Cai International Inc

Cai International Inc details

CAI is a global transportation company offering intermodal container leasing and sales. Established in 1989 and headquartered in San Francisco, CAI has grown into a leading expert in transportation operations and finance. With offices around the world and a broad network of agents and depots, CAI serves hundreds of the world's leading shipping lines, container operators, and logistics providers.

Ticker:CAI
Employees: 99

Filing

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q   x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September
30, 2021 or o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-33388 CAI International, Inc. (Exact name of registrant as specified in its charter) Delaware   94-3109229 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)       Steuart Tower
,
1 Market Plaza , Suite 2400     San Francisco , California   94105 (Address of principal executive offices)   (Zip Code) 415 - 788-0100 (Registrant’s telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act:   Le Title of each class Trading symbols Name of exchange on which registered Common Stock, par value $0.0001 per share CAI New York Stock Exchange 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share CAI-PA New York Stock Exchange 8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share CAI-PB New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    x     No    o   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes    x     No    o   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o    Smaller reporting company o Emerging growth company o If an emerging growth company, indicate by check mark of the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No     x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock  
October
29, 2021 Common Stock, $0.0001 par value per share   17,357,549 shares 1 Table of Contents CAI INTERNATIONAL, INC. IN DEX       Page No. Part I — Financial Information 4 Item 1. Financial Statements (Unaudited) 4   Consolidated Balance Sheets at
September
30 , 2021 and December 31, 202 0 4 Consolidated Statements of
In come
for the three and
nine
months ended
September
30 , 2021 and 2020 6   Consolidated Statements of Comprehensive Income for the three and
nine
months ended
September
30 , 2021 and 2020 7 Consolidated Statements of Stockholders’ Equity for the three and
nine
months ended
September
30, 2021 and 2020 8   Consolidated Statements of Cash Flows for the
nine
months ended
September
30 , 2021 and 2020
10
  Notes to Unaudited Consolidated Financial Statements 1
2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2
5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 3
5
Item 4. Controls and Procedures
35
Part II — Other Information 3
6
Item 1. Legal Proceedings
36
Item 1A. Risk Factors
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 3
7
Item 3. Defaults Upon Senior Securities
37
Item 4. Mine Safety Disclosures
38
Item 5. Other Information
38
Item 6. Exhibits
39
Signatures
40
  ‎ 2 Table of Contents 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, but not limited to, statements relating to the proposed Merger (as defined herein), the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement (as defined herein), risks related to disruption of management’s attention from the Company’s ongoing business operations due to the proposed Merger, the effect of the announcement of the proposed Merger on the ability of the Company to retain and hire key personnel and maintain relationships with its customers, suppliers, operating results and business generally, unexpected costs, liabilities or delays involving the proposed Merger, uncertainty surrounding the proposed Merger, including the timing of the consummation of the Merger, the outcome of any legal proceeding relating to the proposed Merger, our business, operations, growth strategy, service development efforts and the impact of the novel coronavirus (COVID-19) on our business, financial condition, liquidity and results of operations. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (SEC) on March 1, 2021, our Quarterly Reports on Form 10-Q and our other reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our other filings with the SEC. Unless stated otherwise, any forward-looking information contained herein does not take into account or give any effect to the impact of the proposed Merger. ‎ 3 Table of Contents PART I — FINANCIAL INFORMATION   ITEM 1.    FINANCIAL STATEMENTS CAI INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share information) (UNAUDITED)
September
30, December 31, 2021
2020 Assets
Current assets
Cash $
25,225
$ 26,691   Cash held by variable interest entities
21,803
26,856   Current portion of restricted cash
600   600   Accounts receivable, net of allowance for doubtful accounts of $
330
and
$ 393 at
September
30, 2021 and December 31, 2020, respectively
81,453
65,310   Current portion of net investment in finance leases
95,715
78,992   Current portion of financing receivable
13,646
9,550   Prepaid expenses and other current assets
4,151
6,663   Total current assets
242,593
214,662   Restricted cash
14,684
12,355   Rental equipment, net of accumulated depreciation of $ 7
34,640 and
$ 669,360 at
September
30, 2021 and December 31, 2020, respectively
2,171,846
1,781,321   Net investment in finance leases
780,902
550,573   Financing receivable
44,936
48,888   Derivative instruments
8,297
- Other non-current assets
3,084
4,833   Total assets (1) $
3,266
,34
2
$ 2,612,632   Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $
3,436
$ 3,666   Accrued expenses and other current liabilities
24,223
29,598   Unearned revenue
9,721
3,029   Current portion of debt
1
61,748
183,448   Rental equipment payable
139,358
100,509   Total current liabilities
338,486
320,250   Debt
2,097,88
1 1,562,283   Derivative instruments
- 80   Net deferred income tax liability
26,829
24,442   Other non-current liabilities
2,430
3,337   Total liabilities (2)
2,465,626
1,910,392   Stockholders' equity
Preferred stock, par value $ 0.0001 per share; authorized 10,000,000
8.50 % Series A fixed-to-floating rate cumulative redeemable perpetual preferred stock, issued and
outstanding 2,199,610 shares, at liquidation preference
54,990   54,990   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
17,357,549 and 17,562,779 shares at
September
30, 2021 and December 31, 2020, respectively 2   2   Additional paid-in capital
90,
731
100,795   Accumulated other comprehensive loss
175
( 5,743 ) Retained earnings
605,943
503,321   Total stockholders' equity
800,716
702,240   Total liabilities and stockholders' equity $
3,266
,34
2
$ 2,612,632   ‎ 4 Table of Contents (1) Total assets at
September
30, 2021 and December 31, 2020 include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash, $ 21,
803
and $ 26,856 ; Net investment in finance leases, $ 1,
671
and $ 2,683 ; and Rental equipment, net of accumulated depreciation, $ 6
7
,5
46
, and $ 77,907 , respectively. (2) Total liabilities at
September
30, 2021 and December 31, 2020 include the following VIE liabilities for which the VIE creditors do not have recourse to CAI International, Inc.: Current portion of debt, $
35,640
and $ 41,344 ; Debt, $
38,970
and $ 59,519 , respectively. See accompanying notes to unaudited consolidated financial statements.   ‎ 5 Table of Contents CAI INTERN ATIONAL, INC. CONSOLIDATED STATEMENTS OF
INCOME
(In thousands, except per share data) (UNAUDITED) Three Months Ended
September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Leasing revenue Operating leases $ 71,252   $ 57,827   $ 200,940   $ 167,205   Finance leases 17,397   11,241   44,901   34,091   Other 12,178   4,822   21,481   11,150   Total leasing revenue 100,827   73,890   267,322   212,446   Operating expenses Depreciation of rental equipment 32,678   28,267   90,499   82,065   Storage, handling and other expenses 2,604   4,713   7,537   14,305   Gain on sale of rental equipment ( 13,192 ) ( 2,419 ) ( 26,961 ) ( 5,854 ) Administrative expenses 12,294   5,610   30,202   19,330   Total operating expenses 34,384   36,171   101,277   109,846   Operating income 66,443   37,719   166,045   102,600   Other expenses Net interest expense 11,458   15,420   33,744   49,396   Write-off of debt issuance costs - 3,406   - 3,838   Other expense (income) 152   ( 306 ) 488   ( 157 ) Total other expenses 11,610   18,520   34,232   53,077   Income before income taxes 54,833   19,199   131,813   49,523   Income tax expense 3,678   1,697   8,038   3,800   Income from continuing operations 51,155   17,502   123,775   45,723   (Loss) income from discontinued operations, net of income taxes - ( 2,059 ) 1,063   ( 32,236 ) Net income 51,155   15,443   124,838   13,487   Preferred stock dividends 2,207   2,207   6,621   6,621   Net income attributable to CAI common stockholders $ 48,948   $ 13,236   $ 118,217   $ 6,866   Amounts attributable to CAI common stockholders Net income from continuing operations $ 48,948   $ 15,295   $ 117,154   $ 39,102   Net (loss) income from discontinued operations - ( 2,059 ) 1,063   ( 32,236 ) Net income attributable to CAI common stockholders $ 48,948   $ 13,236   $ 118,217   $ 6,866   Net income (loss) per share attributable to CAI common stockholders Basic Continuing operations $ 2.82   $ 0.87   $ 6.77   $ 2.24   Discontinued operations - ( 0.12 ) 0.06   ( 1.85 ) Total basic $ 2.82   $ 0.75   $ 6.83   $ 0.39   Diluted Continuing operations $ 2.79   $ 0.86   $ 6.69   $ 2.21   Discontinued operations - ( 0.11 ) 0.06   ( 1.82 ) Total diluted $ 2.79   $ 0.75   $ 6.75   $ 0.39   Weighted average shares outstanding Basic 17,337   17,570   17,297   17,491   Diluted 17,531   17,706   17,518   17,664   See accompanying notes to unaudited consolidated financial statements. ‎ 6 Table of Contents CAI INTERN ATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 51,155   $ 15,443   $ 124,838   $ 13,487   Other comprehensive income (loss), net of tax: Change in fair value of derivative instruments designated as cash flow hedges 217   ( 1,931 ) 7,736   ( 1,931 ) Reclassification of realized loss on derivative instruments designated as cash flow hedges 250   111   641   111   Foreign currency translation adjustments ( 289 ) 514   ( 698 ) 478   Comprehensive income before tax 51,333   14,137   132,517   12,145   Income tax (expense) benefit related to items of other comprehensive income ( 99 ) 412   ( 1,761 ) 412   Comprehensive income before preferred stock dividends, net of tax 51,234   14,549   130,756   12,557   Dividends on preferred stock ( 2,207 ) ( 2,207 ) ( 6,621 ) ( 6,621 ) Comprehensive income available to CAI common stockholders $ 49,027   $ 12,342   $ 124,135   $ 5,936   See accompanying notes to unaudited consolidated financial statements. ‎ 7 Table of Contents 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, 2020 4,155   $ 103,865   17,563   $ 2   $ 100,795   $ ( 5,743 ) $ 503,321   $ 702,240   Net income - - - - - - 35,740   35,740   Common stock dividend declared, $ 0.30 /share ( 5,192 ) ( 5,192 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Change in fair value of derivative instrument designated as cash flow hedges - - - - - 9,509   - 9,509   Reclassification of realized loss on derivative instruments designated as cash flow hedges - - - - - 157   - 157   Foreign currency translation adjustment - - - - - ( 522 ) - ( 522 ) Income tax expense related to items of other comprehensive income - - - - - ( 2,031 ) - ( 2,031 ) Repurchase of common stock - - ( 390 ) - ( 12,788 ) - - ( 12,788 ) Exercise of stock options - - 107   - 1,499   - - 1,499   Stock-based compensation, net of taxes - - 24   - ( 198 ) - - ( 198 ) Balances as of March 31, 2021 4,155   $ 103,865   17,304   $ 2   $ 89,308   $ 1,370   $ 531,662   $ 726,207   Net income - - - - - - 37,943   37,943   Common stock dividend declared, $ 0.30 /share ( 5,198 ) ( 5,198 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Change in fair value of derivative instrument designated as cash flow hedges - - - - - ( 1,990 ) - ( 1,990 ) Reclassification of realized loss on derivative instruments designated as cash flow hedges - - - - - 234   - 234   Foreign currency translation adjustment - - - - - 113   - 113   Income tax expense related to items of other comprehensive income - - - - - 369   - 369   Repurchase of common stock - - - - - - - - Exercise of stock options - - 21   - 145   - - 145   Stock-based compensation, net of taxes - - 33   - 645   - - 645   Balances as of June 30, 2021 4,155   $ 103,865   17,358   $ 2   $ 90,098   $ 96   $ 562,200   $ 756,261   Net income - - - - - - 51,155   51,155   Common stock dividend declared, $ 0.30 /share ( 5,205 ) ( 5,205 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Change in fair value of derivative instrument designated as cash flow hedges - - - - - 217   - 217   Reclassification of realized loss on derivative instruments designated as cash flow hedges - - - - - 250   - 250   Foreign currency translation adjustment - - - - - ( 289 ) - ( 289 ) Income tax expense related to items of other comprehensive income - - - - - ( 99 ) - ( 99 ) Repurchase of common stock - - - - - - - - Exercise of stock options - - - - 67   - - 67   Stock-based compensation, net of taxes - - - - 566   - - 566   Balances as of September 30, 2021 4,155   $ 103,865   17,358   $ 2   $ 90,731   $ 175   $ 605,943   $ 800,716   ‎ 8 Table of Contents 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, 2019 4,155   $ 103,865   17,479   $ 2   $ 102,709   $ ( 6,630 ) $ 493,294   $ 693,240   Net loss - - - - - - ( 1,330 ) ( 1,330 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Foreign currency translation adjustment - - - - - ( 137 ) - ( 137 ) Exercise of stock options - - 8   - 113   - - 113   Stock-based compensation, net of taxes - - 19   - 468   - - 468   Balances as of March 31, 2020 4,155   $ 103,865   17,506   $ 2   $ 103,290   $ ( 6,767 ) $ 489,757   $ 690,147   Net loss - - - - - - ( 626 ) ( 626 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Foreign currency translation adjustment - - - - - 101   - 101   Exercise of stock options - - 3   - - - - - Stock-based compensation, net of taxes - - 44   - 52   - - 52   Balances as of June 30, 2020 4,155   $ 103,865   17,553   $ 2   $ 103,342   $ ( 6,666 ) $ 486,924   $ 687,467   Net income - - - - - - 15,443   15,443   Common stock dividend declared, $ 0.25 /share ( 4,427 ) ( 4,427 ) Preferred stock dividends, $ 0.53125 /share - - - - - - ( 2,207 ) ( 2,207 ) Change in fair value of derivative instrument designated as cash flow hedges - - - - - ( 1,931 ) - ( 1,931 ) Reclassification of realized loss on derivative instruments designated as cash flow hedges - - - - - 111   - 111   Foreign currency translation adjustment - - - - - 514   - 514   Income tax expense related to items of other comprehensive income - - - - - 412   - 412   Exercise of stock options - - 180   - 3,168   - - 3,168   Stock-based compensation, net of taxes - - 9   - 480   - - 480   Balances as of September 30, 2020 4,155   $ 103,865   17,742   $ 2   $ 106,990   $ ( 7,560 ) $ 495,733   $ 699,030
