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EX-31.1 - EXHIBIT 31.1 - SeaCube Container Leasing Ltd.a6819037ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - SeaCube Container Leasing Ltd.a6819037ex31-2.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
 
 
   (Mark One)    
       
   þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934
       For the quarterly period ended June 30, 2011
       
                     or
       
   o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934
       
       For the transition period from ________ to ________
       
                           Commission File Number 001-34931
                                   
SeaCube Container Leasing Ltd.
(Exact name of registrant as specified in its charter)
 
 Bermuda      98-0655416
 (State of other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification Number)
     
 1 Maynard Drive    
 Park Ridge, New Jersey      07656
 (Address of principal executive offices)       (Zip Code)
 
(201) 391-0800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x  No         o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                               
Yes   x  No         o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller
reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
  Yes         o              No   x
 
The number of outstanding shares of the Registrant’s Common Stock as of August 1, 2011 was 20,163,359.
 


 
 
 
 
 
SeaCube Container Leasing Ltd.
 
FORM 10-Q
 
Table of Contents
 
 
      Page No.
 
       
   
       
   
1
       
     
    Ended June 30, 2011 and 2010 2
 
     
     
    June 30, 2011 and 2010 3
 
     
   
4
       
   
    Condition and Results of Operations
15
       
 
25
       
 
26
       
 
       
 
27
       
 
27
       
 
27
       
 
27
       
 
27
       
 
27
       
 
27
       
28
 
 
 
 

 
 



SeaCube Container Leasing Ltd.
(Amounts in thousands, except for share amounts)
 
   
June 30,
2011
   
December 31,
2010
 
   
(unaudited)
       
Assets
           
Cash and cash equivalents
  $ 12,512     $ 17,868  
Restricted cash
    21,217       17,132  
Accounts receivable, net of allowance of $2,949 and $2,957, respectively
    34,543       27,168  
Net investment in direct finance leases
    561,764       516,158  
Leasing equipment, net of accumulated depreciation of $156,206 and
     $141,783, respectively
    678,787       476,566  
Goodwill
    22,483       22,483  
Shareholder note
    8,370       8,247  
Other assets
    16,795       12,605  
Total assets
  $ 1,356,471     $ 1,098,227  
Liabilities and shareholders’ equity
               
                 
Liabilities:
               
Equipment purchases payable
  $ 47,613     $ 39,379  
Accrued expenses and other liabilities
    34,628       24,068  
Fair value of derivative instruments
    41,268       45,496  
Deferred income
    2,545       2,370  
Deferred income taxes
    3,273       3,406  
Debt:
               
Due within one year
    142,061       130,095  
Due after one year
    882,019       664,107  
Total debt
    1,024,080       794,202  
Total liabilities
    1,153,407       908,921  
Commitments and contingencies (Note 9)
               
Shareholders’ equity:
               
Preferred shares, $0.01 par value, 100,000,000 shares authorized
           
Common shares, $0.01 par value 400,000,000 shares authorized; 20,163,359 shares
               
issued and outstanding at June 30, 2011;  20,017,812 shares issued and                
outstanding at December 31, 2010     201       200  
Additional paid in capital
    218,299       217,789  
Retained earnings
    21,556       12,030  
Accumulated other comprehensive income (loss)
    (36,992 )     (40,713 )
Total shareholders’ equity
    203,064       189,306  
Total liabilities and shareholders’ equity
  $ 1,356,471     $ 1,098,227  
 
 
 
See accompanying notes.
 
 
-1-

 
 
SeaCube Container Leasing Ltd.
(Amounts in thousands, except for per share amounts)
(unaudited)
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Equipment leasing revenue
  $ 24,953     $ 17,544     $ 46,718     $ 34,181  
Finance revenue
    13,711       13,006       26,336       26,329  
Other revenue
    2,100       3,099       4,531       6,333  
Total revenues
    40,764       33,649       77,585       66,843  
Expenses:
                               
Direct operating expenses
    1,270       1,782       2,249       4,059  
Selling, general and administrative expenses
    5,751       4,894       11,645       10,238  
Depreciation expenses
    11,013       8,423       20,917       16,798  
Provision for doubtful accounts
    40       (406 )     40       (356 )
Impairment of leasing equipment held for sale
    169       565       365       782  
Interest expense, including non-cash interest of $982,
    $755, $1,239 and $2,404, respectively
    13,405       10,438       23,859       21,655  
Interest income
    (69 )     (7 )     (143 )     (907 )
Other expenses (income), net
    65       120       432       (528 )
Total expenses
    31,644       25,809       59,364       51,741  
                                 
Income before provision for income taxes
    9,120       7,840       18,221       15,102  
Provision (benefit) for income taxes
    (258 )     551       (177 )     571  
Net income
  $ 9,378     $ 7,289     $ 18,398     $ 14,531  
Net income per common share
                               
Basic
  $ 0.47     $ 0.45     $ 0.91     $ 0.90  
Diluted
  $ 0.47     $ 0.45     $ 0.91     $ 0.90  
Dividend per common share
  $ 0.22     $ 0.175     $ 0.44     $ 0.175  
 
 
 
 
See accompanying notes.
 
 
-2-

 
 
SeaCube Container Leasing Ltd.
(Amounts in thousands)
(unaudited)
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net income
  $ 18,398     $ 14,531  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    21,941       17,385  
Provision for doubtful accounts
    40       (356 )
Loss on sale of leasing equipment
    294       1,122  
Stock based compensation
    574       64  
Derivative loss reclassified into earnings
    1,872       3,474  
Ineffective portion of cash flow hedges
    (1,665 )     (1,688 )
Impairment of leasing equipment held for sale
    365       782  
Changes in operating assets and liabilities:
               
Accounts receivable
    (6,007 )     4,621  
Other assets
    (245 )     (3,069 )
Accounts payable, accrued expenses and other liabilities
    10,533       8,394  
Deferred income
    175       (1,082 )
Net cash provided by operating activities
    46,275       44,178  
Cash flows from investing activities
               
Proceeds from sale of leasing equipment
    5,925       6,733  
Collections on net investment in direct finance leases, net of interest earned
    50,763       52,411  
(Increase) decrease in restricted cash
    (4,085 )     3,227  
Purchase of fixed assets
    (45 )     (128 )
Purchase of leasing equipment
    (220,142 )     (20,846 )
Investment in direct financing leases
    (96,557 )     (20,159 )
Increase in Shareholder Note
    (123 )     (5,711 )
Net cash provided by (used in) investing activities
    (264,264 )     15,527  
Cash flows from financing activities
               
Proceeds from long-term debt
    527,000       20,000  
Repayments of long-term debt
    (297,122 )     (68,216 )
Cash paid for debt issuance fees
    (7,489 )     (2,250 )
Cash paid for derivatives
    (676 )      
Dividends paid
    (8,440 )     (2,800 )
Other financing activities
    (677 )     (558 )
Net cash provided by (used in) financing activities
    212,596       (53,824 )
Effect of changes in exchange rates on cash and cash equivalents
    37       (81 )
Net increase (decrease) in cash and cash equivalents
    (5,356 )     5,800  
Cash and cash equivalents, beginning of period
    17,868       8,014  
Cash and cash equivalents, end of period
  $ 12,512     $ 13,814  
Supplemental disclosures of cash flow information
               
Cash paid for interest
  $ 21,244     $ 18,857  
Cash paid for taxes
  $ 191     $ 412  
 
See accompanying notes.
 
