EDGAR 10-K Filing

Company CIK: 1388430
Filing Year: 2021
Filename: 1388430_10-K_2021_0001388430-21-000004.json

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ITEM 1. BUSINESS
ITEM 1: BUSINESS
Our Company
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 December 31, 2020 and 2019, and our average utilization for the years ended December 31, 2020 and 2019:
As of December 31,
Owned container fleet in TEUs
1,688,351
1,611,527
Managed container fleet in TEUs
56,298
69,650
Total container fleet in TEUs
1,744,649
1,681,177
Owned container fleet in CEUs
1,727,202
1,642,118
Managed container fleet in CEUs
71,318
85,698
Total container fleet in CEUs
1,798,520
1,727,816
Year Ended December 31,
Average container fleet utilization in CEUs
98.5%
98.6%
Average owned container fleet utilization in CEUs
98.5%
98.7%
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. If new units not yet leased are included in the total fleet, utilization would be 97.1% for both total and owned container fleet for the year ended December 31, 2020.
Our revenue from continuing operations consists of container lease revenue from our owned container fleet and management fee revenue for managing containers for third-party investors. Substantially all of our revenue is denominated in U.S. dollars. For the year ended December 31, 2020, we recorded revenue from continuing operations of $294.0 million and net income attributable to CAI common stockholders of $18.9 million. A comparison of our 2020 financial results with those of the prior year can be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
We earn container lease revenue from intermodal containers, which are deployed by our customers in a wide variety of global trade routes. Virtually all of our containers are used internationally, and no container is domiciled in one particular place for a prolonged period of time. As such, substantially all of our container assets are considered to be international with no single country of use.
Disposal of Logistics and Rail Businesses
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On August 14, 2020, we sold substantially all of the assets and liabilities of our logistics business to NFI, a North American logistics provider, for cash proceeds of $6.2 million. On December 29, 2020, we sold 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 accompanying consolidated statements of income and cash flows. All prior periods presented in the consolidated financial statements in this Annual Report on Form 10-K have been restated to reflect the classification of the logistics and rail leasing businesses as discontinued operations and certain assets and liabilities as held for sale. See Note 3 - Discontinued Operations in Item 8. “Financial Statements and Supplementary Data” for more information.
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History
We were founded in 1989, as a traditional container leasing company that leased containers owned by us to container shipping lines. We were originally incorporated under the name Container Applications International, Inc. in the State of Nevada in August 1989. In February 2007, we were reincorporated under our present name in the State of Delaware.
Corporate Information
Our corporate headquarters and principal executive offices are located at Steuart Tower, 1 Market Plaza, Suite 2400, San Francisco, California 94105. Our telephone number is (415) 788-0100 and our website address is www.capps.com. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report on Form 10-K, or any other document that we file with the SEC.
Segment Information
We operate 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.
We sold substantially all of the assets and liabilities of our logistics business and our remaining railcar fleet during the year ended December 31, 2020. The operations of the logistics and rail leasing businesses have been reclassified as discontinued operations in the accompanying consolidated statements of income. As a result, we no longer report Logistics or Rail Leasing as segments.
Industry Overview
Container Leasing
We operate in the worldwide intermodal freight container leasing industry. Intermodal freight containers, or containers, are large, standardized steel boxes used to transport cargo by a number of means, including ship, truck and rail. Container shipping lines use containers as the primary means for packaging and transporting freight internationally, principally from export-oriented economies in Asia to other Asian countries, North America and Western Europe.
Containers are built in accordance with standard dimensions and weight specifications established by the International Standards Organization (ISO). Standard dry van containers are eight feet wide, either 20 or 40 feet long and are either 8 feet 6 inches or 9 feet 6 inches tall.
The three principal categories of containers are as follows:
Dry van containers. A dry van container is constructed of steel sides, roof and end panel with a set of doors on the other end, a wooden floor and a steel undercarriage. Dry van containers are the least expensive and most commonly used type of container. They are used to carry general cargo, such as manufactured component parts, consumer staples, electronics and apparel.
Refrigerated containers. A refrigerated container has an integrated refrigeration unit on one end, which plugs into a generator set or other outside power source and is used to transport perishable goods.
Specialized equipment. Specialized equipment includes open-top, flat-rack, palletwide and swapbody containers, roll trailers, and generator sets. An open-top container is similar in construction to a dry van container except that the roof is replaced with a tarpaulin supported by removable roof bows. A flat-rack container is a heavily reinforced steel platform with a wood deck and steel end panels. Open-top and flat-rack containers are generally used to move heavy or oversized cargo, such as marble slabs, building products or machinery. Palletwide containers are a type of dry-van container externally similar to ISO standard containers, but internally about two inches wider so as to accommodate two European-sized pallets side-by-side. Swapbody containers are a type of dry van container designed to be easily transferred between rail, truck, and barge and are equipped with legs under their frames. Roll trailers are a type of flat-bed trailer equipped with rubber wheels underneath for terminal haulage and stowage on board roll-on/roll-off vessels. Generator sets are units that are attached to refrigerated containers to provide the container with cooling.
Containers provide a secure and cost-effective method of transportation because they can be used in multiple modes of transportation, making it possible to move cargo from a point of origin to a final destination without repeated unpacking and repacking. As a result, containers reduce transit time and freight and labor costs as they permit faster loading and unloading of shipping vessels and more efficient utilization of transportation containers than traditional bulk shipping methods. The protection provided by containers also reduces damage, loss and theft of cargo during shipment. While the life of containers varies based upon the damage and normal wear and tear suffered by a container, we estimate that the average useful life of a dry van container used in our fleet is 13.0 years, and 12.0 years for a refrigerated container.
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Container shipping lines own and lease containers for their use. The Container Census & Leasing, Survey and Forecast of Global Container Units (2020/2021 Annual Report), published by Drewry Maritime Research, estimates that as of the end of 2019, transportation companies (including container shipping lines and freight forwarders) and container leasing companies owned approximately 49% and 51%, respectively, of the total worldwide container fleet, measured in TEUs. Given the uncertainty and variability of export volumes and the fact that container shipping lines have difficulty in accurately forecasting their container requirements at different ports, the availability of containers for lease significantly reduces a container shipping line’s need to purchase and maintain excess container inventory. In addition, container leases allow the container shipping lines to adjust their container fleets both seasonally and over time and help to balance trade flows. The flexibility offered by container leasing helps container shipping lines improve their overall fleet management and provides the container shipping lines with an alternative source of financing.
Fleet Overview. The table below summarizes the composition of our container fleet as of December 31, 2020 by type of equipment:
Dry Van
Percent of
Refrigerated
Percent of
Specialized
Percent of
Percent of
Containers
Total Fleet
Containers
Total Fleet
Equipment
Total Fleet
Total
Total Fleet
Owned container fleet in TEUs
1,539,801
88%
61,801
4%
86,749
5%
1,688,351
97%
Managed container fleet in TEUs
50,521
3%
-
5,449
-
56,298
3%
Total container fleet in TEUs
1,590,322
91%
62,129
4%
92,198
5%
1,744,649
100%
Dry Van
Percent of
Refrigerated
Percent of
Specialized
Percent of
Percent of
Containers
Total Fleet
Containers
Total Fleet
Equipment
Total Fleet
Total
Total Fleet
Owned container fleet in CEUs
1,363,327
76%
222,607
12%
141,268
8%
1,727,202
96%
Managed container fleet in CEUs
44,839
2%
1,148
-
25,331
2%
71,318
4%
Total container fleet in CEUs
1,408,166
78%
223,755
12%
166,599
10%
1,798,520
100%
Marketing and Operations Overview. Our marketing and operations personnel are responsible for developing and maintaining relationships with our lessees, facilitating lease contracts and maintaining the day-to-day coordination of operational issues. This coordination allows us to negotiate lease contracts that satisfy both our financial return requirements and our lessees’ operating needs. It also facilitates our awareness of lessees’ potential equipment shortages and their awareness of our available equipment inventories. We have marketing and operations employees in ten countries, supported by independent agents in a further seven countries.
Leases Overview. To meet the needs of our lessees and achieve a favorable utilization rate, we lease containers under three main types of leases:
Long-Term Leases. Our long-term leases have terms of one year or more and specify the number of containers to be leased, the pick-up and drop-off locations, the applicable per diem rate and the contract term. We typically enter into long-term leases for a fixed term ranging from three to eight years, with five-year leases being most common, although recently we have seen a trend towards longer term leases. Our long-term leases generally require our lessees to maintain all units on lease for the duration of the lease, which provides us with scheduled lease payments and predictable, recurring revenue. A small percentage of our long-term leases contain early termination options and afford the lessee interchangeability of containers, and the ability to redeliver containers if the lessee’s fleet requirements change. Generally, leases with an early termination provision impose various economic penalties on the customer if the customer elects to exercise the early termination provision.
Short-Term Leases. Short-term leases include both master interchange leases and customized short-term leases. Master interchange leases provide a master framework pursuant to which lessees can lease containers on an as-needed basis, and thus command a higher per diem rate than long-term leases. The terms of master interchange leases are typically negotiated on an annual basis. Under our master interchange leases, lessees know in advance their per diem rates and drop-off locations, subject to monthly port limits. We also enter into other short-term leases that typically have a term of less than one year and are generally used for one-way leasing, typically for small quantities of containers. The terms of short-term leases are customized for the specific requirements of the lessee. Short-term leases are sometimes used to reposition containers to high-demand locations and accordingly may contain terms that provide incentives to lessees.
Finance Leases. Finance leases provide our lessees with an alternative method to finance their container acquisitions. Finance leases are long-term in nature and require relatively little customer service attention. They ordinarily require fixed payments over a defined period and generally provide lessees with a right to purchase the leased containers for a nominal amount at the end of the lease term. Per diem rates under finance leases include an element of repayment of capital and, therefore, typically are higher than per diem rates charged under long-term leases. Finance leases require the container lessee to keep the container on lease for the entire term of the lease.
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The following table provides a summary of our container fleet by lease type as of December 31, 2020:
As of December 31, 2020
TEUs
CEUs
Long-term leases
68%
68%
Short-term leases
8%
8%
Finance leases
24%
24%
Total
100%
100%
Our lease agreements contain general terms and conditions detailing standard rights and obligations, including requirements that lessees pay a per diem rate, depot charges, taxes and other charges when due, maintain equipment in good condition, return equipment in good condition in accordance with return conditions set forth in the lease agreement, use equipment in compliance with all applicable laws, and pay us for the value of the equipment as determined by the lease agreement if the equipment is lost or destroyed. A default clause in our lease agreements gives us certain legal remedies in the event that an equipment lessee is in breach of lease terms.
Our lease agreements contain an exclusion of warranties clause and require lessees to defend and indemnify us in most instances from third-party claims arising out of the lessee’s use, operation, possession or lease of the equipment. Lessees are required to maintain physical damage and comprehensive general liability insurance, or be adequately self-insured, and to indemnify us against loss with respect to the equipment. We also maintain our own contingent physical damage and third-party liability insurance that covers our equipment during both on-lease and off-lease periods. All of our insurance coverage is subject to annual deductible provisions and per occurrence and aggregate limits.
Management Services Overview. We manage containers for third-party investors under management agreements that cover portfolios of containers. We lease, re-lease and dispose of the containers and contract for their repair, repositioning and storage. Our management agreements have multiple year terms and provide that we receive a management fee based upon the net operating income for each container, which is equal to the rental revenue for a container less the operating expenses directly attributable to that container. Management fees are collected monthly or quarterly, depending upon the agreement, and generally are not paid if net operating revenue is zero dollars or less for a particular period. If operating expenses exceed revenue, third-party investors are required to pay the excess, or we may deduct the excess, including our management fee, from future net operating revenue. Under these agreements, we also receive a commission for selling or otherwise disposing of containers for the third-party investor. Sales of containers typically have to be approved by the third-party investor.
Our management agreements generally require us to indemnify the third-party investor for liabilities or losses arising out of a breach of our obligations. In return, the third-party investor typically indemnifies us in our capacity as the manager of the container against a breach by the third-party investor, sales taxes on commencement of the arrangement, withholding taxes on payments to the third-party investor under the management agreement and any other taxes, other than our income taxes, incurred with respect to the containers that are not otherwise included as operating expenses deductible from revenue.
Re-leasing, Logistics Management and Depot Management. We believe that managing the period after lease termination, in particular after our containers’ first lease, is one of the most important aspects of our business. Successful management of this period requires disciplined re-leasing capabilities, logistics management and depot management.
Re-leasing. Since our leases generally allow our lessees to return their containers, we typically lease a container several times during its useful life. New containers can usually be leased with a limited marketing and customer service infrastructure because initial leases for new containers typically cover large volumes of units and are fairly standardized transactions. Used containers, on the other hand, are typically leased in smaller transactions that are structured to accommodate pick-ups and returns in a variety of locations. Our utilization rates depend on our re-leasing abilities. Factors that affect our ability to re-lease used containers include the size of our lessee base, ability to anticipate lessee needs, our presence in relevant geographic locations and the level of service we provide our lessees. We believe that our global presence and long-standing relationships with approximately 360 container lessees as of December 31, 2020 provide us an advantage over our smaller competitors in re-leasing our used containers.
