Form 6-K

 

 

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

April 27, 2020

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  ☒ 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  ☒

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

 

 

 


On or about April 27, 2020, Textainer Group Holdings Limited (the “Company”) caused copies of the following documents to be mailed to the Company’s shareholders of record: (1) the Company’s 2019 Annual Report to Shareholders and (2) the Company’s Notice of 2020 Annual General Meeting of Shareholders to be held on May 28, 2020, together with the accompanying Proxy Statement and accompanying Form of Proxy Card.

The Company’s 2019 Annual Report to Shareholders includes the Company’s financial highlights, letter to shareholders and Annual Report on Form 20-F for the fiscal year ended December 31, 2019. The following documents, filed as exhibits to this Form 6-K, are incorporated by reference as part of this Form 6-K:

 

Exhibit

  

Description of Exhibit

99.1    Textainer Group Holdings Limited 2019 Annual Report to Shareholders
99.2    Textainer Group Holdings Limited Notice of 2020 Annual General Meeting of Shareholders to be Held May 28, 2020, Proxy Statement and Form of Proxy Card


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 27, 2020

 

Textainer Group Holdings Limited

/s/ OLIVIER GHESQUIERE

Olivier Ghesquiere
President and Chief Executive Officer


EXHIBIT INDEX

 

Exhibit
Number

  

Description of Document

99.1    Textainer Group Holdings Limited 2019 Annual Report to Shareholders
99.2    Textainer Group Holdings Limited Notice of 2020 Annual General Meeting of Shareholders to be Held May 28, 2020, Proxy Statement and Form of Proxy Card
EX-99.1

Exhibit 99.1

 

LOGO


LOGO


LOGO

 

To Our Shareholders:

2019 was a challenging year for the global supply chain and the current outlook is uncertain. However, Textainer continued to deliver improved financial performance, revenue growth and profitable fleet expansion. Despite a generally slow market, we maintained utilization over 97.4% for the year, invested $739 million in new containers and acquired a 165,000 TEU fleet of containers we previously managed. In addition to container investment, we commenced a share buyback program in September 2019. Lower lease rates, limited container demand and lower used container prices limited our financial improvement in 2019, but we benefited from strong cost control and expense management. While 2019 saw slow growth in container trade, there was a continued preference by shipping lines for leasing containers.

At the end of 2019, we expected to see container demand rebound in 2020 with the resolution of trade disputes and after over a year of limited container investment. In addition, container factory consolidation appears to be leading to higher and more stable container prices, benefitting our lease rates and used container prices. The ongoing coronavirus pandemic has now clouded our forecast. However, we are encouraged by rising new container prices, limited container turn-ins, shipping lines’ clear preference to lease containers during uncertain times and the resumption of production in Chinese factories of export goods. If the pandemic is contained within a few months, we believe there could be significant lease-out activity in the second half of 2020. While we are cautious amidst the uncertain macro environment, our focus on operational discipline and attractive investment should provide continued improvement in our financial performance.

Year in Review

Container leasing market conditions at the start of 2019 were weak. The unfavorable trends that emerged in the fourth quarter of 2018 continued as global trade and tariff disputes impacted shipping demand. New container prices were weak for most of the year and reached as low as $1,650 per CEU, although signs of price increases emerged at year-end as container factories refused to continue selling containers at a loss. Disposal container prices also declined although not as steeply as new production prices. Utilization modestly declined in 2019 with full year utilization averaging 97.4%. The combination of lower new and used container prices, higher depot container inventories, trade disputes and slow trade growth led to weaker container demand in 2019 with total dry container production of only 2.5 million TEU for the year, as compared to almost 4 million in 2018.

Container trade saw limited growth in 2019 due to trade disputes and limited GDP improvement. Shipping lines generally delivered mixed financial performance though an improvement from 2018 as operations were optimized for full sailings. Freight rates and fuel prices continued to be volatile, but vessel overcapacity moderated with limited new ship orders. In 2019, shipping lines generally preferred to lease instead of buy containers in order to preserve capital for the installation of scrubbers on vessels to comply with the IMO2020 rules that limited Sulphur emissions at the start of 2020. Leasing companies purchased over 60% of the new container production in 2019.

 

TEXTAINER GROUP HOLDINGS LIMITED 2019 ANNUAL REPORT | 1


TO OUR SHAREHOLDERS (continued)

 

New container rental rates weakened during 2019 due to limited demand and low new container prices. Increased container turn-ins and higher depot inventory also pressured rental rates. However, container utilization remained high by historic standards. Depot container rental rates also declined in 2019 consistent with new container rental rates.

New container prices weakened in 2019 as limited orders led to intense competition among the container factories. Prices started the year at approximately $1,800 per CEU and firmed up by mid-year before ultimately reaching a low of about $1,650 per CEU in the fourth quarter. Container production was primarily concentrated in the first half of the year with very limited orders in the fourth quarter. Consolidation among the container factories occurred in 2019 with the two largest producers now controlling about 75% of container production. Container production was generally not profitable for the factories and at year-end the manufacturers determined to control capacity and prioritize profitability with container price increases expected in 2020.

Prices for used containers softened from the higher levels that prevailed in 2017 and 2018, primarily due to lower new container prices and higher depot inventories. However, used container prices remain above our depreciated book values and, as a result, we realized over $21 million in gains on used container sales in 2019.

While market conditions were weaker than in 2018, the limited volume of container turn-ins allowed us to maintain an average utilization of 97.4% for the year, a decline of 50 basis points over 2018. We leased out over 400,000 TEU, most of which was new production leased at attractive yields with double-digit returns related to specific market opportunities arising early in the year. A significant percentage of the leases concluded in 2019 were long-term finance leases where the lessee is expected to purchase the equipment at the end of the lease, minimizing residual risk to us. Other lease agreements require a high percentage of containers to be returned in China and other locations in Asia where we anticipate there will be future demand.

We invested $739 million to purchase more than 400,000 TEU of new and used containers in 2019. In addition, in December 2019 we purchased Leased Asset Pool Company Limited, a container investment company that owned 165,000 TEU that we previously managed. At year-end, our fleet totaled 3.5 million TEU, and we owned 85.4% of our fleet, up from 79% at the end of 2018.

In 2019, we were able to grow our net income from the prior year despite headwinds from lower lease rates and resale prices. We benefitted from strong expense control, with G&A expense down 14% and direct container expense decreasing 15% for the full year. Adjusted net income for the year was $55.4 million, or $0.96 per diluted common share, an increase from $50.5 million and $0.90 per diluted common share in 2018.

We continued to maintain a strong balance sheet. During 2019, we raised funds totaling $490 million with the issuance of a new term loan facility and asset backed notes which provide longer term fixed cost financing. We finished the year with a debt-to-equity ratio of 3.0:1 and approximately $755 million of available borrowing capacity in our facilities. We continue to believe that investing in our business will provide attractive long-term returns.

In December 2019, Textainer dual-listed our common shares on the Johannesburg Stock Exchange (“JSE”) under the symbol “TXT” and shortly thereafter Trencor Limited, the former holder of 48% of our common shares, distributed approximately 90% of its 27.3 million Textainer shares to Trencor’s shareholders on the JSE. Trencor has been a Textainer shareholder since 1985 and our dual listing now allows our shares to be directly owned by Trencor’s shareholders.

 

TEXTAINER GROUP HOLDINGS LIMITED 2019 ANNUAL REPORT | 2


TO OUR SHAREHOLDERS (continued)

 

In September 2019, we commenced a $25 million share repurchase program and repurchased 879,000 shares by year-end. At the end of the first quarter of 2020, we had repurchased a total of 3.1 million shares under the repurchase program and we announced a $25 million increase to the program. We are very pleased with the share repurchase program, which we believe to be highly beneficial to our shareholders.

Our strategic priority continues to be focused on improving Textainer’s profitability and total net income. We are pleased with our efforts to lower operating costs in 2019 and we continue to seek opportunities to drive further cost reductions and greater efficiencies. At the end of 2019, we launched an initiative to significantly enhance our IT systems and we look forward to capturing the benefits in the coming years. We remain focused on quality new investment opportunities where we can increase revenue profitably with double-digit average cash on cash yields and we intend to continue to improve our fleet yield through organic growth and optimized re-pricing of existing leases. We continue to take a profit-oriented approach to lease reviews and extensions and we will not extend leases that do not achieve our targeted yield. We are also very focused on credit control and are taking a strict and proactive approach to limit our exposure to weaker credits. We are investing to maintain an adequate inventory of new production to better serve our customers’ needs on short notice. However, we are measured and disciplined with yields on leases and only seek profitable growth.

Outlook

After over a year of limited container production during the period of trade and tariff disputes, as 2019 ended we predicted significant container demand in 2020 as trade growth resumed and low interest rates and low inflation reduced the risk of global recession. We also believed that shipping lines would find themselves short of equipment after strong efforts to optimize their fleets left little slack capacity. The ongoing coronavirus pandemic adds considerable uncertainty to our prior forecast. However, if the pandemic is controlled within a few months, there are still factors that cause us to be reasonably optimistic about Textainer’s prospects in 2020. We believe the financial stress the pandemic has created will cause our shipping line customers to strongly favor leasing containers in 2020 and limited new production and depot inventory should support lease rates and used container prices.

We have seen new production prices rise from lows around $1,650 per CEU in the fourth quarter of 2019 to between $2,000 and $2,100 in the first quarter of 2020 as container factories focused on profitable production and did not aggressively compete for market share. As new container prices increase, we are seeing improvements in lease rates for new and depot containers. In addition, in recent weeks we have seen rising demand and prices for used containers as limited factory production during the pandemic in China and port and trade disruptions reduce the availability of containers in certain locations. We have also seen minimal turn-ins of containers in the first few months of 2020, providing further evidence that containers are in short supply.

It is difficult to predict container production levels for 2020. Several months of production capacity were lost in China during shutdowns caused by the pandemic, and the resumption of production has been gradual. In addition, as noted, the factories have not aggressively pursued market share and may limit production in order to maintain the increased price levels. Generally, higher price levels for new containers increase the value of our container fleet and support our used container prices and lease rates. Our limited depot inventory and the currently seasonally low level of new container inventory should also support higher used container prices in 2020.

New factory inventory currently is around 780,000 TEU, of which approximately 70% belongs to lessors. With several months of new production lost in China, we believe that a significant amount of the available factory inventory has already been leased and awaiting pick-up as trade resumes or will be quickly leased by shipping lines that are short of equipment.

 

TEXTAINER GROUP HOLDINGS LIMITED 2019 ANNUAL REPORT | 3


TO OUR SHAREHOLDERS (continued)

 

Major shipping lines generally saw improved financial performance in 2019 as the industry focused on profitability and improved operations. The year also saw limited new vessel orders and shipping lines focused capital expenditures to install scrubbers to comply with the IMO2020 emissions rules. The pandemic will likely cause significant financial stress to shipping lines, although they will benefit from lower fuel costs. It is likely that shipping lines will rely heavily on container lessors in 2020 as they may have limited funds for capital expenditures.

If the pandemic is contained within a few months, we believe there could be significant lease-out activity in the second half of 2020 as shipping lines struggle to reposition their containers to demand areas as a result of the pandemic disruptions and find themselves short of equipment to meet pent-up demand. If the pandemic is promptly controlled and the macro economic situation does not materially weaken, the positive market trends, low interest rate environment, and our focus on operational discipline and attractive investment, should provide continued momentum for improvement in our financial performance.

We remain positive and are cautiously optimistic in our ability to continue to improve our financial performance as we move through 2020.

In Conclusion

For over 40 years we have successfully navigated through both strong and weak markets in this cyclical business. While the current pandemic is a unique situation, we are comforted by underlying market trends, our fleet and lease profile and our financial strength. We are encouraged after recording another year of improved financial performance and we look forward to the challenge of continuing this in 2020.

 

TEXTAINER GROUP HOLDINGS LIMITED 2019 ANNUAL REPORT | 4


TO OUR SHAREHOLDERS (continued)

 

We would like to thank our shareholders, customers, suppliers and employees for their loyalty, support and dedication. We are ever mindful of your trust in us.

 

 

 

LOGO      

LOGO

 

Hyman Shwiel       Olivier Ghesquiere
CHAIRMAN OF THE BOARD       PRESIDENT AND CHIEF EXECUTIVE OFFICER

This Annual Report contains forward-looking statements within the meaning of U.S. securities laws. Forward-looking statements include statements that are not statements of historical facts and include without limitation statements regarding our expectation of significant container demand in 2020; shipping lines being short equipment capacity; shipping line favoring leasing containers in 2020; limited new production supporting lease rates and used container prices; higher new container prices; shipping lines benefitting from lower fuel costs; shipping lines will struggle to reposition containers to demand areas; future improvement in our financial performance, and may relate to, but are not limited to, expectations or estimates of future operating results or financial performance, capital expenditures, introduction of new products, 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. Readers are cautioned that these forward-looking statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. For a discussion of such risks and uncertainties, see Item 3, “Key Information—Risk Factors” in Textainer’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 30, 2020.

Textainer’s views, estimates, plans and outlook as described within this Annual Report may change subsequent to the release of this Annual Report, Textainer is under no obligation to modify or update any or all the statements it has made herein despite any subsequent changes Textainer may make in its views, estimates, plans or outlook for the future.

This Annual Report contains market data and industry forecasts that were obtained from industry publications, third-party market research and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed.

 

TEXTAINER GROUP HOLDINGS LIMITED 2019 ANNUAL REPORT | 5


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

For the fiscal year ended December 31, 2019

OR

 

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

OR

 

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

Date of event requiring this shell company report _____________________

For the transition period from _______ to _______

Commission file number 001-33725

 

 

Textainer Group Holdings Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

Bermuda

(Jurisdiction of incorporation or organization)

Century House, 16 Par-La-Ville Road, Hamilton HM 08, Bermuda

(Address of principal executive offices)

Michael J. Harvey

Textainer Group Holdings Limited

Century House, 16 Par-La-Ville Road, Hamilton HM 08, Bermuda

(441) 296-2500

mjh@textainer.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Shares, $0.01 par value   TGH   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

56,817,918 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  

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

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☒           International Financial Reporting Standards as issued         Other  ☐
          by the International Accounting Standards Board        

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.     Item 17  ☐ Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


TABLE OF CONTENTS

 

         Page  

Information Regarding Forward-Looking Statements; Cautionary Language

     1  

PART I

    

Item 1.

  Identity of Directors, Senior Management and Advisers      2  

Item 2.

  Offer Statistics and Expected Timetable      2  

Item 3.

  Key Information      3  

Item 4.

  Information on the Company      33  

Item 4A.

  Unresolved Staff Comments      50  

Item 5.

  Operating and Financial Review and Prospects      50  

Item 6.

  Directors, Senior Management and Employees      69  

Item 7.

  Major Shareholders and Related Party Transactions      74  

Item 8.

  Financial Information      79  

Item 9.

  The Offer and Listing      80  

Item 10.

  Additional Information      81  

Item 11.

  Quantitative and Qualitative Disclosures About Market Risk      90  

Item 12.

  Description of Securities Other than Equity Securities      91  

PART II

    

Item 13.

  Defaults, Dividend Arrearages and Delinquencies      92  
         Page  

Item 14.

  Material Modifications to the Rights of Security Holders and Use of Proceeds      92  

Item 15.

  Controls and Procedures      92  

Item 16.

  [Reserved]      93  

Item 16A.

  Audit Committee Financial Expert      93  

Item 16B.

  Code of Ethics      93  

Item 16C.

  Principal Accountant Fees and Services      94  

Item 16D.

  Exemptions from the Listing Standards for Audit Committees      94  

Item 16E.

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      94  

Item 16F.

  Change in Registrant’s Certifying Accountant      95  

Item 16G.

  Corporate Governance      95  

PART III

    

Item 17.

  Financial Statements      97  

Item 18.

  Financial Statements      97  

Item 19.

  Exhibits      97  

Signatures

     114  
 

 

In this Annual Report on Form 20-F, unless indicated otherwise, references to: (1) “Textainer,” “TGH,” “the Company,” “we,” “us” and “our” refer, as the context requires, to Textainer Group Holdings Limited, which is the registrant and the issuer of the class of common shares that has been registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended, or Textainer Group Holdings Limited and its subsidiaries; (2) “TEU” refers to a “Twenty-Foot Equivalent Unit,” which is a unit of measurement used in the container shipping industry to compare shipping containers of various lengths to a standard 20’ dry freight container, thus a 20’ container is one TEU and a 40’ container is two TEU; (3) “CEU” refers to a Cost Equivalent Unit, which is a unit of measurement based on the approximate cost of a container relative to the cost of a standard 20’ dry freight container, so the cost of a standard 20’ dry freight container is one CEU; the cost of a 40’ dry freight container is 1.6 CEU; the cost of a 40’ high cube dry freight container (9’6” high) is 1.7 CEU; and the cost of a 40’ high cube refrigerated container is 8.0 CEU; (4) “our owned fleet” means the containers we own; (5) “our managed fleet” means the containers we manage that are owned by other Container Investors; (6) “our fleet” and “our total fleet” mean our owned fleet plus our managed fleet plus any containers we lease from other lessors; (7) “Container Investors” means the owners of the containers in our managed fleet; and (8) “Trencor” refers to Trencor Ltd., a public South African investment holding company, previously listed on the Johannesburg Stock Exchange, South Africa, which, directly owned approximately 47.5% and 5.3% of our common shares as of December 31, 2018 and 2019, respectively. See Item 4, “Information on the Company” for an explanation of the relationship between Trencor and us.

Dollar amounts in this Annual Report on Form 20-F are expressed in thousands, unless otherwise indicated.


INFORMATION REGARDING FORWARD-LOOKING STATEMENTS; CAUTIONARY LANGUAGE

This Annual Report on Form 20-F, including the sections entitled Item 3, “Key Information — Risk Factors,” and Item 5, “Operating and Financial Review and Prospects,” 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, introduction of new products, 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.

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” and elsewhere in this Annual Report on Form 20-F.

We believe that it is important to communicate our future expectations 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,” as well as any cautionary language in this Annual Report on Form 20-F, 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” and elsewhere in this Annual Report on Form 20-F could negatively impact our business, cash flows, results of operations, financial condition and share price. Potential investors, shareholders and other readers should not place undue reliance on our forward-looking statements.

Forward-looking statements regarding our present plans or expectations involve risks and uncertainties relative to return expectations and related allocation of resources and changing economic or competitive conditions 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” or elsewhere in this Annual Report on Form 20-F, 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. We assume no obligation to, and do not plan to, update any forward-looking statements after the date of this Annual Report on Form 20-F as a result of new information, future events or developments, except as required by federal securities laws. You should read this Annual Report on Form 20-F and the documents that we reference and have filed 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.

Industry data and other statistical information used in this Annual Report on Form 20-F are based on independent publications, reports by market research firms or other published independent sources. Good faith estimates are used for some data that is derived from our review of internal surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information.

In this Annual Report on Form 20-F, 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” in this Annual Report on Form 20-F.

 

1


PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

2


ITEM 3.

KEY INFORMATION

 

A.

Selected Financial Data

The selected financial data presented below under the heading “Statement of Income Data” for the years ended December 31, 2019, 2018 and 2017 and under the heading “Balance Sheet Data” as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included in Item 18, “Financial Statements” in this Annual Report on Form 20-F. The selected financial data presented below under the heading “Statement of Income Data” for the years ended December 31, 2016 and 2015 and under the heading “Balance Sheet Data” as of December 31, 2017, 2016 and 2015 are audited and have been derived from our audited consolidated financial statements not included in this Annual Report on Form 20-F. The data presented below under the heading “Other Financial and Operating Data” have not been audited. Historical results are not necessarily indicative of the results of operations to be expected in future periods. You should read the selected consolidated financial data and operating data presented below in conjunction with Item 5, “Operating and Financial Review and Prospects” and with Item 18, “Financial Statements” in this Annual Report on Form 20-F.

 

     Fiscal Years Ended December 31,  
     2019     2018     2017     2016     2015  
     (Dollars in thousands, except per share data)  

Statement of Income Data:

  

Revenues:

          

Lease rental income - owned fleet

   $ 517,859     $ 501,362     $ 444,888     $ 460,427     $ 512,544  

Lease rental income - managed fleet

     101,901       111,342       104,566       105,511       133,961  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Lease rental income

     619,760       612,704       549,454       565,938       646,505  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management fees - non-leasing

     7,590       8,529       7,146       5,937       5,612  

Trading container sales proceeds

     58,734       19,568       4,758       15,628       12,670  

Cost of trading containers sold

     (51,336     (16,118     (3,302     (15,904     (12,475
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Trading container margin

     7,398       3,450       1,456       (276     195  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on sale of owned fleet containers, net

     21,397       36,071       26,210       6,761       3,454  

Operating expenses:

          

Direct container expense - owned fleet (1)

     45,831       53,845       59,538       60,029       44,706  

Distribution expense to managed fleet container investors

     93,858       102,992       96,718       98,028       123,963  

Depreciation expense (2)

     260,372       249,500       235,293       302,599       224,610  

Container lessee default expense (1)

     7,867       17,948       4,605       30,735       5,301  

Amortization expense

     2,093       3,721       4,092       5,053       4,741  

General and administrative expense

     38,142       44,317       39,677       34,540       35,598  

Bad debt expense, net

     2,002       2,697       477       21,166       5,028  

Gain on insurance recovery and legal settlement

     (14,881     (8,692     —         —         —    

Gain on settlement of pre-existing management agreement

     (1,823     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     433,461       466,328       440,400       552,150       443,947  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     222,684       194,426       143,866       26,210       211,819  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

3


     Fiscal Years Ended December 31,  
     2019     2018     2017     2016     2015  
     (Dollars in thousands, except per share data)  

Other (expense) income:

  

Interest expense

     (153,185     (138,427     (117,475     (85,215     (76,063

Write-off of unamortized deferred debt costs and bond discounts

     —         (881     (7,550     —         (458

Interest income

     2,505       1,709       613       408       125  

Realized gain (loss) on derivative instruments, net

     1,946       5,238       (1,191     (8,928     (12,823

Unrealized (loss) gain on derivative instruments, net

     (15,442     (5,790     4,094       6,210       (1,947

Other, net

     (4     —         3       (8     26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other expense

     (164,180     (138,151     (121,506     (87,533     (91,140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax and noncontrolling interest

     58,504       56,275       22,360       (61,323     120,679  

Income tax (expense) benefit

     (1,948     (2,025     (1,618     3,447       (6,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     56,556       54,250       20,742       (57,876     113,984  

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

     168       (3,872     (1,377     5,393       (5,576
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 56,724     $ 50,378     $ 19,365     $ (52,483   $ 108,408  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Basic

   $ 0.99     $ 0.88     $ 0.34     $ (0.93   $ 1.90  

Diluted

   $ 0.99     $ 0.88     $ 0.34     $ (0.93   $ 1.90  

Weighted average shares outstanding (in thousands):

          

Basic

     57,349       57,200       56,845       56,608       56,953  

Diluted

     57,459       57,487       57,159       56,608       57,093  

Other Financial and Operating Data (unaudited):

          

Cash dividends declared per common share

   $ —       $ —       $ —       $ 0.51     $ 1.65  

Purchase of containers and fixed assets

   $ 466,993     $ 854,383     $ 300,125     $ 505,528     $ 533,306  

Payments on container leaseback financing receivable

   $ 281,445     $ —       $ —       $ —       $ —    

Utilization rate (3)

     97.40     98.10     96.40     94.70     96.80

Total fleet in TEU (as of the end of the period)

     3,500,812       3,354,724       3,279,892       3,142,556       3,147,690  

Balance Sheet Data (as of the end of the period):

          

Cash and cash equivalents (including restricted cash)

   $ 277,905     $ 224,928     $ 237,569     $ 142,123     $ 149,511  

Containers, net

     4,156,151       4,134,016       3,791,610       3,717,542       3,696,311  

Net investment in direct financing and sales-type leases (current and long-term)

     295,303       167,060       182,624       237,234       331,792  

Container leaseback financing receivable (current and long-term)

     271,658       —         —         —         —    

Total assets (4)

     5,202,617       4,768,769       4,401,252       4,310,729       4,386,959  

Long-term debt (including current portion)

     3,797,729       3,409,827       2,990,308       3,038,297       3,003,648  

Total liabilities (4)

     3,916,972       3,532,778       3,195,215       3,130,189       3,125,319  

Total Textainer Group Holdings Limited shareholders’ equity

     1,259,379       1,206,813       1,148,297       1,121,681       1,197,388  

Noncontrolling interest

     26,266       29,178       57,740       58,859       64,252  

 

4


(1)

Amounts for container write-off and container recovery costs from lessee default for the years ended 2015 to 2018 have been reclassified out of the previously reported line item “container impairment” and “direct container expense – owned fleet”, respectively, and included within “container lessee default expense” to conform with the 2019 presentation.

(2)

Amounts to write down the carrying value of containers held for sale to their estimated fair value less costs to sell for years ended 2015 to 2018 have been reclassified out of the previously reported line item “container impairment” and included within “depreciation expense” to conform with the 2019 presentation.

(3)

We measure the utilization rate on the basis of CEU on lease, using the actual number of days on-hire, expressed as a percentage of CEU available for lease, using the actual days available for lease. CEU available for lease excludes CEU that have been manufactured for us but have not yet been delivered to a lessee and CEU designated as held for sale units.

(4)

Amounts for the years ended 2015 to 2018 have been reclassified to report the gross amounts of accounts receivable, prepaid expenses, accounts payable and accrued expenses arising from the managed fleet instead of the net presentation (also see Note 2 “Immaterial Reclassification and Adjustment of Prior Periods” in Item 18, “Financial Statements” in this Annual Report on Form 20-F).

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

An investment in our common shares involves a high degree of risk. You should carefully consider the following risk factors, together with the other information contained elsewhere in this Annual Report on Form 20-F, including our financial statements and the related notes thereto, before you decide to buy, hold or sell our common shares. Any of the risk factors we describe below could adversely affect our business, cash flows, results of operations and financial condition. The market price of our common shares could decline and you may lose some or all of your investment if one or more of these risks and uncertainties develop into actual events.

Risks Related to Our Business and Industry

The demand and pricing for leased containers depends on many factors beyond our control.

Substantially all of our revenue derives from activities related to the leasing, managing and selling of containers. Our ability to continue successfully leasing containers to container shipping lines, earning management fees on leased containers, selling used containers and sourcing capital required to purchase new and used containers depends, in part, upon the continued demand to lease containers and purchase used containers.

 

5


Demand for leased containers depends largely on the rate of growth of world trade and economic growth, with worldwide consumer demand being the most critical factor affecting this growth. Demand for leased containers is also driven by our customers’ “lease vs. buy” decisions. In the past, economic downturns in the U.S., Europe, Asia and countries with consumer-oriented economies have resulted in a reduction in the rate of growth of world trade and demand by container shipping lines for leased containers and it is likely that any future downturns would have similar results. Thus, a decrease in world trade can and has adversely affected our utilization and per diem rates and led to reduced revenue and increased operating expenses (such as storage and repositioning costs) and can have an adverse effect on our financial performance. We cannot predict whether, or when, such downturns will occur or the severity or duration of any downturn. Other material factors affecting demand for leased containers, utilization and per diem rates include the following:

 

   

prices of new and used containers;

 

   

economic conditions, profitability, competitive pressures and consolidation in the container shipping and container leasing industry;

 

   

shifting trends and patterns of cargo traffic;

 

   

fluctuations in demand for containerized goods outside their area of production;

 

   

the availability and terms of container financing for us and for our competitors and customers;

 

   

fluctuations in interest rates and currency exchange rates;

 

   

overcapacity, undercapacity and consolidation of container manufacturers;

 

   

the lead times required to purchase containers;

 

   

the number of containers purchased in the current year and prior years by competitors and container lessees;

 

   

container ship fleet overcapacity or undercapacity;

 

   

repositioning by container shipping lines of their own empty containers to higher demand locations in lieu of leasing containers;

 

   

port congestion and the efficient movement of containers as affected by labor disputes, work stoppages, increased vessel size, shipping line alliances or other factors that reduce or increase the speed at which containers are handled;

 

   

consolidation, withdrawal or insolvency of individual container shipping lines, such as the bankruptcy of Hanjin Shipping Co. in August 2016 which is discussed below;

 

   

import/export tariffs, duties and restrictions or trade disputes;

 

   

customs procedures, foreign exchange controls and other governmental regulations, including environmental or maritime rules that impact container shipping, such as the low sulphur oxide emission rules that took effect in January 2020;

 

   

natural disasters or events that are severe enough to affect local and global economies or interfere with trade, such as the recent declared Novel Coronavirus pandemic; and

 

   

other political and economic factors.

Many of these and other factors affecting the container industry 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 and results of operations. In addition, many of these factors also influence the decision by container shipping lines to lease or buy containers. Should one or more of these factors influence container shipping lines to buy a larger percentage of the containers they operate, our utilization rate and/or per diems could decrease, resulting in decreased revenue and increased storage and repositioning costs, which would harm our business, results of operations and financial condition.

 

6


Global economic weakness has in the past and may in the future materially and negatively impact our business, results of operations, cash flows, financial condition and future prospects.

While domestic and global economic growth resumed and has continued following the global financial crisis in 2008 and 2009, the continued sustainability of the international economic growth is uncertain particularly following the recent declaration of a Novel Coronavirus pandemic. Any slowdown or reversal of the U.S. and global trade growth could heighten a number of material risks to our business, results of operations, cash flows and financial condition, as well as our future prospects, including the following:

 

   

Containerized cargo volume growth — A contraction or slowdown in containerized cargo volume growth would likely create lower utilization, higher direct costs, weaker shipping lines going out of business, pressure for us to offer lease concessions and lead to a reduction in the size of our customers’ container fleets.

 

   

Credit availability and access to equity markets — Issues involving liquidity and capital adequacy affecting lenders could affect our ability to fully access our credit facilities or obtain additional debt and could affect the ability of our lenders to meet their funding requirements when we need to borrow. Further, a high level of volatility in the equity markets could make it difficult for us to access the equity markets for additional capital at attractive prices, if at all. If we are unable to obtain credit or access the capital markets, our business could be negatively impacted. In several of the years prior to 2017 the returns provided from lease transactions were lower due to increased competition in part caused by increased debt financing access for the container leasing industry. At the end of 2016, lower container returns coupled with the impact of Hanjin’s bankruptcy and lower residual values impacted our ability to meet the then prevailing financial covenant conditions in our lending facilities, required covenant amendments and limited our ability to access funds for investment in additional new containers for the first few months of 2017.

Lease and/or utilization rates may decrease, which could adversely affect our business, results of operations and financial condition.

We compete mostly on the pricing and the availability of containers. Lease rates for our containers depend on a large number of factors, including the following:

 

   

the supply of, and demand for, containers available;

 

   

the price of new containers (which is positively but not exclusively correlated with the price of steel);

 

   

the type and length of the lease;

 

   

interest rates and the availability of financing for leasing companies and shipping lines;

 

   

assumptions regarding residual value and future lease pricing;

 

   

the type and age of the container;

 

   

the location of the container being leased;

 

   

the quantity of containers available for lease by our competitors; and

 

   

lease rates offered by our competitors.

Most of these factors are beyond our control. In particular the price of steel declined materially in 2015 and continued to decline in the beginning of 2016 and this was a significant factor in the decline in new container prices and lease rates at that time. New container prices and lease rates reached historically low levels in the beginning of 2016, but starting in the second half of 2016 and until late 2018 steel prices, container prices and lease rates all increased materially. Since late 2018 steel prices, container prices and lease rates have generally all declined and demand for new containers has also declined. In addition, lease rates can be negatively impacted by, among other things, the entrance of new leasing companies or container factories, overproduction of new containers by factories and the over-buying by shipping lines, leasing companies and tax-driven container investors. In 2012 and continuing

 

7


in 2013 and 2014, container leasing companies, including us, raised substantial amounts of new funds in the debt and equity markets and were able to repeatedly refinance existing debt on ever more favorable terms. This increased availability and reduced cost of debt, which given a limited demand for containers, contributed to downward pressure on lease rates. The impact on us of the market downturn that ended in the second half of 2016 was more severe than in the past due to the substantial growth in our owned fleet in the past few years and the relatively high prices paid for new containers in the period from 2010 to 2012 that were initially leased at historically high rates on leases that matured during this period of low lease rates. If future market lease rates continue to decrease or return to historically low levels, revenues generated by our fleet will be adversely affected, which will harm our business, results of operations, cash flows and financial condition. Container utilization rates for us and our competitors declined in 2019 but are currently at high levels by historical standards. If future container utilization rates decrease, revenues generated by our fleet will be adversely affected, which will harm our business, results of operations, cash flows and financial condition.

We face risks associated with re-leasing containers after their initial long-term lease.

We estimate the useful lives of our standard dry freight containers to be 13 to 14 years, open-top and flat-rack containers to be 14 to 16 years, refrigerated containers to be 12 years and tank containers to be 20 years. When we purchase newly produced containers, we typically lease them out under long-term leases with terms of 5 or more years at a lease rate that is correlated to the price paid for the container and prevailing interest rates. As containers leased under term leases are not leased out for their full economic life, we face risks associated with re-leasing containers after their initial long-term lease. If prevailing container lease rates decline significantly between the time a container is initially leased out and when its initial long-term lease expires, or if overall demand for containers declines, we may be unable to earn a similar lease rate from the re-leasing of containers when their initial term leases expire which could materially adversely impact our results and financial performance. Additionally, for containers purchased new in 2015 and 2016, many of these containers are on long-term leases with low per diems that are below current lease rates. Our ability to improve our financial performance depends in part on the ability to renew or re-lease these containers at the time of the expiration of their initial leases at higher rates than the per diems these containers were originally leased out. If container lease rates decline below levels that prevailed in 2015 and 2016 and we are unable to renew these leases at higher rates our financial results may not improve or may weaken.

The bankruptcy of Hanjin Shipping Co. in August 2016 substantially impacted us.

