|
1.86
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|
$
|
0.28
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Diluted
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|
$
|
0.90
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|
$
|
(0.28)
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$
|
1.83
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|
$
|
0.28
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Weighted average shares outstanding
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Basic
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19,180
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|
19,130
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|
19,108
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19,427
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Diluted
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|
19,633
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|
19,130
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|
19,422
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|
19,498
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See accompanying notes to unaudited consolidated financial statements.
CAI INTERN
ATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(UNAUDITED)
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Three Months Ended September 30,
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Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss)
|
|
$
|
17,587
|
|
$
|
(5,451)
|
|
$
|
35,497
|
|
$
|
5,414
|
Other comprehensive income, net of tax:
|
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|
|
|
|
|
|
|
|
|
|
|
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
|
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|
|
|
|
|
|
|
|
|
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|
stockholders
|
|
$
|
18,285
|
|
$
|
(5,314)
|
|
$
|
37,239
|
|
$
|
6,424
|
See accompanying notes to unaudited consolidated financial statements.
CAI INTERN
ATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
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|
|
|
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
|
|
|
1
|
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.
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 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, 201
6
, 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 2016
.
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 201
7
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) h
ave 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, 201
6
, 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.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
In March 2016, the F
inancial
A
ccounting
S
tandards
B
oard (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.
(
3
)
Insurance
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
.
(4
)
Consolidation
of Variable Interest Entities
The Company regularly performs a review of its container fund arrangements with investors to determine whether
or not it has a variable interest in the
fund
and if the fund
is a
variable interest entity (
VIE
). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund
and the fund is a VIE,
a
further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under
FASB
ASC Topic 810:
|
·
|
|
i
t has power to direct the activities of a VIE that most significantly impact the
VIE
’s economic performance; and
|
|
·
|
|
i
t 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 Japan
ese 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
.
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, un
der 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, 201
6
, 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
milli
on and term loans held by VIE of
$3.7
million
.
No
gain or loss was recognized by the Company on the initial consolidation of th
e 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 sheet
s
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
|
|
|
|
|
$
|
-
|
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 c
ustomer payments are received.
There
was
$21.9
million
and
$2.1
million unguaranteed residual
value
at
September 30
, 2017
and December 31, 201
6, 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, 201
6
.
|
|
(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, 201
6
.
|
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.
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 i
ntangible 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
|
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, 201
6
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
|
|
$
|
1,380,499
|
|
|
|
|
On June 16, 2017, the Company entered into an amendment to the Third Amended and Restated Revolving Credit Agreement, pursuant to which the revolving credit facility was amended to increase the commitment level from
$775.0
million to
$960.0
million.
The Company maintains its revolving credit facilities
to finance the acquisition of rental equipment and for general working capital purposes.
As of
September 30
, 2017
, the Company
had
$813.9
million
in
total
availability und
er its revolving credit facilities (net of
$0.1
million in letters of credit)
.
On July 6, 2017, CAL Funding III Limited (CAL Funding III), a wholly-owned indirect subsidiary of CAI, issued
$240.9
million of
3.6
% Class A fixed rate asset-backed notes and
$12.2
million of
4.6%
Class B fixed rate asset-backed notes (collectively, the Notes). Principal and interest on the Notes is payable monthly commencing on July 25, 2017, with the Notes maturing in June 2042. The proceeds from the Notes were used for general corporate purposes, including repayment of debt by the Company. The Notes are secured by all of the assets of CAL Funding III.
The agreements relating to all of the Company’s debt contain various financial and other covenants. As of
September
30, 2017
, the Company was in compliance with all of its debt covenants.
For further information on the Company’s debt instruments, see Note 10 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.
(
10)
Stock–Based Compensation Plan
Stock Options
The Company grants stock options
from time to time
to certain employees and independent directors pursuant t
o its 2007 Equity Incentive Plan, as amended
(Plan)
. Under the Plan, a maximum of
3,421,980
share awards may be granted.
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. All of the stock options have a contractual term of
ten
years.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company’s stock option activities for the
nine
months ended
September 30, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
Options outstanding at January 1
|
|
|
1,428,255
|
|
$
|
16.31
|
|
|
1,189,255
|
|
$
|
18.08
|
Options granted
|
|
|
230,500
|
|
$
|
16.80
|
|
|
245,000
|
|
$
|
7.87
|
Options exercised
|
|
|
(240,173)
|
|
$
|
11.40
|
|
|
-
|
|
$
|
-
|
Options forfeited/cancelled
|
|
|
-
|
|
$
|
16.94
|
|
|
(6,000)
|
|
$
|
21.99
|
Options outstanding at September 30
|
|
|
1,418,582
|
|
$
|
17.22
|
|
|
1,428,255
|
|
$
|
16.31
|
Options exercisable
|
|
|
975,087
|
|
$
|
18.24
|
|
|
1,033,518
|
|
$
|
17.47
|
Weighted average remaining term
|
|
|
5.0
years
|
|
|
|
|
|
4.7
years
|
|
|
|
The aggregate intrinsic value of stock options exercised during the
nine
months ended
September
30, 2017
was
$2.2
million. The aggregate intrinsic value of all options outstanding as of
September
30, 2017
was
$18.6
million based on the closing price of the Company’s common stock of
$30.32
per share on
September
29
, 2017
, the last trading day of the quarter.
The Company
recognized
stock-based compensation expense
relating to stock options
of
$0.4
million
and
$0.3
million for the three months ended
September 30
, 2017 and 2016
, respectively
,
and
$1.2
million and
$1.0
million for the nine months ended
September
30, 2017 and 2016
, respectively
. As of
September 30
, 2017
, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately
$2.9
million, which is to be recognized over the remaining weighted average vesting period of
approximately
2.5
years
.
The fair value of 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 assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
Stock price
|
|
|
|
|
|
|
|
$
|
16.80
|
|
$
|
7.87
|
Exercise price
|
|
|
|
|
|
|
|
$
|
16.80
|
|
$
|
7.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
|
|
|
|
|
|
5.50
-
6.25
|
|
|
5.50
-
6.25
|
Expected volatility (%)
|
|
|
|
|
|
|
|
|
56.40
-
57.50
|
|
|
45.40
-
46.70
|
Risk-free interest rate (%)
|
|
|
|
|
|
|
|
|
1.77
-
2.14
|
|
|
1.30
-
1.40
|
Dividend yield (%)
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
The expected option term is calculated using the simplified method in accordance with SEC guidance. The expected volatility was derived from the average volatility of the Company’s stock over a period approximating the expected term of the options. The risk-free rate is based on the daily U.S. Treasury yield curve with a term approximating the expected term of the options. No forfeiture rate was estimated on all options granted during the nine months ended September 30, 2017, as the Company accounts for forfeitures as they occur (see Note 2).
