CAI International (CAI) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

or

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

 For the transition period from           to

Commission file number: 001-33388

CAI International, Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3109229
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Steuart Tower, 1 Market Plaza, Suite 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  ☒    No   ☐

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  ☒    No   ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

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

Common Stock	October 31, 2019
Common Stock, $0.0001 par value per share	17,425,754 shares

1

CAI INTERNATIONAL, INC.

INDEX

		Page No.
Part I — Financial Information		4
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets at September 30, 2019 and December 31, 2018	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	6
	Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2019 and 2018	7
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	8
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	10
	Notes to Unaudited Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
Part II — Other Information		38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business, operations, growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (SEC) on March 5, 2019 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.

3

PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CAI INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

(UNAUDITED)

	September 30,		December 31,
	2019		2018
Assets
Current assets
Cash	$	21,503	$	20,104
Cash held by variable interest entities		26,772		25,211
Accounts receivable, net of allowance for doubtful accounts of $3,626 and
$2,042 at September 30, 2019 and December 31, 2018, respectively		93,142		95,942
Current portion of net investment in sales-type and direct finance leases		66,977		75,975
Assets held for sale		284,791		449,730
Prepaid expenses and other current assets		6,394		1,525
Total current assets		499,579		668,487
Restricted cash		27,755		30,668
Rental equipment, net of accumulated depreciation of $598,545 and
$557,559 at September 30, 2019 and December 31, 2018, respectively		1,889,266		1,816,794
Net investment in sales-type and direct finance leases		472,790		473,792
Financing receivable		31,661		-
Goodwill		15,794		15,794
Intangible assets, net of accumulated amortization of $6,605 and
$5,397 at September 30, 2019 and December 31, 2018, respectively		4,525		5,733
Other non-current assets		9,364		1,349
Total assets (1)	$	2,950,734	$	3,012,617
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	10,668	$	7,371
Accrued expenses and other current liabilities		25,981		25,069
Unearned revenue		6,355		7,573
Current portion of debt		309,500		311,381
Rental equipment payable		54,202		74,139
Total current liabilities		406,706		425,533
Debt		1,819,649		1,847,633
Deferred income tax liability		33,054		38,319
Other non-current liabilities		5,333		-
Total liabilities (2)		2,264,742		2,311,485
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
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
Common stock, par value $0.0001 per share; authorized 84,000,000 shares; issued and outstanding
17,425,754 and 18,764,459 shares at September 30, 2019 and December 31, 2018, respectively		2		2
Additional paid-in capital		101,317		132,666
Accumulated other comprehensive loss		(6,845)		(6,513)
Retained earnings		487,653		471,112
Total stockholders' equity		685,992		701,132
Total liabilities and stockholders' equity	$	2,950,734	$	3,012,617

4

(1) Total assets at September 30, 2019 and December 31, 2018 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $26,772 and $25,211; Net investment in direct finance leases, $6,101 and $13,862; and Rental equipment, net of accumulated depreciation,  $108,323, and $71,958, respectively.

(2) Total liabilities at September 30, 2019 and December 31, 2018 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $28,650 and $41,066;  Debt, $108,487 and $67,615, respectively. 

See accompanying notes to unaudited consolidated financial statements.

5

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue
Container lease revenue	$	77,300	$	75,331	$	228,585	$	208,298
Logistics revenue		30,270		31,362		87,788		81,251
Total revenue		107,570		106,693		316,373		289,549
Operating expenses
Depreciation of rental equipment		28,750		27,735		85,819		79,016
Storage, handling and other expenses		4,672		2,506		12,631		5,803
Logistics transportation costs		27,037		27,541		77,647		70,536
Gain on sale of rental equipment		(2,411)		(2,633)		(5,436)		(7,530)
Administrative expenses		12,702		11,895		38,110		33,445
Total operating expenses		70,750		67,044		208,771		181,270
Operating income		36,820		39,649		107,602		108,279
Other expenses
Net interest expense		20,123		15,811		60,049		43,758
Other expense		380		116		537		510
Total other expenses		20,503		15,927		60,586		44,268
Income before income taxes		16,317		23,722		47,016		64,011
Income tax expense		1,152		1,403		2,871		3,197
Income from continuing operations		15,165		22,319		44,145		60,814
Loss from discontinued operations, net of income taxes		(19,912)		(565)		(20,983)		(1,625)
Net (loss) income		(4,747)		21,754		23,162		59,189
Preferred stock dividends		2,207		1,748		6,621		2,917
Net (loss) income attributable to CAI common stockholders	$	(6,954)	$	20,006	$	16,541	$	56,272
Amounts attributable to CAI common stockholders
Net income from continuing operations	$	12,958	$	20,571	$	37,524	$	57,897
Net loss from discontinued operations		(19,912)		(565)		(20,983)		(1,625)
Net (loss) income attributable to CAI common stockholders	$	(6,954)	$	20,006	$	16,541	$	56,272
Net income (loss) per share attributable to CAI common
stockholders
Basic
Continuing operations	$	0.75	$	1.07	$	2.10	$	2.93
Discontinued operations		(1.15)		(0.03)		(1.17)		(0.08)
Total basic	$	(0.40)	$	1.04	$	0.93	$	2.85
Diluted
Continuing operations	$	0.74	$	1.06	$	2.07	$	2.90
Discontinued operations		(1.14)		(0.03)		(1.16)		(0.09)
Total diluted	$	(0.40)	$	1.03	$	0.91	$	2.81
Weighted average shares outstanding
Basic		17,330		19,214		17,850		19,741
Diluted		17,525		19,492		18,122		19,997

See accompanying notes to unaudited consolidated financial statements.

6

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net (loss) income	$	(4,747)	$	21,754	$	23,162	$	59,189
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		(256)		(19)		(332)		(257)
Comprehensive (loss) income before preferred stock dividends		(5,003)		21,735		22,830		58,932
Dividends on preferred stock		(2,207)		(1,748)		(6,621)		(2,917)
Comprehensive (loss) income available to CAI common stockholders	$	(7,210)	$	19,987	$	16,209	$	56,015

See accompanying notes to unaudited consolidated financial statements.

7

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)

									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-In		Comprehensive		Retained		Total
	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
Preferred stock dividends, $0.53125/share	-		-	-		-		-		-		(2,207)		(2,207)
Foreign currency translation adjustment	-		-	-		-		-		(81)		-		(81)
Repurchase of common stock	-		-	(595)		-		(13,946)		-		-		(13,946)
Stock-based compensation	-		-	39		-		837		-		-		837
Balances as of March 31, 2019	4,155	$	103,865	18,208	$	2	$	119,557	$	(6,594)	$	487,479	$	704,309
Net income	-		-	-		-		-		-		9,335		9,335
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)
Stock-based compensation	-		-	75		-		916		-		-		916
Balances as of June 30, 2019	4,155	$	103,865	17,420	$	2	$	100,301	$	(6,589)	$	494,607	$	692,186
Net loss	-		-	-		-		-		-		(4,747)		(4,747)
Preferred stock dividends, $0.53125/share	-		-	-		-		-		-		(2,207)		(2,207)
Foreign currency translation adjustment	-		-	-		-		-		(256)		-		(256)
Stock-based compensation	-		-	6		-		1,016		-		-		1,016
Balances as of September 30, 2019	4,155	$	103,865	17,426	$	2	$	101,317	$	(6,845)	$	487,653	$	685,992

8

									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-In		Comprehensive		Retained		Total
	Shares		Amount	Shares		Amount	Capital		Loss		Earnings		Equity
Balances as of December 31, 2017	-	$	-	20,391	$	2	$	172,325	$	(6,122)	$	397,640	$	563,845
Net income	-		-	-		-		-		-		17,138		17,138
Preferred stock dividends, $0.01181/share	-		-	-		-		-		-		(21)		(21)
Foreign currency translation adjustment	-		-	-		-		-		310		-		310
Issuance of common and preferred stock,
net of offering costs	1,600		40,000	100		-		956		-		-		40,956
Stock-based compensation	-		-	2		-		592		-		-		592
Balances as of March 31, 2018	1,600	$	40,000	20,493	$	2	$	173,873	$	(5,812)	$	414,757	$	622,820
Net income	-		-	-		-		-		-		20,297		20,297
Preferred stock dividends, $0.53125/share	-		-	-		-		-		-		(1,148)		(1,148)
Foreign currency translation adjustment	-		-	-		-		-		(548)		-		(548)
Issuance of common and preferred stock,
net of offering costs	600		14,990	-		-		(370)		-		-		14,620
Repurchase of common stock	-		-	(1,225)				(27,946)						(27,946)
Stock-based compensation	-		-	38		-		653		-		-		653
Balances as of June 30, 2018	2,200	$	54,990	19,306	$	2	$	146,210	$	(6,360)	$	433,906	$	628,748
Net income	-		-	-		-		-		-		21,754		21,754
Preferred stock dividends, $0.53125/share	-		-	-		-		-		-		(1,748)		(1,748)
Foreign currency translation adjustment	-		-	-		-		-		(19)		-		(19)
Issuance of common and preferred stock,
net of offering costs	1,955		48,875	-		-		(1,893)		-		-		46,982
Stock-based compensation	-		-	-		-		752		-		-		752
Balances as of September 30, 2018	4,155	$	103,865	19,306	$	2	$	145,069	$	(6,379)	$	453,912	$	696,469

See accompanying notes to unaudited consolidated financial statements.

