tgh-6k_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO

RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

Commission File Number 001-33725

 

Textainer Group Holdings Limited

(Translation of Registrant’s name into English)

 

Century House

16 Par-La-Ville Road

Hamilton HM 08

Bermuda

(441) 296-2500

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  þ    Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  Yes  ¨    No  þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable

 

 

 

 

 


 

This report contains the quarterly report of Textainer Group Holdings Limited for the three months ended March 31, 2016.

 

Exhibits   

1.

Quarterly Report of Textainer Group Holdings Limited for the Three Months Ended March 31, 2016.

 

 

1


 

Exhibit 1

TEXTAINER GROUP HOLDINGS LIMITED

Quarterly Report on Form 6-K for the Three Months Ended March 31, 2016

Table of Contents

 

Information Regarding Forward-Looking Statements; Cautionary Language

 

Page

 

 

 

Item 1. Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2016 and 2015

 

4

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

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

 

28

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market and Credit Risk

 

38

 

 

 

Item 4. Risk Factors

 

39

 

 

 

Signature

 

40

 

 

2


 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS; CAUTIONARY LANGUAGE

This Quarterly Report on Form 6-K, including the section entitled Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements within the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not statements of historical facts and may relate to, but are not limited to, expectations or estimates of future operating results or financial performance, capital expenditures, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue” or the negative of these terms or other similar terminology. The forward-looking statements contained in this Quarterly Report on Form 6-K include, but are not limited to, statements regarding  (i) factors that are likely to continue to affect our performance and (ii) our belief that, assuming that our lenders remain solvent, that our cash flow from operations, proceeds from the sale of containers and borrowing availability under our debt facilities are sufficient to meet our liquidity needs, including for the payment of dividends, for the next twelve months.

Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which cannot be foreseen. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, among others, the risks we face that are described in the section entitled Item 3, “Key Information -- Risk Factors” included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2016 (our “2015 Form 20-F”).

We believe that it is important to communicate our expectations about the future to potential investors, shareholders and other readers. However, there may be events in the future that we are not able to accurately predict or control and that may cause actual events or results to differ materially from the expectations expressed in or implied by our forward-looking statements. The risk factors listed in Item 3, “Key Information -- Risk Factors” included in our 2015 Form 20-F, as well as any cautionary language in this Quarterly Report on Form 6-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you decide to buy, hold or sell our common shares, you should be aware that the occurrence of the events described in Item 3, “Key Information -- Risk Factors” included in our 2015 Form 20-F and elsewhere in this Quarterly Report on Form 6-K could negatively impact our business, cash flows, results of operations, financial condition and share price. Potential investors, shareholders and other readers are cautioned not to place undue reliance on our forward-looking statements.

Forward-looking statements regarding our present plans or expectations for fleet size, management contracts, container purchases, sources and availability of financing, and growth involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, as well as the negotiation of agreements with container investors, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding our present expectations for operating results and cash flow involve risks and uncertainties related to factors such as utilization rates, per diem rates, container prices, demand for containers by container shipping lines, supply and other factors discussed under Item 3, “Key Information -- Risk Factors” included in our 2015 Form 20-F or elsewhere in this Quarterly Report on Form 6-K, which could also cause actual results to differ from present plans. Such differences could be material.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. The forward-looking statements contained in this Quarterly Report on Form 6-K speak only as of, and are based on information available to us on, the date of the filing of this Quarterly Report on Form 6-K. We assume no obligation to, and do not plan to, update any forward-looking statements after the date of this Quarterly Report on Form 6-K as a result of new information, future events or developments, except as expressly required by U.S. federal securities laws. You should read this Quarterly Report on Form 6-K and the documents that we reference and have furnished as exhibits with the understanding that we cannot guarantee future results, levels of activity, performance or achievements and that actual results may differ materially from what we expect.  

In this Quarterly Report on Form 6-K, unless otherwise specified, all monetary amounts are in U.S. dollars. To the extent that any monetary amounts are not denominated in U.S. dollars, they have been translated into U.S. dollars in accordance with our accounting policies as described in Item 18, “Financial Statements” included in our 2015 Form 20-F.

 

 

3


 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease rental income

 

 

 

 

$

122,050

 

 

 

 

 

$

129,246

 

Management fees

 

 

 

 

 

3,344

 

 

 

 

 

 

4,017

 

Trading container sales proceeds

 

 

 

 

 

1,902

 

 

 

 

 

 

4,832

 

Gains on sale of containers, net

 

 

 

 

 

1,618

 

 

 

 

 

 

1,056

 

Total revenues

 

 

 

 

 

128,914

 

 

 

 

 

 

139,151

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct container expense

 

 

 

 

 

14,629

 

 

 

 

 

 

9,204

 

Cost of trading containers sold

 

 

 

 

 

2,644

 

 

 

 

 

 

4,692

 

Depreciation expense

 

 

 

 

 

52,549

 

 

 

 

 

 

43,799

 

Container impairment

 

 

 

 

 

17,292

 

 

 

 

 

 

3,170

 

Amortization expense

 

 

 

 

 

1,374

 

 

 

 

 

 

1,167

 

General and administrative expense

 

 

 

 

 

7,166

 

 

 

 

 

 

7,220

 

Short-term incentive compensation expense

 

 

 

 

 

773

 

 

 

 

 

 

719

 

Long-term incentive compensation expense

 

 

 

 

 

1,608

 

 

 

 

 

 

1,671

 

Bad debt expense

 

 

 

 

 

1,149

 

 

 

 

 

 

1,426

 

Total operating expenses

 

 

 

 

 