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted Stock
The Company grants restricted stock
from time to time
to certain employees pursuant to the Plan. The restricted stock is valued based on the closing price of the Company’s stock on the date of grant and has a vesting period of
four
years. The following table summarizes the activity of restricted stock under the Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
|
|
|
|
Shares of
|
|
Average
|
|
|
|
|
|
|
|
|
Restricted
|
|
Grant Date
|
|
|
|
|
|
|
|
|
Stock
|
|
Fair Value
|
Restricted stock outstanding, December 31, 2016
|
|
|
|
|
|
|
|
|
65,802
|
|
$
|
14.75
|
Restricted stock granted
|
|
|
|
|
|
|
|
|
37,414
|
|
$
|
17.14
|
Restricted stock vested
|
|
|
|
|
|
|
|
|
(24,674)
|
|
$
|
17.83
|
Restricted stock outstanding, September 30, 2017
|
|
|
|
|
|
|
|
|
78,542
|
|
$
|
14.92
|
The Company recognized
$0.1
m
illion of stock-based compensation expense relating to restricted stock for both the three months ended
September 30, 2017 and 2016, and
$0.4
million and
$0.3
million for the nine months ended
September 30, 2017 and 2016, respectively
. As of
September 30, 2017
, unamortized stock-based compensation expense relating to restricted stock was
$1.0
million, which will be recognized over the remaining average vesting period of
2.6
years.
Stock-based compensation expense is recorded as a component of administrative expense
s
in the Company’s consolidated statements of income with a corresponding credit to additional paid-in capital in the Company’s consolidated balance sheets.
(11)
Income Taxes
The consolidated income tax expense for the three
and nine
months ended
September 30, 2017 and 2016
,
was determined based upon estimates of the Company’s consolidated
annual
effective income tax rate for the years ending December 31, 201
7
and 201
6
, respectively. The difference between the consolidated
annual
effective income tax rate and the U.S. federal statutory rate is primarily attributable to foreign income taxes, state income
taxes and the effect of certain permanent differences.
The Company’s estimated effective tax rate was
1.5%
at
September 30, 2017
, compared to
38.0%
at
September 30, 2016
. The lower estimated effective tax rate at
September 30, 2017
was due
to
a significant
increase in the proportion of pretax income
generated
in lower tax jurisdictions.
The Company accounts for uncertain tax positions based on an evaluation as to whether it is more likely than not that a position will be sustained on audit, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the appropriate tax authorities have full knowledge of all relevant information concerning the tax position. Once it has been determined that a tax position is
more likely than not to be sustained on its technical merits, the tax benefit recognized is based on the largest amount that is
greater
than
50%
likely of being realized upon ultimate settlement. As of
September 30, 2017
, the Company had unrecognized tax benefits of
$0.2
million, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was less than
$0.1
million
as of
September 30, 2017
. The Company does not believe the total amount of unrecognized tax benefits as of
September 30, 2017
will change for th
e remainder of 201
7
.
The Company was notified on May 1, 2017 that their 2015 federal income tax return was selected for examination. An initial meeting with the examining agent was held in August 2017. The examination is in its preliminary data gathering stage.
(12)
Fair Value of Financial Instruments
The
carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable
approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company’s asset-backed notes of
$459.6
million and collateralized financing obligations of
$90.7
million as of
September 30, 2017
were estimated to have a fair value of approximately
$458.0
million and
$92.2
million, respectively, based on the fair value of estimated future payments calculated using prevailing interest rates. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy. Management believes that the balances of the Company’s revolving credit facilities of
$675.5
million, term loans totaling
$301.7
million, senior secured notes of
$65.0
million,
term loans held by VIE of
$3.7
million and net inves
tment in direct finance leases of
$227.9
approximate
their fair values as of
September 30
, 2017
. The fair value of these financial instruments would be categorized as Level
2
in the fair
value hierarchy.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) Commitments and Contingencies
In addition to its debt obligations
described in Note 9 above, the Company had commitments to purchase
approximately
$63.9 million of containers and $
150.2
million of
railcars
as of
September 30, 2017
;
$63.9
million of containers and
$
113.5
million
of railcars
in the twelve months ending
September 30
, 2018 and
$36.7
million
of railcars
in the twelve months ending
September 30
, 2019. The Co
mpany also utilizes certain office facilities and equipment under long-term non-cancellable operating lease agreements with total future minimum lease payments of
approximately
$4.3
million
as of
September 30
, 2017
.
(
14)
Related Party Transactions
The Company
has
transferred legal ownership of certain containers to Japanese container funds that were established by Japan Investment Adviser Co., Ltd. (JIA) and CAIJ, Inc. (CAIJ). Prior to April 2016, CAIJ was an
80%
-owned subsidiary of CAI with the remaining
20%
owned by JIA. Prior to the transfer of containers from the Company, the container funds received contributions from unrelated Japanese investors, under separate Japanese investment agreements allowed under Japanese commercial laws. The contributions were used to purchase container equipment from the Company. Under the terms of the agreements, the CAI-related Japanese entities manage the activities of certain Japanese entities but may outsource the whole or part of each operation to a third party. Pursuant to its services agreements with investors, the Japanese container funds outsourced the general management of their operations to CAIJ. The Japanese container funds also entered into equipment management service agreements and financing arrangements whereby the Company managed the leasing activity of containers owned by the Japanese container funds.
As described in Note
4
, the Japanese managed container funds and financing arrangements are considered VIEs. However, with the exception of the financing arrangements described in Note
4
, the Company does not consider its interest in the managed Japanese container funds to be a variable interest. As such, the Company did not consolidate the assets and liabilities, results of operations or cash flows of these funds in its consolidated financial statements.
As described in Note
4
, the Company has included in its consolidated financial statements, the assets and liabilities, results of operations, and cash flows of the financing arrangements, in accordance with
FASB
ASC Topic 810,
Consolidation
.
(15)
Segment and Geographic Information
The Company organizes itself by the nature of the services it provides which includes equipment leasing
(consisting of container leasing and rail leasing)
and logistics.
The container leasing segment is aggregated with equipment management and
derives its revenue from the ownership and leasing of
containers and fees earned for
managing
container
portfolios on behalf of third party investors
. The rail leasing segment derives its revenue from the ownership and leasing of railcars. The
logistics segment derives its revenue from
the
provision of logistics services.
There are
no
inter-segment revenues.
With the exception of administrative expenses, operating expenses are directly attributable to each segment. Administrative expenses that are not directly attributable to a segment are allocated to container or rail leasing based on the net book value of equipment in each segment.