 
-3-

 
 
SeaCube Container Leasing Ltd.
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
1. Description of the Business and Basis of Presentation
 
The accompanying consolidated financial statements of SeaCube Container Leasing Ltd. (the “Company” or “SeaCube”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.
 
The Company purchases intermodal containers and leases them to shipping and transportation companies, both domestically and internationally. Containers include refrigerated and dry freight containers as well as generator sets, which are leased to shipping line customers through a variety of long-term and short-term contractual leasing arrangements.  The Company operates in a single segment.
 
SeaCube was incorporated by Seacastle Operating Company Ltd. (the “Initial Shareholder” or “Seacastle Operating”) in Bermuda in March 2010.  Container Leasing International, LLC (d/b/a SeaCube Containers, LLC), the entity through which we conduct all of our operations (“CLI”), was founded in 1993 and was acquired by an affiliate of the Initial Shareholder in 2006.
 
On October 27, 2010, the SEC declared effective the registration statement relating to the Company’s initial public offering (“IPO”) of 10,925,000 shares at a price to the public of $10.00 per share. The Company issued 3,450,000 shares in the offering, which less underwriting discounts and expenses resulted in net proceeds of approximately $27 million.  The Initial Shareholder sold 7,475,000 of its 16,000,000 previously outstanding shares.
 
Correction of Immaterial Error Related to Prior Period
 
For the three months ended June 30, 2011, interest expense includes a non-cash interest adjustment to reduce interest expense of $1,104, which relates to the three month period ended March 31, 2011. The correction of the error is related to one of the Company’s interest rate hedges, which matured during the three months ended March 31, 2011. Management has concluded that the effect of this error is immaterial to the three month periods ended March 31, 2011 and June 30, 2011 and has thus corrected the error in the current quarter.  There is no impact to the reported net income for the six months ended June 30, 2011.
 
New Accounting Pronouncements
 
Adopted in 2011
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements (“ASU 2009-13”), which amends ASC 605-25, Revenue Recognition—Multiple Element Arrangements, to require the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements and significantly expands the disclosures required for multiple deliverable arrangements. The Company will apply ASU 2009-13 prospectively for revenue arrangements entered into or materially modified in beginning on or after January 1, 2011. The adoption of ASU 2009-13 did not have a material impact on the Company’s Consolidated Financial Statements.
 
 
-4-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
Pending Adoption
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which eliminates the option to present other comprehensive income and its components in the statement of shareholders’ equity, which is the Company’s current presentation.  The Company may either present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company intends to update its presentation of comprehensive income to comply with ASU 2011-05 beginning January 1, 2012.
 
2. Leasing Activity
 
Equipment Leasing Revenue

The Company has noncancelable operating leases for its leasing equipment.  As of June 30, 2011, future minimum lease revenue under these agreements was estimated as follows:
 
   
Total
Amount
 
2011
  $ 45,481  
2012
    70,816  
2013
    54,917  
2014
    44,764  
2015
    37,036  
Thereafter
    68,230  
    $ 321,244  
 
Finance Revenue

At June 30, 2011, receivables under these direct finance leases are collectible through 2022 as follows:
 
   
Total Lease
Receivables
   
Unearned
Lease Income
   
Net Lease
Receivables
 
2011
  $ 77,698     $ 26,576     $ 51,122  
2012
    140,676       45,868       94,808  
2013
    128,641       36,747       91,894  
2014
    143,170       26,697       116,473  
2015
    77,163       18,293       58,870  
Thereafter
    185,616       37,019       148,597  
    $ 752,964     $ 191,200     $ 561,764  

The Company has had strong credit performance due to our comprehensive credit underwriting and monitoring in addition to certain attributes of our business including the size and quality of our customers and our ability to recover containers and remarket them in default situations.  As such, the Company does not record an allowance for credit losses associated with direct finance leases.
 
As of June 30, 2011 and December 31, 2010, the Company had guaranteed and unguaranteed residual values for leasing equipment on direct finance leases of $115,643 and $87,691, respectively.  As of December 31, 2010, the Company had total lease receivables, unearned lease income and net lease receivables of $671,773, $155,615 and $516,158, respectively. The unguaranteed residual values are reflected in the ‘‘Net Lease Receivables’’ above.
 
 
-5-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
3. Leasing Equipment
 
The following is a summary of leasing equipment recorded:
 
   
June 30, 2011
   
December 31, 2010
 
Dry containers
  $ 291,534     $ 137,623  
Refrigerated containers
    520,249       457,365  
Generator sets
    23,210       23,361  
Total
    834,993       618,349  
Less accumulated depreciation
    (156,206 )     (141,783 )
Leasing equipment, net of accumulated depreciation
  $ 678,787     $ 476,566  
 
There were no assets recorded under capital leases as of June 30, 2011 and December 31, 2010, respectively.

4. Borrowings
 
CLI Funding V Credit Facility
 
On March 18, 2011, the Company, through its wholly owned subsidiary, CLI Funding V LLC ("CLIF V”) completed its offering of $230 million Series 2011-1 Fixed Rate Secured Notes ("Series 2011-1 Notes"). The Series 2011-1 Notes, rated "A" by Standard & Poor's, were issued at par with an annual interest rate of 4.5% and have a scheduled maturity date of March 18, 2021 with a legal final maturity date of March 18, 2026.  Certain assets were sold from CLI Funding IV LLC ("CLIF IV") to CLIF V, resulting in the transfer of ownership of the units and repayment of the outstanding borrowings under CLIF IV.
 
Unsecured Term Notes
 
On April 28, 2011, the Company closed on a $50 million Five Year Senior Unsecured Term Loan.  The loan has an annual interest rate of 11%, which is payable semi-annually beginning on July 1, 2011.  There are no required principal payments prior to maturity on April 28, 2016.
 
 
The following is a summary of the Company’s borrowings:
 
   
June 30, 2011
   
December 31, 2010
 
Container Asset-Backed Securitizations:
           
Series 2006-1 Notes
  $ 321,214     $ 352,299  
CLI Funding III Credit Facility
    279,724       311,903  
CLI Funding IV Credit Facility
    90,000       110,000  
CLI Funding V Credit Facility
    225,142        
Unsecured Term Notes
    50,000        
Container Revolving Credit Facility
    58,000       20,000  
Total debt
    1,024,080       794,202  
Less current maturities
    (142,061 )     (130,095 )
Long-term debt, less current maturities
  $ 882,019     $ 664,107  
 
The Company has debt obligations that are collateralized by the Company’s restricted cash, leasing equipment and net investment in direct finance leases.  As of June 30, 2011 and December 31, 2010, assets pledged as collateral on the Company’s debt amounted to $1,251,763 and $978,429, respectively.
 
 
-6-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
5. Derivatives and Hedging Activities
 
In the normal course of business the Company utilizes interest rate derivatives to manage our exposure to interest rate risks.  Specifically, interest rate derivatives are hedging variable rate interest payments on its various debt facilities.  If certain conditions are met, an interest rate derivative may be specifically designated as a cash flow hedge.  All of the Company’s designated interest rate derivatives are cash flow hedges.  For effective cash flow hedges, changes in fair value are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the interest payments on the debt are recorded in earnings.
 
The Company’s interest rate derivatives involve counterparty credit risk.  As of June 30, 2011, all of the Company’s interest rate derivatives are held with counterparties or guaranteed by parties with a credit rating of at least A3 by Moody’s.  The Company monitors the credit risk associated with these instruments periodically to validate that it is probable that the counterparty (or guarantor) will perform.  As of June 30, 2011, the Company does not anticipate that any of these counterparties will fail to meet their obligations.  As of June 30, 2011, there are no credit risk related contingent features in any of the Company’s derivative agreements.
 
