UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020March 31, 2021
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33388
CAI International, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 94-3109229 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
Steuart Tower, 1 Market Plaza, Suite 2400 |
|
|
San Francisco, California |
| 94105 |
(Address of principal executive offices) |
| (Zip Code) |
415-788-0100
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Le | ||
Title of each class | Trading symbols | Name of exchange on which registered |
Common Stock, par value $0.0001 per share | CAI | New York Stock Exchange |
8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share | CAI-PA | New York Stock Exchange |
8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share | CAI-PB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | x |
Non-accelerated filer | o | Smaller reporting company | o |
Emerging growth company | o | ||
If an emerging growth company, indicate by check mark of the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock |
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Common Stock, $0.0001 par value per share |
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CAI INTERNATIONAL, INC.
INDEX
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| Page No. |
4 | ||
Item 1. | 4 | |
| Consolidated Balance Sheets at | 4 |
6 | ||
| 7 | |
8 | ||
| 9 | |
| 11 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. |
| |
Item 4. |
| |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular,but not limited to, statements relating to our business, operations, growth strategy, service development efforts our plans regarding our logistics business and the impact of the novel coronavirus (COVID-19) on our business, financial condition, liquidity and results of operations. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the Securities and Exchange Commission (SEC) on March 5, 2020, this1, 2021, our Quarterly ReportReports on Form 10-Q and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
(UNAUDITED)
June 30, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Assets | ||||||||||||
Current assets | ||||||||||||
Cash | $ | 20,159 | $ | 19,870 | $ | 23,971 | $ | 26,691 | ||||
Cash held by variable interest entities | 27,703 | 26,594 | 23,942 | 26,856 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $3,942 and | ||||||||||||
$7,671 at June 30, 2020 and December 31, 2019, respectively | 70,020 | 72,984 | ||||||||||
Current portion of restricted cash | 600 | 600 | ||||||||||
Accounts receivable, net of allowance for doubtful accounts of $400 and | ||||||||||||
$393 at March 31, 2021 and December 31, 2020, respectively | 61,843 | 65,310 | ||||||||||
Current portion of net investment in finance leases | 75,906 | 71,274 | 80,308 | 78,992 | ||||||||
Current portion of financing receivable | 10,615 | 9,550 | ||||||||||
Prepaid expenses and other current assets | 14,880 | 9,606 | 5,788 | 6,663 | ||||||||
Assets held for sale | 13,143 | 37,781 | ||||||||||
Total current assets | 221,811 | 238,109 | 207,067 | 214,662 | ||||||||
Restricted cash | 22,188 | 26,775 | 12,087 | 12,355 | ||||||||
Rental equipment, net of accumulated depreciation of $660,418 and | ||||||||||||
$620,990 at June 30, 2020 and December 31, 2019, respectively | 1,978,826 | 2,102,839 | ||||||||||
Rental equipment, net of accumulated depreciation of $691,842 and | ||||||||||||
$669,360 at March 31, 2021 and December 31, 2020, respectively | 1,808,001 | 1,781,321 | ||||||||||
Net investment in finance leases | 463,251 | 496,094 | 585,016 | 550,573 | ||||||||
Financing receivable | 53,821 | 30,693 | 50,568 | 48,888 | ||||||||
Derivative instruments | 9,586 | - | ||||||||||
Other non-current assets | 6,036 | 7,255 | 4,280 | 4,833 | ||||||||
Total assets (1) | $ | 2,745,933 | $ | 2,901,765 | $ | 2,676,605 | $ | 2,612,632 | ||||
Liabilities and Stockholders' Equity | ||||||||||||
Current liabilities | ||||||||||||
Accounts payable | $ | 4,557 | $ | 4,534 | $ | 3,231 | $ | 3,666 | ||||
Accrued expenses and other current liabilities | 24,365 | 25,206 | 26,569 | 29,598 | ||||||||
Unearned revenue | 6,802 | 6,405 | 3,260 | 3,029 | ||||||||
Current portion of debt | 251,250 | 218,094 | 183,878 | 183,448 | ||||||||
Rental equipment payable | 3,356 | 25,137 | 61,582 | 100,509 | ||||||||
Liabilities held for sale | 6,517 | 8,752 | ||||||||||
Total current liabilities | 296,847 | 288,128 | 278,520 | 320,250 | ||||||||
Debt | 1,728,310 | 1,880,122 | 1,642,879 | 1,562,283 | ||||||||
Deferred income tax liability | 29,161 | 35,376 | ||||||||||
Derivative instruments | - | 80 | ||||||||||
Net deferred income tax liability | 25,532 | 24,442 | ||||||||||
Other non-current liabilities | 4,148 | 4,899 | 3,467 | 3,337 | ||||||||
Total liabilities (2) | 2,058,466 | 2,208,525 | 1,950,398 | 1,910,392 | ||||||||
Stockholders' equity | ||||||||||||
Preferred stock, par value $0.0001 per share; authorized 10,000,000 | ||||||||||||
8.50% Series A fixed-to-floating rate cumulative redeemable perpetual preferred stock, issued and | ||||||||||||
outstanding 2,199,610 shares, at liquidation preference | 54,990 | 54,990 | 54,990 | 54,990 | ||||||||
8.50% Series B fixed-to-floating rate cumulative redeemable perpetual preferred stock, issued and | ||||||||||||
outstanding 1,955,000 shares, at liquidation preference | 48,875 | 48,875 | 48,875 | 48,875 | ||||||||
Common stock, par value $0.0001 per share; authorized 84,000,000 shares; issued and outstanding | ||||||||||||
17,553,491 and 17,479,127 shares at June 30, 2020 and December 31, 2019, respectively | 2 | 2 | ||||||||||
17,304,111 and 17,562,779 shares at March 31, 2021 and December 31, 2020, respectively | 2 | 2 | ||||||||||
Additional paid-in capital | 103,342 | 102,709 | 89,308 | 100,795 | ||||||||
Accumulated other comprehensive loss | (6,666) | (6,630) | 1,370 | (5,743) | ||||||||
Retained earnings | 486,924 | 493,294 | 531,662 | 503,321 | ||||||||
Total stockholders' equity | 687,467 | 693,240 | 726,207 | 702,240 | ||||||||
Total liabilities and stockholders' equity | $ | 2,745,933 | $ | 2,901,765 | $ | 2,676,605 | $ | 2,612,632 | ||||
(1)Total assets at June 30, 2020March 31, 2021 and December 31, 20192020 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $27,703$23,942 and $26,59426,856; Net investment in finance leases, $4,112$2,150 and $4,790;$2,683; and Rental equipment, net of accumulated depreciation, $90,865,$73,212, and $101,907,$77,907, respectively.
(2)Total liabilities at June 30, 2020March 31, 2021 and December 31, 20192020 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $33,175$43,392 and $26,931;$41,344; Debt, $82,975$48,120 and $100,849,$59,519, respectively.
See accompanying notes to unaudited consolidated financial statements.
CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||
Revenue | ||||||||||||||||||||||
Container lease revenue | $ | 69,443 | $ | 74,286 | $ | 138,556 | $ | 149,797 | ||||||||||||||
Rail lease revenue | 6,282 | 6,462 | 12,085 | 14,343 | ||||||||||||||||||
Total revenue | 75,725 | 80,748 | 150,641 | 164,140 | ||||||||||||||||||
Leasing revenue | ||||||||||||||||||||||
Operating leases | $ | 63,867 | $ | 54,629 | ||||||||||||||||||
Finance leases | 13,245 | 11,590 | ||||||||||||||||||||
Other | 3,688 | 2,894 | ||||||||||||||||||||
Total leasing revenue | 80,800 | 69,113 | ||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||
Depreciation of rental equipment | 28,846 | 29,816 | 55,894 | 61,599 | 28,551 | 27,048 | ||||||||||||||||
Impairment of rental equipment | 557 | 7,323 | 19,724 | 7,323 | ||||||||||||||||||
Storage, handling and other expenses | 6,474 | 5,199 | 12,222 | 10,319 | 2,489 | 4,429 | ||||||||||||||||
Gain on sale of rental equipment | (2,108) | (265) | (3,722) | (9,097) | (6,743) | (1,647) | ||||||||||||||||
Administrative expenses | 7,389 | 8,049 | 15,053 | 17,223 | 7,740 | 6,895 | ||||||||||||||||
Total operating expenses | 41,158 | 50,122 | 99,171 | 87,367 | 32,037 | 36,725 | ||||||||||||||||
Operating income | 34,567 | 30,626 | 51,470 | 76,773 | 48,763 | 32,388 | ||||||||||||||||
Other expenses | ||||||||||||||||||||||
Net interest expense | 17,595 | 23,209 | 37,974 | 47,063 | 11,172 | 18,274 | ||||||||||||||||
Other (income) expense | (97) | 119 | 149 | 157 | ||||||||||||||||||
Other expense | 410 | 246 | ||||||||||||||||||||
Total other expenses | 17,498 | 23,328 | 38,123 | 47,220 | 11,582 | 18,520 | ||||||||||||||||
Income before income taxes | 17,069 | 7,298 | 13,347 | 29,553 | 37,181 | 13,868 | ||||||||||||||||
Income tax expense (benefit) | 1,113 | 583 | (1,943) | 2,732 | ||||||||||||||||||
Income tax expense | 2,504 | 1,199 | ||||||||||||||||||||
Income from continuing operations | 15,956 | 6,715 | 15,290 | 26,821 | 34,677 | 12,669 | ||||||||||||||||
Loss from discontinued operations, net of income taxes | (16,582) | (1,221) | (17,246) | (2,753) | ||||||||||||||||||
Net (loss) income | (626) | 5,494 | (1,956) | 24,068 | ||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 1,063 | (13,999) | ||||||||||||||||||||
Net income (loss) | 35,740 | (1,330) | ||||||||||||||||||||
Preferred stock dividends | 2,207 | 2,207 | 4,414 | 4,414 | 2,207 | 2,207 | ||||||||||||||||
Net (loss) income attributable to CAI common stockholders | $ | (2,833) | $ | 3,287 | $ | (6,370) | $ | 19,654 | ||||||||||||||
Net income (loss) attributable to CAI common stockholders | $ | 33,533 | $ | (3,537) | ||||||||||||||||||
Amounts attributable to CAI common stockholders | ||||||||||||||||||||||
Net income from continuing operations | $ | 13,749 | $ | 4,508 | $ | 10,876 | $ | 22,407 | $ | 32,470 | $ | 10,462 | ||||||||||
Net loss from discontinued operations | (16,582) | (1,221) | (17,246) | (2,753) | ||||||||||||||||||
Net (loss) income attributable to CAI common stockholders | $ | (2,833) | $ | 3,287 | $ | (6,370) | $ | 19,654 | ||||||||||||||
Net income (loss) from discontinued operations | 1,063 | (13,999) | ||||||||||||||||||||
Net income (loss) attributable to CAI common stockholders | $ | 33,533 | $ | (3,537) | ||||||||||||||||||
Net (loss) income per share attributable to CAI | ||||||||||||||||||||||
Net income (loss) per share attributable to CAI | ||||||||||||||||||||||
common stockholders | ||||||||||||||||||||||
Basic | ||||||||||||||||||||||
Continuing operations | $ | 0.79 | $ | 0.26 | $ | 0.62 | $ | 1.24 | $ | 1.88 | $ | 0.60 | ||||||||||
Discontinued operations | (0.95) | (0.07) | (0.99) | (0.15) | 0.06 | (0.80) | ||||||||||||||||
Total basic | $ | (0.16) | $ | 0.19 | $ | (0.37) | $ | 1.09 | $ | 1.94 | $ | (0.20) | ||||||||||
Diluted | ||||||||||||||||||||||
Continuing operations | $ | 0.78 | $ | 0.25 | $ | 0.62 | $ | 1.22 | $ | 1.85 | $ | 0.59 | ||||||||||
Discontinued operations | (0.94) | (0.07) | (0.98) | (0.15) | 0.06 | (0.79) | ||||||||||||||||
Total diluted | $ | (0.16) | $ | 0.18 | $ | (0.36) | $ | 1.07 | $ | 1.91 | $ | (0.20) | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||
Basic | 17,470 | 17,648 | 17,451 | 18,098 | 17,271 | 17,433 | ||||||||||||||||
Diluted | 17,601 | 17,926 | 17,641 | 18,401 | 17,518 | 17,715 | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
(In thousands)
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Net (loss) income | $ | (626) | $ | 5,494 | $ | (1,956) | $ | 24,068 | ||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Foreign currency translation adjustments | 101 | 5 | (36) | (76) | ||||||||
Comprehensive (loss) income before preferred stock dividends | (525) | 5,499 | (1,992) | 23,992 | ||||||||
Dividends on preferred stock | (2,207) | (2,207) | (4,414) | (4,414) | ||||||||
Comprehensive (loss) income available to CAI | ||||||||||||
common stockholders | $ | (2,732) | $ | 3,292 | $ | (6,406) | $ | 19,578 | ||||
Three Months Ended March 31, | ||||||
2021 | 2020 | |||||
Net income (loss) | $ | 35,740 | $ | (1,330) | ||
Other comprehensive income (loss), net of tax: | ||||||
Change in fair value of derivative instruments designated as cash flow hedges | 9,509 | - | ||||
Reclassification of realized loss on derivative instruments designated as cash flow hedges | 157 | - | ||||
Foreign currency translation adjustments | (522) | (137) | ||||
Comprehensive income (loss) before tax | 44,884 | (1,467) | ||||
Income tax expense related to items of other comprehensive income (loss) | (2,031) | - | ||||
Comprehensive income (loss) before preferred stock dividends, net of tax | 42,853 | (1,467) | ||||
Dividends on preferred stock | (2,207) | (2,207) | ||||
Comprehensive income (loss) available to CAI common stockholders | $ | 40,646 | $ | (3,674) | ||
See accompanying notes to unaudited consolidated financial statements.
CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(UNAUDITED)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Total | Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Total | |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | |||||||||||||||||||||||||||||
Balances as of December 31, 2019 | 4,155 | $ | 103,865 | 17,479 | $ | 2 | $ | 102,709 | $ | (6,630) | $ | 493,294 | $ | 693,240 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (1,330) | (1,330) | ||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2020 | 4,155 | $ | 103,865 | 17,563 | $ | 2 | $ | 100,795 | $ | (5,743) | $ | 503,321 | $ | 702,240 | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 35,740 | 35,740 | ||||||||||||||||||||||||||||||||||||
Common stock dividend declared, $0.30/share | (5,192) | (5,192) | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends, $0.53125/share | - | - | - | - | - | - | (2,207) | (2,207) | - | - | - | - | - | - | (2,207) | (2,207) | ||||||||||||||||||||||||||||
Change in fair value of derivative instrument designated | ||||||||||||||||||||||||||||||||||||||||||||
as cash flow hedges | - | - | - | - | - | 9,509 | - | 9,509 | ||||||||||||||||||||||||||||||||||||
Reclassification of realized loss on derivative | ||||||||||||||||||||||||||||||||||||||||||||
instruments designated as cash flow hedges | - | - | - | - | - | 157 | - | 157 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (137) | - | (137) | - | - | - | - | - | (522) | - | (522) | ||||||||||||||||||||||||||||
Income tax expense related to items of other | ||||||||||||||||||||||||||||||||||||||||||||
comprehensive income | - | - | - | - | - | (2,031) | - | (2,031) | ||||||||||||||||||||||||||||||||||||
Repurchase of common stock | - | - | (390) | - | (12,788) | - | - | (12,788) | ||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | - | 8 | - | 113 | - | - | 113 | - | - | 107 | - | 1,499 | - | - | 1,499 | ||||||||||||||||||||||||||||
Stock-based compensation, net of taxes | - | - | 19 | - | 468 | - | - | 468 | - | - | 24 | - | (198) | - | - | (198) | ||||||||||||||||||||||||||||
Balances as of March 31, 2020 | 4,155 | $ | 103,865 | 17,506 | $ | 2 | $ | 103,290 | $ | (6,767) | $ | 489,757 | $ | 690,147 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (626) | (626) | ||||||||||||||||||||||||||||||||||||
Preferred stock dividends, $0.53125/share | - | - | - | - | - | - | (2,207) | (2,207) | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 101 | - | 101 | ||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | - | 3 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of taxes | - | - | 44 | - | 52 | - | - | 52 | ||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2020 | 4,155 | $ | 103,865 | 17,553 | $ | 2 | $ | 103,342 | $ | (6,666) | $ | 486,924 | $ | 687,467 | ||||||||||||||||||||||||||||||
Balances as of March 31, 2021 | 4,155 | $ | 103,865 | 17,304 | $ | 2 | $ | 89,308 | $ | 1,370 | $ | 531,662 | $ | 726,207 | ||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Total | Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Total | |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | |||||||||||||||||||||||||||||
Balances as of December 31, 2018 | 4,155 | $ | 103,865 | 18,764 | $ | 2 | $ | 132,666 | $ | (6,513) | $ | 471,112 | $ | 701,132 | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 18,574 | 18,574 | ||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2019 | 4,155 | $ | 103,865 | 17,479 | $ | 2 | $ | 102,709 | $ | (6,630) | $ | 493,294 | $ | 693,240 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (1,330) | (1,330) | ||||||||||||||||||||||||||||||||||||
Preferred stock dividends, $0.53125/share | - | - | - | - | - | - | (2,207) | (2,207) | - | - | - | - | - | - | (2,207) | (2,207) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | (81) | - | (81) | - | - | - | - | - | (137) | - | (137) | ||||||||||||||||||||||||||||
Repurchase of common stock | - | - | (595) | - | (13,946) | - | - | (13,946) | ||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | - | 27 | - | 107 | - | - | 107 | - | - | 8 | - | 113 | - | - | 113 | ||||||||||||||||||||||||||||
Stock-based compensation, net of taxes | - | - | 12 | - | 730 | - | - | 730 | - | - | 19 | - | 468 | - | - | 468 | ||||||||||||||||||||||||||||
Balances as of March 31, 2019 | 4,155 | $ | 103,865 | 18,208 | $ | 2 | $ | 119,557 | $ | (6,594) | $ | 487,479 | $ | 704,309 | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 5,494 | 5,494 | ||||||||||||||||||||||||||||||||||||
Preferred stock dividends, $0.53125/share | - | - | - | - | - | - | (2,207) | (2,207) | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 5 | - | 5 | ||||||||||||||||||||||||||||||||||||
Repurchase of common stock | - | - | (863) | (20,172) | (20,172) | |||||||||||||||||||||||||||||||||||||||
Exercise of stock options | - | - | 35 | - | 228 | - | - | 228 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of taxes | - | - | 40 | - | 688 | - | - | 688 | ||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2019 | 4,155 | $ | 103,865 | 17,420 | $ | 2 | $ | 100,301 | $ | (6,589) | $ | 490,766 | $ | 688,345 | ||||||||||||||||||||||||||||||
Balances as of March 31, 2020 | 4,155 | $ | 103,865 | 17,506 | $ | 2 | $ | 103,290 | $ | (6,767) | $ | 489,757 | $ | 690,147 | ||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Cash flows from operating activities | ||||||||||||
Net (loss) income | $ | (1,956) | $ | 24,068 | ||||||||
Loss from discontinued operations, net of income taxes | (17,246) | (2,753) | ||||||||||
Net income (loss) | $ | 35,740 | $ | (1,330) | ||||||||
Income (loss) from discontinued operations, net of income taxes | 1,063 | (13,999) | ||||||||||
Income from continuing operations | 15,290 | 26,821 | 34,677 | 12,669 | ||||||||
Adjustments to reconcile net income from continuing operations to net cash provided by | ||||||||||||
operating activities: | ||||||||||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | ||||||||||||
Depreciation | 56,299 | 61,623 | 28,766 | 27,259 | ||||||||
Impairment of rental equipment | 19,724 | 7,323 | ||||||||||
Amortization of debt issuance costs | 2,312 | 2,394 | 815 | 893 | ||||||||
Stock-based compensation expense | 801 | 1,421 | 540 | 725 | ||||||||
Unrealized loss on foreign exchange | 63 | 90 | 400 | 220 | ||||||||
Gain on sale of rental equipment | (3,722) | (9,097) | (6,743) | (1,647) | ||||||||
Deferred income taxes | (3,127) | 2,135 | (940) | (3,504) | ||||||||
Bad debt (recovery) expense | (3,582) | 687 | ||||||||||
Bad debt recovery | (30) | (1,287) | ||||||||||
Changes in other operating assets and liabilities: | ||||||||||||
Accounts receivable | 4,441 | 1,200 | 488 | 3,849 | ||||||||
Prepaid expenses and other assets | 606 | (2,114) | 1,218 | 723 | ||||||||
Net investment in finance leases | 35,746 | 32,824 | 21,605 | 17,102 | ||||||||
Accounts payable, accrued expenses and other liabilities | (1,146) | (3,568) | (2,823) | 130 | ||||||||
Unearned revenue | (394) | (1,862) | (7) | (591) | ||||||||
Net cash provided by operating activities of continuing operations | 123,311 | 119,877 | 77,966 | 56,541 | ||||||||
Net cash provided by (used in) operating activities of discontinued operations | 2,315 | (1,984) | ||||||||||
Net cash (used in) provided by operating activities of discontinued operations | (2,177) | 3,584 | ||||||||||
Net cash provided by operating activities | 125,626 | 117,893 | 75,789 | 60,125 | ||||||||
Cash flows from investing activities | ||||||||||||
Purchase of rental equipment | (32,620) | (231,595) | (171,625) | (27,500) | ||||||||
Purchase of financing receivable | (30,846) | (36,379) | (5,174) | - | ||||||||
Proceeds from sale of rental equipment | 58,467 | 220,403 | 28,783 | 24,534 | ||||||||
Receipt of principal payments from financing receivable | 2,225 | 973 | 2,645 | 325 | ||||||||
Purchase of furniture, fixtures and equipment | (310) | (136) | (22) | (310) | ||||||||
Net cash used in investing activities of continuing operations | (3,084) | (46,734) | (145,393) | (2,951) | ||||||||
Net cash used in investing activities of discontinued operations | (1) | (114) | ||||||||||
Net cash provided by investing activities of discontinued operations | 1,285 | 42 | ||||||||||
Net cash used in investing activities | (3,085) | (46,848) | (144,108) | (2,909) | ||||||||
Cash flows from financing activities | ||||||||||||
Proceeds from debt | 227,000 | 468,082 | 141,000 | 110,000 | ||||||||
Principal payments on debt | (348,331) | (490,319) | (59,887) | (102,681) | ||||||||
Debt issuance costs | (25) | (496) | ||||||||||
Proceeds from issuance of stock | 116 | - | ||||||||||
Repurchase of common stock | - | (34,118) | (12,788) | - | ||||||||
Dividends paid to common stockholders | (5,192) | - | ||||||||||
Dividends paid to preferred stockholders | (4,414) | (4,414) | (2,207) | (2,207) | ||||||||
Exercise of stock options | 113 | 335 | 1,499 | 113 | ||||||||
Net cash used in financing activities of continuing operations | (125,541) | (60,930) | ||||||||||
Net cash provided by financing activities of continuing operations | 62,425 | 5,225 | ||||||||||
Net cash used in financing activities of discontinued operations | - | - | - | (1,061) | ||||||||
Net cash used in financing activities | (125,541) | (60,930) | ||||||||||
Net cash provided by financing activities | 62,425 | 4,164 | ||||||||||
Effect on cash of foreign currency translation | (189) | (77) | (8) | (77) | ||||||||
Net (decrease) increase in cash and restricted cash | (3,189) | 10,038 | (5,902) | 61,303 | ||||||||
Cash and restricted cash at beginning of the period (1) | 73,239 | 75,983 | 66,502 | 73,239 | ||||||||
Cash and restricted cash at end of the period (2) | $ | 70,050 | $ | 86,021 | $ | 60,600 | $ | 134,542 | ||||
Three Months Ended March 31, | ||||||||||||
2021 | 2020 | |||||||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the period for: | ||||||||||||
Income taxes | $ | 225 | $ | 441 | $ | - | $ | 111 | ||||
Interest | 35,167 | 43,327 | 10,242 | 19,736 | ||||||||
Supplemental disclosure of non-cash operating activity | ||||||||||||
Transfer of rental equipment to finance lease | $ | 140 | $ | - | ||||||||
Supplemental disclosure of non-cash investing and financing activity | ||||||||||||
Transfer of rental equipment to finance lease | $ | 7,748 | $ | 19,153 | $ | 56,227 | $ | 5,760 | ||||
Rental equipment payable | 3,356 | 75,810 | 61,582 | 4,596 | ||||||||
(1)Includes cash of $19,870$26,691 and $20,104,$19,870, cash held by variable interest entities of $26,594$26,856 and $25,211,$26,594, and restricted cash of $26,775$12,955 and $30,668$26,775 at December 31, 20192020 and 2018,2019, respectively.
(2)Includes cash of $20,159$23,971 and $22,183,$87,727, cash held by variable interest entities of $27,703$23,942 and $35,105,$21,016, and restricted cash of $22,188$12,687 and $28,733$25,799 at June 30,March 31, 2021 and 2020, and 2019, respectively.
See accompanying notes to unaudited consolidated financial statements.
(1) Description of Business and Significant Accounting Policies
Organization
CAI International, Inc., together with its subsidiaries (collectively, CAI or the Company), is a transportation finance 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’s common stock, 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock and 8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock are traded on the New York Stock Exchange under the symbols “CAI,” “CAI-PA” and “CAI-PB,” respectively. The Company’s corporate headquarters are located in San Francisco, California.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the financial statements of CAI International, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company’s results of operations for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, and the Company’s cash flows for the sixthree months ended June 30, 2020March 31, 2021 and 2019.2020. Certain reclassifications have been made to prior year financial statements to conform to the current presentation. The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 20202021 or in any future period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019,2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 5, 2020.
Immaterial Correction of an Error
As disclosed in Note 20 to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 5, 2020, the Company identified misstatements in the three months ended June 30, 2019 arising from the misclassification of certain leases. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2019 reflect the correction of these misstatements, which the Company has determined are immaterial to the unaudited consolidated financial statements.1, 2021.
Discontinued Operations
TheOn August 14, 2020, the Company committed to a plan to sellsold substantially all of the assets and liabilities of its logistics business duringto NFI, a North American logistics provider, for cash proceeds of $6.2 million. On December 29, 2020, the quarter ended June 30, 2020. The Company expects a salesold its remaining railcar fleet to be completed before the endaffiliates of 2020.Infinity Transportation for cash proceeds of $228.1 million. As a result, the logistics assets and liabilities have been reclassified as held for sale in the accompanying unaudited consolidated balance sheets and the operationsoperating results of the logistics businessand rail businesses have been reclassifiedclassified as discontinued operations in the accompanying unaudited consolidated statements of operationsincome and cash flows. All prior periods presented in these unaudited consolidated financial statements have been restated to reflect the reclassificationclassification of the logistics businessand rail leasing businesses as discontinued operations and assets and liabilities held for sale.operations. See Note 2 – Discontinued Operations for more information.
Concentration of Credit Risk
The Company’s equipment leases and trade receivables subject it to potential credit risk. The Company extends credit to its customers based upon an evaluation of each customer’s financial condition and credit history. Evaluations of the financial condition and associated credit risk of customers are performed an on ongoing basis. The Company’s largest customer and second largest customer accounted for 16%18% and 10%, respectively, of the Company’s total billings during both the three and six months ended JuneMarch 31, 2021.
Accounting Policy Updates
There were no changes to the Company’s accounting policies during the three months ended March 31, 2021. See Note 2 to the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021, for a description of the Company’s significant accounting policies.
(2) Discontinued Operations
As discussed in Note 1, the Company sold substantially all of the assets of its logistics business for proceeds of $6.2 million and its remaining railcar assets for proceeds of $228.1 million during the quarters ended September 30, 2020 and December 31, 2020, respectively. The logistics and rail leasing businesses have been classified as discontinued operations in the accompanying unaudited consolidated statements of income and cash flows for the three months ended March 31, 2021 and 2020.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting Policy Updates
Recently Adopted Accounting Pronouncements
In June 2016,The Company recognized an impairment charge of $19.2 million during the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13) and subsequently issued amendments. The guidance affectsthree months ended March 31, 2020 to reduce the book value of its railcar portfolio, on an individual basis, to its estimated fair value, or to its net book value had the assets not been classified as held for sale. To assist in the Company’s net investment in finance leases, financing receivableassessment of fair value, a third-party appraisal was carried out on the railcar fleet using a combination of cost and accounts receivablemarket approaches. The cost approach utilized the current replacement cost for sales of rental equipmenta particular car type and logistics operations. Topic 326 requires the measurement of expected credit losses to becalculated an estimated depreciation based on relevant information from past events, including historical experiences, current conditionsa railcar having a 40-year life and reasonable and supportable forecasts that affect collectability.residual value being 10% of the estimated purchase price. The Company adopted ASU 2016-13 effective January 1, 2020, using the modified retrospective method, which did not have a significant impact on the consolidated financial statements as credit losses are not expected to be significantmarket approach estimated value based on historical loss trends,recent market transactions involving similar railcars. The railcars were classified within Level 3 of the financial condition of customers, and external market factors.
Allowance for credit losses – Net investment in finance leases and financing receivablefair value hierarchy.
The allowance for credit losses onfollowing tables summarize the components of net investment in finance leases and financing receivable is estimated on a collective basis by internal customer rating (see Note 5 – Leases for descriptions of ratings). Expected credit losses for these financial assets are estimated using a loss-rate methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
Except as described above, there were no changes to the Company’s accounting policies during the six months ended June 30, 2020. See Note 2 to the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 5, 2020, for a description of the Company’s significant accounting policies.
(2) Discontinued Operations
As discussed in Note 1, net assets of the logistics business of $6.6 million and $29.0 million were reclassified as held for sale as of June 30, 2020 and December 31, 2019, respectively, and the related operations of the logistics business were reclassified asincome (loss) from discontinued operations in the accompanying unaudited consolidated statements of operationsincome for the three months ended March 31, 2021 and cash flows. The net assets2020 (in thousands). Revenue and operating expenses for the three months ended March 31, 2021 were a result of immaterial differences in the actual transactions from the amounts accrued prior to the sale of the logistics business are expected to be sold before the end ofand railcar businesses in 2020.