The following tables show condensed segment information for the three
and nine
months ended
September 30, 2017 and 2016
, reconciled to the Company’s income before income taxes and non-controlling interest as shown in its consolidated statements of income
for such periods
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
Container Leasing
|
|
Rail Leasing
|
|
Logistics
|
|
Total
|
Total revenue
|
|
$
|
61,870
|
|
$
|
7,279
|
|
$
|
21,012
|
|
$
|
90,161
|
Total operating expenses
|
|
|
30,270
|
|
|
5,534
|
|
|
22,463
|
|
|
58,267
|
Operating income (loss)
|
|
|
31,600
|
|
|
1,745
|
|
|
(1,451)
|
|
|
31,894
|
Total other expenses
|
|
|
11,537
|
|
|
2,871
|
|
|
-
|
|
|
14,408
|
Income (loss) before income taxes and non-controlling interest
|
|
$
|
20,063
|
|
$
|
(1,126)
|
|
$
|
(1,451)
|
|
$
|
17,486
|
Goodwill
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,794
|
|
$
|
15,794
|
Total assets
|
|
$
|
1,910,899
|
|
$
|
405,118
|
|
$
|
40,140
|
|
$
|
2,356,157
|
Purchase of rental equipment (1)
|
|
$
|
132,405
|
|
$
|
16,771
|
|
$
|
-
|
|
$
|
149,176
|
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
Container Leasing
|
|
Rail Leasing
|
|
Logistics
|
|
Total
|
Total revenue
|
|
$
|
49,661
|
|
$
|
7,614
|
|
$
|
21,197
|
|
$
|
78,472
|
Total operating expenses
|
|
|
45,184
|
|
|
4,367
|
|
|
21,559
|
|
|
71,110
|
Operating income (loss)
|
|
|
4,477
|
|
|
3,247
|
|
|
(362)
|
|
|
7,362
|
Total other expenses
|
|
|
9,159
|
|
|
1,827
|
|
|
1
|
|
|
10,987
|
(Loss) income before income taxes and non-controlling interest
|
|
$
|
(4,682)
|
|
$
|
1,420
|
|
$
|
(363)
|
|
$
|
(3,625)
|
Goodwill
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,579
|
|
$
|
15,579
|
Total assets
|
|
$
|
1,643,929
|
|
$
|
343,214
|
|
$
|
40,059
|
|
$
|
2,027,202
|
Purchase of rental equipment (1)
|
|
$
|
19,730
|
|
$
|
20,613
|
|
$
|
-
|
|
$
|
40,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Container Leasing
|
|
Rail Leasing
|
|
Logistics
|
|
Total
|
Total revenue
|
|
$
|
169,784
|
|
$
|
23,459
|
|
$
|
61,116
|
|
$
|
254,359
|
Total operating expenses
|
|
|
99,788
|
|
|
16,038
|
|
|
63,920
|
|
|
179,746
|
Operating income (loss)
|
|
|
69,996
|
|
|
7,421
|
|
|
(2,804)
|
|
|
74,613
|
Total other expenses
|
|
|
30,346
|
|
|
8,220
|
|
|
1
|
|
|
38,567
|
Income (loss) before income taxes and non-controlling interest
|
|
$
|
39,650
|
|
$
|
(799)
|
|
$
|
(2,805)
|
|
$
|
36,046
|
Purchase of rental equipment (1)
|
|
$
|
246,378
|
|
$
|
31,391
|
|
$
|
-
|
|
$
|
277,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Container Leasing
|
|
Rail Leasing
|
|
Logistics
|
|
Total
|
Total revenue
|
|
$
|
152,875
|
|
$
|
22,462
|
|
$
|
41,743
|
|
$
|
217,080
|
Total operating expenses
|
|
|
121,519
|
|
|
12,363
|
|
|
42,522
|
|
|
176,404
|
Operating income (loss)
|
|
|
31,356
|
|
|
10,099
|
|
|
(779)
|
|
|
40,676
|
Total other expenses
|
|
|
27,203
|
|
|
4,738
|
|
|
1
|
|
|
31,942
|
Income (loss) before income taxes and non-controlling interest
|
|
$
|
4,153
|
|
$
|
5,361
|
|
$
|
(780)
|
|
$
|
8,734
|
Purchase of rental equipment (1)
|
|
$
|
68,183
|
|
$
|
102,399
|
|
$
|
-
|
|
$
|
170,582
|
(1
) Represents cash disbursements for purchasing of rental equipment as reflected in the consolidated statements of cash flows for the periods indicated.
Geographic Data
The Company earns its revenue primarily from
intermodal
containers which are deployed by its customers in a wide variety of global trade routes. Virtually all of the Company’s containers are used internationally and typically no container is domiciled in one particular place for a prolonged period of time. As such, substantially all of the Company’s long-lived assets are considered to be international,
with no single country of use.
The Company’s railcars, with a net book value of
$397.2
million
as of
September 30, 2017
, are used primarily to transport cargo within North America.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents the geographic allocation of revenue for the periods indicated based on customers’ primary domicile (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
|
$
|
30,131
|
|
$
|
30,777
|
|
$
|
90,208
|
|
$
|
70,156
|
France
|
|
|
8,938
|
|
|
7,138
|
|
|
25,600
|
|
|
21,447
|
Switzerland
|
|
|
9,182
|
|
|
4,874
|
|
|
21,087
|
|
|
14,883
|
Japan
|
|
|
5,132
|
|
|
5,368
|
|
|
15,199
|
|
|
16,806
|
Singapore
|
|
|
5,345
|
|
|
3,846
|
|
|
14,669
|
|
|
12,486
|
Korea
|
|
|
5,831
|
|
|
3,616
|
|
|
14,096
|
|
|
11,158
|
Other Asia
|
|
|
11,151
|
|
|
10,184
|
|
|
32,614
|
|
|
31,475
|
Other Europe
|
|
|
11,815
|
|
|
9,950
|
|
|
32,904
|
|
|
30,138
|
Other International
|
|
|
2,636
|
|
|
2,719
|
|
|
7,982
|
|
|
8,531
|
Total revenue
|
|
$
|
90,161
|
|
$
|
78,472
|
|
$
|
254,359
|
|
$
|
217,080
|
(
16)
Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if
their effect is anti-dilutive.
The following table sets forth the reconciliation of basic and diluted net income per share for the three
and nine
months ended
September 30, 2017 and 2016
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CAI common stockholders used
|
|
|
|
|
|
|
|
|
|
|
|
|
in the calculation of basic and diluted earnings per share
|
|
$
|
17,587
|
|
$
|
(5,451)
|
|
$
|
35,497
|
|
$
|
5,377
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in the calculation of basic
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings per share
|
|
|
19,180
|
|
|
19,130
|
|
|
19,108
|
|
|
19,427
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
453
|
|
|
-
|
|
|
314
|
|
|
71
|
Weighted-average shares used in the calculation of diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings per share
|
|
|
19,633
|
|
|
19,130
|
|
|
19,422
|
|
|
19,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
The calculation of diluted earnings per share for the three months ended
September 30, 2017 and 2016
,
excluded from the
denominator
41,989
and
1,231,455
shares, respectively, of common stock options because their effect would have been anti-dilutive
.
The calculation of diluted earnings per share for the
nine
months ended
September 30, 2017 and 2016
,
excluded from the
denominator
822,226
and
1,103,495
shares, respectively, of common stock options because their effect would have been anti-dilutive
.
ITEM 2
:
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS
O
F OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 201
6
filed with the SEC on
March
1
3
, 201
7
. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future.