9

CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities
Net income	$	23,162	$	59,189
Loss from discontinued operations, net of income taxes		(20,983)		(1,625)
Income from continuing operations		44,145		60,814
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities:
Depreciation		85,988		79,128
Amortization of debt issuance costs		3,005		2,648
Amortization of intangible assets		1,208		1,538
Stock-based compensation expense		2,142		1,888
Unrealized loss on foreign exchange		345		317
Gain on sale of rental equipment		(5,436)		(7,530)
Deferred income taxes		1,260		2,424
Bad debt expense (recovery)		1,224		(149)
Changes in other operating assets and liabilities:
Accounts receivable		2,556		(6,889)
Prepaid expenses and other assets		398		(1,611)
Net investment in sales-type and direct finance leases		45,400		-
Accounts payable, accrued expenses and other liabilities		4,057		(477)
Unearned revenue		(151)		(86)
Net cash provided by operating activities of continuing operations		186,141		132,015
Net cash provided by operating activities of discontinued operations		2,016		7,572
Net cash provided by operating activities		188,157		139,587
Cash flows from investing activities
Purchase of rental equipment		(256,469)		(477,703)
Purchase of financing receivable		(37,139)		-
Proceeds from sale of rental equipment		56,422		43,645
Purchase of furniture, fixtures and equipment		(1,720)		(393)
Receipt of principal payments from financing receivable		1,825		-
Receipt of principal payments from sales-type and direct finance leases		-		26,982
Net cash used in investing activities of continuing operations		(237,081)		(407,469)
Net cash provided by (used in) investing activities of discontinued operations		123,199		(50,800)
Net cash used in investing activities		(113,882)		(458,269)
Cash flows from financing activities
Proceeds from debt		500,582		1,227,412
Principal payments on debt		(419,908)		(981,465)
Debt issuance costs		(724)		(9,882)
Proceeds from issuance of common and preferred stock		-		103,681
Repurchase of common stock		(34,118)		(27,946)
Dividends paid to preferred stockholders		(6,620)		(1,376)
Exercise of stock options		532		24
Net cash provided by financing activities of continuing operations		39,744		310,448
Net cash (used in) provided by financing activities of discontinued operations		(113,098)		31,011
Net cash (used in) provided by financing activities		(73,354)		341,459
Effect on cash of foreign currency translation		(874)		(23)
Net increase in cash and restricted cash		47		22,754
Cash and restricted cash at beginning of the period (1)		75,983		47,209
Cash and restricted cash at end of the period (2)	$	76,030	$	69,963

10

Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes	$	559	$	378
Interest		65,330		51,168
Supplemental disclosure of non-cash operating activity
Lease liabilities arising from obtaining right-of-use assets	$	5,306	$	-
Supplemental disclosure of non-cash investing and financing activity
Transfer of rental equipment to sales-type and direct finance lease	$	52,895	$	271,938
Transfer of sales-type and direct finance lease to rental equipment		14,432		-
Rental equipment payable		54,202		257,947

(1) Includes cash of $20,104 and $14,735, cash held by variable interest entities of $25,211 and $20,685, and restricted cash of $30,668 and $11,789 at December 31, 2018 and 2017, respectively.

(2) Includes cash of $21,503 and $14,550, cash held by variable interest entities of $26,772 and $23,779, and restricted cash of $27,755 and $31,634 at September 30, 2019 and 2018, respectively.

See accompanying notes to unaudited consolidated financial statements.

11

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1)  The Company and Nature of Operations

Organization

CAI International, Inc., together with its subsidiaries (collectively, CAI or the Company), is a transportation finance and logistics company. The Company purchases equipment, primarily intermodal shipping containers and railcars, which it leases to its customers. The Company also manages equipment for third-party investors. In operating its fleet, the Company leases, re-leases and disposes of equipment and contracts for the repair, repositioning and storage of equipment. The Company also provides domestic and international logistics services.

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 September 30, 2019 and December 31, 2018, the Company’s results of operations for the three and nine months ended September 30, 2019 and 2018, and the Company’s cash flows for the nine months ended September 30, 2019 and 2018. 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 2019 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, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 5, 2019.

Discontinued Operations

In the quarter ended June 30, 2019, the Company committed to a plan to sell its railcar assets and to reallocate the capital invested in its rail business to other investments. As a result, the railcar assets have been reclassified as held for sale in the accompanying unaudited consolidated balance sheets and the operations of the rail business have been reclassified as discontinued operations in the accompanying unaudited consolidated statements of operations and cash flows. All prior periods presented in these unaudited consolidated financial statements have been restated to reflect the reclassification of the railcar business as discontinued operations and assets held for sale. See Note 3 – Discontinued Operations for more information.

(2)  Accounting Policies and Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), and subsequently issued amendments thereto, that replaced existing lease accounting guidance. The new standard requires lessors to classify leases as a sales-type, direct financing, or operating lease. A lease is a sales-type lease if any of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all of the risks and benefits of the underlying asset to the lessee and a third-party, the lease is a direct financing lease. All leases that are not sales-type or direct financing leases are operating leases. The new standard also established a right-of-use model (ROU) that requires lessees to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months.

The Company adopted ASU 2016-02, as amended, effective January 1, 2019, using the modified retrospective approach and the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. In addition, the Company elected the following practical expedients permitted under the transition guidance within the new standard: (1) the “package of practical expedients,” which does not require the Company to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs, (2) the short-term lease recognition exemption for its office space leases of twelve months or less, which resulted in the Company not recognizing an ROU asset or lease liability for these leases, and (3) the practical expedient to not separate lease and non-lease components for leases that qualify for the practical expedient.  

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Adoption of the new standard resulted in the recognition of operating lease ROU assets of $3.7 million and operating lease liabilities of $4.1 million as of January 1, 2019. Adoption did not have an impact on the Company’s consolidated statements of operations or cash flows. 

Except as described above, there were no changes to the Company’s accounting policies during the nine months ended September 30, 2019. 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, 2018, filed with the SEC on March 5, 2019, for a description of the Company’s significant accounting policies.

Accounting Policies

(a)  Container and Rail Lease Revenue

The Company recognizes revenue from operating leases of its equipment as earned over the term of the lease. Where minimum lease payments vary over the lease term, revenue is recognized on a straight-line basis over the term of the lease. The Company recognizes revenue on a cash basis for certain railcar leases that are billed on an hourly or mileage basis through a third-party railcar manager. Early termination of the rental contracts subjects the lessee to a penalty, which is included in lease revenue upon such termination. Sales-type and finance lease income, and interest earned on financing receivables are recognized using the effective interest method, which generates a constant rate of interest over the term of the arrangement. 

Certain leases include one or more options to renew or purchase the leased rental equipment. The exercise of lease renewal or equipment purchase options is at the sole discretion of the customer.

Included in lease revenue is revenue consisting primarily of fees charged to the lessee for handling, delivery, and repairs. These activities are considered non-lease components of the contract, which are generally accounted for separately from the lease component, and revenue is recognized as earned in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue Recognition.  For certain leases of railcar equipment, the Company is responsible for the repair and maintenance of the railcars throughout the lease term. For such leases, the lease and non-lease component are combined as a single lease component,  and revenue is recognized as earned in accordance with ASC Topic 842, Leases.

Also included in lease revenue is revenue from management fees earned under equipment management agreements. Management fees are generally calculated as a percentage of the monthly net operating income for an investor’s portfolio and recognized as revenue in the month of service.

 (b)  Leases

The Company leases office space under operating leases with expiration dates through 2025. The Company determines whether an arrangement constitutes a lease and records lease liabilities and ROU assets on its consolidated balance sheets at lease commencement. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease pre-payments made and exclude lease incentives. Certain of the Company’s leases include one or more options to renew, which are included in the lease term only when it is reasonably certain that the Company will exercise that option. The Company’s office space leases often include lease and non-lease components, which are combined and accounted for as a single lease component. 

For short-term leases, the Company records rent expense in its consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred.

(3)  Discontinued Operations

As discussed in Note 1, railcar assets of $284.8 million and $449.7 million were reclassified as held for sale as of September 30, 2019 and December 31, 2018, respectively, and the related operations of the rail business as discontinued operations in the accompanying unaudited consolidated statements of operations and cash flows.

The Company’s held for sale railcar assets as of the dates indicated are made up as follows (in thousands):

	September 30,		December 31,
	2019		2018
Rental equipment	$	315,868	$	448,466
Other assets		1,878		1,264
Loss on classification as held for sale		(7,323)		-
Impairment of rental equipment		(25,632)		-
Assets held for sale	$	284,791	$	449,730

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other assets and liabilities of the rail business, including accounts receivable, accrued expenses and other liabilities, deferred tax liabilities and debt, have not been classified as held for sale in the consolidated balance sheets as of September 30, 2019 and December 31, 2018 as they will not be sold by the Company. The rail debt will be repaid upon the sale of the railcar assets.

During the three months ended June 30, 2019, a loss of $7.3 million was recorded when the assets of the railcar business were reclassified as held for sale. During the three months ended September 30, 2019, the Company incurred an additional impairment charge of $25.6 million to reduce the book value of its railcar portfolio to its estimated fair value. To assist the Company in its assessment of fair value, a third-party desk top appraisal was carried out on the railcar fleet using the market value approach. The railcars were classified within Level 3 of the fair value hierarchy.