99,184

 

 

 

 

 

 

73,068

 

Income from operations

 

 

 

 

 

29,730

 

 

 

 

 

 

66,083

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(19,965

)

 

 

 

 

 

(19,395

)

Interest income

 

 

 

 

 

76

 

 

 

 

 

 

39

 

Realized losses on interest rate swaps, collars and caps, net

 

 

 

 

 

(2,353

)

 

 

 

 

 

(2,866

)

Unrealized losses on interest rate swaps, collars and caps, net

 

 

 

 

 

(11,177

)

 

 

 

 

 

(6,001

)

Other, net

 

 

 

 

 

(8

)

 

 

 

 

 

 

Net other expense

 

 

 

 

 

(33,427

)

 

 

 

 

 

(28,223

)

Loss (income) before income tax and noncontrolling interests

 

 

 

 

 

(3,697

)

 

 

 

 

 

37,860

 

Income tax expense

 

 

 

 

 

(20

)

 

 

 

 

 

(1,484

)

Net (loss) income

 

 

 

 

 

(3,717

)

 

 

 

 

 

36,376

 

Less: Net (loss) income attributable to the noncontrolling interests

 

 

323

 

 

 

 

 

 

(1,071

)

 

 

 

Net (loss) income attributable to Textainer Group Holdings Limited common shareholders

 

$

(3,394

)

 

 

 

 

$

35,305

 

 

 

 

Net (loss) income attributable to Textainer Group Holdings Limited common shareholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

 

 

 

$

0.62

 

 

 

 

Diluted

 

$

(0.06

)

 

 

 

 

$

0.62

 

 

 

 

Weighted average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

56,570

 

 

 

 

 

 

56,980

 

 

 

 

Diluted

 

 

56,570

 

 

 

 

 

 

57,173

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

(113

)

 

 

 

 

 

(115

)

Comprehensive (loss) income

 

 

 

 

 

(3,830

)

 

 

 

 

 

36,261

 

Comprehensive loss (income) attributable to the noncontrolling interests

 

 

 

 

 

323

 

 

 

 

 

 

(1,071

)

Comprehensive (loss) income attributable to Textainer Group Holdings Limited common shareholders

 

 

 

 

$

(3,507

)

 

 

 

 

$

35,190

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2016 and December 31, 2015

(Unaudited)

(All currency expressed in United States dollars in thousands)

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,646

 

 

$

115,594

 

Accounts receivable, net of allowance for doubtful accounts of $14,819 and $14,053 at 2016

   and 2015, respectively

 

 

93,455

 

 

 

88,370

 

Net investment in direct financing and sales-type leases

 

 

96,691

 

 

 

87,706

 

Trading containers

 

 

5,282

 

 

 

4,831

 

Containers held for sale

 

 

41,317

 

 

 

43,245

 

Prepaid expenses and other current assets

 

 

8,513

 

 

 

8,385

 

Insurance receivable

 

 

12,275

 

 

 

11,435

 

Due from affiliates, net

 

 

691

 

 

 

514

 

Total current assets

 

 

373,870

 

 

 

360,080

 

Restricted cash

 

 

35,183

 

 

 

33,917

 

Containers, net of accumulated depreciation of $850,244 and $810,393 at 2016 and 2015, respectively

 

 

3,649,698

 

 

 

3,698,011

 

Net investment in direct financing and sales-type leases

 

 

284,728

 

 

 

243,428

 

Fixed assets, net of accumulated depreciation of $9,972 and $9,836 at 2016 and 2015, respectively

 

 

1,801

 

 

 

1,663

 

Intangible assets, net of accumulated amortization of $37,083 and $35,709 at 2016 and 2015,

   respectively

 

 

18,876

 

 

 

20,250

 

Interest rate swaps, collars and caps

 

 

21

 

 

 

814

 

Deferred taxes

 

 

1,825

 

 

 

1,203

 

Other assets

 

 

6,806

 

 

 

6,988

 

Total assets

 

$

4,372,808

 

 

$

4,366,354

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,757

 

 

$

10,477

 

Accrued expenses

 

 

6,755

 

 

 

6,816

 

Container contracts payable

 

 

20,051

 

 

 

41,356

 

Other liabilities

 

 

285

 

 

 

291

 

Due to owners, net

 

 

9,793

 

 

 

11,806

 

Term loan

 

 

31,117

 

 

 

31,097

 

Bonds payable

 

 

58,853

 

 

 

58,788

 

Total current liabilities

 

 

135,611

 

 

 

160,631

 

Revolving credit facilities

 

 

1,105,795

 

 

 

1,013,252

 

Secured debt facilities

 

 

1,030,712

 

 

 

1,062,539

 

Term loan

 

 

393,715

 

 

 

403,500

 

Bonds payable

 

 

419,729

 

 

 

434,472

 

Interest rate swaps, collars and caps

 

 

13,796

 

 

 

3,412

 

Income tax payable

 

 

8,799

 

 

 

8,678

 

Deferred taxes

 

 

10,924

 

 

 

10,420

 

Other liabilities

 

 

2,457

 

 

 

2,523

 

Total liabilities

 

 

3,121,538

 

 

 

3,099,427

 

Equity:

 

 

 

 

 

 

 

 

Textainer Group Holdings Limited shareholders' equity:

 

 

 

 

 

 

 

 

Common shares, $0.01 par value. Authorized 140,000,000 shares; 57,200,764 shares issued and

   56,570,764 shares outstanding at 2016; 57,163,095 shares issued and 56,533,095 shares

   outstanding at 2015

 

 

572

 

 

 

572

 

Additional paid-in capital

 