See “Special Note Regarding Forward-Looking Statements” included earlier in this report.
Unless the context requires otherwise, references to “CAI,” the “Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to CAI International, Inc. and its subsidiaries.
Overview
We are one of the world’s leading transportation finance and logistics companies. We purchase equipment,
primarily intermodal shipping containers and railcars,
which we lease to
our customers
. We also manage equipment for third
-
party investors. In operating our fleet, we lease, re-lease and dispose of equipment and contract for the repair, repositioning and storage of equipment.
We also provide domestic and international logistics services
, through CAI Logistics, Challenger Overseas LLC and Hybrid Logistics, Inc
.
In February 2016, we 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, we purchased Hybrid Logistics, Inc. and its affiliate, General Transportation Services, Inc. (
collectively, Hybrid
), asset light truck brokers, for approximately $1
2.0
million.
Hybrid
is
headquartered in Portland, Oregon.
The following table
s
show the composition of our fleet as of
September
30
, 2017 and 2016
,
and our average utilization for the three
and
nine
months ended
September
30
, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Owned container fleet in TEUs
|
|
|
|
|
|
|
|
|
1,121,355
|
|
|
941,345
|
Managed container fleet in TEUs
|
|
|
|
|
|
|
|
|
83,086
|
|
|
174,162
|
Total container fleet in TEUs
|
|
|
|
|
|
|
|
|
1,204,441
|
|
|
1,115,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned container fleet in CEUs
|
|
|
|
|
|
|
|
|
1,188,078
|
|
|
1,010,083
|
Managed container fleet in CEUs
|
|
|
|
|
|
|
|
|
75,596
|
|
|
156,543
|
Total container fleet in CEUs
|
|
|
|
|
|
|
|
|
1,263,674
|
|
|
1,166,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned railcar fleet in units
|
|
|
|
|
|
|
|
|
6,795
|
|
|
6,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2017
|
|
September 30, 2017
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Average container fleet utilization in CEUs
|
|
|
98.0%
|
|
|
93.3%
|
|
|
96.9%
|
|
|
92.5%
|
Average owned container fleet utilization in CEUs
|
|
|
98.2%
|
|
|
94.0%
|
|
|
97.1%
|
|
|
93.2%
|
Average railcar fleet utilization
|
|
|
89.3%
|
|
|
96.2%
|
|
|
91.0%
|
|
|
96.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intermodal marine container industry-standard measurement unit is the 20-foot equivalent unit
(
TEU
)
, which compares the size of a container to a standard 20-foot container. For example, a 20-foot container is equivalent to one TEU and a 40-foot container is equivalent to two TEUs. Containers can also be measured in cost equivalent units (CEUs), whereby the cost of each type of container is expressed as a ratio relative to the cost of a standard 20-foot dry van container. For example, the CEU ratio for a standard 40-foot dry van container is 1.6 and a 40-foot high cube container is 1.7.
Utilization of containers is computed by dividing
the average
total units on lease
during the period
in CEUs, by the
average
total CEUs in our container
fleet
during the period
. Utilization of railcars is computed by dividing the
average
number of railcars on lease
during the period
by the
average
total number of railcars in our fleet
during the period
. In both cases, the total fleet excludes new units not yet leased and off-hire units designated for sale.
If new units not yet leased are included in the total fleet,
utilization would be
97
.2
%
and
95.9
%
for the total container fleet,
97.2
%
and
95.9
% for
the owned container fleet
,
and
77.
4%
and
79.
9
% for the railcar fleet,
f
or the
three
and
nine
months ended
September
30
, 2017
, respectively
.
On August 31, 2016, Hanjin Shipping Co., Ltd. (Hanjin), the world’
s
7
th
largest container shipping line, announced that it had filed for court protection in South Korea from its creditors. At the time of default, we had approximately 15,000 owned containers on lease to Hanjin representing $40 million of equipment exposure based on net book value, or approximately 2% of our rental revenue assets. We maintain insolvency insurance that covers the value of unreturned containers, damage to recovered containers, recovery costs, legal expenses, and the loss of post-bankruptcy income for a period from the default date to the earlier of the return of the equipment or six
months. As discussed below, during the
nine
months ended
September
30
, 2017, we recognized $2.2 million in container lease revenue from insurance proceeds for lost revenue associated with the bankruptcy of Hanjin.
Three Months Ended
September
30
, 2017
Compared to Three Months Ended
September
30
, 2016
The following table summarizes our operating results for the three months ended
September
30
, 2017 and 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
Increase/(Decrease)
|
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Total revenue
|
|
$
|
90,161
|
|
$
|
78,472
|
|
$
|
11,689
|
|
15
|
%
|
Operating expenses
|
|
|
58,267
|
|
|
71,110
|
|
|
(12,843)
|
|
(18)
|
|
Total other expenses
|
|
|
14,408
|
|
|
10,987
|
|
|
3,421
|
|
31
|
|
Net income (loss) attributable to CAI common stockholders
|
|
|
17,587
|
|
|
(5,451)
|
|
|
23,038
|
|
(423)
|
|
Total revenue for the three months ended
September
30
, 2017
increased $
11.
7
million, or
15
%, compared to the three months ended
September
30
, 201
6
, due to a $
12.2
million, or
25
%,
increase in container lease income
,
offset by a
$0.
3
million, or
4
%,
de
crease in
rail lease income
and
a
$
0
.2
million
, or
1
%,
de
crease in logistics revenue
. Operating expenses for the three months ended
September
30
, 2017
de
creased $
12.8
million, or
18
%, compared to the three months ended
September
30
, 201
6
, as a result of a $
2.
1
million, or
7%, de
crease in depreciation expense,
a $5.3 million, or 60%, decrease in storage, handling and other expenses,
a $
0.2
million
, or
1
%,
de
crease in logistics
transportation costs
,
a $
5.0
million, or
150
%,
decrease in loss on sale of used rental equipment, and a $0.3 million, or 3%, decrease
in administrative expenses.
Total o
ther
expense
s
, primarily net interest expense,
for the three months ended
September
30
, 2017
in
creased $
3.
4
million, or
3
1
%, compared with the
three months ended September 30, 2016
. The increase in revenue
and decrease
in operating expenses resulted in a $
23.0
million, or
4
23
%,
in
crease in net income attributable to CAI common stockholders for the three months ended
September
30
, 2017
compared to the
three months ended September 30, 2016
.
Revenue.
The following discussion explains the significant changes in the composition of our total revenue
for the three months ended
September
30
, 2017
,
compared to the three months ended
September
30
,
2016
:
Container Lease Income
.
Container lease income
increased
$
12.2
million, or
25
%, to $
61.9
million
for the three months ended
September
30,
2017
, from $
49.7
million for the three months ended
September
30
, 201
6
.
Rental revenue
increased by
$
10
.
7
million
,
primarily
due
to a
23
% increase in the average
number
of
CEUs of
on-lease owned containers
and
a
$0.9 million
increase
in handling revenues as a result of an increase in lease
-outs between the two periods.
