Edgar Filing: CAI International, Inc.

20180331 10Q Q1

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 March 31, 2018

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

For the transition period from to

Commission file number: 001-33388

CAI International, Inc.

(Exact name of registrant as specified in its charter)


Delaware		94-3109229
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Steuart Tower, 1 Market Plaza, Suite 900
San Francisco, California		94105
(Address of principal executive offices)		(Zip Code)

415-788-0100

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

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

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

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


Common		April 30, 2018
Common Stock, $.0001 par value per share		20,494,333 shares

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CAI INTERNATIONAL, INC.

INDEX



		Page No.
Part I — Financial Information		5

Item 1.	Financial Statements (Unaudited)	5

	Consolidated Balance Sheets at March 31, 2018 and December 31, 2017	5

	Consolidated Statements of Income for the three months ended March 31, 2018 and 2017	7

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017	8

	Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	9

	Notes to Unaudited Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

Part II — Other Information		29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures		31

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, 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, 2017 filed with the Securities and Exchange Commission (SEC) on February 27, 2018 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.

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PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CAI INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

(UNAUDITED)



	March 31,		December 31,
	2018		2017
Assets
Current assets
Cash	$	21,564	$	14,735
Cash held by variable interest entities		22,765		20,685
Accounts receivable, net of allowance for doubtful accounts of $1,717 and
$1,440 at March 31, 2018 and December 31, 2017, respectively		67,703		68,324
Current portion of net investment in direct finance leases		35,135		30,063
Prepaid expenses and other current assets		4,057		4,258
Total current assets		151,224		138,065
Restricted cash		21,742		11,789
Rental equipment, net of accumulated depreciation of $529,866 and
$505,546 at March 31, 2018 and December 31, 2017, respectively		2,106,515		2,004,961
Net investment in direct finance leases		249,665		246,450
Goodwill		15,794		15,794
Intangible assets, net of accumulated amortization of $3,951 and
$3,407 at March 31, 2018 and December 31, 2017, respectively		7,179		7,723
Furniture, fixtures and equipment, net of accumulated depreciation of $3,246 and
$3,201 at March 31, 2018 and December 31, 2017, respectively		365		338
Other non-current assets		2,647		3,008
Total assets (1)	$	2,555,131	$	2,428,128

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	6,845	$	7,831
Accrued expenses and other current liabilities		11,245		15,706
Due to container investors		387		1,845
Unearned revenue		7,248		7,811
Current portion of debt		168,928		132,049
Rental equipment payable		133,714		92,415
Total current liabilities		328,367		257,657
Debt		1,567,339		1,570,773
Deferred income tax liability		36,605		35,853
Total liabilities (2)		1,932,311		1,864,283

Stockholders' equity
8.50% Series A fixed-to-floating rate cumulative redeemable perpetual preferred stock: par value $.0001 per share;
authorized 4,000,000 shares; issued and outstanding 1,600,000 and 0 shares at March 31, 2018 and
December 31, 2017, respectively ($40,000 aggregate liquidation preference)		-		-
Common stock: par value $.0001 per share; authorized 84,000,000 shares; issued and outstanding
20,492,519 and 20,390,622 shares at March 31, 2018 and December 31, 2017, respectively		2		2
Additional paid-in capital		213,873		172,325
Accumulated other comprehensive loss		(5,812)		(6,122)
Retained earnings		414,757		397,640
Total stockholders' equity		622,820		563,845
Total liabilities and stockholders' equity	$	2,555,131	$	2,428,128

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(1)

Total assets at March 31, 2018 and December 31, 2017 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $22,765 and $20,685; Net investment in direct finance leases, $7,052 and $4,423; and Rental equipment, net of accumulated depreciation, $61,920 and $61,842, respectively.

(2)

Total liabilities at March 31, 2018 and December 31, 2017 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $25,448 and $22,549; Debt, $72,447 and $72,727, respectively.

See accompanying notes to unaudited consolidated financial statements.