The Company held the following interest rate derivatives designated as cash flow hedges as of June 30, 2011:
 
Hedged
Item
 
Current
Notional
Amount
 
Effective
Date
Maturity
Date
Floating
Rate
 
Fixed Interest
Rate
   
Fair Value
(a)
 
CLI Funding Series 2006-1
  $ 2,000  
Feb-2006
Oct-2011
1M LIBOR
    5.5800 %   $ (19 )
CLI Funding Series 2006-1
    11,667  
Feb-2006
Oct-2013
1M LIBOR
    4.1450 %     (499 )
CLI Funding Series 2006-1
    42,583  
Feb-2006
Dec-2013
1M LIBOR
    4.2990 %     (2,116 )
CLI Funding Series 2006-1
    18,750  
Feb-2006
Dec-2013
1M LIBOR
    4.9200 %     (1,029 )
CLI Funding Series 2006-1
    141,416  
Aug-2006
Jun-2016
1M LIBOR
    5.2950 %     (16,734 )
CLI Funding Series 2006-1
    49,797  
Jan-2009
Aug-2016
1M LIBOR
    4.6400 %     (4,391 )
CLI Funding Series 2006-1
    55,000  
Jan-2009
Aug-2016
1M LIBOR
    4.9500 %     (5,202 )
CLI Funding III, LLC
     
Jun-2008
Jun-2018
1M LIBOR
    5.2900 %     (20 )
CLI Funding III, LLC
    14,599  
May-2008
Feb-2018
1M LIBOR
    4.5200 %     (1,288 )
CLI Funding III, LLC
    28,312  
May-2008
Jul-2017
1M LIBOR
    4.5300 %     (2,391 )
CLI Funding III, LLC
    72,542  
May-2008
Feb-2018
1M LIBOR
    4.2075 %     (4,344 )
CLI Funding III, LLC
    3,816  
Jul-2008
Jun-2016
1M LIBOR
    4.0500 %     (367 )
CLI Funding III, LLC
    18,250  
Jul-2008
Jul-2017
1M LIBOR
    4.1000 %     (1,217 )
CLI Funding III, LLC
    16,179  
Jul-2008
Dec-2018
1M LIBOR
    3.6420 %     (471 )
CLI Funding III, LLC
    41,959  
Mar-2010
Nov-2014
1M LIBOR
    2.0200 %     (973 )
CLI Funding III, LLC
    19,409  
Jan-2011
May-2017
1M LIBOR
    1.6250 %     (207 )
Total interest rate derivatives designated as cash flow hedges
  $ 536,279                   $ (41,268 )

(a)  
All interest rate derivatives are recorded in fair value of derivative instruments in the liabilities section of the consolidated balance sheets.
 

 
-7-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
The following tables set forth the net of tax effect of the Company’s cash flow hedge derivative instruments on the consolidated financial statements for the three and six months ended June 30, 2011 and 2010:
 
   
For the Three Months Ended June 30, 2011
 
   
Effective Portion
 
Ineffective Portion
 
Derivative
Instrument
 
Change in
Unrealized (Gain)
Loss Recognized
 in OCI(a)
 
Location of (Gain)
Loss reclassified
from Accumulated
OCI into Income
 
(Gain) Loss Reclassified from
Accumulated
OCI into
 Income(b)
 
Location of
(Gain) Loss
Recognized Directly
in Income
 
(Gain) Loss
Recognized
Directly in
Income
 
Interest rate derivatives
    (8,399 )
Interest expense
    6,906  
Interest expense
    (837 )

   
For the Three Months Ended June 30, 2010
 
   
Effective Portion
 
Ineffective Portion
 
Derivative
Instrument
 
Change in
Unrealized (Gain)
Loss Recognized
 in OCI(a)
 
Location of (Gain)
Loss reclassified
from Accumulated
OCI into Income
 
  (Gain) Loss Reclassified from
Accumulated
OCI into
 Income(b)
 
Location of
(Gain) Loss
Recognized Directly
in Income
 
(Gain) Loss
Recognized
Directly in
Income
 
Interest rate derivatives
    (14,027 )
Interest expense
    8,280  
Interest expense
    (1,107 )

   
For the Six Months Ended June 30, 2011
 
   
Effective Portion
 
Ineffective Portion
 
Derivative
Instrument
 
Change in
Unrealized (Gain)
Loss Recognized
 in OCI(a)
 
Location of (Gain)
Loss reclassified
from Accumulated
OCI into Income
 
((Gain) Loss Reclassified from
Accumulated
OCI into
 Income(b)
 
Location of
(Gain) Loss
Recognized Directly
in Income
 
(Gain) Loss
Recognized
Directly in
Income
 
Interest rate derivatives
    (9,460 )
Interest expense
    13,144  
Interest expense
    (1,665 )

   
For the Six Months Ended June 30, 2010
 
   
Effective Portion
 
Ineffective Portion
 
Derivative
Instrument
 
Change in
Unrealized (Gain)
Loss Recognized
 in OCI(a)
 
Location of (Gain)
Loss reclassified
from Accumulated
OCI into Income
 
(Gain) Loss Reclassified from
Accumulated
OCI into
 Income(b)
 
Location of
(Gain) Loss
Recognized Directly
in Income
 
(Gain) Loss
Recognized
Directly in
Income
 
Interest rate derivatives
    (23,679 )
Interest expense
    17,045  
Interest expense
    (1,688 )

(a)
Represents the change in the fair market value of the Company’s interest rate derivatives, net of tax, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives.
 
(b)
Represents the amount of actual cash paid related to the net settlements of the interest rate derivatives and amortization of deferred losses on the Company’s terminated derivatives as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net settlement of interest rate derivatives
  $ 5,774     $ 6,684     $ 11,272     $ 13,571  
Amortization of terminated derivatives
    1,132       1,596       1,872       3,474  
 
As of June 30, 2011, the amount of Accumulated OCI related to derivatives was $36,576.  The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives in the amount of $19,662 and the amortization of deferred net losses on the Company’s terminated derivatives of $3,516.
 
 
 
-8-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
6. Income Taxes
 
The consolidated income tax expense for the three and six months ended June 30, 2011 and 2010 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2011 and 2010, respectively. The Company’s effective tax rate differs from the U.S. federal tax rate of 35% primarily due to its lower or nontaxed foreign sourced income.  In addition, the three and six months ended June 30, 2011 contains deferred tax benefits resulting from net operating losses from US sources.
 
7. Other Expenses (Income), Net
 
Other expenses (income), net of $120 and $(528) respectively, for the three and six months ended June 30, 2010, included proceeds on a default insurance recovery of $483 and $1,683, respectively.  There were no proceeds from default insurance for the three and six months ended June 30, 2011.
 
8. Comprehensive Income (Loss)
 
Total comprehensive income (loss) includes net income, the changes in the fair value of derivative instruments, reclassification into earnings of amounts previously deferred relating to derivative instruments and foreign currency translation gain (loss) relating to the Company’s foreign subsidiaries.  Total comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 9,378     $ 7,289     $ 18,398     $ 14,531  
Net derivative loss reclassified into earnings
    1,132       1,596       1,872       3,474  
Unrealized gain (loss) on derivative instruments, net of tax
    (2,625 )     (7,343 )     1,812       (10,108 )
Foreign currency translation
    6       (60 )     36       (83 )
Total comprehensive income
  $ 7,891     $ 1,482     $ 22,118     $ 7,814  

9. Commitments and Contingencies
 
Purchase Commitments
 
At June 30, 2011, commitments for capital expenditures totaled $12,450.
 
