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BOX > SEC Filings for BOX > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for SEACUBE CONTAINER LEASING LTD.

Form 10-Q for SEACUBE CONTAINER LEASING LTD.


6-Nov-2012

Quarterly Report


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

This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements included in this Form 10-Q and our annual audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under ''Risk Factors'' included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

SeaCube Container Leasing Ltd ("SeaCube" or "the Company") is one of the world's largest container leasing companies based on total assets. Containers are the primary means by which products are shipped internationally because they facilitate efficient movement of goods via multiple transportation modes including ships, rail and trucks. The principal activities of our business include the acquisition, leasing, re-leasing and subsequent sale of refrigerated and dry containers and generator sets. The Company leases our containers primarily under long-term contracts to a diverse group of the world's leading shipping lines. As of September 30, 2012, we employ 77 people in seven offices worldwide and have total assets of $1.6 billion.

As of September 30, 2012, we own or manage a fleet of 703,305 units, representing 1,092,091 TEUs of containers and generator sets. For the three months ended September 30, 2012, our average utilization was 97.9%, as measured in units.

We lease three types of assets:

Refrigerated containers (''reefers''), which are used for perishable items such as fresh and frozen foods;
Dry freight containers, which are used for general cargo such as manufactured component parts, consumer staples and apparel; and
Generator sets (''gensets''), which are diesel generators used to provide mobile power to reefers.

We lease these assets on a per diem basis on two principal lease types under which the lessee is responsible for all operating costs including taxes, insurance and maintenance:

Operating leases, typically with initial terms of five to eight years, under which containers are re-leased or returned to us at expiration of the initial lease; and
Direct finance leases, which are typically structured as long-term leases with a bargain purchase option, under which ownership transfers to the lessee at expiration of the lease.

The tables below summarize the composition of our fleet by unit, TEU and our owned fleet by net book value as of September 30, 2012:

                           Equipment Fleet by Units

                         Refrigerated         Dry        Gensets        Total
Operating Leases                34,647       143,476        2,492       180,615
Direct Finance Leases           26,034       243,984        2,556       272,574
Total Owned                     60,681       387,460        5,048       453,189
Managed                         30,216       218,562        1,338       250,116
Total Fleet                     90,897       606,022        6,386       703,305

-15-

                             Equipment Fleet by TEUs

                         Refrigerated         Dry        Gensets         Total
Operating Leases                63,988       222,752        2,492         289,232
Direct Finance Leases           50,617       376,961        2,556         430,134
Total Owned                    114,605       599,713        5,048         719,366
Managed                         57,352       314,035        1,338         372,725
Total Fleet                    171,957       913,748        6,386       1,092,091

                        Container Fleet by Net Book Value

                         Refrigerated         Dry        Gensets         Total
Operating Leases        $      417,091     $ 419,651     $ 11,041     $   847,783
Direct Finance Leases          225,358       414,187       13,061         652,606
Total Fleet             $      642,449     $ 833,838     $ 24,102     $ 1,500,389

Results of Operations

Comparison of the Three Months Ended September 30, 2012 to the Three Months
Ended September 30, 2011

                               Three Months       Three Months
                                  Ended              Ended
                              September 30,      September 30,
                                   2012               2011            $ Change           % Change
                                                         (dollars in thousands)
Equipment leasing revenue     $       30,754     $       28,726     $       2,028                  7 %
Finance revenue                       16,213             13,945             2,268                 16 %
Other revenue                          2,531              2,558               (27 )               -1 %
Total revenues                $       49,498     $       45,229     $       4,269                  9 %

Revenue

Total revenue was $49.5 million for the three months ended September 30, 2012 compared to $45.2 million for the three months ended September 30, 2011, an increase of $4.3 million or 9%.

Equipment leasing revenue was $30.8 million for the three months ended September 30, 2012 compared to $28.7 million for the three months ended September 30, 2011, an increase of $2.0 million or 7%. This was primarily due to the average on-hire fleet increasing by approximately 40,600 units.

Finance revenue was $16.2 million for the three months ended September 30, 2012 compared to $13.9 million for the three months ended September 30, 2011, an increase of $2.3 million or 16%. The increase was the result of new investments that increased the average size of our finance lease portfolio.

Other revenue, which includes management fee revenues and re-billable costs to our lessees, was $2.5 million for the three months ended September 30, 2012 compared to $2.6 million for the three months ended September 30, 2011. This small decrease was attributable to higher rebillable costs which were offset by lower management fee revenues.