  See accompanying notes to unaudited consolidated financial statements.
‎ 9
Table of Contents CAI INTERN ATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (UNAUDITED)
Nine Months Ended September 30, 2021 2020 Cash flows from operating activities Net income $ 124,838 $ 13,487 Income (loss) from discontinued operations, net of income taxes 1,063   ( 32,236 ) Income from continuing operations 123,775 45,723 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation 91,123 82,662 Amortization and write-off of debt issuance costs 2,442 6,332 Stock-based compensation expense 1,699 1,213 Unrealized loss (gain) on foreign exchange 373 ( 229 ) Gain on sale of rental equipment ( 26,961 ) ( 5,854 ) Deferred income taxes 1,201 ( 720 ) Bad debt recovery ( 107 ) ( 6,160 ) Changes in other operating assets and liabilities: Accounts receivable ( 18,126 ) 10,992 Prepaid expenses and other assets 2,969 ( 590 ) Net investment in finance leases 88,268 54,626 Accounts payable, accrued expenses and other liabilities ( 4,010 ) 1,592 Unearned revenue 950 ( 525 ) Net cash provided by operating activities of continuing operations 263,596 189,062 Net cash (used in) provided by operating activities of discontinued operations ( 3,919 ) 9,142 Net cash provided by operating activities 259,677 198,204 Cash flows from investing activities Purchase of rental equipment ( 821,806 ) ( 48,782 ) Purchase of financing receivable ( 8,774 ) ( 30,846 ) Proceeds from sale of rental equipment 77,806 75,678 Receipt of principal payments from financing receivable 8,690 4,052 Purchase of furniture, fixtures and equipment ( 94 ) ( 441 ) Net cash used in investing activities of continuing operations ( 744,178 ) ( 339 ) Net cash provided by investing activities of discontinued operations 1,252   16,943 Net cash (used in) provided by investing activities ( 742,926 ) 16,604 Cash flows from financing activities Proceeds from debt 1,221,888 1,025,527 Principal payments on debt ( 707,890 ) ( 911,946 ) Debt issuance costs ( 1,584 ) ( 8,304 ) Proceeds from issuance of common stock 53   116   Repurchase of common stock ( 12,788 ) - Dividends paid to common stockholders ( 15,596 ) ( 4,427 ) Dividends paid to preferred stockholders ( 6,621 ) ( 6,621 ) Exercise of stock options 1,711 3,281 Net cash provided by financing activities of continuing operations 479,173 97,626 Net cash used in financing activities of discontinued operations - ( 3,211 ) Net cash provided by financing activities 479,173 94,415 Effect on cash of foreign currency translation ( 114 ) ( 15 ) Net (decrease) increase in cash and restricted cash ( 4,190 ) 309,208 Cash and restricted cash at beginning of the period (1) 66,502   73,239   Cash and restricted cash at end of the period (2) $ 62,312 $ 382,447
‎
10
Table of Contents
Nine Months Ended September 30, 2021 2020 Supplemental disclosure of cash flow information Cash paid during the period for: Income taxes $ 5,912   $ 434   Interest 29,529   50,249   Lease liabilities arising from obtaining right-of-use assets 262   140   Supplemental disclosure of non-cash investing and financing activity Transfer of rental equipment to finance lease $ 328,017   $ 18,630   Transfer of finance lease to rental equipment - 1,130   Rental equipment payable 311,870   89,634  
(1) Includes cash of $ 26,691 and $ 19,870 , cash held by variable interest entities of $ 26,856 and $ 26,594 , and restricted cash of $ 12,955 and $ 26,775 at December 31, 2020 and 2019, respectively. (2) Includes cash of $
25,225 and $ 15,516 , cash held by variable interest entities of $ 21,803 and $ 26,784 , and restricted cash of $ 15,284 and $ 340,147 at September
30, 2021 and 2020, respectively. See accompanying notes to unaudited consolidated financial statements. 1
1
Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS   (1) Description of Business and Significant Accounting Policies Organization CAI International, Inc., together with its subsidiaries (collectively, CAI or the Company), is a transportation finance company. The Company purchases equipment, primarily intermodal shipping containers, which it leases to its customers. The Company also manages equipment for third-party investors. In operating its fleet, the Company leases, re-leases and disposes of equipment and contracts for the repair, repositioning and storage of equipment. The Company’s common stock, 8.50 % Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock (Series A Preferred Stock) and 8.50 % Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock (Series B Preferred 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, 2021 and December 31, 2020, the Company’s income for the three and nine months ended September 30, 2021 and 2020, and the Company’s cash flows for the nine months ended September
30, 2021 and 2020. Certain reclassifications have been made to prior year financial statements to conform to the current presentation. The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2021 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, 2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 1, 2021. Merger Agreement with Mitsubishi HC Capital Inc. On June 17, 2021, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Mitsubishi HC Capital Inc., a Japanese corporation (Parent), and Cattleya Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (Merger Sub), relating to the proposed acquisition of the Company by Parent. Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), with the Company continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of Parent. Upon completion of the Merger, the Company will cease to be a publicly traded company and at the effective time of the Merger (the Effective Time): (i) each share of the Company’s common stock that is issued and outstanding immediately prior to the Effective Time (other than Excluded Shares (as defined in the Merger Agreement)) will cease to be outstanding and will be converted into the right to receive $ 56.00 , in cash, without interest, subject to deductions of any applicable withholding taxes; (ii) each share of the Company’s Series A Preferred Stock that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $ 25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series A Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes; and (iii) each share of the Company’s Series B Preferred Stock that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $ 25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series B Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes. The closing of the Merger is subject to various closing conditions, each of which is more fully described in the Company’s Current Report on Form 8-K, filed with the SEC on June 21, 2021,
and the Company’s definitive proxy statement on Schedule 14A relating to the Merger, filed with the SEC on August 4, 2021 (the Proxy Statement). The closing of the Merger is subject to, among other things, adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of common stock entitled to vote at a special meeting of the common stockholders of the Company, which was obtained on September 2, 2021 and the completion of the Migration (as defined in the Proxy Statement). The Merger is expected to be completed in the fourth quarter of 2021. However, the exact timing of completion of the Merger cannot be predicted because the Merger is subject to the satisfaction or (to the extent permitted by applicable law) waiver of the conditions to the completion of the Merger more fully described in the Proxy Statement. 12 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   Discontinued Operations On August 14, 2020, the Company sold substantially all of the assets and liabilities of its logistics business to NFI, a North American logistics provider, for cash proceeds of $ 6.2 million. On December 29, 2020, the Company sold its remaining railcar fleet to affiliates of Infinity Transportation for cash proceeds of $ 228.1 million. As a result, the operating results of the logistics and rail businesses have been classified as discontinued operations in the accompanying unaudited consolidated statements of income and cash flows. All prior periods presented in these consolidated financial statements have been restated to reflect the classification of the logistics and rail leasing businesses as discontinued operations. See Note 2 – Discontinued Operations for more information. Concentration of Credit Risk The Company’s equipment leases and trade receivables subject it to potential credit risk. The Company extends credit to its customers based upon an evaluation of each customer’s financial condition and credit history. Evaluations of the financial condition and associated credit risk of customers are performed an on ongoing basis. The Company’s largest customer and second largest customer accounted for 18 % and 10 %, respectively, of the Company’s total billings during the three months ended September 30, 2021, and 19 % and 10 %, respectively, of the Company’s total billings during the nine months ended September 30, 2021. Accounting Policy Updates There were no changes to the Company’s accounting policies during the nine months ended September 30, 2021. See Note 2 to the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021, for a description of the Company’s significant accounting policies. (2) Discontinued Operations As discussed in Note 1, the Company sold substantially all of the assets of its logistics business for proceeds of $ 6.2 million and its remaining railcar assets for proceeds of $ 228.1 million during the quarters ended September 30, 2020 and December 31, 2020, respectively. The logistics and rail leasing businesses have been classified as discontinued operations in the accompanying unaudited consolidated statements of income and cash flows for the three and nine months ended September 30, 2021 and 2020. The Company recognized an impairment charge of $ 19.7 million during the nine months ended September 30, 2020 to reduce the book value of its railcar portfolio, on an individual basis, to its estimated fair value, or to its net book value had the assets not been classified as held for sale. To assist in the Company’s assessment of fair value, a third-party appraisal was carried out on the railcar fleet using a combination of cost and market approaches. The cost approach utilized the current replacement cost for a particular car type and calculated an estimated depreciation based on a railcar having a 40 -year life and residual value being 10 % of the estimated purchase price. The market approach estimated value based on recent market transactions involving similar railcars. The railcars were classified within Level 3 of the fair value hierarchy. ‎ 13 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   The following tables summarize the components of net income (loss) from discontinued operations in the accompanying unaudited consolidated statements of income for the three months ended September 30, 2020 and the nine months ended September 30, 2021 and 2020 (in thousands). There was no income or expense arising from discontinued operations for the three months ended September 30, 2021. Revenue and operating expenses for the nine months ended September 30, 2021 were a result of immaterial differences in the actual transactions from the amounts accrued prior to the sale of the logistics and railcar businesses in 2020. Three Months Ended September 30, 2020 Rail Logistics Total Revenue Rail lease revenue $ 5,162 $ - $ 5,162 Logistics revenue - 13,550 13,550 Total revenue 5,162 13,550 18,712 Operating expenses Depreciation of rental equipment 2,161 - 2,161 Storage, handling and other expenses 1,973 - 1,973 Logistics transportation costs - 12,092 12,092 Gain on sale of rental equipment ( 310 ) - ( 310 ) Administrative expenses 778 3,433 4,211 Total operating expenses 4,602 15,525 20,127 Operating income (loss) 560 ( 1,975 ) ( 1,415 ) Interest expense (income) 1,445 ( 1 ) 1,444 Loss before income taxes ( 885 ) ( 1,974 ) ( 2,859 ) Income tax benefit ( 348 ) ( 452 ) ( 800 ) Net loss from discontinued operations $ ( 537 ) $ ( 1,522 ) $ ( 2,059 ) Nine Months Ended September 30, 2021 Rail Logistics Total Revenue Rail lease revenue $ 293 $ - $ 293 Total revenue 293 - 293 Operating expenses Storage, handling and other expenses ( 142 ) - ( 142 ) Gain on sale of rental equipment ( 33 ) - ( 33 ) Administrative expenses 91 ( 240 ) ( 149 ) Total operating expenses ( 84 ) ( 240 ) ( 324 ) Operating income 377 240 617 Income before income taxes 377 240 617 Income tax (benefit) expense ( 496 ) 50 ( 446 ) Net income from discontinued operations $