Logistics Management. The shipping industry is characterized by large regional trade imbalances, with loaded containers generally flowing from export-oriented economies in Asia to other Asian countries, North America and Western Europe. Because of these trade imbalances, container shipping lines have an incentive to return leased containers in relatively low export areas to reduce the cost of shipping empty containers. We have managed this structural imbalance of inventories with the following approach:
Limiting or prohibiting container returns to low-demand areas. In order to minimize our repositioning costs, our leases typically include a list of the specific locations to which containers may be returned, limitations on the number of containers that may be returned to low-demand locations, high drop-off charges for returning containers to low-demand locations or a combination of these provisions;
Taking advantage of the secondary resale market. In order to maintain a younger fleet age profile, we have aggressively sold older containers when they are returned to low demand areas;
Developing country-specific leasing markets to utilize older containers in the portable storage market. In North America and Western Europe, we lease older containers on a limited basis for use as portable storage;
Seeking one-way lease opportunities to move containers from lower demand locations to higher demand locations. One-way leases may include incentives, such as free days, credits and damage waivers. The cost of offering these incentives is considerably less than the cost we would incur if we paid to reposition the empty containers; and
Paying to reposition our containers to higher demand locations. At locations where our inventories remain high, despite the efforts described above, we will selectively choose to ship excess containers to locations with higher demand.
Depot Management. As of December 31, 2020, we managed our equipment fleet through approximately 180 independent equipment depot facilities located in 39 countries. Depot facilities are generally responsible for repairing containers when they are returned by lessees and for storing the containers while they are off-hire. Our operations group is responsible for managing our depot contracts and periodically visiting depot facilities to conduct inventory and repair audits. We also supplement our internal operations group with the use of independent inspection agents. As of December 31, 2020, a majority of our off-lease inventory was located at depots that are able to report notices of container activity and damage detail via electronic data interchange.
Most of our depot agency agreements follow a standard form and generally provide that the depot will be liable for loss or damage of containers and, in the event of loss or damage, will pay us the previously agreed loss value of the applicable containers. The agreements require the depots to maintain insurance against container loss or damage and we carry insurance to cover the risk that a depot’s insurance proves insufficient.
Our container repair standards and processes are generally managed in accordance with standards and procedures specified by the Institute of International Container Lessors, or the IICL. The IICL establishes and documents the acceptable interchange condition for containers and the repair procedures required to return damaged containers to acceptable interchange condition. When containers are returned by lessees, the depot arranges an inspection of the containers to assess the repairs required to return the containers to acceptable IICL condition. As part of the inspection process, damages are categorized either as lessee damage or normal wear and tear. Items typically designated as lessee damage include dents in the container, while items such as rust are typically designated as normal wear and tear. In general, lessees are responsible for the lessee damage portion of repair costs and we are responsible for normal wear and tear.
Customer Concentration. Billings from our ten largest container lessees represented 62.5% of total billings for the year ended December 31, 2020, with billings from our two largest lessees, MSC Mediterranean Shipping Company S.A. and CMA CGM, accounting for 17.1% and 10.2%, respectively, of total billings, or $69.8 million and $41.6 million, respectively.
Proprietary Real-time Information Technology System. Our proprietary real-time information technology system tracks all of our containers individually by container number, provides design specifications for the containers, tracks on-lease and off-lease transactions, matches each on-lease unit to a lease contract and each off-lease unit to a depot contract, maintains the major terms for each lease contract, tracks accumulated depreciation, calculates the monthly bill for each container lessee and tracks and bills for container repairs. Most of our depot activity is reported electronically, which enables us to prepare container lessee bills and calculate financial reporting information more efficiently.
In addition, our system allows our lessees to conduct business with us through the Internet. This allows our lessees to review our container inventories, monitor their on-lease information, view design specifications and receive information on maintenance and repair. Many of our lessees receive billing and on- and off-lease information from us electronically.
Our Suppliers. We purchase most of our containers in China from manufacturers that have met our qualification requirements. We are currently not dependent on any single manufacturer. We have long-standing relationships with all of our major container suppliers. Our technical services personnel review the designs for our containers and periodically audit the production facilities of our suppliers. In addition, we contract with independent third-party inspectors to monitor production at factories while our containers are being produced. This provides an additional layer of quality control and helps ensure that our containers are produced in accordance with our specifications.
Our Competition. We compete primarily with other global container leasing companies, including both larger and smaller lessors. We also compete with bank leasing companies who offer long-term operating leases and finance leases, and container shipping lines, which sometimes lease their excess container inventory. Other participants in the shipping industry, such as container manufacturers, may also decide to enter the container leasing business. It is common for container shipping lines to utilize several leasing companies to meet their container needs and to minimize reliance on any one individual leasing company.
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Our competitors compete with us in many ways, including pricing, lease flexibility, supply reliability, customer service and the quality and location of containers. Some of our competitors have greater financial resources, better access to capital, lower cost of capital, better credit ratings, more containers, broader market presence, longer standing relationships with lessees, longer operating histories, stronger brand recognition and greater marketing resources than us, or are affiliates of larger companies. We emphasize the quality of our fleet, supply reliability and high level of customer service to our container lessees. We focus on ensuring adequate container availability in high-demand locations, dedicate large portions of our organization to building relationships with lessees, maintain close day-to-day coordination with lessees and have developed a proprietary information technology system that allows our lessees to access real-time information about their containers.
Seasonality. We have historically experienced increased seasonal demand for containers in the second and third quarters of the year. However, equipment rental revenue may fluctuate significantly in future periods based upon the level of demand by container shipping lines for leased containers, our ability to maintain a high utilization rate of containers in our total fleet, and changes in per diem rates for leases.
Credit Control
We provide services for container shipping lines, freight forwarders, and other companies that meet our credit criteria. Our credit policy sets different maximum exposure limits depending on our relationship and previous experience with each customer. Credit criteria may include, but are not limited to, trade route, country, business climate, social and political climate, assessments of net worth, asset ownership, bank and trade credit references, credit bureau reports (including those produced specifically for the maritime sector by Dynamar), operational history and financial strength. We monitor our customers’ performance on an ongoing basis. Our credit control processes are aided by the long payment experience we have with most of our customers, our broad network of relationships that provide current information about our customers’ market reputations and our focus on collections.
Environmental Matters
We are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants to air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and third-party claims for property or natural resource damage and personal injury, as a result of violations of environmental laws and regulations in connection with our or our lessees’ current or historical operations. Under some environmental laws in the United States and certain other countries, the owner or operator of equipment may be liable for environmental damage, cleanup or other costs in the event of a spill or discharge of material from the equipment without regard to the fault of the owner or operator. While we typically maintain liability insurance coverage and typically require our lessees to provide us with indemnity against certain losses, the insurance coverage is subject to large deductibles, limits on maximum coverage and significant exclusions and may not be sufficient or available to protect against any or all liabilities and such indemnities may not cover or be sufficient to protect us against losses arising from environmental damage.
Regulation
Our container operations are subject to regulations promulgated in various countries, including the United States, seeking to protect the integrity of international commerce and prevent the use of equipment for international terrorism or other illicit activities. For example, the Container Security Initiative, the Customs-Trade Partnership Against Terrorism and Operation Safe Commerce are among the programs administered by the U.S. Department of Homeland Security (DHS) that are designed to enhance security for cargo moving throughout the international transportation system by identifying existing vulnerabilities in the supply chain and developing improved methods for ensuring the security of containerized cargo entering and leaving the United States. Moreover, the International Convention for Safe Containers, 1972, as amended (CSC), adopted by the International Maritime Organization, applies to new and existing containers and seeks to maintain a high-level of safety of human life in the transport and handling of containers by providing uniform international safety regulations. As these regulations develop and change, we may incur increased compliance costs due to the acquisition of new, compliant equipment and/or the adaptation of existing equipment to meet new requirements imposed by such regulations. In addition, violations of these rules and regulations can result in substantial fines and penalties, including potential limitations on operations or forfeitures of assets.
Human Capital Management
We seek to attract, retain, and develop the best talent available in order to drive our continued success and achieve our business goals. Our container leasing workforce as of December 31, 2020 was comprised of 99 employees worldwide, 48% of which are located outside the U.S. We are not a party to any collective bargaining agreements. Our workforce decreased 51% in 2020 compared to 2019, mainly due to the sale of the logistics business. Excluding Logistics and Rail employees, voluntary workforce turnover for the year was 3%.
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The success of our employees drives the success of the business, and supports our goal of long-term value creation for our stockholders. We strive for an inclusive and respectful work environment where employees are empowered at all levels to implement new ideas to better serve our global customer base and continuously improve our processes and operations. We believe that we offer competitive benefits and training programs to develop employees’ expertise and skillsets, use training, communication, appropriate investments and clear corporate policies to strive to provide a safe, harassment-free work environment guided by principles of fair and equal treatment, and prioritize employee engagement. As a result, we believe our employees are committed to building strong, innovative and long-term relationships with each other and with our local communities and customer base.
We are committed to diversity and inclusion across our Company, and one of our goals is to increase diverse talent across our leadership. As of December 31, 2020, our global workforce self-identified as 31% male and 69% female. In the U.S., 48% of our workforce was comprised of racial and ethnic minorities. As of February 28, 2021, our board of directors consisted of 33% directors identifying as either female or a minority. Our commitment to diversity recruiting includes partnering with external organizations to develop a diverse talent pipeline, applying a diverse slate approach to increase diversity within our executive management team and developing policies and initiatives aimed at further promoting diversity and inclusion in our organization. To attract diversity in our applicant pools, we post our openings to a wide variety of job boards and deploy appropriate language in our postings.
In 2020, the COVID-19 pandemic had a significant impact on our human capital management. A majority of our workforce worked remotely beginning in the first quarter of 2020 and continuing into 2021 without significant impacts to productivity, and we instituted reduced office capacity, upgraded cleaning practices, social distancing requirements and other safety measures and procedures for those employees who worked at our office locations during this time. We have put into place other health and safety measures globally to enable our operations to continue without significant impact. We did not furlough or conduct any employee layoffs due to the pandemic during the year.
Available Information
Our Internet website address is www.capps.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are available free of charge through the SEC’s website at www.sec.gov and on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Also, copies of our filings with the SEC will be made available, free of charge, upon written request to the Company. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report on Form 10-K, or any other document that we file with the SEC.
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ITEM 1A. RISK FACTORS
ITEM 1A: RISK FACTORS
In addition to the other information contained in this Annual Report on Form 10-K, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations and cash flows. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our securities could decline due to any of these risks and investors may lose all or part of their investment. This section should be read in conjunction with our audited consolidated financial statements and related notes thereto, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Annual Report on Form 10-K.
Business Risks
Container leasing demand can be negatively affected by numerous market factors as well as external political and economic events that are beyond our control. Decreasing leasing demand could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Demand for containers depends largely on the rate of world trade and economic growth. Demand for leased containers is also driven by our customers’ “lease vs. buy” decisions. Cyclical recessions can negatively affect the operating results of container lessors, such as us, because during economic downturns or periods of reduced trade, shipping lines tend to lease fewer containers, or lease containers only at reduced rates, and tend to rely more on their own fleets to satisfy a greater percentage of their requirements. As a result, during periods of weak global economic activity, container lessors like ourselves typically experience decreased leasing demand, decreased equipment utilization, lower average rental rates, decreased leasing revenue, decreased used container resale prices and significantly decreased profitability. These effects can be severe.
For example, our key operating metrics and profitability in 2019 and the first half of 2020 were negatively impacted by reduced trade and economic growth, both of which were affected by increased trade tariffs due to trade dispute between the U.S. and China and the onset of the COVID-19 pandemic and related lockdowns. As a result, our utilization, average leasing rates and used container prices decreased steadily throughout 2019 and the first half of 2020, and our profitability decreased as well. We have also experienced a number of other periods of weak performance due to adverse global economic conditions, including in 2009 due to the global financial crisis, and during 2015 and 2016 due to a global manufacturing recession. During both of these periods, our profitability and growth rate were significantly impacted by weak container demand.
Other general factors affecting demand for leased containers, container utilization and per diem rental rates include:
available supply and prices of new and used containers;
changes in the operating efficiency of our customers;
economic conditions and competitive pressures in the shipping industry;
shifting trends and patterns of cargo traffic, including a reduction in exports from Asian nations or increased trade imbalances;
the availability and terms of container financing;
fluctuations in interest rates and foreign currency values;
overcapacity or undercapacity of the container manufacturers;
the lead times required to purchase containers;
the number of containers purchased by competitors and container lessees;
container ship fleet overcapacity or undercapacity;
increased repositioning by container shipping lines of their own empty containers to higher-demand locations in lieu of leasing containers from us;
consolidation or withdrawal of individual container lessees in the container shipping industry;
import/export tariffs and restrictions;
customs procedures, foreign exchange controls and other governmental regulations;
natural disasters that are severe enough to affect local and global economies, including pandemics such as COVID-19;
political and economic factors, including any changes in international trade agreements; and
future regulations which could restrict our current business practices and increase our cost of doing business.
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All of these factors are inherently unpredictable and beyond our control. These factors will vary over time, often quickly and unpredictably, and any change in one or more of these factors may have a material adverse effect on our business, financial condition, results of operations and cash flows. Many of these factors also influence decisions by our customers to lease or buy containers. Should one or more of these factors influence our customers to buy a larger percentage of the containers they operate, our utilization rate would decrease, resulting in decreased revenue and increased storage and repositioning costs.