Lease Commitments
 
The Company and its subsidiaries are parties to various operating leases relating to office facilities, transportation vehicles, and certain other equipment with various expiration dates through 2015. All leasing arrangements contain normal leasing terms without unusual purchase options or escalation clauses.
 
As of June 30, 2011, the aggregate minimum rental commitment under operating leases having initial or remaining noncancelable lease terms in excess of one year was $1,104.
 
 
 
-9-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
10. Share Based Payments
 
 
A summary of the restricted shares under the Company’s incentive plan is as follows:
 
   
Shares
   
Weighted-average
per share at
grant date
 
Nonvested at January 1, 2011
    150,779     $ 10.47  
Granted
    145,547       15.30  
Vested
    (65,119 )     10.63  
Nonvested at June 30, 2011
    231,207     $ 13.47  
 
The Company recorded compensation expense of $291 and $574 for the three and six months ended June 30, 2011, respectively, and $64 for both the three and six months ended June 30, 2010. Compensation expense is recorded as a component of selling, general and administrative expenses in the Company’s consolidated statements of operations. Total unrecognized compensation cost was approximately $2,869 at June 30, 2011 which is expected to be recognized over the remaining weighted-average vesting period of 2.6 years.
 
11. Earnings per Share and Dividends
 
The computation of basic earnings per share is based on the weighted average number of common shares outstanding including participating securities outstanding during the period.  Diluted EPS is calculated by dividing Net income (loss) by the weighted average number of common shares outstanding during the period while also giving effect to all potentially dilutive common shares based on the treasury stock method.  The weighted average shares used to calculate basic and diluted earnings per share (“EPS”) in the prior year period have been retroactively adjusted to include the 16,000,000 common shares issued to the Initial Shareholder.
 
In accordance with the Earnings per Share Topic, any unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method.  Accordingly, all of the Company’s restricted common shares are participating securities.
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Weighted-average shares:
                       
Common shares outstanding
    19,932,152       16,311,629       19,932,152       16,156,675  
Restricted common shares
    231,207       45,417       189,657       22,834  
Total weighted-average shares
    20,163,359       16,357,046       20,121,809       16,179,509  
 
 
-10-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
The calculation for basic and diluted earnings per share is as follows:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 9,378     $ 7,289     $ 18,398     $ 14,531  
Less:  Undistributed earnings allocated to restricted shareholders
    (108 )     (20 )     (173 )     (21 )
Income attributable to common shareholders
  $ 9,270     $ 7,269     $ 18,225     $ 14,510  

Income per share attributable to common shareholders:
                       
Basic
  $ 0.47     $ 0.45     $ 0.91     $ 0.90  
Diluted
  $ 0.47     $ 0.45     $ 0.91     $ 0.90  
 
There were no potentially dilutive common shares for any period in these consolidated financial statements.
 
On March 9, 2011, the Company’s Board of Directors approved and declared a $0.22 per share cash dividend on its issued and outstanding common shares of 20,163,359, payable on April 15, 2011 to its shareholders of record at the close of business on April 8, 2011.  On May 10, 2011, the Company’s Board of Directors approved and declared a $0.22 per share cash dividend on its issued and outstanding common shares of 20,163,359, payable on July 15, 2011 to its shareholders of record at the close of business on July 8, 2011.
 
12. Geographic Information
 
The Company’s customers use containers to conduct their global trading operations which utilize a vast network of worldwide trade routes.  The Company earns its revenues from such customers when the equipment is in use carrying cargo around the world.  Substantially all of the Company’s revenues are denominated in U.S. dollars. The following table represents the allocation of domestic and international revenues for the periods indicated based upon the customers’ primary domicile.  As all of the Company’s containers are used internationally and not domiciled in one particular place for a prolonged period of time, these assets are considered to be international.
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
Total revenues
 
2011
   
2010
   
2011
   
2010
 
Asia
  $ 15,291     $ 8,887     $ 27,612     $ 17,178  
Australia/New Zealand
    113       311       269       506  
Europe/Africa/Middle East
    14,861       11,835       28,196       24,664  
North America
    4,116       6,065       8,936       11,486  
South America
    6,383       6,551       12,572       13,009  
    $ 40,764     $ 33,649     $ 77,585     $ 66,843  
 
 
-11-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
13. Related Party Transactions
 
Transactions with Affiliates
 
Prior to our IPO, the Company shared some services, staff and space with other affiliates of Seacastle.  In addition, the Company incurred expenses for share-based compensation allocated from Seacastle, to both dedicated and shared SeaCube employees. These amounts are recorded in selling, general and administrative expenses on the Consolidated Statements of Operations. The expense and cost allocations have been determined based on methodologies (such as space used or hours worked) in order to establish reasonable charges for the services provided or for the benefit received during the periods presented.  Since becoming a public company, the transactions with affiliates are significantly reduced and currently limited to reimbursement for shared office space and staff to support tax related work.  For the three months ended June 30, 2011 and 2010, net charges (to) from these affiliates were $88 and $(21), respectively, and for the six months ended June 30, 2011 and 2010, net charges (to) from these affiliates were $196 and $(61), respectively. The Company has a net receivable from affiliates of Seacastle of $255 and $317 as of June 30, 2011 and December 31, 2010, respectively.
 
Shareholder Note and Dividend
 
In August 2010, the Company distributed $3.75 million to the Initial Shareholder in the form of a loan which was used to make interest and principal payments on Seacastle’s Credit Facility.  In September 2010, the Company distributed $4.4 million to the Initial Shareholder in the form of a loan which was used to make interest and principal payments and pay fees on Seacastle’s Credit Facility.  The Initial Shareholder plans to repay these amounts plus interest at 3% per annum with cash expected from SeaCube dividends, contributions from other Seacastle subsidiaries, or other cash flows.  Interest income earned from this note was $62 and $123 for the three and six months ended June 30, 2011.
 
 
 
-12-

 

SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)
 
14. Fair Value of Financial Instruments
 
The following tables set forth the valuation of the Company’s financial assets and liabilities measured at fair value on a recurring basis by input levels as of June 30, 2011 and December 31, 2010:
 
   
Fair Value
as of
June 30,
   
Fair Value Measurement as of
June 30, 2011 Using
Fair Value Hierarchy
 
   
2011
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Restricted cash
  $ 21,217     $ 21,217     $     $  
Liabilities:
                               
Derivative instruments
    41,268             41,268        

   
Fair Value
as of
December 31,
   
Fair Value Measurement as of
December 31, 2010 Using
Fair Value Hierarchy
 
   
2010
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Restricted cash
  $ 17,132     $ 17,132              
Liabilities:
                               
Derivative instruments
    45,496             45,496        
 
Restricted cash:  Restricted cash consists of cash that is held by the Company for security deposits received from lessees pursuant to the terms of various lease agreements and rent collections held in lockbox accounts pursuant to the Company’s credit facilities and securitization agreements.
 
Derivative instruments:  The Company’s interest rate derivatives are recorded at fair value on the Company’s Consolidated Balance Sheets and consist of United States dollar denominated LIBOR-based interest rate derivatives, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close. The fair value generally reflects the estimated amounts that the Company would receive or pay to transfer the contracts at the reporting date and therefore reflects the Company’s or counterparty’s non-performance risk.
 