The increase in
rental revenue
was
partially offset by
a
$
0
.
5
million
decrease
resulting from a
1
% decrease in average owned container per diem rental
rates
and a $0.5 million decrease in repair fees and other container revenue as a result of our efforts in the prior year to off-load older containers from our fleet
.
In addition to the net increase in rental revenue, there was an increase of $1.4 million in finance lease income as a result of an increase in our investment in direct finance leases.
Rail Lease Income.
Rail
lease income
de
creased $
0.
3
million, or
4
%, to $
7.3
million for the three months ended
September
30
, 2017,
from $
7.
6
million for the three months ended
September
30
, 2016
, primarily
due to
a
$0.4 million
de
crease
resulting from the expiration of a significant lease
.
Logistics Revenue.
Logistics revenue
remained relatively consistent between the two periods, decreasing by
$
0
.2
million, or
1
%, to
$
21.0
million
for the three month
s
ended
September
30
, 2017,
from $
21.2
million for the three months ended
September
30
, 2016
.
Expenses.
The following discussion explains the significant changes in expenses for the three months ended
September
30
, 2017
compared to the three months ended
September
30
, 2016
:
Depreciation of Rental Equipment.
Dep
reciation of rental equipment de
creased by $
2.1
million, or
7
%, to $
27.
8
million
for the three months ended
September
30
, 2017
, from $
29.9
million for the three months ended
September
30
, 2016
. This
de
crease was
primarily
due
to
the one-time impairment charge of $2.0 million, related to the Hanjin bankruptcy, record
ed
during the three months ended September 2016.
Increased depreciation caused by investment in the owned container fleet has been offset by the decreasing impact of the change in residual values that was made effective on July 1, 2016.
Storage, Handling and Other Expenses.
Storage, handling and other expenses
de
creased by $
5.3
million, or
60
%, to $
3.5
million for the three months ended
September
30
, 2017
, from $
8.8
million for the three months ended
September
30
, 2016
. The
decrease
was primarily attributable
to a $
3.
6
million
decrease
in
storage
costs
as the size of the off-lease fleet decreased and $1.5 million of insurance proceeds recorded related to repair costs associated with the previously reported Hanjin bankruptcy. These decreases were
partially offset by a $0.
5
million increase in
storage and handling expenses in the Rail business as the size of the fleet increased, and decreased utilization led to increased storage costs
.
Logistics
Transportation Costs
.
L
ogistics
transportation costs
remained relatively consistent between the two periods
, decreasing
by $
0.2
million, or
1
%,
to $
17.9
million
for the three months ended
September
30
, 2017
, from $
18.0
million
for the three months ended
September
30
, 2016
.
The gross margin generated from our logistics business
also remained consistent between the two periods at $3.2 million for both the three months ended September 30, 2017 and 2016
.
Gain
on
Sale
of Used Rental Equipment.
We
recorded
a
gain
on the sale of
used rental equipment
of $
1.7
million
during the three months ended
September
30
, 2017
, compared to
a loss
of
$
3.
3
million for the three
months ended
September
30
, 2016
.
While
we sold approximately
41
% less used containers compared to
the
prior year,
there was
an increase
of
1
75
% in the average margin per unit
, resulting in an increase in gain on sale of used rental equipment
.
Administrative Expenses.
A
dministrative expenses
de
creased by $
0.3
million, or
3
%, to $
10.8
million for the three months ended
September
30
, 2017
, from $
11.1
million for the three months ended
September
30
, 2016
.
Administrative expenses during the three months ended September 30, 2016 included $2.2 million of bad debt expense related to the Hanjin bankruptcy. Excluding this expense, administrative expenses would have increased by $1.9 million, primarily due to a $1.4 million increase in payroll-related costs as a result of an increase in headcount
and an increase in the bonus accrual
, as well as a $0.7 million increase in bad debt expense arising from certain slow paying
customers.
The
se
increase
s
w
ere
partially offset by a $0.6 million reduction
in
the contingent consideration liability
related to acquisitions
.
Net
Interest Expense
. Net interest expense
in
creased by $
3.1
million, or
28
%, to
$
14.0
million for the three months ended
September
30
, 2017
, from $
10
.
9
million for the three
months ended
September
30
, 2016
.
The increase was due to an increase in
the average loan principal balance between the two periods,
as well as
a
n
in
crease in
our
average interest rate,
caused by an increase in LIBOR,
from approximately 2.
6
% to
3.1
%.
Other
Expense
. Other
expense
increased
by $
0.
4
million, or
428
%, to $
0.
4
million for the three months ended
September
30
, 2017, from
a $0.
1
million
loss
for the three months ended
September
30
, 2016
,
due
to foreign exchange losses
. Gains and losses on foreign currency primarily occur when foreign denominated financial assets and liabilities are either settled or re-measured in U.S. dollars. The
loss
on foreign exchange for the three months ended
September
30
, 2017 was
caused primarily by settling intercompany loans that were denominated in Euros
.
Income Tax Expense.
Income
tax expense
decreased
by $
1.9
million, or
1
06
%, to
a
benefit
of
$
0.
1
million f
or the three months ended
September
30
, 2017
, from
an expense of
$
1.8
million for
the three months ended
September
30
, 2016
. The estimated effective tax rate
at
September
30
, 2017
was
1
.5
%, compared to
38
.0
% for the three months ended
September
30
, 2016
.
The lower estimated effective tax rate at
September
30
, 2017
was
due to
an
increase in the proportion of pretax income
generated
in lower tax jurisdictions.
Nine
Months Ended
September
30
, 2017 Compared to
Nine
Months Ended
September
30
, 2016
The following table summarizes our operating results for the
nine
months ended
September
30
, 2017 and 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
Increase
|
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Total revenue
|
|
$
|
254,359
|
|
$
|
217,080
|
|
$
|
37,279
|
|
17
|
%
|
Operating expenses
|
|
|
179,746
|
|
|
176,404
|
|
|
3,342
|
|
2
|
|
Total other expenses
|
|
|
38,567
|
|
|
31,942
|
|
|
6,625
|
|
21
|
|
Net income attributable to CAI common stockholders
|
|
|
35,497
|
|
|
5,377
|
|
|
30,120
|
|
560
|
|
Total revenue for
the
nine
months ended
September
30
, 2017 increased $
37.3
million, or
1
7
%, compared to the
nine
months ended
September
30
, 2016, due to a $
16.9
million, or
11
%, increase in container lease income, a $
1.
0
million, or
4
%, increase in rail lease income and a $
19.4
million, or
46
%, increase in logistics revenue. Operating
expenses for the
nine
months ended
September
30
, 2017
increased $
3.3
million, or
2
%, compared to the
nine
months ended
September
30
, 2016, as a result of a $
5.4
million, or
7
%, increase in depreciation expense, a $
16.
5
million, or
47
%, increase in logistics transportation costs, and a $
2.
