Attached files

file filename
EX-32.2 - CERTIFICATION BY CHIEF FINANCIAL OFFICER - TAL International Group, Inc.exhibit3229-30x2015.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - TAL International Group, Inc.exhibit3119-30x2015.htm
EX-32.1 - CERTIFICATION BY CHIEF EXECUTIVE OFFICER - TAL International Group, Inc.exhibit3219-30x2015.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - TAL International Group, Inc.exhibit3129-30x2015.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2015
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- 001-32638
TAL International Group, Inc.
(Exact name of registrant as specified in the charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
20-1796526
(I.R.S. Employer
Identification Number)
 
 
 
100 Manhattanville Road, Purchase, New York
(Address of principal executive office)
 
10577-2135
(Zip Code)
 
 
 
(914) 251-9000
(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 requirement for the past 90 days. Yes ý    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 ý    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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ý
 
Accelerated Filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). YES o    NO ý
As of October 23, 2015, there were 33,255,291 shares of the Registrant's common stock, $0.001 par value outstanding.
 




TAL International Group, Inc.
Index
 
 
Page No.
 
 
 
 
 

2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the Securities and Exchange Commission, or SEC, or in connection with oral statements made to the press, potential investors or others. All statements, other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "expect," "estimate," "anticipate," "predict," "believe," "think," "plan," "will," "should," "intend," "seek," "potential" and similar expressions and variations are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Forward-looking statements in this report are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those described in the forward-looking statements, including, but not limited to, the risks and uncertainties described in the section entitled "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on February 19, 2015, in this report as well as in the other documents we file with the SEC from time to time, and such risks and uncertainties are specifically incorporated herein by reference.
Forward-looking statements speak only as of the date the statements are made. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. We caution you not to unduly rely on the forward-looking statements when evaluating the information presented in this report.
PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

The consolidated financial statements of TAL International Group, Inc. ("TAL" or the "Company") as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and September 30, 2014 included herein have been prepared by the Company, without audit, pursuant to U.S. generally accepted accounting principles and the rules and regulations of the SEC. In addition, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the results for the interim periods. The results of operations for such interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC, on February 19, 2015 from which the accompanying December 31, 2014 Balance Sheet information was derived, and our other reports filed with the SEC through the current date pursuant to the Exchange Act.

3


TAL INTERNATIONAL GROUP, INC.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS:
 
 
 
Leasing equipment, net of accumulated depreciation and allowances of $1,178,845 and $1,055,864
$
3,856,833

 
$
3,674,031

Net investment in finance leases, net of allowances of $844 and $1,056
202,078

 
219,872

Equipment held for sale
67,480

 
59,861

Revenue earning assets
4,126,391

 
3,953,764

Unrestricted cash and cash equivalents
66,817

 
79,132

Restricted cash
31,185

 
35,649

Accounts receivable, net of allowances of $1,250 and $978
84,883

 
85,681

Goodwill
74,523

 
74,523

Deferred financing costs
27,015

 
32,937

Other assets
12,967

 
11,400

Fair value of derivative instruments
86

 
1,898

Total assets
$
4,423,867

 
$
4,274,984

LIABILITIES AND STOCKHOLDERS' EQUITY:
 
 
 
Equipment purchases payable
$
12,572

 
$
88,336

Fair value of derivative instruments
34,019

 
10,394

Accounts payable and other accrued expenses
54,428

 
57,877

Net deferred income tax liability
443,962

 
411,007

Debt
3,222,149

 
3,040,842

Total liabilities
3,767,130

 
3,608,456

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 37,167,134 and 37,006,283 shares issued respectively
37

 
37

Treasury stock, at cost, 3,911,843 and 3,829,928 shares
(75,310
)
 
(71,917
)
Additional paid-in capital
509,960

 
504,891

Accumulated earnings
249,874

 
246,766

Accumulated other comprehensive (loss)
(27,824
)
 
(13,249
)
Total stockholders' equity
656,737

 
666,528

Total liabilities and stockholders' equity
$
4,423,867

 
$
4,274,984

   



The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.

4


TAL INTERNATIONAL GROUP, INC.
Consolidated Statements of Income
(Dollars and shares in thousands, except earnings per share)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Leasing revenues:
 
 
 
 
 
 
 
Operating leases
$
150,471

 
$
145,613

 
$
441,608

 
$
424,432

Finance leases
3,807

 
4,441

 
11,718

 
14,118

Other revenues
148

 
470

 
913

 
1,464

Total leasing revenues
154,426

 
150,524

 
454,239

 
440,014

 
 
 
 
 
 
 
 
Equipment trading revenues
15,360

 
13,745

 
48,683

 
45,026

Equipment trading expenses
(14,169
)
 
(12,032
)
 
(44,557
)
 
(39,450
)
Trading margin
1,191

 
1,713

 
4,126

 
5,576

 
 
 
 
 
 
 
 
Net (loss) gain on sale of leasing equipment
(2,854
)
 
870

 
(4,963
)
 
6,427

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation and amortization
61,711

 
57,198

 
180,116

 
165,238

Direct operating expenses
13,002

 
8,287

 
31,835

 
25,236

Administrative expenses
10,962

 
11,317

 
34,311

 
34,277

Provision for doubtful accounts
256

 
22

 
68

 
58

Total operating expenses
85,931

 
76,824

 
246,330

 
224,809

Operating income
66,832

 
76,283

 
207,072

 
227,208

Other expenses:
 
 
 
 
 
 
 
Interest and debt expense
30,477

 
26,695

 
89,322

 
81,202

Write-off of deferred financing costs
895

 
173

 
895

 
5,072

Net loss (gain) on interest rate swaps
662

 
(545
)
 
1,014

 
410

Total other expenses
32,034

 
26,323

 
91,231

 
86,684

Income before income taxes
34,798

 
49,960

 
115,841

 
140,524

Income tax expense
12,287

 
17,343

 
40,903

 
48,534

Net income
$
22,511

 
$
32,617

 
$
74,938

 
$
91,990

Net income per common share—Basic
$
0.69

 
$
0.97

 
$
2.28

 
$
2.74

Net income per common share—Diluted
$
0.68

 
$
0.97

 
$
2.27

 
$
2.72

Cash dividends paid per common share
$
0.72

 
$
0.72

 
$
2.16

 
$
2.16

Weighted average number of common shares outstanding—Basic
32,860

 
33,594

 
32,860

 
33,607

Dilutive stock options and restricted stock
94

 
201

 
129

 
168

Weighted average number of common shares outstanding—Diluted
32,954

 
33,795

 
32,989

 
33,775

   
The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.

5


TAL INTERNATIONAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
22,511

 
$
32,617

 
$
74,938

 
$
91,990

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of derivative instruments designated as cash flow hedges (net of income tax effect of $(12,185), $(516), $(13,755) and $(8,766), respectively)
(22,421
)
 
(1,051
)
 
(25,276
)
 
(16,303
)
Reclassification of realized loss on interest rate swap agreements designated as cash flow hedges (net of income tax effect of $1,733, $1,326, $5,181 and $3,339, respectively)
3,174

 
2,546

 
9,490

 
6,386

Amortization of loss on terminated derivative instruments designated as cash flow hedges (net of income tax effect of $228, $102, $705 and $619, respectively)
418

 
186

 
1,296

 
1,132

Foreign currency translation adjustment
(170
)
 
(234
)
 
(85
)
 
(54
)
Other comprehensive (loss) income, net of tax
(18,999
)
 
1,447

 
(14,575
)
 
(8,839
)
Comprehensive income
$
3,512

 
$
34,064

 
$
60,363

 
$
83,151

   

















The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.