873 $ 190 $ 1,063 ‎ 1
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  
Nine Months Ended September 30, 2020 Rail Logistics Total Revenue Rail lease revenue $ 17,247 $ - $ 17,247 Logistics revenue - 66,304 66,304 Total revenue 17,247 66,304 83,551 Operating expenses Depreciation of rental equipment 4,257 - 4,257 Impairment of rental equipment 19,724 - 19,724 Storage, handling and other expenses 4,603 - 4,603 Logistics transportation costs - 58,440 58,440 Gain on sale of rental equipment ( 597 ) - ( 597 ) Administrative expenses 2,111 30,179 32,290 Total operating expenses 30,098 88,619 118,717 Operating loss ( 12,851 ) ( 22,315 ) ( 35,166 ) Interest expense (income) 5,011 ( 7 ) 5,004 Loss before income taxes ( 17,862 ) ( 22,308 ) ( 40,170 ) Income tax benefit ( 4,394 ) ( 3,540 ) ( 7,934 ) Net loss from discontinued operations $ ( 13,468 ) $ ( 18,768 ) $ ( 32,236 )
(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 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, 2021 and 2020. Collateralized Financing Obligations The Company has transferred containers to Japanese investor funds while concurrently entering into lease agreements for the same containers, under which the Company leases the containers back from the Japanese investors. The Company concluded these were financing transactions under which sale-leaseback accounting was not applicable. ‎ 1
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   The terms of the transactions with container funds under financing arrangements include options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance and, as a result, the Company has a variable interest in the funds. The funds are considered VIEs under FASB ASC Topic 810, Consolidation , because, as lessee of the funds, the Company has the power to direct the activities that most significantly impact each entity’s economic performance, including the leasing and managing of containers owned by the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these VIEs and included the VIEs’ assets and liabilities as of
September 30, 2021 and December 31, 2020, and the results of the VIEs’ operations and cash flows for the three and nine months ended September 30, 2021 and 2020, in the Company’s consolidated financial statements. The containers that were transferred to the Japanese investor funds had a net book value of $ 69.2 million as of September 30, 2021. The container equipment, together with $ 21.8 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 $ 47.5  million and term loans held by VIE of $ 27.1  million. No gain or loss was recognized by the Company on the initial consolidation of the VIEs. No containers were sold to the Japanese investor funds during the three and nine months ended September 30, 2021 and 2020. (4) Rental Equipment The following table provides a summary of the Company’s rental equipment (in thousands): September 30, December 31, 2021 2020 Dry containers $ 2,223,529 $ 1,940,572 Refrigerated containers 393,451 315,641 Other specialized equipment 289,506 194,468 2,906,486 2,450,681 Accumulated depreciation ( 734,640 ) ( 669,360 ) Rental equipment, net of accumulated depreciation $ 2,171,846 $ 1,781,321 (5) Leases   The Company leases its rental equipment on either short-term operating leases through master lease agreements, long-term non-cancelable operating leases, or finance leases. The following table summarizes the components of lease revenue (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Leasing revenue - operating leases $ 71,252   $ 57,827   $ 200,940   $ 167,205   Interest income on finance leases 17,397   11,241   44,901   34,091   Other revenue 11,035   3,644   18,036   8,537   Interest income on financing receivable 1,143   1,178   3,445   2,613   Total leasing revenue $ 100,827   $ 73,890   $ 267,322   $ 212,446   For finance leases, the net selling gain recognized at lease commencement, representing the difference between the estimated fair value of rental equipment placed on lease and its net book value, in the amount of $ 7.6 million and $ 0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 7.8 million and $ 0.1 million for the nine months ended September 30, 2021 and 2020, respectively,
is included in “gain on sale of rental equipment” in the consolidated statements of operations. ‎ 1
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   Net investment in finance leases The following table represents the components of the Company’s net investment in finance leases (in thousands):
September 30, December 31, 2021 2020 Gross finance lease receivables (1) $ 1,284,728 $ 909,727 Unearned income (2) ( 408,054 ) ( 280,116 ) Net investment in finance leases 876,674 629,611 Allowance for credit losses ( 57 ) ( 46 ) Net investment in finance leases, net of allowance for credit losses $ 876,617 $ 629,565 (1) At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivables are reduced as customer payments are received. There was $ 139.6  million and $ 98.2 million of unguaranteed residual value at September 30, 2021 and December 31, 2020, respectively, included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of September 30, 2021 and December 31, 2020. (2) The difference between the gross finance lease receivables and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income, together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of September 30, 2021 and December 31, 2020. (3) One major customer represented 70 % and 75 % of the Company’s finance lease portfolio as of September 30, 2021 and December 31, 2020, respectively. No other customer represented more than 10% of the Company’s finance lease portfolio in each of those periods. Contractual maturities of the Company's gross finance lease receivables subsequent to September 30, 2021 for the years ending September 30 are as follows (in thousands): 2022 $ 154,370 2023 160,379 2024 125,265 2025 110,194 2026 102,789 2027 and thereafter 631,731 $ 1,284,728
Financing receivable   The Company has purchased containers and leased back the containers to the seller-lessees through finance leaseback arrangements. As control of the equipment was retained by the customers, the Company concluded that sale-leaseback accounting was not applicable and treated the arrangements as financing transactions. The Company recorded a financing receivable in the amount paid for the containers. Payments made by the seller-lessee are recorded as a reduction to the financing receivable and as interest income, calculated using the effective interest method. The following table summarizes the components of the Company’s financing receivable (in thousands):
September 30, December 31, 2021 2020 Gross financing receivable $ 69,670 $ 71,761 Unearned income ( 11,083 ) ( 13,320 ) 58,587 58,441 Allowance for credit losses ( 5 ) ( 3 ) Total financing receivable $ 58,58
2 $ 58,438 Credit quality information In order to estimate the allowance for losses contained in net investment in finance leases and financing receivable, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, historical credit loss activity, current market and economic conditions, and reasonable and supportable forecasts. 1
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   The Company uses the following definitions for risk ratings: Tier 1 — These customers are typically large international shipping lines that have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to moderate. Tier 2 — These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate. Tier 3 — Customers in this category exhibit volatility in payments on a regular basis. As of
September 30, 2021 and December 31, 2020, based on the most recent analysis performed, the risk category of the Company’s net investment in finance leases and financing receivable, based on year of origination is as follows (in thousands): September 30, 2021 2021 2020 2019 2018 2017 Prior Total Net investment in finance leases Tier 1 $ 274,585   $ 138,261   $ 39,963   $ 207,538   $ 149,502   $ 4,904   $ 814,753   Tier 2 20,473   6,795   18,190   10,285   3,185   2,993   61,921   Tier 3 - - - - - - - Total net investment in finance leases $ 295,058   $ 145,056   $ 58,153   $ 217,823   $ 152,687   $ 7,897   $ 876,674   Financing receivable Tier 1 $ - $ 23,661   $ 27,215   $ - $ - $ - $ 50,876   Tier 2 7,220   - 491   - - - 7,711   Tier 3 - - - - - - - Total financing receivable $ 7,220   $ 23,661   $ 27,706   $ - $ - $ - $ 58,587
  December 31, 2020 2020 2019 2018 2017 2016 Prior Total Net investment in finance leases Tier 1 $ 127,215   $ 49,986   $ 228,802   $ 160,197   $ 5,945   $ 875   $ 573,020   Tier 2 8,425   25,726   12,576   4,272   1,136   4,456   56,591   Tier 3 - - - - - - - Total net investment in finance leases $ 135,640   $ 75,712   $ 241,378   $ 164,469   $ 7,081   $ 5,331   $ 629,611   Financing receivable Tier 1 $ 27,762   $ 30,083   $ - $ - $ - $ - $ 57,845   Tier 2 - 596   - - - - 596   Tier 3 - - - - - - - Total financing receivable $ 27,762   $ 30,679   $ - $ - $ - $ - $ 58,441     ‎ 1
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   (6) Debt and Derivative Instruments Debt Details of the Company’s debt as of
September 30, 2021 and December 31, 2020 were as follows (dollars in thousands): September 30, 2021 December 31, 2020 Outstanding Average Outstanding Average Current Long-term Interest Current Long-term Interest Maturity Revolving credit (1) $ - $ 854,000   1.3 % $ - $ 680,000   1.6 % June 2023 Revolving credit facility - Euro - 20,515   2.4 % - 23,550   2.5 % September 2023 Revolving credit facility - 275,000   1.6 % - - - March 2024 Term loan 1,800   22,350   2.1 % 1,800   23,700   2.2 % April 2023 Term loan - - - 68,500   - 1.9 % - Term loan 6,000   76,000   4.6 % 6,000   80,500   4.6 % October 2023 Term loan 20,160   204,840   1.7 % - - - September 2024 Senior secured notes 40,555   - 4.9 % 6,110   40,555   4.9 % September 2022 Asset-backed notes 2020-1 63,130   616,441   2.3 % 63,130   663,788   2.3 % September 2045 Collateralized financing obligations 29,981   17,484   2.0 % 35,862   33,767   1.7 % February 2026 Term loans held by VIE 5,659   21,486   4.2 % 5,482   25,752   4.2 % February 2026 167,285   2,108,116   186,884   1,571,612   Debt discount and debt issuance costs ( 5,537 ) ( 10,235 ) ( 3,436 ) ( 9,329 ) Total Debt $ 161,748   $ 2,097,881   $ 183,448   $ 1,562,283   (1) $ 500 million of this outstanding debt is subject to an interest rate swap at a cost of 0.29 % as described below in Derivative Instruments . The Company maintains its revolving credit facilities to finance the acquisition of rental equipment and for general working capital purposes. On August 31, 2021, the Company entered into an amendment to the Third Amended and Restated Revolving Credit Agreement, pursuant to which the revolving credit facility was amended to, among other things, increase the commitment level from $ 1,175.0 million to $ 1,350.0 million, with ability to increase the facility by an additional $ 150.0 million without lender approval, subject to certain conditions. As of September 30, 2021, the Company had $ 729.4  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, 2021, the borrowing availability under the Company’s revolving credit facilities was $ 170.2  million, assuming no additional contributions of assets. On September 21, 2021, CAI WF LLC (CAI WF), a wholly-owned subsidiary of the Company, entered into a term loan agreement with a consortium of lenders. The loan agreement provides for a term loan to the Company in an aggregate principal amount of $ 252.0 million, which is secured by certain assets of CAI WF. At closing of the loan agreement, the Company made a draw of $ 225.0 million on the facility, which is scheduled to mature in September 2024. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or LIBOR rate loans. The unpaid principal balance of all term loans will be payable on the 25 th day of each month, which commenced on October 25, 2021. On October 15, 2021, CAI WF LLC drew down an additional $ 27.0 million and entered into an interest rate swap agreement for the full $ 252.0 million outstanding loan. The fixed rate payable by CAI WF LLC under the terms of the swap is 0.74 %. On September 29, 2021, CAI MUFG LLC (CAI MUFG), a wholly-owned subsidiary of the Company, entered into a credit agreement with a consortium of lenders. The credit agreement provides for a revolving credit facility in an aggregate principal amount of $ 400.0 million, which is secured by certain assets of CAI MUFG and scheduled to mature in March 2024, subject to certain extensions set forth in the credit agreement. Subject to certain conditions, the Company may request an increase in the total aggregate commitment level to $ 800.0 million. The interest rates vary depending upon whether the loans are characterized as Base Rate loans, LIBOR rate loans, or commercial paper loans. The Company initially drew down $ 275.0 million at closing. The agreements relating to all of the Company’s debt contain various financial and other covenants. As of September 30, 2021, the Company was in compliance with all of its financial and other covenants. For further information on the Company’s debt instruments, see Note 7 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. ‎ 19 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   Derivative Instruments In July 2020, the Company entered into an interest rate swap agreement with an effective date of July 31, 2020 and scheduled maturity date of June 30, 2025 . This contract is indexed to 1-month LIBOR, has a fixed leg interest rate of 0.29 %, and a notional amount of $ 500.0 million. The Company has designated interest rate swap agreements for a total notional amount of $ 500.0 million as cash flow hedges for accounting purposes. The change in fair value of cash flow hedging instruments during the three and nine months ended September 30, 2021 and 2020, was recorded on the consolidated balance sheets in ‘Accumulated other comprehensive loss’ and reclassified to ‘Net interest expense’ when realized. Over the next twelve months, the Company expects to reclassify an estimated net loss of $ 0.9 million related to the designated interest rate swap agreements from ‘Accumulated other comprehensive loss’ in the consolidated statements of comprehensive income to ‘Net interest expense’ in the consolidated statements of operations. The following table summarizes the impact of derivative instruments designated in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of comprehensive income (loss) on a pretax basis (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Derivative Instrument Financial Statement Caption 2021 2020 2021 2020 Interest rate swap Comprehensive income $ 217   $ ( 1,931 ) $ 7,736   $ ( 1,931 ) Interest rate swap Net interest expense $ 250   $ 111   $ 641   $ 111   The fair value of derivative instruments on the Company’s consolidated balance sheets as of September 30, 2021 and December 31, 2020 was as follows (in thousands): Total Fair Value Level 2 September 30, 2021 Derivative assets - interest rate swaps $ 8,297 $ 8,297