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CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(UNAUDITED)



	Three Months Ended March 31,
	2018		2017
Revenue
Container lease revenue	$	64,634	$	52,954
Rail lease revenue		9,104		8,053
Logistics revenue		21,636		20,499
Total revenue		95,374		81,506

Operating expenses
Depreciation of rental equipment		28,847		27,972
Storage, handling and other expenses		4,100		6,953
Logistics transportation costs		18,665		17,071
(Gain) loss on sale of used rental equipment		(2,195)		873
Administrative expenses		11,241		10,686
Total operating expenses		60,658		63,555

Operating income		34,716		17,951

Other expenses
Net interest expense		16,899		11,672
Other (income) expense		(35)		314
Total other expenses		16,864		11,986

Income before income taxes		17,852		5,965
Income tax expense		714		693

Net income		17,138		5,272
Preferred stock dividends		21		-
Net income attributable to CAI common stockholders	$	17,117	$	5,272

Net income per share attributable to CAI common stockholders
Basic	$	0.84	$	0.28
Diluted	$	0.83	$	0.27

Weighted average shares outstanding
Basic		20,414		19,010
Diluted		20,672		19,231

See accompanying notes to unaudited consolidated financial statements.

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CAI INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(UNAUDITED)



	Three Months Ended March 31,
	2018		2017

Net income	$	17,138	$	5,272
Other comprehensive income, net of tax:
Foreign currency translation adjustments		310		251
Comprehensive income before preferred stock dividends		17,448		5,523
Dividends declared on preferred stock		(21)		-
Comprehensive income available to CAI common stockholders	$	17,427	$	5,523

See accompanying notes to unaudited consolidated financial statements.

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CAI INTERN ATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)



	Three Months Ended March 31,
	2018		2017
Cash flows from operating activities
Net income	$	17,138	$	5,272
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		28,879		28,058
Amortization of debt issuance costs		945		747
Amortization of intangible assets		544		669
Stock-based compensation expense		604		461
Unrealized (gain) loss on foreign exchange		(80)		236
(Gain) loss on sale of used rental equipment		(2,195)		873
Deferred income taxes		752		601
Bad debt expense		124		187
Changes in other operating assets and liabilities:
Accounts receivable		671		(2,653)
Prepaid expenses and other assets		(27)		(4,134)
Accounts payable, accrued expenses and other current liabilities		(6,288)		(4,763)
Due to container investors		(1,458)		(621)
Unearned revenue		(362)		(648)
Net cash provided by operating activities		39,247		24,285
Cash flows from investing activities
Purchase of rental equipment		(112,763)		(48,116)
Proceeds from sale of used rental equipment		9,671		19,325
Purchase of furniture, fixtures and equipment		(58)		(44)
Receipt of principal payments from direct financing leases		8,336		4,114
Net cash used in investing activities		(94,814)		(24,721)
Cash flows from financing activities
Proceeds from debt		477,600		85,787
Principal payments on debt		(441,884)		(100,541)
Debt issuance costs		(3,485)		-
Proceeds from issuance of stock		42,076		-
Exercise of stock options		24		327
Net cash provided by (used in) financing activities		74,331		(14,427)
Effect on cash of foreign currency translation		98		997
Net increase (decrease) in cash and restricted cash		18,862		(13,866)
Cash and restricted cash at beginning of the period (1)		47,209		52,326
Cash and restricted cash at end of the period (2)	$	66,071	$	38,460

Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes	$	174	$	97
Interest		16,654		11,504
Supplemental disclosure of non-cash investing and financing activity
Transfer of rental equipment to direct finance lease	$	15,956	$	1,806
Transfer of direct finance lease to rental equipment		-		291
Rental equipment payable		133,714		51,357

(1)

Includes cash of $14,735 and $15,685, cash held by variable interest entities of $20,685 and $30,449, and restricted cash of $11,789 and $6,192 at December 31, 2017 and 2016, respectively.

(2)

Includes cash of $21,564 and $12,141, cash held by variable interest entities of $22,765 and $20,382, and restricted cash of $21,742 and $5,937 at March 31, 2018 and 2017, respectively.

See accompanying notes to unaudited consolidated financial statements.

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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 and 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock are traded on the New York Stock Exchange under the symbols “CAI” and “CAI-PA,” 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 March 31, 2018 and December 31, 2017, the Company’s results of operations for the three months ended March 31, 2018 and 2017, and the Company’s cash flows for the three months ended March 31, 2018 and 2017. 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 2018 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, 2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2018.