-16-

                               Three Months       Three Months
                                  Ended              Ended
                              September 30,      September 30,
                                   2012               2011            $ Change             % Change
                                                     (dollars in thousands)
Direct operating expenses     $        1,306     $        2,092     $        (786 )             -38 %
Selling, general and
administrative expenses                5,949              5,996               (47 )              -1 %
Depreciation expenses                 13,328             12,242             1,086                 9 %
Provision for doubtful
accounts                                 224                180                44                 *
Impairment of leasing
equipment held for sale                  536                539                (3 )               *
Total                         $       21,343     $       21,049     $         294                 1 %


*Not meaningful.

Direct Operating Expenses

Direct operating expenses were $1.3 million for the three months ended September 30, 2012 compared to $2.1 million for the three months ended September 30, 2011, a decrease of $0.8 million or 38%. In the prior year period, we incurred higher recovery costs attributable to one customer.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $5.9 million for the three months ended September 30, 2012 compared to $6.0 million for the three months ended September 30, 2011, a slight decrease. Slightly higher compensation expenses were offset by savings in travel, professional and legal fees.

Depreciation Expenses

Depreciation of leasing equipment was $13.3 million for the three months ended September 30, 2012 compared to $12.2 million for the three months ended September 30, 2011, an increase of $1.1 million or 9%. Depreciation on new additions net of disposals and sales accounted for an increase of $1.5 million, which was partially offset by a decrease of $0.4 million due to equipment reaching the end of their depreciable lives.

Provision for Doubtful Accounts

Provision for doubtful accounts was $0.2 million for both the three months ended September 30, 2012 and September 30, 2011.

Impairment of Leasing Equipment Held for Sale

We recorded an impairment of leasing equipment held for sale of $0.5 million for both the three months ended September 30, 2012 and September 30, 2011. We evaluate the recovery of our containers and gensets designated for sale and record a loss if the ultimate sales value is expected to be below the current carrying cost. The majority of our impairments occur at the conclusion of an operating lease when our equipment is older and has incurred a certain amount of damage that the lessee is responsible for. These impairments do not include amounts that we recover from lessees to return containers to leasable condition, in accordance with industry standards. We bill our lessees for the cost to repair equipment to this industry standard even if we do not repair the container. This revenue is recorded as Other Revenue and not a reduction of impairment losses. The number of units that were returned and expected to be sold were similar in the current and prior year periods.

-17-

                                Three Months       Three Months
                                   Ended              Ended
                               September 30,      September 30,
                                    2012               2011            $ Change             % Change
                                                      (dollars in thousands)
Interest expense               $       17,763     $       15,424     $       2,339                15 %
Interest income                           (71 )              (68 )              (3 )               4 %
Other expenses (income), net             (949 )                6              (955 )               *
Total                          $       16,743     $       15,362     $       1,381                 9 %


*Not meaningful.

Interest Expense

Interest expense was $17.8 million for the three months ended September 30, 2012 compared to $15.4 million for the three months ended September 30, 2011, an increase of $2.3 million or 15%. Our weighted average debt balance for the three months ended September 30, 2012 increased by approximately $203 million due to our investment in new containers. This resulted in an increase of approximately $2.9 million to interest expense. In addition, we had slightly higher commitment fees in the current year of $0.3 million. These increases were offset by a decrease in non-cash interest expense in the current period by $0.9 million. Higher amortization of deferred financing fees of $0.4 million was offset by an increase in gains recognized directly into income for ineffective derivatives of $0.9 million and lower amortization of terminated derivatives of $0.4 million.

Interest Income

Interest income was $0.1 million for both the three months ended September 30, 2012 and 2011.

Other Expense (Income), Net

Other expense (income), net was $(0.9) million for the three months ended
September 30, 2012 compared to $0.0 million for the three months ended September
30, 2011. This is attributable to higher gains on the sale of equipment in the
current year period due to more containers being returned and sold upon the
completion of leases.

                               Three Months Ended      Three Months Ended
                               September 30, 2012      September 30, 2011        $ Change             % Change
                                                           (dollars in thousands)
Provision (benefit) for
income taxes                  $                  -     $                35     $         (35 )                *


*Not meaningful.

Provision (benefit) for income taxes was $0.0 million for the three months ended September 30, 2012 compared to $0.03 million for the three months ended September 30, 2011. The change in the effective tax rate is primarily attributable to the impact of the U.S. effectively connected income tax liability on the overall provision calculation.