5
million, or
9
%, increase in administrative expenses, offset by a $
10.5
million
, or
39
%,
decrease in storage, handing and other expenses
and a $
10.5
million, or 1
32
%, decrease in loss on sale of used rental equipment
. Total other expenses, primarily net interest expense, for the
nine
months ended
September
30
, 2017 increased $
6.
6
million, or
21
%, compared with the
nine months ended September 30, 2016
. The increase in revenue was
partially
offset by the increase in operating expenses, and resulted in a $
30.1
million, or
5
60
%,
in
crease in net income attributable to CAI common stockholders for the
nine
months ended
September
30
, 2017 compared
to the same
nine
-month period in 2016.
Revenue.
The following discussion explains the significant changes in the composition of our total revenue for the
nine
months ended
September
30
, 2017
,
compared to the
nine
months ended
September
30
, 2016
:
Container Lease Income.
Container lease income increased
$
16.9
million, or
11
%, to $
169.8
million for the
nine
months ended
September
30
, 2017, from $
152.9
million for the
nine
months ended
September
30
, 2016.
Rental revenue
increased by $
21.0
million due to a
1
5
% increase in the average number of CE
Us of on-lease owned containers, partially offset by
a $
4.3
million decrease res
ultin
g from a 3
% decrease in average owned container per diem rental rates. The reduction in average container per diem rental rates has been caused by competitive market pressure
.
Rail Lease Income.
Rail lease income increased $
1.
0
million, or
4
%, to $
23.5
million for the
nine
months ended
September
30
, 2017, from $
22.5
million
for the
nine
months ended
September
30
, 2016, primarily as a result of a
n
8
% increase in the average size of our on-lease railcar fleet during the last twelve months
, partially offset by
a
$0.4 million
decrease
resulting from the expiration of a significant lease
.
Logistics Revenue.
Logistics revenue
increased $
19.4
million, or
46
%, to $
61
.1
million for the
nine
months ended
September
30
, 2017,
from $
41.7
million for the
nine
months ended
September
30
, 2016. The increase was primarily due to an additional $
17.9
million of revenue from the acquisition of Challenger in February 2016 and Hybrid in June 2016, as well as new customers generating an additional $
1.
5
million of revenue at
CAI Logistics
.
Expenses.
The following discussion explains the significant changes in expenses for the
nine
months ended
September
30
, 2017
compared to the
nine
months ended
September
30
, 2016
:
Depreciation of Rental Equipment.
Depreciation of rental equipment increased
by $
5.4
million, or
7
%, to $
82.8
million
for the
nine
months ended
September
30
, 2017, from $
77.4
million for the
nine
months ended
September
30
, 2016. This increase was primarily attributable to an increase of $
4.4
million resulting from a decrease in the residual value estimate for 40-foot high cube dry van containers implemented in 2016, a $1.3 million write-off of rental equipment on lease to a bankrupt customer,
and
an increase of $
1.9
million in depreciation attributable to
our railcar fleet
, reflecting the increase in size of our railcar fleet over the past twelve months.
The increase was partially offset by a decrease due to the one-time impairment charge of $2.0 million, related to the Hanjin bankruptcy, recorded during the nine months ended September 2016.
Storage, Handling and Other Expenses.
Storage,
handling and other expenses decreased by $
10.5
million, or
39
%, to $
16.7
million for the
nine
months ended
September
30
, 2017, from $
27.2
million for the
nine
months ended
September
30
, 2016. The decrease was primarily attributable to a $
10.6
million decrease in storage costs
as the size of the off-lease fleet decreased
compared to the prior
year
and $1.5 million of insurance proceeds recorded related to repair costs associated with the previously reported Hanjin bankruptcy. These decreases were partially offset by a $1.
3
million increase in storage and handling expenses in the Rail business as the size of the fleet increased
, while utilization decreased by 5%,
and an increase of $0.
5
million
in
container liability insurance
premium
resulting from the Hanjin insurance claim
.
Logistics Transportation Costs.
L
ogistics transportation costs increased
by $
16.
5
million, or
47
%, to $
51.6
million for the
nine
months ended
September
30
, 2017
, from $
35
.1
million for the
nine
months ended
September
30
, 2016
. The increase was mainly attributable to
an additional $
15.3
million of costs from
the acquisition of Challenger in February 2016 and Hybrid in June 2016
, as well as an increase of $1.
2
million in
CAI Logistics
costs as a result of new customer activity. The gross margin generated from our logistics business increased from $
6.6
million for the
nine
months ended
September
30
, 2016 to $
9.5
million for the
nine
months ended
September
30
, 2017, primarily due to the acquisitions made in
the logistics business in
2016.
Gain
on Sale
of Used Rental Equipment.
We
recorded a gain
on the sale of used rental equipment of $
2.5
million during the
nine
months ended
September
30
, 2017
, compared to a loss of $
8.0
million for the
nine
months ended
September
30
, 2016.
While we sold 13% less used containers compared to
the
prior year, there
was
a
n
increase
of
137
% in the average margin per
unit
, resulting in
a
gain
on sale of used rental equipment.
Administrative Expenses.
Administrative expenses increased
by $
2.5
million, or
9
%, to $
31.2
million for the
nine
months ended
September
30
, 2017, from $
28.8
million for the
nine
months ended
September
30
, 2016.
The increase was primarily a result of $3.
7
million of
additional
administrative expenses incurred by our newly acquired logistics companies, partially offset by a $
1.2
million reduction in the contingent consideration liability related to the acquisitions.
Net Interest Expense
. Net interest expense increased
by $
6.4
million, or
20
%, to $
37.9
million for the
nine
months ended
September
30
, 2017, from $
31.5
million for the
nine
months ended
September
30
, 2016.
The increase was due to an increase in the average loan principal balance between the two periods, as well as an increase in our average interest rate, caused by an increase in LIBOR, from approximately 2.6% to 3.1%.
Other Expense
. Other expense
in
creased by $
0.2
million, or
60
%, to $0.
7
million for the
nine
months ended
September
30
, 2017, from $0.
4
million for the
nine
months ended
September
30
, 2016
, which related to foreign exchange losses. Gains and losses on foreign currency primarily occur when foreign denominated financial assets and liabilities
are either settled or re-measured in U.S. dollars. The loss on foreign exchange for the three months ended
September
30, 2017 was caused primarily by settling intercompany loans that were denominated in Euros.
Income Tax Expense.
Income tax expense decreased
by $
2.8
million, or
83
%, to $0.
5
million for the
nine
months ended
September
30
, 2017, from $
3.3
million for the
nine
months ended
September
30
, 2016. The estimated effective tax rate at
September
30
, 2017
was
1
.5
%, compared to
38
.0
% for the
nine
months ended
September
30
, 2016. The lower estimated effective tax rate at
September
30
, 2017
was due to an increase in the proportion of pretax
income generated in lower tax jurisdictions.
Liquidity and Capital Resources
As of
September
30, 2017, we had cash and cash equivalents of $
35.0
million
, including $22.4 million of cash held by variable interest entities
.