(2) Accounting Policies and Recent Accounting Pronouncements

(a) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes previous revenue recognition guidance. Leasing revenue recognition is specifically excluded, and therefore, the new standard is only applicable to logistics services agreements, management services agreements, and the sale of used rental equipment. The new standard defines a five-step process to achieve the core principle of ASU 2014-09, which is to recognize revenue when promised goods or services are transferred to customers in amounts that reflect the consideration the Company expects to receive in exchange for those goods or services. The Company adopted ASU 2014-09 effective January 1, 2018, which did not have a material impact on the Company’s consolidated financial statements and related disclosures. See note 2(b) for further details.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination and insurance settlement proceeds. The Company adopted ASU 2016-15 effective January 1, 2018, which did not result in any changes to the presentation of amounts shown on the Company’s consolidated statements of cash flows to all periods presented.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), that requires the inclusion of restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 effective January 1, 2018, which resulted in the inclusion of the Company’s restricted cash balances along with cash in the Company’s consolidated statements of cash flows and separate line items showing changes in restricted cash balances were eliminated from the Company’s consolidated statements of cash flows. ASU 2016-18 was applied retrospectively to all periods presented.

Except as described above, there were no changes to the Company’s accounting policies during the three months ended March 31, 2018. 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, 2017, filed with the SEC on February 27, 2018, for a description of the Company’s significant accounting policies.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(b) Revenue Recognition

The Company provides a range of services to its customers incorporating the rental, sale and management of equipment and the provision of logistics services. Revenue for all forms of service is recognized when earned following the guidelines under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue Recognition and FASB ASC Topic 840, Leases. Revenue is reported net of any related sales tax.

Container and Rail Lease Revenue

The Company recognizes revenue from operating leases of its owned 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. Finance lease income is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease.

Included in lease revenue is revenue consisting primarily of fees charged to the lessee for handling, delivery, repairs, and fees relating to the Company’s damage protection plan, which are recognized as earned.

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.

Logistics Revenue

The Company’s logistics business derives its revenue from three principal sources: (1) truck brokerage services, (2) intermodal transportation services, and (3) international ocean freight and freight forwarding services. For truck brokerage services, which typically involve a short transit time, revenue is recognized when delivery has been completed due to the lack of reliable information to reasonably measure progress toward complete satisfaction of the performance obligation. For intermodal transportation services, which can take a longer time to complete, revenue is recognized over time by measuring progress toward complete satisfaction of the performance obligation, utilizing input methods. For any such services completed as of the end of a reporting period, a percentage of completion method based on costs incurred to date is used to allocate the appropriate revenue to each separate reporting period. The Company provides international freight forwarding services as an indirect carrier, sometimes referred to as a Non-Vessel Operating Common Carrier (NVOCC). Due to the lack of reliable information to reasonably measure progress toward complete satisfaction of the performance obligation, revenue for these shipments is recognized at the time the freight departs the terminal of origin, which is when the customer is billed and the Company has no further obligation to the customer.

The Company reports logistics revenue on a gross basis as it is primarily responsible for fulfilling the promise to provide the specified service desired by the customer and has discretion in establishing the price for the specified service.

Unearned Revenue

The Company records unearned revenue when cash payments are received in advance of the Company satisfying its performance obligations.

Payment terms vary by customer and type of service. The term between invoicing and when payment is due is not significant. For certain customers or services, the Company may require payment before the services are delivered to the customer.

Practical Expedients

The Company expenses sales commissions when incurred because the amortization would have been one year or less. These costs are recorded within administrative expenses.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts with variable consideration for a distinct good or service that forms part of a single performance obligation.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) Consolidation of Variable Interest Entities

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

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

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

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

The Company currently enters into 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.

Managed Container Funds

The fees earned by the Company for arranging, managing and establishing container funds are commensurate with the level of effort required to provide those services, and are at or above the same level of seniority as other operating liabilities of the funds that are incurred in the normal course of business. As such, the Company does not have a variable interest in the managed containers funds, and does not consolidate those funds. The Company recognizes gain on sale of containers to the unconsolidated funds as sales in the ordinary course of business. No container portfolios were sold to the funds during the three months ended March 31, 2018 and 2017.

Collateralized Financing Obligations

The Company has transferred containers to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. In accordance with FASB ASC Topic 840, Sale-Leaseback Transactions, the Company concluded these were financing transactions under which sale-leaseback accounting was not applicable.