6


TAL INTERNATIONAL GROUP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
74,938

 
$
91,990

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
180,116

 
165,238

Amortization of deferred financing costs
5,788

 
5,799

Amortization of net loss on terminated derivative instruments designated as cash flow hedges
2,001

 
1,751

Amortization of lease premiums
2,250

 

Net loss (gain) on sale of leasing equipment
4,963

 
(6,427
)
Net loss on interest rate swaps
1,014

 
410

Write-off of deferred financing costs
895

 
5,072

Deferred income taxes
40,903

 
48,533

Stock compensation charge
5,031

 
4,700

Changes in operating assets and liabilities:
 
 
 
Net equipment purchased for resale activity
(7,000
)
 
(6,335
)
Net realized gain on interest rate swaps terminated prior to their contractual maturities 

 
7,408

Other changes in operating assets and liabilities
1,327

 
(16,485
)
Net cash provided by operating activities
312,226

 
301,654

Cash flows from investing activities:
 
 
 
Purchases of leasing equipment and investments in finance leases
(561,687
)
 
(547,555
)
Proceeds from sale of equipment, net of selling costs
95,556

 
117,351

Cash collections on finance lease receivables, net of income earned
32,051

 
36,269

Other
(35
)
 
(108
)
Net cash (used in) investing activities
(434,115
)
 
(394,043
)
Cash flows from financing activities:
 
 
 
Purchases of treasury stock
(4,446
)
 
(7,690
)
Stock options exercised and stock related activity
38

 
(234
)
Financing fees paid under debt facilities
(761
)
 
(9,074
)
Borrowings under debt facilities
555,000

 
1,225,935

Payments under debt facilities and capital lease obligations
(373,750
)
 
(1,039,021
)
Decrease (increase) in restricted cash
4,464

 
(352
)
Common stock dividends paid
(70,971
)
 
(72,617
)
Net cash provided by financing activities
109,574

 
96,947

Net (decrease) increase in unrestricted cash and cash equivalents
$
(12,315
)
 
$
4,558

Unrestricted cash and cash equivalents, beginning of period
79,132

 
68,875

Unrestricted cash and cash equivalents, end of period
$
66,817

 
$
73,433

Supplemental non-cash investing activities:
 
 
 
Equipment purchases payable
$
12,572

 
$
68,228

   
The accompanying notes to the unaudited consolidated financial statements are
an integral part of these statements.

7

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Note 1—Description of the Business, Basis of Presentation and Recently Adopted Accounting Pronouncements
A.    Description of the Business
TAL International Group, Inc. ("TAL" or the "Company") leases intermodal transportation equipment, primarily maritime containers, and provides maritime container management services, through a worldwide network of offices, third party depots and other facilities. The Company operates in both international and domestic markets. The majority of the Company's business is derived from leasing its containers to shipping line customers through a variety of long-term and short-term contractual lease arrangements. The Company also sells its own containers and containers purchased from third parties for resale. TAL also enters into management agreements with third party container owners under which the Company manages the leasing and selling of containers on behalf of the third party owners.
B.    Basis of Presentation
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the accompanying prior period financial statements and notes to conform to the current year's presentation.
C.    New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09 ("ASU No. 2014-09"), Revenue from Contracts with Customers (Topic 606). This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. Leasing revenue recognition is specifically excluded from this ASU, and therefore, the new standard will only apply to Equipment Trading revenues and sales of leasing equipment. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which defers by one year the effective date of ASU 2014-09 until reporting periods beginning after December 15, 2017, including interim periods within that annual period. Earlier application is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-15 ("ASU No. 2014-15"), Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This standard requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued and to disclose those conditions if management has concluded that substantial doubt exists. Subsequent to adoption, this guidance will need to be applied by management at the end of each annual period and interim period therein to determine what, if any, impact there will be on the Consolidated Financial Statements in a given reporting period. These changes become effective for the Company for the 2016 annual period. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements as this standard is disclosure only.

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-03 ("ASU No. 2015-03"), Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs. This standard changes the presentation of debt issuance costs in the financial statements but does not affect the recognition and measurement of debt issuance costs. The ASU specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note and that amortization of debt issuance costs also shall be reported as interest expense. The ASU’s basis for conclusions observes that in practice, debt issuance costs incurred before the associated funding is received (i.e., before the issuance of the debt liability) are deferred on the balance sheet until that debt liability amount is recorded. These changes will become effective for the Company beginning after December 15, 2015. The Company believes that the adoption of ASU No. 2015-03 will have no impact on its income or cash flows and no material impact on its financial position.

8

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Description of the Business, Basis of Presentation and Recently Adopted Accounting Pronouncements (Continued)
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-15 ("ASU No. 2015-15"), Imputation of Interest (Topic 835): Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Agreements. This standard updates ASU No. 2015-03 which was issued in April, 2015, as ASU No. 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance with ASU No. 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These changes will become effective for the Company beginning after December 15, 2015. The Company is planning on presenting all debt issuance costs in conjunction with ASU No. 2015-03, which is effective beginning after December 15, 2015.
Note 2—Fair Value of Financial Instruments
The Company believes that the carrying amounts of its cash and cash equivalents, accounts receivable, equipment purchases payable, and accounts payable approximated their fair value as of September 30, 2015 and December 31, 2014.
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following fair value hierarchy when selecting inputs for its valuation techniques, with the highest priority given to Level 1:
Level 1—Financial assets and liabilities whose values are based on observable inputs such as quoted prices for identical instruments in active markets (unadjusted).
Level 2—Financial assets and liabilities whose values are based on observable inputs such as (i) quoted prices for similar instruments in active markets; (ii) quoted prices for identical or similar instruments in markets that are not active; or (iii) model-derived valuations in which all significant inputs are observable in active markets.
Level 3—Financial assets and liabilities whose values are derived from valuation techniques based on one or more significant unobservable inputs.
The Company does not measure net investment in finance leases or debt at fair value in its consolidated balance sheets. The fair value, which was measured using Level 2 inputs, and the carrying value of the Company's net investment in finance leases and debt are listed in the table below as of the dates indicated (in thousands):
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Net investment in finance leases - carrying value
$
202,922

 
$
220,928

Net investment in finance leases - estimated fair value
$
209,112

 
$
223,455

Liabilities
 
 
 
Debt—carrying value
$
3,222,149

 
$
3,040,842

Debt—estimated fair value
$
3,257,848

 
$
3,060,790

The Company estimated the fair value of its net investment in finance leases and debt instruments based on the net present value of its future receipts or payments, using a discount rate which reflects the Company's estimate of current market interest rates and spreads as of the balance sheet date.

9

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3—Dividends and Treasury Stock
Dividends
The Company paid the following quarterly dividends during the nine months ended September 30, 2015 and 2014 on its issued and outstanding common stock:
Record Date
Payment
Date
 
Aggregate
Payment
 
Per Share
Payment
September 2, 2015
September 23, 2015
 
$23.7 Million
 
$0.72
June 3, 2015
June 24, 2015
 
$23.7 Million
 
$0.72
March 3, 2015
March 24, 2015
 
$23.7 Million
 
$0.72
September 3, 2014
September 24, 2014
 
$24.2 Million
 
$0.72
June 3, 2014
June 24, 2014
 
$24.2 Million
 
$0.72
March 3, 2014
March 24, 2014
 
$24.2 Million
 
$0.72
Treasury Stock
In the first quarter of 2015, TAL repurchased 81,915 shares at an average price of $41.40 under TAL's 2006 stock repurchase program. On February 11, 2015, TAL's Board of Directors authorized a new share repurchase program of up to 3,000,000 of its outstanding shares. These shares augmented the remaining 88,157 shares authorized for purchase under TAL's 2006 stock repurchase program. TAL had no repurchases of shares under these programs during the second and third quarters of 2015. No time limit was set for the completion of the repurchase program. As of September 30, 2015, 3,088,157 shares may yet be purchased under the 2006 and the 2015 stock buyback programs. See Note 11, "Subsequent Events" for further information on the Company's stock repurchase program.
Note 4—Capital Stock and Stock Options
Stock Based Compensation Plans
The Company records compensation cost relating to stock based payment transactions in accordance with ASC 718. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award) on a straight-line basis.
The Company recognized compensation costs in administrative expenses related to restricted shares granted in 2013, 2014 and 2015 under the Company's stock-based compensation plans of $1.6 million and $1.3 million during the three months ended September 30, 2015 and 2014, respectively and $5.0 million and $4.7 million during the nine months ended September 30, 2015 and 2014, respectively.
Total unrecognized compensation costs of approximately $7.3 million as of September 30, 2015 related to restricted shares granted during 2013, 2014 and 2015 will be recognized over the remaining weighted average vesting period of approximately 1.8 years.
The Company's stock-based compensation plans consist of the 2014 Equity Incentive Plan and the 2005 Management Omnibus Incentive Plan. Following the approval by the Company's shareholders of the 2014 Equity Incentive Plan in April 2014, no further grants will be made under the 2005 Management Omnibus Incentive Plan but the terms of the 2005 Management Omnibus Incentive Plan continue to apply to awards previously granted under the plan.