 

386,673

 

 

 

385,020

 

Treasury shares, at cost, 630,000 shares

 

 

(9,149

)

 

 

(9,149

)

Accumulated other comprehensive income

 

 

(396

)

 

 

(283

)

Retained earnings

 

 

809,640

 

 

 

826,515

 

Total Textainer Group Holdings Limited shareholders’ equity

 

 

1,187,340

 

 

 

1,202,675

 

Noncontrolling interests

 

 

63,930

 

 

 

64,252

 

Total equity

 

 

1,251,270

 

 

 

1,266,927

 

Total liabilities and equity

 

$

4,372,808

 

 

$

4,366,354

 

 

 

5


 

TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands)

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,717

)

 

$

36,376

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

52,549

 

 

 

43,799

 

Container impairment

 

 

17,292

 

 

 

3,170

 

Bad debt expense, net

 

 

1,149

 

 

 

1,426

 

Unrealized losses on interest rate swaps, collars and caps, net

 

 

11,177

 

 

 

6,001

 

Amortization of debt issuance costs and accretion of bond discount

 

 

1,886

 

 

 

2,226

 

Amortization of intangible assets

 

 

1,374

 

 

 

1,167

 

Gains on sale of containers, net

 

 

(1,618

)

 

 

(1,056

)

Share-based compensation expense

 

 

1,763

 

 

 

1,806

 

Changes in operating assets and liabilities

 

 

(11,271

)

 

 

(5,942

)

Total adjustments

 

 

74,301

 

 

 

52,597

 

Net cash provided by operating activities

 

 

70,584

 

 

 

88,973

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of containers and fixed assets

 

 

(144,699

)

 

 

(189,531

)

Proceeds from sale of containers and fixed assets

 

 

32,291

 

 

 

29,110

 

Receipt of payments on direct financing and sales-type leases, net of income earned

 

 

22,460

 

 

 

22,753

 

Net cash used in investing activities

 

 

(89,948

)

 

 

(137,668

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

110,000

 

 

 

76,411

 

Principal payments on revolving credit facilities

 

 

(17,857

)

 

 

(110,963

)

Proceeds from secured debt facilities

 

 

 

 

 

120,000

 

Principal payments on secured debt facilities

 

 

(32,800

)

 

 

(1,500

)

Principal payments on term loan

 

 

(9,900

)

 

 

(9,900

)

Principal payments on bonds payable

 

 

(15,058

)

 

 

(15,058

)

Decrease (increase) in restricted cash

 

 

(1,266

)

 

 

9,533

 

Debt issuance costs

 

 

 

 

 

(1,166

)

Issuance of common shares upon exercise of share options

 

 

 

 

 

62

 

Net tax benefit from share-based compensation awards

 

 

(109

)

 

 

83

 

Capital contributions from noncontrolling interest

 

 

 

 

 

1,851

 

Dividends paid

 

 

(13,481

)

 

 

(26,780

)

Net cash provided by financing activities

 

 

19,529

 

 

 

42,573

 

Effect of exchange rate changes

 

 

(113

)

 

 

(115

)

Net increase (decrease) in cash and cash equivalents

 

 

52

 

 

 

(6,237

)

Cash and cash equivalents, beginning of the year

 

 

115,594

 

 

 

107,067

 

Cash and cash equivalents, end of period

 

$

115,646

 

 

$

100,830

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest expense and realized losses on interest rate swaps, collars and caps, net

 

$

20,323

 

 

$

20,003

 

Net income taxes paid

 

$

313

 

 

$

21

 

Supplemental disclosures of noncash investing activities:

 

 

 

 

 

 

 

 

(Decrease) increase in accrued container purchases

 

$

(21,305

)

 

$

21,273

 

Containers placed in direct financing and sales-type leases

 

$

73,293

 

 

$

24,812

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

7


 

TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

(1)

Nature of Business

Textainer Group Holdings Limited (“TGH”) is incorporated in Bermuda. TGH is the holding company of a group of corporations, consisting of TGH and its subsidiaries (collectively, the “Company”), involved in the purchase, management, leasing and resale of a fleet of marine cargo containers. The Company manages and provides administrative support to the affiliated and unaffiliated owners (the “Owners”) of the containers and structures and manages container leasing investment programs.

The Company conducts its business activities in three main areas: Container Ownership, Container Management and Container Resale (see Note 9 “Segment Information”).

 

(2)

Summary of Significant Accounting Policies

 

(a)

Basis of Accounting

The Company utilizes the accrual method of accounting.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission on March 11, 2016.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the Company’s condensed consolidated financial position as of March 31, 2016, and the Company’s condensed consolidated results of operations and condensed consolidated cash flows for the three months ended March 31, 2016 and 2015. These condensed consolidated financial statements are not necessarily indicative of the results of operations or cash flows that may be reported for the remainder of the fiscal year ending December 31, 2016.

The condensed consolidated financial statements of the Company include TGH and all of its subsidiaries. All material intercompany balances have been eliminated in consolidation.

 

(b)

Principles of Consolidation and Variable Interest Entity

The condensed consolidated financial statements of the Company include TGH and all of its subsidiaries in which the Company has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity (“VME”) or a variable interest entity (“VIE”) and whether the accounting guidance requires consolidation. All significant intercompany accounts and balances have been eliminated in consolidation.

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810) (“ASU 2015-02”). The Company adopted ASU No. 2015-02 on January 1, 2016 and there was no material impact on our consolidated financial statements (see Note 2(q) “Recently Issued Accounting Standards”).