The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under FASB ASC Topic 810, Consolidation, because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance, including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of March 31, 2018, and December 31, 2017, and the results of the VIEs’ operations and cash flows for the three months ended March 31, 2018 and 2017, in the Company’s consolidated financial statements.

The containers that were transferred to the Japanese investor funds had a net book value of $73.8 million as of March 31, 2018. The container equipment, together with $22.8 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 $95.1 million and term loans held by VIE of $2.8 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 the three months ended March 31, 2018, had a net book value of $7.9 million. No containers were sold to Japanese investor funds during the three months ended March 31, 2017.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) Rental Equipment

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


	March 31,		December 31,
	2018		2017
Dry containers	$	1,627,517	$	1,533,063
Refrigerated containers		345,037		345,744
Other specialized equipment		180,176		160,529
Railcars		483,651		471,171
		2,636,381		2,510,507
Accumulated depreciation		(529,866)		(505,546)
Rental equipment, net of accumulated depreciation	$	2,106,515	$	2,004,961

(5) Net Investment in Direct Finance Leases

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



	March 31,		December 31,
	2018		2017
Gross finance lease receivables (1)	$	418,453	$	412,489
Unearned income (2)		(133,653)		(135,976)
Net investment in direct finance leases	$	284,800	$	276,513

(1)

At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received. There was $34.8 million and $34.4 million unguaranteed residual value at March 31, 2018 and December 31, 2017, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of March 31, 2018 and December 31, 2017.

(2)

The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of March 31, 2018 and December 31, 2017.

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

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

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

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

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

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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



	March 31,		December 31,
	2018		2017
Tier 1	$	372,524	$	366,629
Tier 2		45,929		45,860
Tier 3		-		-
	$	418,453	$	412,489

Contractual maturities of the Company's gross finance lease receivables subsequent to March 31, 2018 for the years ending March 31 are as follows (in thousands):



2019	$	58,458
2020		66,212
2021		41,504
2022		39,931
2023		32,138
2024 and thereafter		180,210
	$	418,453

(6) 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 March 31, 2018 and December 31, 2017 were as follows (in thousands):



	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
March 31, 2018
Trademarks and tradenames	$	1,786	$	(1,552)	$	234
Customer relationships		9,344		(2,399)		6,945
	$	11,130	$	(3,951)	$	7,179
December 31, 2017
Trademarks and tradenames	$	1,786	$	(1,411)	$	375
Customer relationships		9,344		(1,996)		7,348
	$	11,130	$	(3,407)	$	7,723

Amortization expense recorded for the three months ended March 31, 2018 and 2017 was $0.5 million and $0.7 million, respectively, and was included in administrative expenses in the consolidated statements of income.

As of March 31, 2018, estimated future amortization expenses are as follows (in thousands):


2019	$	1,843
2020		1,609
2021		1,609
2022		1,234
2023		474
2024 and thereafter		410
	$	7,179

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) Debt

Details of the Company’s debt as of March 31, 2018 and December 31, 2017 were as follows (dollars in thousands):



	March 31, 2018					December 31, 2017
	Outstanding				Average	Outstanding				Average
	Current		Long-term		Interest	Current		Long-term		Interest	Maturity

Revolving credit facility	$	-	$	215,000	3.6%	$	-	$	528,000	3.2%	March 2020
Revolving credit facility - Rail		-		297,000	3.5%		-		272,000	3.2%	October 2020
Revolving credit facility - Euro		-		15,163	2.0%		-		14,736	2.0%	September 2020
Term loan		21,450		-	3.8%		21,900		-	3.4%	April 2018
Term loan		9,000		109,500	3.4%		9,000		111,750	3.1%	October 2019
Term loan		7,000		80,750	3.6%		7,000		82,500	3.3%	June 2021
Term loan		1,209		16,218	3.4%		1,198		16,524	3.4%	December 2020
Term loan		2,831		42,842	3.6%		2,805		43,560	3.6%	August 2021
Senior secured notes		6,110		55,830	4.9%		6,110		58,885	4.9%	September 2022
Asset-backed notes		100,197		672,760	3.7%		65,307		377,984	3.5%	June 2042
Collateralized financing obligations		25,448		69,619	1.1%		22,549		69,441	1.2%	March 2021
Term loans held by VIE		-		2,828	2.9%		-		3,286	2.7%	June 2019
		173,245		1,577,510			135,869		1,578,666
Debt issuance costs		(4,317)		(10,171)			(3,820)		(7,893)
Total Debt	$	168,928	$	1,567,339		$	132,049	$	1,570,773

The Company maintains its revolving credit facilities to finance the acquisition of rental equipment and for general working capital purposes. As of March 31, 2018, the Company had $963.5 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 March 31, 2018, the borrowing availability under the Company’s revolving credit facilities was $136.7 million, assuming no additional contributions of assets.