10

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4—Capital Stock and Stock Options (Continued)
Accumulated Other Comprehensive (Loss)
Accumulated other comprehensive (loss) consisted of the following as of the dates indicated (in thousands and net of tax effects):
 
Cash Flow
Hedges
 
Foreign
Currency
Translation
 
Accumulated Other Comprehensive (Loss) Income
Balance as of December 31, 2014
$
(12,145
)
 
$
(1,104
)
 
$
(13,249
)
Change in fair value of derivative instruments designated as cash flow hedges
(25,276
)
 

 
(25,276
)
Reclassification of realized loss on interest rate swap agreements designated as cash flow hedges
9,490

 

 
9,490

Amortization of net loss on derivative instruments previously designated as cash flow hedges
1,296

 

 
1,296

Foreign currency translation adjustment

 
(85
)
 
(85
)
Other comprehensive (loss)
(14,490
)
 
(85
)
 
(14,575
)
Balance as of September 30, 2015
$
(26,635
)
 
$
(1,189
)
 
$
(27,824
)
 
Cash Flow
Hedges
 
Foreign
Currency
Translation
 
Accumulated Other Comprehensive Income (Loss)
Balance as of December 31, 2013
$
10,959

 
$
(889
)
 
$
10,070

Change in fair value of derivative instruments designated as cash flow hedges
(16,303
)
 

 
(16,303
)
Reclassification of realized loss on interest rate swap agreements designated as cash flow hedges
6,386

 

 
6,386

Amortization of net loss on derivative instruments previously designated as cash flow hedges
1,132

 

 
1,132

Foreign currency translation adjustment

 
(54
)
 
(54
)
Other comprehensive (loss)
(8,785
)
 
(54
)
 
(8,839
)
Balance as of September 30, 2014
$
2,174

 
$
(943
)
 
$
1,231

The following table presents reclassifications out of Accumulated other comprehensive (loss) for the period indicated (in thousands):
 
Amounts Reclassified From Accumulated Other Comprehensive (Loss)
Affected Line Item
in the Consolidated
Statements of Income
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Realized loss on interest rate swap agreements, designated as cash flow hedges
$
4,907

 
$
3,872

 
$
14,671

 
$
9,725

Interest and debt expense
Amortization of net loss on derivative instruments previously designated as cash flow hedges
646

 
288

 
2,001

 
1,751

Interest and debt expense
Amounts reclassified from Accumulated other comprehensive (loss)
5,553

 
4,160

 
16,672

 
11,476

Income before income taxes
Income tax (benefit)
(1,961
)
 
(1,428
)
 
(5,886
)
 
(3,958
)
Income tax expense
Amounts reclassified from Accumulated other comprehensive (loss)
$
3,592

 
$
2,732

 
$
10,786

 
$
7,518

Net income

11

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5—Net Investment in Finance Leases
The following table represents the components of the net investment in finance leases (in thousands):
 
September 30,
2015
 
December 31,
2014
Gross finance lease receivables
$
241,668

 
$
267,720

Allowance on gross finance lease receivables
(844
)
 
(1,056
)
Gross finance lease receivables, net of allowance
240,824

 
266,664

Unearned income
(38,746
)
 
(46,792
)
Net investment in finance leases
$
202,078

 
$
219,872

The Company evaluates potential losses in its finance lease portfolio by regularly reviewing the specific receivables in the portfolio and analyzing historical loss experience. The Company's historical loss experience on its gross finance lease receivables, after considering equipment recoveries, was less than 1%. Net investment in finance lease receivables is generally charged off after an analysis is completed which indicates that collection of the full balance is remote.
In order to estimate its allowance for losses contained in the gross finance lease receivables, the Company categorizes the credit worthiness of the receivables in the portfolio based on internal customer credit ratings, which are reviewed and updated, as appropriate, on an ongoing basis. The internal customer credit ratings are developed based on a review of the financial performance and condition, operating environment, geographical location and trade routes of our customers.
The categories of gross finance lease receivables based on the Company's internal customer credit ratings can be described as follows:
        Tier 1—These customers are typically large international shipping lines who have been in business for many years and have world class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management, which provides TAL with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to modest.
        Tier 2—These customers are typically either smaller shipping lines with less operating scale or shipping lines with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.
        Tier 3—Customers in this category exhibit volatility in payments on a regular basis, thus they are considered non-performing. The Company has initiated or implemented plans to recover equipment on lease to these customers and believes that default is likely, or has already occurred.
Based on the above categories, the Company's gross finance lease receivables are as follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Tier 1
$
190,093

 
$
244,136

Tier 2
51,575

 
23,584

Tier 3

 

Gross finance lease receivables
$
241,668

 
$
267,720

The Company considers an account past due when a payment has not been received in accordance with the terms of the related lease agreement. As of September 30, 2015, approximately $1.6 million of the Company's Tier 1 and $0.2 million of the Company's Tier 2 gross finance lease receivables were past due, substantially all of which were aged approximately 31 days. As of September 30, 2015, none of the Company's gross finance lease receivables were in non-accrual status. The Company categorizes customers as non-accrual based on the credit ratings described above and recognizes income on gross finance lease receivables in non-accrual status as collections are made.

12

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5—Net Investment in Finance Leases (Continued)
The following table represents the activity of the Company's allowance on gross finance lease receivables for the periods presented (in thousands):
 
Beginning
Balance
 
Additions/
(Reversals)
 
Ending
Balance
Finance Lease—Allowance for doubtful accounts:
 
 
 
 
 
For the nine months ended
 
 
 
 
 
September 30, 2015
$
1,056

 
$
(212
)
 
$
844

Note 6—Debt
Debt consisted of the following (amounts in thousands):
 
September 30,
2015
 
December 31,
2014
Asset backed securitization (ABS) term notes
$
1,212,171

 
$
1,504,183

Term loan facilities
961,633

 
858,973

Asset backed warehouse facility
610,000

 
420,000

Revolving credit facilities
365,000

 
160,000

Capital lease obligations
73,345

 
97,686

Total Debt
$
3,222,149

 
$
3,040,842

As of September 30, 2015, the Company had $1,361.6 million of debt outstanding on facilities with fixed interest rates and $1,860.5 million of debt outstanding on facilities with interest rates based on floating rate indices (primarily LIBOR). The Company economically hedges the risks associated with fluctuations in interest rates on a portion of its floating rate borrowings by entering into interest rate swap agreements that convert a portion of its floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. As of September 30, 2015, the Company had interest rate swaps in place with a net notional amount of $1,135.0 million to fix the floating interest rates on a portion of its floating rate debt obligations.
The Company is subject to certain financial covenants under its debt facilities, and as of September 30, 2015, was in compliance with all such covenants.