The demand for leased containers is particularly tied to international trade. If international trade were to decrease, as a result of increased tariffs or other actions impeding trade, it could reduce demand for container leasing, which would materially adversely affect our business, financial condition and results of operations.
A substantial portion of our containers are used in trade involving goods being shipped from exporting countries (e.g., China and other export-oriented Asian countries) to importing countries (e.g., other Asian countries, North America and Western Europe). The willingness and ability of international consumers to purchase foreign goods is dependent upon political support for an absence of government-imposed barriers to international trade in goods and services. For example, international consumer demand for foreign goods is related to price. Therefore, if the price differential between foreign goods and domestically-produced goods were to decrease due to increased tariffs on the import of foreign goods, strengthening in the applicable foreign currencies relative to domestic currencies, rising foreign wages, increasing input or energy costs or other factors, then demand for foreign goods could decrease. This in turn could result in reduced demand for container leasing. A similar reduction in demand for container leasing could result from an increased use of quotas or other technical barriers to restrict trade. The current regime of relatively free trade may not continue, which would materially adversely affect our business, financial condition and results of operations.
The international nature of the container industry exposes us to risks relating to the imposition of import and export duties, quotas, domestic and foreign customs and tariffs, and other impediments to trade. These risks increased in recent years due to trade actions taken by the United States and China that led to increased tariffs on goods traded between these two countries. Given the importance of the United States and China in the global economy, these increased tariffs could significantly reduce the volume of goods traded internationally and reduce the rate of global economic growth, leading to decreased demand for leased containers, lower new container prices (which would indirectly reduce the value of the Company’s inventory of containers held for lease) and decreased market leasing rates. These impacts could have a material adverse effect on our business, financial condition and results of operations.
Lessee defaults may adversely affect our business, results of operations and financial condition by decreasing revenue and increasing storage, repositioning, collection and recovery expenses.
Our rental equipment is leased to numerous lessees. Lessees are required to pay rent and indemnify us for damage to or loss of equipment. Lessees may default in paying rent and performing other obligations under their leases. A delay or diminution in amounts received under the leases, or a default in the performance of maintenance or other lessee obligations under the leases could adversely affect our business, financial condition, results of operations and cash flows and our ability to make payments on our debt.
Our cash flows from rental equipment, principally rental revenue, are affected significantly by the ability to collect payments under leases and the ability to replace cash flows from terminating leases by re-leasing or selling equipment on favorable terms. All of these factors are subject to external economic conditions and the performance by lessees and service providers that are not within our control.
In addition, when lessees default, we may fail to recover all of our equipment, and the equipment we do recover may be returned in damaged condition or to locations where we will not be able to efficiently re-lease or sell the equipment. As a result, we may have to repair and reposition the equipment to other places where we can re-lease or sell it, and we may lose revenue and incur additional operating expenses in repossessing, repositioning and storing the equipment.
We also often incur extra costs when repossessing containers from a defaulting lessee. These costs typically arise when our lessee has also defaulted on payments owed to container terminals or depot facilities where the repossessed containers are located. In such cases, the terminal or depot facility will sometimes seek to have us repay a portion of the unpaid bills as a condition before releasing the containers back to us.
Although the container shipping industry is currently enjoying strong demand and significant increases in freight rates, it has been suffering for several years from excess vessel capacity and low freight rates. A number of our customers generated financial losses over the last several years and many are burdened by high levels of debt. In addition, the implementation in 2020 of the IMO 2020 global sulfur cap regulations is likely to increase the financial pressures on shipping lines. These regulations require our customers to either purchase more expensive, low sulfur fuel or invest large amounts to install sulfur scrubbers for their existing ships.
We maintain insurance to reimburse us and third-party investors for customer defaults. The insurance agreements are subject to deductibles of $3.5 million per occurrence, depending on the customer’s credit rating, and have significant exclusions. Our level of insurance coverage in 2021 is limited to $27.0 million per occurrence and in aggregate, depending on the customer’s credit rating, and may not be sufficient to prevent us from suffering material losses. Additional insurance claims made by the Company may result in such insurance not being available to us in the future on commercially reasonable terms, or at all.
The continued spread of the COVID-19 pandemic may have a material adverse impact on our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has resulted in a significant impact to businesses and supply chains globally. The imposition of work and travel restrictions, as well as other actions by government authorities to contain the outbreak, led to a significant decline in the global economy in the first half of 2020, including extended shutdowns of certain businesses, lower factory production, reduced volumes of global imports and exports and disruptions in global shipping. This led to reduced container demand, which pressured container lease rates in the first half of 2020, and increased the credit risk profile of our shipping line customers. Following the easing of measures to contain the spread of the pandemic and the initial reopening of businesses, trade volumes and container demand recovered strongly in the third quarter of 2020. However, many countries are seeing a resurgence in COVID-19 cases, including our main demand locations in China, and there continues to be a high degree of risk and uncertainty with respect to the outlook for global economic conditions, global trade and container demand. Further, in response to the pandemic, many businesses, including ourselves, have implemented remote working arrangements for their employees that may continue, in whole or in part, for an extended period. Risks associated with the COVID-19 pandemic on our business include, but are not limited to:
increased credit concerns relating to our shipping line customers as they face operational disruptions and increased costs relating to the pandemic, including the risk of bankruptcy or significant payment defaults or delays;
reduced demand for rental equipment and increased pressure on lease rates;
reduced demand for sale of rental equipment and increased pressure on sale rates;
operational issues that could prevent our rental equipment from being discharged or picked up in affected areas or in other locations after having visited affected areas for a prolonged period of time;
business community risks associated with the transition to remote working arrangements, including increased cybersecurity risks, internet capacity constraints or other systems problems, and unanticipated difficulties or delays in our financial reporting processes;
liquidity risks, including that disruptions in financial markets as a result of the pandemic may increase the cost and availability of capital, and the risk of non-compliance with financial covenants in debt agreements;
potential impacts on key management, including health impacts and distractions caused by the pandemic response; and
potential impacts on business relationships due to restrictions on travel.
Although the impact on our business of the COVID-19 pandemic has not been significant to date, if the pandemic continues to cause business disruption and negatively impact the global economy, then its impact could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Fluctuations in global trade cause our business to experience cyclicality.
Market conditions in our industry have historically experienced high level of cyclicality, with periods of strong growth in global trade and high demand for containers followed by periods of weak conditions. Market conditions were exceptionally strong during the second half of 2020 after being weak for much of 2019 and the first half of 2020, but the current outlook for the global economy, global trade and the container leasing market are highly uncertain due to the ongoing COVID-19 pandemic.
New container prices have also experienced a high level of volatility and are currently at record highs. A decrease in new container prices typically negatively impacts our profitability by reducing lease rates and the sale prices we receive for our equipment. These impacts can be severe when new container prices are low for an extended period of time.
Lease rates may decrease due to a decrease in new container prices, weak leasing demand, increased competition or other factors, resulting in reduced revenues, lower margins, and reduced profitability and cash flows.
Market lease rates are typically a function of, among other things, new equipment prices (which are heavily influenced by steel prices), interest rates, the type and length of the lease, the equipment supply and demand balance at a particular time and location, and other factors more fully described below. A decrease in lease rates can have a materially adverse effect on our leasing revenues, profitability and cash flow.
A decrease in market lease rates negatively impacts the lease rates on both new container investments and existing containers in our fleet. Most of our existing containers are on operating leases, which means that the lease term is shorter than the expected life of the container, so the lease rate we receive for the container is subject to change at the expiration of the current lease. A decrease in new container prices from their current record highs, widespread availability of attractively priced financing, and aggressive competition for new leasing transactions could put pressure on market lease rates. As a result, during periods of low market lease rates, the average lease rate received for our containers is negatively impacted by both the addition of new containers at low lease rates as well as, and more significantly, by the turnover of existing containers from leases with higher lease rates to leases with lower lease rates.
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We may incur significant costs to reposition containers.
When lessees return containers to locations where supply exceeds demand, we may make a decision to reposition containers to higher demand areas rather than sell the container and realize a loss on sale. Repositioning expenses vary depending on geographic location, distance, freight rates and other factors. We seek to limit the number of units that can be returned and in some cases, impose surcharges on containers returned to areas where demand for such containers is not expected to be strong. However, market conditions may not enable us to continue such practices. In addition, we may not accurately anticipate which port locations will be characterized by high or low demand in the future, and our current contracts will not protect us from repositioning costs if ports that we expect to be high-demand ports turn out to be low-demand ports at the time leases expire.
We may incur asset impairment charges and additional depreciation expense.
Asset impairment charges may result from the occurrence of unexpected adverse events or management decisions that impact our estimates of expected cash flows generated from our long-lived assets. We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We may be required to recognize asset impairment charges in the future as a result of prolonged reductions in demand for specific container types, an extended weak economic environment, persistent challenging market conditions, events related to particular customers or asset type, or as a result of asset or portfolio sale decisions by management. If an asset, or group of assets, is considered to be impaired, it may also indicate that the residual value of the associated equipment type needs to be reduced. For example, we reduced the residual value for 40-foot high cube dry van containers from $1,650 to $1,400 per container, effective July 1, 2016. If residual values of our rental equipment are lowered further, then our depreciation expense will increase, which would have an adverse impact on our business, financial condition and results of operations.
Consolidation and concentration in the container shipping industry could decrease the demand for leased containers.
We primarily lease containers to container shipping lines. The container shipping lines have historically relied on a large number of leased containers to satisfy their needs. Consolidation of major container shipping lines, such as between Maersk and Hamburg Süd in 2017, or the creation of operating alliances between shipping lines, such as the formation of ONE, a joint venture between NYK, Mitsui OSK and K Line, in 2018, could create efficiencies for the shipping lines and decrease demand for leased containers, because they may be able to fulfill a larger portion of their needs through their owned container fleets. It would also create increased concentration of credit risk if the number of our container lessees decreases due to consolidation. Additionally, large container shipping lines with significant resources could choose to purchase their own containers directly, which would decrease their demand for leased containers and could have an adverse impact on our business, financial condition, results of operations and cash flows. Finally, decreased demand from shipping companies for leased containers could also occur due to consolidation caused by the financial failure of container shipping companies, such as the bankruptcy of Hanjin during 2016.
We derive a substantial portion of our revenue from a limited number of container lessees. The loss of, or reduction in business by, any of these container lessees, or a default from any large container lessee, could result in a significant loss of revenue and cash flow.
We have derived, and believe that we will continue to derive, a significant portion of our revenue and cash flow from a limited number of container lessees. Billings from our ten largest container lessees represented 62.5% of total billings for the year ended December 31, 2020, with billings from our two largest container lessees accounting for 17.1% and 10.2%, respectively, of total billing, or $69.8 million and $41.6 million, respectively. As our business grows, and as consolidation continues among our shipping line customers, we expect the proportion of revenue generated by our larger customers to continue to increase. The loss of a recently-consolidated customer such as those noted above would have a material adverse impact on our business, financial condition, results of operations and cash flows. In addition, a default by any of our largest lessees would result in a major reduction in our leasing revenue, large repossession expenses, potentially large lost equipment charges and a material adverse impact on our performance and financial condition. Although we maintain insurance against customer defaults, our insurance is limited and may not be sufficient to cover such a default.
Changes in market price or availability of containers in China could adversely affect our ability to maintain our supply of containers.
The vast majority of intermodal containers are currently manufactured in China, and we currently purchase almost all of our containers from manufacturers based there. In addition, the container manufacturing industry in China is highly concentrated. In 2019, Dong Fang International Container purchased several of the manufacturing facilities of Singamas Container Holdings Limited, further consolidating the container manufacturing industry. If it became more expensive for us to procure containers in China because of further consolidation among container suppliers, a dispute with one of our manufacturers, increased tariffs imposed by the United States or other governments or for any other reason, we may have to seek alternative sources of supply. We may not be able to make alternative arrangements quickly enough to meet our equipment needs, and the alternative arrangements may increase our costs.
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It may become more expensive for us to store our off-hire containers.
We are dependent on third-party depot operators to repair and store our equipment in port areas throughout the world. In many of these locations the land occupied by these depots is increasingly being considered as prime real estate. Accordingly, local communities are considering increasing restrictions on depot operations which may increase their costs of operation and in some cases force depots to relocate to sites further from port areas. Additionally, depots in prime locations may become filled to capacity based on market conditions and may refuse additional containers due to space constraints. This could require us to enter into higher-cost storage agreements with third-party depot operators in order to accommodate our customers’ turn-in requirements and could result in increased costs and expenses for us. If these changes affect a large number of our depots, it could significantly increase the cost of maintaining and storing our off-hire containers.
Fluctuations in the price of new containers could harm our business, results of operations and financial condition.
New container prices, which dropped to record lows in the first quarter of 2016, have recently increased to record highs. It is uncertain for how long the current container prices will continue. If new container prices decrease, the per diem lease rates for new leases of older, off-lease containers would also be expected to decrease and the prices obtained for containers sold at the end of their useful life would also be expected to decrease. Although new and used container prices are currently at record highs, if the price of new containers declines such that market per diem lease rates or resale values for containers are reduced, our revenue and income could decline. A continuation of these factors could harm our business, financial condition, results of operations and cash flows, even if a sustained reduction in price would allow us to purchase new containers at a lower cost.