Leasing assets held for sale are measured at fair value on a non-recurring basis.  The fair value is calculated using the income approach based on inputs classified as level 2 in the fair value hierarchy.  There were no other assets and liabilities measured at fair value on a nonrecurring basis.
 
The Company’s financial instruments, other than cash, consist principally of cash equivalents, restricted cash, accounts receivable, accounts payable, debt and interest rate derivatives.  The fair value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.  The fair values of our debt are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.

 
-13-

 
 
SeaCube Container Leasing Ltd.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except as otherwise noted)
(unaudited)

 
The carrying amounts and fair values of the Company’s financial instruments are as follows:
 
   
June 30, 2011
   
December 31, 2010
 
   
Carrying
Amount of Asset (Liability)
   
Fair Value
of Asset
(Liability)
   
Carrying
 Amount of Asset (Liability)
   
Fair Value
of Asset
(Liability)
 
                         
Long-term debt
  $ (1,024,080 )   $ (1,029,496 )   $ (794,202 )   $ (794,202 )
Derivative Instrument
    (41,268 )     (41,268 )     (45,496 )     (45,496 )

15. Subsequent Events
 
Dividend
 
On August 9, 2011, the Company’s Board of Directors approved and declared a $0.24 per share cash dividend on its issued and outstanding common stock, payable on October 14, 2011 to shareholders of record at the close of business on October 7, 2011.
 
The Company has evaluated all significant activities through the time of filing these financial statements with the SEC and has concluded that no additional subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
 
 
-14-

 

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, 2010. 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, 2010.

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 June 30, 2011, we employ 76 people in seven offices worldwide and have total assets of $1.4 billion.
 
As of June 30, 2011, we own or manage a fleet of 558,294 units, representing 878,397 TEUs of containers and generator sets.  For the three months ended June 30, 2011, our average utilization was 98.6%, 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 and TEU as of June 30, 2011:

Equipment Fleet by Units
 
   
   
Refrigerated
   
Dry
   
Gensets
   
Total
 
Operating Leases
    32,851       93,780       2,737       129,368  
Direct Finance Leases
    19,332       227,995       2,520       249,847  
Total Owned
    52,183       321,775       5,257       379,215  
Managed
    28,992       148,685       1,402       179,079  
Total Fleet
    81,175       470,460       6,659       558,294  
 
 
 
-15-

 
 
Equipment Fleet by TEUs
 
   
   
Refrigerated
   
Dry
   
Gensets
   
Total
 
Operating Leases
    61,232       143,430       2,737       207,399  
Direct Finance Leases
    35,484       358,921       2,520       396,925  
Total Owned
    96,716       502,351       5,257       604,324  
Managed
    54,409       218,262       1,402       274,073  
Total Fleet
    151,125       720,613       6,659       878,397  
 
The table below summarizes the composition of our owned fleet by net book value as of June 30, 2011:

Container Fleet by Net Book Value
 
   
   
Refrigerated
   
Dry
   
Gensets
   
Total
 
Operating Leases
  $ 385,420     $ 279,371     $ 13,996     $ 678,787  
Direct Finance Leases
    161,697       385,234       14,833       561,764  
Total Fleet
  $ 547,117     $ 664,605     $ 28,829     $ 1,240,551  

Results of Operations
 
Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010
 
   
Three Months
Ended
   
Three Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Equipment leasing revenue
  $ 24,953     $ 17,544     $ 7,409       42 %
Finance revenue
    13,711       13,006       705       5 %
Other revenue
    2,100       3,099       (999 )     -32 %
Total revenues
  $ 40,764     $ 33,649     $ 7,115       21 %

 
Revenue
 
Total revenue was $40.8 million for the three months ended June 30, 2011 compared to $33.6 million for the three months ended June 30, 2010, an increase of $7.1 million or 21%.
 
Equipment leasing revenue was $25.0 million for the three months ended June 30, 2011 compared to $17.5 million for the three months ended June 30, 2010, an increase of $7.4 million or 42%.  This increase was the result of new investments made in the current year, which resulted in the average on-hire fleet increasing by 38,500 units.
 
Finance revenue was $13.7 million for the three months ended June 30, 2011 compared to $13.0 million for the three months ended June 30, 2010, an increase of $0.7 million or 5%.  The increase was the result of new investments that were made in excess of the amortization of the current lease portfolio.
 
Other revenue, which includes management fee revenues and re-billable costs to our lessees, was $2.1 million for the three months ended June 30, 2011 compared to $3.1 million for the three months ended June 30, 2010, a decrease of $1.0 million or 32%. This decrease was attributable to lower rebillable costs and lower management fee revenues.
 
 
-16-

 
 
   
Three Months
Ended
   
Three Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Direct operating expenses
  $ 1,270     $ 1,782     $ (512 )     -29 %
Selling, general and administrative expenses
    5,751       4,894       857       18 %
Depreciation expenses
    11,013       8,423       2,590       31 %
Provision for doubtful accounts
    40       (406 )     446       *  
Impairment of leasing equipment held for sale
    169       565       (396 )     -70 %
Total
  $ 18,243     $ 15,258     $ 2,985       20 %

*
Not meaningful.
 
Direct Operating Expenses
 
Direct operating expenses were $1.3 million for the three months ended June 30, 2011, compared to $1.8 million for the three months ended June 30, 2010, a decrease of $0.5 million or 29%.  The primary reason for the decrease was lower handling fees and repair costs.  Our storage fees continue to be relatively low, which is attributable to higher utilization (and thus fewer units stored).
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $5.8 million for the three months ended June 30, 2011, compared to $4.9 million for the three months ended June 30, 2010, an increase of $0.9 million or 18%.  The increase was primarily due to incremental costs associated with being a publicly traded company.
 
Depreciation Expenses
 
Depreciation of leasing equipment was $11.0 million for the three months ended June 30, 2011 compared to $8.4 million for three months ended June 30, 2010, an increase of $2.6 million or 31%. Depreciation on new additions net of disposals and sales accounted for $2.7 million of the increase, which was offset by a decrease of $0.1 million due to equipment reaching the end of their depreciable lives.
 
Provision for Doubtful Accounts
 
Provision for doubtful accounts was $0.04 million for the three months ended June 30, 2011 compared to $(0.4) million for three months ended June 30, 2010.  We continued to have a strong credit and collections experience, which was due to the improved credit quality of our customer base along with our comprehensive credit underwriting and monitoring.  In the prior year period, we lowered our reserve as the credit quality of our customer base improved.
 
Impairment of Leasing Equipment Held for Sale
 
We recorded an impairment of leasing equipment held for sale of $0.2 million for the three months ended June 30, 2011 compared to $0.6 million for three months ended June 30, 2010, a decrease of $0.4 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.  The decision to sell the container is based upon a discounted cash flow model which includes rebillable costs.  These rebillable costs are recorded as other revenues and are not recorded as a reduction in the impairment of leasing equipment held for sale.

 
-17-

 
 
   
Three Months
Ended
   
Three Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Interest expense
  $ 13,405     $ 10,438     $ 2,967       28 %
Interest income
    (69 )     (7 )     (62 )     *  
Other expenses (income), net
    65       120       (55 )     *  
Total
  $ 13,401     $ 10,551     $ 2,850       27 %

*
Not meaningful.
 