December 31, 2020 Derivative liabilities - interest rate swaps $ 80 $ 80 (7) Stock–Based Compensation Plan Restricted Stock Awards, Time-Based Restricted Stock Units and Performance-Based Restricted Stock Units The Company grants time-based restricted stock units to certain employees and restricted stock awards to independent directors from time to time pursuant to its 2019 Incentive Plan (2019 Plan). Time-based restricted stock units granted to employees have a vesting period of four years , subject to continued employment with the Company; 25 % vesting on each anniversary of the grant date. Restricted stock awards granted to independent directors vest in one year . The Company recognizes the compensation cost associated with restricted stock awards and time-based restricted stock units over the vesting period based on the closing price of the Company’s common stock on the date of grant. The Company grants performance-based restricted stock units to certain executives and other key employees. The performance-based restricted stock units vest at the end of a 3 -year performance cycle if certain financial performance targets are met. The Company recognizes compensation cost associated with the performance-based restricted stock units ratably over the 3 -year term when it is considered probable that performance targets will be met. Compensation cost is based on the closing price of the Company’s common stock on the date of grant.
20 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  
The following table summarizes the activity of restricted stock awards, time-based restricted stock units and performance-based restricted stock units under the 2019 Plan: Weighted Average Number of Grant Date Shares Fair Value Outstanding at December 31, 2020
186,471 $ 23.91 Granted 78,823 $ 37.21 Vested ( 96,163 ) $ 21.48 Forfeited ( 5,071 ) $ 21.90 Outstanding at September 30, 2021 164,060 $ 31.79 The Company recognized stock-based compensation expense relating to restricted stock and performance stock in continuing operations of $ 0.6 million and $ 0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $ 1.7 million and $ 1.0 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 , unamortized stock-based compensation expense relating to restricted stock and performance stock was $ 3.4  million, which will be recognized over the remaining average vesting period of 1.8 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.  Stock Options Stock options granted to employees have a vesting period of four years from the grant date, with 25 % vesting after one year, and 1/48th vesting each month thereafter until fully vested, subject to continued employment with the Company. Stock options granted to independent directors vest in one year . All of the stock options have a contractual term of ten years . The following table summarizes the Company’s stock option activities for the nine months ended September 30, 2021 and 2020 : Nine Months Ended September 30, 2021 2020 Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price Options outstanding at January 1 301,176 $ 16.39 646,946 $ 16.96 Options exercised ( 133,025 ) $ 14.49 ( 197,499 ) $ 14.96 Options forfeited - $ - ( 11,814 ) $ 15.64 Options expired - $ - ( 80,310 ) $ 23.31 Options outstanding at September 30 168,151 $ 17.89 357,323 $ 16.67 Options exercisable 168,151 $ 17.89 344,612 $ 16.70 Weighted average remaining term 3.9 years 5.1 years The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2021 and 2020 was $ 3.8 million and $ 1.4  million, respectively. The aggregate intrinsic value of all options outstanding as of September 30, 2021 was $ 6.4  million based on the closing price of the Company’s common stock of $ 55.91 per share on September 30, 2021 , the last trading day of the quarter. The Company recognized stock-based compensation expense relating to stock options in continuing operations of less than $ 0.1  million for the three months ended September 30, 2020, and less than $ 0.1 million and $ 0.2 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 , there was no remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s employees and independent directors. The Company did no t grant any stock options during the nine months ended September 30, 2021 and 2020 . ‎ 21 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   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 Company issued 1,922 shares under the ESPP during the nine months ended September 30, 2021, and 7,258 shares during the nine months ended September 30, 2020. The Company recognized stock-based compensation expense relating to the ESPP of less than $ 0.1  million for the nine months ended September 30, 2021 and 2020 . (8) Income Taxes The consolidated income tax expense for the three and nine months ended September 30, 2021 and 2020 , was determined based upon estimates of the Company’s consolidated annual effective income tax rate for the years ending December 31, 2021 and 2020, respectively. The difference between the consolidated annual effective income tax rate and the U.S. federal statutory rate is primarily attributable to foreign income taxes, state income taxes and the effect of certain permanent differences. The Company’s estimated effective tax rate before discrete items was 6.1 % at September 30, 2021 , compared to an effective tax rate before discrete items of 8.1 % at September 30, 2020 . The Barbados Revenue Authority examination of Container Applications Limited 2019 corporate income tax return, concluded on May 28, 2021 with no changes. (9) Fair Value of Financial Instruments   Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy when selecting inputs for its valuation techniques, with highest priority given to Level 1:  Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;  Level 2 – inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and  Level 3 – unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. The carrying amounts of cash, restricted cash, accounts receivable and accounts payable reflected in the balance sheets as of September 30, 2021 and December 31, 2020, approximate their fair value due to the short-term nature of these financial assets and liabilities. The carrying value of variable-rate debt in the balance sheets as of September 30, 2021 and December 31, 2020 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 $ 82.0  million, $ 679.6 million, and $ 47.5  million as of September 30, 2021, with a fair value of approximately $ 85.3 million, $ 678.6 million, and $ 49.7  million, respectively, based on the fair value of estimated future payments calculated using prevailing interest rates. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy. The principal balance of the Company’s fixed-rate term loans, asset-backed notes and collateralized financing obligations was $ 86.5 million, $ 726.9  million and $ 69.6  million as of December 31, 2020, with a fair value of approximately $ 91.1 million, $ 725.8  million and $ 71.6  million, respectively. Management believes that the balances of the Company’s senior secured notes of $ 40.6  million and $ 46.7 million, term loans held by VIE of $ 27.1  million and $ 31.2 million, and financing receivable of $ 58.6 million and $ 58.4 million as of September 30, 2021 and December 31, 2020, respectively, approximate their fair values. The fair value of these financial instruments would be categorized as Level 2 in the fair value hierarchy.   (10) Commitments and Contingencies   In addition to its debt obligations described in Note 6 above, the Company had commitments to purchase approximately $ 212.7 million of containers as of September 30, 2021, all in the twelve months ending September 30, 2022 . 22 Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   Since the announcement of the Merger, nine lawsuits have been filed by alleged Company stockholders. Each lawsuit names the Company and the Company’s board of directors as defendants. Each lawsuit alleges, among other things, that the defendants violated provisions of the Securities Exchange Act of 1934, as amended, or breached certain fiduciary duties, because the Company’s preliminary proxy statement on Schedule 14A, dated July 12, 2021 (the “Preliminary Proxy Statement”), or Proxy Statement, as applicable, allegedly omits material information with respect to the Merger and is therefore false and misleading. The lawsuits seek, among other things, injunctive relief, rescissory damages, and awards of plaintiffs’ fees and expenses. The Company and the other defendants deny that they have committed any violation of law or engaged in any of the wrongful acts that are alleged in the lawsuits and maintain that they complied with their fiduciary and other legal duties. However, to avoid the expense and distraction associated with these lawsuits, and without admitting the legal necessity for, or materiality under any applicable laws of, any of the additional disclosures set forth therein, on August 24, 2021, the Company filed with the SEC certain additional disclosures that were supplemental to those contained in the Preliminary Proxy Statement or the Proxy Statement. Plaintiffs in seven of the lawsuits have filed notices of voluntary dismissal. (11) 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. In February 2021, the Board of Directors increased the share repurchase plan by an additional 2.0 million shares. The number, price, structure and timing of the repurchases, if any, will be at the Company’s sole discretion and will be evaluated by the Company depending on prevailing market conditions, corporate needs, and other factors. The stock repurchases may be made in the open market, block trades or privately negotiated transactions. This stock repurchase program replaces any available prior share repurchase authorization and may be discontinued at any time. During the nine months ended September 30, 2021, the Company repurchased 0.4 million shares of its common stock under this repurchase plan, at a cost of approximately $ 12.8 million. As of September 30, 2021 , approximately 2.4 million shares remained available for repurchase under this share repurchase program. For further information on the Company’s shareholders’ equity, see Note 13 to the consolidated financial statements in the Company’ Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021.   (12) Related Parties The Company is responsible for settling income tax liabilities of certain employees related to stock-based compensation. The Company is then reimbursed for those amounts by the employees. At December 31, 2020, the Company had a liability of $ 1.2 million representing tax due to the UK tax authorities in respect of an officer of the Company. The Company also included in its balance sheets at September
30, 2021 and December 31, 2020 a current asset of $ 1.2 million, representing the amount that will be reimbursed to the Company by that officer. (13) Segment and Geographic Information The Company operates under one reportable segment, container leasing, which 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. As disclosed in Note 2, the Company sold substantially all of the assets of its logistics business and all its railcar assets during the year ended December 31, 2020, and the operations of the logistics and rail businesses have been reclassified as discontinued operations in the accompanying unaudited consolidated statements of operations. As a result, the Company will no longer report Logistics or Rail Leasing as segments. Geographic Data The Company earns its revenue primarily from intermodal containers, which are deployed by its customers in a wide variety of global trade routes. Virtually all of the Company’s containers are used internationally and typically no container is domiciled in one particular place for a prolonged period of time. As such, substantially all of the Company’s long-lived assets are considered to be international, with no single country of use. ‎ 2
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Table of Contents CAI INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   The following table represents the geographic allocation of revenue for the periods indicated based on customers’ primary domicile (in thousands): Three Months Ended