Used container sale prices may decrease, leading to losses on the sale of used rental equipment.
Although our revenues primarily depend upon equipment leasing, our profitability is also affected by the gains or losses we realize on the sale of used containers because, in the ordinary course of our business, we sell certain containers when they are returned to us. The volatility of the selling prices and gains or losses from the disposal of such equipment may be significant. Used container selling prices, which can vary substantially, depend upon, among other factors, the cost of new containers, the global supply and demand balance for containers, the location of the containers, the supply and demand balance for used containers at a particular location, the repair condition of the container, refurbishment needs, materials and labor costs and equipment obsolescence. Most of these factors are outside of our control.
Containers are typically sold if it is in our best interest to do so, after taking into consideration earnings prospects, book value, remaining useful life, condition and repair costs, storage costs, suitability for leasing or other uses, and the prevailing local sales price for containers. Gains or losses on the disposition of used containers will fluctuate and may be significant if we sell large quantities of used containers.
Used container selling prices and the gains or losses that we have recognized from selling used containers have varied widely over recent years. During 2015 and 2016, disposal prices were close to, and in many cases below, our residual values which resulted in losses being incurred on the sales of used equipment. As a result of consistent losses being recorded on the sale of 40-foot high cube dry van containers, we reduced the residual value for these containers from $1,650 to $1,400 per container, effective July 1, 2016. Sales prices for used containers recovered from the lows of 2016, resulting in gains being recognized on the sale of used equipment. If used container prices decline, we may incur losses on the sale of used containers, our residual values may need to be reduced, resulting in increased depreciation expense, and we may incur impairment charges on such equipment. A decline in these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We face extensive competition in the container leasing industry.
We may be unable to compete favorably in the highly competitive container leasing business. We compete with a number of major leasing companies, many smaller lessors, companies and financial institutions offering finance leases, promoters of equipment ownership and leasing as a tax-efficient investment, container shipping lines (which sometimes lease their excess container stocks), and suppliers of alternative types of containers for freight transport. Some of these competitors have greater financial resources, better access to capital, lower cost of capital, better credit ratings, more containers, broader market presence, longer standing relationships with lessees, longer operating histories, stronger brand recognition and greater marketing resources than us, or are affiliates of larger companies. Additionally, some of these competitors may have large, underutilized inventories of equipment, which could lead to significant downward pressure on per diem rates, margins and prices of equipment.
Our business requires large amounts of working capital to fund our operations. We are aware that some of our competitors have had ownership changes and there has been consolidation in the industry in recent years. As a consequence, these competitors may have greater resources available to aggressively seek to expand their market share. This could include offering lease rates with which we may not be able to effectively compete. We may not be able to compete successfully against these competitors.
Competition among container leasing companies depends upon many factors, including, among others, per diem rates; lease terms, including lease duration, drop-off restrictions and repair provisions; customer service; and the location, availability, quality and individual characteristics of equipment units. The highly competitive nature of our industry may reduce lease rates and margins and undermine our ability to maintain our current level of container utilization or achieve our growth plans.
The international nature of our business exposes us to numerous risks.
Our ability to enforce lessees’ obligations will be subject to applicable law in the jurisdiction in which enforcement is sought. As containers are predominantly located on international waterways, it is not possible to predict, with any degree of certainty, the jurisdictions in which enforcement proceedings may be commenced. For example, repossession from defaulting lessees may be difficult and more expensive in jurisdictions in which laws do not confer the same security interests and rights to creditors and lessors as those in the United States and in other jurisdictions where recovery of containers from defaulting lessees is more cumbersome. As a result, the relative success and expedience of enforcement proceedings with respect to containers in various jurisdictions cannot be predicted.
We are also subject to risks inherent in conducting business across national boundaries, any one of which could adversely impact our business. These risks include:
regional or local economic downturns;
changes in governmental policy or regulation;
restrictions on the transfer of funds into or out of the countries in which we operate;
consequences from changes in tax laws, including tax laws pertaining to container investors;
value-added tax and other sales-type taxes which could result in additional costs to us if they are not properly collected or paid;
domestic and foreign customs and tariffs;
international incidents, including epidemics and pandemics;
public health issues;
war, hostilities, terrorist attacks, piracy, or the threat of any of these events;
government instability;
nationalization of foreign assets;
government protectionism;
compliance with export controls, including those of the U.S. Department of Commerce;
compliance with import procedures and controls, including those of the DHS;
potential liabilities relating to foreign withholding taxes;
labor or other disruptions at key ports;
difficulty in staffing and managing widespread operations;
restrictive local employment laws; and
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions.
One or more of these factors could impair our current or future international operations and, as a result, harm our overall business, financial condition, results of operations and cash flows.
We may incur costs associated with new security regulations, which may adversely affect our business, financial condition and results of operations.
We may be subject to regulations promulgated in various countries, including the United States, seeking to protect the integrity of international commerce and prevent the use of equipment for international terrorism or other illicit activities. For example, the Container Security Initiative, the Customs-Trade Partnership Against Terrorism and Operation Safe Commerce are among the programs administered by the DHS that are designed to enhance security for cargo moving throughout the international transportation system by identifying existing vulnerabilities in the supply chain and developing improved methods for ensuring the security of containerized cargo entering and leaving the United States. Moreover, the CSC applies to new and existing containers and seeks to maintain a high level of safety of human life in the transport and handling of containers by providing uniform international safety regulations. As these regulations develop and change, we may incur compliance costs due to the acquisition of new, compliant equipment and/or the adaptation of existing equipment to meet new requirements imposed by such regulations. Additionally, certain companies are currently developing or may in the future develop products designed to enhance the security of equipment transported in international commerce. Regardless of the existence of current or future government regulations mandating the safety standards of intermodal shipping equipment, industry participants may adopt such products or our equipment lessees may insist that we adopt such products. In responding to such market pressures, we may incur increased costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Environmental regulations may result in equipment obsolescence or require substantial investments to retrofit existing equipment. Additionally, environmental concerns are leading to significant design changes for new containers that have not been extensively tested, which increases the likelihood that we could face technical problems.
Many countries, including the United States, restrict, prohibit or otherwise regulate the use of chemical refrigerants due to their ozone depleting and global warming effects. Our refrigerated containers currently use various refrigerants. Manufacturers of cooling machines for refrigerated containers are testing units that utilize alternative refrigerants, as well as natural refrigerants such as carbon dioxide, that may have less global warming potential than current refrigerants. If future regulations prohibit the use or servicing of containers of current refrigerants, we could be forced to incur large retrofitting expenses. In addition, refrigerated containers that are not retrofitted may become difficult to lease, command lower rental rates and disposal prices, or may have to be scrapped.
Historically, the foam insulation in the walls of intermodal refrigerated containers required the use of a blowing agent that contains chlorofluorocarbons (CFCs). The manufacturers producing our refrigerated containers have eliminated the use of this blowing agent in the manufacturing process, but a large number of our refrigerated containers manufactured prior to 2014 contain these CFCs. The EU prohibits the import and the placing on the market in the EU of intermodal containers with insulation made with such process. However, we believe international conventions governing free movement of intermodal containers allow the use of such intermodal refrigerated containers in the EU if they have been admitted into the EU countries on temporary customs admission. We have procedures in place that we believe comply with the relevant EU and country regulations. If future international conventions or regulations prohibit the use or servicing of containers with foam insulation that utilized this blowing agent change, we could be forced to incur large retrofitting expenses and those containers that are not retrofitted may become more difficult to lease and command lower rental rates and disposal prices.
An additional environmental concern affecting our operations relates to the materials and processes used to construct our dry containers. The floors of dry containers are plywood, usually made from tropical hardwoods. Due to concerns regarding de-forestation of tropical rain forests and climate change, many countries which have been the source of these hardwoods have implemented severe restrictions on the cutting and export of these woods. Accordingly, container manufacturers have switched a significant portion of production to more readily available alternatives such as birch, bamboo, and other farm-grown wood species. Container users are also evaluating alternative designs that would limit the amount of plywood required and are also considering possible synthetic materials to replace the plywood. These new woods or other alternatives have not proven their durability over the typical 13-15 year life of a dry container, and if they cannot perform as well as the hardwoods have historically, the future repair and operating costs for these containers could be significantly higher and the useful life of the containers may be decreased.
For environmental reasons, container manufacturers have replaced solvent-based paint systems with water-based paint systems for dry container production. Water-based paint systems require more time and care for proper application, and there is an increased risk that the paint will not adhere properly to the steel for the expected useful life of the containers. In addition, some of our refrigerated container manufacturers have recently announced planned changes to the panel treatment and painting processes for refrigerated containers, and we are concerned these changes may lead to decreased protection from the paint system. Poor paint coverage and adherence leads to premature rusting, increased maintenance cost over the life of the container and could result in a shorter useful life.
China has implemented regulations restricting the impact of solid wastes, and these regulations are limiting the import into China of old refrigerated containers destined for material recycling. These regulations may limit the disposal demand for non-working refrigerated containers and could result in a decrease in refrigerated container disposal prices which could have a significant negative impact on our profitability and cash flows.
Our senior executives are critical to the success of our business and our inability to retain them or recruit new personnel could adversely affect our business.
Most of our senior executives and other management-level employees have over 15 years of industry experience. We rely on this knowledge and experience in our strategic planning and in our day-to-day business operations. Our success depends in large part upon our ability to retain our senior management, the loss of one or more of whom could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our success also depends on our ability to retain our experienced sales force and technical personnel as well as recruiting new skilled sales, marketing and technical personnel. Competition for these individuals in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel. In addition, uncertainty regarding our exploration of strategic alternatives may harm our ability to retain and recruit our key personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new equipment lessees and provide acceptable levels of customer service could suffer.
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Security breaches and other disruptions could compromise our information technology systems and expose us to a liability, which could have a material adverse effect on our business, results of operations and our reputation.
In the ordinary course of business, we collect and store sensitive data on our systems and networks, including our proprietary business information and that of our customers and suppliers, and personally identifiable information of our customers and employees. The secure storage, processing, maintenance and transmission of this information is critical to our operations. Despite security measures we employ, our information technology systems and networks may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information, cause us to breach our legal, regulatory or contractual obligations, create an inability to access or rely upon critical business records or cause other disruptions of our business. Despite our existing security procedures and controls, if our network becomes compromised, it could give rise to unwanted media attention, materially damage our customer relationships, harm our business, our reputation, and our financial results, which could result in fines or lawsuits, and may increase the costs we incur to protect against such information security breaches, such as increased investment in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud. These breaches may result from human error, equipment failure, or fraud or malice on the part of employees or third parties.
We expend significant financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally not recognized until launched against a target, regardless of our expenditures and protection efforts, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. Further, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law. We may not be able to limit our liability or damages in the event of such a loss.
We rely on our information technology systems to conduct our business. If these systems fail to adequately perform their functions, or if we experience an interruption in their operation, our business, results of operations and financial prospects could be adversely affected.
The efficient operation of our business is highly dependent on our information technology systems. We rely on our systems to track transactions, such as repair and depot charges and changes to book value, and movements associated with each of our owned or managed equipment units. We use the information provided by our systems in our day-to-day business decisions in order to effectively manage our lease portfolio and improve customer service. We also rely on them for the accurate tracking of the performance of our managed fleet for each third-party investor, and the tracking and billing of logistics moves. The failure of our systems to perform as we expect could disrupt our business, adversely affect our financial condition, results of operations and cash flows and cause our relationships with lessees and third-party investors to suffer. In addition, our information technology systems are vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power loss and computer systems failures, unauthorized breach and viruses. Any such interruption could have a material adverse effect on our business, reputation, results of operations and financial prospects.
Fluctuations in foreign exchange rates could reduce our profitability.
Most of our revenues and costs are billed in U.S. dollars. Our operations and used equipment sales in locations outside of the U.S. have some exposure to foreign currency fluctuations, and trade growth and the direction of trade flows can be influenced by large changes in relative currency values. In addition, most of our container equipment fleet is manufactured in China. Although the purchase price is in U.S. dollars, our manufacturers pay labor and other costs in the local currency, the Chinese yuan. To the extent that our manufacturers’ costs increase due to changes in the valuation of the Chinese yuan, the dollar price we pay for equipment could be affected. Adverse or large exchange rate fluctuations may negatively affect our financial condition, results of operations and cash flows.
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Actual or threatened terrorist attacks, efforts to combat terrorism, or the outbreak of war and hostilities could negatively impact our operations and profitability and may expose us to liability.
Terrorist attacks and the threat of such attacks have contributed to economic instability in the United States and elsewhere, and further acts or threats of terrorism, violence, war or hostilities could similarly affect world trade and the industries in which we and our customers operate. In addition, terrorist attacks or hostilities may directly impact ports, depots, our facilities or those of our suppliers or customers, and could impact our sales and our supply chain. A severe disruption to the worldwide ports system and flow of goods could result in a reduction in the level of international trade and lower demand for our equipment or services. Any of these events could also negatively affect the economy and consumer confidence, which could cause a downturn in the transportation industry. The consequence of any terrorist attacks or hostilities are unpredictable, and we may not be able to foresee events that could have an adverse effect on our operations
It is also possible that our equipment could be involved in a terrorist attack. Although our lease agreements require our lessees to indemnify us against all damages arising out of the use of our containers, and we carry insurance to potentially offset any costs in the event that our customer indemnifications prove to be insufficient, our insurance does not cover certain types of terrorist attacks, and we may not be fully protected from liability of the reputational damage that could arise from a terrorist attack which utilizes one of our containers.