When evaluating an entity for possible consolidation, the Company must determine whether or not it has a variable interest in the entity.  Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. The Company’s variable interests may include its decision maker or service provider fees, its direct and indirect investments and investments made by related parties, including related parties under common control.  If it is determined that the Company does not have a variable interest in the entity, no further analysis is required and the Company does not consolidate the entity.

If the Company has a variable interest in the entity, it must determine whether that entity is a VIE or a VME.

8


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

The Company considers the following facts and circumstances of individual entities when assessing whether or not an entity is a VIE. An entity is determined to be a VIE if the equity investors:

 

·

do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support; or

 

·

lack one or more of the following characteristics of a controlling financial interest:

 

·

The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance;

 

·

the obligation to absorb the expected losses of the entity; or

 

·

the right to receive the expected residual returns of the entity.

The Company is required to consolidate a VIE if it is determined to have a controlling financial interest in the entity and therefore is deemed to be the primary beneficiary of the VIE. The Company is determined to have a controlling financial interest in a VIE if it has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to that VIE.

For entities that do not meet the definition of a VIE, the entity is considered a VME. For these entities, if the Company can exert control over the financial and operating policies of an investee, which can occur if it has a 50% or more voting interest in the entity, the Company consolidates the entity.  

The Company has determined that it has a variable interest in TAP Funding Ltd. (“TAP Funding”) (a Bermuda company), a joint venture between the Company’s wholly-owned subsidiary, its joint venture between Textainer Limited (“TL”) (a Bermuda company) and TAP Ltd. (“TAP”) in which TL owns 50.1% and TAP owns 49.9% of the common shares of TAP Funding, and that TAP Funding is a VME.  The Company consolidates TAP Funding as the Company has a controlling financial interest in TAP Funding.

The Company has determined that it has a variable interest in TW Container Leasing, Ltd. (“TW”) (a Bermuda company), a joint venture between the Company’s wholly-owned subsidiary, TL, and Wells Fargo Container Corp (“WFC”) in which TL owns 25% and WFC owns 75% of the common shares of TW, and that TW is a VIE.  The purpose of TW is to lease containers to lessees under direct financing leases. The Company has determined that it is the primary beneficiary of TW by its equity ownership in the entity and by virtue of its role as manager of the vehicle, namely that the Company has the power to direct the activities of TW that most significantly impact TW’s economic performance. Accordingly, the Company consolidates TW. The book values of TW’s direct financing and sales-type leases and related debt as of March 31, 2016 and December 31, 2015 are disclosed in Note 6 “Direct Financing and Sales-type Leases” and Note 8 “Secured Debt Facilities, Revolving Credit Facilities, Term Loan and Bonds Payable, and Derivative Instruments”, respectively.

 

(c)

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents are comprised of interest-bearing deposits or money market securities with original maturities of three months or less. The Company maintains cash and cash equivalents and restricted cash (see Note 10 “Commitments and Contingencies—Restricted Cash”) with various financial institutions. These financial institutions are located in Bermuda, Canada, Hong Kong, Malaysia, Singapore, the United Kingdom and the United States. A significant portion of the Company’s cash and cash equivalents and restricted cash is maintained with a small number of banks and, accordingly, the Company is exposed to the credit risk of these counterparties in respect of the Company’s cash and cash equivalents and restricted cash. Furthermore, the deposits maintained at some of these financial institutions exceed the amount of insurance provided on the deposits. Restricted cash is excluded from cash and cash equivalents and is included in long-term assets.

 

(d)

Intangible Assets

Intangible assets, consisting primarily of exclusive rights to manage container fleets, are amortized over the expected life of the contracts based on forecasted income to the Company.  The contract terms range from 11 to 13 years.  The Company reviews its intangible assets for impairment if events and circumstances indicate that the carrying amount of the intangible assets may not be recoverable. The Company compares the carrying value of the intangible assets to expected

9


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying amount exceeds expected undiscounted cash flows, the intangible assets are reduced to their fair value.

The changes in the carrying amount of intangible assets during the three months ended March 31, 2016 are as follows:

 

Balance as of December 31, 2015

 

$

20,250

 

Amortization expense

 

 

(1,374

)

Balance as of March 31, 2016

 

$

18,876

 

 

The following is a schedule, by year, of future amortization of intangible assets as of March 31, 2016:

 

Twelve months ending March 31:

 

 

 

 

2017

 

$

5,527

 

2018

 

 

5,313

 

2019

 

 

4,318

 

2020

 

 

2,760

 

2021 and thereafter

 

 

958

 

Total future amortization of intangible assets

 

$

18,876

 

 

 

(e)

Lease Rental Income

Lease rental income arises principally from the renting of containers owned by the Company to various international shipping lines. Revenue is recorded when earned according to the terms of the container rental contracts. These contracts are typically for terms of three to five years, but can vary from one to eight years, and are generally classified as operating leases.

Under long-term lease agreements, containers are usually leased from the Company for periods of three to five years. Such leases are generally cancelable with a penalty at the end of each 12-month period. Under master lease agreements, the lessee is not committed to leasing a minimum number of containers from the Company during the lease term and may generally return the containers to the Company at any time, subject to certain restrictions in the lease agreement. Under long-term lease and master lease agreements, revenue is earned and recognized evenly over the period that the equipment is on lease. Under direct financing and sales-type leases, a container is usually leased from the Company for the remainder of the container’s useful life with a bargain purchase option at the end of the lease term. Revenue is earned and recognized on direct financing leases over the lease terms so as to produce a constant periodic rate of return on the net investment in the leases. Under sales-type leases, a gain or loss is recognized at the inception of the leases by subtracting the book value of the containers from the estimated fair value of the containers and the remaining revenue is earned and recognized over the lease terms so as to produce a constant periodic rate of return on the net investment in the leases.