The following table summarizes the components of net loss from discontinued operations in the accompanying unaudited consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue
Rail lease revenue	$	5,871	$	8,759	$	20,214	$	26,982
Operating expenses
Depreciation of rental equipment		-		3,537		5,248		10,505
Storage, handling and other expenses		3,453		1,008		5,813		4,424
(Gain) loss on sale of rental equipment		(757)		8		(9,418)		(9)
Administrative expenses		620		974		2,977		2,825
Total operating expenses		3,316		5,527		4,620		17,745
Operating income		2,555		3,232		15,594		9,237
Interest expense		2,975		3,972		10,104		11,364
(Loss) income before income taxes		(420)		(740)		5,490		(2,127)
Loss on classification as held for sale and subsequent impairment		25,632		-		32,955		-
Loss from discontinued operations before income taxes		(26,052)		(740)		(27,465)		(2,127)
Income tax benefit		(6,140)		(175)		(6,482)		(502)
Net loss from discontinued operations	$	(19,912)	$	(565)	$	(20,983)	$	(1,625)

(4)  Consolidation of Variable Interest Entities

The Company regularly performs a review of its container fund arrangements with investors to determine whether or not it has a variable interest in the fund and if the fund is a variable interest entity (VIE). If it is determined that the Company does not have a variable interest in the fund, further analysis is not required and the Company does not consolidate the fund. If it is determined that the Company does have a variable interest in the fund and the fund is a VIE, a further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under FASB ASC Topic 810, 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 two types of container fund arrangements with investors which are reviewed under FASB ASC Topic 810, Consolidation. These arrangements include container funds that the Company manages for investors and container funds that have entered into financing arrangements with investors. 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.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. No container portfolios were sold to the funds during the three and nine months ended September 30, 2019 and 2018.  

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.

The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under FASB ASC Topic 810, Consolidation, because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance, including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of September 30, 2019 and December 31, 2018, and the results of the VIEs’ operations and cash flows for the three and nine months ended September 30, 2019 and 2018, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $114.4 million as of September 30, 2019. The container equipment, together with $26.8 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 $99.4 million and term loans held by VIE of $37.8 million.  No gain or loss was recognized by the Company on the initial consolidation of the VIEs. Containers sold to the Japanese investor funds during both the three and nine months ended September 30, 2019 had a net book value of $65.0 million. Containers sold to the Japanese investor during the three and nine months ended September 30, 2018 had a net book value of $14.6 million and $29.8 million, respectively.

(5)  Rental Equipment

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

	September 30,		December 31,
	2019		2018
Dry containers	$	1,966,688	$	1,840,304
Refrigerated containers		298,202		341,983
Other specialized equipment		222,921		192,066
		2,487,811		2,374,353
Accumulated depreciation		(598,545)		(557,559)
Rental equipment, net of accumulated depreciation	$	1,889,266	$	1,816,794

(6)  Net Investment in Sales-Type and Direct Finance Leases

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

	September 30,		December 31,
	2019		2018
Gross sales-type and finance lease receivables (1)	$	781,624	$	804,511
Unearned income (2)		(241,857)		(254,744)
Net investment in sales-type and direct finance leases	$	539,767	$	549,767

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(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 sales-type and finance lease receivables. The gross sales-type and finance lease receivables are reduced as customer payments are received. There was $74.3 million and $74.4 million of unguaranteed residual value at September 30, 2019 and December 31, 2018, respectively, included in gross sales-type and finance lease receivables. There were no executory costs included in gross sales-type and finance lease receivables as of September 30, 2019 and December 31, 2018.

(2)The difference between the gross sales-type and finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of September 30, 2019 and December 31, 2018.

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

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

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

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

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

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

	September 30,		December 31,
	2019		2018
Tier 1	$	714,921	$	698,014
Tier 2		66,703		106,497
Tier 3		-		-
	$	781,624	$	804,511

Contractual maturities of the Company's gross sales-type and finance lease receivables subsequent to September 30, 2019 for the years ending September 30 are as follows (in thousands):

2020	$	109,400
2021		98,955
2022		91,883
2023		91,211
2024		61,405
2025 and thereafter		328,770
	$	781,624

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7)  Financing Receivable

The Company has entered into agreements with customers to purchase rental equipment and to lease the equipment back to the customers on a finance lease. As control of the equipment has been retained by the customers, the Company concluded that sale-leaseback accounting was not applicable and has treated the arrangements as financing transactions. The amount paid by the Company has been recorded as a financing receivable. Payments made by the customers 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):

		September 30,
	Financial statement caption	2019
Current	Prepaid expenses and other current assets	$	3,653
Non-current	Financing receivable		31,661
Total financing receivable		$	35,314

In order to estimate an allowance for losses from financing receivables, the Company reviews the credit worthiness of its customers on an ongoing basis. As of September 30, 2019, $34.6 million and $0.7 million of the Company’s financing receivable would be categorized as Tier 1 and Tier 2, respectively, based on the internal customer credit ratings as described in Note 6.

(8)  Intangible Assets

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

Trademarks and tradenames	2-3 years
Customer relationships	5-8 years

The Company’s intangible assets as of September 30, 2019 and December 31, 2018 were as follows (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
September 30, 2019
Trademarks and tradenames	$	1,786	$	(1,786)	$	-
Customer relationships		9,344		(4,819)		4,525
	$	11,130	$	(6,605)	$	4,525
December 31, 2018
Trademarks and tradenames	$	1,786	$	(1,786)	$	-
Customer relationships		9,344		(3,611)		5,733
	$	11,130	$	(5,397)	$	5,733

Amortization expense was $0.4 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, and $1.2 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively, and was included in administrative expenses in the consolidated statements of operations.

As of September 30, 2019, estimated future amortization expenses are as follows (in thousands):

2020	$	1,609
2021		1,609
2022		664
2023		474
2024		169
	$	4,525

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9)  Leases

Lessor

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		Nine months
	ended		ended
	September 30,		September 30,
	2019		2019
Lease revenue - sales-type and direct finance leases
Profit at lease commencement	$	-	$	-
Interest income on lease receivable		11,112		33,436
		11,112		33,436
Lease revenue - operating leases		62,002		184,464
Other revenue		3,499		9,404
Interest income on financing receivable		687		1,281
Total lease revenue	$	77,300	$	228,585

The following represents future minimum rents receivable under long-term non-cancelable operating leases (in thousands):

	As of
	September 30,
	2019
2020	$	159,590
2021		138,980
2022		118,278
2023		84,772
2024		48,966
2025 and thereafter		85,945
Total	$	636,531

	As of
	December 31,
	2018
2019	$	158,252
2020		129,740
2021		112,111
2022		96,964
2023		66,864
2024 and thereafter		107,346
Total	$	671,277

See Note 6 for contractual maturities of the Company’s gross sales-type and finance lease receivables.

Lessee

The Company has entered into various non-cancelable office space leases with original lease periods expiring between 2019 and 2025.  As of September 30, 2019, operating lease ROU assets of $6.8 million were reported in other non-current assets in the consolidated balance sheets. As of September 30, 2019, total operating lease liabilities were $7.7 million, of which $2.4 million are due within one year and $5.3 million are due beyond one year and were recorded in accrued expenses and other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets.

Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. Lease expense for lease payments is recognized on a straight-line basis over the lease term and is reported in administrative expenses in the consolidated statements of operations.  

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the components of lease expense (in thousands):

	Three months		Nine months
	ended		ended
	September 30,		September 30,
	2019		2019
Operating lease cost	$	684	$	1,870
Short-term lease cost		19		50
Variable lease cost		112		269
Total lease cost	$	815	$	2,189

The weighted-average remaining term of the Company’s operating leases was 3.2 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 3.7% as of September 30, 2019.

Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of September 30, 2019 were as follows (in thousands):

2020	$	2,628
2021		2,612
2022		2,219
2023		499
2024		216
2025 and thereafter		39
Total lease payments		8,213
Less imputed interest		(467)
Total operating lease liabilities	$	7,746

Cash paid for operating leases was $1.8 million during the nine months ended September 30, 2019.

(10)  Debt

Details of the Company’s debt as of September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	September 30, 2019						December 31, 2018
	Outstanding					Average	Outstanding				Average
	Current			Long-term		Interest	Current		Long-term		Interest	Maturity
Revolving credit	$	-		$	480,000	3.5%	$	4,200	$	301,000	4.2%	June 2023
Revolving credit facility - Rail (1) (2)		-			162,500	3.5%		-		272,500	4.2%	October 2023
Revolving credit facility - Euro		18,559	��		-	2.0%		-		19,457	2.0%	September 2020
Term loan		1,800			25,950	4.3%		1,800		27,300	4.5%	April 2023
Term loan (3)		107,250			-	3.6%		111,750		-	3.8%	October 2019
Term loan		7,000			70,250	3.8%		7,000		75,500	4.0%	June 2021
Term loan (1)		1,273			14,325	3.4%		1,240		15,284	3.4%	December 2020
Term loan (1)		2,989			38,399	3.6%		2,909		40,651	3.6%	August 2021
Term loan		6,000			88,000	4.6%		6,000		92,500	4.6%	October 2023
Senior secured notes		6,110			46,665	4.9%		6,110		52,775	4.9%	September 2022
Asset-backed notes 2012-1		17,100			35,625	3.5%		17,100		48,450	3.5%	October 2027
Asset-backed notes 2013-1		22,900			57,250	3.4%		22,900		74,425	3.4%	March 2028
Asset-backed notes 2017-1		25,307			170,822	3.7%		25,307		189,802	3.7%	June 2042
Asset-backed notes 2018-1		34,890			258,767	4.0%		34,890		284,935	4.0%	February 2043
Asset-backed notes 2018-2		34,350			274,800	4.4%		34,350		300,563	4.4%	September 2043
Collateralized financing obligations		23,455			75,917	1.5%		39,610		67,615	1.2%	December 2021
Term loans held by VIE		5,195			32,570	4.2%		1,456		-	3.3%	June 2019
		314,178			1,831,840			316,622		1,862,757
Debt issuance costs		(4,678)			(12,191)			(5,241)		(15,124)
Total Debt	$	309,500		$	1,819,649		$	311,381	$	1,847,633

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) These facilities will be repaid upon the sale of the railcar assets.