The Company’s held for sale assets and liabilities as of the dates indicated are made up as follows (in thousands):
Three Months Ended March 31, 2021 | |||||||||||
Rail | Logistics | Total | |||||||||
Revenue | |||||||||||
Rail lease revenue | $ | 293 | $ | - | $ | 293 | |||||
Total revenue | 293 | - | 293 | ||||||||
Operating expenses | |||||||||||
Storage, handling and other expenses | (142) | - | (142) | ||||||||
Gain on sale of rental equipment | (33) | - | (33) | ||||||||
Administrative expenses | 91 | (240) | (149) | ||||||||
Total operating expenses | (84) | (240) | (324) | ||||||||
Operating income | 377 | 240 | 617 | ||||||||
Income before income taxes | 377 | 240 | 617 | ||||||||
Income tax (benefit) expense | (496) | 50 | (446) | ||||||||
Net income from discontinued operations | $ | 873 | $ | 190 | $ | 1,063 | |||||
June 30, | December 31, | ||||||||||
2020 | 2019 | ||||||||||
Assets | |||||||||||
Accounts receivable, net of allowance for doubtful accounts | $ | 10,815 | $ | 15,601 | |||||||
Prepaid expenses and other assets | 1,693 | 2,263 | |||||||||
Goodwill | 15,794 | 15,794 | |||||||||
Intangible assets | 3,318 | 4,123 | |||||||||
Loss on classification as held for sale | (18,477) | - | |||||||||
Assets held for sale | $ | 13,143 | $ | 37,781 | |||||||
Liabilities | |||||||||||
Accounts payable | $ | 2,256 | $ | 2,757 | |||||||
Accrued expenses and other current liabilities | 4,261 | 5,995 | |||||||||
Liabilities held for sale | $ | 6,517 | $ | 8,752 | |||||||
Net assets | $ | 6,626 | $ | 29,029 | |||||||
Three Months Ended March 31, 2020 | |||||||||||
Rail | Logistics | Total | |||||||||
Revenue | |||||||||||
Rail lease revenue | $ | 5,803 | $ | - | $ | 5,803 | |||||
Logistics revenue | - | 30,106 | 30,106 | ||||||||
Total revenue | 5,803 | 30,106 | 35,909 | ||||||||
Operating expenses | |||||||||||
Impairment of rental equipment | 19,167 | - | 19,167 | ||||||||
Storage, handling and other expenses | 1,319 | - | 1,319 | ||||||||
Logistics transportation costs | - | 26,815 | 26,815 | ||||||||
Loss on sale of rental equipment | 33 | - | 33 | ||||||||
Administrative expenses | 769 | 4,162 | 4,931 | ||||||||
Total operating expenses | 21,288 | 30,977 | 52,265 | ||||||||
Operating loss | (15,485) | (871) | (16,356) | ||||||||
Interest expense (income) | 2,105 | (3) | 2,102 | ||||||||
Loss before income taxes | (17,590) | (868) | (18,458) | ||||||||
Income tax benefit | (4,255) | (204) | (4,459) | ||||||||
Net loss from discontinued operations | $ | (13,335) | $ | (664) | $ | (13,999) | |||||
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the components of loss from discontinued operations in the accompanying unaudited consolidated statements of income for the three and six months ended June 30, 2020 and 2019 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Revenue | |||||||||||
Logistics revenue | $ | 22,648 | $ | 29,802 | $ | 52,754 | $ | 57,518 | |||
Operating expenses | |||||||||||
Logistics transportation costs | 19,533 | 26,091 | 46,348 | 50,610 | |||||||
Administrative expenses | 4,107 | 5,319 | 8,269 | 10,541 | |||||||
Loss on classification as held for sale | 18,477 | - | 18,477 | - | |||||||
Total operating expenses | 42,117 | 31,410 | 73,094 | 61,151 | |||||||
Operating loss | (19,469) | (1,608) | (20,340) | (3,633) | |||||||
Interest income | (3) | (4) | (6) | (8) | |||||||
Loss before income taxes | (19,466) | (1,604) | (20,334) | (3,625) | |||||||
Income tax benefit | (2,884) | (383) | (3,088) | (872) | |||||||
Net loss from discontinued operations | $ | (16,582) | $ | (1,221) | $ | (17,246) | $ | (2,753) | |||
The loss on classification as held for sale for both the three and six months ended June 30, 2020 includes an impairment charge of $15.8 million and $2.3 million to reduce the book value of goodwill and intangible assets, respectively, to their estimated fair value based on estimated sale proceeds for the business. The net assets of the logistics business were classified within Level 3 of the fair value hierarchy.
(3) Consolidation of Variable Interest Entities
The Company regularly performs a review of its container fund arrangements with investors to determine whether or not it has a variable interest in the fund and if the fund is a variable interest entity (VIE). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund and the fund is a VIE, a further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under FASB ASC Topic 810, Consolidation:
it has power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and
it has the obligation to absorb losses of the VIE that could be potentially significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under FASB ASC Topic 810, Consolidation.
The Company currently enters into 2 types of container fund arrangements with investors which are reviewed under FASB ASC Topic 810, Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors. All of the funds under financing arrangements are Japanese container funds that were established under separate investment agreements allowed under Japanese commercial laws. Each of the funds is financed by unrelated Japanese third-party investors.
Managed Container Funds
The fees earned by the Company for arranging, managing and establishing container funds are commensurate with the level of effort required to provide those services, and the arrangements include only terms and conditions that are customarily present in arrangements for similar services. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. NaN container portfolios were sold to the funds during the three and six months ended June 30, 2020March 31, 2021 and 2019.2020.
Collateralized Financing Obligations
The Company has transferred containers to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. The Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 30, 2020March 31, 2021 and December 31, 2019,2020, and the results of the VIEs’ operations and cash flows for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, in the Company’s consolidated financial statements.
The containers that were transferred to the Japanese investor funds had a net book value of $95.0$75.4 million as of June 30, 2020.March 31, 2021. The container equipment, together with $27.7$23.9 million of cash held by the investor funds that can only be used to settle the liabilities of the VIEs, has been included on the Company’s consolidated balance sheets with the related liability presented in the debt section of the Company’s consolidated balance sheets as collateralized financing obligations of $82.3$61.6 million and term loans held by VIE of $33.9$29.9 million. NaN gain or loss was recognized by the Company on the initial consolidation of the VIEs. NaN containers were sold to the Japanese investor funds during the three and six months ended June 30,March 31, 2021 and 2020. Containers sold to the Japanese investor funds during both the three and six months ended June 30, 2019 had a net book value of $65.0 million.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) Rental Equipment
The following table provides a summary of the Company’s rental equipment (in thousands):
June 30, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Dry containers | $ | 1,866,091 | $ | 1,902,471 | $ | 1,977,997 | $ | 1,940,572 | ||||
Refrigerated containers | 275,682 | 282,155 | 306,714 | 315,641 | ||||||||
Other specialized equipment | 215,365 | 224,924 | 215,132 | 194,468 | ||||||||
Railcars | 282,106 | 314,279 | ||||||||||
2,639,244 | 2,723,829 | 2,499,843 | 2,450,681 | |||||||||
Accumulated depreciation | (660,418) | (620,990) | (691,842) | (669,360) | ||||||||
Rental equipment, net of accumulated depreciation | $ | 1,978,826 | $ | 2,102,839 | $ | 1,808,001 | $ | 1,781,321 | ||||
Impairment of railcar assets
During the quarter ended March 31, 2020, an impairment charge of $19.2 million was recognized to reduce the book value of the railcar portfolio, on an individual basis, to the lower of its net book value had the assets not been classified as held for sale, or its estimated fair value at the date when the decision was made not to sell the assets of the railcar business. To assist in the Company’s assessment of fair value, a third-party appraisal was carried out on the railcar fleet using a combination of cost and market approaches. The cost approach utilizes the current replacement cost for a particular car type and calculates an estimated depreciation based on a railcar having a 40-year life and residual value being 10% of the estimated purchase price. The market approach estimates value based on recent market transactions involving similar railcars. The railcars were classified within Level 3 of the fair value hierarchy.
(5) Leases
The Company leases its rental equipment on either short-term operating leases through master lease agreements, long-term non-cancelable operating leases, or finance leases. The following table summarizes the components of lease revenue (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Lease revenue - operating leases | $ | 60,730 | $ | 65,962 | $ | 121,129 | $ | 135,159 | ||||||||||||||||
Leasing revenue - operating leases | $ | 63,867 | $ | 54,629 | ||||||||||||||||||||
Interest income on finance leases | 11,292 | 11,092 | 22,915 | 22,482 | 13,245 | 11,590 | ||||||||||||||||||
Other revenue | 2,945 | 3,100 | 5,162 | 5,905 | 2,536 | 2,217 | ||||||||||||||||||
Interest income on financing receivable | 758 | 594 | 1,435 | 594 | 1,152 | 677 | ||||||||||||||||||
Total lease revenue | $ | 75,725 | $ | 80,748 | $ | 150,641 | $ | 164,140 | ||||||||||||||||
Total leasing revenue | $ | 80,800 | $ | 69,113 | ||||||||||||||||||||
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For finance leases, the net selling loss recognized at lease commencement, representing the difference between the estimated fair value of rental equipment placed on lease and net book value, in the amount of $2.6 million for the three and six months ended June 30, 2019 is included in “gain on sale of rental equipment” in the consolidated statement of operations.
Net investment in finance leases
The following table represents the components of the Company’s net investment in finance leases (in thousands):
June 30, | December 31, | March 31, | December 31, | |||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Gross finance lease receivables (1) | $ | 757,461 | $ | 806,019 | $ | 968,525 | $ | 909,727 | ||||
Unearned income (2) | (218,260) | (238,651) | (303,155) | (280,116) | ||||||||
Net investment in finance leases | 539,201 | 567,368 | 665,370 | 629,611 | ||||||||
Allowance for credit losses | (44) | - | (46) | (46) | ||||||||
Net investment in finance leases, net of allowance for credit losses | $ | 539,157 | $ | 567,368 | $ | 665,324 | $ | 629,565 | ||||
(1)At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received. There was $74.3$109.3 million and $98.2 million of unguaranteed residual value at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, included in gross finance lease receivables. There were 0 executory costs included in gross finance lease receivables as of June 30, 2020March 31, 2021 and December 31, 2019.2020.
(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 0 unamortized initial direct costs as of June 30, 2020March 31, 2021 and December 31, 2019.2020.
(3)NaN major customer represented 66%74% and 65%75% of the Company’s finance lease portfolio as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. No other customer represented more than 10% of the Company’s finance lease portfolio in each of those periods.
Contractual maturities of the Company's gross finance lease receivables subsequent to June 30, 2020March 31, 2021 for the years ending June 30March 31 are as follows (in thousands):
2021 | $ | 117,567 | ||||||||||
2022 | 108,526 | $ | 126,315 | |||||||||
2023 | 108,342 | 126,565 | ||||||||||
2024 | 72,990 | 107,958 | ||||||||||
2025 | 57,037 | 80,339 | ||||||||||
2026 and thereafter | 292,999 | |||||||||||
2026 | 70,315 | |||||||||||
2027 and thereafter | 457,033 | |||||||||||
$ | 757,461 | $ | 968,525 | |||||||||
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financing receivable
During 2020 and 2019, theThe Company has purchased containers and leased back the containers to the seller-lessees through finance leaseback arrangements. As control of the equipment was retained by the customers, the Company concluded that sale-leaseback accounting was not applicable and treated the arrangements as financing transactions. The Company recorded a financing receivable in the amount paid for the containers. Payments made by the seller-lessee are recorded as a reduction to the financing receivable and as interest income, calculated using the effective interest method.
The following table summarizes the components of the Company’s financing receivable (in thousands):
June 30, | December 31, | March 31, | December 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||
Gross financing receivable | $ | 78,669 | $ | 45,530 | $ | 74,447 | $ | 71,761 | ||||||
Unearned income | (15,638) | (11,111) | (13,260) | (13,320) | ||||||||||
63,031 | 34,419 | 61,187 | 58,441 | |||||||||||
Allowance for credit losses | (3) | - | (4) | (3) | ||||||||||
Total financing receivable | $ | 63,028 | $ | 34,419 | $ | 61,183 | $ | 58,438 | ||||||
Amounts due within one year (1) | 9,207 | 3,726 | ||||||||||||
Amounts due beyond one year (2) | 53,821 | 30,693 | ||||||||||||
Total financing receivable | $ | 63,028 | $ | 34,419 | ||||||||||
(1)Included in prepaid expenses and other current assets in the consolidated balance sheets.
(2)Included in financing receivable in the consolidated balance sheets.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Credit quality information
In order to estimate the allowance for losses contained in net investment in finance leases and financing receivable, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, historical credit loss activity, current market and economic conditions, and reasonable and supportable forecasts.
The Company uses the following definitions for risk ratings:
Tier 1— These customers are typically large international shipping lines that have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to moderate.
Tier 2— These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.
Tier 3— Customers in this category exhibit volatility in payments on a regular basis.