September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Switzerland $ 19,316   $ 13,045   $ 55,250   $ 38,033   Korea 11,210   11,195   33,615   30,333   Singapore 12,704   10,542   34,073   30,490   France 10,267   8,078   28,014   23,438   United States 1,608   1,185   3,985   3,578   Other Europe 26,027   14,600   62,107   43,433   Other Asia 18,922   14,387   47,861   40,650   Other International 773   858   2,417   2,491   Total leasing revenue $ 100,827   $ 73,890   $ 267,322   $ 212,446     (14) Earnings Per Share Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, potential common equivalent shares are excluded if their effect is anti-dilutive. The following table sets forth the reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Numerator Net income from continuing operations $ 48,948   $ 15,295   $ 117,154   $ 39,102   Net (loss) income from discontinued operations - ( 2,059 ) 1,063   ( 32,236 ) Net income attributable to CAI common stockholders $ 48,948   $ 13,236   $ 118,217   $ 6,866   Denominator Weighted-average shares used in per share computation - basic 17,337   17,570   17,297   17,491   Effect of dilutive securities: Stock options and restricted stock 194   136   221   173   Weighted-average shares used in per share computation - diluted 17,531   17,706   17,518   17,664   Net income (loss) per share attributable to CAI common stockholders: Basic Continuing operations $ 2.82   $ 0.87   $ 6.77   $ 2.24   Discontinued operations - ( 0.12 ) 0.06   ( 1.85 ) Total basic $ 2.82   $ 0.75   $ 6.83   $ 0.39   Diluted Continuing operations $ 2.79   $ 0.86   $ 6.69   $ 2.21   Discontinued operations - ( 0.11 ) 0.06   ( 1.82 ) Total diluted $ 2.79   $ 0.75   $ 6.75   $ 0.39   Certain options, restricted stock awards and time- and performance-based restricted stock units issued under employee benefit plans are excluded from the computation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2021 , no stock options, restricted stock awards and time- and performance-based restricted stock units were excluded. For the three and nine months ended September 30, 2020, 365,126 shares and 362,943 shares, respectively, of stock options, restricted stock awards and time- and performance-based restricted stock units were excluded.  
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Table of Contents   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, 2020 filed with the SEC on March 1, 2021.  In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future. See “Special Note Regarding Forward-Looking Statements” included earlier in this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references to “CAI,” the “Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to CAI International, Inc. and its subsidiaries. Overview   We are one of the world’s leading transportation finance companies. We lease equipment, primarily intermodal shipping containers, to our customers. We also manage equipment for third-party investors. In operating our fleet, we lease, re-lease and dispose of equipment and contract for the repair, repositioning and storage of equipment. The following tables show the composition of our fleet as of
September 30, 2021 and 2020, and our average utilization for the three and nine months ended September 30, 2021 and 2020 : As of September 30, 2021 2020 Owned container fleet in TEUs 1,899,744  1,622,102  Managed container fleet in TEUs 52,110  60,085  Total container fleet in TEUs 1,951,854  1,682,187  Owned container fleet in CEUs 1,960,562  1,657,067  Managed container fleet in CEUs 69,399  75,480  Total container fleet in CEUs 2,029,961  1,732,547  Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Average container fleet utilization in CEUs 99.6% 98.4% 99.6% 98.2% Average owned container fleet utilization in CEUs 99.7% 98.4% 99.7% 98.3
% The intermodal marine container industry-standard measurement unit is the 20-foot equivalent unit (TEU), which compares the size of a container to a standard 20-foot container. For example, a 20-foot container is equivalent to one TEU and a 40-foot container is equivalent to two TEUs. Containers can also be measured in cost equivalent units (CEUs), whereby the cost of each type of container is expressed as a ratio relative to the cost of a standard 20-foot dry van container. For example, the CEU ratio for a standard 40-foot dry van container is 1.6, and a 40-foot high cube container is 1.7. Utilization of containers is computed by dividing the average total units on lease during the period in CEUs, by the average total CEUs in our container fleet during the period. The total fleet excludes new units not yet leased and off-hire units designated for sale. 2
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Table of Contents   Merger Agreement with Mitsubishi HC Capital Inc. On June 17, 2021, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Mitsubishi HC Capital Inc., a Japanese corporation (Parent), and Cattleya Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (Merger Sub), relating to the proposed acquisition of the Company by Parent. Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), with the Company continuing as the surviving corporation in the Merger as a wholly-owned subsidiary of Parent. Upon completion of the Merger, the Company will cease to be a publicly traded company and at the effective time of the Merger (the Effective Time): (i) each share of the Company’s common stock that is issued and outstanding immediately prior to the Effective Time (other than Excluded Shares (as defined in the Merger Agreement)) will cease to be outstanding and will be converted into the right to receive $56.00, in cash, without interest, subject to deductions of any applicable withholding taxes; (ii) each share of the Company’s 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock (Series A Preferred Stock) that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series A Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes; and (iii) each share of the Company’s 8.50% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Stock (Series B Preferred Stock) that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series B Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes. The closing of the Merger is subject to various closing conditions, each of which is more fully described in the Company’s Current Report on Form 8-K, filed with the SEC on June 21, 2021,
and the Company’s definitive proxy statement on Schedule 14A relating to the Merger, filed with the SEC on August 4, 2021 (the Proxy Statement). The closing of the Merger is subject to, among other things, adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of common stock entitled to vote at a special meeting of the common stockholders of the Company, which was obtained on September 2, 2021 and the completion of the Migration (as defined the Proxy Statement). The Merger is expected to be completed in the fourth quarter of 2021. However, the exact timing of completion of the Merger cannot be predicted because the Merger is subject to the satisfaction or (to the extent permitted by applicable law) waiver of the conditions to the completion of the Merger more fully described in the Proxy Statement. We have incurred Merger-related costs of approximately $6.1 million during the nine months ended September 30, 2021. See also Item 1A. Risk Factors——“Risks Related to the Merger.” COVID-19 Pandemic The COVID-19 pandemic continues to have a meaningful impact on global trade and our business. The pandemic and related work, travel, and social restrictions resulted in a sharp decrease in global economic and trade activity during the first half of 2020, resulting in weak container leasing demand. However, we have seen a significant increase in leasing demand since the second half of 2020, which we expect to continue through 2021 and into 2022. However, it remains difficult to predict the future impact that COVID-19, including the emergence of new variants of the virus, will have on our business, and whether the rebound in demand will be sustained through
2022 and beyond. We were initially concerned that the sharp decrease in global container volumes early in 2020 would increase the financial challenges facing our customers and lead to increased credit risk. While we are not yet through the pandemic, container freight rates and the financial performance of our customers have generally held up better than anticipated, with freight rates reaching record levels. As the impact of the pandemic grew, all the major shipping lines have taken aggressive actions to reduce their deployed vessel capacity, decreasing their network expenses and mitigating rate pressure from reduced freight volumes. The large decrease in bunker fuel prices has also been very helpful to their financial performance. We continue to closely monitor our customers’ payment performance and expect the potential for elevated credit risk as long as economic and trade disruptions persist. For additional information regarding the risk and uncertainties that we could encounter as a result of the COVID-19 pandemic and related global conditions, see “Business Risk – The continued spread of the COVID-19 pandemic may have a material adverse impact on our business, financial condition and results of operations” in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021. ‎ 2
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Table of Contents   Disposal of Logistics and Rail Businesses On August 14, 2020, we sold substantially all the assets of our logistics business to NFI, a North American logistics provider, for cash proceeds of $6.2 million. On December 29, 2020, we sold all our remaining railcar fleet to affiliates of Infinity Transportation for cash proceeds of $228.1 million. As a result, the operating results of the logistics and rail leasing businesses 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 of the logistics and railcar leasing businesses as discontinued operations. See Note 2 – Discontinued Operations to the consolidated financial statements in this Quarterly Report on Form 10-Q for more information. Results of Operations - Three Months Ended
September 30, 2021 Compared to Three Months Ended September 30, 2020   The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, Change 2021 2020 Amount Percent Total leasing revenue $ 100,827  $ 73,890  $ 26,937  36  % Operating expenses 34,384  36,171  (1,787) (5) % Total other expenses 11,610  18,520  (6,910) (37) % Net income attributable to CAI common stockholders 48,948  13,236  35,712  270  % The increase in total revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 , was attributable to a $13.4 million, or 23%, increase in operating lease revenue, a $6.2 million, or 55%, increase in finance lease revenue, and a $7.4 million, or 153%, increase in other lease revenue. The decrease in operating expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 , was the result of a $10.8 million, or 445%, increase in gain on sale of rental equipment and a $2.1 million, or 45%, decrease in storage, handling and other expenses, partially offset by a $4.4 million, or 16%, increase in depreciation expense and a $6.7 million, or 119%, increase in administrative expenses. Total other expenses for the three months ended September 30, 2021 decreased compared with the three months ended September 30, 2020 , primarily due to a $7.4 million, or 39%, decrease in net interest expense. The increase in revenue together with the decrease in operating expenses, total other expense and net loss from discontinued operations resulted in an increase in net income attributable to CAI common stockholders for the three months ended September 30, 2021 of $35.7 million compared to the three months ended September 30, 2020 . Total leasing revenue Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Total leasing revenue $ 100,827  $ 73,890  $ 26,937  36  % The increase in total leasing revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was mainly attributable to an $8.8 million increase in operating lease revenue resulting from a 14% increase in the average number of CEUs of on-lease owned containers, a $6.2 million increase in interest income on finance leases resulting from an increase in the average number of CEUs on finance leases, a $4.8 million increase in operating lease revenue resulting from an 8% increase in average owned container per diem rental rates, and a $7.7 million increase in other lease revenue, mainly attributable to an increase in one-way contracts due to the high demand for containers. Depreciation of rental equipment Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Depreciation of rental equipment $ 32,678  $ 28,267  $ 4,411  16  % The increase in depreciation expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was attributable to a 12
% increase in the average size of our owned container fleet subject to depreciation over the last twelve months. ‎ 2
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Table of Contents   Storage, handling and other expenses Three Months Ended