(2) The maximum credit commitment under the Rail revolving credit facility was decreased on October 1, 2019 from $550 million to $250 million.

(3) Outstanding balance of $107.3 million was repaid on October 1, 2019.

The Company maintains its revolving credit facilities to finance the acquisition of rental equipment and for general working capital purposes. As of September 30, 2019, the Company had $1,016.1 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 September 30, 2019, the borrowing availability under the Company’s revolving credit facilities was $88.4 million, assuming no additional contributions of assets.

On March 29, 2019, one of the Japanese investor funds that is consolidated by the Company as a VIE (see Note 4) entered into a term loan agreement with a bank. Under the terms of the term loan agreement, the Japanese investor fund entered into a seven-year, amortizing term loan of $40.8 million at a fixed interest rate of 4.2%. The term loan is secured by assets of the Japanese investor fund, and is subject to certain borrowing conditions set out in the term loan agreement.

The agreements relating to all of the Company’s debt contain various financial and other covenants. As of September 30, 2019, the Company was in compliance with all of its financial and other covenants.

For further information on the Company’s debt instruments, see Note 8  to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019.

(11)  Stock–Based Compensation Plan

2019 Incentive Plan

In June 2019, the Company’s stockholders approved the CAI International, Inc. 2019 Incentive Plan (2019 Plan), which replaces 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, the Company may grant incentive and nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock or cash-based awards.

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. 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 nine months ended September 30, 2019 and 2018:

		Nine Months Ended September 30,
	2019				2018
			Weighted				Weighted
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price		Shares		Price
Options outstanding at January 1		850,167	$	16.46		859,560	$	16.44
Options exercised		(138,723)	$	13.95		(9,393)	$	14.76
Options forfeited		(3,000)	$	12.88		-	$	-
Options expired		(15,000)	$	25.53		-	$	-
Options outstanding at September 30		693,444	$	16.78		850,167	$	16.46
Options exercisable		591,842	$	17.42		625,263	$	17.54
Weighted average remaining term		5.7 years				6.0 years

The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2019 and 2018 was $1.4 million and $0.1 million, respectively. The aggregate intrinsic value of all options outstanding as of September 30, 2019 was $3.7 million based on the closing price of the Company’s common stock of $21.77 per share on September 30, 2019, the last trading day of the quarter.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company recognized stock-based compensation expense relating to stock options of $0.2 million for both the three months ended September 30, 2019 and 2018, and $0.6 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $0.7 million, which is to be recognized over the remaining weighted average vesting period of approximately 1.1 years.

The Company did not grant any stock options during the nine months ended September 30, 2019 and 2018.

Restricted Stock and Performance Stock 

The Company grants restricted stock units and restricted stock awards from time to time to certain employees and independent directors pursuant to the 2019 Plan. Restricted stock granted to employees has a vesting period of four years; 25% vesting on each anniversary of the grant date. Restricted stock granted to independent directors vests in one year. The Company recognizes the compensation cost associated with restricted stock over the vesting period based on the closing price of the Company’s common stock on the date of grant.

The Company grants performance stock to certain executives and other key employees. The performance stock vests 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 stock 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 and performance stock under the 2019 Plan:

		Weighted
		Average
	Number of	Grant Date
	Shares	Fair Value
Outstanding at December 31, 2018	204,730	$	20.45
Granted	166,939	$	25.37
Vested	(81,259)	$	20.89
Forfeited	(8,674)	$	22.42
Outstanding at September 30, 2019	281,736	$	23.18

The Company recognized stock-based compensation expense relating to restricted stock and performance stock awards of $0.7 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, and $1.8 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, unamortized stock-based compensation expense relating to restricted stock and performance stock was $4.8 million, which will be recognized over the remaining average vesting period of 2.2  years.

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. 

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 ESPP has not yet been implemented and no shares were issued under the ESPP during the three months ended September 30, 2019.

(12)  Income Taxes

The consolidated income tax expense for the three and nine months ended September 30, 2019 and 2018, was determined based upon estimates of the Company’s consolidated annual effective income tax rate for the years ending December 31, 2019 and 2018, respectively. The difference between the consolidated annual effective income tax rate and the U.S. federal statutory rate is primarily attributable to foreign income taxes, state income taxes and the effect of certain permanent differences.

The Company’s estimated effective tax rate was 6.1% at September 30, 2019, compared to 5.0% at September 30, 2018.  

21

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company accounts for uncertain tax positions based on an evaluation as to whether it is more likely than not that a position will be sustained on audit, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the appropriate tax authorities have full knowledge of all relevant information concerning the tax position. Once it has been determined that a tax position is more likely than not to be sustained on its technical merits, the tax benefit recognized is based on the largest amount that is greater than 50% likely of being realized upon ultimate settlement. As of September 30, 2019, 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 less than $0.1 million as of September 30, 2019. The Company does not believe the total amount of unrecognized tax benefits as of September 30, 2019 will change for the remainder of 2019.

(13)  Fair Value of Financial Instruments

The carrying amounts of cash, restricted cash, accounts receivable and accounts payable reflected in the balance sheets as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018 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 $151.0 million, $931.8 million and $99.4 million as of September 30, 2019, with a fair value of approximately $153.7 million, $945.3 million and $100.8 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 asset-backed notes and collateralized financing obligations was $1,032.7 million and $107.2 million as of December 31, 2018, with a fair value of approximately $1,024.7 million and $108.9 million, respectively. Management believes that the balances of the Company’s senior secured notes of $52.8 million and $58.9 million and term loans held by VIE of $37.8 million and $1.5 million as of September 30, 2019 and December 31, 2018, respectively, fixed-rate term loans of $158.6 million as of December 31, 2018,  and financing receivable of $35.3 million as of September 30, 2019, approximate their fair values. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy.

(14)  Commitments and Contingencies

In addition to its debt obligations described in Note 9 above, the Company had commitments to purchase approximately $32.8 million of containers as of September 30, 2019, all in the twelve months ending September 30, 2020.  

(15)  Stockholders’ Equity

Stock Repurchase Plan

In October 2018, the Company announced that the Board of Directors approved the repurchase of up to three million shares of its outstanding common stock. 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. During the nine months ended September 30, 2019, the Company repurchased 1.5 million shares of its common stock under this repurchase plan, at a cost of approximately $34.1 million. The Company did not repurchase any shares under this repurchase plan during the three months ended September 30, 2019. As of September 30, 2019, approximately 1.0 million shares remained available for repurchase under this share repurchase program.

Common Stock At-the-Market (ATM) Offering Program

In October 2017, the Company commenced an ATM offering program with respect to its common stock, which allows the Company to issue and sell up to 2.0 million shares of its common stock. The Company did not issue any shares under this ATM offering program during the nine months ended September 30, 2019. The Company has remaining capacity to issue and sell up to approximately 1.0 million of additional shares of common stock under this ATM offering program.

Series A Preferred Stock Underwritten Offering

In March 2018, the Company completed an underwritten public offering of 1,600,000 shares of its 8.5% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share and liquidation preference $25.00 per share (Series A Preferred Stock), resulting in net proceeds to the Company of approximately $38.3 million, after deducting the underwriting discount and other offering expenses. In April 2018, the Company sold an additional 170,900 shares of Series A Preferred Stock upon the partial exercise by the underwriters of their option to purchase additional Series A Preferred Stock, resulting in net proceeds to the Company of approximately $4.1 million, after deducting the underwriting discount of $0.1 million. The net proceeds were used for repayment of debt and general corporate purposes.

22

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Series A Preferred Stock ATM Offering Program

In May 2018, the Company commenced an ATM offering program with respect to its Series A Preferred Stock, which allows the Company to issue and sell up to 2.2 million shares of its Series A Preferred Stock. The Company did not issue any shares under this ATM offering program during the nine months ended September 30, 2019. The Company has remaining capacity to issue and sell up to approximately 1.8 million of additional shares of Series A Preferred Stock under this ATM offering program.

Series B Preferred Stock Underwritten Offering

In August 2018, the Company completed an underwritten public offering of 1,700,000 shares of its 8.5% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share and liquidation preference $25.00 per share (Series B Preferred Stock), resulting in net proceeds to the Company of approximately $41.2 million, after deducting the underwriting discount. The Company sold an additional 255,000 shares of Series B Preferred Stock upon the exercise by the underwriters of their option to purchase additional Series B Preferred Stock, resulting in net proceeds to the Company of approximately $6.2 million, after deducting the underwriting discount of $0.2 million. The net proceeds were used for repayment of debt and general corporate purposes.

For further information on the Company’s shareholders’ equity, see Note 14 to the consolidated financial statements in the Company’ Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019.