The Company’s container leases generally do not include step-rent provisions, nor do they depend on indices or rates. The Company recognizes revenue on container leases that include lease concessions in the form of free-rent periods using the straight-line method over the minimum terms of the leases.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its lessees to make required payments. These allowances are based on management’s current assessment of the financial condition of the Company’s lessees and their ability to make their required payments. If the financial condition of the Company’s lessees deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

(f)

Containers and Fixed Assets

Capitalized container costs include the container cost payable to the manufacturer and the associated transportation costs incurred in moving the containers from the manufacturer to the containers’ first destined port. Containers purchased new are depreciated using the straight-line method over their estimated useful lives to an estimated dollar residual value. The Company estimates the useful lives of its containers to be as follows:

10


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

 

 

 

Estimated useful

Container type

 

life (years)

Non-refrigerated containers other than open top and flat rack

   Containers

 

13

Refrigerated containers

 

12

Tanks

 

20

Open top and flat rack containers

 

14

 

Containers purchased used are depreciated based upon their remaining useful lives at the date of acquisition to an estimated dollar residual value. The Company evaluates the estimated residual values and remaining estimated useful lives on an ongoing basis. The Company has experienced a significant decrease in container resale prices as a result of the decreased cost of new containers. Based on this extended period of lower realized container resale prices, the Company decreased the estimated future residual value of its 40’ high cube containers from $1,650 per container to $1,450 per container used in the calculation of depreciation expense, effective July 1, 2015. The effect of this change was an increase in depreciation expense of $4,658 for the three months ended March 31, 2016. Depreciation expense may fluctuate in future periods based on fluctuations in these estimates.

Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from three to seven years.

The Company reviews its containers and fixed assets for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The Company compares the carrying value of the containers to the expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds expected future undiscounted cash flows, the assets are reduced to fair value. In addition, containers identified as being available for sale are valued at the lower of carrying value or fair value, less costs to sell.

The Company evaluated the recoverability of the recorded amount of container rental equipment at March 31, 2016 and 2015. During the three months ended March 31, 2016, there was no container impairment for containers that were unlikely to be recovered from lessees in default. During the three months ended March 31, 2015, container impairment included $288 for containers that were unlikely to be recovered from lessees in default.

During the three months ended March 31, 2016 and 2015, the Company recorded impairments of $17,292 and $2,882, which are included in container impairment in the consolidated statements of comprehensive (loss) income, to write-down the value of containers held for sale to their estimated fair value less cost to sell.

 

(g)

Income Taxes

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740) (“ASU 2015-17”). The Company early adopted ASU 2015-17 on January 01, 2016 using the retrospective method, which resulted in a reclassification of $1,825 and $1,203 current deferred taxes assets to non-current deferred taxes assets in the Company’s condensed consolidated balance sheets at March 31 2016 and December 31, 2015, respectively (see Note 2(q) “Recently Issued Accounting Standards”).

The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when the realization of a deferred tax asset is deemed to be unlikely.

The Company also accounts for income tax positions only if those positions are more likely than not of being sustained.  Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.  Changes in the recognition or measurement are reflected in the period in which the change in judgment occurs. If there are findings in future regulatory examinations of the Company’s tax returns, those findings may result in an adjustment to income tax expense.

The Company records interest and penalties related to unrecognized tax benefits in income tax expense.

11


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

 

(h)

Maintenance and Repair Expense and Damage Protection Plan 

The Company’s leases generally require the lessee to pay for any damage to the container beyond normal wear and tear at the end of the lease term.  The Company offers a Damage Protection Plan (“DPP”) to certain lessees of its containers.  Under the terms of the DPP, the Company charges lessees an additional amount primarily on a daily basis and the lessees are no longer obligated for certain future repair costs for containers subject to the DPP.  It is the Company’s policy to recognize these revenues as earned on a daily basis over the related terms of its leases. The Company has not recognized revenue and related expense for customers who are billed at the end of their lease terms under the DPP. Based on past history, there is uncertainty as to the collectability of these amounts from lessees who are billed at the end of their lease terms because the amounts due under the DPP are typically re-negotiated at the end of the lease terms or the lease terms are extended. The Company uses the direct expense method of accounting for maintenance and repairs.

 

(i)

Debt Issuance Costs

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) (“ASU 2015-03”). In August 2015, the FASB issued Accounting Standards Update No. 2015-15 (“ASU 2015-15”) to clarify the exclusion of line-of-credit arrangements from scope of ASU 2015-03. The Company adopted both ASU 2015-03 and ASU 2015-15 on January 1, 2016, which resulted in a reclassification of $18,076 and $19,900 debt issuance costs associated with the Company’s long-term debt (including current maturities) from prepaid expenses and other assets to long-term debt (including current maturities) in the Company’s condensed consolidated balance sheets at March 31, 2016 and December 31, 2015, respectively (see Note 2(q) “Recently Issued Accounting Standards”).

The Company capitalizes costs directly associated with the issuance or modification of its debt in short-term and long-term debt in the condensed consolidated balance sheets. Debt issuance costs are amortized using the interest rate method over the general terms of the related debt and the amortization is recorded in the condensed consolidated statements of comprehensive (loss) income as interest expense. There were no debt issuance costs during the three months ended March 31, 2016. Debt issuance costs of $1,322 were capitalized during the three months ended March 31, 2015.  For the three months ended March 31, 2016 and 2015, amortization of debt issuance costs of $1,823 and $1,858, respectively, were recorded in interest expense. When the Company’s debt is modified or terminated, any unamortized debt issuance costs related to a decrease in borrowing capacity under any of the Company’s lenders is immediately written-off. No unamortized debt issuance costs were written-off during the three months ended March 31, 2016. For the three months ended March 31, 2015, interest expense included $298 of write-offs of unamortized debt issuance costs related to the amendment of the Company’s wholly-owned subsidiary, Textainer Marine Containers IV Limited’s (“TMCL IV”) (a Bermuda company), secured debt facility.