On August 31, 2016 Hanjin filed for bankruptcy protection in South Korea. In the following months its services ceased operation. The insolvency of Hanjin severely disrupted container trade and the container shipping industry. At the time of the insolvency, containers leased to Hanjin with ownership interests attributable to Textainer represented approximately 4.8% of the total owned and managed fleet in TEU. We incurred substantial costs from the Hanjin insolvency, arising from container recovery expenses, unpaid current and future rental income from Hanjin, container repair expenses, container repositioning expenses, re-leasing expenses and the loss of unreturned containers. Additionally, many containers formerly leased to Hanjin were re-leased at substantially lower lease rates than the rates in the leases with Hanjin and other containers were disposed, often at prices below the book value for the containers. We recovered 94% of the containers formerly leased to Hanjin, with the balance of the containers uneconomic or impossible to recover. We maintain insurance that covers certain costs and losses from customer defaults. At the time of the Hanjin default our policy provided for $80 million of coverage after a $5 million deductible was met. We collected substantially all of our insurance claim related to the Hanjin insolvency, however this was insufficient to cover all of our losses and disruptions related to Hanjin. At the time of its insolvency Hanjin was the 7th largest container shipping line in the world and the bankruptcy of Hanjin substantially impacted us, including as follows:

 

8


   

A material portion of the losses we reported for 2016 were attributable to Hanjin’s default and the expenses caused by the default and these expenses related to the default continued in 2017 and were not fully covered by insurance;

 

   

As a result of the Hanjin default, lower container lease rates and lower used container sales prices, our cash flow was substantially reduced in the second half of 2016 and the first half of 2017 and this impacted our ability to comply with financial covenants in certain debt facilities and to invest in new containers in 2016 and the first half of 2017; we obtained waivers and amendments from lenders to address these issues and subsequently refinanced the majority of our debt;

 

   

Customer default insurance may not be available in the future to us or may not be affordable; we have renewed our insurance several times since the Hanjin default; however, the policy and coverage terms are not as favorable as before the Hanjin default and the premium has substantially increased; and

 

   

The Hanjin bankruptcy has led to further consolidation in the shipping line industry, increasing our reliance on a reduced number of customers; as a result of the Hanjin default shippers have heightened concern about the shipping line that carries their cargo and this may impact the container shipping industry in ways we are unable to anticipate and which may adversely impact us.

Reductions in the prices of new containers would harm our business, results of operations and financial condition.

Lease rates for new containers are positively but not exclusively correlated to the price of new containers, which is positively correlated with the price of steel, a major component used in the manufacture of new containers. In the past five years, prices for new standard 20’ dry freight containers have moved in a wide range, with prices ranging between $1,185 and $2,363 during this time. Our average new container cost per CEU declined in 2019 compared to 2018 as container prices declined due to lower steel costs and lower container demand. Container prices have increased since 2016 but have generally declined since late 2018. However, in the beginning of 2020 we have seen price stabilization and increases. If new container prices decline, the lease rates achievable when older, off-lease containers are leased out will also decrease and the prices obtained for containers sold at the end of their useful lives may also decrease. From the beginning of 2013 until the second half of 2016 we saw new container pricing and the sale prices of our containers sold at the end of their useful lives decline and since late 2018 we have generally seen new container pricing and lease rates decline. A decline in new container prices causes low market lease rates and low resale values for containers, which have and may in the future adversely affect our business, results of operations and financial condition, even if low new container prices allow us to purchase new containers at a lower cost. Our future financial performance and profitability depends in part on the lease rates increasing for current leases that expire during the several years as many of these leases were concluded with low initial lease rates. Low new container prices and lease rates will increase the difficulty of raising lease rates on long-term container leases that expire in the future.

Gains and losses associated with the disposition or trading of used equipment may fluctuate and adversely affect our business, results of operations and financial condition.

We regularly sell used containers at the end of their useful lives in marine service or when we believe it maximizes the projected financial return, considering the location, sale price, cost of repair, possible repositioning expenses, earnings prospects and remaining useful life. The realized residual value of these containers affects our profitability. The volatility of the residual values of used containers may be significant. These values depend upon, among other factors, demand for used containers for secondary purposes, comparable new container costs, used container availability, condition and location of the containers, and market conditions. Most of these factors are outside of our control. Additionally, if shipping lines or our leasing company competitors determine to sell their used containers at a younger age than we believe to be the useful life of our equipment, our containers may be more difficult to sell or may sell for less than containers that were more recently manufactured.

Gains or losses on the disposition of used container equipment and the sales fees earned on the disposition of managed containers fluctuate and may be significant if we sell large quantities of used containers. In 2019, 2018 and 2017, we incurred approximately $14 million, $14 million and $4 million, respectively, of container impairments due to the fact that when we determined to dispose of containers their book value exceeded the fair market value.

 

9


Low disposal prices and the high volume of containers being disposed of can cause an elevated level of container impairments to occur. Continued low disposal prices and/or disposal volumes could harm our business, results of operations and financial condition. See Item 5, “Operating and Financial Review and Prospects” for a discussion of our gains or losses on the disposition of used container equipment.

In addition to disposing of our fleet’s used containers at the end of their useful life, we opportunistically purchase used containers for resale from our shipping line customers and other sellers. Shipping lines either enter into trading arrangements with us at the time they are ready to dispose of older containers or enter into purchase leaseback transactions with us where they sell us older containers and then lease them back until the shipping line is ready to dispose of the containers. We face resale price risk with both transactions since by the time the container is provided to us from the shipping line the prevailing prices for older containers may have declined from the value we assumed at the time of purchase.

If the supply of trading equipment becomes limited because these sellers develop other means for disposing of their equipment or develop their own sales network, our equipment trading revenues and our profitability could be negatively impacted. If selling prices rapidly deteriorate and we are holding a large inventory that was purchased when prices for trading equipment were higher or if prices decline over the life of our purchase leaseback transactions, then our gross margins from trading and the sale of containers acquired through purchase leaseback transactions will decline or become negative. Low resale prices coupled with the higher prices paid for purchase leaseback transactions completed several years ago have caused some purchase leaseback transactions to be unprofitable.

The impact of new low sulphur emission rules is uncertain and may adversely affect us and the container shipping industry.

Effective January 1, 2020, under the rules of the International Maritime Organization (“IMO”) the permitted level of sulphur oxide emissions from ships, including container ships, was reduced from 3.5% of emission mass to 0.5% of emissions mass. In order to comply with these regulations our shipping line customers are either switching to low sulphur diesel fuels, installing emissions scrubbers on vessels to remove sulphur oxide from emissions gases or switching to alternative fuels like natural gas for their ships. Shipping lines compliance strategies may include a mix of the compliance approaches and may evolve depending on the cost of complying with each approach. The cost for low sulphur diesel fuel is substantially more than what shipping lines previously paid for bunker fuel and it is expected that there may be shortages of low sulphur fuel initially in certain locations. Installing gas scrubbers is an expensive capital expenditure to a ship and requires extensive retrofitting which removes vessels from service for a period of time. As the rules have only recently become effective, it is difficult to predict what the long-term impact will be on our customers and us from these regulations. If the higher fuel and environmental compliance costs from these rules are not successfully passed on via higher freight rates to shippers, or if freight demand declines due to higher shipping costs, our shipping line customers’ financial performance may weaken and the risk of default by our customers could increase. If higher freight rates cause lower cargo demand, the demand for our containers may decline and/or container lease rates and used container prices may decline, which would harm our business, results of operations and financial condition.

Lessee defaults have and may continue to harm our business, results of operations and financial condition by decreasing revenue and increasing storage, repositioning, collection, insurance and recovery expenses.

Our containers are leased to numerous container lessees. Lessees are required to pay rent and to indemnify us for damage to or loss of containers. Lessees may default in paying rent and performing other obligations under their leases. A delay or diminution in amounts received under the leases (including leases on our managed containers), or a default in the performance of maintenance or other lessee obligations under the leases could adversely affect our business, results of operations and financial condition and our ability to make payments on our debt.

We experienced several lessee defaults in 2016, including the default of Hanjin discussed above, which severely negatively impacted our financial performance and we believe that there is the continued risk of lessee defaults in the future. In 2019 we also experienced lessee defaults, with the largest matter arising from fraudulent conduct by the owners of a regional shipping line. During the last several years shipping lines have made a number

 

10


of efforts to raise freight rates on the major trade lanes, however rate increases have generally not been sustainable for long periods of time. Excess vessel capacity due to new ship production, including the production of very large ships, and the re-activation of previously laid up vessels will continue to be a factor in the future, especially if older vessels are not scrapped. Major shipping lines are expected to be slightly profitable overall for 2019, however reliable information about the financial position and resources of many shipping lines can be difficult to obtain. While containerized trade grew in 2019, it was not sufficient to fully utilize vessel capacity and major shipping lines both took delivery of, and resumed ordering, large vessels. Existing excess vessel capacity and continued new vessel deliveries, especially the delivery of very large vessels, may continue to pressure freight rates for some time. The current level of excess vessel capacity may currently be artificially understated as a number of ships are out of service as they undergo retrofits for scrubbers to comply with the IMO 2020 sulphur oxide emissions rules noted above. Additionally, the commencement of various tariff and trade restriction actions between major trading nations in 2018 which continued and accelerated in 2019 has increased uncertainty about container trade growth and demand and may increase default risk if tariff actions continue and/or increase. While certain trade disputes were resolved at the end of 2019 the duration of these tariff actions may have altered trade pattern and may have lasting impacts on container demand. The implementation of low sulphur oxide emissions rules noted above may weaken the financial performance of our customers and increase their risk of default. The recent declaration of a Novel Coronavirus pandemic has added to uncertainty about container trade demand, freight rates and our lessees’ financial performance. As a result, we continue to face heightened risk that our financial performance and cash flow could be severely affected by defaults by our customers.

When lessees default, we may fail to recover all of our containers, and the containers that we do recover may be recovered in locations where we will not be able to quickly re-lease or sell them on commercially acceptable terms. In recovery actions we must locate the containers and often need to pay accrued storage and handling charges to depots and terminals, which may include debts incurred by the defaulting shipping line. We also may have to reposition these containers to other places where we can re-lease or sell them, which could be expensive, depending on the locations and distances involved. Following repositioning, we may need to repair the containers and pay container depots for storage until the containers are re-leased. These recovery and repair costs, and repositioning costs generally are reflected in our financial statements under container lessee default expense, net and direct container expense – owned fleet, respectively. Accordingly, the amount of our bad debt expense may not capture the total adverse financial impact on us from a shipping line’s default. For our owned containers, these costs directly reduce our income and for our managed containers, lessee defaults decrease rental revenue and increase direct container expense, and thus reduce our management fee revenue. While we maintain insurance to cover some defaults, it is subject to large deductible amounts and significant exclusions and, therefore, may not be sufficient to prevent us from suffering material losses. In 2015 and 2016 we filed significant insurance claims for lessee defaults we experienced. We also filed a pending insurance claim for the regional shipping line default we experienced in 2019. As a result of these insurance claims, potential future insurance claims or changes in the perceived risk of providing default insurance, such insurance might not be available to us in the future on commercially reasonable terms or at all. In the renewals of our default insurance following the Hanjin bankruptcy, the policy premium has significantly increased and coverage has been reduced. In any insurance claim our insurers may not agree with our determination that we have suffered an insured loss or our calculation of the amount of the insured loss. Any such future defaults could harm our business, results of operations and financial condition.

Historically we have recovered a very high percentage of the containers from defaulted lessees. However, in the last six years we encountered defaults from several smaller lessees and lessees in locations where recoveries did not track to our historical experience and significant losses were incurred. These losses were due to a number of containers being unrecoverable as the containers were not in the control of the lessee or the containers were detained by depots or terminals that demanded storage charges in excess of the value of the detained containers after accounting for repair and repositioning costs. Additionally, in certain recent insolvencies, even when we have recovered the containers, they have generally been in very poor condition which limits their ability to be re-leased and reduces their disposal value, both of which add to the ultimate cost of the default. If a material amount of future recoveries from defaulted lessees continue to deviate from our historical recovery experience, our financial performance and cash flow could be severely adversely affected.

 

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Asian economic instability could reduce demand for leasing, which would harm our business, results of operations and financial condition.

Many of our customers are substantially dependent upon shipments of goods exported from Asia. From time to time, there have been health scares, such as the novel coronavirus outbreak in China in early 2020, Severe Acute Respiratory Syndrome and avian flu, financial turmoil, natural disasters and political instability in Asia. In the past, these events have adversely affect our container lessees and the general demand for shipping and have led to reduced demand for leased containers or otherwise caused adverse affects on us. Ongoing or future events such as these may have similar or worse impacts on our business. Any reduction in demand for leased containers would harm our business, results of operations and financial condition.

Certain liens may arise on our containers.

Depot operators, manufacturers, repairmen, terminals, ship owners and transporters do come into possession of our containers from time to time and have amounts due to them from the lessees or sublessees of the containers. In the event of nonpayment of those charges by the lessees or sublessees, we may be delayed in, or entirely barred from, repossessing the containers, or be required to make payments or incur expenses to discharge the lien to take possession of our containers.

We derive a substantial portion of our lease billings from a limited number of container lessees, and the loss of, or reduction in business, by any of these container lessees could harm our business, results of operations and financial condition.

We have derived, and believe that we will continue to derive, a significant portion of lease billings and cash flow from a limited number of container lessees. Lease billings from our 20 largest container lessees represented $546.4 million or 82.1% of the total fleet billings during 2019. Our two largest customers in 2019 were Mediterranean Shipping Company S.A., which accounted for $102.8 million or 15.4% and CMA-CGM S.A., which accounted for $87.3 million or 13.1% of our total fleet’s lease billings. Due to the ongoing consolidation in the shipping line industry, our 20 largest container lessees are becoming an increasing percentage of our total revenue, with correspondingly increased concentration of credit risk. Given the high concentration of our customer base, a default by any of our largest customers would result in a major reduction in leasing revenue, large repossession expenses, potentially large lost equipment charges and a material adverse impact on our performance and financial condition. Our experience with the Hanjin bankruptcy is an example of the occurrence of one of these materially adverse events.

The introduction and use of very large container ships (18,000 TEU+) on the major trade lanes may lead to further industry consolidation and shipping line alliance participation, and even greater reliance by us on our largest customers, and negatively impact the performance of smaller and mid-size shipping lines. Several of the largest shipping lines have invested heavily in these very large ships and reportedly have achieved meaningful unit cost advantages and increased market shares on the major trade lanes. In response, some smaller shipping lines have started to exit the major trade lanes, while others are seeking to form closer operating partnerships.

Consolidation, shipping line alliances, 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. The shipping industry has been consolidating for a number of years, and further consolidation is expected. In recent years two major German shipping lines have each acquired different South American shipping lines, a French shipping line acquired a Singaporean shipping line, two large Chinese shipping lines merged, a German shipping line merged with a Middle Eastern shipping line and a Danish shipping line acquired a German shipping line. Three major Japanese shipping lines also merged together. Additionally, Hanjin declared bankruptcy in August 2016, further reducing the number of large shipping lines. Historically, shipping lines have also formed a number of alliances to share vessel space and the creation of new alliances and changes in the membership of each alliance is ongoing. Consolidation of major container shipping lines and growth of alliances could create efficiencies and decrease the demand that container shipping lines have for leased containers because they may be able to fulfill a larger portion of their needs through their owned container

 

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fleets. Consolidation could also create concentration of credit risk if the number of our container lessees decreases. If shipping line alliances are effective at making shipping lines more efficient, this could reduce the demand for containers. The growth of alliances may add pressure to those shipping lines that do not join an alliance as they may find it more difficult to cost effectively serve shippers needs and/or shippers may choose to only ship cargo with alliances due to solvency concerns or otherwise. Additionally, large container shipping lines with significant resources could choose to manufacture or purchase their own containers, which would decrease their demand for leased containers and could harm our business, results of operations and financial condition.

Our indebtedness reduces our financial flexibility and could impede our ability to operate.

We have historically operated with, and anticipate continuing to operate with, a significant amount of debt. As of December 31, 2019, we had outstanding indebtedness of $3,827 million under our debt facilities. All of our outstanding indebtedness is secured debt collateralized primarily by our container assets and finance leases. There is no assurance that we will be able to refinance our outstanding indebtedness on terms that we can afford or at all. If we are unable to refinance our outstanding indebtedness, or if we are unable to increase the amount of our borrowing capacity, it could limit our ability to grow our business.

The amount of our indebtedness, and the terms of the related indebtedness (including interest rates and covenants), could have important consequences for us, including the following:

 

   

require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt, thereby reducing funds available for operations, investments, dividends, and future business opportunities and other purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

reduce our ability to make acquisitions or expand our business;

 

   

make it more difficult for us to satisfy our current or future debt obligations;

 

   

failure to comply with our debt 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 and have a material adverse effect on our business or financial condition;

 

   

limit 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

 

   

increase 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 and/or compete successfully in our industry. An uncured event of default in some or all of our debt facilities could cause some or all of our entities to be declared bankrupt or liquidated.

We will require a significant amount of cash to service and repay our outstanding indebtedness, fund future capital expenditures, and our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and repay our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. Our business primarily generates cash from our container assets. Our lenders, rating agencies and the investors in our asset-backed debt securities look to the historical and anticipated performance of our container assets when deciding whether to lend to us and the terms for such lending. It is possible that:

 

   

our business will not generate sufficient cash flow from operations to service and repay our debt and to fund working capital requirements and future capital expenditures;

 

   

future borrowings will not be available under our current or future credit facilities in an amount sufficient to enable us to refinance our debt; or

 

   

we will not be able to refinance any of our debt on commercially reasonable terms or at all due to declining historical or anticipated financial performance of our assets or for other reasons.

 

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The terms of our debt 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 secured debt facilities, revolving credit facilities, term loan and bonds may limit or prohibit, among other things, our ability to:

 

   

incur additional indebtedness;

 

   

pay dividends on or redeem or repurchase our common shares;

 

   

enter into new lines of business;

 

   

issue capital stock of our subsidiaries;

 

   

make loans and certain types of investments;

 

   

incur liens;

 

   

sell certain assets or merge with or into other companies or acquire other companies;

 

   

enter into certain transactions with shareholders and affiliates; and

 

   

receive dividends, distributions or other payments from our subsidiaries.

We are also required to comply with certain financial covenants. 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 financial covenants and restrictions, due to weaker financial performance, reduced asset values or otherwise 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 will constitute substantially all of our container assets and finance leases. As a result of the Hanjin bankruptcy, coupled with the lower container returns provided in recent years due to increased competition and lower realized used container prices, in 2016 and 2017 we experienced difficulty in meeting certain of the financial covenants on our lending facilities. We obtained various covenant amendments and waivers to address this situation and subsequently refinanced the majority of our debt with revised covenants. If needed in the future we may be unable to obtain covenant amendments and waivers from our lenders and some or all of our indebtedness could be in default. Additionally, covenant amendments and waivers may limit our ability to access additional funds for container investment and the cost and expense of covenant amendments, waivers and/or refinancing may limit our available funds for container investment.

If we are unable to enter into interest rate swaps, collars and caps on reasonable commercial terms or if a counterparty under our interest rate swap, collar and cap agreements defaults, our exposure associated with our variable rate debt could increase.

We have typically funded a significant portion of the purchase price of new containers through borrowings under our revolving credit facilities and our secured debt facilities and intend to use borrowings under our revolving credit facilities and our secured debt facilities for such funding in the future. All of our outstanding debt, other than the $1,693 million in aggregate principal amount under various asset backed notes and term loans is subject to variable interest rates. We have entered into various interest rate swap and cap agreements to mitigate our exposure associated with variable rate debt. The swap agreements involve payments by us to counterparties at fixed rates in return for receipts based upon variable rates indexed to the London Inter Bank Offered Rate. There can be no assurance that interest rate swaps and caps will be available in the future, or if available, will be on terms satisfactory to us. Moreover, our interest rate swap agreements are subject to counterparty credit exposure, which is defined as the ability of a counterparty to perform its financial obligations under a derivative contract. While we monitor our counterparties’ credit ratings on an on-going basis, we cannot be certain that they will stay in compliance with the related derivative agreements and not default in the future. If we are unable to obtain interest rate swaps and caps or if a counterparty under our interest rate swap and cap agreements defaults, our exposure associated with our variable rate debt could increase.

 

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The phase out of the London Inter Bank Offered Rate, or LIBOR, may adversely impact us.

As noted above the substantial majority of our debt is variable rate debt and this debt is generally priced under rates that are indexed to LIBOR. LIBOR will be discontinued after 2021. We have floating rate debt agreements that will be outstanding after 2021 which have rates set under LIBOR. We must agree with our lenders for the repricing of this debt under a new rate index prior to the discontinuance of LIBOR. Our interest rate hedges and swaps are also priced according to LIBOR and will also be impacted by this matter. None of our current debt agreements provide for the mechanics of a transition to a new interest rate index and the debt markets acceptance of a replacement for LIBOR is uncertain and evolving. Given the amount of our floating rate debt and our significant annual interest expense, the impact of the discontinuance of LIBOR may adversely effect us and our financing structure.

Even with hedged variable rate debt and fixed rate debt, we face interest rate risk.

We generally hedge and fix our overall debt exposure to have a maturity similar to the average remaining lease term of our long-term lease contracts. However if during the duration of our hedging, interest rates increase but lease rate per diems do not also increase, as our hedges expire our financial performance may decline due to higher interest rates not being offset by higher per diems. If this occurs we may not be able to generate sufficient cash flows to service our debt obligations and/or we may breach our debt covenants, all of which would materially and adversely impact us.

We may incur significant costs to reposition our containers, which could harm our business, results of operations and financial condition.

When lessees return containers to locations where supply exceeds demand and when lessees default and we recover containers, we sometimes reposition containers to higher demand areas. Repositioning expenses vary depending on geographic location, distance, freight rates and other factors, and may not be fully covered by drop-off charges collected from the previous lessee of the containers or pick-up charges paid by the new lessee. We seek to limit the number of and impose surcharges on containers returned to low demand locations. Market conditions, however, may not enable us to continue such practices. In addition, we may not be able to accurately anticipate which locations will be characterized by higher or lower demand in the future, and our current contracts will not protect us from repositioning costs if locations that we expect to be higher demand locations turn out to be lower demand locations at the time the containers are returned. For example, the vast majority of our long-term leases require that a high percentage of the containers are returned in Asia, primarily in China. If long-term trade patterns change, it may not be economically desirable to have the bulk of our containers returned in China at the end of long-term leases. Additionally, our customer default insurance that covers lessee insolvencies does not sufficiently insure us for container repositioning expense. Any such increases in costs to reposition our containers could harm our business, results of operations and financial condition.

The demand for leased containers is partially tied to international trade. If this demand were to decrease due to increased barriers to trade, or for any other reason, it could reduce demand for intermodal container leasing, which would harm our business, results of operations and financial condition.

A substantial portion of our containers are used in trade involving goods being shipped from the People’s Republic of China (the “PRC” or “China”) and other Asian countries to the United States, Europe, Latin America or other regions and within Asia. The willingness and ability of international consumers to purchase foreign goods is dependent on political support, in the United States, Europe Latin America and other countries, 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; if the price differential between foreign goods and domestically-produced goods were to decrease due to increased tariffs on foreign goods, strengthening in the applicable foreign currencies relative to domestic currencies, rising wages, increasing input or energy costs or other factors, demand for foreign goods could decrease, which could result in reduced demand for intermodal container leasing. A similar reduction in demand for intermodal container leasing could result from an increased use of quotas or other technical barriers to restrict trade. In 2018 a number of major trading economies implemented and increased tariffs and other trade restrictions and significant renegotiations of existing trade agreements commenced. This continued in 2019 with partial resolutions to certain disputes seen at the end of the year, however it is too soon to tell if trade growth will promptly resume. If these trade restrictions and tariffs continue or increase it may materially impact container demand and change trade patterns.

 

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A contraction or slowdown in containerized cargo growth or negative containerized cargo growth would lead to a surplus of containers and a lack of storage space, which could negatively impact us.

We depend on third party depot operators to repair and store our equipment in port areas throughout the world. Growth in the world’s container fleet has significantly outpaced growth in depot capacity and even in the current period of historically high utilization, we continue to experience limited depot capacity in certain major port cities. Additionally, the land occupied by depots is increasingly being considered prime real estate, as it is coastal land in or near major cities, and this land may be developed into other uses or there may be increasing restrictions on depot operations by local communities. This trend has already caused depot storage costs to increase and could further increase depots’ costs and in some cases force depots to relocate to sites further from the port areas. If these changes affect a large number of our depots, or if we experience a period of lower container utilization, it could significantly increase the cost of maintaining and storing our off-hire containers. Additionally, if depot space is unavailable, we may be unable to accept returned containers from lessees, which may cause us to breach our lease agreements.

We own a large number of containers in our fleet and are subject to significant ownership risk and increasing our owned fleet entails increasing our debt, which could result in financial instability.

Ownership of containers entails greater risk than management of containers for container investors. In 2019, the percentage of containers in our fleet that we own increased from 78.9% at the beginning of the year to 85.4% at the end of the year. In the years prior to 2017 we have consistently increased the number of owned containers in our fleet as a percentage of the total fleet, however in 2017 we assumed management of a large fleet from an insolvent leasing company which caused the owned percentage of our fleet to decline a few percentage points. In December 2019 we purchased the fleet of containers we previously managed for Leased Assets Pool Company Limited, an affiliate of Trencor and this was primarily responsible for the increase in our owned fleet percentage in 2019. In October 2018 we purchased the 75% of TW Container Leasing Limited that we did not own from an affiliate of Wells Fargo and this caused the owned percentage of our fleet to increase 2 percentage points. The increased number of containers in our owned fleet increases our exposure to financing costs, financing risks, changes in per diem rates, re-leasing risk, changes in utilization rates, lessee defaults, repositioning costs, storage expenses, impairment charges and changes in sales prices upon the disposition of containers. The number of containers in our owned fleet fluctuates over time as we purchase new containers, sell containers into the secondary resale market, add third party container investors and/or acquire other fleets.

If we continue to increase the number of containers in our owned fleet, we will likely have more capital at risk and may need to maintain higher debt balances. Additional borrowings may not be available under our revolving credit facilities or our secured debt facilities, and we may not be able to refinance these facilities, if necessary, on commercially reasonable terms or at all. We may need to raise additional debt or equity capital in order to fund our business, expand our sales activities and/or respond to competitive pressures. We may not have access to the capital resources we desire or need to fund our business or may not have access on attractive terms. These factors, among others, may reduce our profitability and adversely affect our plans to maintain the container ownership portion of our business.

If we are unable to lease our new containers shortly after we purchase them, our business, results of operations, cash flows and financial condition may be harmed.

Lease rates for new containers are positively correlated to the fluctuations in the price of new containers, which is positively correlated with the price of steel, a major component used in the manufacture of new containers. If we are unable to lease the new containers that we purchase within a short period of time of such purchase, the market price of new containers and the corresponding market lease rates for new containers may decrease, regardless of the higher cost of the previously purchased containers. Additionally, if we believe new container prices are attractive, we may purchase more containers than we have immediate demand for if we expect container prices or lease rates may rise. If prices do not rise or new container demand weakens, we may be unable to lease this speculative inventory on attractive terms or at all. Declines in new container prices, lease rates, or the inability to lease new containers could harm our business, results of operations and financial condition.

 

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Consolidation of container manufacturers or the disruption of manufacturing for the major manufacturers could result in higher new container prices and/or decreased supply of new containers. Any material increase in the cost or reduction in the supply of new containers could harm our business, results of operations and financial condition.

We currently purchase all of our containers from manufacturers based in the PRC. If it were to become more expensive for us to procure containers in the PRC or to transport these containers at a low cost from the manufacturer to the locations where they are needed by our container lessees because of changes in exchange rates between the U.S. Dollar and Chinese Yuan, consolidation among container suppliers, increased tariffs imposed by the U.S. or other governments, changing trade patterns, increased fuel costs, increased labor costs, or for any other reason, we may have to seek alternative sources of supply and we may not be able to make alternative arrangements quickly enough to meet our container needs, and the alternative arrangements may increase our costs.

The availability and price of containers depend significantly on the capacity and bargaining position of the major container manufacturers. Three major manufacturers have approximately 80% of that industry’s market share. Additionally, one of the major container manufacturers is under common ownership with a large container lessor, which may impact our ability to competitively source containers from this manufacturer. This market structure and the commodity inputs used in manufacturing have led to significant variability in container prices. In particular, the increased focus on environmental matters in China may reduce the supply (and increase the cost) of steel and other raw materials used in our containers and the mandatory use of water borne paint by all container factories in China has already increased the cost of containers and created container production constraints. If an increased cost of purchasing containers is not matched by a corresponding increase in lease rates, or if we have difficulty in sourcing containers, our business, results of operations and financial condition would be harmed.

Sustained reduction in the production of new containers could harm our business, results of operations and financial condition.

Container manufacturing shutdowns in China in the wake of the financial crisis drastically reduced the production of standard dry freight containers from the fourth quarter of 2008 through the end of 2009, combined with continued retirement of older containers in the ordinary course, led to a decline in the world container fleet of approximately 4% in 2009, creating a shortage of containers as worldwide cargo volumes increased by 12.0% in 2010 and 8.6% in 2011. During the period of shutdowns, container manufacturers lost up to 60% of their skilled work force, and had limited production capacity in 2010 as they had to hire and train a new skilled work force. Although manufacturers resumed production in 2011 and continued steady production from 2012 through 2019, if there is a sustained reduction in the production of new containers, it could impact our ability to expand our fleet, which could harm our business, results of operations and financial condition.

Terrorist attacks, the threat of such attacks 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 U.S. 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 container lessees operate. For example, worldwide containerized trade dramatically decreased in the immediate aftermath of the September 11, 2001 terrorist attacks in the U.S., which affected demand for leased containers. In addition, terrorist attacks, threats of terrorism, violence, war or hostilities may directly impact ports, depots, our facilities or those of our suppliers or container lessees 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 containers.

Our lease agreements require our lessees to indemnify us for all costs, liabilities and expenses arising out of the use of our containers, including property damage to the containers, damage to third-party property and personal injury. However, our lessees may not have adequate resources to honor their indemnity obligations after a terrorist attack. Our insurance coverage is limited and is subject to large deductibles and significant exclusions and we have very limited insurance for liability arising from a terrorist attack. Accordingly, we may not be protected from liability (and expenses in defending against claims of liability) arising from a terrorist attack.

 

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We face extensive competition in the container leasing industry.

We may be unable to compete favorably in the highly competitive container leasing and container management businesses. We compete with a relatively small number of major leasing companies, many smaller lessors, companies and financial institutions offering finance leases, and promoters of container ownership and leasing as a tax-efficient investment. Some of these competitors may have greater financial resources and access to capital than we do. Additionally, some of these competitors may have large, underutilized inventories of containers, which could, if leased, lead to significant downward pressure on per diem rates, margins and prices of containers. Competition among container leasing companies depends upon many factors, including, among others: per diem rates; supply reliability; lease terms, including lease duration, drop-off restrictions and repair provisions; customer service; and the location, availability, quality and individual characteristics of containers. In recent years several container leasing companies have acquired other container lessors and we may face increased competition from these merged firms. Following the completion of each consolidation, the new entity may face further pressure for fleet growth and may compete even more aggressively, causing further declines in rental rates available from container leases. New entrants into the leasing business may be attracted by the historically high rate of containerized trade growth, access to the capital markets and low pricing for containers. New entrants may be willing to offer pricing or other terms that we are unwilling or unable to match. Additionally, the management agreements under which we manage containers for other parties do not restrict these container investors from having other container fleets managed by competing leasing companies or from directly competing with us.

Our lessees may decide to buy, rather than lease their containers.

We, like other suppliers of leased containers, are dependent upon decisions by shipping lines to lease rather than to buy their container equipment. Shipping lines own a significant amount of the world’s intermodal containers and effectively compete with us. In part due to constraints on their financing and need to allocate capital to new ship purchases and port terminals, in recent years, shipping lines have generally reduced their purchases of new containers. In 2019 we believe that about 60% of all shipping containers were purchased by leasing companies. Although we believe that this percentage should somewhat rebalance itself we still expect leasing companies to be a major purchaser of the new containers to be produced. Should shipping lines decide to buy a larger percentage of the containers they operate, our utilization rate would decrease, resulting in decreased leasing revenues, increased storage costs and increased repositioning costs. A decrease in the portion of leased containers would also reduce our investment opportunities and significantly constrain our growth.

For reporting periods beginning in 2019, the new accounting guidance under both generally accepted accounting principles in the United States of America (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”) requires recognition of right-of-use asset and corresponding lease liability of operating leases on the lessees’ balance sheet. Because the new leasing guidance virtually eliminates the financial statement benefit of entering into operating leases for the lessees, it could change our customers’ “lease vs. buy” decision and/or decision on lease structures and terms.

Our results of operations are subject to changes resulting from the political and economic policies of the PRC and economic activity in the PRC.

A substantial portion of our containers are leased out from locations in the PRC. The main manufacturers of containers are also located in the PRC. The political and economic policies of the PRC and the level of economic activity in the PRC may have a significant impact on our company and our financial performance.

Changes in the political leadership of the PRC may have a significant effect on laws and policies that impact economic growth and trade and the corresponding need for containers to ship goods from the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, and the imposition of additional restrictions on currency conversion, remittances abroad, and foreign investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation of or increases in such disparities could affect the political or social stability of the PRC. Furthermore, the current high level of debt by some companies in China may lead to defaults which may not be supported by the Chinese government. In recent years the rate of economic growth in the PRC has declined. Additionally, government policies that reduce the emphasis on manufacturing and increase priorities for domestic consumption and services may alter trade patterns and dampen demand for containers. Chinese government environmental policies and practices may reduce steel production which would impact container costs and may limit factory production, which could impact trade growth and container demand.

 

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A large number of our shipping line customers are domiciled either in the PRC (including Hong Kong) or in Taiwan. In 2019, approximately 29.6% of our revenue was attributable to shipping line customers that were either domiciled in the PRC (including Hong Kong) or in Taiwan. All container manufacturing facilities from which we purchased our containers in 2019 are located in the PRC. A reduced rate of economic growth, changes to economic or trade policy or political instability in either the PRC or Taiwan could have a negative effect on our major customers, our ability to obtain containers and correspondingly, our results of operations and financial condition.

The legal systems in the PRC and other jurisdictions have inherent uncertainties that could limit the legal protections available to us and even if legal judgments are obtained, collection may be difficult.

We currently purchase all of our containers from manufacturers based in the PRC. In addition, a substantial portion of our containers are leased out from locations in the PRC. California law governs almost all of these agreements. However, disputes or settlements arising out of these agreements may need to be enforced in the PRC. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, since these laws and regulations are relatively new and the PRC legal system continues to evolve, the interpretations of many laws, regulations and rules are not always uniform and may be subject to considerable discretion, variation, or influence by external forces unrelated to the legal merits of a particular matter. The enforcement of these laws, regulations, and rules involves uncertainties that may limit remedies available to us. Any litigation or arbitration in the PRC may be protracted and may result in substantial costs and diversion of resources and management attention. In addition, the PRC may enact new laws or amend current laws that may be detrimental to us, which may have a material adverse effect on our business operations. If we are unable to enforce any legal rights that we may have under our contracts or otherwise in the PRC, our ability to compete and our results of operations could be harmed.