Asset Backed Securitization Term Notes

On July 20, 2015, TAL Advantage IV LLC, an indirect wholly owned subsidiary of TAL International Group, Inc., prepaid all of the $100.1 million outstanding principal balance of the TAL Advantage IV LLC Series 2010-1 Notes.




13

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Derivative Instruments
Interest Rate Swaps
The Company has entered into interest rate swap agreements to manage interest rate risk exposure. The majority of interest rate swap agreements utilized by TAL effectively modify the Company's exposure to interest rate risk by converting a portion of its floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Such agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the lives of the agreements without an exchange of the underlying principal amounts. In limited instances, the Company has also entered into interest rate swap agreements that involve the receipt of fixed rate amounts in exchange for floating rate interest payments. The counterparties to the Company's interest rate swap agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap agreements, the Company's exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the agreements. The Company does not anticipate any non-performance by the counterparties. Substantially all of the assets of certain indirect, wholly owned subsidiaries of the Company have been pledged as collateral for the underlying indebtedness and the amounts payable under the interest rate swap agreements for each of these entities. In addition, certain assets of TAL International Container Corporation, a direct wholly owned subsidiary of the Company, are pledged as collateral for various credit facilities and the amounts payable under certain interest rate swap agreements.
As of September 30, 2015, the Company had net interest rate swap agreements in place to fix the floating interest rates on a portion of the borrowings under its debt facilities as summarized below:
Net Notional
Amount(1)
 
Weighted Average
Fixed Leg (Pay) Interest Rate(2)
 
Weighted Average
Remaining Term(2)
$1,135 Million
 
2.00%
 
6.8 years
_______________________________________________________________________________

(1)
As of September 30, 2015, the net notional amount outstanding on the Company's interest rate swap agreements is comprised of $1,235.0 million of pay-fixed rate/receive-floating rate agreements and $100.0 million of pay-floating rate/receive-fixed rate agreements. The Company entered into the pay-floating rate/receive-fixed rate agreements at the parent company level to offset the cash flows on certain pay-fixed rate/receive-floating rate agreements of certain wholly owned subsidiaries. The pay-floating rate/receive-fixed rate and pay-fixed rate/receive-floating rate agreements have terms that offset each other.

(2)
The calculations of weighted average fixed (pay) leg interest rate and weighted average remaining term on the Company's interest rate swap agreements reflect the impact of the pay-floating rate/receive-fixed rate agreements and the pay-fixed rate/receive-floating rate agreements they offset.

The following table represents pre-tax amounts in accumulated other comprehensive (loss) related to interest rate swap agreements (in millions) expected to be recognized in income over the next 12 months:
 
Nine Months Ended September 30, 2015
Loss on derivative instruments designated as cash flow hedges

($17.0
)
Amortization of loss on terminated derivative instruments designated as cash flow hedges

($2.3
)

14

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7—Derivative Instruments (Continued)
Amounts recorded in accumulated other comprehensive (loss) attributable to these terminated interest rate swap agreements may be recognized in earnings immediately in conjunction with a termination of the related debt balances.
Fair Value of Derivative Instruments
Under the criteria established by ASC 820, the Company has elected to use the income approach to value its interest rate swap and foreign currency rate swap agreements, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. The Level 2 inputs for the interest rate swap and forward valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts and spot currency rates) and inputs other than quoted prices that are observable for the asset or liability (specifically forward currency points, LIBOR cash and swap rates, basis swap adjustments and credit risk at commonly quoted intervals).
Location of Derivative Instruments in Financial Statements
 
 
Fair Value of Derivative Instruments
(In Millions)
 
 
Asset Derivatives
 
Liability Derivatives
 
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
Derivative Instrument
Balance Sheet Location
Fair
Value
 
Fair
Value
 
Fair
Value
 
Fair
Value
Interest rate swap contracts, designated as cash flow hedges
Fair value of derivative instruments
$

 
$
1.7

 
$
32.0

 
$
9.4

Interest rate swap contracts, not designated
Fair value of derivative instruments
0.1

 
0.1

 
2.0

 
1.0

Foreign exchange contracts, not designated
Fair value of derivative instruments

 
0.1

 

 

Total derivatives
$
0.1

 
$
1.9

 
$
34.0

 
$
10.4

 
 
Effect of Derivative Instruments on Consolidated Statements of Income and Consolidated Statements of Comprehensive Income
(In Millions)
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
Location of Loss (Gain) on
Derivative Instruments

2015
 
2014
 
2015
 
2014
Realized loss on interest rate swap agreements
Interest and debt expense
$
5.2

 
$
4.2

 
$
15.5

 
$
10.6

Amortization of realized net loss on terminated derivative instruments, designated as cash flow hedges
Interest and debt expense
0.6

 
0.3

 
2.0

 
1.8

Change in fair value of derivatives, designated as cash flow hedges
Other comprehensive income
34.6

 
1.6

 
39.0

 
25.1

Net loss (gain) on interest rate swaps, not designated
Net loss (gain) on interest rate swaps
0.7

 
(0.5
)
 
1.0

 
0.4

Foreign exchange agreements, not designated
Administrative expenses

 

 

 
0.1


15

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Segment and Geographic Information
Industry Segment Information
The Company conducts its business activities in one industry, intermodal transportation equipment, and has two reporting segments:
Equipment leasing—the Company owns, leases and ultimately disposes of containers and chassis from its lease fleet, as well as manages leasing activities for containers owned by third parties.

Equipment trading—the Company purchases containers from shipping line customers, and other sellers of containers, and resells these containers to container retailers and users of containers for storage or one-way shipment. Included in the Equipment trading segment revenues are leasing revenues from equipment purchased for resale that is currently on lease until the containers are dropped off.
The following tables show segment information for the periods indicated and the consolidated totals reported (dollars in thousands):
 
Three Months Ended September 30,
 
2015
 
2014
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
Total leasing revenues
$
151,698

 
$
2,728

 
$
154,426

 
$
147,502

 
$
3,022

 
$
150,524

Trading margin

 
1,191

 
1,191

 

 
1,713

 
1,713

Net (loss) gain on sale of leasing equipment
(2,854
)
 

 
(2,854
)
 
870

 

 
870

Depreciation and amortization expense
61,226

 
485

 
61,711

 
56,914

 
284

 
57,198

Interest and debt expense
29,972

 
505

 
30,477

 
26,190

 
505

 
26,695

Income before income taxes(1)
33,768

 
2,587

 
36,355

 
45,928

 
3,660

 
49,588

_______________________________________________________________________
(1)
Segment income before income taxes excludes net losses on interest rate swaps of $0.7 million and net gains on interest rate swaps of $0.5 million for the three months ended September 30, 2015 and 2014, respectively, and the write-off of deferred financing costs of $0.9 million and $0.2 million for the three months ended September 30, 2015 and 2014, respectively.

 
Nine Months Ended September 30,
 
2015
 
2014
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
Total leasing revenues
$
446,473

 
$
7,766

 
$
454,239

 
$
430,192

 
$
9,822

 
$
440,014

Trading margin

 
4,126

 
4,126

 

 
5,576

 
5,576

Net (loss) gain on sale of leasing equipment
(4,963
)
 

 
(4,963
)
 
6,427

 

 
6,427

Depreciation and amortization expense
179,095

 
1,021

 
180,116

 
164,227

 
1,011

 
165,238

Interest and debt expense
87,726

 
1,596

 
89,322

 
79,464

 
1,738

 
81,202

Income before income taxes(1)
109,458

 
8,292

 
117,750

 
134,253

 
11,753

 
146,006

Equipment held for sale at September 30
28,355

 
39,125

 
67,480

 
29,529

 
19,400

 
48,929

Goodwill at September 30
73,523

 
1,000

 
74,523

 
73,523

 
1,000

 
74,523

Total assets at September 30
4,349,159

 
74,708

 
4,423,867

 
4,169,668

 
61,169

 
4,230,837

Purchases of leasing equipment and investments in finance leases(2)
547,418

 
14,269

 
561,687

 
544,709

 
2,846

 
547,555

_______________________________________________________________________________

(1)
Segment income before income taxes excludes net losses on interest rate swaps of $1.0 million and $0.4 million for the nine months ended September 30, 2015 and 2014, respectively, and the write-off of deferred financing costs of $0.9 million and $5.1 million for the nine months ended September 30, 2015 and 2014, respectively.