Interest Expense
 
Interest expense was $13.4 million for the three months ended June 30, 2011, compared to $10.4 million for the three months ended June 30, 2010, an increase of $3.0 million or 28%.  Our weighted average debt balance for the three months ended June 30, 2011 increased by $217.9 million due to our investment in new containers, resulting in an increase of approximately $2.8 million to interest cost.  In addition, in May and November of 2010, we increased our available credit under the CLIF IV and Revolving Credit Facilities, respectively, which resulted in higher commitment fees of $0.2 million in the current period.  There was also an increase in non-cash interest expense in the current period, including an increase in amortization of deferred financing fees of $0.4 million and an increase in losses recognized directly into income for ineffective derivatives of $0.3 million, which was partially offset by lower amortization of terminated derivatives of $0.5 million.  The increase in expense related to hedge ineffectiveness is inclusive of a non-cash interest adjustment to reduce interest expense of $1.1 million, which relates to the three month period ended March 31, 2011. The correction of this immaterial error is related to one of our interest rate hedges, which matured during the three months ended March 31, 2011.
 
Interest Income
 
Interest income was $0.1 million for the three months ended June 30, 2011, compared to $0.0 million for the three months ended June 30, 2010, an increase of $0.1 million.
 
Other Expense (Income), Net
 
Other expense (income), net was $0.1 million for the three months ended June 30, 2011, compared to $0.1 million for the three months ended June 30, 2010.  In 2010, we received an insurance recovery of $0.5 million, which was offset by lower losses in the current period on equipment sales of $0.5 million.
 
Provision (Benefit) for Income Taxes
 
   
Three Months
Ended
   
Three Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Provision (benefit) for income taxes
  $ (258 )   $ 551       (809 )     *  

*
Not meaningful.
 
Provision for income taxes was $(0.3) million for the three months ended June 30, 2011 compared to $0.6 million for the three months ended June 30, 2010. The change in the effective tax rate is primarily attributable to the impact of the lower or nontaxed foreign sourced income.  In addition, the three months ended June 30, 2011 contains deferred tax benefits resulting from net operating losses from US sources.

 
-18-

 
 
   
Three Months
Ended
   
Three Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Net income
  $ 9,378     $ 7,289     $ 2,089       29 %
Adjusted net income**
  $ 10,375     $ 7,953     $ 2,422       30 %

**
Adjusted net income is a measure of financial and operational performance that is not defined by U.S. GAAP.  See “Non-GAAP Measure” for the discussion of adjusted net income as a non-GAAP measure and the reconciliation of it to net income (loss).
 
Net Income
 
Net income was $9.4 million for the three months ended June 30, 2011 as compared to $7.3 million for the three months ended June 30, 2010. The increase in net income was attributable to the items above.
 
Adjusted Net Income
 
Adjusted net income was $10.4 million for the three months ended June 30, 2011 compared to $8.0 million for the three months ended June 30, 2010, an increase of $2.4 million or 30%. In addition to the changes in net income noted above, the three months ended June 30, 2011, includes an increase in the non-cash interest expense of $0.3 million.  Although non-cash interest expense is inclusive of an adjustment to reduce interest expense of $1.1 million, which relates to the three month period ended March 31, 2011, this adjustment had no impact on adjusted net income in the current or prior periods.
 
Comparison of the Six Months Ended June 30, 2011 to the Six Months Ended June 30, 2010
 
   
Six Months
Ended
   
Six Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Equipment leasing revenue
  $ 46,718     $ 34,181     $ 12,537       37 %
Finance revenue
    26,336       26,329       7       0 %
Other revenue
    4,531       6,333       (1,802 )     -28 %
Total revenues
  $ 77,585     $ 66,843     $ 10,742       16 %

 
Revenue
 
Total revenue was $77.6 million for the six months ended June 30, 2011 compared to $66.8 million for the six months ended June 30, 2010, an increase of $10.7 million or 16%.
 
Equipment leasing revenue was $46.7 million for the six months ended June 30, 2011 compared to $34.2 million for the six months ended June 30, 2010, an increase of $12.5 million or 37%.  This increase was the result of new investments made in the current year, which resulted in the average on-hire fleet increasing by 33,200 units.
 
Finance revenue was $26.3 million for the six months ended June 30, 2011 compared to $26.3 million for the six months ended June 30, 2010.  New investments in the current year were offset by the amortization of the current lease portfolio.
 
Other revenue, which includes management fee revenues and re-billable costs to our lessees, was $4.5 million for the six months ended June 30, 2011 compared to $6.3 million for the six months ended June 30, 2010, a decrease of $1.8 million or 28%. This decrease was attributable to lower rebillable costs and lower management fee revenues.

 
-19-

 
 
   
Six Months
Ended
   
Six Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Direct operating expenses
  $ 2,249     $ 4,059     $ (1,810 )     -45 %
Selling, general and administrative expenses
    11,645       10,238       1,407       14 %
Depreciation expenses
    20,917       16,798       4,119       25 %
Provision for doubtful accounts
    40       (356 )     396       *  
Impairment of leasing equipment held for sale
    365       782       (417 )     *  
Total
  $ 35,216     $ 31,521     $ 3,695       12 %

*
Not meaningful.
 
Direct Operating Expenses
 
Direct operating expenses were $2.2 million for the six months ended June 30, 2011, compared to $4.1 million for the six months ended June 30, 2010, a decrease of $1.8 million or 45%.  The primary reason for the decrease was lower maintenance and repair costs and lower handling fees.  Our storage fees continue to be relatively low, which is attributable to higher utilization (and thus fewer units stored).
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $11.6 million for the six months ended June 30, 2011, compared to $10.2 million for the six months ended June 30, 2010, an increase of $1.4 million or 14%.  The increase was primarily due to incremental costs associated with being a publicly traded company.
 
Depreciation Expenses
 
Depreciation of leasing equipment was $20.9 million for the six months ended June 30, 2011 compared to $16.8 million for six months ended June 30, 2010, an increase of $4.1 million or 25%. Depreciation on new additions net of disposals and sales accounted for $4.3 million of the increase, which was offset by a decrease of $0.2 million due to equipment reaching the end of their depreciable lives.
 
Provision for Doubtful Accounts
 
Provision for doubtful accounts was $0.04 million for the six months ended June 30, 2011 compared to $(0.4) million for six months ended June 30, 2010.  We continued to have a strong credit and collections experience, which was due to the improved credit quality of our customer base along with our comprehensive credit underwriting and monitoring.  In the prior year period, we lowered our reserve as the credit quality of our customer base improved.
 
Impairment of Leasing Equipment Held for Sale
 
We recorded an impairment of leasing equipment held for sale of $0.4 million for the six months ended June 30, 2011 compared to $0.8 million for six months ended June 30, 2010, a decrease of $0.4 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.  The decision to sell the container is based upon a discounted cash flow model which includes rebillable costs.  These rebillable costs are recorded as other revenues and are not recorded as a reduction in the impairment of leasing equipment held for sale.
 
 
 
-20-

 
 
   
Six Months
Ended
   
Six Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Interest expense
  $ 23,859     $ 21,655     $ 2,204       10 %
Interest income
    (143 )     (907 )     764       *  
Other expenses (income), net
    432       (528 )     960       *  
Total
  $ 24,148     $ 20,220     $ 3,928       19 %

*
Not meaningful.
 
Interest Expense
 
Interest expense was $23.9 million for the six months ended June 30, 2011, compared to $21.7 million for the six months ended June 30, 2010, an increase of $2.2 million or 10%.  Our weighted average debt balance for the six months ended June 30, 2011 increased by $123.5 million due to our investment in new containers, resulting in an increase of approximately $3.0 million to interest cost.  In addition, in May and November of 2010, we increased our available credit under the CLIF IV and Revolving Credit Facilities, respectively, which resulted in higher commitment fees of $0.6 million in the current period.  These increases were offset by a decrease in non-cash interest expense in the current period, including lower amortization of terminated derivatives of $1.6 million, which was partially offset by an increase in amortization of deferred financing fees of $0.4 million.
 