-18-

                               Three Months       Three Months
                                  Ended              Ended
                              September 30,      September 30,
                                   2012               2011            $ Change             % Change
                                                     (dollars in thousands)
Net income                    $       11,412     $        8,783     $       2,629                30 %
Adjusted net income**         $       12,832     $       11,111     $       1,721                15 %
Adjusted EBITDA**             $       74,172     $       61,589     $      12,583                20 %


**Adjusted net income and adjusted EBITDA are measures of financial and operational performance that are not defined by U.S. GAAP. See "Non-GAAP Measures" for the discussion of adjusted net income and adjusted EBITDA as a non-GAAP measures and their reconciliation to net income (loss).

Net Income

Net income was $11.4 million for the three months ended September 30, 2012 compared to $8.8 million for the three months ended September 30, 2011. The increase in net income was attributable to the items above.

Adjusted Net Income

Adjusted net income was $12.8 million for the three months ended September 30, 2012 compared to $11.1 million for the three months ended September 30, 2011, an increase of $1.7 million or 15%. In addition to the changes in net income noted above, the three months ended September 30, 2012, includes a decrease in non-cash interest expense of $0.9 million, which is excluded from the adjusted net income calculation.

Adjusted EBITDA

Adjusted EBITDA was $74.2 million for the three months ended September 30, 2012 compared to $61.6 million for the three months ended September 30, 2011, an increase of $12.6 million or 20%. In addition to the changes in net income noted above, the three months ended September 30, 2012, includes higher depreciation of $1.1 million and higher interest expense of $2.3 million, which are excluded from the adjusted EBITDA calculation. In addition, the current year period had higher collections on investments in direct financing leases of $6.6 million.

Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended

September 30, 2011

                                Nine Months Ended       Nine Months Ended
                               September 30, 2012      September 30, 2011        $ Change           % Change
                                                            (dollars in thousands)
Equipment leasing revenue      $            90,707     $            75,444     $      15,263                 20 %
Finance revenue                             49,102                  40,281             8,821                 22 %
Other revenue                                8,147                   7,089             1,058                 15 %
Total revenues                 $           147,956     $           122,814     $      25,142                 20 %

Revenue

Total revenue was $148.0 million for the nine months ended September 30, 2012 compared to $122.8 million for the nine months ended September 30, 2011, an increase of $25.1 million or 20%.

Equipment leasing revenue was $90.7 million for the nine months ended September 30, 2012 compared to $75.4 million for the nine months ended September 30, 2011, an increase of $15.3 million or 20%. This was primarily due to the average on-hire fleet increasing by approximately 44,500 units.

-19-

Finance revenue $49.1 million for the nine months ended September 30, 2012 compared to $40.3 million for the nine months ended September 30, 2011, an increase of $8.8 million or 22%. The increase was the result of new investments that increased the average size of our finance lease portfolio.

Other revenue, which includes management fee revenues and re-billable costs to our lessees, was $8.1 million for the nine months ended September 30, 2012 compared to $7.1 million for the nine months ended September 30, 2011, an increase of $1.1 million or 15%. This increase was attributable to higher rebillable costs of $1.3 million, which were partially offset by lower management fee revenues of $0.2 million.

                               Nine Months Ended       Nine Months Ended
                              September 30, 2012      September 30, 2011        $ Change             % Change
                                                          (dollars in thousands)
Direct operating expenses     $             4,134     $             4,341     $        (207 )              -5 %
Selling, general and
administrative expenses                    18,158                  17,641               517                 3 %
Depreciation expenses                      39,485                  33,159             6,326                19 %
Provision for doubtful
accounts                                      894                     220               674                 *
Impairment of leasing
equipment held for sale                     1,946                     904             1,042                 *
Total                         $            64,617     $            56,265     $       8,352                15 %


*Not meaningful.

Direct Operating Expenses

Direct operating expenses were $4.1 million for the nine months ended September 30, 2012 compared to $4.3 million for the nine months ended September 30, 2011, a decrease of $0.2 million or 5%. During the current year period, more containers were returned upon the completion of their lease than in the prior year period resulting in higher positioning as well as maintenance and repair costs. This was offset by higher recovery costs incurred in the prior year that were attributable to one customer.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $18.2 million for the nine months ended September 30, 2012 compared to $17.6 million for the nine months ended September 30, 2011, an increase of $0.5 million or 3%. This is primarily due to merit increases and higher incentive compensation expense that was partially offset by savings in travel, professional and legal fees.

Depreciation Expenses

Depreciation of leasing equipment was $39.5 million for the nine months ended September 30, 2012 compared to $33.2 million for the nine months ended September 30, 2011, an increase of $6.3 million or 19%. Depreciation on new additions net of disposals and sales accounted for an increase of $7.1 million, which was partially offset by a decrease of $0.8 million due to equipment reaching the end of their depreciable lives.