September 30, Change ($ in thousand) 2021 2020 Amount Percent Storage, handling and other expenses $ 2,604  $ 4,713  $ (2,109) (45) % The decrease in storage, handling and other expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to a $1.7 million decrease in storage and handlings costs and a $0.6 million decrease in repair expenses due to a decrease in the average size of the off-lease fleet, partially offset by a $0.2 million increase in container liability insurance . Gain on sale of rental equipment Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Gain on sale of rental equipment $ 13,192  $ 2,419  $ 10,773  445  % While there was a decrease of 47% in the number of CEUs of containers sold during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, there was a 72% increase in the average sale price per CEU, resulting in a 394% increase in gain per CEU, due to an increase in demand for equipment. There was also a $7.5 million increase in net selling gains recognized at lease commencement of certain finance leases. Administrative expenses Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Administrative expenses $ 12,294  $ 5,610  $ 6,684  119  % The increase in administrative expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to a $2.5 million bad debt recovery during the third quarter of 2020 due to cash receipts from a previously reserved customer, a $2.3 million increase in legal and professional fees mainly due to the Merger Agreement with MHC, and a $2.8 million expense in the third quarter of 2021 resulting from a fraudulent wire payment, partially offset by a $0.7 million decrease in incentive-based compensation. Other expense Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Net interest expense $ 11,458  $ 18,826  $ (7,368) (39) % Other expense (income) 152  (306) 458  150  % $ 11,610  $ 18,520  $ (6,910) (37) % Net interest expense The decrease in net interest expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due primarily to a decrease in the average interest rate on our outstanding debt from approximately 2.5% as of September 30, 2020 to 2.0% as of September 30, 2021, caused primarily by a decrease in LIBOR, as well as a decrease in our average loan principal balance between the two periods, mainly due to the paydown of debt with proceeds from the sale of our railcar portfolio in 2020. Other expense (income) Other expense, representing a loss on foreign exchange of $0.2 million for the three months ended September 30, 2021, increased from a gain of $0.3 million for the three months ended September 30, 2020, primarily as a result of movements in the U.S. Dollar exchange rate against the Euro. Income tax expense Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Income tax expense $ 3,678  $ 1,697  $ 1,981  117  % The increase in income tax expense for the three months ended September 30, 2021 compared to three months ended September 30, 2020 was mainly attributable to an increase in income before tax, partially offset by a decrease in the estimated effective tax rate. The full-year estimated effective tax rate before discrete items was 6.1% at September 30, 2021, compared to an effective tax rate before discrete items of 8.1% at September 30, 2020. The decrease in the estimated full-year effective tax rate was primarily due to an increase in the proportion of pretax income generated in lower tax jurisdictions. ‎ 28 Table of Contents   Preferred stock dividends Three Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Preferred stock dividends $ 2,207  $ 2,207  $ - - % Preferred stock dividends for the three months ended September 30, 2021 remained consistent with the three months ended September 30, 2020. Loss from discontinued operations Three Months Ended September 30, Change 2021 2020 Amount Percent ($ in thousand) Total revenue $ - $ 18,712 $ (18,712) (100) % Operating expenses - 20,127 (20,127) (100) % Interest expense - 1,444 (1,444) (100) % Income tax benefit - (800) 800  (100) % Net loss from discontinued operations $ - $ (2,059) $ 2,059  (100) % There was no income or expense arising from discontinued operations for the three months ended September 30, 2021. Results of Operations - Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020   The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (dollars in thousands): Nine Months Ended September 30, Change 2021 2020 Amount Percent Total leasing revenue $ 267,322  $ 212,446  $ 54,876  26  % Operating expenses 101,277  109,846  (8,569) (8) % Total other expenses 34,232  53,077  (18,845) (36) % Net income attributable to CAI common stockholders 118,217  6,866  111,351  1,622  % The increase in total revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 , was attributable to a $33.7 million, or 20%, increase in operating lease revenue, a $10.8 million, or 32%, increase in finance lease revenue, and a $10.3 million, or 93%, increase in other lease revenue. The decrease in operating expenses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 , was the result of a $21.1 million, or 361%, increase in gain on sale of rental equipment and a $6.8 million, or 47%, decrease in storage, handling and other expenses, partially offset by an $8.4 million, or 10%, increase in depreciation expense and a $10.9 million, or 56%, increase in administrative expenses. Total other expenses for the nine months ended September 30, 2021 decreased compared with the nine months ended September 30, 2020 , primarily due to a $19.5 million, or 37%, decrease in net interest expense. The increase in revenue together with the decrease in operating expenses, total other expense and net loss from discontinued operations resulted in an increase in net income attributable to CAI common stockholders for the nine months ended September 30, 2021 of $111.4 million compared to the nine months ended September 30, 2020 . Total leasing revenue Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Total leasing revenue $ 267,322  $ 212,446  $ 54,876  26  % The increase in total leasing revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was mainly attributable to a $19.4 million increase in operating lease revenue resulting from an 11% increase in the average number of CEUs of on-lease owned containers, an $11.6 million increase in interest income on finance leases and financing receivable resulting from an increase in the average number of CEUs on finance leases and financing receivable, a $9.0 million increase in operating lease revenue resulting from a 5% increase in the average owned container per diem rental rates, and an $11.0 million increase in other lease revenue, mainly attributable to an increase in one-way contracts due to the high demand for container
s. ‎ 2
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Table of Contents   Depreciation of rental equipment
Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Depreciation of rental equipment $ 90,499  $ 82,065  $ 8,434  10  % The increase in depreciation expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was mainly attributable to a 9% increase in the average size of our owned container fleet subject to depreciation over the last twelve months. Storage, handling and other expenses Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Storage, handling and other expenses $ 7,537  $ 14,305  $ (6,768) (47) % The decrease in storage, handling and other expenses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to a $5.1 million decrease in storage and handling costs and a $2.0 million decrease in repair expenses due to a decrease in the average size of the off-lease fleet, partially offset by a $0.7 million increase in container liability insurance . Gain on sale of rental equipment Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Gain on sale of rental equipment $ 26,961  $ 5,854  $ 21,107  361  % While there was a decrease of 37% in the number of CEUs of containers sold during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, there was a 49% increase in the average sale price per CEU, resulting in a 430% increase in gain per CEU, due to an increase in demand for equipment. There was also a $7.7 million increase in net selling gains recognized at lease commencement of certain finance leases. Administrative expenses Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Administrative expenses $ 30,202  $ 19,330  $ 10,872  56  % The increase in administrative expenses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to a $1.3 million increase in incentive-based compensation, a $6.1 million bad debt recovery during 2020 due to cash receipts from a previously reserved customer, a $2.8 million increase in legal and professional fees mainly due to the Merger Agreement with MHC, and a $2.8 million expense in 2021 resulting from a fraudulent wire payment, partially offset by a $1.7 million decrease in severance costs mainly associated with the change in our Chief Executive Officer during the second quarter of 2020. Other expense Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Net interest expense $ 33,744  $ 53,234  $ (19,490) (37) % Other expense (income) 488  (157) 645  (411) % $ 34,232  $ 53,077  $ (18,845) (36) % Net interest expense The decrease in net interest expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to a decrease in the average interest rate on our outstanding debt from approximately 2.5% as of September 30, 2020 to 2.0% as of September 30, 2021, caused primarily by a decrease in LIBOR, as well as a decrease in our average loan principal balance between the two periods, mainly due to the paydown of debt with proceeds from the sale of our railcar portfolio in 2020. Other expense (income) Other expense, representing a loss on foreign exchange of $0.5 million for the nine months ended September 30, 2021, increased from a gain of $0.2 million for the nine months ended September 30, 2020, primarily as a result of movements in the U.S. Dollar exchange rate against the Euro. ‎ 30 Table of Contents   Income tax expense Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Income tax expense $ 8,038  $ 3,800  $ 4,238  112  % The increase in income tax expense for the nine months ended September 30, 2021 compared to nine months ended September 30, 2020 was mainly attributable to an increase in income before tax, partially offset by a decrease in the estimated effective tax rate. The full-year estimated effective tax rate before discrete items was 6.1% at September 30, 2021, compared to an effective tax rate before discrete items of 8.1% at September 30, 2020. The decrease in the estimated full-year effective tax rate was primarily due to an increase in the proportion of pretax income generated in lower tax jurisdictions. Preferred stock dividends Nine Months Ended September 30, Change ($ in thousand) 2021 2020 Amount Percent Preferred stock dividends $ 6,621  $ 6,621  $ - - % Preferred stock dividends for the nine months ended September 30, 2021 remained consistent with the nine months ended September 30, 2020. Income (loss) from discontinued operations Nine Months Ended September 30, Change 2021 2020 Amount Percent Total revenue $ 293  $ 83,551  $ (83,258) (100) % Operating (income) expenses (324) 118,717  (119,041) (100) % Interest expense - 5,004  (5,004) (100) % Income tax benefit (446) 7,934  (8,380) (106) % Net income (loss) from discontinued operations $ 1,063  $ (32,236) $ 33,299  (103) % Total revenue and operating expenses from discontinued operations for the nine months ended September 30, 2021 were a result of immaterial differences in the actual transactions from the amounts accrued prior to the sale of the logistics and railcar businesses in 2020. Liquidity and Capital Resources As of September 30, 2021, we had cash and cash equivalents of $62.3 million, including $15.3 million of restricted cash, and $21.8 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. As of September 30, 2021, our outstanding indebtedness and current maximum borrowing level was as follows (in thousands): Current Current Amount Maximum Outstanding Borrowing Level Revolving credit facilities $ 1,149,515  $ 1,878,975  Term loans 331,150  331,150  Senior secured notes 40,555  40,555  Asset-backed notes 679,571  679,571  Collateralized financing obligations 47,465  47,465  Term loans held by VIE 27,145  27,145  2,275,401  3,004,861  Debt discount and debt issuance costs (15,772) - Total $ 2,259,629  $ 3,004,861  ‎ 31 Table of Contents   On August 31, 2021, we entered into an amendment to the Third Amended and Restated Revolving Credit Agreement, pursuant to which the revolving credit facility was amended to, among other things, increase the commitment level from $1,175.0 million to $1,350.0 million, with ability to increase the facility by an additional $150.0 million without lender approval, subject to certain conditions. As of September 30, 2021, we had $729.4 million in total 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, 2021, the borrowing availability under our revolving credit facilities was $170.2 million, assuming no additional contributions of assets. As of September 30, 2021, we had a total of $1,376.7 million of debt in facilities with fixed interest rates or floating interest rates that have been synthetically fixed through interest rate swap agreements, which accounts for 60% of our total outstanding debt. On September 21, 2021, CAI WF LLC (CAI WF), our wholly-owned subsidiary, entered into a term loan agreement with a consortium of lenders. The loan agreement provides for a term loan to us in an aggregate principal amount of $252.0 million, which is secured by certain assets of CAI WF. At closing of the loan agreement, we made a draw of $225.0 million on the facility, which is scheduled to mature in September 2024. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or LIBOR rate loans. The unpaid principal balance of all term loans will be payable on the 25 th day of each month, which commenced on October 25, 2021. On October 15, 2021, we drew down an additional $27.0 million and entered into an interest rate swap agreement for the full $252.0 million outstanding loan. The fixed rate payable under the terms of the swap is 0.74%. On September 29, 2021, CAI MUFG LLC (CAI MUFG), our wholly-owned subsidiary, entered into a credit agreement with a consortium of lenders. The credit agreement provides for a revolving credit facility in an aggregate principal amount of $400.0 million, which is secured by certain assets of CAI MUFG and scheduled to mature in March 2024, subject to certain extensions set forth in the credit agreement. Subject to certain conditions, we may request an increase in the total aggregate commitment level to $800.0 million. The interest rates vary depending upon whether the loans are characterized as Base Rate loans, LIBOR rate loans, or commercial paper loans. We initially drew down $275.0 million at closing. For further information on our debt instruments, see Note 6 to the consolidated financial statements in this Quarterly Report on Form 10-Q and Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. We continue to monitor the COVID-19 pandemic and its impact on our overall liquidity position and outlook. The ultimate impact that COVID-19 may have on our operational and financial performance over the next 12 months is currently uncertain and will depend on certain developments, including, among others, the impact of COVID-19 on our customers, the magnitude and duration of the pandemic, and the rollout and efficacy of vaccines. Assuming that our customers continue to meet their contractual commitments, we currently believe that cash provided by operating activities and existing cash, proceeds from the sale of rental equipment, and borrowing availability under our debt facilities are sufficient to meet our liquidity needs for at least the next twelve months. In addition to customary events of default, the agreements governing our indebtedness contain restrictive covenants, including limitations on certain liens, indebtedness and investments.  In addition, the agreements governing our indebtedness contain various restrictive financial and other covenants.  The financial covenants in the agreements governing our indebtedness require us to maintain: (1) a consolidated funded debt to consolidated tangible net worth ratio, in the case of our debt facilities, of no more than 3.75:1.00, and in the case of our asset-backed notes, of no more than 4.50:1.00; and (2) a fixed charge coverage ratio, in the case of our debt facilities, of at least 1.20:1.00, and in the case of our asset-backed notes, of at least 2.50:1.00. As of September 30, 2021, we were in compliance with all of our financial and other covenants and we expect to remain in compliance for at least the next twelve months. ‎ 32 Table of Contents   Cash Flows   The following table sets forth certain cash flow information for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 2020 Net income $ 124,838  $ 13,487  Net income from continuing operations adjusted for non-cash items 193,545  122,967  Changes in working capital 70,051  66,095  Net cash provided by operating activities of continuing operations 263,596  189,062  Net cash used in investing activities of continuing operations (744,178) (339) Net cash provided by financing activities of continuing operations 479,173  97,626  Net cash (used in) provided by discontinued operations (2,667) 22,874  Effect on cash of foreign currency translation (114) (15) Net (decrease) increase in cash and restricted cash (4,190) 309,208  Cash and restricted cash at beginning of period 66,502  73,239  Cash and restricted cash at end of period $ 62,312  $ 382,447  Cash Flows from Continuing Operations Operating Activities Net cash provided by operating activities of continuing operations was $263.6 million for the nine months ended September 30, 2021, an increase of $74.5 million compared to $189.1 million for the nine months ended September 30, 2020. The increase was due to a $70.6 million increase in income from continuing operations as adjusted for depreciation, impairment and other non-cash items, and a $4.0 million increase in our net working capital adjustments. The increase of $70.6 million in income from continuing operations as adjusted for non-cash items was primarily attributable to an increase of $78.1 million in income from continuing operations, a decrease of $6.1 million in bad debt recovery due to cash receipts from a cash-based customer in the prior year, an increase of $8.5 million in depreciation expense, and an increase of $1.9 million in deferred income taxes, partially offset by an increase of $21.1 million in gain on sale of rental equipment, mainly due to an increase in container prices as a result of high demand, and a decrease of $3.9 million in amortization and write-off of debt issuance costs. Net working capital provided by operating activities of $70.1 million in the nine months ended September 30, 2021, was due to an $88.3 million decrease in net investment in finance leases, representing the receipt of principal payments and a $3.0 million decrease in prepaid expenses and other assets, partially offset by an $18.1 million increase in accounts receivable, primarily caused by the increase in billings and the timing of cash receipts from customers, and a $4.0 million decrease in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of cash payments. Net working capital provided by operating activities of $66.1 million in the nine months ended September 30, 2020 was due to a $54.6 million decrease in net investment in finance leases, representing the receipt of principal payments, an $11.0 million decrease in accounts receivable, primarily caused by the timing of cash receipts from customers, and a $1.6 million increase in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of cash payments. Investing Activities Net cash used in investing activities of continuing operations was $744.2 million for the nine months ended September 30, 2021, an increase of $743.8 million compared to net cash used in investing activities of $0.3 million for the nine months ended September 30, 2020. The increase in cash used was attributable to a $773.0 million increase in purchase of rental equipment, partially offset by a $22.1 million decrease in purchase of financing receivable, a $2.1 million increase in proceeds from sale of rental equipment and a $4.6 million increase in receipt of principal payments from financing receivable. Financing Activities Net cash provided by financing activities of continuing operations was $479.2 million for the nine months ended September 30, 2021, an increase of $381.5 million compared to net cash provided by financing activities of $97.6 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, our net cash inflow from borrowings was $514.0 million compared to net cash inflow of $113.6 million for the nine months ended September 30, 2020. The increase in net cash inflow from borrowings was partially offset by an increase of $12.8 million for the repurchase of common stock and an increase of $11.2 million in dividends paid to common stockholders. ‎ 33 Table of Contents   Cash Flows from Discontinued Operations Net cash used in discontinued operations was $2.7 million for the nine months ended September 30, 2021 , a decrease of $25.5 million compared to net cash provided by discontinued operations of $22.9 million for the nine months ended September 30, 2020 . The change between the two periods was primarily due to the sale of the logistics and railcar businesses in 2020. Equity Transactions Stock Repurchase Plan In October 2018, we announced that our Board of Directors approved the repurchase of up to three million shares of our outstanding common stock. In February 2021, our Board of Directors increased the share repurchase plan by an additional 2.0 million shares. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and will be evaluated by us depending on prevailing market conditions, corporate needs, and other factors. The stock repurchases may be made in the open market, block trades or privately negotiated transactions. This stock repurchase program replaces any available prior share repurchase authorization and may be discontinued at any time. During the nine months ended September 30, 2021, we repurchased 0.4 million shares of our common stock under this repurchase plan, at a cost of approximately $12.8 million. As of September 30, 2021, approximately 2.4 million shares remained available for repurchase under our share repurchase program. Contractual Obligations and Commercial Commitments The following table sets forth our contractual obligations and commercial commitments by due date as of September 30, 2021 (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 $ 1,149,515  $ - $ 874,515  $ 275,000  $ - $ - $ - Term loans 331,150  27,960  48,510  254,680  - - - Senior secured notes 40,555  40,555  - - - - - Asset-backed notes 679,571  63,130  63,130  63,130  64,986  64,986  360,209  Collateralized financing obligations 47,465  29,981  - - - 17,484  - Term loans held by VIE 27,145  5,659  5,906  6,157  6,426  2,997  - Interest on debt and capital lease obligations (1) 140,176  46,606  38,081  19,612  10,733  14,464  10,680  Rental equipment payable 139,358  139,358  - - - - - Rent, office facilities and equipment 11,970  2,161  2,398  2,452  2,361  2,392  206  Equipment purchase commitments 212,724  212,724  - - - - - Total contractual obligations $ 2,779,629  $ 568,134  $ 1,032,540  $ 621,031  $ 84,506  $ 102,323  $ 371,095  (1) Our estimate of interest expense commitment includes $20.4 million relating to our revolving credit facilities subject to variable interest rates, $15.5 million relating to our revolving credit facilities subject to fixed interest rates, $23.7 million relating to our term loans, $1.9 million relating to our senior secured notes, $70.0 million relating to our asset-back notes, $5.8 million relating to our collateralized financing obligations, and $2.8 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, 2021: variable-rate revolving credit facilities, 1.5%; fixed-rate revolving credit facilities, 1.8%; term loans, 2.4%; senior secured notes, 4.9%; asset-backed notes, 2.3%; collateralized financing obligations, 2.0%; 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, 2021, we had no material off-balance sheet arrangements or obligations that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three months ended September 30, 2021. See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. ‎ 34 Table of Contents   Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-04 (ASU 2020-04), which adds ASC Topic 848, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022 and ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 and 2021-01 prospectively as and when we enter into transactions to which these updates apply. Except as described above, there are no other recent accounting pronouncement that are relevant to our business. ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign exchange rates and interest rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below. Foreign Exchange Rate Risk . Although we have significant foreign-based operations, the U.S. Dollar is our primary operating currency. Thus, most of our revenue and expenses are denominated in U.S. Dollars. We have equipment sales in British Pound Sterling, Euros and Japanese Yen and incur overhead costs in foreign currencies, primarily in British Pound Sterling and Euros. During the nine months ended September 30, 2021, the U.S. Dollar increased in value in relation to other major foreign currencies (such as the Euro). The increase in the relative value of the U.S. Dollar has decreased our revenues and expenses denominated in foreign currencies. The associated decrease in the value of certain foreign currencies as compared to the U.S. Dollar has also caused assets held at some of our foreign subsidiaries to decrease in value when translated to US dollars. We recognized a loss on foreign exchange of $0.5 million for the nine months ended September 30, 2021. A 10% change in foreign exchange rates would not have a material impact on our financial position, results of operations or cash flows. Interest Rate Risk. The nature of our business exposes us to market risk arising from changes in interest rates to which our variable-rate debt is linked. In July 2020, we entered into a five-year interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $500.0 million of variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 0.29%. Any changes in the fair value of the derivative instrument are recognized in accumulated other comprehensive loss and reclassified to net interest expense as they are realized. As of September 30, 2021, approximately 60% of our debt was either fixed or hedged using derivative instruments, which helps mitigate any negative impact of changes in short-term interest rates. However, a 1.0% increase or decrease in the interest rates on our unhedged debt would result in an increase or decrease of approximately $9.0 million in interest expense over the next 12 months. ITEM 4.  CONTROLS AND PROCEDURES Management Evaluation of Disclosure Controls and Procedures In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and 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 principal executive and financial officer concluded that as of September 30, 2021 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 financial officer, 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, 2021, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 35 Table of Contents   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, other than as set forth in Note 10, Commitments and Contingencies , in the accompanying notes to the unaudited consolidated financial statements included in Part I – Item 1. Financial Statements of this Quarterly Report on Form 10-Q. 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, 2020 filed with the SEC on March 1, 2021. 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 each 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. 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, 2020, except as set forth below.