(16)  Related Parties

In May 2018, the Company purchased, and subsequently cancelled, 1,225,214 shares of its common stock, from an affiliate of Andrew S. Ogawa in a privately-negotiated transactions. Mr. Ogawa is a member of the Company’s Board of Directors. The stock was purchase at a price of $22.81 per share, which represented a 2% discount to the closing price on the date of purchase.

(17)  Segment and Geographic Information

The Company organizes itself by the nature of the services it provides which includes equipment leasing (consisting of container leasing and rail leasing) and logistics.

As disclosed in Note 3, the Company’s railcar assets have been reclassified as held for sale in the accompanying unaudited consolidated balance sheets and the operations of the rail business have been reclassified as discontinued operations in the accompanying unaudited consolidated statements of operations. As a result, the Company will no longer report Rail leasing as a segment. The Company revised prior period information to conform to current period presentation.

The container leasing segment is aggregated with equipment management and derives its revenue from the ownership and leasing of containers and fees earned for managing container portfolios on behalf of third-party investors. The logistics segment derives its revenue from the provision of logistics services. There are no material inter-segment revenues and operating expenses are directly attributable to each segment.

The following tables show condensed segment information for the three and nine months ended September 30, 2019 and 2018, reconciled to the Company’s income before income taxes as shown in its consolidated statements of operations for such periods (in thousands):

	Three Months Ended September 30, 2019
	Container Leasing		Logistics		Total
Total revenue	$	77,300	$	30,270	$	107,570
Operating expenses		39,668		30,679		70,347
Amortization of intangible assets		-		403		403
Total operating expenses		39,668		31,082		70,750
Operating income (loss)		37,632		(812)		36,820
Net interest and other expenses (income)		20,507		(4)		20,503
Income (loss) before income taxes	$	17,125	$	(808)	$	16,317
Purchase of rental equipment (1)	$	89,027	$	-	$	89,027

23

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

	Three Months Ended September 30, 2018
	Container Leasing		Logistics		Total
Total revenue	$	75,331	$	31,362	$	106,693
Operating expenses		32,985		33,608		66,593
Amortization of intangible assets		-		451		451
Total operating expenses		32,985		34,059		67,044
Operating income (loss)		42,346		(2,697)		39,649
Net interest and other expenses (income)		15,932		(5)		15,927
Income (loss) before income taxes	$	26,414	$	(2,692)	$	23,722
Purchase of rental equipment (1)	$	251,670	$	-	$	251,670

	Nine Months Ended September 30, 2019
	Container Leasing		Logistics		Total
Total revenue	$	228,585	$	87,788	$	316,373
Operating expenses		116,538		91,025		207,563
Amortization of intangible assets		-		1,208		1,208
Total operating expenses		116,538		92,233		208,771
Operating income (loss)		112,047		(4,445)		107,602
Net interest and other expenses (income)		60,598		(12)		60,586
Income (loss) before income taxes	$	51,449	$	(4,433)	$	47,016
Purchase of rental equipment (1)	$	256,469	$	-	$	256,469

	Nine Months Ended September 30, 2018
	Container Leasing		Logistics		Total
Total revenue	$	208,298	$	81,251	$	289,549
Operating expenses		96,129		83,603		179,732
Amortization of intangible assets		-		1,538		1,538
Total operating expenses		96,129		85,141		181,270
Operating income (loss)		112,169		(3,890)		108,279
Net interest and other expenses (income)		44,284		(16)		44,268
Income (loss) before income taxes	$	67,885	$	(3,874)	$	64,011
Purchase of rental equipment (1)	$	477,703	$	-	$	477,703

(1)  Represents cash disbursements for purchasing of rental equipment 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):

	September 30, 2019		December 31, 2018
Container leasing	$	2,611,755	$	2,506,279
Logistics (2)		44,380		45,951
Rail (3)		294,599		460,387
Total assets	$	2,950,734	$	3,012,617

(2)  Includes goodwill of $15.8 million as of September 30, 2019 and December 31, 2018.

(3)  Represents total assets related to discontinued operations, including assets held for sale of $284.8 million and $449.7 million as of September 30, 2019 and December 31, 2018, respectively.

24

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Geographic Data

The Company earns its revenue primarily from intermodal containers, which are deployed by its customers in a wide variety of global trade routes. Virtually all of the Company’s containers are used internationally and typically no container is domiciled in one particular place for a prolonged period of time. As such, substantially all of the Company’s long-lived assets are considered to be international, with no single country of use.

The following table represents the geographic allocation of revenue for the periods indicated based on customers’ primary domicile (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
United States	$	31,887	$	33,162	$	92,840	$	86,706
Switzerland		13,837		13,929		41,712		36,246
Korea		10,807		8,707		31,361		21,927
Singapore		10,655		5,987		31,005		16,725
France		8,768		9,295		26,582		27,435
Other Asia		14,638		18,828		44,613		52,608
Other Europe		16,529		14,636		47,052		40,794
Other International		449		2,149		1,208		7,108
Total revenue	$	107,570	$	106,693	$	316,373	$	289,549

(18)  Earnings Per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, potential common equivalent shares are excluded if their effect is anti-dilutive.

The following table sets forth the reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator
Net income from continuing operations	$	12,958	$	20,571	$	37,524	$	57,897
Net loss from discontinued operations		(19,912)		(565)		(20,983)		(1,625)
Net (loss) income attributable to CAI common stockholders	$	(6,954)	$	20,006	$	16,541	$	56,272
Denominator
Weighted-average shares used in per share computation - basic		17,330		19,214		17,850		19,741
Effect of dilutive securities:
Stock options and restricted stock		195		278		272		256
Weighted-average shares used in per share computation - diluted		17,525		19,492		18,122		19,997
Net income (loss) per share attributable to CAI common
stockholders:
Basic
Continuing operations	$	0.75	$	1.07	$	2.10	$	2.93
Discontinued operations	$	(1.15)	$	(0.03)	$	(1.17)	$	(0.08)
Total basic	$	(0.40)	$	1.04	$	0.93	$	2.85
Diluted
Continuing operations	$	0.74	$	1.06	$	2.07	$	2.90
Discontinued operations	$	(1.14)	$	(0.03)	$	(1.16)	$	(0.09)
Total diluted	$	(0.40)	$	1.03	$	0.91	$	2.81

25

CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The calculation of diluted earnings per share for the three months ended September 30, 2019 and 2018, excluded from the denominator 246,750and 86,055 shares, respectively, of common stock options because their effect would have been anti-dilutive. The calculation of diluted earnings per share for the nine months ended September 30, 2019 and 2018, excluded from the denominator 127,135and 158,495 shares, respectively, of common stock options because their effect would have been anti-dilutive.   

26

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, 2018 filed with the SEC on March 5, 2019.  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 and logistics companies. We purchase equipment, primarily intermodal shipping containers and railcars, which we lease to our customers. We also manage equipment for third-party investors. In operating our fleet, we lease, re-lease and dispose of equipment and contract for the repair, repositioning and storage of equipment. We also provide domestic and international logistics services.

The following tables show the composition of our fleet as of September 30, 2019 and 2018, and our average utilization for the three and nine months ended September 30, 2019 and 2018:

	As of September 30,
	2019		2018
Owned container fleet in TEUs		1,623,588		1,435,516
Managed container fleet in TEUs		72,462		75,872
Total container fleet in TEUs		1,696,050		1,511,388
Owned container fleet in CEUs		1,649,465		1,475,142
Managed container fleet in CEUs		88,493		69,134
Total container fleet in CEUs		1,737,958		1,544,276
Owned railcar fleet in units		5,504		7,489

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Average container fleet utilization in CEUs		98.4%		99.2%		98.7%		99.2%
Average owned container fleet utilization in CEUs		98.6%		99.2%		98.7%		99.2%
Average railcar fleet utilization		85.3%		89.0%		88.1%		88.1%

The intermodal marine container industry-standard measurement unit is the 20-foot equivalent unit (TEU), which compares the size of a container to a standard 20-foot container. For example, a 20-foot container is equivalent to one TEU and a 40-foot container is equivalent to two TEUs. Containers can also be measured in cost equivalent units (CEUs), whereby the cost of each type of container is expressed as a ratio relative to the cost of a standard 20-foot dry van container. For example, the CEU ratio for a standard 40-foot dry van container is 1.6, and a 40-foot high cube container is 1.7.

Utilization of containers is computed by dividing the average total units on lease during the period in CEUs, by the average total CEUs in our container fleet during the period. Utilization of railcars is computed by dividing the average number of railcars on lease during the period by the average total number of railcars in our fleet during the period. In both cases, the total fleet excludes new units not yet leased and off-hire units designated for sale. If new units not yet leased are included in the total fleet, utilization would be 95.9% and 96.4% for the total container fleet, 95.9% and 96.4% for the owned container fleet, and 82.1%  and 84.6%  for the railcar fleet, for the three and nine months ended September 30, 2019, respectively.  

27

Discontinued Operations

In the quarter ended June 30, 2019, we committed to a plan to sell our railcar assets as we believe it is in the best interest of our shareholders to reallocate the capital invested in our rail business to other investments. As a result, the railcar assets have been classified as held for sale and the operations of the rail business have been classified 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.

During the three months ended June 30, 2019, a loss of $7.3 million was recorded when the assets of the railcar business were reclassified as held for sale. During the three months ended September 30, 2019, we incurred an additional impairment charge of $25.6 million to reduce the book value of our railcar portfolio to its estimated fair value. To assist us in our assessment of fair value, a third-party desk top appraisal was carried out on the railcar fleet using the market value approach.  See Note 3 – Discontinued Operations to the consolidated financial statements in this Quarterly Report on Form 10-Q for more information. 