Provision for Doubtful Accounts

Provision for doubtful accounts was $0.9 million for the nine months ended September 30, 2012 compared to $0.2 million for the nine months ended September 30, 2011. In the current year period, provision for doubtful account increased moderately compared to the prior year period.

Impairment of Leasing Equipment Held for Sale

We recorded an impairment of leasing equipment held for sale of $1.9 million for the nine months ended September 30, 2012 compared to $0.9 million for the nine months ended September 30, 2011, an increase of $1.0 million. We evaluate the recovery of our containers and gensets designated for sale and record a loss if the ultimate sales value is expected to be below the current carrying cost. The majority of our impairments occur at the conclusion of an operating lease when our equipment is older and has incurred a certain amount of damage that the lessee is responsible for. These impairments do not include amounts that we recover from lessees to return containers to leasable condition, in accordance with industry standards. We bill our lessees for the cost to repair equipment to this industry standard even if we do not repair the container. This revenue is recorded as Other Revenue and not a reduction of impairment losses. In the current year period, we had more containers returned and sold upon the completion of their lease term.

-20-

                                Nine Months Ended       Nine Months Ended
                               September 30, 2012      September 30, 2011        $ Change             % Change
                                                           (dollars in thousands)
Interest expense               $            51,370     $            39,283     $      12,087                31 %
Interest income                               (209 )                  (211 )               2                -1 %
Other expenses (income), net                (2,268 )                   438            (2,706 )               *
Total                          $            48,893     $            39,510     $       9,383                24 %


*Not meaningful.

Interest Expense

Interest expense was $51.4 million for the nine months ended September 30, 2012 compared to $39.3 million for the nine months ended September 30, 2011, an increase of $12.1 million or 31%. Our weighted average debt balance for the nine months ended September 30, 2012 increased by approximately $291 million due to our investment in new containers. This resulted in an increase of approximately $11.4 million to interest expense. In the current year period, there were slightly higher commitment fees of $0.2 million. In addition, non-cash interest expense increased in the current period by $0.5 million, which included higher amortization of deferred financing fees of $1.4 million partially offset by increases in gains recognized directly into income for ineffective derivatives of $0.2 million and by lower amortization of terminated derivatives of $0.7 million.

Interest Income

Interest income was $0.2 million for both the nine months ended September 30, 2012 and 2011.

Other Expense (Income), Net

Other expense (income), net was $(2.3) million for the nine months ended
September 30, 2012 compared to $0.4 million for the nine months ended
September 30, 2011. This is attributable to higher gains on the sale of
equipment in the current year period due to more containers being returned and
sold upon the completion of leases.

                               Nine Months Ended       Nine Months Ended
                              September 30, 2012      September 30, 2011         $ Change             % Change
                                                           (dollars in thousands)
Provision (benefit) for
income taxes                  $              (127 )   $              (142 )   $           15                  *


*Not meaningful.

Provision (benefit) for income taxes was $(0.1) million for both the nine months ended September 30, 2012 and September 30, 2011. The change in the effective tax rate is primarily attributable to the impact of the U.S. effectively connected income tax liability on the overall provision calculation.

-21-

                               Nine Months Ended       Nine Months Ended
                              September 30, 2012      September 30, 2011        $ Change             % Change
                                                          (dollars in thousands)
Net income                    $            34,573     $            27,181     $       7,392                27 %
Adjusted net income**         $            38,619     $            30,760     $       7,859                26 %
Adjusted EBITDA**             $           215,693     $           175,206     $      40,487                23 %


**Adjusted net income and adjusted EBITDA are measures of financial and operational performance that are not defined by U.S. GAAP. See "Non-GAAP Measures" for the discussion of adjusted net income and adjusted EBITDA as a non-GAAP measures and their reconciliation to net income (loss).

Net Income

Net income was $34.6 million for the nine months ended September 30, 2012 compared to $27.2 million for the nine months ended September 30, 2011. The increase in net income was attributable to the items above.

Adjusted Net Income

Adjusted net income was $38.6 million for the nine months ended September 30, 2012 compared to $30.8 million for the nine months ended September 30, 2011, an increase of $7.9 million or 26%. In addition to the changes in net income noted above, the nine months ended September 30, 2012, includes an increase in the non-cash interest expense of $0.5 million, which is excluded from the adjusted net income calculation.

Adjusted EBITDA

Adjusted EBITDA was $215.7 million for the nine months ended September 30, 2012 . . .

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