In addition, as our containers are used in trade involving goods being shipped to locations throughout the world, it is not possible to predict, with any degree of certainty, the jurisdictions in which enforcement proceedings may be commenced. Litigation and enforcement proceedings have inherent uncertainties in any jurisdiction and are expensive. These uncertainties are enhanced in countries that have less developed legal systems where the interpretation of laws and regulations is not consistent, may be influenced by factors other than legal merits and may be cumbersome, time-consuming and even more expensive. For example, repossession from defaulting lessees may be difficult and more expensive in jurisdictions whose laws do not confer the same security interests and rights to creditors and lessors as those in the United States and where the legal system is not as well developed. Additionally, even if we are successful in obtaining judgments against defaulting lessees, these lessees may have limited owned assets and/or heavily encumbered assets and the collection and enforcement of a monetary judgment may be unsuccessful. As a result, the remedies available and the relative success and expedience of collection and enforcement proceedings with respect to the containers in various jurisdictions cannot be predicted.

Because substantially all of our revenues are generated in U.S. dollars, but a significant portion of our expenses are incurred in other currencies, exchange rate fluctuations could have an adverse impact on our results of operations.

The U.S. dollar is our primary operating currency. Almost all of our revenues are denominated in U.S. dollars, and approximately 77% of our direct container expenses -owned fleet were denominated in U.S. dollars for the year ended December 31, 2019. Accordingly, a significant amount of our expenses are incurred in currencies other than the U.S. dollar. This difference could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to the other currencies. During 2019, 2018 and 2017, 23%, 21%, and 25%, respectively, of our direct container expenses – owned fleet were paid in up to 20 different foreign currencies. A decrease in the value of the U.S. dollar against non-U.S. currencies in which our expenses are incurred translates into an increase in those expenses in U.S. dollar terms, which would decrease our net income. While the prices of the used containers we trade or dispose are primarily quoted and billed in U.S. Dollars, declines in the currencies where these containers are sold relative to the U.S. Dollar can serve to reduce the market prices for used containers, which will decrease our net income. We do not engage in foreign currency hedging activities which might reduce the volatility associated with exchange rates.

 

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The international nature of the container shipping industry exposes us to numerous risks.

We are 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;

 

   

fluctuations in currency exchange rates;

 

   

changes in governmental policy or regulation;

 

   

restrictions on the transfer of funds or other assets into or out of different countries;

 

   

import and export duties and quotas;

 

   

domestic and foreign customs, tariffs and taxes;

 

   

war, hostilities and terrorist attacks, or the threat of any of these events;

 

   

government instability;

 

   

nationalization of foreign assets;

 

   

government protectionism;

 

   

compliance with export controls and economic sanctions, including those of the U.S. Department of Commerce and the U.S. Treasury or other governments;

 

   

compliance with import procedures and controls, including those of the U.S. Department of Homeland Security or other governments;

 

   

consequences from changes in tax laws, including tax laws pertaining to the container investors;

 

   

potential liabilities relating to foreign withholding taxes;

 

   

labor or other disruptions at key ports;

 

   

difficulty in staffing and managing widespread operations; and

 

   

restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions.

 

   

Outbreaks of regional or international epidemics or pandemics such as a Coronavirus or SARS.

One or more of these factors or other related factors may impair our current or future international operations and, as a result, harm our business, results of operations and financial condition.

We rely on our proprietary information technology systems to conduct our business. If these systems fail to perform their functions adequately, or if we experience an interruption in their operation, our business, results of operations and financial condition could be harmed.

The efficient operation of our business is highly dependent on our proprietary information technology systems. We rely on our systems to record transactions, such as repair and depot charges, purchases and disposals of containers and movements associated with each of our owned or managed containers. We use the information provided by these systems in our day-to-day business decisions in order to effectively manage our lease portfolio, reduce costs and improve customer service. We also rely on these systems for the accurate tracking of the performance of our managed fleet for each container investor. In 2020 we commenced efforts to replace several legacy computer systems that are central to our business operations. The failure of our systems to perform as we expect, or any failure to successfully replace our legacy systems, could disrupt our business, adversely affect our results of operations and cause our relationships with lessees and container investors to suffer. 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 and viruses or cyber-attacks. Even though we have developed redundancies and other contingencies to mitigate any disruptions to our information technology systems, these redundancies and contingencies may not completely prevent interruptions to our information technology systems. In recent years we have moved various information technology systems and data to cloud-based storage providers and software vendors. We face additional risks from relying on third parties to store, process and manage our data and software. Any such interruptions could harm our business, results of operations and financial condition.

 

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Cyber attacks and/or information technology security breaches on us or our customers could materially and adversely affect us.

If we, our customers or other third parties with which we do business were to fall victim to successful cyber-attacks or experience other cybersecurity incidents that cause system failure, downtime, or the loss of sensitive data, we may incur substantial costs and suffer other negative consequences. Our ability to handle the delivery and return of containers, lease billing, and the sale of older containers is dependent on the stable operation of our information technology systems. Our customers’ ability to generate revenue and make timely payments to us is similarly dependent on the stable operation of their information technology systems. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential data; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service.

Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Should the Company be affected by such an incident, we may incur substantial costs and suffer other negative consequences, which may include substantial remediation costs, such as liability for stolen assets or information, repairs of system damage, and incentives to customers or business partners in an effort to maintain relationships after an attack, as well as litigation and legal risks.

Use of counterfeit and improper refrigerant in refrigeration machines for refrigerated containers could cause irreparable damage to the refrigeration machines, death or personal injury, and materially impair the value of our refrigerated container fleet.

In past years, there were a limited number of reports of counterfeit and improper refrigerant gas being used to service refrigeration machines in depots primarily in Asia. The use of this counterfeit gas has led to the explosion of several refrigeration machines. Several of these incidents resulted in personal injury or death, and in all cases, the counterfeit gas led to irreparable damage to the refrigeration machines.

Safer testing procedures were developed and implemented by refrigeration manufacturers and industry participants in order to determine whether counterfeit or improper gas was used to service a refrigeration machine. However, there can be no assurance that these procedures will prove to continue to be reliable and cost effective. If industry procedures and tests are not proven safe and effective or if the use of such counterfeit and improper refrigerant recurs and is widespread or other counterfeit refrigerant issues emerge in the future, the value of our refrigerated container fleet and our ability to lease refrigerated containers could be materially impaired and could therefore have a material adverse effect on our financial condition, results of operations and cash flows. Additionally, we might be subject to claims for damages by parties injured by contaminated refrigeration machinery operated by our lessees which may materially adversely affect us.

We face risks from our tank container management agreement with Trifleet Leasing (The Netherlands) B.V.

We entered into a tank container management agreement with Trifleet Leasing (The Netherlands) B.V. (“Trifleet”) in June 2013. Under this agreement, we invest funds with Trifleet for the purchase and leasing of tank containers. Trifleet is our exclusive manager for investments in tank containers. Intermodal tank containers are used for the transport and storage of liquid foodstuffs, chemicals and gases. This is a specialized market subject to a number of regulations and strict operating procedures. As Trifleet is investing funds on our behalf in tank containers, our return on any investments under this management agreement are highly reliant on their skill and performance, as well as, the overall investment climate for tank containers. While we approve of the amounts committed under the management agreement, Trifleet selects the lessees, negotiates lease terms, determines equipment specifications, negotiates equipment orders and supervises production, and is responsible for all other management activities including customer billing, equipment return, re-leasing, maintenance and repairs. If Trifleet or the tank container market does not perform as we anticipate, we may not receive adequate returns on our investment and our results

 

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could be materially impacted. Additionally, given the nature of tank containers and their cargos, our ownership of tank containers could expose us to different and additional risks than we generally face as the owner and lessor of dry freight and refrigerated containers. While lessees, Trifleet and ourselves all maintain insurance, and lessees agree to accept liability for claims caused by the operation of tank containers, this may still be inadequate to shield us from costs and liability from any claims arising from tank containers that we own pursuant to the Trifleet management agreement.

If our insurance is inadequate or if we are unable to obtain insurance, we may experience losses.

Under all of our leases, our lessees are generally responsible for loss of or damage to a container beyond ordinary wear and tear, and they are required to purchase insurance to cover any other liabilities. Our depots are also required to maintain insurance and indemnify us against losses. We also maintain our own insurance to cover our containers when they are not on-hire to lessees or when the lessee fails to have adequate primary coverage, and third-party liability insurance for both on-hire and off-hire containers. In addition, we maintain insurance that, after satisfying our deductibles, would cover loss of revenue as a result of default under most of our leases, as well as, the recovery cost or replacement value of most of our containers. Lessees’ and depots’ insurance policies and indemnity rights may not protect us against losses. Our own insurance may prove to be inadequate to prevent against losses or in the future coverage may be unavailable or uneconomic, and losses could arise from a lack of insurance coverage.

U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company for U.S. federal income tax purposes.

Based upon the nature of our business activities, we could become classified as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to direct or indirect U.S. investors in our common shares. For example, if we are a PFIC, our U.S. investors could become subject to increased tax liabilities under U.S. tax laws and regulations and could become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either:

 

   

75% or more of our gross income in the taxable year is passive income, or

 

   

the average percentage of our assets (which includes cash) by value in a taxable year which produce or are held for the production of passive income is at least 50%.

In applying these tests, we are treated as owning or generating directly our pro rata share of the assets and income of any corporation in which we own at least 25% by value. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we have raised.

Under the PFIC rules, unless a U.S. investor is permitted to and does elect otherwise under the Internal Revenue Code, such U.S. investor would be liable to pay U.S. federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the investor’s holding period for our common shares. Based on the composition of our income, valuation of our assets, and our election to treat certain of our subsidiaries as disregarded entities for U.S. federal income tax purposes, we do not believe we were a PFIC for any period after our initial public offering (“IPO”) date and we do not expect that we should be treated as a PFIC for our current taxable year. However, there can be no assurance at all in this regard. Because the PFIC determination is highly fact intensive and made at the end of each taxable year, it is possible that we may be a PFIC for the current or any future taxable year or that the U.S. Internal Revenue Service (“IRS”) may challenge our determination concerning our PFIC status.

 

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We may become subject to unanticipated tax liabilities that may have a material adverse effect on our results of operations.

Textainer Group Holdings Limited is a Bermuda company, and we believe that a significant portion of the income derived from our operations will not be subject to tax in Bermuda, which currently has no corporate income tax, or in many other countries in which we conduct activities or in which our customers or containers are located. However, this belief is based on the anticipated nature and conduct of our business, which may change. It is also based on our understanding of our position under the tax laws of the countries in which we have assets or conduct activities. This position is subject to review and possible challenge by taxing authorities and to possible changes in law that may have retroactive effect.

A portion of our income is treated as effectively connected with our conduct of a trade or business within the U.S., and is accordingly subject to U.S. federal income tax. It is possible that the IRS may challenge that a greater portion of our income is effectively connected income that should be subject to U.S. federal income tax.

Our results of operations could be materially and adversely affected if we become subject to a significant amount of unanticipated tax liabilities.

Our U.S. subsidiaries may be treated as personal holding companies for U.S. federal tax purposes now or in the future.

Any of our direct or indirect U.S. subsidiaries could be subject to additional U.S. tax on a portion of its income if it is considered to be a personal holding company (“PHC”) for U.S. federal income tax purposes. This status depends on whether more than 50% of the subsidiary’s shares by value could be deemed to be owned (taking into account constructive ownership rules) by five or fewer individuals and whether 60% or more of the subsidiary’s adjusted ordinary gross income consists of “personal holding company income,” which includes certain forms of passive and investment income. The PHC rules do not apply to non-U.S. corporations. We believe that none of our U.S. subsidiaries should be considered PHCs. In addition, we intend to cause our U.S. subsidiaries to manage their affairs in a manner that reduces the possibility that they will meet the 60% income threshold. However, because of the lack of complete information regarding our ultimate share ownership (i.e., particularly as determined by constructive ownership rules), our U.S. subsidiaries may become PHCs in the future and, in that event, the amount of U.S. federal income tax that would be imposed could be material.

Changes in tax laws or their application could adversely affect the results of our operations.

Our worldwide operations are taxed under the laws of the jurisdictions in which we operate. However, the integrated nature of our worldwide operations can produce conflicting claims from revenue authorities in different countries as to the profits to be taxed in the individual countries, including disputes relating to transfer pricing. Some of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which provide a framework for mitigating the impact of double taxation on our revenues and capital gains. However, mechanisms developed to resolve such conflicting claims are largely uncertain, and can be expected to be very lengthy in coming to a final determination in the applicable jurisdictions.

In recent years, tax authorities around the world have increased their scrutiny of company tax filings, and have become more rigid in exercising any discretion they may have. As part of this, the Organization for Economic Co-operation and Development (“OECD”) has proposed a number of tax law changes under its Base Erosion and Profit Shifting (“BEPS”) Action Plans to address issues of transparency, coherence and substance.

These OECD tax reform initiatives also need local country implementation, including in the Bermuda and U.S., which may result in significant changes to established tax principles. In response to EU efforts to investigate the tax policies of non-EU jurisdictions, effective December 31, 2018 Bermuda adopted the Economic Substance Act of 2018, which requires that Bermuda registered entities engaged in certain relevant activities (which include finance, leasing and shipping) maintain sufficient economic substance and activities in Bermuda. The failure to comply with the Economic Substance Act may result in fines and penalties and ultimately the striking off of an entity from the Bermuda corporate register. The Economic Substance Act took effect on July 1, 2019 and additional guidance is expected from the Bermuda government about the implementation of, and compliance with, the Act. We may be unable to comply with the Economic Substance Act or compliance with the act may materially adversely impact our operations and results. Penalties for noncompliance could adversely affect our operations and results.

 

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In addition, in the U.S., the U.S. Tax Cuts and Job Act of 2017 was signed into law on December 22, 2017 (the “New Tax Act”), which includes substantial changes to the U.S. taxation of individuals and businesses. The New Tax Act also establishes new tax laws that will affect our operations, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) elimination of the corporate alternative minimum tax; (3) the creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax on taxable income adjusted for certain base erosion payments; (4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to currently tax certain global intangible low-taxed income (“GILTI”) of controlled foreign corporations, which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to 50% to reduce this income tax liability (subject to some limitations); (6) a new limitation on deductible interest expense; (7) limitations on the deductibility of certain executive compensation; (8) limitations on the use of FTCs to reduce the U.S. income tax liability; and (9) limitations on net operating losses generated in the taxable years beginning after December 31, 2017, to 80% of taxable income. Our financial statements for the year ended December 31, 2019 reflect the effects of the New Tax Act based on current guidance. However, there are uncertainties and ambiguities in the application of certain provisions of the New Tax Act, and as a result we made certain judgments and assumptions in the interpretation thereof. The U.S. Treasury Department and the Internal Revenue Service may issue further guidance on how the provisions of the New Tax Act will be applied or otherwise administered that differs from our current interpretation. In addition, the New Tax Act could be subject to potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us. As we further analyze the impact of the New Tax Act and collect relevant information, we may make adjustments to the provisional amounts.

In general, such tax reform efforts, including with respect to tax base or rate, transfer pricing, intercompany dividends, cross border transactions, controlled corporations, and limitations on tax relief allowed on the interest on intercompany debt, will require us to continually assess our organizational structure against tax policy trends, and could lead to an increased risk of international tax disputes and an increase in our effective tax rate, and could adversely affect our financial results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

We have significant net operating loss carry-forwards in the United States. As of December 31, 2019, we had net operating loss carry-forwards relating to U.S. federal income taxes; $108,014 which will begin to expire from December 31, 2020 through December 31, 2037 if not utilized and $20,351 has no expiration date.

In the United States, utilization of these net operating loss carry-forwards for federal income tax purposes may be subject to an annual limitation if there is an ownership change within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change within the meaning of Section 382 occurs if a transaction or series of transactions over a three-year period result in a cumulative change of more than 50% in the beneficial ownership of a company’s stock. We do not believe we have a limitation on the ability to utilize our net operating loss carry-forwards under Section 382 as of December 31, 2019. However, issuances, sales and/or exchanges of our stock (including, potentially, relatively small transactions and transactions beyond our control) occurring after December 31, 2019, taken together with prior transactions with respect to our stock over a three-year period, could trigger an ownership change under Section 382 in the future and therefore a limitation on our ability to utilize our net operating loss carryforwards. Any such limitation could cause some loss carryforwards to expire before we would be able to utilize them to reduce taxable income in future periods, possibly resulting in a substantial income tax expense or write down of our tax assets or both. Furthermore, net operating losses generated subsequent to December 31, 2017 are subject to the New Tax Act, which removes net operating loss expirations, but limits utilization against 80% of taxable income.

The calculation of our income tax expense requires judgment and the use of estimates.

We periodically assess tax positions based on current tax developments, including enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted appropriately through the income tax provision. We account for income tax positions on uncertainties by recognizing the effect of income tax positions only if those positions are more likely than not of being sustained and maintain reserves for income tax positions we believe are not 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. However, due to the judgment required in estimating those reserves, actual amounts paid, if any, could differ from these estimates.

 

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The U.S. government has special contracting requirements that create additional risks.

In January 2019, we were informed that the U.S. Transportation Command Directorate of Acquisition (“USTranscom”) had issued a multi-vendor contract that included us as one of the vendors selected to supply leased marine containers and intermodal equipment to the U.S. Military. As a multi-vendor contract, there is no guarantee that the U.S. Military will accept our bids to supply containers and related services. Thus, expected revenues from the USTranscom contract are difficult to predict and may not materialize or prove profitable. If we do not perform in accordance with the terms of the USTranscom contract, we may receive a poor performance report that would be considered by the U.S. Military in making any future awards.

In contracting with the U.S. Military, we are subject to U.S. government contract laws, regulations and other requirements that impose risks not generally found in commercial contracts. For example, U.S. government contracts require contractors to comply with a number of socio-economic requirements and to submit periodic reports regarding compliance, are subject to audit and modification by the U.S. government in its sole discretion, and impose certain requirements relating to software and/or technical data that, if not followed, could result in the inadvertent grant to the U.S. government of broader licenses to use and disclose such software or data than intended.

These laws, regulations and contract provisions also permit, under certain circumstances, the U.S. government unilaterally to:

 

   

suspend or prevent us for a set period of time from receiving new government contracts or extending existing contracts based on violations or suspected violations of laws or regulations;

 

   

terminate the USTranscom contract;

 

   

reduce the scope and value of the USTranscom contract;

 

   

audit our performance under the USTranscom contract and our compliance with various regulations; and

 

   

change certain terms and conditions in the USTranscom contract.

In addition, the U.S. Military may terminate the USTranscom contract either for its convenience at any time or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable the contractor to recover only those costs incurred or committed, and settlement expenses and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and make the contractor liable for excess costs incurred by the U.S. Military in procuring undelivered items from another source.

In addition, the U.S. government could bring criminal and civil charges against us based on intentional or unintentional violations of the representations and certifications that we have made in the USTranscom contract. Although adjustments arising from U.S. government audits and reviews have not seriously harmed our business in the past, future audits and reviews could cause adverse effects. We could also suffer serious harm to our reputation if allegations of impropriety were to be made against us.

We may choose to pursue acquisitions or joint ventures that could present unforeseen integration obstacles or costs and we face risks from our joint venture.

We may pursue acquisitions and joint ventures. Acquisitions involve a number of risks and present financial, managerial and operational challenges, including:

 

   

potential disruption of our ongoing business and distraction of management;

 

   

difficulty integrating personnel and financial and other systems;

 

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hiring additional management and other critical personnel; and

 

   

increasing the scope, geographic diversity and complexity of our operations.

In addition, we may encounter unforeseen obstacles or costs in the integration of acquired businesses. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business. Acquisitions or joint ventures may not be successful, and we may not realize any anticipated benefits from acquisitions or joint ventures.

On December 20, 2012, Textainer Limited (“TL”), our wholly-owned subsidiary, purchased 50.1% of the outstanding common shares of TAP Funding Ltd. (“TAP Funding”). TAP Funding owns a fleet of containers under our management. TAP Funding is governed by members and management agreements. TL has two voting rights and TAP Ltd. (“TAP”), the 49.9% shareholder, has one voting right in TAP Funding, with the exception of certain matters such as bankruptcy proceedings, the incurrence of debt and mergers and consolidations, which require unanimity. TL also has two seats and TAP has one seat on TAP Funding’s board of directors. While we own the majority of TAP Funding, we face risks associated with TAP Funding’s structure that requires both shareholders to agree on certain significant matters such as debt financing, mergers and liquidation. It is possible that the interests of the other shareholder could be different from our interests. Conflicts between us and the other shareholder of TAP Funding could result in litigation, an inability to finance and operate TAP Funding, and other problems that might have a material adverse impact on us as a whole.

Our senior executives are critical to the success of our business and any inability to retain them or recruit and successfully integrate new personnel could harm our business, results of operations and financial condition.

Our senior management has a solid history in the container leasing industry. 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.

In August 2018, our current President and CEO, Olivier Ghesquiere, assumed this position upon the retirement of Philip Brewer, our former President and CEO. In October 2018, our Executive Vice President and CFO, Michael Chan, assumed this position upon the departure of our former Executive Vice President and CFO, Hilliard Terry. We face risks from the changes in senior management and our performance will depend on the success of our management transition and the integration of these personnel into their new roles with the Company.

Our success also depends on our ability to retain our experienced sales force and technical personnel as well as recruit 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. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new container lessees and provide acceptable levels of customer service could suffer. We have “at will” employment agreements with all of our executive officers.

The lack of an international title registry for containers increases the risk of ownership disputes.

Although the Bureau International des Containers registers and allocates a four letter prefix to every container in accordance with ISO standard 6346 (Freight container coding, identification and marking) to identify the owner/operator and each container has a unique prefix and serial number, 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 this has not occurred to date, the lack of a title recordation system with respect to containers could result in disputes with lessees, end-users, or third parties who may improperly claim ownership of containers.

 

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We may incur costs associated with cargo security regulations, which may adversely affect our business, results of operations and financial condition.

We may be subject to regulations promulgated in various countries, including the U.S., seeking to protect the integrity of international commerce and prevent the use of containers 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 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 U.S. Moreover, the International Convention for Safe Containers, 1972, as amended, adopted by the International Maritime Organization, applies to 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 containers and/or the adaptation of existing containers 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 containers transported in international commerce. Regardless of the existence of current or future government regulations mandating the safety standards of intermodal shipping containers, our competitors may adopt such products or our container lessees may require 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, results of operations and financial condition.

Environmental liability and regulations may adversely affect our business, results of operations and financial condition.

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, ground 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 costs arising out of third-party claims for property or natural resource damage and personal injury, as a result of violations of or liabilities under or compliance with environmental laws and regulations in connection with our or our lessees’ current or historical operations. Under some environmental laws in the U.S. and certain other countries, the owner or operator of a container may be liable for environmental damage, cleanup or other costs in the event of a spill or discharge of material from the container without regard to the fault of the owner or operator. While we typically maintain certain limited liability insurance and typically require lessees to provide us with indemnity against certain losses, the insurance coverage may not be sufficient to protect against any or all liabilities and such indemnities may not be sufficient, or available, to protect us against losses arising from environmental damage. Moreover, our lessees may not have adequate resources, or may refuse to honor their indemnity obligations and our insurance coverage is subject to large deductibles, coverage limits and significant exclusions.

Environmental regulations also impact container production and operation, including regulations on the use of chemical refrigerants due to their ozone depleting and global warming effects. Our refrigerated containers currently use R134A refrigerant. While R134A does not contain chlorofluorocarbons (“CFCs”), the European Union (“EU”) instituted regulations to phase out the use of R134A in automobile air conditioning systems which began in 2011 due to concern that the release of R134A into the atmosphere may contribute to global warming. While the European Union regulations do not currently restrict the use of R134A in refrigerated containers or trailers, it is possible that the phase out of R134A in automobile air conditioning systems will be extended to containers in the future and our operations could be impacted. It has been proposed that R134A usage in containers be banned beginning in 2025, although the final decision has not been made as of yet.

Container production also raises environmental concerns. The floors of dry freight containers are plywood typically made from tropical hardwoods. Due to concerns regarding de-forestation and climate change, many countries have implemented severe restrictions on the cutting and export of this wood. Accordingly, container manufacturers have switched a significant portion of production to alternatives such as birch, bamboo, and other farm grown wood and users are also evaluating alternative designs that would limit the amount of plywood required and are also considering possible synthetic materials. New woods or other alternatives have not proven their durability over the typical life of a dry freight container, and if they cannot perform as well as the hardwoods have historically, the future repair and operating costs for these containers may be impacted. The insulation foam in the walls of certain refrigerated containers requires the use of a blowing agent that contains CFCs. Manufacturers are phasing out the use of this blowing agent in manufacturing, however, if future regulations prohibit the use or servicing of containers with insulation manufactured with this blowing agent we could be forced to incur large retrofitting expenses and these containers might bring lower rental rates and disposal prices. EU regulations currently restrict the sale or use of

 

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refrigerated containers manufactured with the CFC containing blowing agent and strict enforcement of these regulations could impact our ability to lease or sell these refrigerated containers in EU countries. The container industry in China has always used solvent-based paint systems. Regulations in China for the container industry required stopping the use of solvent-based paint systems in 2017, due to the restrictions on volatile organic compounds used in solvent-based paints. To comply with the new regulations, new water borne paint systems were developed and are being used by container manufacturers. The use of water borne paint systems has required significant factory investment and it is problematic to apply water borne paint during the winter in colder parts of China. The conversion to water borne paint impacts factory capacity, increase the cost of containers and require greater investment by us in container inspection and factory supervision. The industry does not have significant years of experience with water borne paint and the long term durability of water borne paint may not be the same as solvent based paint which could impact the useful life and resale value of containers with water borne paint.

We are subject to certain U.S. laws that may impact our international operations and any investigation or determination that we violated these laws may affect our business and operations adversely.

As a Bermuda corporation that has an indirect wholly-owned U.S. subsidiary with operations in the U.S., our U.S. operations are subject to certain U.S. laws that may also impact our international operations. We are subject to the regulations imposed by the Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. We are also subject to U.S. Executive Orders and U.S. Treasury sanctions regulations restricting or prohibiting business dealings in or with certain nations and with certain specially designated nationals (individuals and legal entities). Any determination or investigation into violations of these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We could face litigation involving our management of containers for container investors.

We manage containers for container investors under management agreements that are negotiated with each container investor. We make no assurances to container investors that they will make any amount of profit on their investment or that our management activities will result in any particular level of income or return of their initial capital. Although our management agreements contain contractual protections and indemnities that are designed to limit our exposure to such litigation, such provisions may not be effective, and we may be subject to a significant loss in a successful litigation by a container investor.

We may not be able to resume paying a dividend and any dividends paid in the future could be reduced or eliminated.

We eliminated our dividend payment in the fourth quarter of 2016. We may not be able, or may choose not to reinstate our dividend program and pay future dividends, and if reinstated any future dividend could again be eliminated or reduced. The declaration, amount and payment of future dividends are at the discretion of our board of directors and will be dependent on our future operating results and the cash requirements of our business. There are a number of factors that can affect our ability to pay dividends and there is no guarantee that we will pay dividends in any given year, in each quarter of a year, or pay any specific amount of dividends. In addition, we will not pay dividends in the event we are not allowed to do so under Bermuda law, are in default under (or such payment would cause a default under) TL’s revolving credit facilities or term loan, or if such payment would cause us to breach any of our covenants. These covenants include certain financial covenants, which would be directly affected by the payment of dividends, such as a maximum ratio of consolidated funded debt to consolidated tangible net worth (which amount would decrease by the amount of any dividend paid). The reduction, suspension or elimination of dividends may negatively affect the market price of our common shares. Furthermore, since we are a holding company, substantially all of the assets shown on our consolidated balance sheet are held by our subsidiaries. Accordingly, our earnings and cash flow and our ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends as permitted under our lending agreements.

 

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We face risks from our share repurchase program.

In September 2019 we announced a share repurchase program to repurchase up to $25 million of our shares and in March 2020 we announced an increase by another $25 million of our shares. Purchases under this program are at our discretion and we may not purchase all $50 million of shares under the program. This program may be reduced or terminated at any time by us. Share repurchases may reduce our financial flexibility, limit our ability to reduce debt, limit our ability to resume a dividend program and may reduce our funds available for container investments. Using funds to repurchase shares could cause our debt to equity ratio to increase and may impair our ability to comply with the financial covenants in our debt agreements. Share repurchases may also reduce the number of shares available for other investors to purchase in the market which could add to share price volatility for our stock. We face these and other risks related to share repurchases. During 2019, the Company repurchased approximately 879,000 shares for a total amount of approximately $8.6 million. The Company did not repurchase any of its common shares during 2018 and 2017.

Future changes in accounting rules could significantly impact how we, our managed fleet container investors and our customers account for our leases.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under this new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The guidance is effective for interim and annual periods beginning after December 15, 2018 and early application is permitted. Additionally, IFRS has issued similar changes to lease accounting under IFRS 16 Leases. Because the new leasing guidance virtually eliminates for lessees the financial statement benefit of entering into operating leases, it could change the way we and our customers conduct our businesses. Future changes in accounting rules will also impact container investors whose containers are managed by us. The accounting of these changes could make it more difficult for such container investors to raise funding and may also make managed container programs less attractive to container investors.

Risks Related to Our Common Shares

The market price and trading volume of our common shares, which may be affected by market conditions beyond our control, have been volatile and could continue to remain volatile.

The market price of our common shares has been, and may continue to be highly volatile and subject to wide fluctuations. In addition, the trading volume in our common shares has fluctuated and may continue to fluctuate, causing significant price variations to occur. Since our initial public offering, our common shares have fluctuated from an intra-day low of $4.23 per share to an intra-day high of $43.96 per share. If the market price of the shares declines significantly, the value of an investment in our common shares would decline. The market price of our common shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our common shares or result in fluctuations in the price or trading volume of our common shares include:

 

   

variations in our quarterly operating results;

 

   

failure to meet analysts’ earnings estimates;

 

   

publication of research reports about us, other intermodal container lessors or the container shipping industry or the failure of securities analysts to cover our common shares or our industry;

 

   

additions or departures of key management personnel;

 

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adverse market reaction to any indebtedness we may incur or preference or common shares we may issue in the future;

 

   

changes in our dividend payment or share repurchase policies or failure to execute our existing policies;

 

   

actions by shareholders;

 

   

changes in market valuations of similar companies;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;

 

   

speculation in the press or investment community;

 

   

changes or proposed changes in laws or regulations affecting the container shipping industry or enforcement of these laws and regulations, or announcements relating to these matters; and

 

   

impact of global financial crises or stock market disruptions.

Recently and in the past, the stock market has experienced extreme price and volume fluctuations. These market fluctuations could result in extreme volatility in the trading price of our common shares, which could cause a decline in the value of your investment in our common shares. In addition, the trading price of our common shares could decline for reasons unrelated to our business or financial results, including in reaction to events that affect other companies in our industry even if those events do not directly affect us. You should also be aware that price volatility may be greater if the public float and trading volume of our common shares are low.

We face risks related to our dual listing on the Johannesburg Stock Exchange and our relationship with Trencor.

Trencor Limited, a company traded on the Johannesburg Stock Exchange (the “JSE”) in South Africa, owned approximately 47.5% of our issued and outstanding common shares. In December 2019 we commenced a secondary, or dual, listing of our common shares on the JSE under the symbol “TXT”. Promptly following our dual listing, Trencor distributed approximately 24.3 million of its shares in the Company to Trencor’s own shareholders and these shares are now trading on the JSE. Trencor retained 3.0 million, or approximately 5.3%, of our common shares as of December 31, 2019. Two of our eight directors are also directors of Trencor. These directors owe fiduciary duties to each company and may have conflicts of interest in matters involving or affecting us as well as Trencor. We have no agreements with Trencor that limit or restrict its ability to sell or transfer its remaining shares in us. Any sale or transfer of some or all of the common shares owned by Trencor or our other large South African shareholders could adversely affect our share price.

While our primary listing remains on the New York Stock Exchange, or NYSE, and we follow the corporate governance requirements applicable to a Bermuda company listed as a foreign private issuer on the NYSE, holders of our TXT shares on the JSE, including possibly Trencor, may seek to impose on us some or all of the corporate governance practices applicable to South African companies which may result in constraints on management and may involve significant costs. These include the King IV Report on Corporate Governance, a document accepted by the JSE and promulgated by the South African Institute of Directors which, among other things, suggests that corporations in their corporate decision-making consider the following stakeholders in addition to the owners of shares: parties who contract with the enterprise; parties who have a non-contractual nexus with the enterprise (including civil society and the environment); and the state.

Any future issuance of securities by us on the JSE would be subject to compliance with JSE rules and subject to review by the JSE and possibly South African exchange control regulations. These requirements could restrict or limit our ability to issue new shares in South Africa. If a significant percentage of our shares remain on the JSE, limits on our ability to issue new equity in South Africa could materially impact our ability to access capital for growth and negatively impact our business.

If we are unwilling or unable to comply with the current or future continuing listing requirements of the JSE we may have our shares delisted from the JSE. The JSE is the primary stock exchange in South Africa and there are restrictions on South African investors holding securities outside South Africa, including on the NYSE. A delisting from the JSE might cause significant sales of our common shares and negatively impact the price of our common shares on the NYSE. If we wish to voluntarily delist our shares from the JSE we may be required to provide a cash tender offer to all holders on the JSE and we may be unwilling or financially unable to do, which could limit our ability to avoid negative share price impacts from any delisting of our shares on the JSE.

 

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We are a holding company with no material direct operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.

We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries, which own our operating assets. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our common shares. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions or lending covenants. If we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretion not to, pay dividends on our common shares.

It may not be possible for investors to enforce U.S. judgments against us.

We and all of our direct and indirect subsidiaries, except Textainer Equipment Management (U.S.) Limited and Textainer Equipment Management (U.S.) II LLC, are incorporated in jurisdictions outside the U.S. A substantial portion of our assets and those of our subsidiaries are located outside of the U.S. In addition, half of our directors are non-residents of the U.S., and all or a substantial portion of the assets of these non-residents are located outside the U.S. As a result, it may be difficult or impossible for U.S. investors to serve process within the U.S. upon us, our non-U.S. subsidiaries, or our directors, or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our assets or the assets of our subsidiaries are located would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws, or would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.

We are a foreign private issuer and, as a result, under NYSE rules, we are not required to comply with certain corporate governance requirements.