Results of Operations - Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

The following table summarizes our results of operations for the three months ended September 30, 2019 and 2018 (dollars in thousands):

	Three Months Ended September 30,				Increase/(Decrease)
	2019		2018		Amount		Percent
Total revenue	$	107,570	$	106,693	$	877	1	%
Operating expenses		70,750		67,044		3,706	6	%
Total other expenses		20,503		15,927		4,576	29	%
Net income from continuing operations		12,958		20,571		(7,613)	(37)	%
Net loss from discontinued operations		(19,912)		(565)		(19,347)	3,424	%
Net (loss) income attributable to CAI common stockholders		(6,954)		20,006		(26,960)	(135)	%

The increase in total revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018,  was attributable to a $2.0 million, or 3%, increase in container lease revenue, partially offset by a $1.1 million, or 3%, decrease in logistics revenue. The increase in operating expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018,  was as a result of a $2.2 million, or 86%, increase in storage, handling and other expenses, a $1.0 million, or 4%, increase in depreciation expense, a $0.8 million, or 7%, increase in administrative expenses, and a $0.2 million, or 8%, decrease in gain on sale of used rental equipment, partially offset by a $0.5 million, or 2%, decrease in logistics transportation costs. Total other expenses for the three months ended September 30, 2019 increased compared with the three months ended September 30, 2018, primarily due to a $4.3 million, or 27%, increase in net interest expense. Total dividends of $2.2 million on our preferred stock were recorded in the three months ended September 30, 2019,  compared to total dividends of $1.7 million for the three months ended September 30, 2018. The increase in revenue, offset by the increase in operating expenses, total other expenses, preferred stock dividends, and the loss from discontinued operations resulted in a decrease in net income attributable to CAI common stockholders for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, of $27.0 million.

Container lease revenue

	Three Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container lease revenue	$	77,300	$	75,331	$	1,969	3	%

The increase in container lease revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was mainly attributable to an  $8.9 million increase in rental revenue, primarily due to a 15% increase in the average number of CEUs of on-lease owned containers, partially offset by a $7.0 million decrease resulting from a 10% reduction in average owned container per diem rental rates.

Logistics revenue and gross margin

	Three Months Ended September 30,				Decrease
($ in thousand)	2019		2018		Amount		Percent
Logistics revenue	$	30,270	$	31,362	$	(1,092)	(3)	%
Logistics transportation costs		27,037		27,541		(504)	(2)	%
Logistics gross margin	$	3,233	$	3,821	$	(588)	(15)	%

28

The decrease in logistics revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to a decrease in rates, partially offset by an increase in volume in our intermodal and truck brokerage operations.  The gross margin percentage fell from 12.2% for the three months ended September 30, 2018 to 10.7% for the three months ended September 30, 2019 due primarily to lower margins being achieved in our intermodal and truck brokerage operations.

Depreciation of rental equipment

	Three Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	28,750	$	27,735	$	1,015	4	%

Depreciation expense for the three months ended September 30, 2019 increased compared to the three months ended September 30, 2018. While there was  a 14% increase in the average size of our owned container fleet during the twelve months,  32% of containers purchased during the current year were used, which depreciate at a lower rate or are already fully depreciated.

Storage, handling and other expenses

	Three Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	4,672	$	2,506	$	2,166	86	%

The increase in storage, handling and other expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily attributable to a  $1.3 million increase in storage, handling and repair expenses due to an increase in the average size of the off-lease fleet, a  $0.4 million credit recorded in recovery costs in the prior year as a result of insurance proceeds received relating to the bankruptcy of Hanjin Shipping Co. Ltd. (Hanjin), and a $0.2 million increase in container liability insurance.

Gain on sale of rental equipment

	Three Months Ended September 30,				Decrease
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	2,411	$	2,633	$	(222)	(8)	%

While we sold approximately 45%  more CEUs of containers during the three months ended September 30, 2019 compared to the three months ended September 30, 2018, there was a decrease of 13% in the average sale price per unit, resulting in a decrease in gain on sale.

Administrative expenses

	Three Months Ended September 30,				Increase/(Decrease)
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	8,666	$	7,241	$	1,425	20	%
Logistics		4,036		4,654		(618)	(13)	%
	$	12,702	$	11,895	$	807	7	%

Container leasing

The increase in administrative expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily attributable to a $1.3 million increase in bad debt expense resulting from non-payment from certain customers called into default and a $0.5 million increase in legal and professional fees, partially offset by a $0.3 million decrease in incentive-based compensation.

Logistics

The decrease in administrative expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily attributable to a $0.4 million decrease in payroll-related costs between the two periods due to a reduction in headcount. 

Other expenses

	Three Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Net interest expense	$	20,123	$	15,811	$	4,312	27	%
Other expense		380		116		264	228	%
	$	20,503	$	15,927	$	4,576	29	%

29

Net interest expense

The increase in net interest expense for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was due primarily to an increase in our average loan principal balance between the two periods, as we continue to increase borrowings to finance the acquisition of additional rental equipment, partially offset by a decrease in the average interest rate on our outstanding debt, caused by a slight decrease in LIBOR, from approximately 3.8% as of September 30, 2018 to 3.7% as of September 30, 2019.

Other expense

Other expense, representing a loss on foreign exchange of $0.4 million for the three months ended September 30, 2019,  increased from a loss of $0.1 million for the three months ended September 30, 2018, primarily as a result of movements in the U.S. Dollar exchange rate against the Euro.

Income tax expense

	Three Months Ended September 30,				Decrease
($ in thousand)	2019		2018		Amount		Percent
Income tax expense	$	1,152	$	1,403	$	(251)	(18)	%

Income tax expense for the three months ended September 30, 2019 remained relatively consistent with the three months ended September 30, 2018.  While income before tax decreased between the two periods, the full-year estimated effective tax rate increased from 5.0% at September 30, 2018 to 6.1% at September 30, 2019. The increase in estimated full-year effective tax rate was primarily caused by an increase in the amount of interest income generated by foreign direct finance leases subject to both foreign and U.S. income tax. 

Preferred stock dividends

	Three Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Preferred stock dividends	$	2,207	$	1,748	$	459	26	%

An accrual for preferred stock dividends of $2.2 million was recorded in the three months ended September 30, 2019 attributable to the shares of preferred stock that were issued in 2018 and outstanding as of September 30, 2019. The Series B Preferred Stock was issued in August 2018 and as a result, the accrual for preferred stock dividends was $1.7 million for the three months ended September 30, 2018.  

Loss from discontinued operations

	Three Months Ended September 30,				Increase/(Decrease)
	2019		2018		Amount		Percent
Rail lease revenue	$	5,871	$	8,759	$	(2,888)	(33)	%
Operating expenses		3,316		5,527		(2,211)	(40)	%
Interest expense		2,975		3,972		(997)	(25)	%
Impairment of rental equipment		25,632		-		25,632	100	%
Net loss from discontinued operations		(19,912)		(565)		(19,347)	3,424	%

The decrease in rail lease revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, was primarily attributable to a decrease in the size of the on-lease railcar fleet between the two periods. The decrease in operating expenses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, was as a result of a $3.5 million, or 100%, decrease in depreciation expense, a $0.8 million increase in gain on sale of rental equipment and a $0.4 million, or 36% decrease in administrative expenses, partially offset by a $2.4 million, or 243%, increase in storage, handing and other expenses.  The decrease in interest expense for the three months ended September 30, 2019 compared with the three months ended September 30, 2018, was primarily attributable to a decrease in our average loan principal balance between the two periods. The decrease in revenue and the $25.6 million impairment of rental equipment,  partially offset by the decrease in operating expenses and interest expense resulted in an increase in net loss from discontinued operations for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, of $19.3 million.

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Results of Operations - Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

The following table summarizes our results from operations for the nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Nine Months Ended September 30,				Increase/(Decrease)
	2019		2018		Amount		Percent
Total revenue	$	316,373	$	289,549	$	26,824	9	%
Operating expenses		208,771		181,270		27,501	15	%
Total other expenses		60,586		44,268		16,318	37	%
Net income from continuing operations		37,524		57,897		(20,373)	(35)	%
Net loss from discontinued operations		(20,983)		(1,625)		(19,358)	1,191	%
Net income attributable to CAI common stockholders		16,541		56,272		(39,731)	(71)	%

The increase in total revenue for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018,  was attributable to a $20.3 million, or 10%, increase in container lease revenue and a $6.5 million, or 8%, increase in logistics revenue. The increase in operating expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018,  was as a result of a  $7.1 million, or 10%, increase in logistics transportation costs, a $6.8 million, or 9%, increase in depreciation expense, a $6.8 million, or 118%, increase in storage, handling and other expenses, a $4.7 million, or 14%, increase in administrative expenses, and a $2.1 million, or 28%, decrease in gain on sale of used rental equipment. Total other expenses for the nine months ended September 30, 2019 increased compared with the nine months ended September 30, 2018, primarily due to a $16.3 million, or 37%, increase in net interest expense. Total dividends of $6.6 million on our preferred stock was recorded in the nine months ended September 30, 2019, compared to total dividends of $2.9 million for the nine months ended September 30, 2018. The increase in revenue, offset by the increase in operating expenses, total other expenses, preferred stock dividend,  and the increase in loss from discontinued operations, resulted in a decrease in net income attributable to CAI common stockholders for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, of $39.7 million.