Our operations could be affected by natural or man-made events in the locations in which we or our customers or suppliers operate.
We have operations in locations subject to severe weather conditions, natural disasters, the outbreak of contagious disease, or man-made incidents such as chemical explosions, any of which could disrupt our operations. In addition, our suppliers and customers also have operations in such locations. For example, in 2015, a chemical explosion and fire in the port of Tianjin, China damaged or destroyed a small number of our containers and disrupted operations in the port. Similarly, outbreaks of pandemic or contagious diseases, such as the COVID-19 virus, H1N1 (swine) flu and the Ebola virus, could significantly reduce the demand for international shipping or could prevent our containers from being discharged in the affected areas or in other locations after having visited the affected areas. Any future natural or man-made disasters or health concerns in the world where we have business operations could lead to disruption of the regional and global economies, which could result in a decrease in demand for leased containers.
Certain liens may arise on our equipment.
Depot operators, repairmen and transporters may come into possession of our equipment from time to time and have sums due to them from lessees or sub-lessees of equipment. In the event of nonpayment of those charges by lessees or sub-lessees, we may be delayed in, or entirely barred from, repossessing equipment, or be required to make payments or incur expenses to discharge liens on our equipment.
The lack of an international title registry for containers increases the risk of ownership disputes.
There is no internationally recognized system of recordation or filing to evidence our title to containers nor is there an internationally recognized system for filing security interests in containers. Although we have not incurred material problems with respect to this lack of an internationally recognized system, the lack of an international title recordation system for containers could result in disputes with lessees, end-users, or third parties who may improperly claim ownership of the containers.
Indebtedness and Finance Risks
Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.
We have a significant amount of indebtedness and we intend to borrow additional amounts under our credit facilities to purchase equipment and make acquisitions and other investments. We expect that we will maintain a significant amount of indebtedness on an ongoing basis. As of December 31, 2020, our total outstanding debt was $1,758.5 million. Interest expense on such debt will be $9.3 million per quarter for 2021, assuming floating interest rates remain consistent with those as of December 31, 2020. There is no assurance that we will be able to generate sufficient cash flow from operations to service and repay our debt, or to refinance our outstanding indebtedness when it becomes due, or, if refinancing is available, that it can be obtained on terms that we can afford.
Some of our credit facilities require us to pay a variable rate of interest, which will increase or decrease based on variations in certain financial indices, and increases in interest rates can significantly decrease our profits. In 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 our variable-rate borrowings.
The amount of our indebtedness could have important consequences for us, including the following:
requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future business opportunities and other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
making it more difficult for us to satisfy our debt obligations, and any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default under the agreements governing such indebtedness, which could lead to, among other things, an acceleration of our indebtedness or foreclosure on the assets securing our indebtedness, which could have a material adverse effect on our business, financial condition, results of operations and cash flows;
making it difficult for us to pay dividends on, or repurchase, our common stock, our Series A Preferred Stock or our Series B Preferred Stock;
placing us at a competitive disadvantage compared to our competitors having less debt;
limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; and
increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates.
We may not generate sufficient cash flow from operations to service and repay our debt and related obligations and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our industry.
Our credit facilities impose, and the terms of any future indebtedness may impose, significant operating, financial and other restrictions on us and our subsidiaries.
Restrictions imposed by our credit facilities or other indebtedness will limit or prohibit, among other things, our ability to:
incur additional indebtedness;
pay dividends on or redeem or repurchase our stock;
enter into new lines of business;
issue capital stock of our subsidiaries (except to the Company);
make loans and certain types of investments;
create liens;
sell certain assets or merge with or into other companies;
enter into certain transactions with stockholders and affiliates; and
restrict dividends, distributions or other payments from our subsidiaries.
These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions, including a breach of financial covenants, could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness, which would constitute substantially all of our equipment assets.
The expected replacement of the LIBOR benchmark interest rate may have an impact on our business and the trading price of our Series A Preferred Stock and our Series B Preferred Stock.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. As a result, the continuation of LIBOR on the current basis cannot be guaranteed after 2021 and it is likely that LIBOR will be phased out or modified by 2023. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. Financial services regulators and industry groups are evaluating the phase-out of LIBOR and the development of alternate reference rate indices or reference rates. In the United States, the Alternative Reference Rates Committee (“ARRC”) was tasked with identifying alternative reference rates to replace LIBOR. The Secured Overnight Financing Rate (“SOFR”) has emerged as the ARRC’s preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by the Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates. In addition, it is uncertain what methods of calculating a replacement rate will be adopted generally or whether different industry bodies, such as the loan market and the derivative market, will adopt the same methodologies.
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As of December 31, 2020, we had $797.5 million of debt outstanding on facilities with interest rates based on LIBOR. Our credit facilities include fallback language that seeks to facilitate an agreement with our lenders on a replacement rate for LIBOR in the event of its discontinuance. We cannot predict what reference rate would be agreed upon or what the impact of any such replacement rate would be to our interest expense. Potential changes to the underlying floating-rate indices and reference rates may have an adverse impact on our liabilities indexed to LIBOR and could have a negative impact on our profitability and cash flows. Furthermore, we cannot predict or quantify the time, effort and cost required to transition to the use of new benchmark rates, including with respect to negotiating and implementing any necessary changes to existing contractual agreements, and implementing changes to our systems and processes. We continue to evaluate the operational and other effects of such changes.
In addition, on and after April 15, 2023, with respect to our Series A Preferred Stock, and August 15, 2023, with respect to our Series B Preferred Stock, such series preferred stock will each have a floating dividend rate set each dividend period at an annual rate based in part on LIBOR. At this time, it is not possible to predict the effect of any changes as a result of the discontinuation of LIBOR, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the UK or elsewhere. Furthermore, if we or the calculation agent for the applicable series of preferred stock determine that Three-Month LIBOR (as defined in the applicable certificate of designations) has been permanently discontinued, the calculation agent will use an alternative rate, as further detailed in the applicable certificate of designations. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our Series A Preferred Stock and our Series B Preferred Stock.
Tax and Regulatory Risks
We are subject to legislative, regulatory, and legal developments involving taxes.
Taxes are a significant part of our expenses. We exercise significant judgement in calculating our worldwide tax provision for income taxes and other tax liabilities. Although we believe our tax estimates are reasonable, many factors may limit their accuracy. We are currently under examination in Barbados for the 2019 tax year, and may be subject to examinations in the future in this, and other, jurisdictions. Relevant tax authorities may disagree with our tax treatment of certain material items and thereby increase our tax liability. We are subject to U.S. federal, state, and foreign income, payroll, property, sales and use, and other types of taxes. Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in a material effect to our results of operations, financial condition, and liquidity. Higher tax rates could have a material adverse effect on our results of operations, financial condition, and liquidity.
We operate in numerous tax jurisdictions and are subject to not only the phase-in of current tax regulations or changes in the applicable tax regulations in those jurisdictions, but may also be subject to tax authorities within any of these jurisdictions challenging our operating structure or revising the interpretation of tax laws and regulations. Should any of these events occur it could result in additional taxes, interest and penalties that could materially impact our financial conditions and our future financial results.
We are headquartered in the United States as a Delaware corporation, and also operate through a number of international subsidiaries. We are subject to the tax regulations of each jurisdiction in which we operate in addition to United States tax regulations. We have structured our Company and its domestic and international subsidiaries to minimize our income tax obligations, however, under certain circumstances our tax structure could result in additional U.S. or foreign taxes. There can be no assurance that our current effective tax rate will not change in the future or that our tax structure and the amount of taxes we pay in any of these countries will not be challenged by the relevant taxing authorities. If the tax authorities challenge our tax positions or the amount of taxes paid for the purchase, lease or sale of equipment in each jurisdiction in which we operate, we could incur substantial expenses associated with defending our tax position as well as expenses associated with the payment of any additional taxes, penalties and interest that may be imposed on us. The payment of these amounts could have an adverse material effect on our business, financial condition, results of operations and cash flows.
Legislation recently enacted in Bermuda and Barbados requiring registered entities within those jurisdictions to establish domestic economic substance could have a material adverse impact on our future financial results.
We seek to minimize our overall tax liability through the use of a tax efficient corporate structure of our international subsidiaries. As part of that effort, we have established an asset owning subsidiary registered in Barbados and multiple special purpose vehicles registered in Bermuda. While this structure has effectively reduced our overall tax liability, there can be no assurance that this will continue to be the case, particularly if the structure is challenged by one or more governmental agencies within those jurisdictions or the structure otherwise becomes non-compliant with applicable law. The failure to be able to maintain the above tax efficient corporate structure, and any fines or penalties that could be imposed as a result of challenges to the structure, could have a material adverse impact on our business operations, and future financial and operational results.
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Barbados and Bermuda have both enacted legislation that could have a material impact upon our subsidiaries located in those jurisdictions. In 2019 Barbados enacted the Companies (Economic Substance) Act, 2019 and in 2018 Bermuda enacted the Economic Substance Act 2018. Both sets of legislation require affected Barbados and Bermuda registered companies to maintain a substantial economic presence in their respective countries. It is anticipated that the guidelines which assist in the interpretation and application of the legislation, will be revised periodically within those jurisdictions, but this legislation could require us to incur additional costs to achieve compliance, and/or result in the imposition of significant penalties, and possibly require us to re-domicile our registered subsidiaries to a jurisdiction with higher tax rates. As noted, because the details surrounding implementation of this legislation are still developing, we cannot predict the impact of the economic substance requirements on our Company. However, the results of our business operations and future financial performance could be materially adversely affected depending on whether, and to the extent, we become subject to this legislation and/or other unanticipated tax liabilities.
We may be affected by market or regulatory responses to climate change.
Changes in laws, rules, and regulations, or actions by authorities under existing laws, rules, or regulations, to address greenhouse gas emissions and climate change could negatively impact our customers and business. For example, restrictions on emissions could significantly increase costs for our customers whose production processes require significant amounts of energy. Customers’ increased costs could reduce their demand to lease our assets. Potential consequences of laws, rules, or regulations addressing climate change could have an adverse effect on our financial position, results of operations, and cash flows.
As a U.S. corporation, we are subject to the Foreign Corrupt Practices Act, and a determination that we violated this act may affect our business and operations adversely.
As a U.S. corporation, we are subject to the regulations imposed by the Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. Violations of the FCPA could result in fines and penalties; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries; and a materially negative effect on our company and our operating results. Although we have implemented policies and procedures designed to ensure compliance with the FCPA, there can be no assurance that our employees, business partners, or agents will not violate our policies. Any perception or determination that we have violated the FCPA could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to comply with applicable regulations that impact our international operations, our business, results of operations or financial condition could be adversely affected.
Due to the international scope of our operations, we are subject to numerous laws and regulations, including economic sanctions, anti-corruption, anti-money laundering, import and export and similar laws. In recent years, we have seen a substantial increase in the enforcement of many of these laws in the United States and other countries. Any failure or perceived failure to comply with existing or new laws and regulations may subject us to significant fines, penalties, criminal and civil lawsuits, forfeiture of significant assets, and other enforcement actions in one or more jurisdictions, result in significant additional compliance requirements and costs, increase regulatory scrutiny of our business, result in the loss of customers, restrict our operations and limit our ability to grow our business, adversely affect our results of operations, and harm our reputation.
Risks Related to our Stock
Our common stock price has been volatile and may remain volatile.
The trading price of our common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, new products or services by us or our competitors, general conditions in the shipping industry and the intermodal equipment sales and leasing markets, changes in earnings estimates by analysts, or other events or factors which may or may not be under our control. Broad market fluctuations may adversely affect the market price of our common stock. Since the initial public offering of our common stock at $15.00 per share on May 16, 2007, the market price of our common stock has fluctuated significantly. Since the trading volume of our common stock is modest on a daily basis, shareholders may experience difficulties in liquidating our common stock at an acceptable price. Factors affecting the trading price of our common stock may include, among others:
variations in our financial results;
changes in financial estimates or investment recommendations by any securities analysts following our business;
the public’s response to our press releases, our other public announcements and our filings with the SEC;
our ability to successfully execute our business plan;
changes in accounting standards, policies, guidance, interpretations or principles;
future sales of common stock by us or our directors, officers or significant stockholders or the perception such sales may occur;
our ability to achieve operating results consistent with securities analysts’ projections;
the operating and stock price performance of other companies that investors may deem comparable to us;
recruitment or departure of key personnel;
our ability to timely address changing equipment lessee and third-party investor preferences;
equipment market and industry factors;
the size of our public float;
general stock market conditions; and
other events or factors, including those resulting from war, incidents of terrorism or responses to such events.
In addition, if the market for companies deemed similar to us or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business or financial results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.
Future new sales of our common stock or preferred stock by us or outstanding shares by existing stockholders, or the perception that there will be future sales of new shares from us or existing stockholders, may cause our common stock or preferred stock price, as applicable, to decline and impair our ability to obtain capital through future stock offerings.