As a foreign private issuer, we are permitted by the NYSE to comply with Bermuda corporate governance practice in lieu of complying with certain NYSE corporate governance requirements. This means that we are not required to comply with NYSE requirements that:

 

   

the board of directors consists of a majority of independent directors;

 

   

independent directors meet in regularly scheduled executive sessions;

 

   

the audit committee satisfy NYSE standards for director independence (although we must still comply with independence standards pursuant to Rule 10A-3 promulgated under the U.S. Securities Exchange Act of 1934, as amended);

 

   

the audit committee have a written charter addressing the committee’s purpose and responsibilities;

 

   

we have a nominating and corporate governance committee composed of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

we have a compensation committee composed of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

we establish corporate governance guidelines and a code of business conduct;

 

   

our shareholders approve any equity compensation plans; and

 

   

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

 

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Our board of directors has adopted an audit committee charter, a compensation committee charter and a nominating and governance committee charter. Additionally, we have a company code of conduct, corporate governance guidelines, conduct performance evaluations of our board and committees, and have obtained shareholder approval for our equity compensation plan. However, we use some of the exemptions available to a foreign private issuer. As a result, our board of directors may not consist of a majority of independent directors and our compensation committee may not consist of any or a majority of independent directors. Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

Required public company corporate governance and financial reporting practices and policies have increased our costs, and we may be unable to provide the required financial information in a timely and reliable manner.

Our management may not be able to continue to meet the regulatory compliance and reporting requirements that are applicable to us as a public company. This result may subject us to adverse regulatory consequences, and could lead to a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. If we do not maintain compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, we could suffer a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our common shares to decline.

In addition, if we fail to maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner or otherwise comply with the standards applicable to us as a public company. Any failure by us to timely provide the required financial information could materially and adversely impact our financial condition and the market value of our common shares. Furthermore, testing and maintaining internal controls can divert our management’s attention from other matters that are important to our business. These regulations have increased our legal and financial compliance costs, we expect the regulations to make it more difficult to attract and retain qualified officers and directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly.

Future sales of a large number of our securities into the public market, or the expectation of such sales, could cause the market price of our common shares to decline significantly.

Sales of substantial amounts of common securities into the public market, or the perception that such sales will occur, may cause the market price of our common shares to decline significantly. In September 2012, we completed a sale of 8,625,000 common shares, including 2,500,000 common shares offered by a selling shareholder, Halco. The price of our shares could be negatively impacted if we undertake additional offerings to sell securities. In addition, at our 2018 Annual General Meeting our shareholders approved an amendment and restatement of the 2015 Share Incentive Plan as the 2019 Share Incentive Plan and to increase the maximum number of our common shares issuable pursuant to such plan by 2,500,000 shares and to extend the term of such plan for ten years from the date of the annual meeting of shareholders. The common shares to be issued pursuant to awards under our 2019 Share Incentive Plan have been registered on registration statements on Form S-8 filed with the Securities Exchange Commission and, when issued, will be freely tradable under the Securities Act of 1933.

We have provisions in our bye-laws that may discourage a change of control.

Bermuda law and our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These include provisions:

 

   

requiring the approval of not less than 66% of our issued and outstanding voting shares for certain merger or amalgamation transactions that have not been approved by our board of directors;

 

   

prohibiting us from engaging in a business combination with an interested shareholder for a period of three years after the date of the transaction in which the person becomes an interested shareholder, unless certain conditions are met;

 

   

authorizing our board of directors to issue blank-check preference shares without shareholder approval;

 

32


   

establishing a classified board with staggered three-year terms;

 

   

only authorizing the removal of directors (i) for cause by the affirmative vote of the holders of a majority of the votes cast at a meeting or (ii) without cause by the affirmative vote of the holders of 66% of the common shares then issued and outstanding and entitled to vote on the resolution; and

 

   

establishing advance notice requirements for nominations for election to our board of directors.

These provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and/or our board of directors. Public shareholders who might desire to participate in these types of transactions may not have an opportunity to do so. These provisions could substantially impede the ability of public shareholders to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium.

As a shareholder of our company, you may have greater difficulties in protecting your interests than as a shareholder of a U.S. or South African corporation.

The Companies Act 1981 of Bermuda, as amended (the “Companies Act”), applies to our company and differs in material respects from laws generally applicable to U.S. or South African corporations and their shareholders. Taken together with the provisions of our bye-laws, some of these differences may result in you having greater difficulties in protecting your interests as a shareholder of our company than you would have as a shareholder of a U.S. corporation listed on NYSE or a South Africa corporation listed on the JSE. This affects, among other things, the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with our company, what approvals are required for business combinations by our company with a large shareholder or a wholly-owned subsidiary, what rights you may have as a shareholder to enforce specified provisions of the Companies Act or our bye-laws, and the circumstances under which we may indemnify our directors and officers.

Our bye-laws restrict shareholders from bringing legal action against our officers and directors.

Our bye-laws contain a broad waiver by our shareholders of any claims or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.

History and Development of the Company

Our business began operations in 1979. We reorganized our business in 1993 and incorporated Textainer Group Holdings Limited under the laws of Bermuda as a holding company of a group of corporations involved in the purchase, ownership, management, leasing and disposal of a fleet of intermodal containers. Textainer Group Holdings Limited is incorporated with an indefinite duration under registration number EC18896.

Textainer Group Holdings Limited’s common shares are primary listed on the NYSE under the symbol “TGH”. The Company’s common shares are secondary listed on the JSE in Johannesburg, South Africa under the symbol “TXT”. Textainer Group Holdings Limited’s headquarters office is located at Century House, 16 Par-La-Ville Road, Hamilton HM 08 Bermuda and our telephone number is (441) 296-2500. Our agent in the United States is Daniel W. Cohen, Textainer Group Holdings Limited, c/o Textainer Equipment Management (U.S.) Limited, 650 California Street, 16th Floor, San Francisco, CA 94108.

At December 31, 2019, Textainer Group Holdings Limited had two directly-owned subsidiaries:

 

   

Textainer Equipment Management Limited (“TEML”), our wholly-owned subsidiary incorporated in Bermuda, which together with its four wholly-owned subsidiaries (see Item 4 (C), “Organizational Structure”) provides container management, acquisition and disposal services to affiliated and unaffiliated container investors; and

 

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Textainer Limited (“TL”), our wholly-owned subsidiary incorporated in Bermuda, which owns containers directly and via six subsidiaries:

 

   

Textainer Marine Containers II Limited (“TMCL II”), a Bermuda company which is wholly-owned by TL;

 

   

Textainer Marine Containers V Limited (“TMCL V”), a Bermuda company which is wholly-owned by TL;

 

   

Textainer Marine Containers VI Limited (“TMCL VI”), a Bermuda company which is wholly-owned by TL;

 

   

Textainer Marine Containers VII Limited (“TMCL VII”), a Bermuda company which is wholly-owned by TL;

 

   

Leased Assets Pool Company Limited (“LAPCO”), a Bermuda company which is wholly-owned by TL; and

 

   

TAP Funding Ltd. (“TAP Funding”), a Bermuda company in which TL and TAP Limited (“TAP”) hold common shares of 50.1% and 49.9%, respectively, and voting rights of 66.7% and 33.3%, respectively (see Note 1 “Nature of Business and Summary of Significant Accounting Polices” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further information).

Our internet website address is www.textainer.com. The information contained on, or that can be accessed through, our website is not incorporated into and is not intended to be a part of this Annual Report on Form 20-F.

Significant Events

In August 2016, Hanjin Shipping company Co., Ltd (“Hanjin”), filed for bankruptcy. The Company maintains insurance that covers a portion of the exposure related to the value of containers that are unlikely to be recovered from its customers, the cost to recover containers and up to 183 days of lost lease rental income. The Company entered into a final agreement with the insurance companies on December 31, 2018 and the total remaining payments of $9,814 for the Company’s owned fleet were received in January and early February 2019. As of December 31, 2019, there is no insurance receivable for the Company’s owned fleet related to this bankrupt customer. In 2019, the Company received a net cash distribution of $14,881 from the Hanjin bankruptcy estate for its owned fleet. (see Note 3 “Insurance Receivable and Impairment” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

In October 2018, TL entered into an agreement to purchase 75% of the total outstanding common shares of TW Container Leasing, Ltd. (“TW”) from Wells Fargo Container Corp. (“WFC”) for a cash consideration of $29,658 (see Note 1 “Nature of Business and Summary of Significant Accounting Policies” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

In January 2019, the Company dissolved its wholly-owned subsidiary, TW (see Note 1 “Nature of Business and Summary of Significant Accounting Policies” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

In April 2019, TMCL VII issued $328,900 aggregate Class A principal amount and $21,100 aggregate Class B principal amount of Series 2019-1 Fixed Rate Asset Backed Notes (“TMCL VII 2019-1 Bonds”). Proceeds from 2019-1 Bonds was primarily used to pay down debt in our secured debt facility and revolving credit facility (see Note 9 “Debt and Derivative Instruments” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

 

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In September 2019, the Company announced that Trencor Limited (“Trencor”), a company publicly traded on the JSE in Johannesburg, South Africa under the symbol “TRE” and the former holder of 27.2 million common shares or approximately 47.5% of the Company’s issued and outstanding common shares, filed with the JSE a circular (the “Trencor circular”) requesting that Trencor’s shareholders approve the unbundling of Trencor’s shares in Textainer. The Trencor circular was approved by Trencor’s shareholders in October 2019 and the Trencor share unbundling was implemented in December 2019.

In December 2019, the Company filed a Pre-Listing Announcement with the JSE to commence a secondary, or dual, listing of the Company’s common shares on the Main Board of the JSE under the share code “TXT” with commencement of trading on December 11, 2019. The secondary listing was not in connection with any current capital raising effort.

In December 2019, the Company entered into a stock purchase agreement with TAC Limited, a wholly-owned subsidiary of Trencor, to purchase LAPCO. The purchase price consideration consisted of $65,527 in cash paid to TAC Limited, cash amounts paid by the Company to fully repay LAPCO’s debt facility of $126,289 and transaction costs incurred to complete the transaction of $104. The Company repaid LAPCO’s existing debt at the closing by refinancing this debt in the Company’s existing revolving credit facility. LAPCO owned a fleet of approximately 161,000 TEU of intermodal containers managed by the Company and approximately 3,000 TEU of containers managed by other container lessors (see Note 4 “LAPCO Acquisition” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

Principal Capital Expenditures

Our capital expenditures for containers in our owned fleet and fixed assets during 2019, 2018 and 2017 were $748.4 million, $854.4 million and $300.1 million, respectively. We received proceeds from the sale of containers and fixed assets during 2019, 2018 and 2017 of $150.7 million, $147.3 million and $135.3 million, respectively.

As all of our containers are used internationally, where no one container is domiciled in one particular place for a prolonged period of time, all of our long-lived assets are considered to be international with no single country of use. Our capital requirements are primarily financed through cash flows from operations and our debt facilities.

 

B.

Business Overview

Our Company

We are one of the world’s largest lessors of intermodal containers based on fleet size, with a total fleet of approximately 2.3 million containers, representing 3.5 million TEU. Containers are an integral component of intermodal trade, providing a secure and cost-effective method of transportation because they can be used to transport freight by ship, rail or truck, making it possible to move cargo from point of origin to final destination without repeated unpacking and repacking.

We lease containers to approximately 250 shipping lines and other lessees, including almost all of the world’s top 20 container lines, as measured by the total TEU capacity of their container vessels. We believe that our scale, global presence, customer service, market knowledge and long history with our customers have made us one of the most reliable suppliers of leased containers. We have a long track record in the industry, operating since 1979, and have developed long-standing relationships with key industry participants. Our top 20 customers, as measured by revenues, have on average been our customers for 30 years.

We have provided an average of approximately 250,000 TEU of new containers per year for the past five years and have been one of the largest buyers of new containers over the same period. We are one of the largest sellers of used containers, having sold an average of approximately 140,000 containers per year for the last five years to more than 1,500 customers.

We provide our services worldwide via an international network of 14 regional and area offices and almost 500 independent depots.

 

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We operate our business in three core segments.

 

   

Container Ownership. As of December 31, 2019, we owned containers accounting for approximately 85% of our fleet.

 

   

Container Management. As of December 31, 2019, we managed containers on behalf of 14 unaffiliated container investors, providing acquisition, management and disposal services. As of December 31, 2019, total managed containers accounted for approximately 15% of our fleet.

 

   

Container Resale. We generally sell containers from our fleet when they reach the end of their useful lives in marine service or when we believe it is financially attractive for us to do so, considering location, sale price, the cost of repair, and possible repositioning expenses. We also purchase and lease or resell containers from shipping line customers, container traders and other sellers of containers.

Our total revenues primarily consist of leasing revenues derived from the lease of owned and managed containers. The most important driver of our profitability is the extent to which revenues on our owned fleet and management fee income exceed our operating costs. The key drivers of our revenues are fleet size, rental rates, utilization and direct costs. Our operating costs primarily consist of depreciation, container impairment, interest expense, direct operating expenses and administrative expenses. Our lessees are generally responsible for loss of or damage to a container beyond ordinary wear and tear, and they are required to purchase insurance to cover any other liabilities.

Our container lessees use containers for their global trade utilizing many worldwide trade routes. The Company earns its revenue from these international carriers when the containers are on lease. Substantially all of our leasing related revenues are denominated in U.S. dollars.

Our total fleet consists of containers that we own, and containers owned by other container investors that we manage. In general, owning containers during periods of high demand for containers provides higher margins than managing containers, since we receive all of the net operating income for the containers that we own but only a percentage of the net operating income of the containers that we manage as a management fee. On the other hand, managing containers during periods of low demand for containers reduces the negative financial impact of such periods since the container investors bear the cost or risk of owning the containers.

For 2019, our income from operations was $222.7 million and income before income tax and noncontrolling interests was $58.5 million. During 2019, the average utilization of our owned fleet was 97.4%. For geographic and financial information relating to each of our reportable operating segments, see Note 10 “Segment Information” in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

Industry Overview

Containers are built in accordance with standard dimensions and weight specifications established by the International Organization for Standardization (“ISO”). The industry-standard measurement unit is the Twenty-Foot Equivalent Unit (“TEU”), which compares the length of a container to a standard 20’ container. For example, a 20’ container is equivalent to one TEU and a 40’ container is equivalent to two TEU. Standard dry freight containers are typically 8’ wide, come in lengths of 20’, 40’ or 45’ and are either 8’6” or 9’6” high. The three principal types of containers are described as follows:

 

   

Dry freight standard containers. A dry freight standard container is constructed of steel sides, roof, an end panel on one end and a set of doors on the other end, a wooden floor and a steel undercarriage. Dry freight standard 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. The largest portion of our fleet is comprised of dry freight containers, which are by far the most common of the three principal types of intermodal containers.

 

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Dry freight specialized containers. Dry freight specialized containers consist of open-top and flat-rack containers. An open-top container is similar in construction to a dry freight standard 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 transport heavy or oversized cargo, such as marble slabs, building products or machinery.

 

   

Other containers. Other containers include refrigerated containers, tank containers, 45’ containers, pallet-wide containers and other types of containers. The two most prominent types of such containers are refrigerated containers and tank containers. A refrigerated container has an integral refrigeration unit on one end which plugs into an outside power source and is used to transport perishable goods. Tank containers are used to transport liquid bulk products such as chemicals, oils, and other liquids.

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 transportation of cargo than traditional break bulk shipping methods. The protection provided by containers also reduces damage, loss and theft of cargo during shipment. While the useful life of containers varies based upon the damage and normal wear and tear suffered by the container, we estimate that our useful life for a standard dry freight container used in intermodal transportation is on average 13 to 14 years. Some shipping lines have recently indicated that they intend to keep their containers for longer than 13 to 14 years.

According to Drewry Maritime Research, as of December 2018, leasing companies owned approximately 53% of the total worldwide container fleet of 41.6 million TEU. We estimate that leasing companies owned approximately 22.1 million TEU, or approximately 53% of the total worldwide container fleet, as of end of 2019. Given the uncertainty and variability of export volumes and the fact that shipping lines have difficulty in accurately forecasting their container requirements at different ports, the availability of containers for lease significantly reduces a shipping line’s need to purchase and maintain excess container inventory. In addition, leasing a portion of their total container fleets enables shipping lines to serve their manufacturer and retailer customers better by:

 

   

increasing their flexibility to manage the availability and location of containers;

 

   

increasing their ability to meet peak demand requirements, particularly prior to holidays such as Christmas and Lunar New Year; and

 

   

reducing their capital expenditures.

Based on industry analyst reports from early 2020, we expected 2020 new dry freight container production to reach 2.5 million TEU of dry van as opposed to an estimated of 2.3 million TEU in 2019. We expected lessors to continue to purchase 60% of the total production which is higher than the historical average while shipping lines focus on investing in ships and compliance with the low sulphur emissions rules of the International Maritime Organization that became effective in January 2020 (“IMO 2020”). Global demand growth for shipping is expected to slow with the overall market dominated by trade uncertainty and the recent declaration of a Novel Coronavirus pandemic, which will lead to slower overall GDP growth in 2020. The impact of the Novel Coronavirus and lower global GDP may result in lower container production than forecast at the start of 2020 and may alter the percentage of total production purchased by lessors. While new production inventory is currently below 800,000 TEU, depot inventory has remained relatively flat at very reasonable levels as evidenced by the continued high utilization rates throughout the industry. Deliveries of mega ships and introduction of IMO 2020 are expected to continuously generate a positive impact on leased container demand in 2020; however, the impact of Novel Coronavirus and lower global GDP on our industry is uncertain.

The shipping business has been characterized by cyclical swings due in part to lengthy periods of excess or scarce vessel capacity. We believe that these sustained periods of vessel supply/demand imbalances are mainly a function of the multi-year ordering and production cycle associated with the manufacture of new vessels, which requires shipping lines to estimate market growth many years into the future, and the shipping line industry’s shift to the use of significantly larger vessels. Container leasing companies are partially insulated from the risks of these shipping cycles by the relatively short production time associated with the manufacture of new containers. Lead times for new container orders are typically only a few months, so the rate of new container ordering can be quickly adjusted to reflect unexpected market changes.

 

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According to Drewry Maritime Research, intermodal leasing companies, as ranked by total TEU, are as follows (1):

 

Company

   TEU
(000’s)
     Percent of
Total
 

Triton International Limited (2)

     6,061        27.5

Florens Leasing

     3,800        17.2

Textainer (3)

     3,501        15.9

SeaCo Global

     2,305        10.5

CAI International, Inc. (2)

     1,681        7.6

Beacon Intermodal Leasing

     1,495        6.8

SeaCube Container Leasing Ltd

     1,157        5.2

Touax Global Container Solutions

     460        2.1

Blue Sky Intermodal

     378        1.7

UES International

     313        1.4

Other

     900        4.1
  

 

 

    

 

 

 

Grand Total

     22,051        100.0
  

 

 

    

 

 

 

 

(1)

All companies’ information at December 2018, except as otherwise noted.

(2)

Triton’s and CAI’s fleet at December 31, 2019, according to their most recent published information.

(3)

Textainer Group’s owned and managed fleet at December 31, 2019.

Competitive Strengths

We believe that we possess a number of strengths that provide us with a competitive advantage, including:

One of the Largest Container Lessors in the Industry. We operate one of the world’s largest fleets of leased intermodal containers, with a total fleet of approximately 2.3 million containers, representing 3.5 million TEU, as of December 31, 2019. We provide our services worldwide via a network of regional and area offices and independent depots. We have been one of the largest buyers of new containers purchasing an average of almost 250,000 TEU per year for the last five years and are also one of the largest sellers of used containers, selling an average of approximately 140,000 containers per year for the last five years. Our consistent presence in the market buying and selling containers provides us with broad market intelligence, and valuable insight into the demand patterns of our shipping line customers and resale container buyers.

Proven Ability to Grow Our Fleet Over Time. Our ability to invest in our fleet has allowed us to become one the world’s largest container lessors. We have demonstrated our ability to increase the size of our container fleet by purchasing containers from manufacturers and by acquiring existing container fleets or their management rights. Over the past 21 years, we have acquired the rights to manage over 1,500,000 TEU from former competitors and we have acquired approximately 885,000 TEU of containers from our managed fleet. As one of the largest buyers of new containers, we have developed strong relationships with container manufacturers. These relationships, along with our large volume buying power and solid financial structure, enable us to reliably purchase containers during periods of high demand.

Ability to Generate Attractive Returns Throughout the Container Life-Cycle. One of our major strengths is our demonstrated ability to generate attractive revenue streams throughout the economic life of a container in marine service and upon resale of the container at the end of its marine service life. At the end of a lease, we generally have the ability to either negotiate an extension of the lease term or to take back the container and re-lease or sell it maximizing the container’s return. We focus on renewing or extending our long-term container leases beyond their expiration dates (typically three to five years from the start of the lease). In addition, we attempt to negotiate favorable return provisions on all leases and maintain an active presence in the master and spot lease markets. This flexibility, coupled with our international coverage, organization and resources, allows us to deploy containers to those markets where we can re-lease or sell them on comparatively attractive terms, thereby optimizing our returns and the residual value of our fleet.

 

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Strong Long-Standing Relationships with Customers. Our scale, long presence in the business and reliability as a supplier of containers has resulted in strong relationships with our customers. We lease containers to approximately 250 shipping lines and other lessees, including almost all of the world’s top 20 container lines, as measured by vessel fleet size in TEU and we have sold containers to an average of more than 1,500 resale customers for the last five years. We believe our ability to consistently supply containers in locations where our customers need them makes us one of the most reliable lessors of containers. Our top 20 customers, as measured by revenues, have on average been our customers for 30 years.

Multiple Sources of Revenue. We believe that the long-term nature of our lease portfolio, as well as the presence of both owned and managed containers in our fleet, provides us with a more predictable source of revenues and operating cash flow and higher operating margins over time, enabling us to manage and grow our business more effectively. We derive revenues from leasing our owned containers, managing containers owned by third parties and buying and selling containers. These multiple revenue streams provide for a diverse income base, help to mitigate the effects of our cyclical industry on profitability and allow us to optimize our use of capital.

Experienced Management Team. Our management team has a solid history in the industry. The management team has extensive experience in sourcing, leasing, financing, selling, trading and managing containers, as well as a long track record of successfully acquiring and selling container assets.

Business Strategies

We intend to grow our business profitably by pursuing the following strategies:

Leverage Our Status as one of the Largest Container Lessors and Consistent Purchaser and Seller of Containers. We endeavor to make regular purchases of containers to replace older containers and increase the size of our fleet. We believe that this consistent purchasing behavior and the resulting scale and young fleet age profile provides us with a competitive advantage in maintaining strong relationships with manufacturers and growing our market share with our existing customers.

Be the Most Reliable Supplier of Quality Containers. We continue to provide superior equipment and ensure that it is available in the right location and at the right time. Having one of the world’s largest owned and managed container fleets, we are in a strong position to be the most reliable supplier of dry freight containers to meet the demands of shipping lines.

Pursue Attractive Container Related Acquisition Opportunities. We will continue to seek to identify and attempt to acquire attractive portfolios of containers and companies to allow us to grow our fleet profitably. We believe that the consolidation trend in our industry will continue and may offer us future growth opportunities. We also believe that current economic conditions may result in potential acquisition opportunities, including the purchase and leaseback of customer-owned containers. Purchase and leaseback transactions can be attractive to our customers because they free up cash for other capital needs. These transactions enable us to buy attractively priced containers and at the same time place them on leases for the remainder of their marine service lives.

Focus on Maintaining High Levels of Utilization, Prioritize Profitability and Operating Efficiency. We will continue to target higher utilization. We will prioritize profitability with attractive yields on our assets through our disciplined focus on optimal lease pricing, longer-term leases and portfolio management. As of December 31, 2019, approximately 86% of our total on hire fleet (based on total TEU) was on long-term and finance leases, compared to approximately 76% ten years ago. We also drive operating efficiency by maintaining a low-cost structure, having brought down our fleet management cost per CEU per day by approximately 20% over the 10 years ended December 31, 2019. We believe that we can grow our fleet without a proportionate increase in our headcount, thereby improving our profitability by spreading our operating expenses over a larger revenue base.

Extend the Lease of In-fleet Containers. Since many shipping lines must utilize capital to finance vessels, it is possible that some will conclude in 2020, as they did in prior years, that it is more cost-effective to extend leases of in-fleet containers than either buy containers or lease new containers.

 

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Grow Our Container Resale Business. We sell containers to optimize their residual value in multiple markets, including locations with low lease-out demand. In order to improve the sales price of our containers, we often move them from the location where they are returned by the lessee to another location that has a higher market price. We benefit not only as a result of the increased sales price but also because we often receive rental revenue from a shipping line for the one-way lease of the container. We also buy and resell containers from shipping line customers, container traders and other sellers of containers. We attempt to improve the sales price of these containers in the same manner as with containers from our fleet.

Maintain Access to Diverse Sources of Capital. We have successfully utilized a wide variety of financing alternatives to fund our growth, including secured debt financings, bank financing, and equity from third party investors in containers. We believe this diversity of funding, combined with our access to the public equity markets, provides us with an advantage in terms of both cost and availability of capital, versus our smaller competitors and also some of our shipping line customers.

Operations

We operate our business through a network of regional and area offices and independent depots. We maintain three regional offices as follows:

 

   

Americas Region in Cranford, New Jersey, USA responsible for North and South America;

 

   

European Region in New Malden, UK responsible for Europe, the Mediterranean, the Middle East, and Africa; and

 

   

Asian Pacific Region in Singapore, responsible for Asia and Australia.

Regional vice presidents are in charge of regional leasing and operations. Marketing directors and assistants located in the regional and area offices handle day-to-day marketing and collection activities. Our operations include a global sales force, container operations group, container resale group and logistics services group. Our headquarters office is in Hamilton, Bermuda. Our administrative office is located in San Francisco, California.

Our Container Fleet

As of December 31, 2019, we operated 3,500,812 TEU. We attempt to continually invest in our container fleet each year in an effort to replace the older containers being retired from marine service and to build our fleet size. We purchased an average of approximately 250,000 TEU of new containers per year over the past five years. Our ability to invest in our fleet on a consistent basis has been instrumental in becoming one of the world’s largest container lessors. The containers that we lease are either owned outright by us or owned by third parties and managed by us. The table below summarizes the composition of our owned and managed fleets, in TEU and CEU, by type of containers as of December 31, 2019:

 

     TEU     CEU  
     Owned     Managed     Total     Owned     Managed     Total  

Standard dry freight

     2,775,180       490,710       3,265,890       2,489,663       436,871       2,926,534  

Refrigerated

     158,691       9,993       168,684       641,190       40,498       681,688  

Other specialized

     56,301       9,937       66,238       88,061       14,869       102,930  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fleet

     2,990,172       510,640       3,500,812       3,218,914       492,238       3,711,152  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total fleet

     85.4     14.6     100.0     86.7     13.3     100.0

The amounts in the table above did not change significantly from December 31, 2019 to the date of this Annual Report on Form 20-F.

 

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Our containers are designed to meet a number of criteria outlined by the ISO. The standard criteria include the size of the container and the gross weight rating of the container. This standardization ensures that the widest possible number of transporters can use containers and it facilitates container and vessel sharing by the shipping lines. The standardization of the container is also an important element of the container leasing business since we can operate one fleet of containers that can be used by all of our customers.

Maintenance and repair of our containers is performed by independent depots that we retain in major port areas and inland locations. Such depots also handle and inspect containers that are either picked up or redelivered by lessees, and store containers that are not leased.

Our Leases

Most of our revenues are derived from leasing our owned fleet and managed fleet of containers to our core shipping line customers. The vast majority of our container leases are structured as operating leases, though we also provide customers with finance leases. Regardless of lease type, we seek to exceed our targeted return on our owned and managed containers over the life of each container by managing container utilization, lease rates, drop-off restrictions and the disposal process. We lease containers under three different types of operating leases (term leases, master leases and spot leases) and also under finance leases.

Term leases

Term leases (also referred to as long-term leases) provide a customer with a specified number of containers for a specified period, typically for 5 or more years, with an associated set of pick-up and drop-off conditions. Our term leases generally require our lessees to maintain all units on lease for the duration of the lease. Term leases also include lifecycle leases, under which lessees will lease containers until they reach a pre-specified age which is typically near the end of their useful lives rather than for a specified period. Once containers under lifecycle leases are returned to us, they are generally sold due to the age of the containers. Term leases provide us with enhanced cash flow certainty due to their extended duration but carry lower per diem rates than other lease types. As of December 31, 2019, 75.1% of our total on-hire fleet, as measured in TEU, was on term leases.

As of December 31, 2019, our term leases had an average remaining duration of 3.1 years, assuming no leases are renewed. However, we believe that many of our customers will renew leases for containers that are less than sale age at the expiration of the lease. In addition, for leases that are not extended our containers typically remain on-hire at the contractual per diem rate for an average of an additional 11 months beyond the end of the contractual lease term. For additional information about the minimum future rentals under the long-term leases for our owned and managed fleet at December 31, 2019, see Note 1 “Nature of Business and Summary of Significant Accounting Policies” in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

Master leases

Master leases provide a framework of terms and conditions pursuant to which lessees can lease containers on an as-needed basis for unspecified periods of time. Master lease terms and conditions are valid for a set period, typically one year, and provide the lessee with greater flexibility than is typical in term leases. Under our master leases, lessees know in advance their per diem rates and drop-off locations, subject to monthly drop-off location limits. In addition, under these master lease agreements, the lessee is generally not committed to leasing a minimum number of containers from us during the lease term and may generally return the containers to us at any time, subject to certain restrictions. Due to their flexibility and duration, master leases command higher per diem rates than term leases. As of December 31, 2019, 12.4% of our total on-hire fleet, as measured in TEU, was on master leases.

Spot leases

Spot leases provide the customer with containers for a relatively short lease period with fixed pick-up and drop-off locations. Spot leases are generally used to position a container to a desired location for subsequent lease or sale. As of December 31, 2019, 2.1% of our total on-hire fleet, as measured in TEU, was on spot leases.

 

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Finance Leases

Finance leases provide our lessees with an alternative method to finance their container acquisitions. Finance leases are long-term in nature, typically ranging from three to twelve years and require relatively little customer service attention. They ordinarily require fixed payments over a defined period and provide lessees with a right to purchase the subject containers for a nominal amount at the end of the lease term. Per diem rates include an element of repayment of capital and, therefore, typically are higher than rates charged under other leases. Finance leases require the lessee to keep the containers on lease for the entire term of the lease. As of December 31, 2019, approximately 10.4% of our total on-hire fleet, as measured in TEU, was on finance leases with an average remaining term of 8.5 years.

Maintenance, Repair and Damage Protection

Under all of our leases, our lessees are generally responsible for loss of or damage to a container beyond ordinary wear and tear, and they are required to purchase insurance to cover any other liabilities. Any damage must be repaired at the expense of the lessee according to standardized guidelines promulgated by the Institute of International Container Lessors (“IICL”). Lessees are also required to obtain insurance to cover loss of the equipment on lease, public liability and property damage insurance as well as indemnify us from claims related to their usage of the leased containers. In some cases, a Damage Protection Plan (“DPP”) is provided whereby the lessee pays us (in the form of either a higher per-diem rate or a fixed one-time payment upon the return of a container) to assume a portion of the financial burden of repairs up to a pre-negotiated amount. This DPP does not cover damages from war or war risks, loss of a container, constructive total loss of the container, damages caused by contamination or corrosion from cargo, damages to movable parts and any costs incurred in removing labels, which are all responsibilities of the lessees. DPP is generally cancelable by either party with prior written notice. Maintenance is monitored through inspections at the time that a container is leased out and returned. In 2019, DPP revenue was 2.5% of total lease rental income. We also maintain our own insurance to cover our containers when they are not on-hire to lessees or when the lessee fails to have adequate primary coverage, and third-party liability insurance for both on-hire and off-hire containers. In addition, we maintain insurance that, after satisfying our deductibles, would cover loss of revenue as a result of default under most of our leases, as well as the recovery cost or replacement value of most of our containers.

Lease Agreements

In general, our lease agreements consist of two basic elements, a master terms and conditions agreement (“Master Agreement”), and a lease schedule. Lease schedules contain the business terms (including daily rate, term duration and drop-off schedule, among other things) for specific leasing transactions, while Master Agreements outline the general rights and obligations of the lessor and lessee under all of the lease schedules covered by the Master Agreement. For most customers, we have a small number of Master Agreements (often one) and a large number of lease schedules.

Our standard Master Agreements generally require the lessees to pay rentals, depot charges, taxes and other charges when due, to maintain the containers in good condition and repair, to return the containers in good condition in accordance with the return conditions set forth in the Master Agreement, to use the containers in compliance with all laws, and to pay us for the value of the containers as determined under the terms of the agreements if the container is lost or destroyed. The default clause gives us certain legal remedies in the event that the lessee is in breach of the lease.

Re-leasing, Logistics and Depot Management

We believe that managing the period after termination of our containers’ first lease is one of the most important aspects of our business. The container shipping industry is characterized by large regional trade imbalances, with loaded containers generally flowing from export-oriented economies in Asia to North America and Western Europe. Because of these trade imbalances, container shipping lines have an incentive to return leased containers in North America and Western Europe to avoid the cost of shipping empty containers back to Asia. Successful management of the deployment of our containers after they come off their first lease requires disciplined re-leasing capabilities, logistics management, depot management, careful cost control and profitable disposals of used containers.

 

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Re-leasing

Since our leases allow our lessees to return their containers, we typically lease a container several times during its life. New containers can usually be leased with a limited sales 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 in part on our re-leasing capabilities. Factors that affect our ability to re-lease used containers include the size of our lessee base, ability to anticipate lessee needs, their presence in relevant geographic locations and the level of service we provide our lessees. We believe that our global presence and relationships with approximately 250 container lessees provide us an advantage in re-leasing our containers relative to many of our smaller competitors.

Logistics

Other methods of reducing off-lease risks include:

 

   

Limiting or prohibiting container returns to low-demand areas. In order to reduce our repositioning costs, our leases typically include a prohibition on returning containers to specific locations, limitations on the number of containers that may be returned to lower demand locations, drop-off charges for returning containers to lower demand locations or a combination of these provisions.

 

   

Taking advantage of a robust resale market when available. In order to optimize the investment return on a container, we have sold containers in our excess inventory and/or weak demand locations when an analysis indicates it is financially more attractive than attempting to re-lease or reposition the container.

 

   

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 limited damage waivers. The cost of offering these incentives is generally less than the cost we would incur if we were to pay to reposition the containers. We also use one-way leases to move containers from locations where the market price for selling containers is low to locations with a higher market price, to improve the resale value of the containers.

 

   

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 pay to reposition excess containers to locations with higher demand or higher resale prices.

 

   

Diversifying our customers. We have sought to diversify our customers and, correspondingly, the locations where containers are needed around the world.

Depot Management

As of December 31, 2019, we managed our container fleet through approximately 500 independent container depot facilities in more than 200 locations. 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 relationships and periodically visiting the depot facilities to conduct quality assurance audits to control costs and ensure repairs meet industry standards. We occasionally supplement our internal operations group with the use of independent inspection agents. Furthermore, depot repair work is periodically audited to prevent over-charging. We are in regular communication with our depot partners through the use of electronic data interchange (“EDI”) and/or e-mail. The electronic exchange of container activity information with each depot is conducted via the internet. As of December 31, 2019, a large majority of our off-lease inventory was located at depots that are able to report container activity and damage detail via EDI. We use the industry standard, ISO 9897 Container Equipment Data Exchange messages, for most EDI reporting.