As of June 30, 2020March 31, 2021 and December 31, 2019,2020, based on the most recent analysis performed, the risk category of the Company’s net investment in finance leases and financing receivable, based on year of origination is as follows (in thousands):
June 30, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | |||||||||||||||||||||||||||||||||||
March 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | |||||||||||||||||||||||||||||||||||
Net investment in finance leases | ||||||||||||||||||||||||||||||||||||||||||
Tier 1 | $ | 2,967 | $ | 56,469 | $ | 242,365 | $ | 167,783 | $ | 6,800 | $ | 1,401 | $ | 477,785 | $ | 55,876 | $ | 125,988 | $ | 46,760 | $ | 220,813 | $ | 156,780 | $ | 6,171 | $ | 612,388 | ||||||||||||||
Tier 2 | 3,609 | 29,859 | 13,955 | 6,456 | 1,830 | 5,707 | 61,416 | 1,432 | 7,990 | 24,012 | 11,622 | 4,120 | 3,806 | 52,982 | ||||||||||||||||||||||||||||
Tier 3 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total net investment in finance leases | $ | 6,576 | $ | 86,328 | $ | 256,320 | $ | 174,239 | $ | 8,630 | $ | 7,108 | $ | 539,201 | $ | 57,308 | $ | 133,978 | $ | 70,772 | $ | 232,435 | $ | 160,900 | $ | 9,977 | $ | 665,370 | ||||||||||||||
Financing receivable | ||||||||||||||||||||||||||||||||||||||||||
Tier 1 | $ | 30,420 | $ | 31,948 | $ | - | $ | - | $ | - | $ | - | $ | 62,368 | $ | - | $ | 26,439 | $ | 29,159 | $ | - | $ | - | $ | - | $ | 55,598 | ||||||||||||||
Tier 2 | - | 663 | - | - | - | - | 663 | 5,028 | - | 561 | - | - | - | 5,589 | ||||||||||||||||||||||||||||
Tier 3 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total financing receivable | $ | 30,420 | $ | 32,611 | $ | - | $ | - | $ | - | $ | - | $ | 63,031 | $ | 5,028 | $ | 26,439 | $ | 29,720 | $ | - | $ | - | $ | - | $ | 61,187 | ||||||||||||||
Net investment in | Financing | |||||
December 31, 2019 | finance leases | receivable | ||||
Tier 1 | $ | 502,265 | $ | 33,694 | ||
Tier 2 | 65,103 | 725 | ||||
Tier 3 | - | - | ||||
$ | 567,368 | $ | 34,419 | |||
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||
Net investment in finance leases | |||||||||||||||||||||
Tier 1 | $ | 127,215 | $ | 49,986 | $ | 228,802 | $ | 160,197 | $ | 5,945 | $ | 875 | $ | 573,020 | |||||||
Tier 2 | 8,425 | 25,726 | 12,576 | 4,272 | 1,136 | 4,456 | 56,591 | ||||||||||||||
Tier 3 | - | - | - | - | - | - | - | ||||||||||||||
Total net investment in finance leases | $ | 135,640 | $ | 75,712 | $ | 241,378 | $ | 164,469 | $ | 7,081 | $ | 5,331 | $ | 629,611 | |||||||
Financing receivable | |||||||||||||||||||||
Tier 1 | $ | 27,762 | $ | 30,083 | $ | - | $ | - | $ | - | $ | - | $ | 57,845 | |||||||
Tier 2 | - | 596 | - | - | - | - | 596 | ||||||||||||||
Tier 3 | - | - | - | - | - | - | - | ||||||||||||||
Total financing receivable | $ | 27,762 | $ | 30,679 | $ | - | $ | - | $ | - | $ | - | $ | 58,441 | |||||||
(6) Debt and Derivative Instruments
Debt
Details of the Company’s debt as of June 30, 2020March 31, 2021 and December 31, 20192020 were as follows (dollars in thousands):
June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
Outstanding | Average | Outstanding | Average | Outstanding | Average | Outstanding | Average | |||||||||||||||||||||||||||
Current | Long-term | Interest | Current | Long-term | Interest | Maturity | Current | Long-term | Interest | Current | Long-term | Interest | Maturity | |||||||||||||||||||||
Revolving credit | $ | 2,000 | $ | 695,000 | 1.7% | $ | - | $ | 624,000 | 3.3% | June 2023 | $ | - | $ | 793,000 | 1.4% | $ | - | $ | 680,000 | 1.6% | June 2023 | ||||||||||||
Revolving credit facility - Rail (1) | - | 137,500 | 1.7% | - | 137,500 | 3.3% | October 2023 | |||||||||||||||||||||||||||
Revolving credit facility - Euro | 21,561 | - | 2.0% | 21,537 | - | 2.0% | September 2020 | - | 22,519 | 2.4% | - | 23,550 | 2.5% | September 2023 | ||||||||||||||||||||
Term loan | 1,800 | 24,600 | 2.8% | 1,800 | 25,500 | 3.9% | April 2023 | 1,800 | 23,250 | 2.2% | 1,800 | 23,700 | 2.2% | April 2023 | ||||||||||||||||||||
Term loan | 72,000 | - | 2.7% | 7,000 | 68,500 | 3.5% | June 2021 | 66,750 | - | 1.9% | 68,500 | - | 1.9% | June 2021 | ||||||||||||||||||||
Term loan | 14,647 | - | 3.4% | 15,284 | - | 3.4% | December 2020 | 6,000 | 79,000 | 4.6% | 6,000 | 80,500 | 4.6% | October 2023 | ||||||||||||||||||||
Term loan | 3,071 | 36,086 | 3.6% | 3,016 | 37,635 | 3.6% | August 2021 | |||||||||||||||||||||||||||
Term loan | 6,000 | 83,500 | 4.6% | 6,000 | 86,500 | 4.6% | October 2023 | |||||||||||||||||||||||||||
Senior secured notes | 6,110 | 43,610 | 4.9% | 6,110 | 46,665 | 4.9% | September 2022 | 6,110 | 37,500 | 4.9% | 6,110 | 40,555 | 4.9% | September 2022 | ||||||||||||||||||||
Asset-backed notes 2012-1 (2) | - | - | - | 17,100 | 31,350 | 3.5% | - | |||||||||||||||||||||||||||
Asset-backed notes 2013-1 (2) | - | - | - | 22,900 | 51,525 | 3.4% | - | |||||||||||||||||||||||||||
Asset-backed notes 2017-1 | 25,307 | 151,842 | 3.7% | 25,307 | 164,496 | 3.7% | June 2042 | |||||||||||||||||||||||||||
Asset-backed notes 2018-1 | 34,890 | 232,600 | 4.0% | 34,890 | 250,045 | 4.0% | February 2043 | |||||||||||||||||||||||||||
Asset-backed notes 2018-2 | 34,350 | 249,038 | 4.4% | 34,350 | 266,213 | 4.4% | September 2043 | |||||||||||||||||||||||||||
Asset-backed notes 2020-1 | 63,130 | 648,006 | 2.3% | 63,130 | 663,788 | 2.3% | September 2045 | |||||||||||||||||||||||||||
Collateralized financing obligations | 27,808 | 54,455 | 0.8% | 21,681 | 69,615 | 1.5% | February 2026 | 37,852 | 23,776 | 1.8% | 35,862 | 33,767 | 1.7% | February 2026 | ||||||||||||||||||||
Term loans held by VIE | 5,367 | 28,520 | 4.2% | 5,250 | 31,234 | 4.2% | February 2026 | 5,540 | 24,344 | 4.2% | 5,482 | 25,752 | 4.2% | February 2026 | ||||||||||||||||||||
254,911 | 1,736,751 | 222,225 | 1,890,778 | 187,182 | 1,651,395 | 186,884 | 1,571,612 | |||||||||||||||||||||||||||
Debt issuance costs | (3,661) | (8,441) | (4,131) | (10,656) | ||||||||||||||||||||||||||||||
Debt discount and debt issuance costs | (3,304) | (8,516) | (3,436) | (9,329) | ||||||||||||||||||||||||||||||
Total Debt | $ | 251,250 | $ | 1,728,310 | $ | 218,094 | $ | 1,880,122 | $ | 183,878 | $ | 1,642,879 | $ | 183,448 | $ | 1,562,283 | ||||||||||||||||||
(1) The maximum credit commitment under the Rail revolving credit facility was decreased on July 2, 2020 from $250$500 million to $150 million.
(2) On April 27, 2020, the Company repaid in full theof this outstanding debt associated with the asset-backed notes 2012-1 and 2013-1.is subject to an interest rate swap at a cost of 0.29% as described below in Derivative Instruments.
The Company maintains its revolving credit facilities to finance the acquisition of rental equipment and for general working capital purposes. As of June 30, 2020,March 31, 2021, the Company had $521.9$388.7 million in total availability under its revolving credit facilities (net of $0.1 million in letters of credit), subject to the Company’s ability to meet the collateral requirements under the agreements governing the facilities. Based on the borrowing base and collateral requirements at June 30, 2020,March 31, 2021, the borrowing availability under the Company’s revolving credit facilities was $162.7$248.8 million, assuming no additional contributions of assets.
The agreements relating to all of the Company’s debt contain various financial and other covenants. As of June 30, 2020,March 31, 2021, the Company was in compliance with all of its financial and other covenants.
In early July 2020, the Company completed an interest rate hedging transaction swapping one month LIBOR for a fixed rate of 0.29% on $500 million of its floating rate debt for a term of five years.
For further information on the Company’s debt instruments, see Note 107 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 5, 2020.1, 2021.
(7) Stock–Based Compensation Plan
2019 Incentive PlanDerivative Instruments
In June 2019, the Company’s stockholders approved the CAI International, Inc. 2019 Incentive Plan (2019 Plan), which replaced the CAI International, Inc. Amended and Restated 2007 Equity Incentive Plan (2007 Plan). No further awards will be made under the 2007 Plan. Under the 2019 Plan, a maximum of 2,577,075 share awards may be granted. Under the 2019 Plan,July 2020, the Company may grant incentiveentered into an interest rate swap agreement with an effective date of July 31, 2020 and nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awardsscheduled maturity date of June 30, 2025. This contract is indexed to 1-month LIBOR, has a fixed leg interest rate of 0.29%, and other stock or cash-based awards.a notional amount of $500.0 million.
Stock Options
Stock options grantedAs of March 31, 2021, the Company has designated interest rate swap agreements for a total notional amount of $500.0 million as cash flow hedges for accounting purposes. The change in fair value of cash flow hedging instruments during the three months ended March 31, 2021 was recorded on the consolidated balance sheets in ‘Accumulated other comprehensive loss’ and reclassified to employees have a vesting period‘Net interest expense’ when realized. The Company had 0 derivative instruments as of four years from the 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)
Over the next twelve months, the Company expects to reclassify an estimated net loss of $0.6 million related to the designated interest rate swap agreements from ‘Accumulated other comprehensive loss’ in the consolidated statements of comprehensive income to ‘Net interest expense’ in the consolidated statements of operations.
The following table summarizes the Company’s stock option activities forimpact of derivative instruments designated in cash flow hedging relationships on the six months ended June 30, 2020consolidated statements of operations and 2019:the consolidated statements of comprehensive income (loss) on a pretax basis (in thousands):
Six Months Ended June 30, | ||||||||||||
2020 | 2019 | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Number of | Exercise | Number of | Exercise | |||||||||
Shares | Price | Shares | Price | |||||||||
Options outstanding at January 1 | 646,946 | $ | 16.96 | 850,167 | $ | 16.46 | ||||||
Options exercised | (17,750) | $ | 13.94 | (125,504) | $ | 14.14 | ||||||
Options forfeited | (11,814) | $ | 15.64 | (3,000) | $ | 12.88 | ||||||
Options expired | - | $ | - | (10,000) | $ | 26.41 | ||||||
Options outstanding at June 30 | 617,382 | $ | 17.07 | 711,663 | $ | 16.75 | ||||||
Options exercisable | 596,297 | $ | 17.11 | 586,408 | $ | 17.58 | ||||||
Weighted average remaining term | 3.3 years | 5.9 years | ||||||||||
Three Months Ended March 31, | |||||||
Derivative Instrument | Financial Statement Caption | 2021 | 2020 | ||||
Interest rate swap | Comprehensive income | $ | 9,509 | $ | - | ||
Interest rate swap | Net interest expense | $ | 157 | $ | - | ||
The aggregate intrinsicfair value of stock options exercised duringderivative instruments on the six months ended June 30, 2020Company’s consolidated balance sheets of March 31, 2021 and 2019 was $0.2 million and $1.2 million, respectively. The aggregate intrinsic value of all options outstanding as of June 30,December 31, 2020 was $1.5 million based on the closing price of the Company’s common stock of $16.66 per share on June 30, 2020, the last trading day of the quarter.as follows (in thousands):
The Company recognized stock-based compensation expense relating to stock options of $0.1 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $0.3 million and $0.4 million for the six months ended June 30, 2020, respectively. As of June 30, 2020, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $0.2 million, which is to be recognized over the remaining weighted average vesting period of approximately 0.6 years.
The Company did 0t grant any stock options during the six months ended June 30, 2020 and 2019.
Total | ||||||
Fair Value | Level 2 | |||||
March 31, 2021 | ||||||
Derivative assets - interest rate swaps | $ | 9,586 | $ | 9,586 | ||
December 31, 2020 | ||||||
Derivative liabilities - interest rate swaps | $ | 80 | $ | 80 | ||
(7) Stock–Based Compensation Plan
Restricted Stock Awards, Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units
The Company grants time-based restricted stock units to certain employees and restricted stock awards to independent directors from time to time pursuant to theits 2019 Plan.Incentive Plan (2019 Plan). Time-based restricted stock units granted to employees have a vesting period of four years;years, subject to continued employment with the Company; 25% vesting on each anniversary of the grant date. Restricted stock awards granted to independent directors vest in one year. The Company recognizes the compensation cost associated with restricted stock awards and time-based restricted stock units over the vesting period based on the closing price of the Company’s common stock on the date of grant.
The Company grants performance-based restricted stock units to certain executives and other key employees. The performance-based restricted stock units vestsvest at the end of a 3-year performance cycle if certain financial performance targets are met. The Company recognizes compensation cost associated with the performance-based restricted stock units ratably over the 3-year term when it is considered probable that performance targets will be met. Compensation cost is based on the closing price of the Company’s common stock on the date of grant.
The following table summarizes the activity of restricted stock awards, time-based restricted stock units and performance-based restricted stock units under the 2019 Plan:
Weighted | Weighted | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Number of | Grant Date | Number of | Grant Date | |||||||||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||||
Outstanding at December 31, 2019 | 281,736 | $ | 23.18 | |||||||||||||||||||||
Outstanding at December 31, 2020 | 186,471 | $ | 23.91 | |||||||||||||||||||||
Granted | 143,957 | $ | 25.60 | 58,725 | $ | 36.07 | ||||||||||||||||||
Vested | (86,009) | $ | 22.00 | (46,703) | $ | 23.24 | ||||||||||||||||||
Forfeited | (86,208) | $ | 25.33 | (5,071) | $ | 21.90 | ||||||||||||||||||
Outstanding at June 30, 2020 | 253,476 | $ | 24.22 | |||||||||||||||||||||
Outstanding at March 31, 2021 | 193,422 | $ | 27.82 | |||||||||||||||||||||
The Company recognized stock-based compensation expense relating to restricted stock and performance stock in continuing operations of $0.5 million and $0.6 million for the three months ended June 30, 2019March 31, 2021 and $0.6 million and $1.2 million for the six months ended June 30, 2020, and 2019, respectively, and a benefit of $0.1 million for the three months ended June 30, 2020.respectively. As of June 30, 2020,March 31, 2021, unamortized stock-based compensation expense relating to restricted stock and performance stock was $4.3$3.8 million, which will be recognized over the remaining average vesting period of 1.9 years.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-based compensation expense is recorded as a component of administrative expenses in the Company’s consolidated statements of operations with a corresponding credit to additional paid-in capital in the Company’s consolidated balance sheets.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Options
Stock options granted to employees have a vesting period of four years from the grant date, with 25% vesting after one year, and 1/48th vesting each month thereafter until fully vested, subject to continued employment with the Company. Stock options granted to independent directors vest in one year. All of the stock options have a contractual term of ten years.
The following table summarizes the Company’s stock option activities for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, | ||||||||||||
2021 | 2020 | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Number of | Exercise | Number of | Exercise | |||||||||
Shares | Price | Shares | Price | |||||||||
Options outstanding at January 1 | 301,176 | $ | 16.39 | 646,946 | $ | 16.96 | ||||||
Options exercised | (107,000) | $ | 14.01 | (7,750) | $ | 14.54 | ||||||
Options outstanding at March 31 | 194,176 | $ | 17.70 | 639,196 | $ | 16.98 | ||||||
Options exercisable | 194,176 | $ | 17.70 | 584,652 | $ | 17.25 | ||||||
Weighted average remaining term | 4.3 years | 5.2 years | ||||||||||
The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2021 and 2020 was $2.9 million and $0.1 million, respectively. The aggregate intrinsic value of all options outstanding as of March 31, 2021 was $5.4 million based on the closing price of the Company’s common stock of $45.52 per share on March 31, 2021, the last trading day of the quarter.
The Company recognized stock-based compensation expense relating to stock options in continuing operations of less than $0.1 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was 0 remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors.
The Company did 0t grant any stock options during the three months ended March 31, 2021 and 2020.
Employee Stock Purchase Plan
In June 2019, the Company’s stockholders approved the CAI International, Inc. 2019 Employee Stock Purchase Plan (ESPP). The ESPP provides a means by which eligible employees may be given an opportunity to purchase shares of the Company’s common stock at a discount using payroll deductions. The ESPP authorizes the issuance of up to 250,000 shares of the Company’s common stock. The first offering period under the ESPP commenced in December 2019. The Company issued 7,258did not issue any shares of the Company common stock under the ESPP during the three and six months ended June 30,March 31, 2021 and 2020. The Company recognized stock-based compensation expense relating to the ESPP of less than $0.1 million for both the three and six months ended June 30,March 31, 2021 and 2020.
(8) Income Taxes
The consolidated income tax expense for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, was determined based upon estimates of the Company’s consolidated annual effective income tax rate for the years ending December 31, 20202021 and 2019,2020, 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 before discrete items was 8.2%7.1% at June 30, 2020,March 31, 2021, compared to an effective tax rate of 5.6%8.6% at June 30, 2019. Discrete items during the three and six months ended June 30, 2020 primarily related to the impairment of railcar assets (Note 4) of $19.2 million, which resulted in a tax benefit of $4.5 million.
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 June 30, 2020, the Company had unrecognized tax benefits of $0.3 million, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was $0.1 million as of June 30, 2020. The Company does not believe the total amount of unrecognized tax benefits as of June 30, 2020 will change for the remainder ofMarch 31, 2020.