In the future, we may sell additional shares of our common stock or preferred stock to raise additional capital. The issuance of additional shares of our common stock, preferred stock or convertible securities, will dilute the ownership interest of our common and preferred stockholders. In addition, our greater than 5% stockholders may sell a substantial number of their shares in the public market, which could also affect the market price for our common and preferred stock. We cannot predict the size of future sales or issuances of our common or preferred stock or the effect, if any, that they may have on the market price for our common and preferred stock. The issuance and/or sale of substantial amounts of common or preferred stock, or the perception that such issuances and/or sales may occur, could adversely affect the market price of our common or preferred stock and impair our ability to raise capital through the sale of additional equity or debts securities.
Dividends now paid to holders of our common stock may need to be reduced or eliminated.
Although our board of directors has approved a dividend policy under which we pay cash dividends on our common stock, any determinations by us to pay cash dividends on our common stock will be based upon our financial condition, results of operations, business requirements, investment in rental equipment, tax considerations and our board of directors’ continuing quarterly determination that the declaration of dividends under the dividend policy is in the best interests of our stockholders and is in compliance with all laws and agreements. In addition, the terms of our credit agreements contain provisions restricting the amount of cash dividends subject to certain exceptions. Consequently, investors may be forced to rely more so or completely on sales of their common stock to realize returns on investment.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock.
Our certificate of incorporation and bylaws and Delaware corporate law each contain provisions that could delay, defer or prevent a change in control of our company or changes in our management. Among other things, these provisions:
authorize us to issue preferred stock that can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common stock;
permit removal of directors only for cause by the holders of a majority of the shares entitled to vote at the election of directors and allow only the directors to fill a vacancy on the board of directors;
prohibit stockholders from calling special meetings of stockholders;
prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
require the affirmative vote of 66 2/3% of the shares entitled to vote to amend our bylaws and certain articles of our certificate of incorporation, including articles relating to the classified board, the size of the board, removal of directors, stockholder meetings and actions by written consent;
allow the authorized number of directors to be changed only by resolution of the board of directors;
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;
classify our board of directors into three classes so that only a portion of our directors are elected each year; and
allow our directors to amend our bylaws.
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These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law, which makes unfriendly takeover more difficult, may discourage, delay or prevent a change in control of us, which shareholders not affiliated with the takeover group might favor. Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.
The change of control conversion right in our preferred stock may make it more difficult for a party to acquire us or discourage a party from acquiring us.
Upon the occurrence of a change of control, each holder of shares of our outstanding preferred stock will have the right (subject to certain conditions) to convert some or all of the shares of preferred stock held by such holder (the “Change of Control Conversion Right”). The Change of Control Conversion Right may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing certain of our change of control transactions under circumstances that otherwise could provide the holders of our preferred stock with the opportunity to realize a premium over the then-current market price of such equity securities or that stockholders may otherwise believe is in their best interests.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2: PROPERTIES
Office Locations. As of December 31, 2020, we operated our business in 13 offices in 12 different countries including the U.S. We have 2 offices in the U.S. including our headquarters in San Francisco, California. We have 11 offices outside the U.S., including offices operated by third-party corporate service providers in Bermuda and Luxembourg. In addition, we have agents in Asia, Europe, Africa, and South America. All of our offices, except those operated by third party corporate service providers, are leased.
The following table summarizes our office locations as of December 31, 2020:
Office Locations - U.S.
San Francisco, CA (Headquarters)
Charleston, SC
Office Locations - International
Brentwood, United Kingdom
St. Michael, Barbados
Antwerp, Belgium
Singapore
Hamburg, Germany
Taipei, Taiwan
Kuala Lumpur, Malaysia
Hamilton, Bermuda
Luxembourg City, Luxembourg
Sydney, Australia
Seoul, South Korea

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3: LEGAL PROCEEDINGS
From time to time we may become a party to litigation matters arising in connection with the normal course of our business, including in connection with enforcing our rights under our leases. While we cannot predict the outcome of these matters, in the opinion of our management, any liability arising from these matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nevertheless, unexpected adverse future events, such as an unforeseen development in our existing proceedings, a significant increase in the number of new cases or changes in our current insurance arrangements could result in liabilities that have a material adverse impact on our business, financial condition, results of operations or cash flows. We are currently not party to any material legal proceedings which are material to our business, financial condition, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
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PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NYSE under the symbol “CAI.”
In addition, our Series A Preferred Stock and our Series B Preferred Stock are traded on the NYSE under the symbols “CAI-PA” and “CAI-PB,” respectively.
Holders
As of February 18, 2021, there were 26 registered holders of record of the common stock and 4,488 beneficial holders, based on information obtained from our transfer agent.
Dividend Policy
Our board of directors approved the initiation of a regular cash dividend on our common stock at a rate of $0.25 per share per quarter, equivalent to $1.00 per share annually, effective during the third quarter of 2020. The dividend was increased to $0.30 per share effective the first quarter of 2021. We are required to pay dividends of 8.5% per annum on our outstanding shares of each series of our preferred stock. Any determinations by us to pay cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations, business requirements, tax considerations and our board of directors’ continuing determination that the declaration of dividends under the dividend policy are in the best interests of our stockholders and are in compliance with all laws and agreements, including the agreements governing our indebtedness, applicable to the dividend program. In the absence of such a policy, other than to pay dividends on our preferred stock, we intend to retain future earnings to finance the operation and expansion of our business, and to repurchase our common stock.
Purchases of Equity Securities by the Issuer
Period
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Unit) (1)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2020 - October 31, 2020
-
$
-
-
1,000,000
November 1, 2020 - November 30, 2020
-
-
-
1,000,000
December 1, 2020 - December 31, 2020(2)
249,034
31.95
248,569
751,431
Total
249,034
$
31.95
248,569
751,431
(1) On October 8, 2018, we announced that our Board of Directors had approved the repurchase of up to 3.0 million shares of outstanding common stock. The repurchase plan does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. As of December 31, 2020, 0.8 million shares remained available for repurchase under our share repurchase plan. On February 11, 2021, the Board of Directors increased the share repurchase plan by an additional 2.0 million shares.
(2)Includes 465 shares withheld by the Company to satisfy the tax obligations of certain of our employees upon the vesting of restricted stock awards.
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Performance Graph
The graph below compares cumulative shareholder returns on our common stock as compared with the Russell 2000 Stock Index and the Dow Jones Transportation Stock Index for the period from December 31, 2015 to December 31, 2020. The graph assumes an investment of $100 as of December 31, 2015, and that all dividends were reinvested without the payment of any commissions. The stock performance shown on the performance graph below is not necessarily indicative of future performance.
Returns as of December 31,
Company/Index
Dec. 31, 2015
CAI International, Inc.
$
$
$
$
$
$
Russell 2000 Index
Dow Jones Transportation Index

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6: SELECTED FINANCIAL DATA
Not applicable. Financial information related to the fiscal years ended December 31, 2017 and 2016 may be found in Part II, Item 6. Selected Financial Data in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 5, 2020. Please refer to the consolidated financial statements included herein in Part III, Item 8. Financial Statements and Supplementary Data for information with respect to the fiscal years ended December 31, 2020, 2019 and 2018.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7: 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 consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K. 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. See “Special Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
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. As of December 31, 2020, our container fleet comprised 1,798,520 CEUs, 96% of which represented our owned fleet and 4% of which represented our managed fleet.
Our revenue comprises container lease revenue from our owned container fleet and management fee revenue for managing containers for third-party investors.
Our revenue from our owned container fleet depends primarily upon a combination of: (1) the number of units in our owned fleet; (2) the utilization level of equipment in our owned fleet; and (3) the per diem rates charged under each equipment lease. The same factors in our managed fleet affect the amount of our management fee income. The number of CEUs in our container fleet varies over time as we purchase new equipment based on prevailing market conditions during the year and sell used equipment to parties in the secondary resale market.
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 saw a significant increase in leasing demand during the second half of the year, but it is too early to tell whether this rebound in leasing demand will be sustained into 2021 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 this Annual Report on Form 10-K.
Disposal of Logistics and Rail Businesses
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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 accompanying consolidated statements of income and cash flows. All prior periods presented in the consolidated financial statements in this Annual Report on Form 10-K have been restated to reflect the classification of the logistics and rail leasing businesses as discontinued operations and certain assets and liabilities as held for sale.
Key Operating Metrics
Utilization. We measure container utilization on the basis of the average number of CEUs on lease expressed as a percentage of our total container fleet available for lease. We calculate the total fleet available for lease by excluding new units that have been manufactured for us but either remain at the manufacturer or have not yet entered their first lease, and off-hire units that are likely to be sold. Our utilization is primarily driven by the overall level of equipment demand, the location of our available equipment and the quality of our relationships with equipment lessees. The location of available equipment is critical because equipment available in high-demand locations is more readily leased and is typically leased on more favorable terms than equipment available in low-demand locations.
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The equipment leasing market is highly competitive. As such, our relationships with our customers are important to ensure that they continue to select us as one of their providers of leased equipment. Our average container fleet utilization rate in CEUs for the year ended December 31, 2020 was 98.5% compared to 98.6% for the year ended December 31, 2019. Our average container fleet utilization remained relatively consistent between the two periods due to limited supply of new equipment despite strong leasing demand. Our utilization rate may increase or decrease depending on future global economic conditions and the additional supply of new equipment.
Per Diem Rates. The per diem rate for a lease is set at the time we enter into a lease agreement. Our long-term per diem rates have historically been strongly influenced by new equipment pricing, interest rates, the balance of supply and demand for equipment at a particular time and location, our estimate of the residual value of the equipment at the end of the lease, the type and age of the equipment being leased, and, for container per diem rates, the purchase of equipment and efficiencies in container utilization by container shipping lines. The overall average per diem rates for equipment in our owned fleet and in the portfolios of equipment comprising our managed fleet do not change significantly in response to changes in new equipment prices because existing lease agreements can only be re-priced upon the expiration of the lease.
Continuing operations
Container Lease Revenue. We generate container lease revenue by leasing our owned containers primarily to container shipping lines. Approximately 80% of our container lease revenue is derived from the rental of containers. Container lease revenue is comprised of monthly lease payments due under the lease agreements together with payments for other charges set forth in the leases, such as handling fees, drop-off charges and repair charges. Approximately 24% of our owned container fleet is subject to finance leases. Under a finance lease, the lessee’s payments consist of principal and interest components. The interest component is included within container lease revenue. Lessees under our finance leases have the substantive risks and rewards of equipment ownership and typically have the option to purchase the equipment at the end of the lease term for a nominal amount.
Container lease revenue also includes management fee revenue generated by our management services, which include the leasing, re-leasing, repair, repositioning, storage and disposition of equipment. We provide these management services pursuant to management agreements with third-party investors. Under these agreements, which have multiple year terms, we earn fees for the management of the equipment and a commission, or a managed units’ sales fee, upon disposition of equipment under management.
Operating Expenses. Our operating expenses include depreciation of rental equipment, storage, handling and other expenses applicable to our owned equipment, and administrative expenses.
We depreciate our containers on a straight-line basis over a period ranging from 12 to 15 years to a fixed estimated residual value depending on the type of container (see Note 2(d) to our consolidated financial statements included in this Annual Report on Form 10-K). We regularly assess both the estimated useful life of our containers and their expected residual values, and, when warranted, adjust our depreciation estimate accordingly. Depreciation expense for rental equipment will vary over time based upon the size of our owned rental equipment fleet and the purchase price of new equipment. If our rental equipment is impaired, the equipment is written-down to its fair value and the amount of the write-down is recorded in depreciation expense.
Storage, handling and other expenses are operating costs of our owned rental equipment fleet. Storage and handling expenses occur when lessees drop off equipment at depots at the end of a lease. Storage and handling expenses vary significantly by location. Other expenses include repair expenses, which are the result of normal wear and tear on the equipment, and repositioning expenses, which are incurred when we contract to move equipment from locations where our inventories exceed actual or expected demand to locations with higher demand. Storage, handling and other expenses are directly related to the number of units in our owned fleet and inversely related to our utilization rate for those units: as utilization increases, we typically have lower storage, handling and repositioning expenses.
Our administrative expenses are primarily employee-related costs such as salary, bonus and commission expenses, and employee benefits, as well as rent, bad debt and travel and entertainment costs, and expenses incurred for outside services such as legal, consulting and audit-related fees.
Our operating expenses include the gain or loss on sale of rental equipment. This gain or loss is typically the result of our sale of used equipment in the secondary resale market and is the difference between: (1) the cash we receive for these units, less selling expenses; and (2) the net book value of the units.
Discontinued operations
Rail Lease Revenue. Lease revenue was generated by leasing our railcars primarily for the transport of industrial goods, materials and other products on railroad tracks throughout North America. Rail lease revenue was comprised of monthly lease payments due under the lease agreements. Lease revenue was based on a fixed monthly rate or was recognized on an hourly or mileage basis. A small number of our railcars were subject to finance leases.
Logistics Revenue. Logistics revenue was generated by arranging for the movement of our customers’ freight through our network of non-affiliated transportation carriers and equipment providers. Revenue represented the gross price charged to our customers.
Discontinued operations expenses. Operating expenses for discontinued operations include depreciation of rental equipment, storage, handling and other expenses, logistics transportation costs, loss on sale of rental equipment and administrative expenses.