 

(j)

Foreign Currency Transactions

Although substantially all of the Company’s income from operations is derived from assets employed in foreign countries, virtually all of this income is denominated in U.S. dollars. The Company pays some of its expenses in various foreign currencies. For the three months ended March 31, 2016 and 2015, $3,934 (or 26.9%) and $2,791 (or 30.3%), respectively, of the Company’s direct container expenses were paid in up to 18 different foreign currencies. The Company does not hedge these container expenses as there are no significant payments made in any one foreign currency.

 

(k)

Concentrations

The Company’s customers are mainly international shipping lines, which transport goods on international trade routes. Once the containers are on-hire with a lessee, the Company does not track their location. The domicile of the lessee is not indicative of where the lessee is transporting the containers. The Company’s business risk in its foreign concentrations lies with the creditworthiness of the lessees rather than the geographic location of the containers or the domicile of the lessees. The Company’s largest customer (Customer A) accounted for 11.7% and 10.6% of the Company’s lease rental income for the three months ended March 31, 2016 and 2015, respectively. The Company’s second largest customer (Customer B) accounted for 11.2% and 9.9% of the Company’s lease rental income during the three months ended March 31, 2016 and 2015, respectively. The Company had no other single lessee made up greater than 10% of the Company’s lease rental income for those periods. Customer A accounted for 13.3% and 9.3% of the Company’s gross account receivable as of March 31, 2016 and December 31, 2015, respectively and Customer B accounted for 9.2% and 9.7% of the Company’s gross account receivable as of March 31, 2016 and December 31, 2015, respectively.

12


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

 

(l)

Derivative Instruments  

The Company has entered into various interest rate swap, collar and cap agreements to mitigate its exposure associated with its variable rate debt. The swap agreements involve payments by the Company to counterparties at fixed rates in return for receipts based upon variable rates indexed to the London Inter Bank Offered Rate (“LIBOR”). The differentials between the fixed and variable rate payments under interest rate swap agreements are recognized in realized losses on interest rate swaps, collars and caps, net in the condensed consolidated statements of comprehensive (loss) income.

As of the balance sheet dates, none of the derivative instruments are designated by the Company for hedge accounting. The fair value of the derivative instruments is measured at each balance sheet date and the change in fair value is recorded in the condensed consolidated statements of comprehensive (loss) income as unrealized losses on interest rate swaps, collars and caps, net.

 

(m)

Share Options and Restricted Share Units

The Company estimates the fair value of all employee share options awarded under its 2015 Share Incentive Plan (the “2015 Plan”), amended and restated from the 2007 Share Incentive Plan (the “2007 Plan”) on May 21, 2015, on the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s condensed consolidated statements of comprehensive (loss) income as part of long-term incentive compensation expense and direct container expense.

The Company uses the Black-Scholes-Merton option-pricing model as a method to determine the estimated fair value for employee share option awards.  The Company uses the fair market value of the Company’s common shares on the grant date, discounted for estimated dividends that will not be received by the employees during the vesting period, for determining the estimated fair value for employee restricted share units. Compensation expense for employee share awards is recognized on a straight-line basis over the vesting period of the award.

 

(n)

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s management evaluates its estimates on an ongoing basis, including those related to the container rental equipment, intangible assets, accounts receivable, income taxes, and accruals.

These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions.

13


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

 

(o)

Net income attributable to Textainer Group Holdings Limited common shareholders per share  

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Textainer Group Holdings Limited common shareholders by the weighted average number of shares outstanding during the applicable period. Diluted EPS reflects the potential dilution that could occur if all outstanding share options were exercised for, and all outstanding restricted share units were converted into, common shares. Share options of 1,131,049 and 630,304 for the three months ended March 31, 2016 and 2015, respectively, and restricted share units of 292,838 for the three months ended March 31, 2016 were excluded from the computation of diluted EPS because they were anti-dilutive under the treasury stock method. There was no restricted share unit excluded from the computation of diluted EPS during the three months ended March 31, 2015. A reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

Share amounts in thousands

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

Net (loss) income attributable to Textainer Group Holdings  Limited common shareholders

 

$

(3,394

)

 

$

35,305

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

56,570

 

 

 

56,980

 

Dilutive share options and restricted share units

 

 

-

 

 

 

193

 

Weighted average common shares outstanding - diluted

 

 

56,570

 

 

 

57,173

 

Net (loss) income attributable to Textainer Group Holdings Limited common shareholders

     per common share

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

$

0.62

 

Diluted

 

$

(0.06

)

 

$

0.62

 

 

Given that the Company had a net loss attributable to Textainer Group Holdings Limited common shareholders for the three months ended March 31, 2016, there was no dilutive effect of share options and restricted share units.

 

 

(p)

Fair Value Measurements

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:

 

·

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

·

Level 2: Inputs other than quoted prices which are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

·

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The Company uses the exchange price notion, which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).