Most of the depot agency agreements follow a standard form and generally provide that the depot will be liable for loss or damage of off-hire containers and, in the event of loss, 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 when a depot’s insurance proves insufficient.

 

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Our container repair standards and processes are generally managed in accordance with standards and procedures specified by the IICL. The IICL establishes and documents the acceptable interchange condition for containers and the repair procedures required to return damaged containers to the acceptable interchange condition. At the time that 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 and debris left 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 the repair costs and we are responsible for normal wear and tear. The lessees are generally billed the lessee damage portion at the time the containers are returned.

Management Services

As of December 31, 2019, we owned 85% of the containers in our fleet and managed the rest on behalf of 14 unaffiliated container investors. We earn acquisition, management and disposal fees on managed containers. Our information technology (“IT”) systems track revenues and operating expenses attributable to specific containers and the container investors receive payments based on the net operating income of their own containers. Fees to manage containers typically include acquisition fees of 1% to 2% of the purchase price; daily management fees of 8% to 13% of net operating income; and disposal fees of 5% to 10% of cash proceeds when containers are sold. We earned combined acquisition, management and disposal fees on our managed fleet of $15.2 million, $16.9 million and $15.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. If operating expenses were to exceed revenues, the container investors would be obligated to pay the excess or we would deduct the excess, including our management fee, from future net operating income. In some cases, we are compensated for sales through a percentage sharing of sales proceeds over an agreed floor amount. We will typically indemnify the container investors for liabilities or losses arising from negligence, willful misconduct or breach of our obligations in managing the containers. The container investors will indemnify us as the manager against any claims or losses arising with respect to the containers, provided that such claims or losses were not caused by our negligence, willful misconduct or breach of our obligations. Typically, the terms of the management agreements are for the expected economic useful life in marine service of the containers subject to the agreement.

In June 2003, we entered into a contract with the U.S. Transportation Command Directorate of Acquisition (“USTranscom”) pursuant to which we serve as a major supplier of leased marine containers to the U.S. Military. Compared to our shipping line customers, we provide a much broader level of services to the U.S. Military under the USTranscom contract. Furthermore, unlike our shipping line customers, who pick up from and return containers to container depots, for the U.S. Military we are required to arrange transportation from a container depot to a military facility upon lease out and to pick up a container at a military facility and return it to a container depot when the lease period has ended. This requires us to arrange for movement of the empty containers by truck, rail and/or vessel. The USTranscom contract provides added compensation for these services.

This contract also allows the U.S. Military to return containers in many locations throughout the world. Since the inception of the USTranscom contract, we have delivered or transitioned approximately 185,000 containers and chassis to the U.S. Military, of which approximately 125,000 containers have been returned. In addition, approximately 56,000 containers have been reported as unaccounted for and the U.S. Military paid a stipulated loss value for each such container. The USTranscom contract expired on June 23, 2013 and we were awarded a new contract on December 12, 2013. The new contract covered a base year starting on December 24, 2013, was subsequently renewed annually from 2014 to 2017. The USTranscom contract expired on September 30, 2018 and was extended through February 28, 2019. Textainer, as one of the vendors, was awarded a new contract on January 28, 2019. The new contract covers a base year starting on March 1, 2019, with four option years running through February 29, 2024. On March 1, 2020, Textainer exercised the right to supply containers for the second out of five option years.

Resale of Containers

Our Resale Division sells off-hire containers from our fleet at the end, typically about 13 years, of their useful lives in marine service or when we believe it is financially attractive for us to do so, considering the location, sale price, cost of repair, and possible repositioning expenses. In addition, we buy new trading containers and used trading containers from shipping lines and other third parties that we then lease or resell. Our Resale Division has a

 

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team of 18 container sales and operations specialists in five offices globally that manage the sale process for these used containers. Our Resale Division is one of the largest sellers of used containers among container lessors, selling an average of approximately 140,000 containers per year for the last five years to more than 1,500 customers. From 2015 through 2019, this Division generated $63.6 million in income before income tax and noncontrolling interests, including $21.0 million during 2019. We generally sell containers to depots, domestic storage companies, freight forwarders (who often use the containers for one-way trips into less developed countries) and other purchasers of used containers.

Underwriting and Credit Controls

We only lease to container shipping lines and other lessees or sell to buyers that meet our credit criteria. Our credit approval process is rigorous, and all of our underwriting and credit decisions are controlled by our credit committee, which is made up of senior management from different disciplines. Our credit committee sets different maximum exposure limits depending on our relationship and previous experience with each customer lessee and container sales customer. Credit criteria may include, but are not limited to, trade route, country, social and political climate, assessments of financial performance including net worth and profitability, asset ownership, bank and trade credit references, credit bureau reports, operational history and financial strength. Our marketing and resale staff are also responsible for collections, which positively contributes to our strong collection and credit approval process through our staff’s close communication with our customers.

Our credit department sets and reviews credit limits for new and existing customer lessees and container sales customers, monitors compliance with those limits on an on-going basis, monitors collections, and deals with customers in default. Our credit committee meets regularly to assess performance of our container lessees and to recommend actions to be taken in order to reduce credit risks. Our underwriting processes are aided by the long payment experience we have with most of our customer lessees and container sales customers, our broad network of relationships in the container shipping industry that provides current information about customer lessees’ and container sales customers’ market reputations and our focus on collections.

Other factors reducing losses due to default by a lessee or customer include the growth in the container shipping industry, our constant monitoring of collections, effective collection mechanism, our historically high recovery rate for containers in default situations and the re-marketability of our container fleet. The growth in the container shipping industry helps reduce the risk of customer defaults since the core assets of a poorly performing shipping line, its ships and containers, have historically been needed to meet the demand for world containerized trade. In addition, the law in several major port locations is highly favorable to creditors and many of our large customers call on ports that will allow us to arrest, or seize, the customers’ ships or fuel storage bunkers, or repossess our containers if the customer is in default under our container leases. Finally, we also purchase insurance for equipment recovery and loss of revenue due to customer defaults for most of our customers, in addition to the insurance that our customers are required to obtain, however our equipment recovery insurance is subject to high deductibles and has coverage limits and exclusions.

Over the past five years, we recovered, on average, 82% of the containers that were the subject of defaulted contracts which had at least 1,000 CEU on lease. In connection with the Hanjin bankruptcy, 94% of the containers leased to Hanjin have been turned in, with the balance of the containers uneconomic or impossible to recover. We maintain insurance that covers certain costs and losses from customer defaults. At the time of the Hanjin default our policy provided for $80 million of coverage after a $5 million deductible was met. We collected substantially all of our insurance claim related to the Hanjin insolvency and after receiving subrogation waivers from our insurers, in the fourth quarter of 2019 we received payments directly from the Hanjin bankruptcy estate, however this was insufficient to cover all of our losses and disruptions related to Hanjin. We typically incur operating expenses such as repairs and repositioning when containers are recovered after a default. However, recovery expenses are typically covered under insurance and we are reimbursed above our deductible amount. Due to the above, over the last five years, our write-offs of customer receivables for our owned and managed fleet have averaged 1.7% of our lease rental income over such period.

 

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Marketing and Customer Service

Our global sales and customer service force is responsible for developing and maintaining relationships with senior management staff at our shipping line customers, negotiating lease contracts and maintaining day-to-day coordination with operations staff. This close customer communication often assists us in negotiating lease contracts that satisfy both our financial return requirements and our customers’ operating needs. It also makes us more likely to be aware of our customers’ potential equipment shortages and makes our customers more likely to be aware of our available container inventories.

Our senior sales people have considerable industry experience and we believe that the quality of our customer relationships and the level of communication with our customers represent an important advantage for us. As of December 31, 2019 our global sales and customer service group consisted of 87 people, with 17 in North America, 45 in Asia and Australia, 19 in Europe and 6 in Africa.

Customers

We believe that our staff, organization and long presence in the business have resulted in very strong relationships with our shipping line customers. Our top 20 customers, as measured by lease billings of our total owned and managed fleet, have on average been our customers for 30 years and have an average Dynamar credit rating, a common credit report used in the maritime sector, of 3.7 as of December 31, 2019. The Dynamar credit rating ranges from 1 to 10, with 1 indicating low credit risk. Our top 20 customers include almost all of the world’s largest shipping lines, as measured by container vessel fleet size. We currently have containers on-hire to approximately 250 customers. Our customers are mainly international shipping lines, but we also lease containers to freight forwarding companies and the U.S. Military. Our top 20 and top 5 customers accounted for approximately 82.1% and 50.0%, respectively, of our total owned and managed fleet’s 2019 lease billings. Our two largest customers in 2019 were Mediterranean Shipping Company S.A., which accounted for $102.8 million or 15.4% and CMA-CGM S.A., which accounted for $87.3 million or 13.1% of our total owned and managed fleet’s 2019 lease billings. A default by any of our major customers, such as the bankruptcy of Hanjin in 2016, could have a material adverse impact on our business, results from operations and financial condition. In addition, the largest lessees of our owned fleet are often among the largest lessees of our managed fleet. The largest lessees of our managed fleet are responsible for a significant portion of the billings that generate our management fee revenue. For further discussion, see Note 1 “Nature of Business and Summary of Significant Accounting Policies” to our consolidated statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

Proprietary Information Technology

We have developed proprietary IT systems that allow us to monitor container status and offer our customers a high level of service. Our systems include internet-based updates regarding container availability and booking status. Our systems record the status of and provide the accounting and billing for each of our containers individually by container number. We also have the ability to produce complete management reports for each portfolio of equipment we own and manage. This makes us a preferred candidate to quickly assume management of competitors’ container fleets. We also maintain proprietary technology in support of our military business.

In addition, our systems allow our business partners to conduct certain business with us through our website, www.textainer.com. These systems allow customers to check our container inventories, review design specifications, request bookings for container pick-ups, create redelivery bookings and review and approve repair bills. Our website also allows depots to download recent statements for self-billing activity and to check the status of containers.

Suppliers

We have long relationships with all of our major suppliers. We currently purchase all of our containers in the PRC. There are currently three major manufacturers, in addition to few smaller manufacturers, of dry freight standard and specialized containers. Our operations staff reviews the designs for our containers and periodically audits the production facilities of our suppliers. In addition, we use our Asian operations group and occasionally third-party inspectors to visit factories when our containers are being produced to provide an extra layer of quality control. Nevertheless, defects in our containers do sometimes occur. We work with the manufacturers to correct these defects, and our manufacturers have generally honored their warranty obligations in such cases.

 

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Competition

We compete with at least six other major container leasing companies in addition to many smaller lessors, companies and financial institutions offering finance leases, and promoters of container ownership and leasing as a tax-efficient investment. It is common for our shipping line customers to utilize several leasing companies to meet their container needs.

Other lessors compete with us in many ways, including pricing, lease flexibility and supply reliability, as well as the location, availability, quality and individual characteristics of their containers and customer service. While we are forced to compete aggressively on price, we emphasize our supply reliability and high level of customer service to our customers. We invest heavily to ensure container availability in higher demand locations. We dedicate a large part of our organization to building customer relationships, maintaining close day-to-day coordination with customers’ operating staff and have developed powerful and user-friendly systems that allow our customers to transact business with us through the internet. We believe that our close customer relationships, experienced staff, reputation for market leadership, scale efficiencies and proprietary systems provide important competitive advantages.

Legal Proceedings

From time to time we are a party to litigation matters arising in connection with the normal course of our business. 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. Nevertheless, unexpected adverse future events, such as an unforeseen development in our existing proceedings, new claims brought against us or changes in our current insurance arrangements could result in liabilities that have a material adverse impact on our business.

Environmental

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. While we maintain certain limited liability insurance coverage as well as require our lessees to provide us with indemnity against certain losses, the insurance coverage may not be sufficient to protect us against losses arising from environmental damage and/or systems or services we may be required to install.

In addition to environmental regulations affecting container movement, shipping, movement and spillage, environmental regulations also impact container production and operation, including regulations on the use of chemical refrigerants (i.e. CFC’s and solvent-based paints) due to their ozone depleting and global warming effects, and regulations on the cutting and export of hardwood due to concerns regarding de-forestation and climate change. These environmental regulations may impact the future repair and operating costs for these containers and we could be forced to incur large retrofitting expenses for our refrigerated containers. To comply with the new regulations, new water borne paint systems have been developed and are being used by container manufacturers. The conversion to water borne paint may impact factory capacity, increase the cost of containers and require greater investment by us in container inspection and factory supervision.

For further discussions, see Item 3, “Key Information — Risk Factors — Environmental liability and regulations may adversely affect our business, results of operations and financial condition.”

 

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Regulation

We may be subject to regulations promulgated in various countries, including the U.S., seeking to protect the integrity of international commerce and prevent the use of containers for international terrorism or other illicit activities. As these regulations develop and change, we may incur increased compliance costs due to the acquisition of new, compliant containers and/or the adaptation of existing containers to meet any new requirements imposed by such regulations. For further discussions, see Item 3, “Key Information — Risk Factors — We may incur costs associated with cargo security regulations, which may adversely affect our business, results of operations and financial condition.”

We may also be affected by legal or regulatory responses to potential global climate change. Please see Item 3, “Key Information — Risk Factors — Environmental liability and regulations may adversely affect our business, results of operations and financial condition.”

 

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C.

Organizational Structure

Our current corporate structure is as follows:

 

LOGO

We currently own 100% of all of our direct and indirect subsidiaries, except for TAP Funding. TAP Funding is a joint venture involving TL and TAP. As of December 31, 2019, TL owned 50.1% and TAP owned 49.9% of the common shares and TL had two voting rights and TAP had one voting right of TAP Funding, with the exception of certain matters such as bankruptcy proceedings, the incurrence of debt and mergers and consolidations, which require unanimity.

Trencor, owned 47.5% of our outstanding share capital as of December 31, 2018. Trencor is a South African public investment holding company, that has been listed on the JSE in Johannesburg, South Africa since 1955. Trencor’s origins date from 1929, and it currently is engaged in finance related activities. These

 

49


shares were previously held by Halco Holdings Inc. (“Halco”), a company owned by Halco Trust, a discretionary trust. In February 2018, Halco Trust distributed and transferred to Trencor Limited, a nominated discretionary beneficiary of Halco Trust, the trust’s 100% shareholding in Halco. In May 2018, Halco declared dividends to Trencor which resulted in Trencor becoming the direct shareholder of 47.5% of our common shares. Halco went into voluntary liquidation on October 12, 2018. On December 11, 2019, we commenced a secondary, or dual, listing of our common shares on the JSE in Johannesburg, South Africa under the symbol “TXT”. Promptly following our dual listing, Trencor distributed approximately 24.3 million of its shares in the Company to Trencor’s own shareholders and these shares now trade on the JSE. Trencor retained 3 million, or approximately 5.3% of our common shares as of December 31, 2019. Hennie Van der Merwe and David M. Nurek are members of our board of directors and the board of directors of Trencor.

 

D.

Property, Plant and Equipment

As of December 31, 2019, our employees were located in 14 regional and area offices in 13 different countries. We maintain an office in Bermuda, where Textainer Group Holdings Limited is incorporated. We have 13 offices outside Bermuda, including our administrative office in San Francisco, California and offices in Cranford, New Jersey; New Malden, United Kingdom; Hamburg, Germany; Durban, South Africa; Yokohama, Japan; Seoul, South Korea; Taipei, Taiwan; Singapore; Sydney, Australia; Port Klang, Malaysia; Hong Kong; and Shanghai, China.

We lease our office space in Bermuda, the U.S., United Kingdom and Singapore and have exclusive agents that secure office space for us in our other locations. The lease for our Bermuda office expires in December 2020, the lease for our San Francisco office expires in May 2027, the lease for our Cranford, New Jersey office expires in August 2021, the lease for our New Malden, United Kingdom office expires in December 2024 and our lease for our Singapore office expires in November 2021. In addition, we have non-exclusive agents who represent us in India, Indonesia, Pakistan, Republic of the Philippines, Sri Lanka, Thailand and Vietnam. We believe that our current facilities are adequate to meet current requirements and that additional or substitute space will be available as needed to accommodate our expected growth.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following Operating and Financial Review and Prospects should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 20-F. 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 “Information Regarding Forward-Looking Statements; Cautionary Language.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 20-F, particularly in Item 3, “Key Information — Risk Factors.”

Dollar amounts in this section of this Annual Report on Form 20-F are expressed in thousands of U.S. dollars unless otherwise indicated.

For the discussion of the financial condition and results of operations for the years ended December 31, 2018 compared to the year ended December 31, 2017, refer to Item 5 “Operating and Financial Review and Prospects — Operating Results” and “— Liquidity and Capital Resources” in our Form 20-F for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission on March 25, 2019, which discussion is incorporated herein by reference.

 

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Executive Summary

Operating since 1979, we are one of the world’s largest lessors of intermodal containers based on fleet size, with a total fleet of approximately 2.3 million containers, representing 3.5 million TEU. During 2019: (i) we invested in approximately $740 million of containers for our fleet, (ii) we completed an acquisition from previously managed fleet of approximately 165,000 TEU, (iii) our utilization averaged 97.4% in 2019 compared to 98.1% in 2018, (iv) we leased out over 400,000 TEU, and (v) we repurchased approximately 879,000 shares of our common shares.

Our business comprises of three reportable segments for financial reporting purposes: Container Ownership, Container Management and Container Resale. Our total revenues primarily consist of leasing revenues derived from the leasing of our owned and managed containers and other non-leasing fees received for managing containers owned by third parties, equipment resale and military management. For further details of our business overview, see Item 4, “Information on the Company.

Key Factors Affecting Our Performance

We believe there are a number of key factors that have affected, and are likely to continue to affect, our operating performance. These key factors include the following, among others:

 

   

the demand for leased containers;

 

   

lease rates;

 

   

steel prices;

 

   

interest rates;

 

   

our ability to lease our new containers shortly after we purchase them;

 

   

prices of new and used containers and the impact of changing prices on containers held for sale and the residual value of our in-fleet owned containers;

 

   

remarketing risk;

 

   

the creditworthiness of our customers;

 

   

further consolidation among shipping lines and/or container lessors;

 

   

further consolidation of container manufacturers and/or decreased access to new containers; and

 

   

global and macroeconomic factors that affect trade generally, such as recessions, terrorist attacks, pandemics or the outbreak of war and hostilities.

For further details of these and other factors which may affect our business and results of operations, see Item 3, “Key Information— Risk Factors.

Revenue

Our revenue comprises lease rental income, management fees – non-leasing and trading container margin.

Lease Rental Income. We generate lease rental income by leasing our owned container fleet and managed container fleet to container shipping lines and other customers. Lease rental income comprises daily per diem rental charges due under the lease agreements, together with payments for other charges set forth in the leases, such as handling fees, drop-off charges and pick-up charges and credits (together “geography revenue”) and charges for a DPP. The operating results of our owned container business are determined by the amount by which our container rental revenue exceeds our ownership costs, consisting primarily of depreciation, interest expense, storage, handling and other direct operating expenses and management costs.

 

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Lease rental income and operating expenses arising from the leasing services of the managed portion of our fleet are included on a gross amount basis in our consolidated statements of comprehensive income. We earn management fees from management of the container investor’s containers, which include the leasing, repair, repositioning and storage of the managed fleet pursuant to management agreements with container investors. The management agreements typically cover the entire economic life of the containers.

Utilization is a key performance indicator that demonstrates how much of our equipment is on lease at a point in time or over a period of time. We measure utilization on the basis of CEU on lease, dividing the actual number of CEU days on-hire by actual CEU days available for lease. We calculate containers available for lease by excluding containers that have been manufactured for us but have not yet been delivered to a lessee and containers designated as held for sale units. Our utilization is primarily a function of our current lease structure, overall level of container demand, the location of our available containers and prevailing lease terms by location. The location of available containers is critical because containers available in high-demand locations are more readily leased and are typically leased on more favorable terms than containers available in low-demand locations.

Lease rental income is also affected by 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 rate for new containers has historically been strongly influenced by new container pricing (which in turn is heavily influenced by the cost of container manufacturing inputs such as steel, paint, wood, labor and other components), interest rates, the balance of supply and demand for containers at a particular time and location, our estimate of the residual value of the container at the end of its useful life in marine service, the type of the container being leased, container purchasing activities by container shipping lines and competitors, and efficiencies in container utilization by container shipping lines. Average per diem rates for containers in our owned fleet and in the portfolios of containers comprising our managed fleet change slowly in response to changes in new container prices because existing lease agreements can only be re-priced upon expiration of the lease.

Management Fees – non-leasing. Management fee from non-leasing services is generated by our management services, which include the acquisition and disposition of containers. We provide these management services pursuant to management agreements with container investors. Under these agreements, we earn fees for the acquisition of new containers and a sales commission upon disposition of containers under management. Our acquisition fees are calculated as a percentage of the cost of the container and are deferred and recognized as earned on a straight-line basis over the deemed lease term. Our sales commissions are either a fixed dollar amount or based on a percentage of the sales price.

All rental operations are conducted worldwide in our name as agent for the container investors. Customer accounts receivable and vendor payables arising from direct container operations of the managed portion of our fleet are included in our consolidated balance sheets.

Trading Container Margin. Our Container Resale Division purchases new trading containers and used containers from third parties, primarily shipping lines, and resells these containers to a wide variety of buyers. Trading container margin represents the sales proceeds of these containers net of the cost at the time the containers are sold.

Gain on Sale of Owned Fleet Containers, net

Gain on sale of owned fleet containers, net, represents the excess of the sale price of our owned fleet containers over their net book value at the time of sale. Containers are generally sold at the end of their useful lives in marine service or when we believe it is financially attractive for us to do so, considering the location, sale price, cost of repair and possible repositioning expenses. Gain on sale of owned fleet containers, net, also includes gains (losses) recognized at the inception of sales-type leases of our owned fleet, representing the excess (deficiency) of the estimated fair value of containers placed on sales-type leases over (below) their book value.

Operating Expenses

Our operating expenses include direct container expenses – owned fleet, distribution expenses to managed fleet container investors, depreciation expense, container lessee default expense, amortization expense, general and administrative expenses and bad debt expense, net.

 

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Direct Container Expenses – Owned Fleet. Storage, handling, maintenance, repositioning, agency costs, insurance expenses and other direct container expenses are operating costs of our owned fleet. Storage and handling expenses occur when our customers drop off containers at depots around the world. Storage and handling expenses vary significantly by location. Other direct container expenses include maintenance expenses, which are the result of normal wear and tear on the containers, and repositioning expenses, which are incurred when we contract to move containers from locations where our inventories exceed actual or expected demand to locations with higher demand. Other direct container expenses also include agency costs, which are operational expenses incurred in our agent offices, and insurance expenses, which include customer default insurance premiums. Storage, handling, maintenance, repositioning, and other direct container expenses are directly related to the number of containers in our owned fleet and inversely related to our utilization rate for those containers. As utilization increases, we typically have lower storage, handling, maintenance and repositioning expenses. We use the direct expense method of accounting for maintenance and repairs.

Our leases require the lessee to pay for any damage to the container beyond normal wear and tear at the end of the lease term. We also offer a DPP pursuant to which the lessee pays a fee over the term of the lease (per diem) or a lump sum upon return of containers in exchange for not being charged for certain damages at the end of the lease term. This revenue is recognized as earned over the term of the lease. We do not recognize DPP revenue and related expense over the lease term for customers who are billed at the end of the lease term under the DPP or for other lessees who do not participate in the DPP. Based on past history, there is uncertainty as to collectability of these amounts from lessees who are billed at the end of the lease term because the amounts due under the DPP are typically re-negotiated at the end of the lease term or the lease term is extended.

Distribution to Managed Fleet Container Investors. Our distribution amounts to container investors for the managed fleet includes the net operating income of each container investor’s fleet, reduced by the management fees earned and retained by the Company. This amount also includes expenses related to the operation of the managed containers which are presented on a gross basis in the consolidated statements of comprehensive income.

Our management fees from leasing services are calculated as a percentage of net operating income of the containers. Net operating income is calculated as the lease payment and any other revenue attributable to a container, minus operating expenses related to that container (but not depreciation or financing expenses of the container investor). The container investors are responsible for the direct container expenses incurred in the operation of the managed fleet. The management fee percentage generally varies based upon the type of lease and the terms of the management agreement. Management fee percentages for long-term leases are generally lower than management fee percentages for master or spot leases because less daily involvement by management personnel is required to manage long-term leases.

 

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Depreciation Expense. We depreciate our standard dry freight containers over a period of 13 to 14 years, refrigerated containers over a period of 12 years, tank containers over a period of 20 years and open top and flat rack containers over a period of 14 to 16 years, on a straight-line basis to a fixed residual value. We regularly assess both the estimated useful life of our containers and the expected residual values, and, when warranted, adjust our depreciation estimates accordingly. Depreciation expense will vary over time based upon the number and the purchase price of containers in our owned fleet. Beginning from the third quarter of 2017, depreciation of our existing owned fleet decreased as a result of an increase in the estimated residual value of our 20’ dry containers, 40’ dry containers and 40’ high cube dry containers. Beginning from the third quarter of 2018, depreciation of our existing owned fleet decreased as a result of an increase in the estimated residual value of our 40’ high cube dry containers, partially offset by a decrease in the estimated residual value of our 40’ high cube refrigerated containers.

In addition, we evaluate our containers held for use in our leasing operation to determine whether there has been any event such as a decline in results of operations or residual values that would cause the book value of our containers held for use to be impaired. When an impairment exists, containers held for use are written down to their fair value and the amount of the write down is recorded in depreciation expense.

When the Company is required to write down the cost basis of its containers identified for sale to fair value less cost to sell, the Company measures the fair value of its containers identified 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 records impairments to write down the value of containers identified for sale to their estimated fair value less cost to sell. Any subsequent increase in fair value are recognized as reversal of container impairment but not in excess of the cumulative loss previously recognized.

Container Lessee default expense. Container lessee default expense, represents the amounts recorded for container write-off and container recovery costs from lessee default, net of gain associated with recoveries on containers previously estimated as lost from lessee default.

Amortization Expense. Amortization expense represents the amortization of the price paid for the rights to manage the container fleets of Capital Intermodal Limited, Capital Intermodal GmbH and Capital Intermodal Assets Limited (collectively “Capital Intermodal”) and Amphibious Container Leasing Limited (“Amficon”); Capital Lease Limited, Hong Kong (“Capital”). The purchase prices are being amortized over the expected useful lives of the contracts on a pro-rata basis to the expected management fees.

General and Administrative Expense. Our general and administrative expenses are primarily employee-related costs such as salary, employee benefits, short-term and long-term incentive compensation expense, rent, travel and entertainment costs, as well as expenses incurred for outside services such as legal, consulting, tax and audit-related fees.

Bad Debt Expense, net. Bad debt expense, net, represents the amounts recorded to provide for an allowance for the doubtful collection of accounts receivable for the owned fleet.

 

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A.

Operating Results

Comparison of the Years Ended December 31, 2019 and 2018

The following table summarizes our revenues and gain on sale of owned fleet containers, net for the years ended December 31, 2019 and 2018 and changes between those periods:

 

     Year Ended December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Lease rental income - owned fleet

   $ 517,859      $ 501,362      $ 16,497        3.3

Lease rental income - managed fleet

     101,901        111,342        (9,441      (8.5 %) 
  

 

 

    

 

 

    

 

 

    

Lease rental income

   $ 619,760      $ 612,704      $ 7,056        1.2
  

 

 

    

 

 

    

 

 

    

Management fees - non-leasing

   $ 7,590      $ 8,529      $ (939      (11.0 %) 
  

 

 

    

 

 

    

 

 

    

Trading container sales proceeds

   $ 58,734      $ 19,568      $ 39,166        200.2

Cost of trading containers sold

     (51,336      (16,118      (35,218      218.5
  

 

 

    

 

 

    

 

 

    

Trading container margin

   $ 7,398      $ 3,450      $ 3,948        114.4
  

 

 

    

 

 

    

 

 

    

Gain on sale of owned fleet containers, net

   $ 21,397      $ 36,071      $ (14,674      (40.7 %) 
  

 

 

    

 

 

    

 

 

    

Lease rental income increased $7,056 (1.2%) from 2018 to 2019 primarily due to a $13,991 increase in finance lease income, partially offset by a $4,636 decrease in operating lease income due to a 0.5% decrease in average per diem rental rates, a 0.8% decrease in utilization, partially offset by a 0.7% increase in our total operating fleet that was available for lease, and a $1,816 decrease on delivery, handling and repair fee revenue.

Management fees – non-leasing decreased $939 (-11.0%) from 2018 to 2019 primarily due to a $1,631 decrease in military management fees, partially offset by a $512 increase in acquisition fees on container purchases for the managed fleet and a $183 increase in sales commissions due primarily to higher sales volume for the managed fleet.

Trading container margin increased $3,948 (114.4%) from 2018 to 2019; $10,955 of the increase resulted from a growth in unit sales volume, partially offset by a $7,007 decrease due to a reduction in per unit margin.

Gain on sale of owned fleet containers, net, decreased $14,674 (-40.7%) from 2018 to 2019; $12,013 of the decrease resulted from a reduction in average gain per container sold, $841 of the decrease resulting from a reduction in the number of containers being sold and a $1,820 of the decrease resulting from a day-one loss on sales-type leases in 2019 compared to a day-one gain on sales-type leases in 2018.

 

55


The following table summarizes our total operating expenses for the years ended December 31, 2019 and 2018 and changes between those periods:

 

     Year Ended December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Direct container expense - owned fleet (1)

   $ 45,831      $ 53,845      $ (8,014      (14.9 %) 

Distribution expense to managed fleet container investors

     93,858        102,992        (9,134      (8.9 %) 

Depreciation expense (2)

     260,372        249,500        10,872        4.4

Container lessee default expense (1)

     7,867        17,948        (10,081      (56.2 %) 

Amortization expense

     2,093        3,721        (1,628      (43.8 %) 

General and administrative expense

     38,142        44,317        (6,175      (13.9 %) 

Bad debt expense, net

     2,002        2,697        (695      (25.8 %) 

Gain on insurance recovery and legal settlement

     (14,881      (8,692      (6,189      71.2

Gain on settlement of pre-existing management agreement

     (1,823      —          (1,823      100.0
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 433,461      $ 466,328      $ (32,867      (7.0 %) 
  

 

 

    

 

 

    

 

 

    

 

(1)

Amounts for container write-off and container recovery costs from lessee default for the years ended December 31, 2018 have been reclassified out of the previously reported line item “container impairment” and “direct container expense—owned fleet”, respectively, and included within “container lessee default expense” to conform with the 2019 presentation.

(2)

Amounts to write-down the carrying value of containers held for sale to their estimated fair value less costs to sell for the years ended December 31, 2018 have been reclassified out of the previously reported line item “container impairment” and included within “depreciation expense” to conform with the 2019 presentation.

Direct container expense – owned fleet decreased $8,014 (-14.9%) from 2018 to 2019 primarily due to a $7,893 decrease in repositioning expense, a $2,600 decrease in maintenance expense and a $1,500 decrease in military sublease expense, partially offset by a $4,674 increase in storage expense.

Distribution expense to managed fleet container investors decreased $9,134 (-8.9%) from 2018 to 2019 primarily due to a decrease in lease rental income for the managed fleet.

Depreciation expense increased $10,872 (4.4%) from 2018 to 2019. The following table summarizes the variances included within the changes,

 

     From 2018 to
2019
 

Net increase in the size of our owned fleet, excluding fully depreciated containers

   $ 8,163  

Net increase on changes in estimated future residual value of 40’ high cube dry containers and 40’ high cube refrigerated containers used in the calculation of depreciation expense, effective July 1, 2018

     2,266  

Increase in impairment to write down the value of containers held for sale to their estimated fair value less cost to sell, net of reversal of previously recorded impairments due to rising used container prices

     443  
  

 

 

 
   $ 10,872  
  

 

 

 

Container lessee default expense decreased $10,081 (-56.2%) from 2018 to 2019; $4,280 of the decrease was due to a reduction in container recovery costs and $5,801 of the decrease was due to a reduction in container write-off that were deemed unlikely to be recovered from insolvent customers and a gain associated with recoveries on containers previously estimated as lost with insolvent customers in 2019.

Amortization expense represents the amortization of amounts paid to acquire the rights to manage the container fleets of Capital, Amficon and Capital Intermodal. Amortization, expense decreased $1,628 (-43.8%) from 2018 to 2019 primarily due to an update in management fee revenue estimates for the Capital, Amficon and Capital Intermodal fleets, partially offset by a $835 write-off in 2018 of the Company’s intangible asset of the management rights due to the Company’s acquisition of a portion of Capital’s fleet that we previously managed.

 

56


General and administrative expense decreased $6,175 (-13.9%) from 2018 to 2019 primarily due to a $6,119 decrease in compensation costs, of which a $2,368 decrease was from departing senior executive personnel in 2018.

Bad debt expense, net, decreased $695 (-25.8%) from 2018 to 2019 primarily due to required reserve for certain insolvent lessees in both years, partially offset by an update on management’s assessment of the financial condition of certain of the Company’s lessees and their ability to make required payments.

Gain on insurance recovery and legal settlement for 2019 and 2018 amounted to $14,881 and $8,692, respectively. The 2019 amount includes a $14,040 cash distribution from Hanjin bankruptcy estate received during the fourth quarter of 2019 and the 2018 amount was primarily for insurance settlement associated with the Hanjin bankruptcy for insurable costs including primarily unrecovered containers and incurred container recovery costs, net of the insurance deductible.

Gain on settlement of pre-existing management agreement for 2019 amounted to $1,823 which related to the settlement of the container management agreement in conjunction with our acquisition of LAPCO on December 31, 2019. See Note 4 “LAPCO Acquisition” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further information.

The following table summarizes other income (expenses) for the years ended December 31, 2019 and 2018 and changes between those periods:

 

     Year Ended December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Interest expense

   $ (153,185    $ (138,427    $ (14,758      10.7

Write-off of unamortized deferred debt issuance costs

     —          (881      881        (100.0 )% 

Interest income

     2,505        1,709        796        46.6

Realized gain on derivative instruments, net

     1,946        5,238        (3,292      (62.8 )% 

Unrealized loss on derivative instruments, net

     (15,442      (5,790      (9,652      166.7

Other, net

     (4      —          (4      100.0
  

 

 

    

 

 

    

 

 

    

Net other expense

   $ (164,180    $ (138,151    $ (26,029      18.8
  

 

 

    

 

 

    

 

 

    

Interest expense increased $14,758 (10.7%) from 2018 to 2019 primarily due to a $15,754 increase resulting from an addition in the average debt balance of $366,618, partially offset by a $1,267 decrease resulting from a reduction in average interest rates of 0.04 percentage point.