Logistics transportation costs represent the expenses we incur for providing logistics services to our customers. Such costs include shipping, pick-up and delivery charges, primarily from railroads and drayage companies we contract with to fulfill the movement of our customers’ freight.
Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
Revenue
Container lease revenue
$
294,013
$
298,853
Operating expenses
Depreciation of rental equipment
109,856
111,917
Storage, handling and other expenses
17,758
17,533
Gain on sale of rental equipment
(10,204)
(4,402)
Administrative expenses
27,312
34,188
Total operating expenses
144,722
159,236
Operating income
149,291
139,617
Other expenses
Net interest expense
61,565
79,174
Write-off of debt issuance costs
6,135
-
Other (income) expense
(651)
Total other expenses
67,049
79,487
Income before income taxes
82,242
60,130
Income tax expense
1,800
4,783
Income from continuing operations
80,442
55,347
Loss from discontinued operations, net of taxes
(52,709)
(24,336)
Net income
27,733
31,011
Preferred stock dividends
8,829
8,829
Net income attributable to CAI common stockholders
$
18,904
$
22,182
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss the results of our operations and certain cash flow information for the year ended December 31, 2020 compared to the year ended December 31, 2019. A discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018 has been omitted from this Annual Report on Form 10-K, but may be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 5, 2020, which is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.capps.com).
‎
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
Container lease revenue
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Container lease revenue
$
294,013
$
298,853
$
(4,840)
-2%
The decrease in container lease revenue between 2020 and 2019 was mainly attributable to a $7.2 million decrease in rental revenue resulting from a 3% reduction in average owned container per diem rental rates, a $4.4 million decrease in rental revenue arising from a change to cash-based revenue recognition for a certain customer due to collectability issues, a $2.2 million decrease in lease revenue due to a lease modification resulting in a change in lease classification from operating to finance for a specific lease, and a $0.8 million decrease in repair fee revenue resulting from an increase in utilization rate during 2020, partially offset by a $9.8 million increase in rental revenue, primarily due to a 4% increase in the average number of CEUs of on-lease owned containers. The reduction in average container per diem rental rates was caused primarily by competitive market pressure.
Depreciation of rental equipment
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Depreciation of rental equipment
$
109,856
$
111,917
$
(2,061)
-2%
The decrease in depreciation expense between 2020 and 2019 was mainly attributable to a 3% decrease in the average size of our owned container fleet subject to depreciation over the last twelve months.
Storage, handling and other expenses
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Storage, handling and other expenses
$
17,758
$
17,533
$
1%
Storage, handling and other expenses remained relatively consistent between 2020 and 2019.
Gain on sale of rental equipment
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Gain on sale of rental equipment
$
10,204
$
4,402
$
5,802
132%
While there was a slight decrease of 5% in the average sale price per CEU, we sold approximately 28% more CEUs of containers in 2020 compared to 2019 due to increased demand, resulting in an increase in gain on sale of rental equipment. We also recognized a net selling loss of $2.6 million at the commencement of a finance lease during 2019.
Administrative expenses
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Administrative expenses
$
27,312
$
34,188
$
(6,876)
-20%
The decrease in administrative expenses between 2020 and 2019 was primarily attributable to an $11.9 million decrease in bad debt expense, mainly due to cash receipts from a previously reserved customer and improved collection efforts, partially offset by a $2.1 million increase in legal and professional fees due to the strategic review process, a $1.7 million increase in severance costs mainly associated with the change in our Chief Executive Officer, and a $1.1 million increase in payroll-related costs.
‎
Other expenses
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Net interest expense
$
61,565
$
79,174
$
(17,609)
-22%
Write-off of debt issuance costs
6,135
-
6,135
-
Other (income) expense
(651)
(964)
-308%
$
67,049
$
79,487
$
(12,438)
-16%
Net interest expense
The decrease in net interest expense between 2020 and 2019 was due primarily to a decrease in the average interest rate on our outstanding debt from approximately 3.6% at December 31, 2019 to 2.3% at December 31, 2020, caused primarily by a decrease in LIBOR, as well as a decrease in our average loan principal balance between the two periods, as we decreased acquisition activity for rental equipment during the first half of 2020.
Write-off of debt issuance costs
The $6.1 million write-off of debt issuance costs during 2020 is due to the early repayment of debt associated with our Series 2017-1, 2018-1 and 2018-2 asset-backed notes.
Other (income) expense
Other income, representing a gain on foreign exchange of $0.7 million for the year ended December 31, 2020, increased from a loss of $0.3 million for the year ended December 31, 2019, primarily as a result of movements in the U.S. Dollar exchange rate against the Euro.
Income tax expense
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Income tax expense
$
1,800
$
4,783
$
(2,983)
-62%
While income before tax increased between the two periods, the effective tax rate decreased from 8.0% for the year ended December 31, 2019 to 2.2% for the year ended December 31, 2020. The decrease in the effective tax rate was primarily caused by a $3.2 million tax benefit in 2020 as a result of revaluing our state deferred tax liability due to the sale of the logistics and rail businesses, an increase in the proportion of pretax income generated in lower tax jurisdictions, and a decrease in the proportion of interest income generated by foreign finance leases subject to both foreign and U.S. income tax.
Note 9 to our consolidated financial statements included in this Annual Report on Form 10-K includes a reconciliation between the tax expense calculated at the statutory U.S. income tax rate and the actual tax expense for the years ended December 31, 2020 and 2019.
Preferred stock dividends
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Preferred stock dividends
$
8,829
$
8,829
$
-
0%
Preferred stock dividends for 2020 remained consistent with 2019.
‎
Loss from discontinued operations
The following table summarizes our results of discontinued operations for the years ended December 31, 2020 and 2019:
Year Ended December 31,
Change
Amount
Percent
($ in thousand)
Total revenue
$
89,253
$
143,817
$
(54,564)
-38%
Operating expenses
145,680
161,795
(16,115)
-10%
Interest expense
7,070
13,327
(6,257)
-47%
Income tax benefit
10,788
6,969
3,819
55%
Net loss from discontinued operations
52,709
24,336
28,373
117%
The decrease in revenue from discontinued operations between 2020 and 2019 was the result of a $51.4 million decrease in logistics revenue, primarily attributable to the sale of the logistics business during the quarter ended September 30, 2020, and a $3.2 million decrease in rail lease revenue, primarily attributable to a decrease in the size of the on-lease railcar fleet between the two periods due to the sale of railcars.
The decrease in operating expenses from discontinued operations between 2020 and 2019 was mainly the result of a $45.7 million decrease in logistics transportation costs primarily attributable to the sale of the logistics business during the quarter ended September 30, 2020, a $13.2 million decrease in impairment of rental equipment due to changes in the fair value of railcar assets held for sale, and a $4.8 million decrease in administrative expenses primarily attributable to a decrease in payroll-related costs which is partially offset by an increase in severance costs related to the sale of the businesses. These decreases were partially offset by a $29.1 million increase in loss on sale of rental equipment due to the sale of the remaining railcar fleet and an $18.5 million loss on classification as held for sale of the logistics business, primarily due to the write down of goodwill and intangible assets, and certain sale related costs.
The decrease in interest expense from discontinued operations between 2020 and 2019 was mainly attributable to a decrease in the average interest rate on the outstanding debt of the rail business and a decrease in the average loan principal balance between the two periods. The increase in income tax benefit from discontinued operations between 2020 and 2019 was attributable to the increase in loss before tax. The decrease in revenue, partially offset by the decrease in operating expenses and interest expense, and the increase in income tax benefit, resulted in an increase in net loss from discontinued operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, of $28.4 million.
Liquidity and Capital Resources
As of December 31, 2020, we had cash and cash equivalents of $53.5 million, including $26.9 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 under our debt agreements, and equity and debt offerings. Our cash in-flows are used to finance capital expenditures and meet debt service requirements.
As of December 31, 2020, our outstanding indebtedness and the related maximum borrowing level was as follows (in thousands):
Current
Current
Amount
Maximum
Outstanding
Borrowing Level
Revolving credit facilities
$
703,550
$
1,205,664
Term loans
180,500
180,500
Senior secured notes
46,665
46,665
Asset-backed notes
726,918
726,918
Collateralized financing obligations
69,629
69,629
Term loans held by VIE
31,234
31,234
1,758,496
2,260,610
Debt discount and debt issuance costs
(12,765)
-
Total
$
1,745,731
$
2,260,610
As of December 31, 2020, we had $502.0 million in availability under our revolving credit facilities (net of $0.1 million in letters of credit), subject to our ability to meet the collateral requirements under the agreements governing the facilities. Based on the borrowing base and collateral requirements as of December 31, 2020, the borrowing availability under our revolving credit facilities was $253.3 million, assuming no additional contributions of assets.
‎
As of December 31, 2020, we had $1,460.9 million of debt in facilities with fixed interest rates or floating interest rates that have been synthetically fixed through interest rate swap agreements. This accounts for 83% of our total outstanding debt. These fixed rate facilities are scheduled to mature between 2021 and 2045 and had a weighted average interest rate of 2.3% as of December 31, 2020.
As of December 31, 2020, we had $297.5 million of debt in facilities with interest rates based on floating rate indices (primarily LIBOR). These floating rate facilities are schedule to mature between 2021 and 2023 and had a weighted average interest rate of 1.8% as of December 31, 2020.
We have typically funded a significant portion of the purchase price for new equipment through borrowings under our credit facilities. However, from time to time we have funded new equipment acquisitions through the use of working capital.
The revolving credit facility and term loans associated with our rail business were repaid in full upon the sale of our remaining railcars in December 2020.
Revolving Credit Facilities
We have two revolving credit facilities, which have a maximum borrowing capacity of $1,175.0 million and €25.0 million, respectively, and maturity dates of June 2023 and September 2023, respectively. The entire amount of the facilities drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.
We use the revolving credit facilities primarily to fund the purchase of rental equipment. As of December 31, 2020, in addition to a rental equipment payable of $100.5 million, we had commitments to purchase $140.9 million of containers in the twelve months ending December 31, 2021.
Term Loans
We utilize our term loans as an important funding source for the purchase of rental equipment. Our term loans amortize in monthly or quarterly installments and mature between June 2021 and October 2023.
Senior Secured Notes
We used the proceeds from the senior secured notes primarily to fund the purchase of rental equipment, as discussed in Note 7 to our consolidated financial statements included in this Annual Report on Form 10-K. The notes amortize in semi-annual installments and mature in September 2022.
Asset-Backed Notes
Our asset-backed notes were issued by our indirect wholly-owned subsidiary, which was established to facilitate asset-backed note financings. We used the proceeds from the issuance of the asset-backed notes primarily to repay our outstanding balance under previously issued asset-backed notes.
Our borrowings under the asset-backed facilities amortize in monthly installments and mature in September 2045. We are required to maintain a restricted cash account to cover payments of the obligations. As of December 31, 2020, the restricted cash account had a balance of $12.4 million.
Other Debt Obligations
We have entered into a series of collateralized financing obligations with Japanese investor funds that are consolidated by us as VIEs (see Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K). The obligations have maturity dates between March 2021 and February 2026.
One of our Japanese investor funds that is consolidated by us as a VIE entered into a term loan agreement with a bank. The VIE term loan matures in February 2026.
Our term loans, senior secured notes, asset-backed notes, collateralized financing obligations and term loans held by VIEs are secured by specific pools of rental equipment and other assets owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.
We continue to monitor the COVID-19 outbreak and its impact on our overall liquidity position and outlook. The ultimate impact that COVID-19 may have on our operations and financial performance over the next twelve months is currently uncertain and will depend on certain developments, including, among others, the impact of COVID-19 on our customers and the magnitude and duration of the pandemic. Assuming that our customers meet their contractual commitments, we currently believe that cash provided by operating activities and existing cash, proceeds from the sale of rental equipment, and borrowing availability under out debt facilities are sufficient to meet our liquidity needs for at least the next twelve months.
‎
In addition to customary events of default, our revolving credit facilities and term loans contain restrictive covenants, including limitations on certain liens, indebtedness and investments and restrictions on dividends, distributions or other payments from our subsidiaries. In addition, all of our debt facilities contain various restrictive financial and other covenants. The financial covenants in our debt facilities require us to maintain (1) a consolidated funded debt to consolidated tangible net worth ratio of no more than 3.75:1.00, and in the case of our asset-backed notes, of no more than 4.50:1:00; and (2) a fixed charge coverage ratio of at least 1.20:1.00, and in the case of our asset-backed notes, an interest coverage ratio of at least 2.50:1.00. As of December 31, 2020, we were in compliance with all of our debt covenants.
Under certain conditions, as defined in our credit agreements with our banks and/or note holders, we are subject to certain cross default provisions that may result in an acceleration of principal repayment under these credit facilities if an uncured default condition were to exist. Our asset-backed notes are not subject to any such cross-default provisions.