(9) Fair Value of Financial Instruments
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy when selecting inputs for its valuation techniques, with highest priority given to Level 1:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3 – unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts of cash, restricted cash, accounts receivable and accounts payable reflected in the balance sheets as of June 30, 2020March 31, 2021 and December 31, 2019,2020, approximate their fair value due to the short-term nature of these financial assets and liabilities. The carrying value of variable-rate debt in the balance sheets as of June 30, 2020March 31, 2021 and December 31, 20192020 approximates fair value as the changes in their associated interest rates reflect the current market and credit risk is similar to when the loans were originally obtained.
The principal balance of the Company’s fixed-rate term loans, asset-backed notes and collateralized financing obligations was $143.3$85.5 million, $728.0$711.1 million, and $82.3$61.6 million as of June 30, 2020,March 31, 2021, with a fair value of approximately $144.9$89.2 million, $735.9$710.0 million, and $84.0$58.8 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. The principal balance of the Company’s fixed-rate term loans, asset-backed notes and collateralized financing obligations was $148.4$86.5 million, $898.2$726.9 million and $91.3$69.6 million as of December 31, 2019,2020, with a fair value of approximately $151.0$91.1 million, $911.0$725.8 million and $93.0$71.6 million, respectively. Management believes that the balances of the Company’s senior secured notes of $49.7$43.6 million and $52.8$46.7 million, term loans held by VIE of $33.9$29.9 million and $36.5$31.2 million, and financing receivable of $63.0$61.2 million and $34.4$58.4 million as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, approximate their fair values. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy.
(10) Commitments and Contingencies
In addition to its debt obligations described in Note 6 above, the Company had commitments to purchase approximately $6.8$312.7 million of containers as of June 30, 2020,March 31, 2021, all in the twelve months ending June 30, 2021.March 31, 2022
CAI INTERNATIONAL, INC..
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) Stockholders’ Equity
Stock Repurchase Plan
In October 2018, the Company announced that the Board of Directors approved the repurchase of up to 3 million shares of its outstanding common stock. In February 2021, the Board of Directors increased the share repurchase plan by an additional 2.0 million shares. The number, price, structure and timing of the repurchases, if any, will be at the Company’s sole discretion and will be evaluated by the Company depending on prevailing market conditions, corporate needs, and other factors. The stock repurchases may be made in the open market, block trades or privately negotiated transactions. This stock repurchase program replaces any available prior share repurchase authorization and may be discontinued at any time. TheDuring the three months ended March 31, 2021, the Company did 0t repurchase anyrepurchased 0.4 million shares of its common stock under this repurchase plan, during the six months ended June 30, 2020.at a cost of approximately $12.8 million. As of June 30, 2020,March 31, 2021, approximately 1.02.4 million shares remained available for repurchase under this share repurchase program.
For further information on the Company’s shareholders’ equity, see Note 1613 to the consolidated financial statements in the Company’ Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 5, 2020.1, 2021.
(12) Related Parties
The Company is responsible for settling income tax liabilities of certain employees related to stock-based compensation. The Company is then reimbursed for those amounts by the employees. At June 30, 2020 and December 31, 2019,2020, the Company had a liability of $1.2 million representing tax due to the UK tax authorities in respect of an officer of the Company. The Company also included in its balance sheets at June 30, 2020March 31, 2021 and December 31, 20192020 a current asset of $1.2 million, representing the amount that will be reimbursed to the Company by that officer.
(13) Segment and Geographic Information
The Company organizes itself by the nature of the services it provides which includes equipment leasing (consisting ofoperates under one reportable segment, container leasing, and rail leasing) and logistics.
As disclosed in Note 2, the net assets of the Company’s logistics business have been reclassified as held for sale in the accompanying unaudited consolidated balance sheets and the operations of the logistics business have been reclassified as discontinued operations in the accompanying unaudited consolidated statements of operations. As a result, the Company will no longer report Logistics as a segment. The Company revised prior period information to conform to current period presentation.
The container leasing segmentwhich 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. There are no material inter-segment revenues.
WithAs disclosed in Note 2, the exceptionCompany sold substantially all of administrative expenses, operating expenses are directly attributable to each segment. Administrative expenses that are not directly attributable to a segment are allocated to the segments based upon relative asset values or revenue.
The following tables show condensed segment information forassets of its logistics business and all its railcar assets during the three and six monthsyear ended June 30,December 31, 2020, and 2019, reconciled to the Company’s income before income taxesoperations of the logistics and rail businesses have been reclassified as showndiscontinued operations in itsthe accompanying unaudited consolidated statements of operations for such periods (in thousands):
Three Months Ended June 30, 2020 | |||||||||
Container Leasing | Rail Leasing | Total | |||||||
Total revenue | $ | 69,443 | $ | 6,282 | $ | 75,725 | |||
Total operating expenses | 36,757 | 4,401 | 41,158 | ||||||
Operating income | 32,686 | 1,881 | 34,567 | ||||||
Net interest and other expenses | 16,037 | 1,461 | 17,498 | ||||||
Income before income taxes | $ | 16,649 | $ | 420 | $ | 17,069 | |||
Purchase of rental equipment (1) | $ | 5,120 | $ | - | $ | 5,120 | |||
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended June 30, 2019 | |||||||||
Container Leasing | Rail Leasing | Total | |||||||
Total revenue | $ | 74,286 | $ | 6,462 | $ | 80,748 | |||
Total operating expenses | 40,026 | 10,096 | 50,122 | ||||||
Operating income (loss) | 34,260 | (3,634) | 30,626 | ||||||
Net interest and other expenses | 20,144 | 3,184 | 23,328 | ||||||
Income (loss) before income taxes | $ | 14,116 | $ | (6,818) | $ | 7,298 | |||
Purchase of rental equipment (1) | $ | 59,352 | $ | 31,031 | $ | 90,383 | |||
Six Months Ended June 30, 2020 | |||||||||
Container Leasing | Rail Leasing | Total | |||||||
Total revenue | $ | 138,556 | $ | 12,085 | $ | 150,641 | |||
Total operating expenses | 73,396 | 25,775 | 99,171 | ||||||
Operating income (loss) | 65,160 | (13,690) | 51,470 | ||||||
Net interest and other expenses | 34,557 | 3,566 | 38,123 | ||||||
Income (loss) before income taxes | $ | 30,603 | $ | (17,256) | $ | 13,347 | |||
Purchase of rental equipment (1) | $ | 32,620 | - | $ | 32,620 | ||||
Six Months Ended June 30, 2019 | |||||||||
Container Leasing | Rail Leasing | Total | |||||||
Total revenue | $ | 149,797 | $ | 14,343 | $ | 164,140 | |||
Total operating expenses | 78,740 | 8,627 | 87,367 | ||||||
Operating income | 71,057 | 5,716 | 76,773 | ||||||
Net interest and other expenses | 40,091 | 7,129 | 47,220 | ||||||
Income (loss) before income taxes | $ | 30,966 | $ | (1,413) | $ | 29,553 | |||
Purchase of rental equipment (1) | $ | 167,442 | $ | 64,153 | $ | 231,595 | |||
(1) Represents cash disbursements for purchasing of rental equipmentoperations. As a result, the Company will no longer report Logistics or Rail Leasing as reflected in the consolidated statements of cash flows for the periods indicated.
The summary below presents total assets for the Company's segments as of the dates indicated (in thousands):
June 30, | December 31, 2019 | ||||||||
Container leasing | $ | 2,465,139 | $ | 2,565,828 | |||||
Rail | 261,874 | 293,459 | |||||||
Logistics (2) | 18,920 | 42,478 | |||||||
Total assets | $ | 2,745,933 | $ | 2,901,765 | |||||
(2) Represents total assets related to discontinued operations, including assets held for sale of $13.1 million and $37.8 million as of June 30, 2020 and December 31, 2019, respectively.
segments.
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.
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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Switzerland | $ | 12,472 | $ | 12,339 | $ | 24,988 | $ | 26,387 | $ | 16,314 | $ | 12,516 | ||||||||||||
Korea | 11,310 | 9,239 | ||||||||||||||||||||||
Singapore | 10,098 | 10,316 | 19,948 | 20,350 | 10,606 | 9,850 | ||||||||||||||||||
Korea | 9,899 | 10,684 | 19,138 | 20,554 | ||||||||||||||||||||
France | 7,730 | 8,881 | 15,360 | 17,814 | 8,394 | 7,630 | ||||||||||||||||||
United States | 7,439 | 8,128 | 14,478 | 17,778 | 1,177 | 1,236 | ||||||||||||||||||
Other Europe | 13,593 | 15,324 | 28,833 | 30,523 | 18,350 | 15,240 | ||||||||||||||||||
Other Asia | 13,676 | 14,667 | 26,263 | 29,975 | 13,818 | 12,587 | ||||||||||||||||||
Other International | 818 | 409 | 1,633 | 759 | 831 | 815 | ||||||||||||||||||
Total revenue | $ | 75,725 | $ | 80,748 | $ | 150,641 | $ | 164,140 | ||||||||||||||||
Total leasing revenue | $ | 80,800 | $ | 69,113 | ||||||||||||||||||||
(14) Earnings Per Share
Basic net income (loss) income per share is computed based on the weighted average number of shares of common stock outstanding during each 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 six months ended June 30,March 31, 2021 and 2020 and 2019 (in thousands, except per share data):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Numerator | ||||||||||||||||||||||||
Net income from continuing operations | $ | 13,749 | $ | 4,508 | $ | 10,876 | $ | 22,407 | $ | 32,470 | $ | 10,462 | ||||||||||||
Net loss from discontinued operations | (16,582) | (1,221) | (17,246) | (2,753) | ||||||||||||||||||||
Net (loss) income attributable to CAI common stockholders | $ | (2,833) | $ | 3,287 | $ | (6,370) | $ | 19,654 | ||||||||||||||||
Net income (loss) from discontinued operations | 1,063 | (13,999) | ||||||||||||||||||||||
Net income (loss) attributable to CAI common stockholders | $ | 33,533 | $ | (3,537) | ||||||||||||||||||||
Denominator | ||||||||||||||||||||||||
Weighted-average shares used in per share computation - basic | 17,470 | 17,648 | 17,451 | 18,098 | 17,271 | 17,433 | ||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Stock options and restricted stock | 131 | 278 | 190 | 303 | 247 | 282 | ||||||||||||||||||
Weighted-average shares used in per share computation - diluted | 17,601 | 17,926 | 17,641 | 18,401 | 17,518 | 17,715 | ||||||||||||||||||
Net (loss) income per share attributable to CAI | ||||||||||||||||||||||||
common stockholders: | ||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||
Continuing operations | $ | 0.79 | $ | 0.26 | $ | 0.62 | $ | 1.24 | $ | 1.88 | $ | 0.60 | ||||||||||||
Discontinued operations | (0.95) | (0.07) | (0.99) | (0.15) | 0.06 | (0.80) | ||||||||||||||||||
Total basic | $ | (0.16) | $ | 0.19 | $ | (0.37) | $ | 1.09 | $ | 1.94 | $ | (0.20) | ||||||||||||
Diluted | ||||||||||||||||||||||||
Continuing operations | $ | 0.78 | $ | 0.25 | $ | 0.62 | $ | 1.22 | $ | 1.85 | $ | 0.59 | ||||||||||||
Discontinued operations | (0.94) | (0.07) | (0.98) | (0.15) | 0.06 | (0.79) | ||||||||||||||||||
Total diluted | $ | (0.16) | $ | 0.18 | $ | (0.36) | $ | 1.07 | $ | 1.91 | $ | (0.20) | ||||||||||||
Certain options, restricted stock awards and time- and performance-based restricted stock units issued under employee benefit plans are excluded from the computation of diluted earnings per share because they were anti-dilutive. For the three and six months ended June 30, 2020, 654,384March 31, 2021, 112 shares and 379,662 shares, respectively, of stock options, restricted stock awards and time- and performance-based restricted stock units were excluded. For the three and six months ended June 30, 2019, 146,116March 31, 2020, 97,606 shares and 126,184 shares, respectively, of stock options, restricted stock awards and time- and performance-based restricted stock units were excluded.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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, 20192020 filed with the SEC on March 5, 2020.1, 2021. 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 Quarterly Report on Form 10-Q.
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 companies. We purchaselease 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.
The following tables show the composition of our fleet as of June 30,March 31, 2021 and 2020, and 2019, and our average utilization for the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
As of June 30, | As of March 31, | |||||||||||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||
Owned container fleet in TEUs | 1,597,898 | 1,553,231 | 1,714,552 | 1,590,880 | ||||||||||||||||||||
Managed container fleet in TEUs | 63,757 | 69,805 | 55,226 | 66,721 | ||||||||||||||||||||
Total container fleet in TEUs | 1,661,655 | 1,623,036 | 1,769,778 | 1,657,601 | ||||||||||||||||||||
Owned container fleet in CEUs | 1,630,054 | 1,584,456 | 1,767,305 | 1,622,354 | ||||||||||||||||||||
Managed container fleet in CEUs | 79,643 | 63,492 | 70,255 | 82,705 | ||||||||||||||||||||
Total container fleet in CEUs | 1,709,697 | 1,647,948 | 1,837,560 | 1,705,059 | ||||||||||||||||||||
Owned railcar fleet in units | 5,276 | 5,631 | ||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Average container fleet utilization in CEUs | 98.0% | 98.8% | 98.1% | 98.8% | 99.6% | 98.2% | ||||||||||||||||||
Average owned container fleet utilization in CEUs | 98.0% | 98.8% | 98.2% | 98.8% | 99.7% | 98.4% | ||||||||||||||||||
Average railcar fleet utilization | 89.6% | 88.1% | 87.3% | 89.3% | ||||||||||||||||||||
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, theThe 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 96.1% and 96.0% for both the total and owned container fleet, and 86.6% and 84.3% for the railcar fleet, for the three and six months ended June 30, 2020, respectively.
COVID-19 Pandemic
The COVID-19 pandemic continues to have a meaningful impact on global trade and our business. The pandemic and related work, travel, and social restrictions have resulted in a sharp decrease in global economic and trade activity and a decline in container volumes during the second quarter. As a result, container leasing demand was weak during the first half of the year. We2020, resulting in weak container leasing demand. However, we have seen increaseda significant increase in leasing demand in July as COVID-related restrictions have eased in Europe andsince the United States, butsecond half of 2020, which we expect to continue through 2021. However, it is too early to tell whether this rebound in leasing demand will be sustained.sustained into 2022 and beyond.
We have beenwere initially concerned that the sharp decrease in global container volumes this yearearly in 2020 would increase the financial challenges facing our customers and lead to increased credit risk. While we are not yet through the pandemic, container freight rates and the financial performance of our customers have generally held up better than anticipated. Allanticipated, with freight rates reaching record levels. As the impact of the pandemic grew, all the major shipping lines have taken aggressive actions to reduce their deployed vessel capacity, decreasing their network expenses and mitigating rate pressure from reduced freight volumes. The large decrease in bunker fuel prices has also been very helpful to their financial performance. However, there is no certainty that our customers will continue to be able to manage through the challenges of the COVID-19 environment. We continue to closely monitor our customers’ payment performance and expect our customerthe potential for elevated credit risk will remain elevated as longalong as economic and trade disruptions persist.
For additional information regarding the risk and uncertainties that we could encounter as a result of the COVID-19 pandemic and related global conditions, see “The“Business Risk – The continued spread of the COVID-19 pandemic may have a material adverse impact on our business, financial condition and results of operations” in Item 1A. “Risk Factors” in this Quarterly Reportsour Annual Report on Form 10-Q.10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021.
Change in Chief Executive OfficerDisposal of Logistics and Rail Businesses
In JuneOn August 14, 2020, we sold substantially all the Board terminated Victor M. Garcia as President and Chief Executive Officerassets of the Company and promoted Timothy B. Page to Executive Vice President, and Interim President and Chief Executive Officer of the Company. The Board is actively searching for a permanent replacement for its Chief Executive Officer.