Container lease revenue

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container lease revenue	$	228,585	$	208,298	$	20,287	10	%

The increase in container lease revenue for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was mainly attributable to a $32.9 million increase in rental revenue, primarily due to a 19% increase in the average number of CEUs of on-lease owned containers, partially offset by a $12.7 million decrease resulting from a 7% reduction in average owned container per diem rental rates.

Logistics revenue and gross margin

	Nine Months Ended September 30,				Increase/(Decrease)
($ in thousand)	2019		2018		Amount		Percent
Logistics revenue	$	87,788	$	81,251	$	6,537	8	%
Logistics transportation costs		77,647		70,536		7,111	10	%
Logistics gross margin	$	10,141	$	10,715	$	(574)	(5)	%

The increase in logistics revenue for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was due to an increase in freight rates, partially offset by a decrease in volume in our intermodal and truck brokerage operations. Transportation costs increased at a slightly higher rate than revenue due primarily to increased volume in our lower margin intermodal business and resulted in a  decrease in the gross margin percentage from 13.2% for the nine months ended September 30, 2018 to 11.6% for the nine months ended September 30, 2019.

Depreciation of rental equipment

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	85,819	$	79,016	$	6,803	9	%

Depreciation expense for the nine months ended September 30, 2019 increased compared to the nine months ended September 30, 2018. While there was a 19% increase in the average size of our owned container fleet during the twelve months, 32% of containers purchased during the current year were used, which depreciate at a lower rate or are already fully depreciated.  

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Storage, handling and other expenses

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	12,631	$	5,803	$	6,828	118	%

The increase in storage, handling and other expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily attributable to a $1.8 million credit recorded in recovery costs in the prior year as a result of insurance proceeds received relating to the bankruptcy of Hanjin, a  $2.9 million increase in storage, handling and repair expenses due to an increase in the average size of the off-lease fleet and a $0.6 million increase in container liability insurance.

Gain on sale of rental equipment

	Nine Months Ended September 30,				Decrease
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	5,436	$	7,530	$	(2,094)	(28)	%

While we sold approximately 41% more CEUs of containers during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, there was a decrease of 7% in the average sale price per unit, resulting in a decrease in gain on sale.

Administrative expenses

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Container leasing	$	23,531	$	20,705	$	2,826	14	%
Logistics		14,579		12,740		1,839	14	%
	$	38,110	$	33,445	$	4,665	14	%

Container leasing

The increase in administrative expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily attributable to a $1.3 increase in bad debt expense resulting from non-payment from certain customers called into default, a $0.8 million increase in payroll-related costs, largely due to increased incentive compensation and increased stock-based compensation expense, and a $0.8 million increase in legal and professional fees.  

Logistics

The increase in administrative expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily attributable to a $1.5 million increase in payroll-related costs between the two periods due to an increase in average headcount.

Other expenses

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Net interest expense	$	60,049	$	43,758	$	16,291	37	%
Other expense		537		510		27	5	%
	$	60,586	$	44,268	$	16,318	37	%

Net interest expense

The increase in net interest expense for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was due primarily to an increase in our average loan principal balance between the two periods, as we continue to increase borrowings to finance the acquisition of additional rental equipment, partially offset by a decrease in the average interest rate on our outstanding debt, caused by a decrease in LIBOR, from approximately 3.8% as of September 30, 2018 to 3.7% as of September 30, 2019.

Other expense

Other expense, representing a loss on foreign exchange of $0.5 million for the nine months ended September 30, 2019,  remained relatively consistent with the nine months ended September 30, 2018.

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Income tax expense

	Nine Months Ended September 30,				Decrease
($ in thousand)	2019		2018		Amount		Percent
Income tax expense	$	2,871	$	3,197	$	(326)	(10)	%

Income tax expense for the nine months ended September 30, 2019 remained relatively consistent compared to the nine months ended September 30, 2018. While income before tax decreased between the two periods, the full-year estimated effective tax rate increased from 5.0% at September 30, 2018 to 6.1% at September 30, 2019. The increase in full-year estimated effective tax rate was primarily caused by an increase in the amount of interest income generated by foreign direct finance leases subject to both foreign and U.S. income tax.

Preferred stock dividends

	Nine Months Ended September 30,				Increase
($ in thousand)	2019		2018		Amount		Percent
Preferred stock dividends	$	6,621	$	2,917	$	3,704	127	%

An accrual for preferred stock dividends of $6.6 million was recorded in the nine months ended September 30, 2019 attributable to the shares of preferred stock that were issued in 2018 and outstanding as of September 30, 2019. The Series B Preferred Stock being was issued in August 2018 and as a result, the accrual for preferred stock dividends was $2.9 million for the nine months ended September 30, 2018.  

Loss from discontinued operations

The following table summarizes our results of discontinued operations for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30,				Increase/(Decrease)
	2019		2018		Amount		Percent
Rail lease revenue	$	20,214	$	26,982	$	(6,768)	(25)	%
Operating expenses		4,620		17,745		(13,125)	(74)	%
Interest expense		10,104		11,364		(1,260)	(11)	%
Loss on classification as held for sale and subsequent impairment		32,955		-		32,955	100	%
Net loss from discontinued operations		(20,983)		(1,625)		(19,358)	1,191	%

The decrease in rail lease revenue for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, was primarily attributable to a decrease in the size of the on-lease railcar fleet between the two periods. The decrease in operating expenses for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, was as a result of an  $9.4 million increase in gain on sale of rental equipment and a $5.3 million, or 50%, decrease in depreciation expense, partially offset by a $1.4 million, or 31%, increase in storage, handing and other expenses. The decrease in interest expense for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, was primarily attributable to a decrease in our average loan principal balance between the two periods. The decrease in revenue and the $33.0 million loss on classification as held for sale and subsequent impairment,  partially offset by the decrease in operating expenses and interest expense resulted in an increase in net loss from discontinued operations for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, of $19.4 million.

Liquidity and Capital Resources

As of September 30, 2019, we had cash and cash equivalents of $48.3 million, including $26.8 million of cash held by variable interest entities (VIEs). 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.

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As of September 30, 2019, our outstanding indebtedness and current maximum borrowing level was as follows (in thousands):

	Current		Current
	Amount		Maximum
	Outstanding		Borrowing Level
Revolving credit facilities	$	661,059	$	1,677,293
Term loans		363,236		363,236
Senior secured notes		52,775		52,775
Asset-backed notes		931,811		931,811
Collateralized financing obligations		99,372		99,372
Term loans held by VIE		37,765		37,765
		2,146,018		3,162,252
Debt issuance costs		(16,869)		-
Total	$	2,129,149	$	3,162,252

As of September 30, 2019, we had $1,016.1 million in availability under our revolving credit facilities (net of $0.1 million in letters of credit), subject to our ability to meet the collateral requirements under the agreements governing the facilities. Based on the borrowing base and collateral requirements at September 30, 2019, the borrowing availability under our revolving credit facilities was $88.4 million, assuming no additional contributions of assets.

The maximum credit commitment under the Rail revolving credit facility was decreased on October 1, 2019 from $550 million to $250 million.

For further information on our debt instruments, see Note 10 to the consolidated financial statements in this Quarterly Report on Form 10-Q and Note 8 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019.

Assuming that our customers 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. We will continue to monitor our liquidity and the credit markets.

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 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) 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 1.10:1.00. As of September 30, 2019, we were in compliance with all of our financial and other covenants.

Cash Flows

The following table sets forth certain cash flow information for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30,
	2019		2018
Net income	$	23,162	$	59,189
Net income from continuing operations adjusted for non-cash items		133,881		141,078
Changes in working capital		52,260		(9,063)
Net cash provided by operating activities of continuing operations		186,141		132,015
Net cash used in investing activities of continuing operations		(237,081)		(407,469)
Net cash provided by financing activities of continuing operations		39,744		310,448
Net cash provided by (used in) discontinued operations		12,117		(12,217)
Effect on cash of foreign currency translation		(874)		(23)
Net increase in cash and restricted cash		47		22,754
Cash and restricted cash at beginning of period		75,983		47,209
Cash and restricted cash at end of period	$	76,030	$	69,963

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Cash Flows from Continuing Operations

Operating Activities

Net cash provided by operating activities of continuing operations was $186.1 million for the nine months ended September 30, 2019, an increase of $54.1 million compared to $132.0 million for the nine months ended September 30, 2018. The increase was due to a  $61.3 million increase in our net working capital adjustments, partially offset by a $7.2 million decrease in income from continuing operations as adjusted for depreciation, amortization and other non-cash items. The decrease of $7.2 million in net income as adjusted for non-cash items was primarily due to a $16.7 million decrease in income from continuing operations and a $1.2 million decrease in deferred income taxes, partially offset by an increase of $6.9 million in depreciation expense,  a  decrease of $2.1 million in the gain on sale of rental equipment,  and an increase of $1.4 million in bad debt expense.  

Net working capital provided by operating activities of $52.3 million in the nine months ended September 30, 2019, was due to a $45.4 million decrease in net investment in sales-type and direct finance leases, primarily due to receipt of principal payments, a $2.6 million decrease in accounts receivable, primarily caused by the timing of cash receipts from customers, and a  $4.1 million increase in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments. Net working capital used in operating activities of $9.1 million in the nine months ended September 30, 2018 was due to a $6.9 million increase in accounts receivable, primarily caused by an increase in lease and logistics activity, a $1.6 million increase in prepaid expenses and other assets, and a $0.5 million decrease in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments. 