16

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Segment and Geographic Information (Continued)

(2)
Represents cash disbursements for purchases of leasing equipment and investments in finance lease as reflected in the consolidated statements of cash flows for the periods indicated, but excludes cash flows associated with the purchase of equipment held for resale.
There are no intercompany revenues or expenses between segments. Additionally, certain administrative expenses have been allocated between segments based on an estimate of services provided to each segment. A portion of the Company's equipment purchased for resale was purchased through certain sale-leaseback transactions with our shipping line customers. Due to the expected longer term nature of these transactions, these purchases are reflected as leasing equipment as opposed to equipment held for sale and the cash flows associated with these transactions are reflected as purchases of leasing equipment and proceeds from the sale of equipment in investing activities in the Company's consolidated statements of cash flows.
Geographic Segment Information
The Company earns most of its leasing revenues from international containers which are deployed by its customers in a wide variety of global trade routes. Substantially all of the Company's leasing related revenue is denominated in U.S. dollars. The following table represents the geographic allocation of equipment leasing revenues for the periods indicated based on customers' primary domicile (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Total leasing revenues:
 
 
 
 
 
 
 
United States of America
$
10,876

 
$
8,410

 
$
32,012

 
$
24,585

Asia
73,218

 
72,232

 
213,560

 
201,491

Europe
66,358

 
65,593

 
197,181

 
196,445

Other International
3,974

 
4,289

 
11,486

 
17,493

Total
$
154,426

 
$
150,524

 
$
454,239

 
$
440,014

As most of the Company's containers are used internationally, where no one container is domiciled in one particular place for a prolonged period of time, substantially all of the Company's long-lived assets are considered to be international.
The following table represents the geographic allocation of equipment trading revenues for the periods indicated based on the location of sale (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Total equipment trading revenues:
 
 
 
 
 
 
 
United States of America
$
2,992

 
$
2,574

 
$
9,152

 
$
5,646

Asia
7,546

 
6,732

 
20,158

 
22,984

Europe
3,037

 
3,650

 
9,830

 
14,348

Other International
1,785

 
789

 
9,543

 
2,048

Total
$
15,360

 
$
13,745

 
$
48,683

 
$
45,026


17

TAL INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9—Commitments and Contingencies
Residual Value Guarantees
During 2008, the Company entered into commitments for equipment residual value guarantees in connection with certain finance leases that were sold or brokered to financial institutions. The guarantees represent the Company's commitment that these assets will be worth a specified amount at the end of certain lease terms (if the lessee does not default on the lease) which expire in 2016. At September 30, 2015, the maximum potential amount of the guarantees under which the Company could be required to perform was approximately $27.1 million. The carrying values of the guarantees of $1.1 million have been deferred and are included in accounts payable and accrued expenses. Under the criteria established by ASC 820, the Company performed fair value measurements of the guarantees at origination using Level 2 inputs, which were based on significant other observable inputs other than quoted prices, either on a direct or indirect basis. The Company accounts for the residual value guarantees under Accounting Standards Codification 460, Guarantees. The Company expects that the market value of the equipment covered by the guarantees will equal or exceed the value of the guarantees and therefore, no contingent loss has been provided as of September 30, 2015.
Purchase Commitments
At September 30, 2015, commitments for capital expenditures totaled approximately $4.2 million.
Note 10—Income Taxes
The consolidated income tax expense for the three and nine months ended September 30, 2015 and 2014 was determined based upon estimates of the Company's consolidated effective income tax rates for the year ending December 31, 2015 and the year ended December 31, 2014. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes and the effect of certain permanent differences.
Note 11—Subsequent Events
Quarterly Dividend
On October 28, 2015, the Company's Board of Directors approved and declared a $0.45 per share quarterly cash dividend on its issued and outstanding common stock, payable on December 23, 2015 to shareholders of record at the close of business on December 2, 2015.
Stock Repurchase Program
On October 28, 2015, TAL’s Board of Directors authorized the repurchase of shares of common stock with an aggregate value of up to $150 million. This repurchase program replaces the February 11, 2015 and March 13, 2006 share repurchase programs which were terminated. Repurchases may be made from time to time at TAL's discretion, based on ongoing assessments of the capital needs of the business, the market price of TAL's common stock and general market and other conditions.





18


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of the consolidated financial condition and results of operations of TAL International Group, Inc. and its subsidiaries should be read in conjunction with related consolidated financial data and our annual audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 19, 2015. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described herein and under "Risk Factors" and "Forward-Looking Statements" in our Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our Company
We are one of the world's largest and oldest lessors of intermodal containers and chassis. Intermodal containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Because of the handling efficiencies they provide, intermodal containers are the primary means by which many goods and materials are shipped internationally. Chassis are used for the transportation of containers domestically.
We operate our business in one industry, intermodal transportation equipment, and have two business segments:
Equipment leasing—we own, lease and ultimately dispose of containers and chassis from our lease fleet, as well as manage containers owned by third parties.

Equipment trading—we purchase containers from shipping line customers, and other sellers of containers, and resell these containers to container retailers and users of containers for storage or one-way shipment.
Operations
Our operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of September 30, 2015, our total fleet consisted of 1,493,023 containers and chassis, representing 2,449,765 twenty-foot equivalent units (TEU). We have an extensive global presence, offering leasing services through 17 offices in 11 countries and approximately 230 third party container depot facilities in approximately 40 countries as of September 30, 2015. Our customers are among the largest shipping lines in the world. For the nine months ended September 30, 2015, our twenty largest customers accounted for 82% of our leasing revenues, our five largest customers accounted for 55% of our leasing revenues, and our largest customer, CMA CGM, accounted for 16% of our leasing revenues.

19


The following tables provide the composition of our equipment fleet as of the dates indicated (in units, TEU and cost-equivalent units, or "CEU"):
 
Equipment Fleet in Units(1)
 
Equipment Fleet in TEU(1)
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Dry
1,313,912

 
1,189,707

 
1,191,425

 
2,131,165

 
1,928,482

 
1,931,344

Refrigerated
66,898

 
65,010

 
65,798

 
127,142

 
123,342

 
125,731

Special
56,179

 
56,180

 
56,932

 
102,677

 
102,065

 
103,395

Tank
11,249

 
9,282

 
9,542

 
11,249

 
9,282

 
9,542

Chassis
21,231

 
19,116

 
13,412

 
38,236

 
33,877

 
23,910

Equipment leasing fleet
1,469,469

 
1,339,295

 
1,337,109

 
2,410,469

 
2,197,048

 
2,193,922

Equipment trading fleet
23,554

 
32,448

 
30,645

 
39,296

 
52,571

 
50,915

Total
1,493,023

 
1,371,743

 
1,367,754

 
2,449,765

 
2,249,619

 
2,244,837

 
Equipment Fleet in CEU(1)
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Operating leases
2,702,373

 
2,475,518

 
2,456,287

Finance leases
208,038

 
197,537

 
211,081

Equipment trading fleet
105,284

 
105,229

 
109,757

Total
3,015,695

 
2,778,284

 
2,777,125

_______________________________________________________________________________
(1) As of September 30, 2015, the Company had 1.0%, 1.1%, and 0.8% of managed equipment in units, TEU, and CEU, respectively.                                 
In the equipment fleet tables above, we have included total fleet count information based on CEU. CEU is a ratio used to convert the actual number of containers in our fleet to a figure based on the relative purchase prices of our various equipment types to that of a 20 foot dry container. For example, the CEU ratio for a 40 foot standard height dry container is 1.6, and a 40 foot high cube refrigerated container is 10.0. The CEU ratios used in this calculation are from our debt agreements and may differ slightly from current actual cost ratios and CEU ratios used by others in the industry.
We lease five types of equipment: (1) dry freight containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, (2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, (3) special containers, which are used for heavy and over-sized cargo such as marble slabs, building products and machinery, (4) tank containers, which are used to transport bulk liquid products such as chemicals, and (5) chassis, which are used for the transportation of containers domestically. Our in-house equipment sales group manages the sale process for our used containers and chassis from our equipment leasing fleet and buys and sells used and new containers and chassis acquired from third parties.