Write-off of unamortized deferred debt issuance costs for 2018 amounted to $881, which was related to the early redemption of TL’s Term Loan and amendment of TL’s Revolving Credit Facility.

Realized gain on derivative instruments, net decreased $3,292 (-62.8%) from 2018 to 2019 primarily due to a decrease in market rates as compared to spot strike rates in our contracts which caused a smaller positive net settlement differential in 2019 compared to a larger positive net settlement differential in 2018.

Unrealized loss on derivative instruments, net increased $9,652 (166.7%) from 2018 to 2019 primarily due to a larger decrease in the forward LIBOR curve, which caused a greater reduction on the value of the interest rate derivatives, between December 31, 2018 to December 31, 2019 compared to the decrease between December 31, 2017 to December 31, 2018.

 

57


The following table summarizes income tax expense and net (loss) income attributable to the noncontrolling interests for the years ended December 31, 2019 and 2018 and changes between those periods:

 

     Year Ended December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Income tax expense

   $ 1,948      $ 2,025      $ (77      (3.8 )% 

Net (loss) income attributable to the noncontrolling interests

   $ (168    $ 3,872      $ (4,040      (104.3 )% 

Income tax expense decreased $77 (-3.8%) from 2018 to 2019. Our effective tax rate in 2019 decreased to 3.3% from 3.6% in 2018. The decrease in income tax expense in 2019 compared to 2018 was primarily due to a lower tax uncertainty, partially offset by unfavorable stock base compensation. See Note 8 “Income Taxes” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further information.

Net loss attributable to the noncontrolling interests in 2019 represents the noncontrolling interest’s portion of TAP Funding’s net loss and the net loss position was primarily due to the unrealized loss on derivative instruments mentioned above. Net income attributable to the noncontrolling interests in 2018 represents the noncontrolling interest’s portion of TAP Funding’s and TW’s net income. See Note 1 “Nature of Business and Summary of Significant Accounting Polices” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further information.

Segment Information

For further discussion, see Note 1 “Nature of Business and Summary of Significant Accounting Policies” and Note 10 “Segment Information” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

The following table summarizes our income before income taxes and noncontrolling interests attributable to each of our business segments for the years ended December 31, 2019 and 2018 (before inter-segment eliminations) and percentage changes between those periods:

 

     Year Ended December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Container ownership

   $ 14,296      $ 26,166      $ (11,870      (45.4 )% 

Container management

     27,747        20,322        7,425        36.5

Container resale

     21,036        16,128        4,908        30.4

Other

     (4,089      (4,083      (6      0.1

Eliminations

     (486      (2,258      1,772        (78.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax and noncontrolling interests

   $ 58,504      $ 56,275      $ 2,229        4.0
  

 

 

    

 

 

    

 

 

    

 

 

 

 

58


Income before income taxes and noncontrolling interests attributable to the Container Ownership segment decreased $11,870 (-45.4%) from 2018 to 2019. The following table summarizes the variances included within this decrease:

 

     From 2018 to 2019  

Increase in lease rental income - owned fleet

   $ 17,893  

Decrease in container lessee default expense, net

     10,081  

Increase in gain on insurance recovery and legal settlement

     6,189  

Decrease in direct container expense - owned fleet

     4,834  

Decrease in gain on sale of owned fleet containers, net

     (14,674

Increase in interest expense

     (14,487

Increase in depreciation expense

     (11,390

Increase in unrealized loss on derivative instruments, net

     (9,652

Other

     (664
  

 

 

 
   $ (11,870
  

 

 

 

Income before income taxes and noncontrolling interests attributable to the Container Management segment increased $7,425 (36.5%) from 2018 to 2019. The following table summarizes the variances included within this increase:

 

     From 2018 to 2019  

Decrease in distribution expense to managed fleet container investors

   $ 9,134  

Decrease in general and administrative expense

     5,387  

Gain on settlement of pre-existing management agreement in 2019

     1,823  

Decrease in amortization expense

     1,319  

Decrease in lease rental income - managed fleet

     (9,441

Decrease in management fees - non leasing

     (1,537

Other

     740  
  

 

 

 
   $ 7,425  
  

 

 

 

Income before income taxes and noncontrolling interests attributable to the Container Resale segment increased $4,908 (30.4%) from 2018 to 2019. The following table summarizes the variances included within this increase:

 

     From 2018 to 2019  

Increase in trading container margin, net

   $ 3,915  

Increase in management fees - non leasing

     374  

Decrease in general and administrative expense

     320  

Decrease in amortization expense

     310  

Other

     (11
  

 

 

 
   $ 4,908  
  

 

 

 

Loss before income taxes and noncontrolling interests attributable to Other activities unrelated to our reportable business segments increased $6 (0.1%) from 2018 to 2019 primarily due to an increase in general and administrative expense.

Segment eliminations decreased $1,772 (-78.5%) from 2018 to 2019. This change consisted of a $1,160 decrease in acquisition fees received by our Container Management segment from our Container Ownership segment and a $612 increase in depreciation expense related to capitalized acquisition fees received by our Container Management segment from our Container Ownership segment. Our Container Ownership segment capitalizes acquisition fees billed by our Container Management segment as part of containers, net and records depreciation expense to amortize the acquisition fees over the useful lives of the containers, which is eliminated in consolidation.

 

59


Currency

As in previous years, almost all of our revenues are denominated in U.S. dollars and approximately 77% of our direct container expenses – owned fleet in 2019 were denominated in U.S. dollars. Our operations 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 2019, our non-U.S. dollar operating expenses were spread among 17 currencies, resulting in some level of self-hedging. We do not engage in currency hedging.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the 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 estimates are 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.

Revenue Recognition

Lease Rental Income. Lease rental income arises principally from leasing containers to various international shipping lines and includes all rental charges billed to the lessees. Lease rental income—owned fleet comprises rental income for the container fleet owned by the Company. Lease rental income—managed fleet comprises rental income for the container fleet owned by the container investors. For lease accounting purposes, the management agreements with these container investors are deemed to convey to the Company the right to control the use of the managed containers and are therefore accounted for as “lease rental income—managed fleet” as reported in the consolidated statements of comprehensive income.

We recognize revenue from operating leases of containers as earned over the term of the lease. 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.

We cease recognition of lease revenue if and when a container lessee defaults in making timely lease payments or we otherwise determine that future lease payments are not likely to be collected from the lessee. Our determination of the collectability of future lease payments is made by management on the basis of available information, including the current creditworthiness of container shipping lines that lease containers from us, historical collection results and review of specific past due receivables. If we experience unexpected payment defaults from our container lessees, we will cease revenue recognition for those leases, which will reduce container rental revenue.

Finance lease income is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease. The same risks of collectability discussed above apply to our collection of finance lease income. If we experience unexpected payment defaults under our finance leases, we will cease revenue recognition for those leases that will reduce finance lease income.

Lease rental income and operating expenses arising from the leasing services of the managed portion of our fleet are included at gross amounts in our consolidated statements of comprehensive income. Our management fees earned from leasing and management services of the managed fleet are the balance after ‘lease rental income – managed fleet’ minus ‘distribution expense to managed fleet container investors’ in our consolidated statements of comprehensive income. Fees are typically calculated as a fixed percentage of net operating income, which is revenue from the containers under management minus direct operating expense related to those containers.

 

60


Container Rental Equipment

Depreciation. When we acquire containers, we record the cost of the container on our balance sheet. We then depreciate the container over its estimated useful life (which represents the number of years we expect to be able to lease the container to shipping lines) to its estimated “residual value” (which represents the amount we estimate we will recover upon the sale or other disposition of the equipment at the end of its “useful life” as a shipping container). Our estimates of useful life are based on our actual experience with our fleet, and our estimates of residual value are based on a number of factors including disposal price history.

The Company estimates the useful lives and residual values of its containers to be as follows:

 

     2019     2018  
     Estimated useful      Residual     Estimated useful      Residual  
     life (years)      Value     life (years)      Value  

Dry containers other than open top and flat rack containers:

          

20’

     13      $ 1,000       13      $ 1,000  

40’

     14      $ 1,200       14      $ 1,200  

40’ high cube

     13      $ 1,400       13      $ 1,350 to $1,400  

45’ high cube

     13      $ 1,500       13      $ 1,500  

Refrigerated containers:

          

20’

     12      $ 2,750       12      $ 2,750  

20’ high cube

     12      $ 2,049       12      $ 2,049  

40’ high cube

     12      $ 4,000       12      $ 4,000 to $4,500  

Open top and flat rack containers:

          

20’ folding flat rack

     15      $ 1,300       15      $ 1,300  

40’ folding flat rack

     16      $ 1,700       16      $ 1,700  

20’ open top

     15      $ 1,500       15      $ 1,500  

40’ open top

     14      $ 2,500       14      $ 2,500  

Tank containers

     20        10% of cost       20        10% of cost  

We review our depreciation policies, including estimates of useful lives and residual values, on a regular basis to determine whether a change in estimates of useful lives and residual values is warranted. Our analysis incorporates the long-term view based on historical trends, inputs and the current state of used container prices. To perform the assessment, we analyze sales data over a minimum of a ten-year period which reflects the cyclical nature of the global economic environment and more specifically, our industry. We believe a ten-year length of time includes sufficient periods of high and low used container prices to allow us to more accurately predict future residual values. In addition, to capture the current pricing environment and shorter-term factors that influence used container prices, current year-to-date sales data are also considered.

We completed our 2019 annual depreciation policy review during the third quarter and concluded no change was necessary.

Valuation of Leasing Equipment. On a quarterly basis, we evaluate our containers held for use in our leasing operation to determine whether there has been any event such as a decline in results of operations or residual values that would cause the book value of our containers held for use to be impaired. This evaluation is performed at the lowest level of identifiable cash flows which we have determined to be groups of containers based on equipment type. The estimated undiscounted cash flows are based on historical lease operating revenue, expenses and residual values, adjusted to reflect current market conditions. Impairment exists when the estimated future undiscounted cash flows to be generated by an asset group are less than the net book value of that asset group. Any such impairment would be expensed in our results of operations. There was no such impairment for the years ended December 31, 2019, 2018 and 2017.

 

61


Containers Held for Sale

We also evaluate all off-lease containers to determine whether the containers will be repaired and returned to service or sold based upon what we estimate will be the best economic alternative. If we designate a container as held for sale, depreciation on the container ceases, and the container is reported at the lower of (1) its recorded value or (2) the amount we expect to receive upon sale (less the estimated cost to sell the container). Containers held for sale are evaluated for impairment on a quarterly basis based on sale prices for similar types of equipment in the locations in which the containers are stored. Any write-down of containers held for sale is reflected in our statement of operations as an expense. If a large number of containers are designated as held for sale or prices for used containers drop, impairment charges for containers held for sale may increase which would result in decreased net income. Subsequent additions or reductions to the fair values of these written down assets are recorded as adjustments to the carrying value of the equipment held for sale. Any subsequent increase in fair value is recognized as a reversal to container impairment but not in excess of the cumulative loss previously recognized.

We will continue to monitor the performance of our container fleet and evaluate the key factors driving market conditions and assess the assumptions used in our impairment testing analysis should market conditions warrant a reassessment.

Recent Accounting Pronouncements

For further discussion, see Note 1 “Nature of Business and Summary of Significant Accounting Policies” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

 

B.

Liquidity and Capital Resources

As of December 31, 2019, we had cash and cash equivalents (including restricted cash) of $277,905. Our principal sources of liquidity have been our cash flows from operations including the sale of containers and borrowings under debt facilities. As of December 31, 2019, we had the following outstanding borrowings and borrowing capacities per debt facility (in thousands):

 

Facility:

   Current
Borrowing
     Additional
Borrowing
Commitment
     Total
Commitment
     Current
Borrowing
     Available
Borrowing,
as Limited
by our
Borrowing
Base
     Current and
Available
Borrowing
 

TL Revolving Credit Facility

   $ 1,286,289      $ 213,711      $ 1,500,000      $ 1,286,289      $ 133,165      $ 1,419,454  

TL 2019 Term Loan

     160,000        —          160,000        160,000        —          160,000  

TMCL II Secured Debt Facility

     694,506        505,494        1,200,000        694,506        —          694,506  

TMCL V 2017-1 Bonds

     318,879        —          318,879        318,879        —          318,879  

TMCL V 2017-2 Bonds (1)

     398,947        —          398,947        398,947        —          398,947  

TMCL VI Term Loan

     251,400        —          251,400        251,400        —          251,400  

TMCL VII 2018-1 Bonds (1)

     232,416        —          232,416        232,416        —          232,416  

TMCL VII 2019-1 Bonds (1)

     331,333        —          331,333        331,333        —          331,333  

TAP Funding Revolving Credit Facility (2)

     153,525        36,475        190,000        153,525        4,078        157,603  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (3)

   $ 3,827,295      $ 755,680      $ 4,582,975      $ 3,827,295      $ 137,243      $ 3,964,538  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts on the TMCL V 2017-2 Bonds, TMCL VII 2018-1 Bonds and TMCL VII 2019-1 Bonds exclude an unamortized discount of $45, $2,332 and $101, respectively.

(2)

TAP Funding Revolving Credit facility was amended in February 2020 with total commitment amount decreased to $155,000.

(3)

Current borrowing for all debts excludes prepaid debt issuance costs in an aggregate amount of $27,088.

 

62


We have typically funded a significant portion of the purchase price of new containers through borrowings under our TL Revolving Credit Facility and TMCL II Secured Debt Facility, and intend to continue to utilize these facilities in the future. In 2019, at such time as our secured debt facilities reached an appropriate size, the facilities were refinanced through the issuance of bonds to institutional investors. We anticipate similar refinancing at such times as the TL Revolving Credit Facility, TMCL II Secured Debt Facility or any similar revolving debt facilities we establish nears their maximum size. This timing will depend on our level of future purchases of containers, the size of our debt facilities in the future, and prevailing conditions in the debt markets.

Our cash inflows from operations are affected by the utilization rate of our fleet and the per diem rates of our leases, whereas the cash inflows from proceeds for the sale of containers are affected by market demand for used containers and our available inventory of containers for sale. Our cash outflows are affected by payments and expenses related to our purchasing of containers, interest on our debt obligations or other contingencies discussed in Note 11 “Commitments and Contingencies” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F, which may place demands on our short-term liquidity.

We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries, which own our operating assets. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends, if any, on our common shares. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. If we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretion not to, pay dividends on our common shares. Our board of directors takes a fresh view every quarter, taking into consideration our cash needs for opportunities that may be available to us, and sets our dividend, if any, accordingly. The TL Revolving Credit Facility and TL 2019 Term Loan also prohibit TL from paying dividends to TGH in excess of certain limits. A substantial amount of cash used by TGH to pay dividends to its common shareholders has historically been received from TL and TEML in the form of dividends.

Our consolidated financial statements do not reflect the income taxes that would be payable to foreign taxing jurisdictions if the earnings of a group of corporations operating in those jurisdictions were to be transferred out of such jurisdictions, because such earnings are intended to be permanently reinvested in those countries. At December 31, 2019, cumulative earnings of approximately $33,976 would be subject to income taxes of approximately $10,193 if such earnings of foreign corporations were transferred out of such jurisdictions in the form of dividends.

The disruption in the credit market in 2008 and 2009 had a significant adverse impact on a number of financial institutions and Hanjin’s bankruptcy in 2016 had a significant adverse impact on the liquidity of the container leasing industry. Assuming that our lenders remain solvent, we currently believe that cash flow from operations, proceeds from the sale of containers and borrowing availability under our debt facilities are sufficient to meet our liquidity needs for the next twelve months. We will continue to monitor our liquidity and the credit markets. However, we cannot predict with any certainty the impact on the Company of any further disruptions in the credit environment.

Description of Indebtedness

For further discussion, see Note 9 “Debt and Derivative Instruments” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

As of December 31, 2019, the total outstanding principal balance on our fixed rate debt facilities was $1,693 million with fixed interest rates between 3.50% and 5.07% as of December 31, 2019. Final maturities on these fixed rate debt facilities are between December 2026 and April 2044. As of December 31, 2019, the total outstanding principal balance on our floating rate debt facilities was $2,134 million with interest rates between 3.24% and 3.69%, primarily LIBOR plus a margin, as of December 31, 2019. Final maturities on these floating rate debt facilities are between December 2021 and July 2026.

We have entered into several interest rate cap, and swap agreements to reduce the impact of changes in interest rates associated with our floating rate debt obligations. Total notional amount of these interest rate hedging agreements amounted to $1,031 million as of December 31, 2019 (also see Item 11 “Quantitative and Qualitative Disclosures about Market Risk” for further information).

 

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TL Revolving Credit Facility. TL has a revolving credit facility with Wells Fargo Bank and other lenders who provide a total commitment amount of up to $1,500,000 (which includes a $25,000 letter of credit facility, together, the “TL Revolving Credit Facility”). The TL Revolving Credit Facility provides for payments of interest only during its term, beginning on its inception date through the maturity date. TL is required to make principal payments on the TL Revolving Credit Facility on any payment date for the outstanding loan principal amount that exceeds the borrowing base on such payment date. The interest rate on the TL Revolving Credit Facility, payable monthly in arrears, is based either on the base rate for Base rate loans plus a spread of between 0.75% and 1.25% or LIBOR for Eurodollar rate loans plus a spread between 1.25% and 1.75% during the revolving period prior to the maturity date. There is a commitment fee on the unused amount of the total commitment. The spread and the commitment fee vary based on the leverage of TGH.

The TL Revolving Credit Facility contains restrictive covenants, including limitations on certain liens, indebtedness and investments. In addition, the TL Revolving Credit Facility contains certain restrictive financial covenants, such as (i) TGH and TL each to maintain a consolidated leverage ratio of 3.50 to 1.00 or less; (ii) TGH to maintain a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00; (iii) TL to maintain a minimum consolidated interest coverage ratio range from 2.75 to 1.00 as of December 31, 2018, to 4.00 to 1.00 as of September 30, 2019 and each fiscal quarter through the maturity date; and (iv) TGH to maintain a minimum consolidated tangible net worth of $972,000 plus 50% of TGH’s net income since June 30, 2018, with no deduction for any period in which there is a net loss.

TL 2019 Term Loan. TL issued a $160,000 fixed rate term loan (the “TL 2019 Term Loan”) to a group of financial institutions. It is a partially amortizing term loan with the remaining principal due in full on December 26, 2026. The TL 2019 Term Loan was entered into on December 18, 2019 and proceeds from the TL 2019 Term Loan, were used to paydown debt in the TMCL II Secured Debt Facility and TL Revolving Credit Facility.

The TL 2019 Term Loan contains restrictive covenants, including limitations on certain liens, indebtedness and investments. In addition, the TL 2019 Term Loan contains certain restrictive financial covenants, such as (i) TGH and TL each to maintain a consolidated leverage ratio of 3.50 to 1.00 or less; (ii) TGH to maintain a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00; (iii) TL to maintain a minimum consolidated interest coverage ratio of 4.00 to 1.00; and (iv) TGH to maintain a minimum consolidated tangible net worth of $972,000 plus 50% of TGH’s net income since June 30, 2018, with no deduction for any period in which there is a net loss.

TMCL II Secured Debt Facility. TMCL II has a securitization facility with Wells Fargo Bank and other lenders who provide a total commitment of $1,200,000 (the “TMCL II Secured Debt Facility”).

TMCL II is required to make principal payments on the TMCL II Secured Debt Facility on any payment date for the outstanding loan principal amount that exceeds the borrowing base on such payment date. The interest rate on the TMCL II Secured Debt Facility, payable monthly in arrears, is one-month LIBOR plus 1.75% during the revolving period prior to the conversion date. There is a commitment fee on the unused amount of the total commitment.

TMCL II must maintain certain financial covenants per the debt agreement, such as (i) no event of default in the TL Revolving Credit Facility (see TL Revolving Credit Facility restrictive covenants disclosure in the below paragraphs); (ii) TEML may not incur more than $1,000 of consolidated funded debt; (iii) TEML must make at least $2,000 in after-tax profits annually; (iv) TEML’s wholly-owned subsidiary Textainer Equipment Management (U.S.) Limited (“TUS”) may not incur more than $1,000 of consolidated funded debt; and (v) TUS must make at least $200 in after-tax profits annually.

TMCL V 2017-1 Bonds & TMCL V 2017-2 Bonds. TMCL V issued the Series 2017-1 Fixed Rate Asset Backed Notes (the “TMCL V 2017-1 Bonds”), $350,000 aggregate Class A principal amount and $70,000 aggregate Class B principal amount of TMCL V 2017-1 Bonds, to qualified institutional investors pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S promulgated under the Securities Act. The $420,000 in TMCL V 2017-1 Bonds represent fully amortizing notes payable over a scheduled payment term of 9 years, but not to exceed a maximum payment term of 25 years. The target final payment date and legal final payment date are May 20, 2026 and May 20, 2042, respectively. Proceeds from the TMCL V 2017-1 Bonds were used to acquire containers from TMCL III and for general corporate purposes.

TMCL V issued the Series 2017-2 Fixed Rate Asset Backed Notes (the “TMCL V 2017-2 Bonds”), $416,000 aggregate Class A principal amount and $84,000 aggregate Class B principal amount of TMCL V 2017-2 Bonds, to qualified institutional investors pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S promulgated under the Securities Act. The $500,000 in TMCL V 2017-2 Bonds represent fully amortizing notes payable over a scheduled payment term of 9 years, but not to exceed a maximum payment term of 25 years. The target final payment date and legal final payment date are June 20, 2026 and June 20, 2042, respectively. Proceeds from the TMCL V 2017-2 Bonds were used to acquire containers from the TL Revolving Credit Facility and the TMCL II Secured Debt Facility and for general corporate purposes.

 

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Both TMCL V 2017-1 Bonds and TMCL V 2017-2 Bonds in TMCL V must maintain certain financial covenants per debt agreements, such as (i) TMCL V must maintain at least a 1.10 to 1.00 of the debt service coverage ratio; (ii)TEML may not incur more than $1,000 of consolidated funded debt; (iii) TEML must make at least $2,000 in after-tax profits annually; (iv) TUS may not incur more than $1,000 of consolidated funded debt; (v) TUS must make at least $200 in after-tax profits annually and; (vi) TGH must maintain a leverage ratio no greater than 4.00 to 1.00.

TMCL VI Term Loan. TMCL VI issued a $300,000 fixed rate term loan (the “TMCL VI Term Loan”) to a group of financial institutions. It is a partially-amortizing term loan based on defined repayment schedules until February 15, 2025 and after that, repayment will be based on available cash. It has a legal final maturity date on February 15, 2038. The TMCL VI Term Loan was entered into on February 15, 2018 and proceeds from the TMCL VI Term Loan, were used to paydown debt in the TMCL II Secured Debt Facility and TL Revolving Credit Facility. TMCL VI is required to make additional principal payments if the outstanding loan principal amount of the TMCL VI Term Loan exceeds the borrowing base on the payment date.

TMCL VI must maintain certain financial covenants per debt agreement, such as (i) TMCL VI must maintain at least a 1.10 to 1.00 of the debt service coverage ratio; (ii) TEML may not incur more than $1,000 of consolidated funded debt; (iii) TEML must make at least $2,000 in after-tax profits annually; (iv) TUS may not incur more than $1,000 of consolidated funded debt; (v) TUS must make at least $200 in after-tax profits annually; and (vi) TGH must maintain a leverage ratio no greater than 4.00 to 1.00.

TMCL VII 2018-1 Bonds. TMCL VII issued the Series 2018-1 Fixed Rate Asset Backed Notes (the “TMCL VII 2018-1 Bonds”), $250,000 aggregate Class A principal amount and $9,100 aggregate Class B principal amount of TMCL VII 2018-1 Bonds, to qualified institutional investors pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S promulgated under the Securities Act.

The $259,100 in TMCL VII 2018-1 Bonds represent partially amortizing notes payable over a scheduled payment term of 7 years, but not to exceed a maximum payment term of 25 years. The anticipated repayment date and legal final payment date are July 2025 and July 2043, respectively. Proceeds from the TMCL VII 2018-1 Bonds were used to paydown debt in the TMCL II Secured Debt Facility and the TL Revolving Credit Facility.

TMCL VII 2019-1 Bonds. TMCL VII issued the Series 2019-1 Fixed Rate Asset Backed Notes (the “TMCL VII 2019-1 Bonds”), $328,900 aggregate Class A principal amount and $21,100 aggregate Class B principal amount of TMCL VII 2019-1 Bonds, to qualified institutional investors pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S promulgated under the Securities Act.

The $350,000 in TMCL VII 2019-1 Bonds represent partially amortizing notes payable over a scheduled payment term of 7.5 years, but not to exceed a maximum payment term of 25 years. The anticipated repayment date and legal final payment date are October 2026 and April 2044, respectively. Proceeds from the TMCL VII 2019-1 Bonds were used to paydown debt in the TMCL II Secured Debt Facility and the TL Revolving Credit Facility.

Both TMCL VII 2018-1 Bonds and TMCL VII 2019-1 Bonds in TMCL VII must maintain certain financial covenants per debt agreements, such as (i) TMCL VII must maintain at least a 2.00 to 1.00 interest coverage ratio;

(ii) TEML may not incur more than $1,000 of consolidated funded debt; (iii) TEML must make at least $2,000 in after-tax profits annually; (iv) TUS may not incur more than $1,000 of consolidated funded debt; (v) TUS must make at least $200 in after-tax profits annually and; (vi) TGH must maintain a leverage ratio no greater than 4.00 to 1.00.

TAP Funding Revolving Credit Facility. TAP Funding has a credit agreement (the “TAP Funding Credit Agreement”) with a group of banks that provides for a revolving credit facility with an aggregate commitment amount of up to $190,000 (the “TAP Funding Revolving Credit Facility”). The interest rate on the TAP Funding Revolving Credit Facility, payable monthly in arrears, is one-month LIBOR plus 1.95% through its maturity date. There is a commitment fee on the unused amount of the total commitment. TAP Funding is required to make principal payments on the TAP Funding Revolving Credit Facility on a monthly basis to the extent that the outstanding amount due exceeded the borrowing base.

 

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The TAP Funding Revolving Credit Facility contains restrictive covenants, including limitations on TEML’s net income and debt levels, TAP Funding’s certain liens, indebtedness, investments, overall asset base minimums, certain debt service coverage ratio, tangible net worth and the average age of the TAP Funding Revolving Credit Facility’s container fleet.

On February 7, 2020, the Company entered into an amendment of the TAP Funding Revolving Credit Facility (see Note 14 “Subsequent Event” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further information).

Debt Covenants. All of our debt facilities are secured by specific pools of containers and related assets owned by the Company. TGH also acts as an unconditional guarantor of the TL Revolving Credit Facility and the TL 2019 Term Loan. In addition to customary events of default as defined in our credit agreements and indenture and various restrictive financial covenants fore-mentioned, the Company’s debt facilities also contain other various debt covenants and borrowing base minimums. The TL Revolving Credit Facility and TL 2019 Term Loan also contains cross default provisions that may result in an acceleration of principal repayment under these debt facilities if an uncured default condition were to exist. We were in full compliance with these requirements at December 31, 2019.

Cash Flow

The following table summarizes historical cash flow information for the years ended December 31, 2019 and 2018:

 

     December 31,      2019 vs 2018  
     2019      2018      $ Change      % Change  
     (Dollars in thousands)                

Net cash provided by operating activities

   $ 428,545      $ 316,119      $ 112,426        35.6

Net cash used in investing activities

   $ (761,792    $ (736,787    $ (25,005      3.4

Net cash provided by financing activities

   $ 386,182      $ 408,154      $ (21,972      (5.4 %) 

Operating Activities

Net cash provided by operating activities increased $112,426 (35.6%) from 2018 to 2019. The following table summarizes the variances included within this increase:

 

Increase in net income adjusted for noncash items

   $ 19,571  

Decrease in accounts receivable, net in 2019 compared to an increase in 2018

     59,643  

Decrease in trading containers in 2019 compared to an increase in 2018

     49,649  

Decrease in gain on sale of owned fleet containers, net in 2019

     14,674  

Decrease in receipt of payments on direct financing and sales-type lease, net of income earned in 2019

     (14,051

Decrease in due to container investors, net in 2019 compared to 2018

     (7,018

Decrease in accounts payable and accrued expenses in 2019 compared to 2018

     (5,171

Other, net

     (4,871
  

 

 

 
   $ 112,426  
  

 

 

 
  

 

 

 

The increase in net cash provided by operating activities from 2018 to 2019 was primarily due to an increase in net income adjusted for non-cash items such as depreciation expense, unrealized (loss) gain on derivative instruments, amortization of debt issuance costs and accretion of bond discounts. The increased level of profitability was primarily due to a 0.7% increase in our total operating fleet that was available for lease and a decrease in our direct container expense – owned fleet.

Investing Activities

Net cash used in investing activities increased $25,005 (3.4%) from 2018 to 2019 primarily due to cash paid in 2019 for container leaseback financing receivable of $281,445 and cash paid in 2019 for LAPCO acquisition of $171,841, partially offset by lower amount of cash paid for container and fixed asset purchases and higher proceeds from the sale of containers and fixed assets.

 

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Financing Activities

Net cash provided by financing activities decreased $21,972 (5.4%) from 2018 to 2019. The following table summarizes the variances included within this decrease:

 

Decrease in net borrowings on debt

   $ (30,906

Purchase of treasury shares in 2019

     (8,597

Proceeds from container leaseback financing liability in 2019

     17,448  

Others

     83  
  

 

 

 
   $ (21,972
  

 

 

 

 

C.

Research and Development, Patents and Licenses, etc.

We do not carry out research and development activities and our business and profitability are not materially dependent upon any patents or licenses. We have registered “TEXTAINER,” “TEX” and “tex” (logo) in the U.S. Patent and Trademark Office and in the patent and trademark agencies of thirteen countries as trademarks.

 

D.

Trend Information

Please see Item 5, “Operating and Financial Review and Prospects – Tabular Disclosure of Contractual Obligations” for a description of identifiable trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity either increasing or decreasing at present or in the foreseeable future. We will require sufficient capital in the future to meet our payments and other obligations under our contractual obligations and commercial commitments. The need to make such payments is a “Trend” as it is unlikely that all such obligations will be eliminated from our future business activities. We intend to utilize cash on hand in order to meet our obligations under our contractual obligations and commercial commitments. It is likely that we will generate sufficient operating cash flow to meet these ongoing obligations in the foreseeable future. From time to time, we may issue additional debt in order to raise capital for future requirements.

 

E.

Off-Balance Sheet Arrangements

At December 31, 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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F.

Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments by due date as of December 31, 2019:

 

     Payments Due by Twelve Month Period Ending December 31  
                                              2025 and  
     Total      2020      2021      2022      2023     2024      thereafter  
                   (Dollars in thousands)               
                          (Unaudited)                      

Total debt obligations:

                   

TL Revolving Credit Facility

   $ 1,286,289      $ 5,063      $  138,229      $ 138,229      $ 1,004,768     $ —        $ —    

TL 2019 Term Loan

     160,000        10,523        10,898        11,285        11,686       12,102        103,506  

TMCL II Secured Debt Facility (1)

     694,506        68,459        66,435        60,474        52,086       52,086        394,966  

TMCL V 2017-1 Bonds

     318,879        39,357        52,173        63,220        62,557       54,769        46,803  

TMCL V 2017-2 Bonds (2)

     398,947        43,958        55,259        67,021        80,125       73,442        79,142  

TMCL VI Term Loan

     251,400        25,500        25,500        25,500        25,500       25,500        123,900  

TMCL VII 2018-1 Bonds (2)

     232,416        18,655        18,655        18,655        18,655       18,655        139,141  

TMCL VII 2019-1 Bonds (2)

     331,333        28,000        28,000        28,000        28,000       28,000        191,333  

TAP Funding Revolving Credit Facility

     153,525        11,038        142,487        —          —         —          —    

Interest on obligations (3)

     533,645        135,866        123,274        103,445        79,621       46,598        44,841  

Interest rate swaps and caps payables (receivables), net (4)

     10,046        4,250        3,733        2,087        (24     —          —    

Office lease obligations

     15,966        2,232        2,200        2,039        2,103       2,163        5,229  

Container contracts payable

     9,394        9,394        —          —          —         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total contractual obligations (5)(6)

   $ 4,396,346      $ 402,295      $ 666,843      $ 519,955      $ 1,365,077     $ 313,315      $ 1,128,861  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

The estimated future repayments for TMCL II Secured Debt Facility is based on the assumption that the facility will not be extended on its associated conversion date.

(2)

Future scheduled payments for the TMCL V 2017-2 Bonds, TMCL VII 2018-1 Bonds and TMCL VII 2019-1 Bonds exclude an unamortized discount of $45, $2,332 and $101, respectively.

(3)

Using 1.76% which was one-month spot interest rate of LIBOR plus a margin rate that varies based on each debt facility. Weighted average interest rate at 3.62%.

(4)

Calculated based on the difference between our fixed contractual rates and the counterparties’ estimated average rate at 1.76% which was one-month spot interest of LIBOR rate as of December 31, 2019, for all periods, for all interest rate contracts outstanding as of December 31, 2019.

(5)

Future scheduled payments for all debts exclude prepaid issuance costs in an aggregate amount of $27,088.

(6)

Excluded container leaseback financing liability amounting to $17,449 as of December 31, 2019 which is accounted for as a financing transaction under FASB Accounting Standards Update No. 2016-02, Leases (“Topic 842”) (“ASU 2016-02”). This is excluded due to the uncertainty in the timing and variable amounts of future cash flows since the estimated future scheduled payments is dependent upon assumptions regarding the amounts distributed to the Container Investors which is based on net operating income of the managed fleet, reduced by the management fees earned. The Container Investors have no rights or recourse against the Company in the event of a lessee default or any other risk in respect of the managed containers.

 

G.

Safe Harbor

This Annual Report on Form 20-F contains forward-looking statements. See “Information Regarding Forward-Looking Statements; Cautionary Language.”

 

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ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.

Directors and Senior Management

The following table sets forth information regarding our executive officers and directors as of March 30, 2020. Our board of directors is elected annually on a staggered basis and each director holds office for three years or until his successor has been duly elected, except in the event of his death, resignation, removal or earlier termination of his office. Our bye-laws provide for, among other things, the election of our board of directors on a staggered basis. The business address of each of our executive officers and non-management directors is Century House, 16 Par-La-Ville Road, Hamilton HM 08, Bermuda.

David M. Nurek, Robert D. Pedersen and Iain Brown are designated Class III directors, to hold office until our 2020 annual general meeting of shareholders, Olivier Ghesquiere and Hennie Van der Merwe are designated Class II directors, to hold office until our 2021 annual general meeting of shareholders and John A. Maccarone, Dudley R. Cottingham, and Hyman Shwiel are designated Class I directors, to hold office until our 2022 annual general meeting of shareholders. Directors may be re-elected when their term of office expires.

