Edgar Filing: CAI International, Inc.

20190331 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, 2019

☐ 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 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 ☒

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

Common Stock		April 30, 2019
Common Stock, $0.0001 par value per share		17,934,992 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, 2019 and December 31, 2018	5
	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018	7
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	8
	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	9
	Consolidated Statements of Cash Flows for the three months ended March 31, 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	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II — Other Information		32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

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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, 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.

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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,
	2019		2018
Assets
Current assets
Cash	$	20,128	$	20,104
Cash held by variable interest entities		27,058		25,211
Accounts receivable, net of allowance for doubtful accounts of $2,839 and
$2,042 at March 31, 2019 and December 31, 2018, respectively		94,729		95,942
Current portion of net investment in sales-type and direct finance leases		74,895		75,975
Prepaid expenses and other current assets		4,422		2,789
Total current assets		221,232		220,021
Restricted cash		29,703		30,668
Rental equipment, net of accumulated depreciation of $613,838 and
$599,443 at March 31, 2019 and December 31, 2018, respectively		2,176,376		2,265,260
Net investment in sales-type and direct finance leases		465,041		473,792
Goodwill		15,794		15,794
Intangible assets, net of accumulated amortization of $5,799 and
$5,397 at March 31, 2019 and December 31, 2018, respectively		5,331		5,733
Operating lease right-of-use assets		3,181		-
Furniture, fixtures and equipment, net of accumulated depreciation of $2,657 and
$2,635 at March 31, 2019 and December 31, 2018, respectively		960		964
Other non-current assets		297		385
Total assets (1)	$	2,917,915	$	3,012,617

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	7,361	$	7,371
Accrued expenses and other current liabilities		19,869		22,460
Due to container investors		670		2,609
Unearned revenue		5,216		7,573
Current portion of debt		318,664		311,381
Rental equipment payable		56,221		74,139
Total current liabilities		408,001		425,533
Debt		1,764,695		1,847,633
Deferred income tax liability		38,949		38,319
Operating lease liabilities		1,961		-
Total liabilities (2)		2,213,606		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, at March 31, 2019 and December 31, 2018		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, at March 31, 2019 and December 31, 2018		48,875		48,875
Common stock, par value $0.0001 per share; authorized 84,000,000 shares; issued and outstanding
18,207,676 and 18,764,459 shares at March 31, 2019 and December 31, 2018, respectively		2		2
Additional paid-in capital		119,557		132,666
Accumulated other comprehensive loss		(6,594)		(6,513)
Retained earnings		487,479		471,112
Total stockholders' equity		704,309		701,132
Total liabilities and stockholders' equity	$	2,917,915	$	3,012,617

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(1)

Total assets at March 31, 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, $27,058 and $25,211; Net investment in direct finance leases, $13,486 and $13,862; and Rental equipment, net of accumulated depreciation, $126,305, and $71,958, respectively.

(2)

Total liabilities at March 31, 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, $47,816 and $41,066; Debt, $117,625 and $67,615, 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,
	2019		2018
Revenue
Container lease revenue	$	75,511	$	64,634
Rail lease revenue		7,881		9,104
Logistics revenue		27,716		21,636
Total revenue		111,108		95,374

Operating expenses
Depreciation of rental equipment		31,784		28,847
Storage, handling and other expenses		5,120		4,100
Logistics transportation costs		24,519		18,665
Gain on sale of used rental equipment		(8,832)		(2,195)
Administrative expenses		14,396		11,241
Total operating expenses		66,987		60,658

Operating income		44,121		34,716

Other expenses
Net interest expense		23,850		16,899
Other expense (income)		38		(35)
Total other expenses		23,888		16,864

Income before income taxes		20,233		17,852
Income tax expense		1,659		714

Net income		18,574		17,138
Preferred stock dividends		2,207		21
Net income attributable to CAI common stockholders	$	16,367	$	17,117

Net income per share attributable to CAI common stockholders
Basic	$	0.88	$	0.84
Diluted	$	0.87	$	0.83

Weighted average shares outstanding
Basic		18,555		20,414
Diluted		18,870		20,672

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,
	2019		2018

Net income	$	18,574	$	17,138
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments		(81)		310
Comprehensive income before preferred stock dividends		18,493		17,448
Dividends on preferred stock		(2,207)		(21)
Comprehensive income available to CAI common stockholders	$	16,286	$	17,427

See accompanying notes to unaudited consolidated financial statements.

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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)
Exercise of stock options	-		-	27		-		107		-		-		107
Stock based compensation - options	-		-	-		-		221		-		-		221
Stock based compensation - restricted stock	-		-	14		-		618		-		-		618
Payment of income tax withheld on vested
restricted stock	-		-	(2)		-		(109)		-		-		(109)
Balances as of March 31, 2019	4,155	$	103,865	18,208	$	2	$	119,557	$	(6,594)	$	487,479	$	704,309


									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
Exercise of stock options	-		-	2		-		24		-		-		24
Stock based compensation - options	-		-	-		-		416		-		-		416
Stock based compensation - restricted stock	-		-	2		-		188		-		-		188
Payment of income tax withheld on vested
restricted stock	-		-	(2)		-		(36)		-		-		(36)
Balances as of March 31, 2018	1,600	$	40,000	20,493	$	2	$	173,873	$	(5,812)	$	414,757	$	622,820