Interest Income
 
Interest income was $0.1 million for the six months ended June 30, 2011, compared to $0.9 million for the six months ended June 30, 2010, a decrease of $0.8 million.  The decrease is primarily attributable to the decrease in the interest received from the $94.8 million promissory note from the Initial Shareholder.  In March 2010, SeaCube Operating Company Ltd assumed the obligation of the Initial Shareholder, which was treated as a non-cash equity distribution to the Initial Shareholder.
 
Other Expense (Income), Net
 
Other expense (income), net was $0.4 million for the six months ended June 30, 2011, compared to $(0.5) million for the six months ended June 30, 2010. In 2010, we received an insurance recovery of $1.7 million, which was offset by lower losses in the current period on equipment sales of $0.8 million.
 
Provision (Benefit) for Income Taxes
 
   
Six Months
Ended
   
Six Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Provision (benefit) for income taxes
  $ (177 )   $ 571       (748 )     *  

*
Not meaningful.
 
Provision for income taxes was $(0.2) million for the six months ended June 30, 2011 compared to $0.6 million for the six months ended June 30, 2010. The change in the effective tax rate is primarily attributable its lower or nontaxed foreign sourced income.  In addition, the six months ended June 30, 2011 contains deferred tax benefits resulting from net operating losses from US sources.
 
 
-21-

 
 
   
Six Months
Ended
   
Six Months
Ended
   
Prior Period Change
 
   
June 30, 2011
   
June 30, 2010
   
$ Change
   
% Change
 
   
(dollars in thousands)
 
Net income
  $ 18,398     $ 14,531     $ 3,867       27 %
Adjusted net income**
  $ 19,649     $ 16,844     $ 2,805       17 %

**
Adjusted net income is a measure of financial and operational performance that is not defined by U.S. GAAP.  See “Non-GAAP Measure” for the discussion of adjusted net income as a non-GAAP measure and the reconciliation of it to net income (loss).
 
Net Income
 
Net income was $18.4 million for the six months ended June 30, 2011 as compared to $14.5 million for the six months ended June 30, 2010. The increase in net income was attributable to the items above.
 
Adjusted Net Income
 
Adjusted net income was $19.6 million for the six months ended June 30, 2011 compared to $16.8 million for the six months ended June 30, 2010, an increase of $2.8 million or 17%. In addition to the changes in net income noted above, the six months ended June 30, 2011, includes a decrease in the non-cash interest expense of $1.1 million.
 
Liquidity and Capital Resources
 
We have historically met our liquidity requirements primarily from the following sources:
 
 
Revenues including operating lease revenues, total finance lease collections, billings to lessors for repairs and maintenance, and asset management fees. Cash flows from operating activities and principal collections on finance leases were $97.0 million and $96.6 million for the six months ended June 30, 2011 and 2010, respectively.
 
 
Lines of credit and other secured borrowings, under which $1,024.1 million was outstanding and $172.0 million was available as of June 30, 2011.
 
 
Sales of our older leasing equipment, which was $5.9 million and $6.7 million for the six months ended June 30, 2011 and 2010, respectively.
 
We expect that our cash flows from our operations, principal collections on direct finance leases, existing credit facilities and sales of older equipment will be sufficient to meet our liquidity needs.  Our current projections of cash flows from operations and the availability of funds under our revolving credit agreement are expected to be sufficient to fund our maturing debt and contractual obligations in the next several years.  In the future, we will need to borrow funds to finance the purchases of new assets we intend to buy to expand our business.
 
On March 18, 2011, our indirect wholly owned subsidiary, CLI Funding V LLC ("CLIF V"), completed its offering of $230 million Series 2011-1 Fixed Rate Secured Notes ("Series 2011-1 Notes").  The Series 2011-1 Notes, rated "A" by Standard & Poor's, were issued at par with an annual interest rate of 4.5%.  In addition, on April 28, 2011, the Company closed on a $50 million Five Year Senior Unsecured Term Loan.  The loan has an annual interest rate of 11%, which is payable semi-annually beginning on July 1, 2011.  There are no required principal payments prior to maturity on April 28, 2016.  The Company will use the net proceeds of these borrowings for container purchases and other general business purposes.
 
Liquidity Needs to Acquire Equipment to be Leased
 
The acquisition of leasing assets fuels our growth. As a result, we expect to invest substantial funds to acquire containers and gensets, although there can be no assurances as to the timing and amount of such acquisitions.  Going forward, provided there is sufficient demand, production capacity, appropriate pricing and available financing, we intend to invest in new containers at a level that is consistent with our historical investment activity. As of August 2, 2011, SeaCube has ordered approximately $399.6 million of new equipment for delivery through November 30, 2011.  Of this amount, approximately $359.4 million, or 90%, has been committed to long-term leases.
 
 
 
-22-

 
 
Cash Flow
 
The following table sets forth certain historical cash flow information for the six months ended June 30, 2011 and 2010.
 
Cash Flows:
 
Six Months
Ended
June 30, 2011
   
Six Months
Ended
June 30, 2010
 
   
(dollars in thousands)
 
Net cash provided by operating activities
  $ 46,275     $ 44,178  
Net cash provided by (used in) investing activities
    (264,264 )     15,527  
Net cash provided by (used in) financing activities
    212,596       (53,824 )
Effect of changes in exchange rates on cash and cash equivalents
    37       (81 )
Net increase (decrease) in cash and cash equivalents
  $ (5,356 )   $ 5,800  

Net cash provided by operating activities was $46.3 million and $44.2 million for the six months ended June 30, 2011 and 2010, respectively, a $2.1 million increase.  The increase in operating cash flow from six months ended June 30, 2011 compared to June 30, 2010 was primarily the result of increased profitability.
 
Net cash provided by (used in) investing activities was $(264.3) million and $15.5 million for the six months ended June 30, 2011 and 2010, respectively, a $279.8 million decrease to cash flow.  The primary driver of the decrease is our higher investment in direct finance leases and purchases of leased equipment in the current year period of $275.7 million, which reflects the continued strong demand for containers.  In addition, our restricted cash balances increased by $4.1 million in the six months ended June 30, 2011 versus a decrease of $3.2 million in the six months ended June 30, 2010.
 
Net cash provided by (used in) financing activities was $212.6 million and $(53.8) million for the six months ended June 30, 2011 and 2010, respectively, a $266.4 million increase to cash flow.  During the current period, the proceeds of long-term debt (net of payments) increased by $278.1 million versus the prior period as a result of our increased investment in direct finance leases and leasing equipment.  In conjunction with the closing of the financing in the current period, we incurred debt issuance costs of $7.5 million. Also, upon the repayment of the outstanding borrowings under CLIF IV, we paid $0.7 million, which represented the fair value of the derivative on the CLIF IV borrowings.  Additionally, dividends paid during the six months ended June 30, 2011 were $8.4 million compared with $2.8 million during the six months ended June 30, 2010.
 
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of June 30, 2011.
 
Non-GAAP Measure
 
Adjusted net income is a measure of financial and operating performance that is not defined by U.S. GAAP and should not be considered a substitute for net income, income from operations or cash flow from operations, as determined in accordance with U.S. GAAP.  Adjusted net income is a measure of our operating and financial performance used by management to focus on consolidated financial and operating performance exclusive of income and expenses that relate to non-routine or significant non-cash items of the business.
 