Our principal sources of liquidity
are
cash
in-
flows
provided by operating activities
,
proceeds from the sale of rental equipment
, borrowings from financial institutions
,
and equity offerings.
Our cash in-flows are used to finance capital expenditures and meet debt service requirements.
As of
September
30, 2017,
our outstanding indebtedness
and current maximum borrowing level
was comprised of the following (in thousands)
:
|
|
|
|
|
|
|
|
|
Current
|
|
Current
|
|
|
Amount
|
|
Maximum
|
|
|
Outstanding
|
|
Borrowing Level
|
Revolving credit facilities
|
|
$
|
675,534
|
|
$
|
1,489,540
|
Term loans
|
|
|
301,665
|
|
|
301,665
|
Senior secured notes
|
|
|
64,995
|
|
|
64,995
|
Asset-backed notes
|
|
|
459,618
|
|
|
459,618
|
Collateralized financing obligations
|
|
|
90,708
|
|
|
90,708
|
Term loans held by VIE
|
|
|
3,743
|
|
|
3,743
|
|
|
|
1,596,263
|
|
|
2,410,269
|
Debt issuance costs
|
|
|
(12,353)
|
|
|
-
|
Total
|
|
$
|
1,583,910
|
|
$
|
2,410,269
|
As of
September
30, 2017, we had $
813.9
million in availability under our revolving credit facilities (net of $0.1 million in letters of credit) subject to our ability to meet the collateral requirements under the agreements governing the facilities. Based on the borrowing base and collateral requirements at
September
30, 2017, the borrowing availability under our revolving credit facilities was
$
74.6
million, assuming no additional contributions of assets.
On July 6, 2017, CAL Funding III Limited (CAL Funding III), a wholly-owned indirect subsidiary of CAI, issued $240.9 million of 3.6% Class A fixed rate asset-backed notes and $12.2 million of 4.6% Class B fixed rate asset-backed notes (collectively, the Notes). Principal and interest on the Notes is payable monthly commencing on July 25, 2017, with the Notes maturing in June 2042. The proceeds from the Notes
were
used for general corporate purposes, including repayment of outstanding debt. The Notes are secured by all of the assets of CAL Funding III.
For further information on our debt instruments, see Note 9 to the consolidated financial statements in this Quarterly Report on Form 10-Q and Note 10 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 13, 2017
.
Assuming that our lenders remain solvent, we currently
believe that cash
provided by operating activities and existing cash, proceeds from the sale
of
rental equipment,
and borrowing availability under our
debt
facilities are sufficient to meet our liquidity needs for at least the next
twelve
months.
We will continue to monitor our liquidity and the credit markets.
In addition to customary events of default, our revolving credit facilities and term loans contain restrictive covenants, including limitations on certain liens, indebtedness and investments. In addition, all of our debt facilities contain various restrictive financial and other covenants. The financial covenants in our debt facilities require us to maintain
:
(1) a consolidated funded debt to consolidated tangible net worth ratio of
no more than
3.75:1.00
, and in the case of our asset-backed notes, of no more than 4.50:
1.00
; and (2) a fixed charge coverage ratio of
at least
1.20:1.00
, and in the case of our asset-backed notes, of at least 1.10:1.00
. As of
September
30
, 2017
, we were in compliance with all of
the applicable
debt covenants.
Cash Flow
The following table sets forth certain cash flow information for the
nine
months ended
September
30
, 2017
and 201
6
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
Net income
|
|
$
|
35,497
|
|
$
|
5,414
|
Net income adjusted for non-cash items
|
|
|
120,495
|
|
|
99,098
|
Changes in working capital
|
|
|
(15,737)
|
|
|
(5,230)
|
Net cash provided by operating activities
|
|
|
104,758
|
|
|
93,868
|
Net cash used in investing activities
|
|
|
(216,635)
|
|
|
(123,249)
|
Net cash provided by financing activities
|
|
|
100,316
|
|
|
14,293
|
Effect on cash of foreign currency translation
|
|
|
380
|
|
|
1
|
Net decrease in cash
|
|
|
(11,181)
|
|
|
(15,087)
|
Cash at beginning of period
|
|
|
46,134
|
|
|
52,553
|
Cash at end of period
|
|
$
|
34,953
|
|
$
|
37,466
|
Operating Activities Cash Flows
Net cash provided by operating activities of $
104.8
million for the
nine
months ended
September
30
, 2017
,
in
creased
$
10.9
million from $
93.
9
million for the
nine
months ended
September
30
, 2016
. The
in
crease was due to a $
21.
4
million
increase
in net income as adjusted for depreciation, amortization and other non-cash items
, offset by
a
$
10.5
million
decrease
in our net working capital adjustments.
The
increase
in net income as adjusted for non-ca
sh items was primarily due to
an increase of
$
30.1
million in net income, an increase of
$
5.5
million in depreciation expense
, and
an increase of $
0.9
million in
amortization of intangible assets,
partially offset by
a
$
10.5
million decrease in the loss on sale of used rental equipment,
a $
1
.8
million
de
crease in deferred income taxes
,
a $1.7 million decrease in bad debt expense,
and
a $
1.2
million reduction in contingent consideration
.
Net
working capital
used in operating activities of
$
15.7
million in the
nine
months ended
September
30
,
2017
,
was
due to a
$
6.3
million increase in accounts receivable, primarily
caused by
an increase in
lease and logistics activity
,
a
$
5.9
million
decrease
in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments
,
a
$3.0 million decrease in due to container investors
due to the decrease in our managed fleet,
and
a
$
0.5
million
dec
rease
in
unearned revenue
. Net working capital
used
in
operating activities of
$
5.2
million in the
nine
months ended
September
30
, 2016
,
was
due to a
$
7.6
million
increase in accounts receivable, primarily
a result of
the
logistics acquisitions
, partially offset by a $
1.5
million
in
crease in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments, and
a
$
1.0
million
in
crease in
unearned revenue
.
Investing Activities Cash Flows
Net cash used in investing activities
in
creased $
93.4
million
to $
216.6
million for the
nine
months ended
September
30
, 2017
,
from $
123.2
million for the
nine
months ended
September
30
, 2016
. The
in
crease in cash usage was primarily attributable to a
$107.2 million increase in the purchase of rental equipment and a $
5.0
million decrease in receipt of principal payments from direct financing leases, partially offset by a
$
15
.
6
million decrease in acquisition costs
and
a $
2.7
million increase in proceeds from the sale of used containers
.
Financing
Activities Cash Flows
Net cash
provided by
financing activities for the
nine
months ended
September
30
, 2017
,
inc
reased
$
86.0
million compared to the
nine
months ended
September
30
, 2016
. During the
nine
months ended
September
30
, 2017
, our net cash
in
flow
from
borrowings was $
108.1
million compared to $
24.2
million for the
nine
months ended
September
30
, 2016
, reflecting
a
n increase
in
net
borrowings used for the acquisition of rental
equipment during the
nine
months ended
September
30
, 2017
,
compared to the
nine
months ended
September
30
, 2016
.