On February 28, 2018, CAL Funding III Limited (CAL Funding III), a wholly-owned indirect subsidiary of CAI, issued $332.0 million of 4.0% Class A fixed rate asset-backed notes and $16.9 million of 4.8% Class B fixed rate asset-backed notes (collectively, the Series 2018-01 Asset-Backed Notes). Principal and interest on the Series 2018-01 Asset-Backed Notes is payable monthly commencing on March 26, 2018, with the Series 2018-01 Asset-Backed Notes maturing in February 2028. The proceeds were used for general corporate purposes, including repayment of debt by the Company.

On April 19, 2018, the Company entered into a $30.0 million five-year term loan agreement with a bank. The loan is payable in 19 quarterly installments of $0.5 million starting July 31, 2018 and a final payment of $21.5 million on April 30, 2023. The loan bears interest at a variable rate based on LIBOR.

The agreements relating to all of the Company’s debt contain various financial and other covenants. As of March 31, 2018, the Company was in compliance with all of its debt covenants.

For further information on the Company’s debt instruments, see Note 10 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2018.

(8) Stock–Based Compensation Plan

Stock Options

The Company grants stock options from time to time to certain employees and independent directors pursuant to its 2007 Equity Incentive Plan, as amended (Plan). Under the Plan, a maximum of 3,421,980 share awards may be granted.

Stock options granted to employees have a vesting period of four years from grant date, with 25% vesting after one year, and 1/48th vesting each month thereafter until fully vested. Stock options granted to independent directors vest in one year. All of the stock options have a contractual term of ten years.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the Company’s stock option activities for the three months ended March 31, 2018 and 2017:



		Three Months Ended March 31,
	2018				2017
			Weighted				Weighted
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price		Shares		Price
Options outstanding at January 1		859,560	$	16.44		1,428,255	$	16.31
Options granted		-	$	-		190,500	$	15.89
Options exercised		(1,893)	$	12.64		(60,875)	$	8.44
Options outstanding at March 31		857,667	$	16.45		1,557,880	$	16.57
Options exercisable		521,021	$	17.56		1,009,555	$	18.21
Weighted average remaining term		6.1 years				4.5 years

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017 was less than $0.1 million and $0.4 million, respectively. The aggregate intrinsic value of all options outstanding as of March 31, 2018 was $4.6 million based on the closing price of the Company’s common stock of $21.26 per share on March 29, 2018, the last trading day of the quarter.

The Company recognized stock-based compensation expense relating to stock options of $0.4 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors was approximately $2.1 million, which is to be recognized over the remaining weighted average vesting period of approximately 2.3 years.

The fair value of stock options granted to the Company’s employees and independent directors was estimated using the Black-Scholes-Merton pricing model using the following weighted average assumptions:



	Three Months Ended March 31,
	2018		2017
Stock price	$	-	$	15.89
Exercise price	$	-	$	15.89

Expected term (years)		-		6.25
Expected volatility (%)		-		56.40
Risk-free interest rate (%)		-		2.14
Dividend yield (%)		-		-

The expected option term is calculated using the simplified method in accordance with SEC guidance. The expected volatility was derived from the average volatility of the Company’s stock over a period approximating the expected term of the options. The risk-free rate is based on the daily U.S. Treasury yield curve with a term approximating the expected term of the options. No forfeiture rate was estimated on all options granted during the three months ended March 31, 2017, as the Company accounts for forfeitures as they occur.

Restricted Stock and Performance Stock

The Company grants restricted stock from time to time to certain employees and non-employee directors pursuant to the Plan. The Company recognizes the compensation cost associated with restricted stock over a specified award vesting period based on the closing price of the Company’s stock on the date of grant.

The Company grants performance stock to selected 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 based on the likelihood of performance targets being met. Compensation cost is based on the closing price of the Company’s stock on the date of grant.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the activity of restricted stock and performance stock under the Plan:

Weighted

Average