Discontinued Operations
We committed to a plan to sell our logistics business during the quarter ended June 30, 2020. We expectto NFI, a saleNorth American logistics provider, for cash proceeds of $6.2 million. On December 29, 2020, we sold all our remaining railcar fleet to be completed before the endaffiliates of 2020.Infinity Transportation for cash proceeds of $228.1 million. As a result, the logistics assets and liabilities have been reclassified as held for sale and the operationsoperating results of the logistics businessand rail leasing businesses have been reclassifiedclassified as discontinued operations in the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q. All prior periods presented in the unaudited consolidated financial statements have been restated to reflect the reclassification.reclassification of the logistics and railcar leasing businesses as discontinued operations. See Note 2 – Discontinued Operations to the consolidated financial statements in this Quarterly Report on Form 10-Q for more information.
Results of Operations - Three Months Ended June 30, 2020March 31, 2021 Compared to Three Months Ended June 30, 2019March 31, 2020
The following table summarizes our results of operations for the three months ended June 30,March 31, 2021 and 2020 and 2019 (dollars in thousands):
Three Months Ended June 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||
2020 | 2019 | Amount | Percent | 2021 | 2020 | Amount | Percent | |||||||||||||||||
Total revenue | $ | 75,725 | $ | 80,748 | $ | (5,023) | (6) | % | ||||||||||||||||
Total leasing revenue | $ | 80,800 | $ | 69,113 | $ | 11,687 | 17 | % | ||||||||||||||||
Operating expenses | 41,158 | 50,122 | (8,964) | (18) | % | 32,037 | 36,725 | (4,688) | (13) | % | ||||||||||||||
Total other expenses | 17,498 | 23,328 | (5,830) | (25) | % | 11,582 | 18,520 | (6,938) | (37) | % | ||||||||||||||
Net (loss) income attributable to CAI common stockholders | (2,833) | 3,287 | (6,120) | (186) | % | |||||||||||||||||||
Net income (loss) attributable to CAI common stockholders | 33,533 | (3,537) | 37,070 | (1,048) | % | |||||||||||||||||||
The decreaseincrease in total revenue for the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019,March 31, 2020, was primarily attributable to a $4.8$9.2 million, or 7%17%, decreaseincrease in containeroperating lease revenue, a $1.7 million, or 14%, increase in finance lease revenue, and a $0.8 million, or 27%, increase in other lease revenue. The decrease in operating expenses for the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019,March 31, 2020, was primarily the result of a $6.8$5.1 million, or 92%309%, decrease in impairment charges related to our rail assets, a $1.0 million, or 3%, decrease in depreciation expense, a $1.8 million, or 695%, decreaseincrease in gain on sale of rental equipment and a $0.7$1.9 million, or 8%44%, decrease in administrativestorage, handling and other expenses, partially offset by a $1.3$1.5 million, or 25%6%, increase in storage, handlingdepreciation expense and othera $0.8 million, or 12%, increase in administrative expenses.
Total other expenses for the three months ended June 30, 2020March 31, 2021 decreased compared with the three months ended June 30, 2019,March 31, 2020, primarily due to a $5.6$7.1 million, or 24%39%, decrease in net interest expense. Total dividends of $2.2 million on our preferred stock were recorded in both the three months ended June 30, 2020 and 2019.
The increase in revenue together with the decrease in revenueoperating expenses, total other expense and the net loss from discontinued operations partially offset by the decrease in operating expenses and total other expenses resulted in a decreasean increase in net income attributable to CAI common stockholders for the three months ended June 30, 2020March 31, 2021 of $37.1 million compared to the three months ended June 30, 2019,March 31, 2020.
Total leasing revenue
Three Months Ended March 31, | Change | |||||||||||
($ in thousand) | 2021 | 2020 | Amount | Percent | ||||||||
Total leasing revenue | $ | 80,800 | $ | 69,113 | $ | 11,687 | 17 | % | ||||
The increase in total leasing revenue for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was mainly attributable to a $6.6 million increase in rental revenue resulting from a 12% increase in the average number of $6.1 million.CEUs of on-lease owned containers and a $5.4 million increase in rental revenue arising from payments made by a cash-based customer, partially offset by a $0.3 million decrease in other revenue such as drop-off and repair fees given the current high utilization rate.
Depreciation of rental equipment
Three Months Ended March 31, | Change | |||||||||||
($ in thousand) | 2021 | 2020 | Amount | Percent | ||||||||
Depreciation of rental equipment | $ | 28,551 | $ | 27,048 | $ | 1,503 | 6 | % | ||||
The increase in depreciation expense for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was mainly attributable to a 5% increase in the average size of our owned container fleet subject to depreciation over the last twelve months.
Container lease revenue
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container lease revenue | $ | 69,443 | $ | 74,286 | $ | (4,843) | (7) | % | ||||
The decrease in container lease revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was mainly attributable to a $3.9 million decrease in rental revenue resulting from a 6% reduction in average owned container per diem rental rates and a $3.3 million decrease in rental revenue arising from a change to cash-based revenue recognition for a certain customer due to collectability issues, partially offset by a $1.2 million increase in rental revenue resulting from a 2% increase in the average number of CEUs of on-lease owned containers and a $0.4 million increase in interest income on finance leases and financing receivables.
Rail lease revenue
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Rail lease revenue | $ | 6,282 | $ | 6,462 | $ | (180) | (3) | % | ||||
Rail lease revenue for the three months ended June 30, 2020 remained relatively consistent with the three months ended June 30, 2019.
Depreciation of rental equipment
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 26,750 | $ | 27,938 | $ | (1,188) | (4) | % | ||||
Rail leasing | 2,096 | 1,878 | 218 | 12 | % | |||||||
$ | 28,846 | $ | 29,816 | $ | (970) | (3) | % | |||||
Container leasing
Depreciation expense for the three months ended June 30, 2020 decreased compared to the three months ended June 30, 2019, primarily attributable to a 1% decrease in the average size of our owned container fleet during the last twelve months and 22% of containers purchased during the same period being used, which depreciate at a lower rate or are already fully depreciated.
Rail leasing
Depreciation expense for the three months ended June 30, 2020 remained relatively consistent with the three months ended June 30, 2019.
Impairment of rental equipment
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Rail leasing | $ | 557 | $ | 7,323 | $ | (6,766) | (92) | % | ||||
An impairment charge of $7.3 million was recognized during the three months ended June 30, 2019 to reduce the book value of the railcar portfolio, on an individual basis, to the lower of its net book value or its estimated fair value at the date when the decision was made to sell the assets of the railcar business.
Storage, handling and other expenses
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 5,163 | $ | 4,063 | $ | 1,100 | 27 | % | ||||
Rail leasing | 1,311 | 1,136 | 175 | 15 | % | |||||||
$ | 6,474 | $ | 5,199 | $ | 1,275 | 25 | % | |||||
Three Months Ended March 31, | Change | |||||||||||
($ in thousand) | 2021 | 2020 | Amount | Percent | ||||||||
Storage, handling and other expenses | $ | 2,489 | $ | 4,429 | $ | (1,940) | (44) | % | ||||
Container leasing
The increasedecrease in storage, handling and other expenses for the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019March 31, 2020 was primarily attributable to a $1.1 million increasedecrease in storage costs and a $0.5 million decrease in repair expenses due to an increasea decrease in the average size of the off-lease fleet.
Rail leasing
Storage, handling and other expenses for the three months ended June 30, 2020 remained relatively consistent with the three months ended June 30, 2019.
Gain (loss) on sale of rental equipment
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 1,788 | $ | (1,006) | $ | 2,794 | 278 | % | ||||
Rail leasing | 320 | 1,271 | (951) | 75 | % | |||||||
$ | 2,108 | $ | 265 | $ | 1,843 | (695) | % | |||||
Three Months Ended March 31, | Change | |||||||||||
($ in thousand) | 2021 | 2020 | Amount | Percent | ||||||||
Gain on sale of rental equipment | $ | 6,743 | $ | 1,647 | $ | 5,096 | 309 | % | ||||
Container leasing
The increaseWhile there was a decrease of 19% in gain on salethe number of rental equipment forCEUs of containers sold during the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019March 31, 2020, there was mainly attributable to a $2.6 million net selling loss recognized at the commencement of a finance lease during the quarter ended June 30, 2019.
Rail leasing
The decrease in gain on sale of rental equipment for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was mainly attributable to a 13% decrease in the number of railcars sold and a 44% decrease29% increase in the average sale price per unit between the two periods.CEU, resulting in a 385% increase in gain per CEU, due to an increase in demand for equipment.
Administrative expenses
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 6,633 | $ | 7,019 | $ | (386) | (5) | % | ||||
Rail leasing | 756 | 1,030 | (274) | (27) | % | |||||||
$ | 7,389 | $ | 8,049 | $ | (660) | (8) | % | |||||
Three Months Ended March 31, | Change | |||||||||||
($ in thousand) | 2021 | 2020 | Amount | Percent | ||||||||
Administrative expenses | $ | 7,740 | $ | 6,895 | $ | 845 | 12 | % | ||||
Container leasing
The decreaseincrease in administrative expenses for the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019March 31, 2020 was primarily attributable to a $2.0 million decrease in bad debt expense due to cash receipts from a previously reserved customer, partially offset by a $1.5$0.7 million increase in severancepayroll-related costs, associated with the change in our Chief Executive Officer.
Rail leasing
The decrease in administrative expenses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to a $0.4 million decrease in bad debt expenselargely due to improved cash collection from customers.increased incentive-based compensation.
Other expensesexpense
Three Months Ended June 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | 2021 | 2020 | Amount | Percent | ||||||||||||||||
Net interest expense | $ | 17,595 | $ | 23,209 | $ | (5,614) | (24) | % | $ | 11,172 | $ | 18,274 | $ | (7,102) | (39) | % | ||||||||
Other (income) expense | (97) | 119 | (216) | 182 | % | |||||||||||||||||||
Other expense | 410 | 246 | 164 | (67) | % | |||||||||||||||||||
$ | 17,498 | $ | 23,328 | $ | (5,830) | (25) | % | $ | 11,582 | $ | 18,520 | $ | (6,938) | (37) | % | |||||||||
Net interest expense
The decrease in net interest expense for the three months ended June 30, 2020March 31, 2021 compared to the three months ended June 30, 2019March 31, 2020 was due primarily to a decrease in the average interest rate on our outstanding debt from approximately 3.9%3.3% as of June 30, 2019March 31, 2020 to 2.9%2.1% as of June 30, 2020,March 31, 2021, caused primarily by a decrease in LIBOR, as well as a decrease in our average loan principal balance between the two periods, as we decreased acquisition activity for rental equipment.mainly due to the paydown of debt with proceeds from the sale of our railcar portfolio in 2020.
Other (income) expense
Other income,expense, representing a gainloss on foreign exchange of $0.1$0.4 million for the three months ended June 30, 2020, decreasedMarch 31, 2021, increased from a loss of $0.1$0.2 million for the three months ended June 30, 2019,March 31, 2020, primarily as a result of movements in the U.S. Dollar exchange rate against the Euro.
Income tax expense
Three Months Ended June 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | 2021 | 2020 | Amount | Percent | ||||||||||||||||
Income tax expense | $ | 1,113 | $ | 583 | $ | 530 | 91 | % | $ | 2,504 | $ | 1,199 | $ | 1,305 | 109 | % | ||||||||
The increase in income tax expense for the three months ended June 30, 2020March 31, 2021 compared to three months ended June 30, 2019March 31, 2020 was mainly attributable to an increase in the estimated effectiveincome before tax, rate. The full-year estimated effective tax rate was 8.2% at June 30, 2020, compared to an effective tax rate of 5.6% at June 30, 2019. The increase in the estimated full-year effective tax rate was primarily due to an increase in the amount of interest income generated by foreign finance leases subject to both foreign and U.S. income tax.
Preferred stock dividends
Three Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Preferred stock dividends | $ | 2,207 | $ | 2,207 | $ | - | - | % | ||||
Preferred stock dividends for the three months ended June 30, 2020 remained consistent with the three months ended June 30, 2019.
Loss from discontinued operations
Three Months Ended June 30, | Change | |||||||||||
2020 | 2019 | Amount | Percent | |||||||||
Logistics revenue | $ | 22,648 | $ | 29,802 | $ | (7,154) | (24) | % | ||||
Operating expenses | 42,117 | 31,410 | 10,707 | 34 | % | |||||||
Interest income | 3 | 4 | (1) | (25) | % | |||||||
Net loss from discontinued operations | (16,582) | (1,221) | (15,361) | 1,258 | % | |||||||
The decrease in logistics revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, was primarily attributable to a decrease in volume and rates in our intermodal and truck brokerage operations. The increase in operating expenses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, was mainly a result of an $18.5 million loss on classification as held for sale recorded during the quarter ended June 30, 2020, primarily due to the write down of goodwill and intangible assets, partially offset by a $6.6 million, or 25%, decrease in logistics transportation costs, primarily attributable to a decrease in volume and rates.
Results of Operations - Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019 (dollars in thousands):
Six Months Ended June 30, | Change | |||||||||||
2020 | 2019 | Amount | Percent | |||||||||
Total revenue | $ | 150,641 | $ | 164,140 | $ | (13,499) | (8) | % | ||||
Operating expenses | 99,171 | 87,367 | 11,804 | 14 | % | |||||||
Total other expenses | 38,123 | 47,220 | (9,097) | (19) | % | |||||||
Net income attributable to CAI common stockholders | (6,370) | 19,654 | (26,024) | (132) | % | |||||||
The decrease in total revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was attributable to an $11.2 million, or 8%, decrease in container lease revenue and a $2.3 million, or 16%, decrease in rail lease revenue. The increase in operating expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily the result of a $12.4 million, or 169%, increase in impairment charges related to our rail assets, a $5.4 million, or 59% decrease in gain on sale of rental equipment, and a $1.9 million, or 18% increase in storage, handling and other expenses, partially offset by a $5.7 million, or 9%, decrease in depreciation expense and a $2.2 million, or 13% decrease in administrative expenses.
Total other expenses for the six months ended June 30, 2020 decreased compared with the six months ended June 30, 2019, primarily due to a $9.1 million, or 19%, decrease in net interest expense. Total dividends of $4.4 million on our preferred stock were recorded in both the six months ended June 30, 2020 and 2019.
The decrease in revenue, increase in operating expenses, and net loss from discontinued operations, partially offset by the decrease in total other expenses resulted in a decrease in net income attributable to CAI common stockholders for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, of $26.0 million.
Container lease revenue
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container lease revenue | $ | 138,556 | $ | 149,797 | $ | (11,241) | (8) | % | ||||
The decrease in container lease revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was mainly attributable to a $9.5 million decrease in rental revenue resulting from a 7% reduction in average owned container per diem rental rates, a $0.7 million decrease in repair fee revenue, and a $6.6 million decrease in rental revenue arising from a change to cash-based revenue recognition for a certain customer due to collectability issues, partially offset by a $4.7 million increase in rental revenue resulting from a 4% increase in the average number of CEUs of on-lease owned containers and a $0.8 million increase in interest on financing receivable.
Rail lease revenue
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Rail lease revenue | $ | 12,085 | $ | 14,343 | $ | (2,258) | (16) | % | ||||
The decrease in rail lease revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was mainly attributable to a 18% decrease in the average size of the on-lease railcar fleet, caused primarily by the sale of railcars.