Th
e increase was also a result of
a decrease of $
9.2
million used to repurchase our stock
pursuant to our previously announced stock repurchase plan
and a $
1.4
million increase in proceeds received
from
the exercise of stock options
, partially offset by a $6.8 million increase in restricted cash and a $1.7 million increase in debt issuance costs, both primarily related to the asset-backed notes issued in the current year.
Stock Repurchase Plan
On December 14, 2015, we announced that our Board of Directors had approved the repurchase of up to one million shares of our outstanding common stock.
On February 4, 2016, the Company’s Board of Directors approved a one million share increase in the previously approved share repurchase program
,
bringing the total authorized for repurchase to two million shares of our outstanding common stock. T
he number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liqu
idity needs and other factors.
Stock repurchases may be made in the open market, block trades or priv
ately negotiated transactions.
The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock
. As of
September
30
, 2017
, approximately 0.8 million shares remained available for repurchase under our share repurchase plan.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments by due date as of
September
30
, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less than
|
|
1-2
|
|
2-3
|
|
3-4
|
|
4-5
|
|
More than
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
years
|
|
years
|
|
5 years
|
Total debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
$
|
675,534
|
|
$
|
-
|
|
$
|
-
|
|
$
|
421,534
|
|
$
|
254,000
|
|
$
|
-
|
|
$
|
-
|
Term loans
|
|
301,665
|
|
|
42,318
|
|
|
17,862
|
|
|
118,511
|
|
|
122,974
|
|
|
-
|
|
|
-
|
Senior secured notes
|
|
64,995
|
|
|
6,110
|
|
|
6,110
|
|
|
6,110
|
|
|
6,110
|
|
|
40,555
|
|
|
-
|
Asset-backed notes
|
|
459,618
|
|
|
65,307
|
|
|
65,307
|
|
|
65,307
|
|
|
65,307
|
|
|
65,307
|
|
|
133,083
|
Collateralized financing obligations
|
|
90,708
|
|
|
23,365
|
|
|
37,468
|
|
|
29,875
|
|
|
-
|
|
|
-
|
|
|
-
|
Term loans held by VIE
|
|
3,743
|
|
|
-
|
|
|
3,743
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Interest on debt and capital lease obligations (1)
|
|
153,276
|
|
|
46,815
|
|
|
43,831
|
|
|
30,235
|
|
|
13,833
|
|
|
7,930
|
|
|
10,632
|
Rental equipment payable
|
|
190,180
|
|
|
190,180
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Rent, office facilities and equipment
|
|
4,342
|
|
|
2,140
|
|
|
1,801
|
|
|
230
|
|
|
97
|
|
|
74
|
|
|
-
|
Equipment purchase commitments - Containers
|
|
63,927
|
|
|
63,927
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Equipment purchase commitments - Rail
|
|
150,179
|
|
|
113,478
|
|
|
36,701
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total contractual obligations
|
$
|
2,158,167
|
|
$
|
553,640
|
|
$
|
212,823
|
|
$
|
671,802
|
|
$
|
462,321
|
|
$
|
113,866
|
|
$
|
143,715
|
|
(1)
|
|
Our estimate of
interest
expense commitment includes $
51.1
million relating to our revolving credit facilities, $
24.0
million relating to our term loans, $
12.6
million relating to our senior secured notes, $
63.5
million relating to our asset back notes, $
2.1
million relating to our collateralized financing obligations,
and
$0.
1
million relat
ing
to our term loans held by VIEs. The calculation of interest commitment related to our debt assumes the following weighted-average interest rates as of
September
30
, 2017
: revolving credit facilities,
2.
9
%; term loans,
3.1
%; senior secured notes, 4.9%; asset-backed notes,
3.5
%; collateralized financing obligations,
1.
3
%;
and
term loans held by VIE, 2.
7
%. These calculations assume that weighted-average interest rates will remain at the same level over the next five years. We expect that interest rates will vary over time based upon fluctuations in the underlying indexes upon which these rates are based.
|
Off-Balance Sheet Arrangements
As of
September
30
, 2017
, we had no material off-balance sheet arrangements or obligations
that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors
.
Critical Accounting Policies and Estimates
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
our
container equipment are based on historical disposal experience and
our
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 our equipment or assigned residual values, which
would suggest that a change in depreciation
estimates
is warranted.
After
we
conducted
our
regular depreciation policy review for 2016,
we
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 our 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 ende
d
September
30
, 2017.
We continuously monitor disposal prices across our entire portfolio for indications of a sustained market downturn. If necessary, we will adjust our estimates
if there are indicators that the current weak market for containers will be sustained over a longer time horizon.
There have been no changes to our
critical
accounting policies during the
nine
months ended
September
30
, 2017
.
Recent Accounting Pronouncements
In August 2016, the
F
inancial
A
ccounting
S
tandards
B
oard
(FASB)
issued Accounting Standards Update (ASU) No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. In November 2016, the FASB also issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which will require
amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows
. ASU 2016-15 and ASU 2016-18 are effective for interim and annual periods beginning after December 15, 2017, using a retrospective transition method
to each period presented
. We are currently evaluating the potential impact adoption of the standard will have on our consolidated statements of cash flows.
In February 2016, the
FASB issued ASU
No. 2016-02,
Leases (Topic 842)
(ASU 2016-02).
The FASB issued
ASU 2016-02
to increase transparency and comparability among organization
s
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Under ASU 2016-02, lessors will account for leases using an approach that is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases
and operating leases
. Unlike current guidance
,
however,
a lease with collecta
bility uncertainties may be classified as a sales-type lease. If collect
a
bility of lease payments, plus any amount necessary to satisfy a lessee residual value guarantee, is not probable, lease payments received
will be
recognized
as a deposit liability and the underlying assets will not be
derecognized until collecta
bility of the remaining amounts becomes probable.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted
, and
must be adopted using a modified retrospective transition. We
plan to adopt this guidance effective January 1, 2019 and
are currently evaluating the potential impact adoption will have on our consolidated financial statements
and related disclosures
.
In May 2014, the
FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09), which supersedes previous revenue recognition guidance. ASU 2014-09 requires
that a company recognize
revenue
when it
transfer
s promised
goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts.
In July 2016, the FASB deferred the effective date for
interim and annual periods beginning after December 15, 2017
. Early adoption is permitted to the original effective date of periods beginning after December 15, 2016
.
The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.
We plan to adopt this guidance effective January 1, 2018 using the modified retrospective approach
and are currently in the process of evaluating the impact adoption will have on our consolidated financial statements and related disclosures
.
While we have not completed our
full
assessment,
we do not believe that adoption will have a material impact on the amount or timing of revenue recognized or our revenue recognition policies.
We expect to complete our assessment of the impact towards the end of 2017.
The most recent
adopted
accounting pronouncements are described in Note 2(b) to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.