20



The percentage of our equipment fleet by equipment type as of September 30, 2015 and the percentage of our leasing revenues by equipment type for the nine months ended September 30, 2015 are as follows:
Equipment Type
Percent of
total fleet in
units
 
Percent of total
fleet in CEU
 
Percent of
leasing
revenues
Dry
88.0
%
 
61.7
%
 
65.7
%
Refrigerated
4.5

 
21.5

 
19.5

Special
3.8

 
4.5

 
6.7

Tank
0.7

 
6.0

 
3.4

Chassis
1.4

 
2.8

 
3.0

Equipment leasing fleet
98.4

 
96.5

 
98.3

Equipment trading fleet
1.6

 
3.5

 
1.7

Total
100.0
%
 
100.0
%
 
100.0
%
We generally lease our equipment on a per diem basis to our customers under three types of leases: long-term leases, finance leases and service leases. Long-term leases, typically with initial contractual terms ranging from three to eight years, provide us with stable cash flow and low transaction costs by requiring customers to maintain specific units on-hire for the duration of the lease. Finance leases, which are typically structured as full payout leases, provide for a predictable recurring revenue stream with the lowest cost to the customer because customers are generally required to retain the equipment for the duration of its useful life. Service leases command a premium per diem rate in exchange for providing customers with a greater level of operational flexibility by allowing the pick-up and drop-off of units during the lease term. We also have expired long-term leases whose fixed terms have ended but for which the related units remain on-hire and for which we continue to receive rental payments pursuant to the terms of the initial contract. Some leases have contractual terms that have features reflective of both long-term and service leases and we classify such leases as either long-term or service leases, depending upon which features we believe are predominant.
The following table provides a summary of our equipment leasing fleet portfolio by lease type, based on CEU as of the dates indicated below:
Lease Portfolio
September 30,
2015

December 31,
2014

September 30,
2014
Long-term leases
65.5
%
 
68.9
%
 
66.9
%
Finance leases
8.2

 
8.0

 
8.5

Service leases
17.9

 
17.7

 
18.3

Expired long-term leases (units on-hire)
8.4

 
5.4

 
6.3

Total
100.0
%
 
100.0
%
 
100.0
%
As of September 30, 2015, December 31, 2014 and September 30, 2014, our long-term and finance leases combined had average remaining contract terms of approximately 42 months, 41 months, and 42 months, respectively, assuming no leases are renewed.

21


Operating Performance
Our profitability is primarily determined by the extent to which our leasing and other revenues exceed our ownership, operating and administrative expenses. Our profitability is also impacted by the gains or losses that we realize on the sale of our used equipment and the net sales margins on our equipment trading activities.
Our leasing revenues are primarily driven by the size of our owned fleet, our equipment utilization and the average lease rates in our lease portfolio. Our leasing revenues also include ancillary fees driven by container pick-up and drop-off volumes. Leasing revenues for the third quarter of 2015 increased 2.6% from the third quarter of 2014.
Fleet size.    As of September 30, 2015, our fleet included 2,992,263 CEU, an increase of 8.7% from December 31, 2014 and an increase of 8.8% from September 30, 2014. The increase in our fleet size from September 30, 2014 was primarily due to our purchases of new containers and the completion of several large sale-leaseback transactions in the second half of 2014 and during 2015. We also manage 23,432 CEU for third parties.
As of October 28, 2015, we have purchased approximately $510 million of containers for delivery in 2015 through new orders and sale-leaseback transactions. Most of TAL's new container purchases were made in the first few months of the year. In general, market forecasters had expected global containerized trade growth to be in the range of 5-6% in 2015, and the initial expectation for solid trade growth supported leasing demand early in the year. However, global containerized trade growth has been less than expected this year, and we did not benefit from a traditional summer peak season for dry containers. Container pick-ups on our early lease commitments have proceeded slowly, and our investments in new containers have been limited during the second half of the year.
Utilization.    Our average utilization was 95.8% during the third quarter of 2015, a decrease from 97.1% in the second quarter and a decrease from 97.9% in the third quarter of 2014. Weaker than expected trade growth in 2015 has led to increased drop-off volumes, decreased pick-up volumes and lower utilization. Drop-off volumes in our sale-leaseback portfolio have been particularly high since these leases are generally structured to provide maximum redelivery flexibility. We expect our utilization will continue to trend down over the next few quarters as we head into the typical slow season. However, our utilization remains at a high level and continues to be supported by the high percentage of our units that are on-hire to customers on long-term or finance leases. We expect that our utilization will rebound in 2016 if trade growth meets expectations.
The following tables set forth our equipment fleet utilization(1) for the periods indicated below:
 
Quarter Ended
 
September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Average Utilization
95.8
%
 
97.1
%
 
97.9
%
 
98.1
%
 
97.9
%


September 30,
2015
 
June 30,
2015
 
March 31,
2015
 
December 31,
2014
 
September 30,
2014
Ending Utilization
94.7
%
 
96.6
%
 
97.7
%
 
98.1
%
 
98.1
%
_______________________________________________________________________________

(1)
Utilization is computed by dividing our total units on lease (in CEU) by the total units in our fleet (in CEU) excluding new units not yet leased and off-hire units designated for sale.
Average lease rates.    Average lease rates in the third quarter of 2015 for our dry container product line decreased by 0.7% from the second quarter of 2015 and decreased by 3.9% from the third quarter of 2014, excluding the impact of sale-leaseback transactions. New container prices have decreased significantly over the last several years, and this decrease has continued in 2015 due to a significant drop in steel prices in China. Very low long-term interest rates and aggressive competition for new leasing transactions have combined with falling container prices to push market lease rates to historically low levels, and market lease rates for dry containers are currently well below our portfolio average. Low market lease rates negatively impact our overall average lease rates as we add new containers to our fleet and as leases covering existing containers expire and are re-priced. We expect our dry container lease rates will continue to decrease in the fourth quarter of 2015, and if market lease rates remain near their current low level for an extended period of time, we expect the decrease in our average dry container lease rates will accelerate in 2016 and 2017 due to the large number of leases with high lease rates that are scheduled to expire in those years.