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,
	2019		2018
Cash flows from operating activities
Net income	$	18,574	$	17,138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		31,839		28,879
Amortization of debt issuance costs		1,202		945
Amortization of intangible assets		403		544
Stock-based compensation expense		839		604
Unrealized (gain) loss on foreign exchange		26		(80)
Gain on sale of used rental equipment		(8,832)		(2,195)
Deferred income taxes		630		752
Bad debt expense		738		124
Changes in other operating assets and liabilities:
Accounts receivable		1,158		671
Prepaid expenses and other assets		(1,132)		(27)
Net investment in sales-type and direct financing leases		16,442		-
Accounts payable, accrued expenses and other liabilities		(3,580)		(6,288)
Due to container investors		(1,940)		(1,458)
Unearned revenue		(2,038)		(362)
Net cash provided by operating activities		54,329		39,247
Cash flows from investing activities
Purchase of rental equipment		(141,212)		(112,763)
Proceeds from sale of used rental equipment		180,331		9,671
Purchase of furniture, fixtures and equipment		(50)		(58)
Receipt of principal payments from sales-type and direct financing leases		-		8,336
Net cash provided by (used in) investing activities		39,069		(94,814)
Cash flows from financing activities
Proceeds from debt		306,582		477,600
Principal payments on debt		(382,847)		(441,884)
Debt issuance costs		(419)		(3,485)
Proceeds from issuance of common and preferred stock		-		42,076
Repurchase of common stock		(13,946)		-
Dividends paid to preferred stockholders		(2,207)		-
Exercise of stock options		107		24
Net cash (used in) provided by financing activities		(92,730)		74,331
Effect on cash of foreign currency translation		238		98
Net increase in cash and restricted cash		906		18,862
Cash and restricted cash at beginning of the period (1)		75,983		47,209
Cash and restricted cash at end of the period (2)	$	76,889	$	66,071

Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes	$	91	$	174
Interest		22,544		16,654

Supplemental disclosure of non-cash investing and financing activity
Transfer of rental equipment to direct finance lease	$	8,349	$	15,956
Rental equipment payable		56,221		133,714

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(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 $20,128 and $21,564, cash held by variable interest entities of $27,058 and $22,765, and restricted cash of $29,703 and $21,742 at March 31, 2019 and 2018, 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, 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 March 31, 2019 and December 31, 2018, the Company’s results of operations for the three months ended March 31, 2019 and 2018, and the Company’s cash flows for the three months ended March 31, 2019 and 2018. 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.

(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.

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 income or cash flows.

Except as described above, there were no changes to the Company’s accounting policies during the three months ended March 31, 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.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease.

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 2024. 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 leases under ASC 842 are included in operating lease right-of-use assets, accrued expenses and other current liabilities, and operating lease liabilities in the Company’s consolidated balance sheets.

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 income on a straight-line basis over the lease term and records variable lease payments as incurred.

(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.

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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 months ended March 31, 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 March 31, 2019 and December 31, 2018, and the results of the VIEs’ operations and cash flows for the three months ended March 31, 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 $139.8 million as of March 31, 2019. The container equipment, together with $27.1 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 $124.2 million and term loans held by VIE of $41.3 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, 2019 and 2018, had a net book value of $65.0 million and $7.9 million, respectively.

(4) Rental Equipment

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


	March 31,		December 31,
	2019		2018
Dry containers	$	1,885,018	$	1,840,304
Refrigerated containers		340,495		341,983
Other specialized equipment		206,282		192,035
Railcars		358,419		490,381
		2,790,214		2,864,703
Accumulated depreciation		(613,838)		(599,443)
Rental equipment, net of accumulated depreciation	$	2,176,376	$	2,265,260

On February 26, 2019, the Company entered into an agreement to sell 2,146 railcars. The sale of 1,946 railcars for consideration of $165.3 million was completed in February 2019, which resulted in a $7.0 million gain on sale of rental equipment. The sale of the remaining 200 railcars is expected to complete in the second quarter of 2019.

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) 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):



	March 31,		December 31,
	2019		2018
Gross sales-type and finance lease receivables (1)	$	785,149	$	804,511
Unearned income (2)		(245,213)		(254,744)
Net investment in sales-type and direct finance leases	$	539,936	$	549,767

(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 $74.4 million unguaranteed residual value at March 31, 2019 and December 31, 2018, 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 March 31, 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 March 31, 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):



	March 31,		December 31,
	2019		2018
Tier 1	$	677,220	$	698,014
Tier 2		107,929		106,497
Tier 3		-		-
	$	785,149	$	804,511

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Contractual maturities of the Company's gross sales-type and finance lease receivables subsequent to March 31, 2019 for the years ending March 31 are as follows (in thousands):


2020	$	115,179
2021		91,343
2022		83,364
2023		77,814
2024		69,955
2025 and thereafter		347,494
	$	785,149

(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, 2019 and December 31, 2018 were as follows (in thousands):



	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
March 31, 2019
Trademarks and tradenames	$	1,786	$	(1,786)	$	-
Customer relationships		9,344		(4,013)		5,331
	$	11,130	$	(5,799)	$	5,331
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 March 31, 2019 and 2018, respectively, and was included in administrative expenses in the consolidated statements of income.

As of March 31, 2019, estimated future amortization expenses are as follows (in thousands):


2020	$	1,609
2021		1,609
2022		1,232
2023		474
2024		407
	$	5,331

(7) Leases

Lessee

The Company has entered into various non-cancelable office space leases with original lease periods expiring between 2019 and 2024. The components of lease expense for the three months ended March 31, 2019 were as follows (in thousands):



Operating lease cost	$	600
Short-term lease cost		15
Variable lease cost		73
Total lease cost	$	688

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CAI INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 4.2% as of March 31, 2019.

Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of March 31, 2019 were as follows (in thousands):



2020	$	1,722
2021		727
2022		590
2023		452
2024