The announcement and pendency of the Merger may have an adverse effect on our business, financial condition, operating results and cash flows. On June 17, 2021, we entered into the Merger Agreement with Parent and Merger Sub, relating to the proposed acquisition of the Company by Parent. Upon consummation of the Merger pursuant to the Merger Agreement, the Company will continue as the surviving corporation as a wholly-owned subsidiary of Parent. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, (i) each share of the Company’s common stock that is issued and outstanding immediately prior to the Effective Time (other than Excluded Shares (as defined in the Merger Agreement)) will cease to be outstanding and will be converted into the right to receive $56.00, in cash, without interest, subject to deductions of any applicable withholding taxes; (ii) each share of the Company’s Series A Preferred Stock that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series A Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes; and (iii) each share of the Company’s Series B Preferred Stock that is issued and outstanding immediately prior to the Effective Time, other than Excluded Shares, will be converted into the right to receive an amount equal to the sum of: (a) the liquidation preference of $25.00 per share, plus (b) the aggregate amount of all accrued and unpaid dividends on such Series B Preferred Stock as of the Effective Time, in cash, without interest, subject to deductions of any applicable withholding taxes. Uncertainty about the effect of the proposed Merger on our employees, partners, customers and other third parties may disrupt our sales and marketing or other key business activities and may have a material adverse effect on our business, financial condition, operating results and cash flows. Current and prospective employees may experience uncertainty about their roles following the Merger, and this may have an effect on our corporate culture. There can be no assurance we will be able to attract and retain key talent to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business, financial condition and operating results. In addition, we have devoted, and will continue to devote, significant management and other internal resources towards the completion of the Merger and planning for integration, which could materially adversely affect our business, financial condition, operating results and cash flows. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the proposed Merger and generally restricts us from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies, to respond effectively to competitive pressures and industry developments, and to attain our financial and other goals and may otherwise harm our business, financial condition, operating results and cash flows. The failure to complete the Merger in a timely manner or at all could negatively impact the market price of our common stock, Series A Preferred Stock and/or Series B Preferred Stock as well as adversely affect our business, financial condition, operating results and cash flows. Completion of the Merger is subject to conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the requirement that the Merger Agreement be adopted by the affirmative vote of the holders of at least a majority of the outstanding shares of common stock entitled to vote at a special meeting of the common stockholders of the Company
, which was obtained on September 2, 2021.  36 Table of Contents  
The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived. These conditions, including the Migration, are more fully described in the Proxy Statement. We cannot guarantee that the closing conditions set forth in the Merger Agreement will be satisfied or, even if satisfied, that no event of termination will take place. In the event that the Merger is not completed for any reason, the holders of our capital stock will not receive any payment for their shares of capital stock in connection with the proposed Merger. Instead, we will remain an independent public company and the holders of our capital stock will continue to own their shares of stock. If the Merger or a similar transaction is not completed, the share price of our common stock, Series A Preferred Stock and/or Series B Preferred Stock may drop to the extent that the current market price of our common stock, Series A Preferred Stock and/or Series B Preferred Stock reflects an assumption that a transaction will be completed. Furthermore, if the Merger is significantly delayed or not completed, we may suffer other consequences that could adversely affect our business, results of operations and stock price, including the following:  we could be required to pay a termination fee equal to $35.0 million to Parent, and up to $5.0 million of Parent’s fees and expenses incurred in connection with the Merger Agreement and related transactions, under certain circumstances as described in the Merger Agreement;  we would have incurred significant costs in connection with the Merger that we would be unable to recover;  we may be subject to negative publicity or be negatively perceived by the investment or business communities;  we may be subject to legal proceedings related to any delay or failure to complete the Merger;  any disruptions to our business resulting from the announcement and pendency of the Merger, including any adverse changes in our relationships with our customers, suppliers, other business partners and employees, may continue or intensify in the event the Merger is not consummated; and  we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures. There can be no assurance that our business, financial condition, operating results and cash flows will not be adversely affected, as compared to our condition prior to the announcement of the Merger, if the Merger is not consummated. The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to affect an alternative transaction with us. The Merger Agreement contains provisions that, subject to certain exceptions, limit our ability to initiate, solicit or knowingly encourage, or engage in discussions or negotiations with respect to, or provide non-public information in connection with, a proposal from a third party with respect to an alternative transaction. In addition, under specified circumstances in which the Merger Agreement is terminated, we could be required to pay a termination fee of up to $35.0 million to Parent. It is possible that these or other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our Company from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire our common stock than it might otherwise have proposed to pay. Additional information regarding these restrictions is provided in the Pr
oxy Statement. Litigation challenging the Merger Agreement may prevent the Merger from being consummated at all or within the expected timeframe and may result in substantial costs to us. As described in Note 10, Commitments and Contingencies , in the accompanying notes to the unaudited consolidated financial statements included in Part I – Item 1. Financial Statements of this Quarterly Report on Form 10-Q, nine lawsuits have been filed against us and our board of directors in relation to the preliminary proxy statement on Schedule 14A relating to the Merger, filed with the SEC on July 12, 2021, and the
Proxy Statement. The lawsuits seek, among other things, injunctive relief, rescissory damages, and awards of plaintiffs’ fees and expenses. If the plaintiffs in any such lawsuits are successful in obtaining an injunction prohibiting us from completing the Merger on the agreed upon terms, then the Merger may not be consummated at all or within the expected timeframe. Also, if our insurance provider were to deny coverage under the existing insurance policies covering such actions or should such policies fail to cover the costs of defending either or both of the lawsuits, we may incur substantial costs. We will incur substantial transaction fees and costs in connection with the Merger. As of
September
30, 2021, we have incurred $
6
.1 million of expenses and fees for professional services and other transaction costs in connection with the Merger and expect to continue to incur additional significant costs. A material portion of these expenses are payable by us whether or not the Merger is completed. While we have assumed that a certain amount of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs historically borne by us. These costs could adversely affect our business, financial condition, operating results and cash flows. ITEM 2.  UNREGISTERED SALES OF EQU ITY SECURITIES AND USE OF PROCEEDS None. ITEM 3.  DEFAULTS UPON SENIOR SECURITIES None. 
37 Table of Contents  
ITEM 4.  MINE SAFETY DISCLOSURES Not applicable. ITEM 5.  OTHER INFORMATION None. ‎ 3
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Table of Contents   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
2.1* Agreement and Plan of Merger, dated as of June 17, 2021, by and among Mitsubishi HC Capital Inc., Cattleya Acquisition Corp. and CAI International, Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on June 21, 2021). 3.1   Amended and Restated Certificate of Incorporation of CAI International, Inc. (incorporated by reference to Exhibit 3.1 t o 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). 3.6 Amendment to 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 June 21, 2021). 10.1** Amendment No. 8 to Third Amended and Restated Revolving Credit Agreement, dated August 31, 2021, by and among CAI International, Inc., Container Applications Limited, the guarantors named therein, Bank of America, N.A., as a lender and administrative agent, the other lending institutions party thereto, BofA Securities, Inc., Wells Fargo Bank, National Association and MUFG Union Bank, N.A., as syndication agents, BofA Securities, Inc., as lead arranger and book runner, and ABN AMRO Capital USA LLC, BBVA USA, Bank of Montreal, Royal Bank of Canada and PNC Bank, National Association, as documentation agents (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 3, 2021). 10.2** Term Loan Agreement, dated as of September 21, 2021, by and among CAI WF LLC, the lenders from time to time party thereto and Wells Fargo Bank N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 27, 2021). 10.3** Credit Agreement, dated as of September 29, 2021, by and among CAI MUFG LLC, the lenders and group agents from time to time party thereto and MUFG Bank, Ltd., as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 5, 2021). 31.1   Certification of p rincipal executive officer and principal 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 principal executive officer and principal 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, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iv) Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, and (vi) Notes to Unaudited Consolidated Financial Statements. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document).
* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any omitted schedules to the Securities and Exchange Commission upon request.
** Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any omitted schedules to the Securities and Exchange Commission upon request.
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Table of Contents   SI GNATURES   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 5, 2021 /s/    TIMOTHY B. PAGE   Timothy B. Page   President and Chief Executive Officer   (Principal Executive and Financial Officer)  
 
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