22


Average lease rates in the third quarter of 2015 for our refrigerated container product line decreased by 2.9% from the third quarter of 2014. For several years, our average lease rates for refrigerated containers have been negatively impacted by historically low market leasing rates. The cost of refrigeration machines included in refrigerated containers has trended down over the last few years, which has led to lower refrigerated container prices and lease rates. Lease rates for new refrigerated containers are also being negatively impacted by the widespread availability of attractively priced financing and aggressive competition.
The average lease rates for special containers were approximately 2.1% lower in the third quarter of 2015 compared to the third quarter of 2014, excluding the impact of sale-leaseback transactions. This decrease is mainly the result of certain lease renegotiations.
Equipment disposals.    During the third quarter of 2015, we recognized a $2.9 million loss on the sale of our used containers, compared to a gain of $0.9 million in the third quarter of 2014.
The decrease in our disposal results was primarily driven by lower average sale prices for used containers. Our average used container selling prices decreased approximately 17% from the third quarter of 2014 due to the impact of lower new container prices and increased disposal volumes by leasing companies and shipping lines in response to the weaker containerized trade volumes.
Our disposal results also continue to be negatively impacted by the disposal of containers purchased through sale-leaseback transactions. These containers have generally been purchased for prices higher than the net book value of original TAL containers of similar ages. The higher purchase prices are supported by leasing revenues received by TAL under the terms of the sale-leaseback agreements, and these sale-leaseback transactions remain profitable on an overall basis. However, TAL has started to recognize losses on the disposal of a large portion of our sale-leaseback containers due to the reduction in sale prices for used containers and the fact that lease revenue and fees are excluded from the gain or loss calculations upon disposal.
Equipment ownership expenses.    Our ownership expenses, which consist of depreciation and interest expense, increased by $8.3 million or 9.9% in the third quarter of 2015 as compared to the third quarter of 2014. There was a one-time $1.3 million charge to interest expense in the third quarter of 2015 related to an early buyout of equipment financed under capital leases. Excluding this charge, ownership costs increased by 8.3% from the third quarter of 2014, which is generally in line with the 7.2% growth in average net book value of our revenue earning assets.
Credit performance.    We recorded a $0.3 million provision for doubtful accounts during the third quarter of 2015, compared to a small provision during the third quarter of 2014. While our credit performance was strong during the third quarter of 2015, our overall concern about credit risk has increased this year. Many of the major shipping lines have reported modest or negative profitability over the last few years due to persistent excess vessel capacity. Our customers are facing additional financial pressures in 2015 due to weaker than expected trade volumes and a steep drop in freight rates on their major trade lanes. It seems likely that many of our customers will generate financial losses for the remainder of 2015. We also anticipate that the high volume of new vessels entering service over the next several years will complicate our customers’ efforts to increase freight rates, and we expect our customers’ financial performance will remain under pressure for some time.
Operating expenses.    Direct operating expenses were $13.0 million in the three months ended September 30, 2015, compared to $8.3 million in the same period in 2014, an increase of $4.7 million. This increase was mainly due to higher volume of drop-off activity and lower utilization, which increased storage and repair expenses.
Our administrative expenses decreased $0.3 million to $11.0 million in the third quarter of 2015, compared to $11.3 million in the third quarter of 2014, mainly due to a decrease in foreign exchange losses on our Euro and GBP denominated assets and liabilities.

23


Dividends
We paid the following quarterly dividends during the nine months ended September 30, 2015 and 2014 on our issued and outstanding common stock:
Record Date
Payment Date
 
Aggregate
Payment
 
Per Share
Payment
September 2, 2015
September 23, 2015
 
$23.7 Million
 
$0.72
June 3, 2015
June 24, 2015
 
$23.7 Million
 
$0.72
March 3, 2015
March 24, 2015
 
$23.7 Million
 
$0.72
September 3, 2014
September 24, 2014
 
$24.2 Million
 
$0.72
June 3, 2014
June 24, 2014
 
$24.2 Million
 
$0.72
March 3, 2014
March 24, 2014
 
$24.2 Million
 
$0.72
Historically, most of our dividends have been treated as a non-taxable return of capital, and based on our current estimates we believe that our dividends paid in 2015 will also be treated as a non-taxable return of capital to TAL shareholders. The taxability of the dividends to TAL shareholders does not impact TAL's corporate tax position. Investors should consult with a tax adviser to determine the proper tax treatment of these distributions.
Stock Buyback Program
On October 28, 2015 TAL’s Board of Directors authorized the repurchase of shares of common stock with an aggregate value of up to $150 million. This repurchase program replaces the February 11, 2015 and March 13, 2006 share repurchase programs which were terminated. Repurchases may be made from time to time at TAL's discretion, based on ongoing assessments of the capital needs of the business, the market price of TAL's common stock and general market and other conditions. No time limit was set for the completion of the repurchase program. In the first quarter of 2015, TAL repurchased 81,915 shares at an average price of $41.40. TAL had no repurchases of shares during the second and third quarters of 2015.

Stock repurchases under the repurchase program may be made through open market and/or privately negotiated transactions at such times and in such amounts as our management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, restrictions regarding a repurchase program included in our credit facilities and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated by the Board of Directors at any time without prior notice.





24


Results of Operations
The following table summarizes our results of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands of dollars):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Leasing revenues:
 
 
 
 
 
 
 
Operating leases
$
150,471

 
$
145,613

 
$
441,608

 
$
424,432

Finance leases
3,807

 
4,441

 
11,718

 
14,118

Other revenues
148

 
470

 
913

 
1,464

Total leasing revenues
154,426

 
150,524

 
454,239

 
440,014

 
 
 
 
 
 
 
 
Equipment trading revenues
15,360

 
13,745

 
48,683

 
45,026

Equipment trading expenses
(14,169
)
 
(12,032
)
 
(44,557
)
 
(39,450
)
Trading margin
1,191

 
1,713

 
4,126

 
5,576

 
 
 
 
 
 
 
 
Net (loss) gain on sale of leasing equipment
(2,854
)
 
870

 
(4,963
)
 
6,427

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation and amortization
61,711

 
57,198

 
180,116

 
165,238

Direct operating expenses
13,002

 
8,287

 
31,835

 
25,236

Administrative expenses
10,962

 
11,317

 
34,311

 
34,277

Provision for doubtful accounts
256

 
22

 
68

 
58

Total operating expenses
85,931

 
76,824

 
246,330

 
224,809

Operating income
66,832

 
76,283

 
207,072

 
227,208

Other expenses:
 
 
 
 
 
 
 
Interest and debt expense
30,477

 
26,695

 
89,322

 
81,202

Write-off of deferred financing costs
895

 
173

 
895

 
5,072

Net loss (gain) on interest rate swaps
662

 
(545
)
 
1,014

 
410

Total other expenses
32,034

 
26,323

 
91,231

 
86,684

Income before income taxes
34,798

 
49,960

 
115,841

 
140,524

Income tax expense
12,287

 
17,343

 
40,903

 
48,534

Net income
$
22,511

 
$
32,617

 
$
74,938

 
$
91,990



25


Comparison of Three Months Ended September 30, 2015 to Three Months Ended September 30, 2014
Leasing revenues.    The principal components of our leasing revenues are presented in the following table. Per diem revenue represents daily usage revenue earned under operating lease contracts; fee and ancillary lease revenue represent fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses; and finance lease revenue represents interest income earned under finance lease contracts.
 
Three Months Ended 
 September 30,
 
2015
 
2014
 
(in thousands)
Leasing revenues:
 
 
 
Operating lease revenues:
 
 
 
Per diem revenue
$
140,087

 
$
138,672

Fee and ancillary lease revenue
10,384

 
6,941

Total operating lease revenue
150,471

 
145,613

Finance lease revenue
3,807

 
4,441

Other revenues
148

 
470

Total leasing revenues
$
154,426

 
$
150,524

Total leasing revenues were $154.4 million in the three months ended September 30, 2015, compared to $150.5 million in the same period in 2014, an increase of $3.9 million, or 2.6%.
Per diem revenue increased by $1.4 million, or 1.0%, compared to the three months ended September 30, 2014. The primary reasons for this increase are as follows:
$6.9 million increase due to an increase of approximately 124,000 CEU in the average number of containers on-hire under operating leases; partially offset by a
$5.4 million decrease due to lower average per diem rates.
Fee and ancillary lease revenue increased by $3.4 million in the three months ended September 30, 2015, compared to the same period in 2014 primarily due to higher drop-off volumes.
Finance lease revenue decreased by $0.6 million in the three months ended September 30, 2015, compared to the same period in 2014, primarily due to a decrease in the average size of our finance lease portfolio and a decrease in the portfolio average interest rate.
Equipment Trading Activities.    Equipment trading revenues represent the proceeds on the sale of equipment purchased for resale. Equipment trading expenses represent the cost of equipment sold, including costs associated with the acquisition, maintenance and selling of trading inventory, such as positioning, repairs, handling and storage costs, and estimated direct selling and administrative costs.
 