14


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:

 

 

 

Quoted

Prices in

Active

Markets for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant Unobservable Inputs

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps, collars and caps

 

$

 

 

$

21

 

 

$

 

Total

 

$

 

 

$

21

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps, collars and caps

 

$

 

 

$

13,796

 

 

$

 

Total

 

$

 

 

$

13,796

 

 

$

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps, collars and caps

 

$

 

 

$

814

 

 

$

 

Total

 

$

 

 

$

814

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps, collars and caps

 

$

 

 

$

3,412

 

 

$

 

Total

 

$

 

 

$

3,412

 

 

$

 

 

The following table summarizes the Company’s assets measured at fair value on a non-recurring basis as of March 31, 2016 and December 31, 2015:

 

 

 

Quoted

Prices in

Active

Markets for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Containers held for sale (1)

 

$

 

 

$

31,998

 

 

$

 

Total

 

$

 

 

$

31,998

 

 

$

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Containers held for sale (1)

 

$

 

 

$

32,153

 

 

$

 

Total

 

$

 

 

$

32,153

 

 

$

 

 

 

(1)

Represents the carrying value of containers included in containers held for sale in the condensed consolidated balance sheets that have been impaired to write down the value of the containers to their estimated fair value less cost to sell.

The Company measures the fair value of its $1,734,324 notional amount of interest rate swaps, collars and caps using observable (Level 2) market inputs. The valuation also reflects the credit standing of the Company and the counterparties to the interest rate swaps, collars and caps. The valuation technique utilized by the Company to calculate the fair value of the interest rate swaps, collars and caps is the income approach.  This approach represents the present value of future cash flows based upon current market expectations. The Company’s interest rate swap, collar and cap agreements had a fair value asset and liability of $21 and $13,796, respectively, as of March 31, 2016 and a fair value asset and liability of $814 and $3,412, respectively, as of December 31, 2015. The credit valuation adjustment was determined to be $20 (a reduction to the net liability) and $97 (an addition to the net liability) as of March 31, 2016 and December 31, 2015, respectively.

15


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

The change in fair value for the three months ended March 31, 2016 and 2015 of $11,177 and $6,001, respectively, was recorded in the condensed consolidated statements of comprehensive (loss) income as unrealized losses on interest rate swaps, collars and caps, net.

When the Company is required to write down the cost basis of its containers held for sale to fair value less cost to sell, the Company measures the fair value of its containers held for sale under a Level 2 input. The Company relies on its recent sales prices for identical or similar assets in markets, by geography, that are active. The Company recorded impairments to write down the value of containers identified for sale to their estimated fair value less cost to sell.

The Company calculates the fair value of its financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different from the book value of those financial instruments. The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable and payable, net investment in direct financing and sales-type leases, due from affiliates, net, container contracts payable, due to owners, net, debt and interest rate swaps, collars and caps. At March 31, 2016 and December 31, 2015, the fair value of the Company’s financial instruments approximated the related book value of such instruments except that, the fair value of net investment in direct financing and sales-type leases (including the short-term balance) was approximately $387,241 and $317,602 at March 31, 2016 and December 31, 2015, respectively, compared to book values of $381,419 and $331,134 at March 31, 2016 and December 31, 2015, respectively, and the fair value of long-term debt (including current maturities) based on the borrowing rates available to the Company was approximately $3,014,551 and $2,996,400 at March 31, 2016 and December 31, 2015, respectively, compared to book values of $3,039,921 and $3,003,648 at March 31, 2016 and December 31, 2015, respectively.  

 

(q)

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). This new standard will replace all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. Leasing revenue recognition is specifically excluded from ASU 2014-09, and therefore, the new standard will only apply to sales of equipment portfolios and dispositions of used equipment. The topic was amended in August 2015 to defer the effective date to interim and annual periods beginning after December 15, 2017, with early application permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 may be applied either using the full retrospective method or the modified retrospective method. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810) (“ASU 2015-02”). ASU 2015-02 requires an entity to re-evaluate whether they should consolidate under the revised consolidation model. This amendment modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting entities, eliminates the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities with interests in VIEs, particularly those that have fee arrangements and related party relationships. The updated guidance is effective for periods beginning after December 15, 2015. The Company’s adoption of ASU No. 2015-02 on January 1, 2016.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) (“ASU 2015-03”).  This amendment intends to simplify the presentation of debt issuance costs and more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable International Financial Reporting Standards. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Debt issuance costs will be presented as a direct deduction from the carrying value of the associated debt, consistent with the existing presentation of a debt discount. Before the FASB issued this simplification, debt issuance costs were capitalized as an asset (i.e., prepaid expenses and other current assets and other assets). The costs will continue to be amortized to interest expense using the effective interest method. In August 2015, the FASB issued Accounting Standards Update No. 2015-15 (“ASU 2015-15”) to clarify the exclusion of line-of-credit arrangements from scope of ASU 2015-03. Debt issuance costs related to line-of-credit arrangements can be deferred and presented as an asset that is subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03, which requires the use of the retrospective method, is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted both ASU 2015-03 and ASU 2015-15 on January 1, 2016.

16


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740) (“ASU 2015-17”). This amendment intends to simplify the presentation of deferred income taxes and more closely align the presentation of deferred taxes under U.S. GAAP with the presentation under comparable International Financial Reporting Standards. The deferred income tax assets and liabilities, with any related valuation allowance, will be offset and presented as a single noncurrent amount in a classified statement of financial position. An entity shall not offset deferred tax assets and liabilities attributable to different tax-paying components of the entity or to different tax jurisdictions. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early application permitted. ASU 2015-17 may be applied using the prospective method or the retrospective method to all periods presented. The Company early adopted ASU 2015-17 on January 01, 2016.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) (“ASU 2016-01”). This amendment intends to improve the recognition and measurement of financial instruments under U.S. GAAP. The exit price notion will be used to measure the fair value of the financial instruments of public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on their balance sheets. This amendment also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of ASU 2016-01 is not permitted. ASU 2016-01 requires the use of the modified retrospective method to all periods presented. The Company is evaluating the potential impact of the adoption of ASU 2016-01 on its consolidated financial statements.  