As of December 31, 2019, Trencor held an interest in approximately 5.3% of our outstanding share capital. In December 2019, we commenced a secondary, or dual, listing of our common shares on the JSE in Johannesburg, South Africa under the symbol “TXT”. Promptly following our dual listing, Trencor distributed approximately 24.3 million of its shares in the Company to Trencor’s own shareholders and these shares are now trading on the JSE. See Item 4, “Information on the Company— Organizational Structure” and Item 7, “Major Shareholders and Related Party Transactions” for an explanation of the relationship between us and Trencor. As indicated below, two of our directors are also directors of Trencor.

 

Executive Officers and Directors

   Age   

Position

Hyman Shwiel (1)(2)(3)

   75   

Chairman

Olivier Ghesquiere

   53    Director, President and Chief Executive Officer

Iain Brown (1)

   56   

Director

Dudley R. Cottingham (1)(2)(3)

   68   

Director

John A. Maccarone (2)(3)

   75   

Director

David M. Nurek (1)(2)(3)(4)

   70   

Director

Hennie Van der Merwe (3)(5)

   72   

Director

Robert D. Pedersen

   60   

Director

Michael K. Chan

   57   

Executive Vice President and Chief Financial Officer

 

(1)

Member of the audit committee.

(2)

Member of the compensation committee.

(3)

Member of the nominating and corporate governance committee.

(4)

Chairman of Trencor. Trencor holds 5.3% of our share interest.

(5)

Chief Executive Officer and Director of Trencor. Trencor holds 5.3% of our share interest.

Certain biographical information about each of these individuals is set forth below.

Directors

Hyman Shwiel has been a member of our board of directors since September 2007. Mr. Shwiel was a partner with Ernst & Young LLP for 25 years. He served during that period in various roles, including Area Managing Partner and as National Director of Enterprise and Professional Risk. Upon his retirement in 2005, he became a consultant to Ernst & Young until 2007. Mr. Shwiel holds a C.T.A. and a M.B.A. from the University of Cape Town and is a Chartered Accountant (South Africa) and a CPA.

Olivier Ghesquiere was appointed President and Chief Executive Officer and to our board of directors in August 2018. Mr. Ghesquiere served as our Executive Vice President – Leasing from January 2017 to August 2018, responsible for worldwide sales and marketing related activities and operations. Mr. Ghesquiere served as our Senior Vice President – Marketing and Sales since December 2015. Mr. Ghesquiere worked at Groupe Ermewa S.A. as Chief Operating Officer and then Chief Executive Officer from January 2009 through February 2015 where he was responsible for growing the railcar and locomotive fleet to become the second largest in Europe. During that

 

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time Mr. Ghesquiere was also chairman of Eurotainer SA for which he was the Managing Director from April 2004 through December 2008 where he developed their tank container business focusing on higher value segments of the market. Mr. Ghesquiere has served as Vice Chairman and chairman of the International Tank Container Organization (ITCO) leasing committee from 2006 through 2010. Mr. Ghesquiere holds a Masters in Applied Economics from the Louvain School of Management, Belgium.

Iain Brown has been a member of our board of directors since May 2016. Mr. Brown was a member of the board of directors of Halco. Mr. Brown is a director of Coveham Container Services Limited, has been providing administrative services and strategic advice to owners and investors in the container leasing industry for over twenty five years. He holds a B.S. in Engineering degree from the University of Cape Town, a MS in Engineering from University of Texas and an M.B.A. in Finance from The Wharton School of the University of Pennsylvania.

Dudley R. Cottingham has been a member of our board of directors since December 1993 and served as assistant Secretary and/or secretary between December 1993 and October 2007. He has also served in the past as president of certain of our subsidiaries and continues to serve as a director of our Bermuda subsidiaries. Mr. Cottingham has over 35 years of experience in public accounting for a variety of international and local clients. He is a director and the audit committee chairman of Bermuda Press (Holdings) Ltd., a newspaper publishing and commercial printing company listed on the Bermuda Stock Exchange and is chairman of the listing committee of the Bermuda Stock Exchange. He is chairman and an Investment and Operational Committee member of the Aurum Funds which are listed on the Bermuda Stock Exchange. He was a managing director of and was formerly a partner of Arthur Morris & Company Limited, a provider of audit and accounting services for international clients, since 1982. Mr. Cottingham is currently a consultant and had served as vice president and director of Continental Management Ltd., a Bermuda company providing corporate representation, administration and management services, since 1982 and Continental Trust Corporation Ltd., a Bermuda company that provides corporate and individual trust administration services, since 1994. He is a director of Morris, Cottingham & Co. Ltd. and their other group companies in Turks & Caicos Islands. Mr. Cottingham is a Chartered Accountant.

John A. Maccarone served as our President and Chief Executive Officer from January 1999 until October 2011 when he retired from Textainer and as a member of our board of directors since December 1993. Mr. Maccarone co-founded Intermodal Equipment Associates, a marine container leasing company based in San Francisco, and held a variety of executive positions with the company from 1979 until 1987, when he joined the Textainer Group as President and Chief Executive Officer of TEML, now a subsidiary of our company. From 1977 through 1978, Mr. Maccarone was Director of Marketing based in Hong Kong for Trans Ocean Leasing Corporation, a San Francisco-based company. From 1969 to 1976, Mr. Maccarone was a marketing representative for IBM Corporation in Chicago, Illinois. From 1966 to 1968, he served as a Lieutenant in the U.S. Army Corps of Engineers in Thailand and Virginia. Mr. Maccarone holds a B.S. in Engineering Management from Boston University and an M.B.A. from Loyola University of Chicago.

David M. Nurek has been a member of our board of directors since September 2007. Mr. Nurek was appointed as an alternate director of Trencor in November 1992 and as a non-executive member of its board of directors in July 1995. He is chairman of Trencor and a member of Trencor’s remuneration and nomination and social and ethics committees. In August 2019, Mr. Nurek retired from his position as an executive of Investec Bank Limited, a subsidiary of Investec Limited, which is listed on the JSE. Investec Limited has entered into a dual listed company structure with Investec plc, which is quoted on the London Stock Exchange (collectively, the “Investec Group”). He was the regional chairman of Investec Limited’s various businesses in the Western Cape, South Africa, and also the Investec Group’s worldwide head of legal risk. Prior to joining Investec Limited in June 2000, Mr. Nurek served as chairman of the South African legal firm Sonnenberg Hoffmann & Galombik, which has since changed its name to Edward Nathan Sonnenbergs Inc. Mr. Nurek serves as a non-executive on the boards of directors of various listed and unlisted companies in South Africa and holds a Diploma in Law and a Graduate Diploma in Company Law from the University of Cape Town and completed a Program of Instruction for Lawyers at Harvard Law School and a Leadership in Professional Services Firms program at Harvard Business School.

Hennie Van der Merwe has been a member of our board of directors since August 2017 and between March 2003 to 2011. Mr. Van der Merwe joined Trencor in 1997 and began serving as a director of Trencor in 1998. He was appointed the Chief Executive Officer of Trencor in August 2017. Mr. Van der Merwe also serves as non-executive chairman of the board of Master Drilling Group Limited and as a non-executive director of Bell Equipment Limited, both of which are listed on the JSE. From 1984 to 1991, he held various senior executive positions in the banking sector in South Africa, lastly as chief executive officer of Senbank, the corporate/merchant

 

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banking arm of Bankorp Group Ltd. From 1991 to 1998, Mr. Van der Merwe served as deputy chairman for Waco International Ltd., an international industrial group listed on the JSE with subsidiaries listed on the Sydney and London Stock Exchanges. Prior to entering the business world, Mr. Van der Merwe practiced as an attorney at law in Johannesburg, South Africa. Mr. Van der Merwe holds Bachelor of Arts and L.L.B degrees in Law from the University of Stellenbosch in South Africa, and a Master of Law in Tax Law from the University of the Witwatersrand in South Africa.

Robert D. Pedersen has been a member of our board of directors since April 2017. Mr. Pedersen was appointed President and Chief Executive Officer of TEML, our management company, in October 2011 and retired on March 31, 2017. Mr. Pedersen served as our Executive Vice President responsible for worldwide sales and marketing related activities and operations since January 2006. Mr. Pedersen was Senior Vice President of our leasing group from 1999 to 2005. From 1991 to 1999, Mr. Pedersen held several positions within our company, and from 1978 through 1991, he worked in various capacities for Klinge Cool, a manufacturer of refrigerated container cooling units, XTRA, a container lessor, and Maersk Line, a container shipping line. Mr. Pedersen is a graduate of the A.P. Moller Shipping and Transportation Program and the Merkonom Business School in Copenhagen, where he majored in Company Organization.

Executive Officers

For certain biographical information about Olivier Ghesquiere, see “Directors” above.

Michael K. Chan was appointed Executive Vice President and Chief Financial Officer (CFO) in September 2018. Mr. Chan served as our Vice President and Senior Vice President of Finance from April 2017 through August 2018, responsible for overseeing treasury, investor relations, accounting, financial reporting, and financial planning and analysis. Mr. Chan also served as a Controller from 1994 to 2006. Prior to re-joining the company in 2017, Mr. Chan was CFO at Ygrene Energy Fund from 2015 to 2017, a market-leading specialty finance company, where he raised nearly $1 billion in capital and achieved the industry’s first AAA rating on the company’s senior notes. From 2011 to 2015, Mr. Chan worked as Senior Director of Treasury and Capital Markets for The Cronos Group, a leading global container leasing company which was acquired by Shenzhen Stock Exchange listed Bohai Leasing Company. Before that, Mr. Chan held the CFO position at The Chartres Lodging Group from 2006 to 2011, where he was instrumental in executing key acquisitions and sales for the hotel investment and asset management company. Mr. Chan joined Coopers & Lybrand in 1989, now PricewaterhouseCoopers (PwC) and held the position of Audit Manager. Mr. Chan is a member of the American Institute of Certified Public Accountants (AICPA) and holds a B.S. in Business Administration – Accounting from California State University East Bay.

Board of Directors

Our board of directors currently consists of eight members. Our bye-laws provide that our board of directors shall consist of five to twelve directors, as the board of directors may determine from time to time.

 

B.

Compensation

The aggregate direct compensation we paid to our executive officers as a group (two persons) for the year ended December 31, 2019 was approximately $1,752, which included approximately $453 in bonuses and approximately $267 in vested restricted stock and funds set aside or accrued to provide for health and life insurance, retirement, or similar benefits. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, which amounted to approximately $119. We did not pay our officers who also serve as directors any separate compensation for their directorship during 2019, other than reimbursements for travel expenses.

During 2019, our executive officers as a group were granted 60,000 share options, with an exercise price of $9.13 and an expiration date of November 30, 2029, and 60,000 restricted share units through our 2019 Share Incentive Plan.

All of our full-time employees, including employees of our direct and indirect subsidiaries and dedicated agents and our executive officers, were eligible to participate in our 2015 Short Term Incentive Plan (“STIP”). Under that plan, all eligible employees received an incentive award based on their respective job classification and our return on assets and earnings per share. In 2019, all STIP participants, including our executive officers received 137.5% of their target incentive award that applied to calendar year 2018 performance with the incentive award paid in early 2019.

 

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The aggregate direct compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31, 2019 was approximately $531. Some directors were also reimbursed for expenses incurred to attend board or committee meetings which amounted to approximately $67 during 2019.

2019 Share Incentive Plan

Our board of directors adopted the 2007 Share Incentive Plan (“2007 Plan”) on August 9, 2007, and our shareholders approved the 2007 Plan on September 4, 2007. The maximum number of common shares of Textainer Group Holdings Limited that could be granted pursuant to the 2007 Plan was 3,808,371 shares, representing 8% of the number of common shares issued and outstanding 45 days following our initial public offering on October 9, 2007, subject to adjustments for share splits, share dividends or other similar changes in our common shares or our capital structure. On February 23, 2010, the Company’s Board of Directors approved an increase in the number of shares available for future issuance by 1,468,500 from 3,808,371 shares to 5,276,871 shares, which was approved by the Company’s shareholders at the annual meeting of shareholders on May 19, 2010. The shares to be issued pursuant to awards under the 2007 Plan may be authorized, but unissued, or reacquired common shares. On May 21, 2015, TGH’s board of directors approved an amendment and restatement of the 2007 Plan as the 2015 Plan at the annual meeting of shareholders. The amendment and restatement of the 2007 Plan increased the maximum number of shares available for future issuance by 2,000,000 shares and extended the term of such plan for ten years from the date of the annual meeting of shareholders. On May 23, 2019, TGH’s board of directors approved an amendment and restatement of the 2015 Plan as the 2019 Plan at the annual meeting of shareholders. The amendment and restatement of the 2015 Plan increased the maximum number of shares available for future issuance by 2,500,000 shares and to update the Plan language to eliminate references to IRS Section 162(m) performance based compensation provisions that were eliminated under the new US tax rules that went into effect in January 2018. At December 31, 2019, 2,461,153 shares were available for future issuance under the 2019 Plan.

The 2019 Plan provides for the grant of share options, restricted shares, restricted share units, share appreciation rights and dividend equivalent rights, collectively referred to as “awards.” Share options granted under the 2019 Plan may be either incentive share options under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified share options. We may grant incentive share options only to our employees or employees of any parent or subsidiary of Textainer Group Holdings Limited. Awards other than incentive share options may be granted to our employees, directors and consultants or the employees, directors and consultants of any parent or subsidiary of Textainer Group Holdings Limited.

Our board of directors or a committee designated by our board of directors, referred to as the “plan administrator,” administers the 2019 Plan, including selecting the award recipients, determining the number of shares to be subject to each award, determining the exercise or purchase price of each award and determining the vesting and exercise periods of each award. Awards under the plan may vest upon the passage of time or upon the attainment of certain performance criteria.

The exercise price of all share options granted under the 2019 Plan will be at least equal to 100% of the fair market value of our common shares on the date of grant. If, however, incentive share options are granted to an employee who owns shares possessing more than 10% of the voting power of all classes of our common shares or the shares of any parent or subsidiary, the exercise price of any incentive share option granted must equal at least 110% of the fair market value on the grant date and the maximum term of these incentive share options must not exceed five years. The maximum term of all other awards under the 2019 Plan will be ten years. The plan administrator will determine the term and exercise, or purchase price of any other awards granted under the 2019 Plan.

Under the 2019 Plan, incentive share options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the participant only by the participant. Other awards shall be transferable by will or by the laws of descent or distribution and to the extent provided in the award agreement. The 2019 Plan permits the designation of beneficiaries by holders of awards, including incentive share options.

 

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In the event a participant in the 2019 Plan terminates employment or is terminated by us (or by our parent or subsidiary) without cause, any options which have become exercisable prior to the time of termination will remain exercisable for three months from the date of termination (unless a shorter or longer period of time is determined by the plan administrator). In the event a participant in the 2019 Plan is terminated by us (or by our parent or subsidiary) for cause, any options which have become exercisable prior to the time of termination will immediately terminate. If termination was caused by death or disability, any options which have become exercisable prior to the time of termination, will remain exercisable for twelve months from the date of termination (unless a shorter or longer period of time is determined by the plan administrator). Unless an individual award agreement otherwise provides, all vesting of all other awards will generally terminate upon the date of termination.

Subject to any required action by our shareholders, the number of common shares covered by outstanding awards, the number of common shares that have been authorized for issuance under the 2019 Plan, the exercise or purchase price of each outstanding award, the maximum number of common shares that may be granted subject to awards to a participant in any calendar year, and the like, shall be proportionally adjusted by the plan administrator in the event of any increase or decrease in the number of issued common shares resulting from certain changes in our capital structure as described in the 2019 Plan.

In the event of a corporate transaction or a change in control of Textainer Group Holdings Limited, all outstanding awards under the 2019 Plan will terminate unless the acquirer assumes or replaces such awards. In addition, and except as otherwise provided in an individual award agreement, assumed or replaced awards will automatically become fully vested if a participant is terminated by the acquirer without cause within twelve months after a corporate transaction. In the event of a corporate transaction where the acquirer does not assume or replace awards granted under the 2019 Plan, all of these awards become fully vested immediately prior to the consummation of the corporate transaction. In the event of a change in control and except as otherwise provided in an individual award agreement, outstanding awards will automatically become fully vested if a participant is terminated by the acquirer without cause within twelve months after such change in control.

Under the 2019 Plan, a “corporate transaction” is generally defined as:

 

   

acquisition of 50% or more of the common shares by any individual or entity including by tender offer;

 

   

a reverse merger or amalgamation in which 40% or more of the common shares is acquired by an individual or entity;

 

   

a sale, transfer or other disposition of all or substantially all of the assets of Textainer Group Holdings Limited;

 

   

a merger, amalgamation or consolidation in which Textainer Group Holdings Limited is not the surviving entity; or

 

   

a complete liquidation or dissolution.

Under the 2019 Plan, a “change in control” is generally defined as:

 

   

acquisition of 50% or more of the common shares by any individual or entity which a majority of our board of directors (who have served on the board for at least 12 months) do not recommend that our shareholders accept, or

 

   

a change in the composition of the board of directors as a result of contested elections over a period of 12 months or less.

Unless terminated sooner, the 2019 Plan will automatically terminate in 2029. The board of directors will have authority to amend or terminate the 2019 Plan. To the extent necessary to comply with applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to awards granted to residents therein, we will obtain shareholder approval of any such amendment to the 2019 Plan in such a manner and to such a degree as required.

 

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2008 Bonus Plan

On September 21, 2007, our board of directors approved the Textainer Group Holdings Limited 2008 Bonus Plan (the “Bonus Plan”). The Bonus Plan provides for incentive payments to our employees and those of our affiliates, including our dedicated agents and key executives. Although the Bonus Plan permits the awards to be paid in shares, we expect that the awards will be cash-based. The Bonus Plan is designed to provide incentive awards based on the achievement of goals relating to our performance and the performance of our individual business units while maintaining a degree of flexibility in the amount of incentive compensation paid to such individuals. Under the Bonus Plan, performance goals may relate to one or more of the following measures, for the company as a whole, a line of business, service or product: increase in share price, earnings per share, total shareholder return, operating margin, gross margin, return on equity, return on assets, return on investment, operating income, net operating income, pre-tax income, cash flow, revenue, expenses, earnings before interest, taxes and depreciation, economic value added, market share, corporate overhead costs, liquidity management, net interest income, net interest income margin, return on capital invested, shareholders’ equity, income before income tax expense, residual earnings after reduction for certain compensation expenses, net income, profitability of an identifiable business unit or product, or performance relative to a peer group of companies on any of the foregoing measures.

Employment with Executive Officers and Directors

We have entered into employment agreements with our executive officers. Each of these employment agreements contains provisions requiring us to make certain severance payments in case the executive officer is terminated without cause. The agreements terminate upon termination of employment. Employment is at-will for each of our executive officers and their employment may be terminated at any time for any reason.

Other than as disclosed above, none of our directors has service contracts with us or any of our subsidiaries providing for benefits upon termination of employment.

 

C.

Board Practices

Our corporate governance practices are in compliance with, and are not prohibited by, the laws of Bermuda. Therefore, we are exempt from many of the NYSE corporate governance practices, other than the establishment of a formal audit committee satisfying the requirements of Rule 10A-3 under the Exchange Act and notification of non-compliance with NYSE listing requirements pursuant to Rule 10A-3 promulgated under the Exchange Act. For further discussion on the practices that we follow in lieu of the NYSE’s corporate governance rules, see Part II Item 16G, “Corporate Governance” in this Annual Report on Form 20-F.

 

D.

Employees

We had approximately 170 employees as of December 31, 2019. We believe that our relations with our employees are good, and we are not a party to any collective bargaining agreements.

 

E.

Share Ownership

See Item 7, “Major Shareholders and Related Party Transactions” for information regarding director and senior management ownership of our common shares.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.

Major Shareholders

The following table presents information regarding the beneficial ownership of our common shares as of December 31, 2019:

 

   

each person or entity that we know beneficially owns more than 5% of our issued and outstanding shares;

 

   

each director, director nominee and executive officer; and

 

   

all of our directors, director nominees and executive officers as a group.

 

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Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. The percentage of beneficial ownership of our common shares owned is based on 56,817,918 common shares issued and outstanding on December 31, 2019. We do not believe that we are directly or indirectly owned or controlled by any foreign government. The voting rights of our common shares held by major shareholders are the same as the voting rights of shares held by all other shareholders. We are unaware of any arrangement that might result in a change of control.

 

     Number of Common Shares  
     Beneficially Owned  

Holders

   Shares (7)      % (9)  

5% or More Shareholders

     

Coronation Asset Management (Pty) Ltd

     6,716,360        11.8

Isam K. Kabbani (2)

     3,720,850        6.5

Trencor Limited (1)

     3,000,158        5.3

Directors and Executive Officers

     

David M. Nurek (3)

     3,031,198        5.3

Hennie Van der Merwe (4)

     3,013,777        5.3

John A. Maccarone (5)

     1,549,519        2.7

Robert D. Pedersen

     356,612        *  

Olivier Ghesquiere

     238,792        *  

Michael K. Chan

     94,278        *  

Hyman Shwiel

     34,641        *  

Dudley R. Cottingham (6)

     32,641        *  

Iain Brown

     27,105        *  

Current directors and executive officers (9 persons) as a group

     5,378,405        9.5

 

*

Less than 1%.

(1)

Includes 3,000,158 shares held by Trencor. In December 2019, Trencor completed the unbundling of our common shares held by Trencor which resulted in the distribution of such common shares to Trencor’s shareholders (the “Unbundling Transaction”). Prior to the unbundling transaction, Trencor previously owned approximately 47.5% of our common shares. There are 27,278,802 common shares issued and outstanding in a secondary, or dual, listing of our common shares on the JSE under the symbol “TXT”.

(2)

Includes 3,720,850 shares held by Delmas Invest Holding S.A, an affiliate of Mr. Kabbani.

(3)

Includes 3,000,158 shares held by Trencor (which in terms of SEC regulations are solely reported herewith as beneficially owned by Mr. Nurek due to his position as a director of Trencor). Mr. Nurek is one of our directors, and a member of the board of directors of Trencor. Mr. Nurek disclaims beneficial ownership, except to the extent of his pecuniary interest therein, if any, of the shares held by Trencor.

(4)

Includes 3,000,158 shares held by Trencor (which in terms of SEC regulations are solely reported herewith as beneficially owned by Mr. Van der Merwe due to his position as a director of Trencor). Mr. Van der Merwe is one of our directors, and a CEO and director of Trencor. Mr. Van der Merwe disclaims beneficial ownership, except to the extent of his pecuniary interest therein, if any, of the shares held by Trencor.

(5)

Includes 1,205,100 shares held by the Maccarone Family Partnership L.P. and 333,513 shares held by the Maccarone Revocable Trust.

(6)

Includes 19,716 shares held by Caribbean Dream Limited, a company owned by a trust in which Mr. Cottingham is the principal beneficiary.

(7)

Beneficial ownership by a person assumes the exercise of all share options, warrants and rights held by such person, even if not vested. Common shares beneficially owned include the following outstanding share options and restricted share units:

 

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    Grant Date  
    11/18/2010 to
11/19/2014 (8)
    11/12/2015     5/19/2016     11/30/2016     5/18/2017     11/30/2017     11/30/2018     5/23/2019     11/30/2019  

Share options

                 

Exercise price

   
$28.05 to
$38.36
 
 
  $ 14.17     $ 12.23     $ 9.70     $ 9.75     $ 22.95     $ 11.15       N/A     $ 9.13  

Expiration date

   

11/17/2020 to

11/19/2024


 

    11/12/2025       5/19/2026       11/30/2026       5/18/2027       11/30/2027       11/30/2028       N/A       11/30/2029  

Robert D. Pedersen

    100,820       26,534       —         36,029       —         —         —         —         —    

Michael K. Chan

          —         —         —         3,750       4,750       20,000       —         20,000  

Olivier Ghesquiere

          —         10,000       19,200       —         17,760       40,000       —         40,000  

Restricted share units

                 

David M. Nurek

          —         —         —         —         —         —         8,456       —    

Hennie Van der Merwe

          —         —         —         —         —         —         8,456       —    

John A. Maccarone

          —         —         —         —         —         —         8,456       —    

Robert D. Pedersen

          —         —         9,813       —         —         —         8,456       —    

Olivier Ghesquiere

          —         2,500       4,800       —         8,880       30,000       —         40,000  

Michael K. Chan

          —         —         —         1,874       2,374       15,000       —         20,000  

Hyman Shwiel

          —         —         —         —         —         —         8,456       —    

Dudley R. Cottingham

          —         —         —         —         —         —         8,456       —    

Iain Brown

          —         —         —         —         —         —         8,456       —    

 

(8)

Robert Pedersen’s outstanding share options that were granted during 2010 to 2014 are comprised of 7,500 shares of $28.26 exercise price, 16,500 shares of $28.54 exercise price, 23,000 shares of $28.05 exercise price, 26,000 shares of $38.36 exercise price and 27,820 shares of $34.14 exercise price that were granted on 11/18/2010, 11/16/2011, 11/14/2012, 11/14/2013 and 11/19/2014, respectively. Expiration date is ten years from the respective grant date.

(9)

Percentage ownership is based on 56,817,918 shares outstanding as of December 31, 2019.

As of December 31, 2019, based on information available to the Company, 24,185 of our outstanding common shares were held in Bermuda, our domicile and headquarter country, by one holder of record. An aggregate of 27,278,802 of our outstanding common shares trade under secondary, or dual, listing on the JSE. An aggregate of 29,080,687 of our outstanding common shares, which includes 29,074,150 shares held by Cede & Company, were held in the United States by five holders of record. The shares held by Cede & Company, a nominee of the Depository Trust Company, include common shares beneficially owned by holders in the United States and by non-U.S. beneficial owners.

 

B.

Related Party Transactions

We do not have a corporate policy regarding related party transactions, nor are there any provisions in our memorandum of association or bye-laws regarding related party transactions, other than the provision, as permitted by Bermuda law, that we, or one of our subsidiaries, may enter into a contract in which our directors or officers are directly or indirectly interested if the director or officer discloses his interest to our board of directors at the first opportunity at a meeting of directors or in writing.

Loans to Executive Officers

As permitted by Bermuda law, in the past, we had extended loans to certain employees in connection with their acquisition of our common shares in accordance with our various employees’ share arrangements. As of December 31, 2019, and 2018, no amounts were outstanding on such loans to employees. Currently, there are no loans outstanding to our directors or executive officers, nor will we extend loans to our directors or executive officers in the future, in compliance with the requirements of Section 402 of the Sarbanes-Oxley Act of 2002 and Section 13(k) of the Securities Exchange Act of 1934, as amended.

 

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Indemnification of Officers and Directors

We have entered into indemnification agreements with each of our directors and executive officers to give such directors and officers, as well as their immediate family members, additional contractual assurances regarding the scope of indemnification set forth in our bye-laws, and to provide additional procedural protections which may, in some cases, be broader than the specific indemnification provisions contained in our bye-laws. The indemnification agreements may require us, among other things, to indemnify such directors and officers, as well as their immediate family members, against liabilities that may arise by reason of their status or service as directors or officers and to advance expenses as a result of any proceeding against them as to which they could be indemnified.

Agreements with Maccarone Container Fund, LLC

TEML has entered into a management agreement with Maccarone Container Fund, LLC, related to TEML’s management of containers owned by Maccarone Container Fund, LLC effective 2016. Director John Maccarone and his family members are the beneficial owners of Maccarone Container Fund, LLC. In 2019 and 2018, we managed approximately 1,300 TEU (for which we received approximately $17 per year in management fees) for Maccarone Container Fund, LLC.

Relationships and Agreements with Trencor Limited and Entities Related to Trencor Limited

As of December 31, 2019, Trencor held 5.3% or 3.0 million of the Company’s common shares. On December 11, 2019, we commenced a secondary, or dual, listing of our common shares on the JSE in Johannesburg, South Africa under the symbol “TXT”. Promptly following our dual listing, Trencor distributed approximately 24.3 million of its shares in the Company to Trencor’s own shareholders and these shares are now trading on the JSE. Prior to the unbundling transaction in December 2019, Trencor previously owned approximately 47.5% of our common shares and as noted below these shares were previously held by Halco. Hennie Van der Merwe and David M. Nurek, are members of the Company’s board of directors and the board of directors of Trencor.

On February 20, 2018, Halco Trust distributed and transferred to Trencor, one of the nominated discretionary beneficiaries of the Halco Trust, the trust’s 100% shareholding in Halco and on May 11, 2018, Halco declared dividends to Trencor which resulted in Trencor becoming the shareholder in the 47.5% of the Company’s common shares it owned. Halco went into voluntary liquidation on October 12, 2018.

At Halco’s request, the Company and Halco entered into a Voting Limitation Deed (“VLD”), effective January 1, 2018, whereby Halco agreed to limit or restrict its shareholder voting rights in the Company, solely in respect of the appointment and/or removal of directors and then only to the extent necessary to ensure that Trencor will be regarded for purposes of IFRS as being neither in control of nor having significant influence over the Company. All of Halco’s voting rights, save for the said limitation or restriction, were unaffected by the VLD. Accordingly, from January 1, 2018, the financial results of the Company, as reported under U.S. GAAP, are no longer required to consolidate and convert into IFRS for inclusion in the results of Trencor, thus eliminating commercial issues (e.g. the costs and delays caused by the need to convert the Company’s financial results under U.S. GAAP into IFRS for public reporting by Trencor). In connection with the transfer of the Company’s shares held by Halco to Trencor on May 11, 2018, Trencor assumed the same contractual rights and obligations as Halco had in the VLD. Following the unbundling transaction from Trencor to its own shareholders noted above, the provisions of the VLD are inapplicable.

 

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On May 11, 2018, the Company, Trencor and Halco entered into an indemnification agreement with Computershare Trust Company, N.A., the share transfer agent for the Company, and Computershare Inc. (together, the “Transfer Agent”) pursuant to which the Company and Halco jointly and severally agreed to indemnify and hold harmless the Transfer Agent, and Halco agreed to indemnify and hold harmless the Company, against any and all costs, damages, losses, fees, penalties, judgments, taxes or expenses which the Transfer Agent may incur in connection with or arising from three missing share certificates representing approximately 5.5 million aggregate common shares, $0.01 par value, of the Company held by Halco. The obligations under this agreement were transferred to Trencor when it became the shareholder of the Company’s common stock and on December 2, 2019 the Company agreed to assume the obligation to indemnify the Transfer Agent and agreed to indemnify Trencor under the indemnification agreement.

The Company’s personnel assisted Trencor with the conversion of the Company’s financial information from U.S. GAAP to IFRS. Trencor paid $432 and $529 for these accounting services in 2019 and 2018, respectively.

Relationships and Agreements with Leased Assets Pool Company Limited

On December 2, 2019, we entered into a stock purchase agreement with TAC Limited, a wholly-owned subsidiary of Trencor, to purchase LAPCO. On December 31, 2019, we completed the acquisition of LAPCO and the purchase price consideration consisted of $65,527 in cash paid to TAC Limited, cash amounts paid by the Company to fully repay LAPCO’s debt facility of $126,289 and transaction costs incurred to complete the transaction of $104. We repaid LAPCO’s existing debt at the closing date by refinancing this debt in our existing revolving credit facility. LAPCO owned a fleet of approximately 161,000 TEU of intermodal containers managed by the Company and approximately 3,000 TEU of containers managed by other container lessors. The transaction is substantially an acquisition of LAPCO’s container fleet because substantially all the fair value of the gross assets we acquired (excluding cash) was concentrated in a single identifiable asset which are containers.

We had entered into a management agreement with LAPCO, an indirect wholly-owned subsidiary of Trencor, related to our management of containers owned by LAPCO. Pursuant to this agreement, LAPCO had the right, but not an obligation, to require us to purchase containers on its behalf, within guidelines specified in the agreement and for as long as the management agreement is in place. In 2019, 2018 and 2017, we received the following fees or commissions from LAPCO: (i) $2,366, $2,465 and $2,329, respectively, in management fees and (ii) $842, $1,111 and $666, respectively, in sales commissions and acquisition fees. LAPCO was free to compete against us with respect to its investment in containers and used our competitors to manage some of its containers.

On December 31, 2019, the management agreement between the Company and LAPCO was terminated as a result of our acquisition of LAPCO. There were no stated contractual settlement provisions relating to the management agreement. After the acquisition, LAPCO became a wholly-owned subsidiary of the Company. As of December 31, 2019, we recorded the acquired net assets of LAPCO consisting of cash of $19,975, containers and container-related assets of $167,001 and working capital of $6,767. In accordance with our accounting of the LAPCO acquisition under Topic 805, Business Combination, we also recognized a gain on settlement of pre-existing management agreement amounting to $1,823 (see Note 4 “LAPCO Acquisition” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for additional information).

Transactions with Container Investment Services Limited and Coveham Container Services Limited

A member of our board of directors, Iain Brown, serves as Director and owns 66.66% of Coveham Container Services Limited (“CCSL”). CCSL is a U.K. company that provides administration and accounting services to investors, container owners and other clients in the transportation industry including the Company’s U.K. entity, Textainer Equipment Management (U.K.) Limited (“TEMUK”) starting in October 2018. In 2019 and 2018, the Company incurred $29 and $8, respectively, for administration and accounting services provided by CCSL to TEMUK. In 2018, the Company paid $28 to Container Investment Services Limited (“CIS”) primarily for accounting services provided to the TEMUK. Iain Brown also served as a director and owned 50% of CIS, which was a U.K. company that provided administration and accounting services until it ceased operations in September 2018.

 

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Transactions with Continental Management Ltd.

A member of our board of directors, Dudley R. Cottingham, was a member of the board of directors of Continental Management Ltd (“Continental”) as of December 31, 2018 and became a consultant effective January 1, 2019. Continental is a Bermuda company that provides corporate representation, administration and management services. In 2019, 2018 and 2017, the Company paid $79, $121, and $59, respectively, to Continental primarily for Bermuda government annual fees and registered office fees.

 

C.

Interests of Experts and Counsel

Not applicable.

 

ITEM 8.

FINANCIAL INFORMATION

 

A.

Consolidated Statements and Other Financial Information Financial Statements

Our audited consolidated financial statements which are comprised of our consolidated balance sheets as of December 31, 2019 and 2018 and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2019 and the notes to those statements and the report of independent registered public accounting firm thereon, are included under Item 18, “Financial Statements” of this Annual Report on Form 20-F. Also, see Item 5, “Operating and Financial Review and Prospects” for additional financial information.

Legal Proceedings

See Item 4, “Information on the Company — Business Overview—Legal Proceedings” for information on our legal proceedings which may have, or have had in the recent past, significant effects on our financial position or profitability.