Depreciation of rental equipment
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 53,798 | $ | 56,350 | $ | (2,552) | (5) | % | ||||
Rail leasing | 2,096 | 5,249 | (3,153) | (60) | % | |||||||
$ | 55,894 | $ | 61,599 | $ | (5,705) | (9) | % | |||||
Container leasing
Depreciation expense for the six months ended June 30, 2020 decreased compared to the six months ended June 30, 2019. While there was a 2% increase in the average size of our owned container fleet during the last twelve months, 22% of containers purchased during the same period were used, which depreciate at a lower rate or are already fully depreciated.
Rail leasing
The decrease in depreciation expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to differences in the timing of railcar assets being held for sale, during which time no depreciation was charged. Railcar assets were classified as held for sale for three months during the six months ended June 30, 2020, compared to one month during the six months ended June 30, 2019. There was also a 14% decrease in the average size of the railcar fleet during the last twelve months.
Impairment of rental equipment
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Rail leasing | $ | 19,724 | $ | 7,323 | $ | 12,401 | 169 | % | ||||
An impairment charge of $7.3 million was recognized during the six months ended June 30, 2019 to reduce the book value of the railcar portfolio, on an individual basis, to the lower of its net book value or its estimated fair value at the date when the decision was made to sell the assets of the railcar business. The impairment charge for the six months ended June 30, 2020 included a charge of $19.2 million that was recognized during the three months ended March 31, 2020, when the held for sale criteria for the railcar assets were no longer met. The impairment reduced the book value of the railcar portfolio, on an individual basis, to the lower of its net book value had the assets not been classified as held for sale, or its estimated fair value at the date when the decision was made not to sell the assets of the railcar business. For additional information on the impairment, see Note 4 to our consolidated financial statements in this Quarterly Report on Form 10-Q.
Storage, handling and other expenses
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 9,592 | $ | 7,959 | $ | 1,633 | 21 | % | ||||
Rail leasing | 2,630 | 2,360 | 270 | 11 | % | |||||||
$ | 12,222 | $ | 10,319 | $ | 1,903 | 18 | % | |||||
Container leasing
The increase in storage, handling and other expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a $1.6 million increase in storage and repair expenses due to an increase in the average size of the off-lease fleet.
Rail leasing
Storage, handling and other expenses for the six months ended June 30, 2020 remained relatively consistent with the six months ended June 30, 2019.
Gain on sale of rental equipment
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 3,435 | $ | 436 | $ | 2,999 | 688 | % | ||||
Rail leasing | 287 | 8,661 | (8,374) | (97) | % | |||||||
$ | 3,722 | $ | 9,097 | $ | (5,375) | (59) | % | |||||
Container leasing
The increase in gain on sale of rental equipment for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was mainly attributable to a $2.6 million net selling loss recognized at the commencement of a finance lease during the quarter ended June 30, 2019.
Rail leasing
The decrease in gain on sale of rental equipment for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was mainly attributable to a 91% increase in the number of railcars sold between the two periods, primarily due to the sale of 1,946 railcars on February 26, 2019, resulting in a gain on sale of $7.0 million.
Administrative expenses
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Container leasing | $ | 13,442 | $ | 14,867 | $ | (1,425) | (10) | % | ||||
Rail leasing | 1,611 | 2,356 | (745) | (32) | % | |||||||
$ | 15,053 | $ | 17,223 | $ | (2,170) | (13) | % | |||||
Container leasing
The decrease in administrative expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a $3.8 million decrease in bad debt expense due to cash receipts from a previously reserved customer, partially offset by a $1.5 million increase in severance costs associated with the change in our Chief Executive Officer and an increase of $1.2 million in professional fees due to the strategic review process.
Rail leasing
The decrease in administrative expenses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to a $0.5 million decrease in bad debt expense due to improved collection efforts and a $0.2 million decrease in payroll-related costs, largely due to decreased incentive-based compensation expense.
Other expenses
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Net interest expense | $ | 37,974 | $ | 47,063 | $ | (9,089) | (19) | % | ||||
Other expense | 149 | 157 | (8) | (5) | % | |||||||
$ | 38,123 | $ | 47,220 | $ | (9,097) | (19) | % | |||||
Net interest expense
The decrease in net interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due primarily to a decrease in the average interest rate on our outstanding debt from approximately 3.9% as of June 30, 2019 to 2.9% as of June 30, 2020, caused primarily by a decrease in LIBOR, as well as a decrease in our average loan principal balance between the two periods, as we decreased acquisition activity for rental equipment.
Other expense
Other expense for the six months ended June 30, 2020 remained relatively consistent with the six months ended June 30, 2019.
Income tax expense
Six Months Ended June 30, | Change | |||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | ||||||||
Income tax (benefit) expense | $ | (1,943) | $ | 2,732 | $ | (4,675) | (171) | % | ||||
The decrease in income tax expense for the six months ended June 30, 2020 compared to six months ended June 30, 2019 was mainly attributable to a discrete tax benefit of $4.5 million resulting from the impairment of railcar assets charge of $19.2 million during the three months ended March 31, 2020, partially offset by an increase in the estimated effective tax rate. The full-year estimated effective tax rate before discrete items was 8.2%7.1% at June 30, 2020,March 31, 2021, compared to an effective tax rate of 5.6%8.6% at June 30, 2019.March 31, 2020. The increasedecrease in the estimated full-year effective tax rate before discrete items was primarily due to an increase in the amountproportion of interestpretax income generated by foreign finance leases subject to both foreign and U.S. income tax.in lower tax jurisdictions.
Preferred stock dividends
Six Months Ended June 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||
($ in thousand) | 2020 | 2019 | Amount | Percent | 2021 | 2020 | Amount | Percent | ||||||||||||||||
Preferred stock dividends | $ | 4,414 | $ | 4,414 | $ | - | - | % | $ | 2,207 | $ | 2,207 | $ | - | - | % | ||||||||
Preferred stock dividends for the sixthree months ended June 30, 2020March 31, 2021 remained consistent with the sixthree months ended June 30, 2019.March 31, 2020.
LossIncome (loss) from discontinued operations
Six Months Ended June 30, | Change | |||||||||||
2020 | 2019 | Amount | Percent | |||||||||
Logistics revenue | $ | 52,754 | $ | 57,518 | $ | (4,764) | (8) | % | ||||
Operating expenses | 73,094 | 61,151 | 11,943 | 20 | % | |||||||
Interest income | 6 | 8 | (2) | (25) | % | |||||||
Net loss from discontinued operations | (17,246) | (2,753) | (14,493) | 526 | % | |||||||
Three Months Ended March 31, | Change | |||||||||||
2021 | 2020 | Amount | Percent | |||||||||
($ in thousand) | ||||||||||||
Total revenue | $ | 293 | $ | 35,909 | $ | (35,616) | (99) | % | ||||
Operating expenses | (324) | 52,265 | (52,589) | (101) | % | |||||||
Interest expense | - | 2,102 | (2,102) | (100) | % | |||||||
Income tax benefit | (446) | (4,459) | 4,013 | (90) | % | |||||||
Net income (loss) from discontinued operations | 1,063 | (13,999) | 15,062 | (108) | % | |||||||
The decrease in logisticsTotal revenue and operating expenses from discontinued operations for the sixthree months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily attributable to a decrease in volume and a decrease in rates in our intermodal and truck brokerage operations. The increase in operating expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was mainlyMarch 31, 2021 were a result of an $18.5 million loss on classification as held for sale recorded duringimmaterial differences in the quarter ended June 30, 2020, primarily dueactual transactions from the amounts accrued prior to the write downsale of goodwillthe logistics and intangible assets, partially offset by a $4.3 million, or 8%, decreaserailcar businesses in logistics transportation costs, primarily attributable to a decrease in volume.2020.
Liquidity and Capital Resources
As of June 30, 2020,March 31, 2021, we had cash and cash equivalents of $70.1$60.6 million, including $27.7$12.7 million of restricted cash, and $23.9 million of cash held by variable interest entities (VIEs) and $22.2 million of restricted cash.. 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 and debt offerings. Our cash in-flows are used to finance capital expenditures and meet debt service requirements.
As of June 30, 2020,March 31, 2021, our outstanding indebtedness and current maximum borrowing level was as follows (in thousands):
Current | Current | Current | Current | |||||||||
Amount | Maximum | Amount | Maximum | |||||||||
Outstanding | Borrowing Level | Outstanding | Borrowing Level | |||||||||
Revolving credit facilities | $ | 856,061 | $ | 1,378,074 | $ | 815,519 | $ | 1,204,322 | ||||
Term loans | 241,704 | 241,704 | 176,800 | 176,800 | ||||||||
Senior secured notes | 49,720 | 49,720 | 43,610 | 43,610 | ||||||||
Asset-backed notes | 728,027 | 728,027 | 711,136 | 711,136 | ||||||||
Collateralized financing obligations | 82,263 | 82,263 | 61,628 | 61,628 | ||||||||
Term loans held by VIE | 33,887 | 33,887 | 29,884 | 29,884 | ||||||||
1,991,662 | 2,513,675 | 1,838,577 | 2,227,380 | |||||||||
Debt issuance costs | (12,102) | - | ||||||||||
Debt discount and debt issuance costs | (11,820) | - | ||||||||||
Total | $ | 1,979,560 | $ | 2,513,675 | $ | 1,826,757 | $ | 2,227,380 | ||||
As of June 30, 2020,March 31, 2021, we had $521.9$388.7 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 June 30, 2020,March 31, 2021, the borrowing availability under our revolving credit facilities was $162.7$248.8 million, assuming no additional contributions of assets.
We reduced the maximum credit commitment under the Rail revolving credit facility on July 2, 2020 from $250As of March 31, 2021, we had a total of $1,431.3 million to $150 million.
In early July 2020, we entered into anof debt in facilities with fixed interest rates or floating interest rates that have been synthetically fixed through interest rate swap fixing $500 millionagreements, which accounts for 78% of our variable ratetotal outstanding debt. Approximately 77% of our debt is now fixed rate.
For further information on our debt instruments, see Note 6 to the consolidated financial statements in this Quarterly Report on Form 10-Q and Note 107 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 5, 2020.1, 2021.
We continue to monitor the COVID-19 outbreakpandemic and its impact on our overall liquidity position and outlook. The ultimate impact that COVID-19 may have on our operational and financial performance over the next 12 months is currently uncertain and will depend on certain developments, including, among others, the impact of COVID-19 on our customers, and the magnitude and duration of the pandemic.pandemic, and the rollout and efficacy of vaccines. Assuming that our customers continue to meet their contractual commitments, 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.
In addition to customary events of default, the agreements governing our indebtedness contain restrictive covenants, including limitations on certain liens, indebtedness and investments. In addition, the agreements governing our indebtedness contain various restrictive financial and other covenants. The financial covenants in the agreements governing our indebtedness require us to maintain: (1) in the case of our debt facilities, a consolidated funded debt to consolidated tangible net worth ratio, in the case of our debt facilities, 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, in the case of our debt facilities, a fixed charge coverage ratio of at least 1.20:1.00, and in the case of our asset-backed notes, of at least 1.10:2.50:1.00. As of June 30, 2020,March 31, 2021, we were in compliance with all of our financial and other covenants and we expect to remain in compliance for at least the next twelve months.
Cash Flows
The following table sets forth certain cash flow information for the sixthree months ended June 30,March 31, 2021 and 2020 and June 30, 2019 (in thousands):
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||
Net (loss) income | $ | (1,956) | $ | 24,068 | ||||||||
Net income | $ | 35,740 | $ | (1,330) | ||||||||
Net income from continuing operations adjusted for non-cash items | 84,058 | 93,397 | 57,485 | 35,328 | ||||||||
Changes in working capital | 39,253 | 26,480 | 20,481 | 21,213 | ||||||||
Net cash provided by operating activities of continuing operations | 123,311 | 119,877 | 77,966 | 56,541 | ||||||||
Net cash used in investing activities of continuing operations | (3,084) | (46,734) | (145,393) | (2,951) | ||||||||
Net cash used in financing activities of continuing operations | (125,541) | (60,930) | ||||||||||
Net cash provided by (used in) discontinued operations | 2,314 | (2,098) | ||||||||||
Net cash provided by financing activities of continuing operations | 62,425 | 5,225 | ||||||||||
Net cash used in (provided by) discontinued operations | (892) | 2,565 | ||||||||||
Effect on cash of foreign currency translation | (189) | (77) | (8) | (77) | ||||||||
Net (decrease) increase in cash and restricted cash | (3,189) | 10,038 | (5,902) | 61,303 | ||||||||
Cash and restricted cash at beginning of period | 73,239 | 75,983 | 66,502 | 73,239 | ||||||||
Cash and restricted cash at end of period | $ | 70,050 | $ | 86,021 | $ | 60,600 | $ | 134,542 | ||||
Cash Flows from Continuing Operations
Operating Activities
Net cash provided by operating activities of continuing operations was $123.3$78.0 million for the sixthree months ended June 30, 2020,March 31, 2021, an increase of $3.4$21.4 million compared to $119.9$56.5 million for the sixthree months ended June 30, 2019.March 31, 2020. The increase was due to a $12.8$22.2 million increase in our net working capital adjustments, partially offset by a $9.3 million decrease in income from continuing operations as adjusted for depreciation, impairment and other non-cash items.items, partially offset by a $0.7 million decrease in our net working capital adjustments. The decreaseincrease of $9.3$22.2 million in income from continuing operations as adjusted for non-cash items was primarily dueattributable to a decreasean increase of $11.5$22.0 million in income from continuing operations, a decreasean increase of $5.3$2.6 million in deferred tax liabilities due to discrete tax benefits recognized in the prior year, an increase of $1.5 million in depreciation expense, a decrease of $5.3 million in deferred income taxes, and a decrease of $4.3$1.3 million in bad debt expenserecovery due to receipt of paymentscash receipts from a previously reservedcash-based customer in the prior year, partially offset by an increase of $12.4$5.1 million in impairment of rental equipment and a $5.4 million decrease in gain on sale of rental equipment, mainly due to an increase in container prices as a large saleresult of railcars in the prior year.high demand.
Net working capital provided by operating activities of $39.3$20.5 million in the sixthree months ended June 30, 2020,March 31, 2021, was due to a $35.7$21.6 million decrease in net investment in finance leases, primarily due torepresenting the receipt of principal payments and a $4.4$1.2 million decrease in accounts receivable, primarily caused by the timing of cash receipts from customers,prepaid expenses and other assets, partially offset by a $1.1$2.8 million decrease in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments.cash receipts. Net working capital provided by operating activities of $26.5$21.2 million in the sixthree months ended June 30, 2019March 31, 2020 was due to a $32.8$17.1 million decrease in net investment in finance leases, primarily due torepresenting the receipt of principal payments and a $1.2$3.8 million decrease in accounts receivable, primarily caused by the timing of cash receipts from customers, partially offset by a $3.6 million decrease in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments, a $2.1 million increase in prepaid expenses and other current assets, primarily as a result of timing of payments and a $1.9 million decrease in unearned revenue.customers.
Investing Activities
Net cash used in investing activities of continuing operations was $3.1$145.4 million for the sixthree months ended June 30, 2020, a decreaseMarch 31, 2021, an increase of $43.7$142.4 million compared to $46.7net cash used in investing activities of $3.0 million for the sixthree months ended June 30, 2019.March 31, 2020. The decreaseincrease in cash used was primarily attributable to a $199.0$144.1 million decreaseincrease in purchase of rental equipment and a $5.5$5.2 million decreaseincrease in purchase of financing receivable, partially offset by a $161.9$4.2 million decreaseincrease in proceeds from sale of rental equipment.