Cash Flow
The following table sets forth certain cash flow information for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
Net income
$
27,733
$
31,011
Net income from continuing operations adjusted for non-cash items
186,420
179,412
Changes in working capital
83,470
73,324
Net cash provided by operating activities of continuing operations
269,890
252,736
Net cash used in investing activities of continuing operations
(142,631)
(271,538)
Net cash (used in) provided by financing activities of continuing operations
(193,947)
30,669
Net cash provided by (used in) discontinued operations
59,854
(14,794)
Effect on cash of foreign currency translation
Net decrease in cash
(6,737)
(2,744)
Cash and restricted cash at beginning of period
73,239
75,983
Cash and restricted cash at end of period
$
66,502
$
73,239
Cash Flows from Continuing Operations
Operating Activities
Net cash provided by operating activities of continuing operations was $269.9 million for the year ended December 31, 2020, an increase of $17.2 million compared to $252.7 million for the year ended December 31, 2019. The increase was due to a $10.1 million increase in our net working capital adjustments and a $7.0 million increase in income from continuing operations as adjusted for depreciation, amortization and other non-cash items. The increase of $7.0 million in net income as adjusted for non-cash items was primarily due to a $25.1 million increase in income from continuing operations and a $5.5 million increase in amortization and write-off of unamortized debt issuance costs, partially offset by a decrease of $11.9 million in bad debt expense due to receipt of payments from a previously reserved customer, an increase of $5.8 million in the gain on sale of rental equipment, a decrease of $2.8 million in deferred income taxes, and a decrease of $1.5 million in depreciation expense.
Net working capital provided by operating activities of $83.5 million for the year ended December 31, 2020 was mainly attributable to a $74.4 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 $0.3 million increase in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments, partially offset by a $1.8 million increase in prepaid expenses and other assets. Net working capital provided by operating activities of $73.3 million for the year ended December 31, 2019 was due to a $65.7 million decrease in net investment in finance leases, representing the receipt of principal payments, a $3.1 million decrease in accounts receivable, primarily caused by the timing of cash receipts from customers, and a $6.6 million increase in accounts payable, accrued expenses and other liabilities, primarily caused by the timing of payments, partially offset by a $2.1 million increase in prepaid expenses and other assets.
Investing Activities
Net cash used in investing activities of continuing operations decreased $128.9 million to $142.6 million for the year ended December 31, 2020 from $271.5 million for the year ended December 31, 2019. The decrease in cash usage was primarily attributable to a $97.9 million decrease in the purchase of rental equipment, a $19.6 million increase in proceeds from sale of rental equipment, a $6.3 million decrease in the purchase of financing receivables, and a $3.6 million increase in the receipt of principal payments from financing receivables.
‎
Financing Activities
Net cash used in financing activities of continuing operations was $193.9 million for the year ended December 31, 2020, an increase of $224.6 million compared to net cash provided by financing activities of continuing operations of $30.7 million for the year ended December 31, 2019. During the year ended December 31, 2020, our net cash outflow for borrowings was $163.4 million compared to net cash inflow from borrowings of $73.2 million for the year ended December 31, 2019, reflecting a decrease in investment in rental equipment during 2020 compared to 2019. The increase in net cash outflow for borrowings, an $8.9 million increase in dividends paid to common stockholders, and an $8.2 million increase in payments made for debt issuance costs were partially offset by a $26.2 million decrease in the repurchase of common stock and a $2.7 million increase in proceeds from employee stock option exercises.
Cash Flows from Discontinued Operations
Net cash provided by discontinued operations was $59.9 million for the year ended December 31, 2020, an increase of $74.6 million compared to net cash used in discontinued operations of $14.8 million for the year ended December 31, 2019. The increase in cash provided by discontinued operations was primarily attributable to an $83.2 million decrease in net cash used in financing activities of discontinued operations due to a decrease in net cash outflow to repay borrowings for rail operations, and a $5.9 million increase in net cash provided by operating activities of discontinued operations, partially offset by a decrease of $14.4 million in net cash provided by investing activities of discontinued operations, mainly as a result of a decrease in proceeds received from the sale of railcar assets.
Equity Transactions
Stock Repurchase Plan
In October 2018, we announced that our Board of Directors had approved the repurchase of up to 3.0 million shares of our outstanding common stock. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and will be evaluated by us depending on market conditions, corporate needs and other factors. Stock repurchases may be made in the open market, block trades or privately negotiated transactions. This stock repurchase program replaced any available prior share repurchase authorization and may be discontinued at any time. During the year ended December 31, 2020, we repurchased 0.2 million shares of our common stock under this repurchase plan, at a cost of approximately $7.9 million. As of December 31, 2020, approximately 0.8 million shares remained available for repurchase under our share repurchase program. In February 2021, our Board of Directors increased the share repurchase plan by an additional 2.0 million shares.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments by due date as of December 31, 2020 (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
$
703,550
$
-
$
-
$
703,550
$
-
$
-
$
-
Term loans
180,500
76,300
7,800
96,400
-
-
-
Senior secured notes
46,665
6,110
40,555
-
-
-
-
Asset-backed notes
726,918
63,130
63,130
63,130
63,594
64,985
408,949
Collateralized financing obligations
69,629
35,862
16,282
-
-
-
17,485
Term loans held by VIE
31,234
5,482
5,719
5,969
6,223
6,494
1,347
Interest on debt obligations (1)
139,454
37,316
34,143
22,938
12,027
10,296
22,734
Rental equipment payable
100,509
100,509
-
-
-
-
-
Rent, office facilities and equipment
4,310
2,423
1,452
-
Equipment purchase commitments - Containers
140,873
140,873
-
-
-
-
-
Total contractual obligations
$
2,143,642
$
468,005
$
169,081
$
892,261
$
81,990
$
81,790
$
450,515
(1)Our estimate of interest expense commitment includes $9.0 million relating to our revolving credit facilities subject to variable interest rates, $22.2 million relating to our revolving credit facilities subject to fixed interest rates, $12.1 million relating to our term loans, $4.1 million relating to our senior secured notes, $82.0 million relating to our asset-backed notes, $6.2 million relating to our collateralized financing obligations, and $3.7 million related to our term loans held by VIEs. The calculation of interest commitment related to our debt assumes the following weighted average interest rates as of December 31, 2020: variable-rate revolving credit facilities, 1.7%; fixed-rate revolving credit facilities, 1.8%; term loans, 3.2%; senior secured notes, 4.9%; asset-backed notes, 2.3%; collateralized financing obligations, 1.7%; and term loans held by VIEs, 4.2%. These calculations assume that 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 interest rates are based, including the potential discontinuation of LIBOR after 2021.
‎
See Note 7 to our consolidated financial statements included in this Annual Report on Form 10-K for a description of the terms of our revolving credit facilities, term loans, senior secured notes, asset-based notes, collateralized financing obligations, and term loans held by VIEs.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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, revenue or expenses, results of operations, liquidity capital expenditure, or capital resources that are material to investors. An off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement involving an unconsolidated entity under which we would have: (1) retained a contingent interest in transferred assets; (2) an obligation under derivative instruments classified as equity; (3) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development services with us; or (4) made guarantees.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, the reported amounts of income and expenses during the reporting period and the disclosure of contingent assets and liabilities as of the date of the financial statements. We have identified the policies and estimates below as among those critical to our business operations and the understanding of our results of operations. These policies and estimates are considered critical due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact that these estimates can have on our financial statements. The following accounting policies and estimates include inherent risks and uncertainties related to judgments and assumptions made by us. Our estimates are based on the relevant information available at the end of each period. Actual results could differ from those estimates.
Rental Equipment
We purchase new container equipment from manufacturers to lease to our customers. We also purchase used container equipment through sale-leaseback transactions with our customers, or equipment that was previously owned by one of our third party investors. Used equipment is typically purchased with an existing lease in place.
Container rental equipment is recorded at original cost and depreciated to an estimated residual value on a straight-line basis over its estimated useful life. The estimated useful lives and residual values of our container equipment are based on historical disposal experience and our expectations for future used container sale prices. Depreciation estimates are reviewed on a regular basis to determine whether sustained changes have taken place in the useful lives of our equipment or assigned residual values, which would suggest that a change in depreciation estimates is warranted. We completed our annual depreciation policy review during the fourth quarter of 2020 and concluded no change was necessary.
The estimated useful lives and residual values for each major equipment type purchased new from the factory are as follows:
Depreciable
Residual Value
Life in Years
20-ft. standard dry van container
$
1,050
13.0
40-ft. standard dry van container
$
1,300
13.0
40-ft. high cube dry van container
$
1,400
13.0
20-ft. refrigerated container
$
2,750
12.0
40-ft. high cube refrigerated container
$
3,500
12.0
Other specialized equipment is depreciated to its estimated residual value, which ranges from $1,000 to $3,500, over its estimated useful life of between 12.5 years and 15 years.
For used container equipment acquired through sale-leaseback transactions, we often adjust our estimates for remaining useful life and residual values based on current conditions in the sale market for older containers and our expectations for how long the equipment will remain on-hire to the current lessee.
Impairment of Long-Lived Assets
On at least an annual basis, we evaluate our rental equipment fleet to determine whether there have been any events or changes in circumstances indicating that the carrying amount of all, or part, of our fleet may not be recoverable. Events which would trigger an impairment review include, among others, a significant decrease in the long-term average market value of rental equipment, a significant decrease in the utilization rate of rental equipment resulting in an inability to generate income from operations and positive cash flow in future periods, or a change in market conditions resulting in a significant decrease in lease rates.
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When testing for impairment, equipment is generally grouped by equipment type, and is tested separately from other groups of assets and liabilities. Potential impairment exists when the estimated future undiscounted cash flows generated by an asset group, comprised of lease proceeds and residual values, less related operating expenses, are less than the carrying value of that asset group. If potential impairment exists, the equipment is written down to its fair value. In determining the fair value of an asset group, we consider market trends, published value for similar assets, recent transactions of similar assets and in certain cases, quotes from third party appraisers. No impairment charges were recorded as a result of our annual review completed during the fourth quarter of 2020.
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 provided 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 2021-04 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 ASU 2021-01 prospectively as and when we enter into transactions to which these updates apply.
The most recently adopted accounting pronouncements are described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A: 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.
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.
Approximately 83% of our debt is either fixed or hedged using derivative instruments, which helps mitigate the 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 $3.0 million in interest expense over the next 12 months, based on December 31, 2020 levels.
This analysis does not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of an increase in interest rates of significant magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in our financial structure.
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 year ended December 31, 2020, the U.S. Dollar decreased in value in relation to other major foreign currencies (such as the Euro and British Pound Sterling). The decrease in the relative value of the U.S. Dollar has increased our revenues and expenses denominated in foreign currencies. The associated increase 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 increase in value when translated to U.S. Dollars. For the year ended December 31, 2020, we recognized a gain on foreign exchange of $0.7 million. A 10% change in foreign exchange rates would not have a material impact on our business, financial position, results of operations or cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedule are contained in Item 15 of this Annual Report on Form 10-K, and are incorporated herein by reference. See Part IV, Item 15(a) for an index to the consolidated financial statements and supplementary data.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Executive Vice President, Interim President and Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.
These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including our Executive Vice President, Interim President and Chief Executive Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Based upon the evaluation of these disclosure controls and procedures, our Executive Vice President, Interim President and Chief Executive Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed with the participation of our principal executive officer and principal financial officer or persons performing similar functions to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Our management, including our Executive Vice President, Interim President and Chief Executive Officer, under the supervision of our Board of Directors, conducted an assessment of the effectiveness of its internal control over financial reporting as of December 31, 2020 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Inherent Limitations in the Effectiveness of Controls
Because of its inherent limitations, our internal controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Remediation of Previously Reported Material Weakness
As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, we identified a material weakness in our internal control over financial reporting resulting from the ineffective design and operation of process level controls over the completeness and accuracy of key assumptions and financial data utilized in estimating the fair value of certain assets. The material weakness arose because management’s risk assessment process did not appropriately identify risks, and design and implement responsive control activities associated with changes in business operations.
We have taken several steps to remediate the material weakness identified above, including the following:
We have implemented continuous risk assessment processes that are designed to identify and assess changes that could significantly impact our internal control over financial reporting, including existing and new risks of material misstatement related to the measurement and review of fair value.
We have enhanced the design of existing control activities and implemented additional control activities to ensure controls related to fair value estimates (including controls that validate the completeness and accuracy of information, data and assumptions), are properly designed, implemented and documented.
We completed our remediation activities by testing the operating effectiveness of the newly implemented and enhanced controls and found them to be effective. Based on the implementation work and results of testing performed, we have concluded that the previously identified material weakness has been remediated as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
Except for the remediation described above, there were no changes to our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
‎CAI International, Inc.:
Opinion on Internal Control Over Financial ReportingWe have audited CAI International, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
San Francisco, California
March 1, 2021
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ITEM 9B. OTHER INFORMATION
ITEM 9B: OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2020.
Code of Ethics
We have a written Code of Business Conduct and Ethics in place that applies to all our employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, and persons performing similar functions. A copy of our Code of Business Conduct and Ethics is available on our website at www.capps.com. We intend to use our website as a method of disseminating any change to, or waiver from, our Code of Business Conduct and Ethics as permitted by the applicable SEC rules.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from our definitive proxy statement for our 2021 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2020.
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PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements.
The following financial statements are included in Item 8 of this report:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(a)(2)Financial Statement Schedules.
The following financial statement schedule for the Company is filed as part of this report:
Schedule II-Valuation Accounts
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying Consolidated Financial Statements or notes thereto.
(a)(3)List of Exhibits.
The exhibits set forth on the accompanying Exhibit Index immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.