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 will replace all current U.S. GAAP guidance on this topic. Under ASU 2016-02, lessors will account for leases using an approach that is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases and operating leases and lessors should be precluded from recognizing selling profit and revenue at lease commencement for a lease that does not transfer control of the underlying asset to the lessees. A dual approach is to be applied for lessee accounting with lease classification determined in accordance with the principles in existing lease requirements. A lessee will account for most existing capital leases as finance leases, recognizing amortization of the right-of-use asset separately from interest on the lease liability, and most existing operating leases as operating leases, recognizing a single total lease expense. Both finance leases and operating leases result in the lessee recognizing a right-of-use asset and a lease liability on balance sheet, with an exception for leases that commence at or near the end of the underlying asset’s economic life. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and with early application permitted. ASU 2016-02 requires the use of the modified retrospective method to all periods presented. The Company is evaluating the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”). This amendment intends to improve the accounting for employee share-based payments under U.S. GAAP. ASU 2016-09 changes several aspects of accounting for share-based payment award transactions which includes accounting for income taxes, classification of excess tax benefits on statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2016-09 is permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value will be applied using a modified retrospective transition method, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement will be applied retrospectively and amendment requiring recognition of excess tax benefits and tax deficiencies in the income statement will be applied prospectively. ASU 2016-09 may be applied either using a prospective transition method or a retrospective transition method for the amendments related to the presentation of excess tax benefits on the statement of cash flows. The Company is evaluating the potential impact of the adoption of ASU 2016-09 on its consolidated financial statements.

 

 

17


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

(3)

Insurance Receivable and Impairment 

In August 2015, one of the Company’s customers became insolvent and containers on operating and direct financing leases to the customer were deemed unlikely to be recovered. The Company maintains insurance to cover the value of containers that are unlikely to be recovered from its customers, the cost to recover containers and up to 180 days of lost lease rental income.  Accordingly, during the year ended 2015, an impairment was recorded to write off containers, net and net investment in direct financing and sales-type leases with book values of $8,815 and $2,903, respectively, and an insurance receivable of $11,435 was recorded for $8,796 of estimated proceeds for containers unlikely to be recovered, $1,685 of recovery costs recorded as a reduction to direct container expense and $955 of lost lease rental income recorded as reduction to container impairment. The impairment net of estimated insurance proceeds of $1,968 was recorded in container impairment in the condensed consolidated statements of comprehensive income for the year ended 2015.  In addition, bad debt expense of $2,574 was recorded in the condensed consolidated statements of comprehensive income for the year ended 2015 to fully reserve for the customer’s outstanding accounts receivable. An additional insurance receivable of $840 was recorded for the three months ended March 31, 2016 for $601 of recovery costs recorded as a reduction to direct container expense and $239 of lost lease rental income recorded as a reduction to container impairment.

 

(4)

Container Purchases

In February and March 2016, the Company concluded two separate purchases totaling approximately 41,100 containers from a third-party owner for total purchase consideration of approximately $71,000. The total purchase price, which was based on the fair value of the assets acquired, was recorded in our net investment in direct financing and sales-type leases.

 

 

(5)

Transactions with Affiliates and Owners

Amounts due from affiliates, net generally result from cash advances and the payment of affiliated companies’ administrative expenses by the Company on behalf of such affiliates. Balances are generally paid within 30 days.

Management fees, including acquisition fees and sales commissions for the three months ended March 31, 2016 and 2015 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Fees from affiliated owner

 

$

743

 

 

$

968

 

Fees from unaffiliated owners

 

 

2,137

 

 

 

2,598

 

Fees from owners

 

 

2,880

 

 

 

3,566

 

Other fees

 

 

464

 

 

 

451

 

Total management fees

 

$

3,344

 

 

$

4,017

 

 

Due to owners, net represents lease rentals collected on behalf of and payable to Owners, net of direct expenses and management fees receivable. Due to owners, net at March 31, 2016 and December 31, 2015 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Affiliated owner

 

$

1,006

 

 

$

1,881

 

Unaffiliated owners

 

 

8,787

 

 

 

9,925

 

Total due to owners, net

 

$

9,793

 

 

$

11,806

 

 

 

(6)

Direct Financing and Sales-type Leases

The Company leases containers under direct financing and sales-type leases. The Company had 205,823 and 165,255 containers under direct financing and sales-type leases as of March 31, 2016 and December 31, 2015, respectively.

18


TEXTAINER GROUP HOLDINGS LIMITED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(All currency expressed in United States dollars in thousands, except per share amounts)

 

The components of the net investment in direct financing and sales-type leases, which are reported in the Company’s Container Ownership segment in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015 were as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Future minimum lease payments receivable

 

$

429,293

 

 

$

372,644

 

Residual value of containers

 

 

7,450

 

 

 

7,460

 

Less unearned income

 

 

(55,324

)

 

 

(48,970

)

Net investment in direct financing and sales-type

   Leases

 

$

381,419

 

 

$

331,134

 

Amounts due within one year

 

$

96,691

 

 

$

87,706

 

Amounts due beyond one year

 

 

284,728

 

 

 

243,428

 

Net investment in direct financing and sales-type

   Leases

 

$

381,419