Financing Activities
Net cash used in financing activities of continuing operations was $125.5 million for the six months ended June 30, 2020, an increase of $64.6 million compared to net cash used in financing activities of $60.9 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, our net cash outflow from borrowings was $121.3 million compared to $22.2 million for the six months ended June 30, 2019. The increase in net cash outflow from borrowings was partially offset byequipment and a decrease of $34.1 million in the repurchase of common stock.
Cash Flows from Discontinued Operations
Net cash provided by discontinued operations was $2.3 million for the six months ended June 30, 2020, an increase of $4.4 million compared to net cash used by discontinued operations of $2.1 million for the six months ended June 30, 2019. The increase in cash was primarily attributable to a $4.3 million increase in net cash provided by operating activitiesreceipt of discontinued operations, mainly resultingprincipal payments from a decrease in accounts receivable due to a decrease in the volume of sales between the two periods.financing receivables.
Financing Activities
Net cash provided by financing activities of continuing operations was $62.4 million for the three months ended March 31, 2021, an increase of $57.2 million compared to net cash provided by financing activities of $5.2 million for the three months ended March 31, 2020. During the three months ended March 31, 2021, our net cash inflow from borrowings was $81.1 million compared to $7.3 million for the three months ended March 31, 2020. The increase in net cash inflow from borrowings was partially offset by an increase of $12.8 million for the repurchase of common stock and an increase of $5.2 million in dividends paid to common stockholders.
Cash Flows from Discontinued Operations
Net cash used in discontinued operations was $0.9 million for the three months ended March 31, 2021, a decrease of $3.5 million compared to net cash provided by discontinued operations of $2.6 million for the three months ended March 31, 2020. The change between the two periods was due to revenue and expenses resulting from immaterial differences in the actual transactions from the amounts accrued prior to the sale of the logistics and railcar business in 2020.
Equity Transactions
Stock Repurchase Plan
In October 2018, we announced that our Board of Directors approved the repurchase of up to three million shares of our outstanding common stock. In February 2021, our Board of Directors increased the share repurchase plan by an additional 2.0 million shares. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and will be evaluated by us depending on prevailing market conditions, corporate needs, and other factors. The stock repurchases may be made in the open market, block trades or privately negotiated transactions. This stock repurchase program replaces any available prior share repurchase authorization and may be discontinued at any time. We did not repurchase anyDuring the three months ended March 31, 2021, we repurchased 0.4 million shares of our common stock under this repurchase plan, during the six months ended June 30, 2020.at a cost of approximately $12.8 million. As of June 30, 2020,March 31, 2021, approximately 1.02.4 million shares remained available for repurchase under our share repurchase program.
Common Stock At-the-Market (ATM) Offering Program
In October 2017, we commenced an ATM offering program with respect to our common stock, which allows us to issue and sell up to 2.0 million shares of our common stock. We did not issue any shares under this ATM program during the six months ended June 30, 2020. We have remaining capacity to issue up to approximately 1.0 million of additional shares of common stock under this ATM offering program.
Series A Preferred Stock ATM Offering Program
In May 2018, we commenced an ATM offering program with respect to our Series A Preferred Stock, which allows us to issue and sell up to 2.2 million shares of our Series A Preferred Stock. We did not issue any shares under this ATM program during the six months ended June 30, 2020. We have remaining capacity to issue up to approximately 1.8 million of additional shares of Series A Preferred Stock under this ATM offering program.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments by due date as of June 30, 2020March 31, 2021 (in thousands):
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
Less than | 1-2 | 2-3 | 3-4 | 4-5 | More than | Less than | 1-2 | 2-3 | 3-4 | 4-5 | More than | |||||||||||||||||||||||||||||
Total | 1 year | years | years | years | years | 5 years | Total | 1 year | years | years | years | years | 5 years | |||||||||||||||||||||||||||
Total debt obligations: | ||||||||||||||||||||||||||||||||||||||||
Revolving credit facilities | $ | 856,061 | $ | 23,561 | $ | - | $ | 695,000 | $ | 137,500 | $ | - | $ | - | $ | 815,519 | $ | - | $ | - | $ | 815,519 | $ | - | $ | - | $ | - | ||||||||||||
Term loans | 241,704 | 97,518 | 43,886 | 28,800 | 71,500 | - | - | 176,800 | 74,550 | 7,800 | 94,450 | - | - | - | ||||||||||||||||||||||||||
Senior secured notes | 49,720 | 6,110 | 6,110 | 37,500 | - | - | - | 43,610 | 6,110 | 37,500 | - | - | - | - | ||||||||||||||||||||||||||
Asset-backed notes | 728,027 | 94,547 | 94,547 | 94,547 | 94,547 | 94,547 | 255,292 | 711,136 | 63,130 | 63,130 | 63,130 | 64,058 | 64,986 | 392,702 | ||||||||||||||||||||||||||
Collateralized financing obligations | 82,263 | 27,808 | 36,971 | - | - | - | 17,484 | 61,628 | 37,852 | 6,292 | - | - | 17,484 | - | ||||||||||||||||||||||||||
Term loans held by VIE | 33,887 | 5,367 | 5,599 | 5,841 | 6,096 | 6,355 | 4,629 | 29,884 | 5,540 | 5,780 | 6,034 | 6,287 | 6,243 | - | ||||||||||||||||||||||||||
Interest on debt and capital lease obligations (1) | 192,516 | 53,768 | 46,387 | 39,928 | 18,796 | 12,900 | 20,737 | 128,608 | 36,142 | 32,196 | 18,375 | 11,602 | 15,316 | 14,977 | ||||||||||||||||||||||||||
Rental equipment payable | 3,356 | 3,356 | - | - | - | - | - | 61,582 | 61,582 | - | - | - | - | - | ||||||||||||||||||||||||||
Rent, office facilities and equipment | 6,498 | 2,816 | 2,639 | 674 | 308 | 61 | - | 3,793 | 2,402 | 993 | 288 | 110 | - | - | ||||||||||||||||||||||||||
Equipment purchase commitments - Containers | 6,762 | 6,762 | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Equipment purchase commitments | 312,668 | 312,668 | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Total contractual obligations | $ | 2,200,794 | $ | 321,613 | $ | 236,139 | $ | 902,290 | $ | 328,747 | $ | 113,863 | $ | 298,142 | $ | 2,345,228 | $ | 599,976 | $ | 153,691 | $ | 997,796 | $ | 82,057 | $ | 104,029 | $ | 407,679 | ||||||||||||
(1)Our estimate of interest expense commitment includes $42.8$10.2 million relating to our revolving credit facilities $17.4subject to variable interest rates, $17.2 million relating to our revolving credit facilities subject to fixed interest rates, $10.7 million relating to our term loans, $5.3$3.0 million relating to our senior secured notes, $116.1$77.9 million relating to our asset-back notes, $6.5$6.1 million relating to our collateralized financing obligations, and $4.5$3.4 million relating to our term loans held by VIE. The calculation of interest commitment related to our debt assumes the following weighted-average interest rates as of June 30, 2020:March 31, 2021: variable-rate revolving credit facilities, 1.7%1.4%; fixed-rate revolving credit facilities, 1.5%; term loans, 3.6%3.2%; senior secured notes, 4.9%; asset-backed notes, 4.1%2.3%; collateralized financing obligations, 0.8%1.8%; and term loans held by VIE, 4.2%. 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, including the potential discontinuation of LIBOR after 2021.
Off-Balance Sheet Arrangements
As of June 30, 2020,March 31, 2021, 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
There have been no changes to our critical accounting policies during the sixthree months ended June 30, 2020.March 31, 2021. See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 5, 2020.1, 2021.
Recent Accounting Pronouncements
The mostIn March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-04 (ASU 2020-04), which adds ASC Topic 848, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022 and ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 and 2021-01 prospectively as and when we enter into transactions to which these updates apply.
Except as described above, there are no other recent adopted accounting pronouncementspronouncement that are described in Note 1relevant to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign exchange rates and interest rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.
Foreign Exchange Rate Risk. Although we have significant foreign-based operations, the U.S. Dollar is our primary operating currency. Thus, most of our revenue and expenses are denominated in U.S. Dollars. We have equipment sales in British Pound Sterling, Euros and Japanese Yen and incur overhead costs in foreign currencies, primarily in British Pound Sterling and Euros. During the sixthree months ended June 30, 2020,March 31, 2021, the U.S. Dollar increased in value in relation to other major foreign currencies (such as the Euro and British Pound Sterling)Euro). The increase in the relative value of the U.S. Dollar has decreased our revenues and expenses denominated in foreign currencies. The associated decrease in the value of certain foreign currencies as compared to the U.S. Dollar has also caused assets held at some of our foreign subsidiaries to decrease in value when translated to US dollars. We recognized a gain on foreign exchange of $0.1 million and a loss on foreign exchange of $0.1$0.4 million for the three and six months ended June 30, 2020, respectively.March 31, 2021. A 10% change in foreign exchange rates would not have a material impact on our financial position, results of operations or cash flows.
Interest Rate Risk. The nature of our business exposes us to market risk arising from changes in interest rates to which our variable-rate debt is linked. In July 2020, we entered into a five-year interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $500.0 million of variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 0.29%. Any changes in the fair value of the derivative instrument are recognized in accumulated other comprehensive loss and reclassified to net interest expense as they are realized.
As of June 30, 2020, the principal amount of debt outstanding under the variable-rate arrangementsMarch 31, 2021, approximately 78% of our revolving credit facilities was $856.1 million. In addition, at June 30, 2020, we had balances on our variable-rate term loans of $98.4 million. As of June 30, 2020, our total outstanding variable-rate debt was $954.5 million,either fixed or hedged using derivative instruments, which represented 48%helps mitigate any negative impact of our total debt at that date. The averagechanges in short-term interest rate on our variable-rate debt was 1.8% as of June 30, 2020, based on LIBOR plusrates. However, a margin based on certain conditions set forth in our debt agreements.
A 1.0% increase or decrease in underlyingthe interest rates for theseon our unhedged debt obligations would result in an increase or decrease of approximately $4.1 million in interest expense by approximately $9.5 million annually assuming debt remains constant at June 30, 2020 levels.
In early July 2020, we entered into an interest rate swap fixing $500 million of our variable rate debt. Approximately 77% of our debt is now fixed rate.
over the next 12 months.
ITEM 4. CONTROLS AND PROCEDURES
Management Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act), we carried out an evaluation, under the supervision and with the participation of our management, including our Executive Vice President,principal executive and Interim President and Chief Executive Officer,financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Executive Vice President,principal executive and Interim President and Chief Executive Officerfinancial officer concluded that as of June 30, 2020March 31, 2021 our disclosure controls and procedures were not effective duewith respect to a material weaknesscontrols and procedures designed to ensure that information required to be disclosed by the Company in internal control overthe reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are accumulated and communicated to the Company’s management, including the Company’s principal executive and financial reporting described in management’s annual report on internal control over financial reporting in our Annual Report on Form 10-K for the year ended December 31, 2019.officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Remediation and Changes in Internal Control Over Financial Reporting
We have taken actions to improve our internal control over financial reporting, including implementing plans as identified in Item 9A of our 2019 Form 10-K, to address our material weakness. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that remediation of this material weakness will be completed in 2020.
Except as noted above, thereThere has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under Exchange Act) that occurred during the quarter ended June 30, 2020,March 31, 2021, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may be a party to litigation matters or disputes arising in the ordinary course of business, including in connection with enforcing our rights under our leases. Currently, we are not a party to any legal proceedings which are material to our business, financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
Before making an investment decision, investors should carefully consider the risks in the “Risk Factors” in Part 1: Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on March 5, 2020.1, 2021. These risks are not the only ones facing our company.Company. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations. Any of these risks could adversely affect our business, cash flows, financial condition and results of operations. The trading price of our common stock and preferred stock could fluctuate due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q. Except as set forth below, thereThere have been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019.
The continued spread of the COVID-19 pandemic may have a material adverse impact on our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has resulted in a significant impact to businesses and supply chains globally. The imposition of work and travel restrictions, as well as other actions by government authorities to contain the outbreak, have led to extended shutdowns of certain businesses, lower factory production, reduced volumes of global imports and exports and disruptions both of global and domestic transportation. The supply chain disruptions and government actions to counter the pandemic further exacerbated financial challenges faced by our shipping line and other customers. Additionally, the economic uncertainty created by the pandemic is affecting demand in several manufacturing sectors and has resulted in a slowdown in the global economy, the extent and duration of which are uncertain. Further, in response to the pandemic, many businesses, including ourselves, have implemented remote working arrangements for their employees during the first quarter of 2020 that may continue, in whole or in part, for an extended period. Risks associated with the COVID-19 pandemic on our business include, but are not limited to:
increased credit concerns relating to our shipping lines, rail shippers and logistics customers as they face reduced demand, operational disruptions and increased costs relating to the pandemic, including the risk of bankruptcy or significant payments defaults or delays;
further reduced demand for rental equipment and increased pressure on lease rates;
reduced demand for sale of rental equipment;
reduced demand for logistics services, both internationally and domestically;
disruption to carriers impacting our ability to provide logistics services to our customers;
operational issues that could prevent our rental equipment from being discharged or picked up in affected areas or in other locations after having visited affected areas for a prolonged period of time;
business community risks associated with the transition to remote working arrangements, including increased cybersecurity risks, internet capacity constraints or other systems problems, and unanticipated difficulties or delays in our financial reporting processes;
liquidity risks, including that disruptions in financial markets as a result of the pandemic may increase the cost and availability of capital, and the risk of non-compliance with financial covenants in debt agreements;
potential impacts on key management, including health impacts and distractions caused by the pandemic response; and
potential impacts on business relationships due to restrictions on travel.
The magnitude of the COVID-19 pandemic, including the extent of any impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably determined at this time due to the rapid development and fluidity of the situation. The effects of the pandemic on our business will depend on its duration and severity, whether business disruptions will continue and the overall impact on the global economy.
2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities by the Issuer
Period | Total Number of Shares (or Units) Purchased (1) | Average Price Paid per Share (or Unit) (1) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) | ||||||
April 1, 2020 – April 30, 2020 | - | $ | - | - | 1,000,000 | |||||
May 1, 2020 – May 31, 2020(2) | 2,648 | 15.58 | - | 1,000,000 | ||||||
June 1, 2020 – June 30, 2020 | - | - | - | 1,000,000 | ||||||
Total | 2,648 | $ | 15.58 | - | 1,000,000 |
Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) | ||||||
January 1, 2021 – January 31, 2021 | 310,098 | $ | 32.57 | 310,098 | 2,751,431 | |||||
February 1, 2021 – February 28, 2021 | 80,374 | 33.34 | 80,374 | 2,441,333 | ||||||
March 1, 2021 – March 31, 2021(2) | 1,629 | 43.35 | - | 2,360,959 | ||||||
Total | 392,101 | $ | 32.77 | 390,472 | 2,360,959 |
(1)On October 8, 2018, we announced that our Board of Directors had approved the repurchase of up to three3.0 million shares of outstanding common stock. On February 11, 2021, the Board of Directors increased the share repurchase plan by an additional 2.0 million shares. The repurchase plan does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. As of June 30, 2020, 1.0March 31, 2021, 2.4 million shares remained available for repurchase under our share repurchase plan.
(2)Represents shares withheld by the Company to satisfy the tax obligations of certain of ourits employees upon the vesting of restricted stock awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See below for a list of exhibits filed or furnished with this report, which are incorporated by reference herein.
Exhibit No. | Description | |
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101 | The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CAI International, Inc. |
| (Registrant) |
|
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| /s/ TIMOTHY B. PAGE |
| Timothy B. Page |
| Executive Vice President, Interim President and Chief Executive Officer |
| (Principal Executive and Financial Officer) |
|
|