We define adjusted net income (loss) as net income before non-cash interest expense related to terminations and modifications of derivative instruments, losses on retirement of debt, fair value adjustments on derivative instruments, loss on swap terminations, write-offs of goodwill and gain on the 2009 Sale. We use adjusted net income to assess our consolidated financial and operating performance, and we believe this non-GAAP measure is helpful to management and investors in identifying trends in our performance. This measure helps management make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. Adjusted net income provides us with a measure of financial performance of the business based on operational factors including the profitability of assets on an economic basis net of operating expenses and the capital costs of the business on a consistent basis as it removes the impact of certain non-routine and non-cash items from our operating results.  Adjusted net income is a key metric used by senior management and our board of directors to review the consolidated financial performance of the business.
 
 
-23-

 
 
Adjusted net income has limitations as an analytical tool and is not a presentation made in accordance with U.S. GAAP and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP, including net income, or net cash from operating activities.  For example, adjusted net income does not reflect (i) our cash expenditures or future requirements for capital expenditures or contractual commitments, or (ii) changes in or cash requirements for our working capital needs.  In addition, our calculation of adjusted net income may differ from the adjusted net income or analogous calculations of other companies in our industry, limiting its usefulness as a comparative measure. Because of these limitations, adjusted net income should not be considered a measure of discretionary cash available to us to invest in the growth of our business or to pay dividends.  We compensate for these limitations by relying primarily on our U.S. GAAP results and using adjusted net income only supplementally.
 
The following table shows the reconciliation of net income, the most directly comparable U.S. GAAP measure to adjusted net income:
 
    Three Months Ended June 30,     Six Months Ended June 30,  
   
2011
   
2010
   
2011
   
2010
 
Net income
  $ 9,378     $ 7,289     $ 18,398     $ 14,531  
Non-cash interest expense, net of tax
    997       664       1,251       2,313  
Adjusted net income
  $ 10,375     $ 7,953     $ 19,649     $ 16,844  

New Accounting Pronouncements
 
Adopted in 2011
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements (“ASU 2009-13”), which amends ASC 605-25, Revenue Recognition—Multiple Element Arrangements, to require the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements and significantly expands the disclosures required for multiple deliverable arrangements. The revised guidance provides entities with the option of adopting the revisions retrospectively for all periods presented or prospectively for all revenue arrangements entered into or materially modified after the date of adoption. The Company will apply ASU 2009-13 prospectively for revenue arrangements entered into or materially modified in beginning on or after January 1, 2011. The adoption of ASU 2009-13 did not have a material impact on the Company’s Consolidated Financial Statements.
 
Pending Adoption
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which eliminates the option to present other comprehensive income and its components in the statement of shareholders’ equity.  The Company may either present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company intends to update its presentation of comprehensive income to comply with ASU 2011-05 beginning January 1, 2012.
 
 
-24-

 
 
 
 
Exchange Rate Risk
 
While our leasing per diems are billed and paid to us in U.S. dollars, we are subject to exchange gains and losses for local currency expenditures. We record the effect of non-U.S. dollar currency transactions when we translate the non-U.S. subsidiaries’ financial statements into U.S. dollars using exchange rates as they exist at the end of each month.
 
 
Interest Rate Risk
 
We have long-term debt obligations that accrue interest at variable rates. Interest rate changes may therefore impact the amount of interest payments, future earnings and cash flows. We have entered into interest rate swap agreements to mitigate the impact of changes in interest rates that may result from fluctuations in the variable rates of interest accrued by our long-term debt obligations.  Based on the debt obligation payable as of June 30, 2011, we estimate that cash flows from interest expense relating to variable rate debt and the relevant interest rate swap agreement would increase by $0.04 million on an annual basis in the event interest rates were to increase by 10%.
 
 
Credit Risk
 
We are subject to concentrations of credit risk with respect to amounts due from customers. We seek to limit our credit risk by performing ongoing credit evaluations and, when deemed necessary, require letters of credit, guarantees or collateral. Our credit policy sets different maximum exposure guidelines for each customer. Credit criteria may include, but are not limited to, customer trade route, country, social and political climate, assessments of net worth, asset ownership, bank and trade credit references, credit bureau reports, operational history and financial strength.
 
We seek to reduce credit risk by maintaining insurance coverage against customer insolvency and related equipment losses. We maintain contingent physical damage, recovery and loss of revenue insurance, which provides coverage in the event of a customer’s insolvency, bankruptcy or default giving rise to our demand for return of all of our equipment. Subject to the policy’s deductible and other terms and conditions, it covers the cost of recovering our equipment, damage to the equipment, loss of equipment and, to a limited extent, lost revenues. This coverage automatically renews for one additional one-year term on the anniversary of the commencement date subject to maintaining a certain claim experience rate.
 
Our hedging transactions using derivative instruments have counterparty credit risk. The counterparties to our derivative arrangements and repurchase agreements are major financial institutions with high credit ratings. As a result, we do not anticipate that any of these counterparties will fail to meet their obligations. However, there can be no assurance that we will be able to adequately protect against this risk and will ultimately realize an economic benefit from our hedging strategies or recover the full value of the securities underlying our repurchase agreements in the event of a default by a counterparty.
 
 
Provision for Doubtful Accounts
 
The provision for doubtful accounts includes our estimate of allowances necessary for receivables on both operating and direct financing lease receivables. The provision for doubtful accounts is developed based on two key components (1) specific reserves for receivables which are impaired for which management believes full collection is doubtful and (2) reserves for estimated losses inherent in the receivables based upon historical trends. We believe our provision for doubtful accounts is adequate to provide for credit losses inherent in our accounts receivable. The provision for doubtful accounts requires the application of estimates and judgments as to the outcome of collection efforts and the realization of collateral, among other things. In addition, changes in economic conditions or other events may necessitate additions or deductions to the provision for doubtful accounts. Direct financing leases are evaluated on a case-by-case basis. When evaluating our operating and direct financing lease receivables for impairment, we consider, among other things, the level of past due amounts of the respective receivable, the borrower’s financial condition, credit quality indicators of the borrower, the value of underlying collateral and third party credit enhancements such as guarantees and insurance policies. Once a direct financing lease is determined to be non-performing, our procedures provide for the following events to take place in order to evaluate collectability:
 
 
 
-25-

 
 
 
The past due amounts are reclassified to accounts receivable,
 
 
The equipment value supporting such direct financing lease is reclassified to leasing equipment, and
 
 
Collectability is evaluated, taking into consideration equipment book value and the total outstanding receivable, as well as the likelihood of collection through the recovery of equipment.
 
The adequacy of our provision for doubtful accounts is provided based upon a monthly review of the collectability of our receivables. This review is based on the risk profile of the receivables, credit quality indicators such as the level of past-due amounts and economic conditions, as well as the value of underlying collateral in the case of direct financing lease receivables.
 
 
(a) Disclosure Controls and Procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2011.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2011, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
 
(b) Changes in Internal Control Over Financial Reporting.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
 
 
-26-

 
 

Legal Proceedings

We have been, and may from time to time be, involved in litigation and claims incidental to the conduct of our business in the ordinary course. Our industry is also subject to scrutiny by government regulators, which could result in enforcement proceedings or litigation related to regulatory compliance matters. We maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. As of the date of this Form 10-Q, we are not a party to any material legal or adverse regulatory proceedings.

Risk Factors