Investing Activities

Net cash used in investing activities of continuing operations was $237.1 million for the nine months ended September 30, 2019, a decrease of $170.4 million compared to net cash used in investing activities of $407.5 million for the nine months ended September 30, 2018. The decrease in cash was primarily attributable to a  $221.2 million decrease in purchase of rental equipment and a $12.8 million increase in proceeds from sale of rental equipment, partially offset by a $37.1 million decrease for the purchase of financing receivables and a $27.0 million decrease in receipt of principal payments from sales-type and direct finance leases.    

Financing Activities

Net cash provided by financing activities from continuing operations was $39.7 million for the nine months ended September 30, 2019,  a decrease of $270.7 million compared to net cash provided by financing activities of  $310.4 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, our net cash inflow from borrowings was $80.7 million compared to net cash inflow of $245.9 million for the nine months ended September 30, 2018, which reflected a decrease in net borrowings used for the acquisition of rental equipment during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease was also a result of a $103.7 million decrease in proceeds received from the issuance of common stock and preferred stock,  a  $6.2 million increase in the repurchase of common stock, and a $5.2 million increase in dividends paid to preferred stockholders during the nine months ended September 30, 2019, partially offset by a $9.2 million decrease in payments made for debt issuance costs.

Cash Flows from Discontinued Operations

Net cash provided by discontinued operations was $12.1 million for the nine months ended September 30, 2019, an increase of $24.3 million compared to net cash used by discontinued operations of $12.2 million for the nine months ended September 30, 2018. The increase in cash was primarily attributable to a $174.0 million increase in net cash provided by investing activities of discontinued operations, mainly as a result of proceeds received from the sale of railcar assets, partially offset by a $144.1 million increase in net cash used in financing activities of discontinued operations due to an increase in net cash outflow from borrowings for rail operations, and a $5.6 million decrease in net cash provided by operating activities of discontinued operations.

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. 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. During the nine months ended September 30, 2019, we repurchased 1.5 million shares of our common stock under this repurchase plan, at a cost of approximately $34.1 million. We did not repurchase any shares under this repurchase plan during the three months ended September 30, 2019. As of September 30, 2019, approximately 1.0 million shares remained available for repurchase under our share repurchase program.

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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 nine months ended September 30, 2019. 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 nine months ended September 30, 2019. 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 September 30, 2019 (in thousands):

	Payments Due by Period
			Less than		1-2		2-3		3-4		4-5		More than
	Total		1 year		years		years		years		years		5 years
Total debt obligations:
Revolving credit facilities (1)	$	661,059	$	18,559	$	-	$	-		480,000	$	162,500	$	-
Term loans (1)		363,236		126,312		130,774		7,800		28,350		70,000		-
Senior secured notes		52,775		6,110		6,110		40,555		-		-		-
Asset-backed notes		931,811		134,547		134,547		134,547		107,421		94,547		326,202
Collateralized financing obligations		99,372		23,455		28,468		29,965		-		-		17,484
Term loans held by VIE		37,765		5,195		5,426		5,659		5,906		6,157		9,422
Interest on debt and capital lease obligations (2)		281,060		72,317		64,439		55,100		42,578		16,601		30,025
Rental equipment payable		54,202		54,202		-		-		-		-		-
Rent, office facilities and equipment		8,366		2,762		2,625		2,221		502		217		39
Equipment purchase commitments - Containers		32,797		32,797		-		-		-		-		-
Total contractual obligations	$	2,522,443	$	476,256	$	372,389	$	275,847	$	664,757	$	350,022	$	383,172

(1) Includes $162.5 million outstanding under a revolving credit facility and $57.0 million outstanding under term loans that are expected to be repaid upon the sale of our railcar assets.

(2) Our estimate of interest expense commitment includes $87.4 million relating to our revolving credit facilities, $27.5 million relating to our term loans, $6.6 million relating to our senior secured notes, $147.2 million relating to our asset-back notes, $6.7 million relating to our collateralized financing obligations, and $5.6 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 September 30, 2019: revolving credit facilities, 3.5%; term loans, 4.0%; senior secured notes, 4.9%; asset-backed notes, 4.0%; collateralized financing obligations, 1.5%; 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 September 30, 2019, 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 nine months ended September 30, 2019. See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019.

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Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued Accounts Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13). This guidance affects net investment in sales-type and direct finance leases and the amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, current conditions, and reasonable and supportable information that affects collectability. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and with early adoption permitted for fiscal years beginning after December 15, 2018. Further, ASU 2018-19 was issued in November 2018 to clarify that operating lease receivables should be accounted for under the new lease standard, Topic 842, and are not within the scope of Topic 326. The Company is currently evaluating the potential impact of Topic 326 on its consolidated financial statements and related disclosures.

The most recent adopted accounting pronouncements are described in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

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 nine months ended September 30, 2019, the U.S. Dollar increased in value in relation to other major foreign currencies (such as the Euro and British Pound Sterling). 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. For the nine months ended September 30, 2019, we recognized a loss on foreign exchange of $0.5 million. 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. As of September 30, 2019, the principal amount of debt outstanding under the variable-rate arrangements of our revolving credit facilities was $661.1 million. In addition, at September 30, 2019, we had balances on our variable-rate term loans of $212.2 million. As of September 30, 2019, our total outstanding variable-rate debt was $873.3 million, which represented 41% of our total debt at that date. The average interest rate on our variable-rate debt was 3.6% as of September 30, 2019, based on LIBOR plus a margin based on certain conditions set forth in our debt agreements.

A 1.0% increase or decrease in underlying interest rates for these debt obligations would increase or decrease interest expense by approximately $8.7 million annually assuming debt remains constant at September 30, 2019 levels.

While we actively manage our interest exposure by adjusting the ratio of floating and fixed-rate debt, we do not currently participate in hedging in the form of interest rate swaps or other derivative instruments to manage the market risks described above.

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 President and Chief Executive Officer and our Chief 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 President and Chief Executive Officer and our Chief Financial Officer concluded that as of September 30, 2019 our disclosure controls and procedures were effective with respect to controls and procedures designed to ensure that information required to be disclosed by the Company in the 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 principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There 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 September 30, 2019, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, 2018 filed with the SEC on March 5, 2019. These risks are not the only ones facing our 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, there 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, 2018.

We may incur additional impairment charges on our rail assets, which may have an adverse effect on our business, financial condition or results of operations.

Due to the reclassification of our railcar business as “assets held for sale”, we recorded an asset impairment charge of $7.3 million for the quarter ending June 30, 2019 and an additional impairment charge of $25.6 million for the quarter ending September 30, 2019, reducing the value of our railcar assets to their estimated fair value.  The fair value was estimated based on the latest information available at June 30, 2019 and September 30, 2019.  There are a limited number of purchasers of rail assets and the price that we can receive, net of sale-related expenses, is dependent on many factors, including: market conditions, such as the state of the economy and the number of comparable new and used railcars available for purchase; demand for railcars in the particular configurations of the railcars in our fleet; and whether particular railcars are currently subject to leases, and if so, the terms of such leases.  As a result, although the impairment charges reflect our best estimate of the value of our rail assets as of the dates specified, no assurance can be provided that we will not incur additional impairment charges or losses on sale.   Any additional impairment charges could have a material adverse effect on our business, financial condition or results of operations.

In addition, no assurance can be given that our railcar business can be sold for a price that in our opinion reflects its intrinsic value.  If a sale of the railcar business at what we consider to be a reasonable price is not available, we may decide to cease efforts to sell the rail assets and resume operating the railcar assets as an ongoing business.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

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)
July 1, 2019 – July 31, 2019	-	$	-	-	1,000,000
August 1, 2019 – August 31, 2019(2)	175		24.30	-	1,000,000
September 1, 2019 – September 30, 2019	-		-	-	1,000,000
Total	175	$	24.30	-	1,000,000

⁽¹⁾ On October 8, 2018, we announced that our Board of Directors had approved the repurchase of up to three million shares of outstanding common stock. 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 September 30, 2019, approximately 1.0 million shares remained available for repurchase under our share repurchase plan.

⁽²⁾ In August 2019, we withheld 175 shares of common stock, at an average price of $24.30 per share, to satisfy the tax obligations of certain of our employees upon the vesting of restricted stock awards.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None. 

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5.  OTHER INFORMATION

None.

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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
3.1	Amended and Restated Certificate of Incorporation of CAI International, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, as amended, File No. 333-140496 filed on April 24, 2007).
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of CAI International, Inc., dated June 4, 2018 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 5, 2018).
3.3	Certificate of Designations of Rights and Preferences of 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, dated March 28, 2018 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 28, 2018).
3.4	Certificate of Designations of Rights and Preferences of 8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, dated August 10, 2018 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on August 10, 2018).
3.5	Amended and Restated Bylaws of CAI International, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 10, 2009).
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018, (iv) Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, and (vi) Notes to Unaudited Consolidated Financial Statements.

* Management contract or compensatory plan.

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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)
November 1, 2019	/s/    VICTOR M. GARCIA
	Victor M. Garcia
	President and Chief Executive Officer
	(Principal Executive Officer)
November 1, 2019	/s/    TIMOTHY B. PAGE
	Timothy B. Page
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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