Dividend Policy

We are not required to pay dividends, and our shareholders do not have contractual or other rights, to receive dividends. The timing and amount of future dividends will be at the discretion of our board of directors and will be dependent on our future operating results and the cash requirements of our business. There are a number of factors that can affect our ability to pay dividends and there is no guarantee that we will pay dividends in any given year. See Item 3, “Key Information — Risk Factors,” for a discussion of these factors. Our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends.

In addition, we will not pay dividends in the event we are not allowed to do so under Bermuda law, are in default under (or such payment would cause a default under) the revolving credit facility of TL, or if such payment would cause us to breach any of our covenants. These covenants include certain financial covenants, which would be directly affected by the payment of dividends, such as a minimum tangible net worth level (which level would decrease by the amount of any dividend paid) and a maximum ratio of consolidated funded debt to consolidated tangible net worth (which amount would decrease by the amount of any dividend paid). Please see Item 5, “Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a description of these covenants. Furthermore, since we are a holding company, substantially all of the assets shown on our consolidated balance sheet are held by our subsidiaries. Accordingly, our earnings and cash flow and our ability to pay dividends are largely dependent upon the earnings and cash flows of our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends.

In 2014, we began calculating our earnings and profits under U.S. federal income tax principles for purposes of determining whether distributions exceed our current and accumulated earnings and profits. We believe that some or all of our distributions will be treated as a return of capital to our U.S. shareholders and we report each quarter on our website at www.textainer.com whether that quarter’s distribution exceeds our current accumulated earnings and profits. The taxability of the dividends does not impact our corporate tax position. You should consult with a tax advisor to determine the proper tax treatment of these distributions.

 

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B.

Significant Changes

Except as disclosed in the Annual Report on Form 20-F, no significant changes have occurred since December 31, 2019, which is the date of our audited consolidated financial statements included in this Annual Report on Form 20-F.

 

ITEM 9.

THE OFFER AND LISTING

 

A.

Offer and Listing Details

Trading Markets and Price History

Our common shares have been primary listed on the NYSE under the symbol “TGH” since October 10, 2007. Prior to that time, there was no public market for our common shares. Our common shares are secondary or dual listed on the JSE in Johannesburg, South Africa under the symbol “TXT” since December 2019. The following table sets forth the high and low closing sale prices, as reported on the NYSE for our common shares for the periods indicated:

 

     High      Low  

Annual Highs and Lows:

     

2019

   $ 13.95      $ 6.74  

2018

   $ 25.85      $ 9.30  

2017

   $ 23.55      $ 8.50  

2016

   $ 15.72      $ 7.05  

2015

   $ 34.44      $ 13.48  

Quarterly Highs and Lows (two most recent full financial years):

     

Fourth quarter 2019

   $ 11.40      $ 8.68  

Third quarter 2019

   $ 11.05      $ 6.74  

Second quarter 2019

   $ 10.76      $ 9.26  

First quarter 2019

   $ 13.95      $ 9.65  

Fourth quarter 2018

   $ 13.04      $ 9.30  

Third quarter 2018

   $ 16.20      $ 12.80  

Second quarter 2018

   $ 18.60      $ 14.45  

First quarter 2018

   $ 25.85      $ 16.30  

Monthly Highs and Lows (over the most recent six month period):

     

February 2020

   $ 10.86      $ 8.25  

January 2020

   $ 10.95      $ 9.47  

December 2019

   $ 11.40      $ 8.71  

November 2019

   $ 10.01      $ 8.68  

October 2019

   $ 10.72      $ 9.09  

September 2019

   $ 11.05      $ 7.96  

Transfer Agent

The transfer agent and registrar for our common shares is Computershare Shareholder Services, Inc. and its fully owned subsidiary Computershare Trust Company, N.A., having its principal office at 250 Royall Street, Canton, MA 02021. Computershare Investor Services (PTY) LTD and Computershare (PTY) LTD provide administration services and act as the nominee registrar for the common shares traded on the JSE. The address of Computershare Investor Services (PTY) LTD and Computershare (PTY) LTD is 15 Biermann Avenue, Rosebank 2196, South Africa.

 

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B.

Plan of Distribution

Not applicable.

 

C.

Markets

See Item 9, “Offer and Listing Details – Trading Markets” above.

 

D.

Selling Shareholders

Not applicable.

 

E.

Dilution

Not applicable.

 

F.

Expenses of the Issue

Not applicable.

 

ITEM 10.

ADDITIONAL INFORMATION

 

A.

Share Capital

Not applicable.

 

B.

Memorandum and Articles of Association

We are an exempted company incorporated under the laws of Bermuda. We are registered with the Registrar of Companies in Bermuda under registration number EC18896. We were incorporated on December 3, 1993 under the name Textainer Group Holdings Limited, prior to that time our business was based in Panama. Our headquarters office is located at 16 Par-La-Ville Road, Hamilton HM 08 Bermuda.

We incorporate by reference into this Annual Report on Form 20-F the description of our memorandum of association and our bye-laws contained in “Description of Share Capital” of our Registration Statement on Form F-1 filed with the SEC on September 26, 2007. Such information is a summary which does not purport to be complete and is qualified in its entirety by reference to our memorandum of association and our bye-laws, copies of which have been filed as Exhibits 3.1 and 3.2, respectively, to such Registration Statement.

 

C.

Material Contracts

We have not entered into any material contracts during the two years immediately preceding the date of this Annual Report on Form 20-F other than contracts entered into in the ordinary course of business and other than those described in Item 4, “Information on the Company—History and Development of the Company—Significant Events” or elsewhere in this Annual Report on Form 20-F.

 

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D.

Exchange Controls

Trencor, a South African company listed on the JSE, had 47.5% and 5.3% of our issued and outstanding shares as of December 31, 2018 and 2019, respectively. South Africa’s exchange control regulations provide for restrictions on exporting capital from South Africa. These restrictions require Trencor to obtain approval from South African exchange control authorities before engaging in transactions that would result in dilution of their share interest in us below certain thresholds, whether through their sale of their own shareholdings or through the approval of our issuance of new shares. The exchange control authorities may decide not to grant such approval if a proposed transaction were to dilute Trencor’s interest in us below certain levels. While the South African government has, to some extent, relaxed exchange controls in recent years, it is difficult to predict whether or how it will further relax or abolish exchange control measures in the future. The above requirements could restrict or limit our ability to issue new shares. In addition, Trencor is required to comply with JSE Listings Requirements in connection with its holding or sale of our common shares.

 

E.

Taxation

The following discussion is a summary of the material Bermuda and U.S. federal income tax consequences of an investment in our common shares. This discussion is not exhaustive of all possible tax considerations. In particular, this discussion does not address the tax consequences under state, local, and other national (e.g., non-Bermuda and non-U.S.) tax laws. Accordingly, we urge you to consult your own tax advisor regarding your particular tax circumstances and the tax consequences under state, local, and other national tax laws. The following discussion is based upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect.

Bermuda Tax Consequences

The following is a summary of the material Bermuda tax consequences of an investment in our common shares. The following discussion is not exhaustive of all possible tax considerations. We urge you to consult your own tax advisor regarding your particular tax circumstances.

Taxation of the Companies

We and our Bermuda subsidiaries have obtained an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 that, if any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain, or appreciation, or any tax in the nature of estate duty or inheritance tax, then such tax will not until March 31, 2035 be applicable to us or any of our operations, or to any of our shares, debentures, or other obligations, except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda. As an exempted company, we are required to pay an annual Bermuda government fee based on our assessable capital.

Taxation of Holders

Currently, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by our shareholders in respect of our common shares. The issue, transfer, or redemption of our common shares is not currently subject to stamp duty.

United States Federal Income Tax Consequences

The following is a summary of the material U.S. federal income tax consequences of an investment in our common shares. The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Code, regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the IRS, and judicial decisions, all as currently available and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Any such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below.

 

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This summary does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; certain former citizens or long-term residents of the U.S.; persons subject to the alternative minimum tax; persons holding common shares as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired common shares pursuant to the exercise of any employee share option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting shares; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.

This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to an investment in common shares. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of common shares, as well as any tax consequences arising under the laws of any state, local, foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

This summary is directed solely to persons who hold their common shares as capital assets within the meaning of Section 1221 of the Code, which includes property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of common shares that is any of the following:

 

   

a citizen or resident of the U.S. or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;

 

   

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source;

 

   

a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all substantial decisions of the trust; or

 

   

a trust in existence on August 20, 1996 that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

The term “Non-U.S. Holder” means a beneficial owner of common shares that is not a U.S. Holder or an entity treated as a partnership for U.S. federal income tax purposes. As described in “—Taxation of Non-U.S. Holders” below, the tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of common shares, the U.S. federal income tax consequences to a partner in the partnership will depend on the status of the partner and the activities of the partnership. A holder of common shares that is a partnership and the partners in such partnership should consult their own tax advisors regarding the U.S. federal income tax consequences of an investment in common shares.

Taxation of the Companies

Textainer and Non-U.S. Subsidiaries

A non-U.S. corporation deemed to be engaged in a trade or business within the U.S. is subject to U.S. federal income tax on income which is treated as effectively connected with the conduct of that trade or business. Such income tax, if imposed, is based on effectively connected income computed in a manner similar to the manner in which the income of a domestic corporation is computed, except that a foreign corporation will be entitled to deductions and credits for a taxable year only if it timely files a U.S. federal income tax return for that year. In addition, a non-U.S. corporation may be subject to the U.S. federal branch profits tax on the portion of its effectively connected earnings and profits, with certain adjustments, deemed repatriated out of the U.S. Currently, the maximum U.S. federal income tax rates are 21% for a corporation’s effectively connected income and 30% for the branch profits tax.

 

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A portion of our income is treated as effectively connected with the conduct of a trade or business within the U.S., and such effectively connected income is subject to U.S. federal income tax. U.S. federal income tax returns have been filed declaring such effectively connected income.

The determination of whether a person is engaged in a U.S. trade or business is based on a highly factual analysis. In general, there is no clear test as to the nature and scope of activities that constitute being engaged in a U.S. trade or business, and it is unclear how a court would construe the existing authorities with respect to our activities. Accordingly, it is possible that the IRS could assert that a significantly greater portion of our income than we currently report is derived from the conduct of a U.S. trade or business and therefore, is effectively connected income that is subject to U.S. federal income tax.

In addition to U.S. federal income tax on income associated with a U.S. trade or business, we are also subject to a 30% U.S. withholding tax imposed on the gross amount of certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the U.S. (such as rents, dividends and interest on investments), to the extent such amounts are not effectively connected income. This 30% U.S. withholding tax is subject to reduction by applicable treaties. Distributions by our U.S. subsidiaries to us are expected to be subject to this 30% U.S. withholding tax.

U.S. Subsidiaries

Our U.S. subsidiaries are subject to U.S. federal income tax on their worldwide income subject to reduction by allowable foreign tax credits. Certain foreign sourced income earned by the U.S. subsidiaries may be taxed at a rate lower than 21%.

Transfer Pricing

Under U.S. federal income tax laws, transactions among taxpayers that are owned or controlled directly or indirectly by the same interests generally must be at arm’s-length terms. The IRS may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such taxpayers if it determines that such transactions are not at arm’s-length terms and that such distribution, apportionment, or allocation is necessary in order to clearly reflect the income of any of such taxpayers. Additionally, if we have not met the requirements of the new CBC Regulations (effective for our taxable years beginning on or after June 30, 2016), we may become subject to penalties and the IRS may pursue a further investigation or audit of our operations, which may result in an adjustment to our transfer pricing policies as described in the immediately preceding sentence. In such a situation, we may incur increased tax liability, possibly materially, thereby reducing our profitability and cash flows.

Taxation of U.S. Holders

The discussion in “—Distributions on Common Shares” and “—Dispositions of Common Shares” below assumes that we will not be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see “—Passive Foreign Investment Company” below.

Distributions on Common Shares

General. Subject to the discussion in “—Passive Foreign Investment Company” below, if you actually or constructively receive a distribution on common shares, you must include the distribution in gross income as a taxable dividend on the date of your receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign taxes withheld. Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations with respect to dividends received from certain domestic corporations. Dividends paid by us may or may not be eligible for preferential rates applicable to qualified dividend income, as described below. In addition, certain non-corporate U.S. Holders may be subject to an additional 3.8% Medicare tax on dividend income whether or not it is “qualified dividend income.” See “—Medicare Tax” below.

 

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To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the common shares, and thereafter as capital gain. Preferential tax rates for long-term capital gain may be applicable to non-corporate U.S. Holders. In addition, certain non-corporate U.S. Holders may be subject to an additional 3.8% Medicare tax on capital gain. See “—Medicare Tax” below.

Qualified Dividend Income. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), the maximum individual U.S. federal income tax rate applicable to “qualified dividend income” (“QDI”) generally is 20%. Among other requirements, dividends will be treated as QDI if either (i) our common shares are readily tradable on an established securities market in the U.S., or (ii) we are eligible for the benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and which is determined to be satisfactory by the Secretary of the U.S. Treasury. The income tax treaty between the U.S. and Bermuda (the jurisdiction of our incorporation) does not qualify for these purposes. However, subject to the discussion below, under “—Passive Foreign Investment Company—Mark-to-Market Election,” we expect that under current administrative guidance, our common shares are “readily tradable” on an established securities market as a result of being listed on the NYSE.

In addition, for dividends to be treated as QDI, we must not be a PFIC (as discussed below) for either the taxable year in which the dividend was paid or the preceding taxable year. We do not believe that we were a PFIC for our prior taxable year and we intend to conduct our business so that we should not be treated as a PFIC for our current taxable year or any future taxable year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, it is possible that we may be a PFIC for the current or any future taxable year. Please see the discussion under “—Passive Foreign Investment Company” below. Additionally, in order to qualify for QDI treatment, you generally must have held the common shares for more than 60 days during the 121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period during which the risk of loss is diminished.

Since the QDI rules are complex, you should consult your own tax advisor regarding the availability of the preferential tax rates for dividends paid on common shares.

In-Kind Distributions. Generally, distributions to you of new common shares or rights to subscribe for new common shares that are received as part of a pro rata distribution to all of our shareholders will not be subject to U.S. federal income tax. The adjusted tax basis of the new common shares or rights so received will be determined by allocating your adjusted tax basis in the old common shares between the old common shares and the new common shares or rights received, based on their relative fair market values on the date of distribution. However, in the case of a distribution of rights to subscribe for common shares, the adjusted tax basis of the rights will be zero if the fair market value of the rights is less than 15% of the fair market value of the old common shares on the date of distribution and you do not make an election to determine the adjusted tax basis of the rights by allocation as described above. Your holding period for the new common shares or rights should include the holding period for the old common shares on which the distribution was made.

Foreign Tax Credits. Subject to certain conditions and limitations, any foreign taxes paid on or withheld from distributions from us and not refundable to you may be credited against your U.S. federal income tax liability or, alternatively, may be deducted from your taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by you or withheld from you that year.

Distributions will constitute foreign source income for foreign tax credit limitation purposes. The foreign tax credit limitation is calculated separately with respect to two specific classes of income. For this purpose, distributions characterized as dividends distributed by us are expected to constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).

Since the rules governing foreign tax credits are complex, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances.

 

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Dispositions of Common Shares

Subject to the discussion in “—Passive Foreign Investment Company” below, you will recognize taxable gain or loss on the sale or other taxable disposition of common shares equal to the difference between the U.S. dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the common shares. Such gain or loss will be capital gain or loss.

If you have held the common shares for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax rates for long-term capital gain apply for non-corporate U.S. Holders. The maximum rate for individuals on net long-term capital gain is currently 20%. In the case of a corporation, capital gains are taxed at the same rate as ordinary income, the maximum rate for which is currently 35%. If you have held the common shares for one year or less, such capital gain or loss will be short-term capital gain or loss taxable as ordinary income. The deductibility of capital losses is subject to limitations. In addition, certain U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax on capital gain income. See “—Medicare Tax” below.

Any gain or loss recognized on the disposition of common shares is not expected to give rise to foreign source income for U.S. foreign tax credit purposes.

You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the disposition of common shares.

Passive Foreign Investment Company

We will be a PFIC under Section 1297 of the Code if, for a taxable year, either (a) 75% or more of our gross income for such taxable year is passive income (the “income test”) or (b) 50% or more of the average percentage, generally determined by fair market value, of our assets during such taxable year either produce passive income or are held for the production of passive income (the “asset test”). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. However, rents meeting certain requirements are treated as derived from the conduct of an active trade or business and are not treated as passive income.

Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income. In addition, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to income of such related person that is not passive income.

Under the income and asset tests, whether or not we are a PFIC will be determined annually based upon the composition of our income and the composition and valuation of our assets, all of which are subject to change. In analyzing whether we should be treated as a PFIC, we are relying on the amount and character of our projected revenues and the amount and character of our projected capital expenditures, the valuation of our assets, and our election to treat certain of our subsidiaries as disregarded entities for U.S. federal income tax purposes. If the amount and character of our actual revenues and capital expenditures do not match our projections, we may be a PFIC. In these calculations, we have valued our intangible assets based on our market capitalization, determined using the market price of our common shares. Such market price may fluctuate. If our market capitalization is less than anticipated or subsequently declines, this will decrease the value of our intangible assets and we may be a PFIC. Furthermore, we have made a number of assumptions regarding the value of our intangible assets. We believe our valuation approach is reasonable. However, it is possible that the IRS could challenge the valuation of our intangible assets, which may result in our being a PFIC.

 

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We do not believe that we were a PFIC for our prior taxable year and we intend to conduct our business so that we should not be treated as a PFIC for our current taxable year or any future taxable year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, it is possible that we may be a PFIC for the current or any future taxable year or that the IRS may challenge our determination concerning our PFIC status.

Default PFIC Rules under Section 1291 of the Code. If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of an investment in common shares will depend on whether such U.S. Holder is permitted to make and makes (i) an election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or (ii) a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder owning common shares while we were or are a PFIC that has not made either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”

If you are a Non-Electing U.S. Holder, you will be subject to the default tax rules of Section 1291 of the Code with respect to:

 

   

any “excess distribution” paid on common shares, which means the excess (if any) of the total distributions received by you during the current taxable year over 125% of the average distributions received by you during the three preceding taxable years (or during the portion of your holding period for the common shares prior to the current taxable year, if shorter); and

 

   

any gain recognized on the sale or other taxable disposition (including a pledge) of common shares.

Under these default tax rules:

 

   

any excess distribution or gain will be allocated ratably over your holding period for the common shares;

 

   

the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the current year;

 

   

the amount allocated to each of the other years will be treated as ordinary income and taxed at the highest applicable tax rate in effect for that year; and

 

   

the resulting tax liability from any such prior years will be subject to the interest charge applicable to underpayments of tax.

In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates applicable to QDI (as discussed above in “—Distributions on Common Shares”) if we are a PFIC either in the taxable year of the distribution or the preceding taxable year, but will instead be taxable at rates applicable to ordinary income.

Special rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits with respect to foreign taxes imposed on distributions on common shares.

If we are a PFIC for any taxable year during which you hold common shares, we will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold common shares, regardless of whether we actually continue to be a PFIC.

QEF Election. We currently do not intend to prepare or provide you with certain tax information that would permit you to make a QEF Election to avoid the adverse tax consequences associated with owning PFIC stock.

Mark-to-Market Election. U.S. Holders may make a Mark-to-Market Election, but only if the common shares are marketable stock. The common shares will be “marketable stock” as long as they remain listed on the NYSE and are regularly traded. Shares are “regularly traded” for any calendar year during which it is traded (other than in de minimis quantities) on at least fifteen days during each calendar quarter. There can be no assurances, however, that our common shares will be treated, or continue to be treated, as regularly traded.

 

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If you make a Mark-to-Market Election, you generally will not be subject to the default rules of Section 1291 of the Code discussed above. Rather, you will be required to recognize ordinary income for any increase in the fair market value of the common shares for each taxable year that we are a PFIC. You will also be allowed to deduct as an ordinary loss any decrease in the fair market value to the extent of net marked-to-market gain previously included in prior years. Your adjusted tax basis in the common shares will be adjusted to reflect the amount included or deducted.

The Mark-to-Market Election will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the common shares cease to be marketable stock or the IRS consents to the revocation of the election. You should consult your own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.

Since the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of an investment in common shares.

Medicare Tax

Certain U.S. persons, including individuals, estates and trusts, may be required to pay an additional 3.8% on, among other things, dividends and capital gains from the sale or disposition of Common Shares. For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. U.S. Holders likely will not be able to credit foreign taxes against the 3.8% Medicare tax. You should consult your tax advisors regarding the implications of the additional Medicare tax resulting from your ownership and disposition of our common shares.

Information Reporting and Backup Withholding

Information reporting requirements will apply to distributions on common shares or proceeds from the disposition of common shares paid within the U.S. (and, in certain cases, outside the U.S.) to a U.S. Holder unless such U.S. Holder is an exempt recipient, such as a corporation. Furthermore, backup withholding (currently at 28%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements. A U.S. Holder may avoid backup withholding if it furnishes a properly completed IRS Form W-9 and is able to make the required certifications.

Backup withholding is not an additional tax. Rather, amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

Information Reporting Regarding PFICs and Specified Foreign Financial Assets

If we are a PFIC, all U.S. Holders may be required to file annual tax returns (including on Form 8621) containing such information as the U.S. Treasury requires.

U.S. Holders who are individuals will be subject to reporting obligations with respect to their common shares if they do not hold their common shares in an account maintained by a financial institution and the aggregate value of their common shares and certain other “specified foreign financial assets” exceeds $50,000. Significant penalties can apply if a U.S. Holder is required to disclose its common shares under these rules and fails to do so.

In the event a U.S. Holder does not file the information reports described above relating to ownership of a PFIC or disclosure of specified foreign financial assets, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. holder for the related tax year will not close before such report is filed.

 

88


If you are a U.S. Holder, you are urged to consult with your own tax advisor regarding the application of the PFIC and specified foreign financial assets information reporting requirements and related statute of limitations tolling provisions with respect to our common shares.

Taxation of Non-U.S. Holders

Distributions on Common Shares

Subject to the discussion in “—Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on distributions received on common shares, unless the distributions are effectively connected with a trade or business that you conduct in the U.S. and (if an applicable income tax treaty so requires) attributable to a permanent establishment that you maintain in the U.S.

If distributions are effectively connected with a U.S. trade or business and (if applicable) attributable to a U.S. permanent establishment, you will be subject to tax on such distributions in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders – Distributions on Common Shares” above. In addition, any such distributions received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

Dispositions of Common Shares

Subject to the discussion in “—Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on any gain recognized on a sale or other taxable disposition of common shares, unless (i) the gain is effectively connected with a trade or business that you conduct in the U.S. and (if an applicable income tax treaty so requires) attributable to a permanent establishment that you maintain in the U.S., or (ii) you are an individual and are present in the U.S. for at least 183 days in the taxable year of the disposition, and certain other conditions are met.

If you meet the test in clause (i) above, you generally will be subject to tax on any gain that is effectively connected with your conduct of a trade or business in the U.S. in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders – Dispositions of Common Shares” above. Effectively connected gain realized by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

If you meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate on the amount by which your U.S. source capital gain exceeds your U.S. source capital loss during the taxable year.

Information Reporting and Backup Withholding

Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, common shares are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing certification of non-U.S. status on an appropriate IRS Form W-8.

Backup withholding is not an additional tax. Rather, amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

 

F.

Dividends and Paying Agents

Not applicable.

 

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G.

Statement by Experts

Not applicable.

 

H.

Documents on Display

Whenever a reference is made in this Annual Report on Form 20-F to any contract, agreement or other document, the reference may not be complete, and you should refer to the copy of that contract, agreement or other document filed as an exhibit to one of our previous SEC filings. You can read our SEC filings over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Copies of reports and other information may also be inspected in the offices of the NYSE, 20 Broad Street, New York, New York 10005.

 

I.

Subsidiary Information

Not applicable.

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign exchange rates and interest rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.

Foreign Exchange Rate Risk. Although we have significant foreign-based operations, the U.S. dollar is our primary operating currency. Thus, substantially all of our revenue and the majority of our expenses in 2019, 2018 and 2017 were denominated in U.S. dollars. During 2019, 2018 and 2017, 23%, 21% and 25%, respectively, of our direct container expenses – owned fleet were paid in up to 20 different foreign currencies, respectively. We do not hedge these container expenses as there are no significant payments made in any one foreign currency. Foreign exchange fluctuations did not materially impact our financial results in those periods.

Interest Rate Risk. We have entered into various interest rate swap, and cap agreements to mitigate our exposure associated with our variable rate debt. The swap agreements involve payments by us to counterparties at fixed rates in return for receipts based upon variable rates indexed to LIBOR.

As of December 31, 2019, certain of our interest rate swap agreements are designated as cash flow hedges for accounting purposes, and any unrealized gains or losses related to the changes in fair value are recognized in accumulated comprehensive income and re-classed to interest expense as they are realized. As of December 31, 2018, and 2017, none of the derivative instruments we have entered into qualify for hedge accounting. The fair value of the derivative instruments not designated as cash flow hedges are measured at each of these balance sheet dates and the change in fair value is recorded in the consolidated statements of comprehensive income as unrealized gain (loss) on derivative instruments, net and reclassified to realized gain (loss) on derivative instruments, net as they are realized.

We utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs which are observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs which are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, which 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; and Level 3 inputs which are unobservable inputs that reflect the reporting entity’s own assumptions.

 

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We use 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).

Our liability valuation reflects our credit standing and the credit standing of the counterparties to the interest rate swaps and caps. The valuation technique we utilized to calculate the fair value of the interest rate swaps and caps was the income approach. This approach represents the present value of future cash flows based upon current market expectations.

The notional amount of the interest rate swap agreements was $906,500 as of December 31, 2019, with expiration dates between January 2020 and April 2023. We pay fixed rates between 1.27% and 2.94% under the interest rate swap agreements. The net fair value of these agreements was a liability of $13,643 and an asset of $1,916 as of December 31, 2019 and 2018, respectively.

The notional amount of the interest rate cap agreements was $124,000 as of December 31, 2019, with expiration dates between May 2020 and September 2022.

Based on the average debt balances and derivative instruments for the year ended December 31, 2019, it is estimated that a 1% increase in interest rates would result in a net increase of $11,324 in interest expense and realized gain on derivative instruments, net. It would also result in an increase in the fair value of derivative instruments, net of $15,888.

Quantitative and Qualitative Disclosures About Credit Risk

We maintain detailed credit records about our container lessees. Our credit policy sets different maximum exposure limits for our container lessees. Credit criteria may include, but are not limited to, container lessee trade route, country, social and political climate, assessments of net worth, asset ownership, bank and trade credit references, credit bureau reports, including those from Dynamar B.V. or “Dynamar,” and Lloyd’s Marine Intelligence Unit (common credit reporting agencies used in the maritime sector), operational history and financial strength. We monitor our container lessees’ performance and our lease exposures on an ongoing basis, and our credit management processes are aided by the long payment experience we have with most of our container lessees and our broad network of long-standing relationships in the shipping industry that provide current information about our container lessees. In managing this risk, we also make an allowance for doubtful accounts. The allowance for doubtful accounts is developed based on two key components:

 

   

specific reserves for receivables which are impaired for which management believes full collection is doubtful; and

 

   

reserves for estimated losses inherent in the receivables based upon historical trends.

As of December 31, 2019, approximately 95.6% of gross accounts receivable for our total fleet and 97.5% of the gross finance lease receivables were from container lessees and customers outside of the U.S. Customers in Taiwan, PRC (including Hong Kong), France, Switzerland and Singapore accounted for approximately 15.5%, 14.1%, 14.0%, 13.3% and 11.1%, respectively, of our total fleet container lease billings for 2019. Customers in no other country accounted for greater than 10.0% of our total fleet container lease billings for the same period.

An allowance for doubtful accounts of $5,108 has been established against receivables as of December 31, 2019 for our owned fleet. During 2019, receivable write-offs from the allowance for doubtful accounts, net of recoveries, totaled $1,397 for our owned fleet.

For further discussion, see Note 1 “Nature of Business and Summary of Significant Accounting Policies” to our consolidated statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F.

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

 

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PART II

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

 

ITEM 15.

CONTROLS AND PROCEDURES

 

A.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019.

The “disclosure controls and procedures” means our controls and other procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in the reports that we filed or submitted to the SEC, such as this Annual Report on Form 20-F, was (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, it was concluded that, as of such date, the disclosure controls and procedures were effective as of December 31, 2019.

 

B.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, including our Chief Executive Officer and Chief Financial Officer under the oversight of our Board of Directors, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective for the year ended December 31, 2019.

All internal control systems and procedures, no matter how well designed, have inherent limitations. Therefore, even those internal control systems and procedures determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.

 

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C.

Report of the Registered Public Accounting Firm

Our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included under Item 18, “Financial Statements” on page F-3 in this Annual Report on Form 20-F.

 

ITEM 16.

[RESERVED]

 

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

In accordance with NYSE rules, we have an audit committee responsible for advising the board regarding the selection of independent auditors and evaluating our internal controls. As a foreign private issuer, we are not required to comply with NYSE requirements that our audit committee has a minimum of three members and that all of our audit committee members satisfy the NYSE’s requirements for independence. Our audit committee has four members, Messrs. Shwiel, Cottingham, Brown and Nurek. In March 2020, our Board of Directors determined that all members of the Audit Committee are independent as that term is defined in Rule 10A-3 under the Exchange Act. The board affirmatively determined that Messrs. Shwiel and Cottingham are audit committee financial experts. Mr. Shwiel is also the chairman of our board of directors. Prior to March 2020, Mr. Nurek and Mr. Brown were not considered to be independent and did not have voting rights as members of the Audit Committee. Mr. Nurek is a director of Trencor and Mr. Brown was an administrator of LAPCO. Our board of directors has adopted an audit committee charter effective October 9, 2007.

 

ITEM 16B.

CODE OF ETHICS

We have adopted the Textainer Group Holdings Limited Code of Business Conduct and Ethics (the “Code of Business Conduct and Ethics”), which covers members of our board of directors and all of our employees (including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions).

The Code of Business Conduct and Ethics addresses, among other things, the following items:

 

   

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

   

full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

 

   

compliance with applicable governmental laws, rules and regulations;

 

   

the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and

 

   

accountability for adherence to the code.

During 2019, no waivers or amendments were made to the Code of Business Conduct and Ethics for any of our directors or executive officers. We have posted the text of the Code of Business Conduct and Ethics on our website at www.textainer.com.

 

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ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our audit committee pre-approves all services provided by our principal accountants, KPMG LLP. All of the services and fees described below were reviewed and pre-approved by our audit committee. Our audit committee has delegated to the chairman of the audit committee certain limited authority to grant pre-approvals. These decisions to pre-approve a service must be presented to the full audit committee at its next scheduled meeting.

The following is a summary of the fees billed to us by our principal accountants for professional services rendered for 2019 and 2018:

 

Fee Category

   2019
Fees
     2018
Fees
 

Audit Fees

   $ 1,792      $ 1,835  

Audit-Related Fees

     30        173  

Tax Fees

     6        14  
  

 

 

    

 

 

 

Total Fees

   $ 1,828      $ 2,022  
  

 

 

    

 

 

 
  

 

 

    

 

 

 

Audit Fees—Consists of fees billed for professional services rendered for the audit of our financial statements and services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.

Audit-Related Fees—Consists of fees for attestation related services other than those described above as Audit fees. Fees for both 2019 and 2018 were related to the performance of agreed upon procedures on certain specific lender requirements.

Tax Fees—Consists of fees billed for professional services for tax compliance, tax advice and tax planning.

 

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Until March 2020, we relied on the exemption afforded by Rule 10A-3(b)(1)(iv)(D) under the Exchange Act. One of the four members of our audit committee (Mr. Nurek) is a director of Trencor and one of the audit committee members (Mr. Brown) was an administrator of LAPCO. Prior to March 2020, neither Mr. Nurek or Mr. Brown were voting members nor chairpersons of our audit committee nor one of our executive officers. We believe that such reliance did not materially adversely affect the ability of the audit committee to act independently or to satisfy the other requirements of Rule 10A-3. In March 2020, our Board determined that Mr. Nurek and Mr. Brown are independent as that term is defined in Rule 10A-3 under the Exchange Act given the completion of the unbundling of the Company shares held by Trencor in December 2019 which reduced Trencor’s shareholding in the company from 47.5% to 5.3% of the outstanding shares and the Company’s purchase of LAPCO in December 2019.

 

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

In August 2019, our board of directors approved a share repurchase program of up to $25,000 of the Company’s common shares. Under the program, the Company may purchase its common shares from time to time in the open market, in privately negotiated transactions or such other manner as will comply with applicable laws and regulations. The authorization did not obligate us to acquire a specific number of shares during any period, but it may be modified, suspended or terminated at any time at the discretion of the Company’s board of directors. In March 2020, we announced that our board of directors had approved an amendment to our share repurchase program to increase from $25,000 to an aggregate of $50,000 in common shares that may be repurchased under the program (see Note 13 “Share Repurchase Program” and Note 14 “Subsequent Event” to our consolidated financial statements in Item 18, “Financial Statements” in this Annual Report on Form 20-F for further discussion.

 

94


The table below is a summary of the shares repurchased by us during the year ended December 31, 2019. All shares were repurchased in the open market pursuant to the share repurchase program.

 

     Issuer Purchases of Common Shares  
            Average     

Total number of

shares purchased

     Approximate dollar  
            as      value of shares that  

Period

   Total number of
shares purchased
     price paid
per shares
     part of publicly
announced plan
     may yet be purchased
under the plan
 

September 1, 2019 through September 30, 2019

     240,789      $ 10.59        240,789      $ 22,450  

October 1, 2019 through October 31, 2019

     371,327      $ 9.56        371,327      $ 18,900  

November 1, 2019 through November 30, 2019

     155,411      $ 9.43        155,411      $ 17,435  

December 1, 2019 through December 31, 2019

     111,110      $ 9.06        111,110      $ 16,429  
  

 

 

       

 

 

    

Total

     878,637      $ 9.75        878,637     
  

 

 

       

 

 

    

 

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

 

ITEM 16G.

CORPORATE GOVERNANCE

Our corporate governance practices are in compliance with, and are not prohibited by, the laws of Bermuda. Therefore, we are exempt from many of the NYSE corporate governance practices, other than the establishment of a formal audit committee satisfying the requirements of Rule 10A-3 under the Exchange Act and notification of non-compliance with NYSE listing requirements pursuant to Rule 10A-3 promulgated under the Exchange Act. The practices that we follow in lieu of the NYSE’s corporate governance rules are described below.

 

   

We are not required under Bermuda law to maintain a board of directors with a majority of independent directors. However, as of March 2020 six of our eight directors are independent, as that term is defined by the NYSE.

 

   

We are not required by Bermuda law to hold regular meetings of the board of directors at which only independent dire