Three Months Ended 
 September 30,
 
2015
 
2014
 
(in thousands)
Equipment trading revenues
$
15,360

 
$
13,745

Equipment trading expenses
(14,169
)
 
(12,032
)
Equipment trading margin
$
1,191

 
$
1,713

The equipment trading margin was $1.2 million in the three months ended September 30, 2015, compared to $1.7 million in the same period in 2014, a decrease of $0.5 million. Equipment trading margin decreased $0.7 million from lower per unit margins on equipment sold and increased by $0.2 million due to an increase in sales volume.
Net (loss) gain on sale of leasing equipment.    Loss on sale of equipment was $2.9 million for the three months ended September 30, 2015, compared to a gain on sale of equipment of $0.9 million in the same period in 2014, a decrease of $3.8 million. The decrease in sales results was mainly due to a 17% decrease in used dry container selling prices.

26


Depreciation and amortization.    Depreciation and amortization was $61.7 million in the third quarter of 2015, compared to $57.2 million in the third quarter of 2014, an increase of $4.5 million or 7.9%. Depreciation expense increased $6.1 million primarily due to the net increase in the size of our depreciable fleet, partially offset by a decrease of $1.6 million due to equipment becoming fully depreciated.
Direct operating expenses.    Direct operating expenses primarily consist of our costs to repair equipment returned off lease, to store the equipment when it is not on lease and to reposition equipment that has been returned to locations with weak leasing demand.
Direct operating expenses were $13.0 million in the three months ended September 30, 2015, compared to $8.3 million in the same period in 2014, an increase of $4.7 million. This increase was primarily driven by higher storage costs of $2.7 million resulting from an increase in the number of idle units. This increase was also due to an increase in redelivery and repair related costs of $2.4 million due to a higher volume of redeliveries. This increase was partially offset by a decrease in survey costs of $0.8 million due to a lower volume of new container acceptances.
Administrative expenses.    Administrative expenses were $11.0 million in the third quarter of 2015 compared to $11.3 million in the same period in 2014, a decrease of $0.3 million or 2.7%. This decrease was mainly due to a decrease in foreign exchange losses on our Euro and GBP denominated assets and liabilities.
Provision for doubtful accounts.    We had a provision for doubtful accounts of $0.3 million in the third quarter of 2015, compared to a small provision in the third quarter of 2014.
Interest and debt expense.    Interest and debt expense was $30.5 million in the third quarter of 2015, compared to $26.7 million in the third quarter of 2014, an increase of $3.8 million. Interest and debt expense increased $2.9 million mainly due to a higher average debt balance of $3,197.1 million in the third quarter of 2015, compared to $2,884.7 million in the prior year quarter. Interest and debt expense also increased $1.3 million in the third quarter due to an early buyout on certain capital lease obligations. This increase was partially offset by a decrease of $0.4 million due to a lower effective interest rate of 3.58% in the third quarter of 2015 compared to 3.62% in the third quarter of 2014.
Net loss (gain) on interest rate swaps.    Net loss on interest rate swaps was $0.7 million in the three months ended September 30, 2015, compared to a gain of $0.5 million in the same period in 2014. While the large majority of our interest rate swap agreements have been designated as hedges and generally do not impact the income statement because the change in fair value is included in other comprehensive income, a small portion of our interest rate swaps are not designated as hedges and thus are subject to revaluation. The fair value of these non-designated interest rate swap agreements decreased during the third quarter of 2015 due to a decrease in long term interest rates. Under the majority of our interest rate swap agreements, we make interest payments based on fixed interest rates and receive payments based on the applicable prevailing variable interest rate. As long term interest rates decreased during the third quarter of 2015, the current market rate on interest rate swap agreements with similar terms decreased relative to our existing interest rate swap agreements, which caused the fair value of our existing interest rate swap agreements to decrease during the quarter.
Income tax expense.    Income tax expense was $12.3 million in the three months ended September 30, 2015, compared to $17.3 million in the same period in 2014. The effective tax rates for the three months ended September 30, 2015 and 2014 were 35.3% and 34.7%, respectively. Our effective tax rate increased in 2015 due to changes in state apportionment factors in 2014 for several states that required an adjustment to the deferred tax balance.
While we record income tax expense, we do not currently pay any significant federal, state or foreign income taxes due to the availability of net operating loss carryovers and accelerated tax depreciation for our equipment. The majority of the expense recorded for income taxes is recorded as a deferred tax liability on the balance sheet. We anticipate that the deferred income tax liability will continue to grow for the foreseeable future.


27


Comparison of Nine Months Ended September 30, 2015 to Nine Months Ended September 30, 2014
Leasing revenues.    The principal components of our leasing revenues are presented in the following table. Per diem revenue represents daily usage revenue earned under operating lease contracts; fee and ancillary lease revenue represent fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses; and finance lease revenue represents interest income earned under finance lease contracts.
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
(in thousands)
Leasing revenues:
 
 
 
Operating lease revenues:
 
 
 
Per diem revenue
$
415,884

 
$
403,402

Fee and ancillary lease revenue
25,724

 
21,030

Total operating lease revenue
441,608

 
424,432

Finance lease revenue
11,718

 
14,118

Other revenues
913

 
1,464

Total leasing revenues
$
454,239

 
$
440,014

Total leasing revenues were $454.2 million in the nine months ended September 30, 2015, compared to $440.0 million in the same period in 2014, an increase of $14.2 million, or 3.2%.
Per diem revenue increased by $12.5 million, or 3.1%, compared to the nine months ended September 30, 2014. The primary reasons for this increase are as follows:
$30.5 million increase due to an increase of approximately 185,000 CEU in the average number of containers on-hire under operating leases; partially offset by a
$18.0 million decrease due to lower average per diem rates.
Fee and ancillary lease revenue increased by $4.7 million compared to the nine months ended September 30, 2014 primarily due to an increase in drop-off volumes.
Finance lease revenue decreased by $2.4 million in the nine months ended September 30, 2015, compared to the same period in 2014, primarily due to a decrease in the average size of our finance lease portfolio and a decrease in the portfolio average interest rate.
Equipment Trading Activities.    Equipment trading revenues represent the proceeds on the sale of equipment purchased for resale. Equipment trading expenses represent the cost of equipment sold, including costs associated with the acquisition, maintenance and selling of trading inventory, such as positioning, repairs, handling and storage costs, and estimated direct selling and administrative costs.
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
(in thousands)
Equipment trading revenues
$
48,683

 
$
45,026

Equipment trading expenses
(44,557
)
 
(39,450
)
Equipment trading margin
$
4,126

 
$
5,576

The equipment trading margin was $4.1 million in the nine months ended September 30, 2015, compared to $5.6 million in the same period in 2014, a decrease of $1.5 million. The trading margin decreased by $1.8 million due to lower per unit margins on equipment sold partially offset by an increase of $0.3 million due to an increase in sales volumes.
Net (loss) gain on sale of leasing equipment.    Loss on sale of equipment was $5.0 million in the nine months ended September 30, 2015, compared to a gain on sale of equipment of $6.4 million in the same period in 2014, a decrease of $11.4 million. The decrease in sales results was mainly due to a 20% decrease in used dry container selling prices.

28


Depreciation and amortization.    Depreciation and amortization was $180.1 million in the nine months ended September 30, 2015, compared to $165.2 million in the same period in 2014, an increase of $14.9 million or 9.0%. Depreciation expense increased by $19.2 million due to the net increase in the size of our depreciable fleet, partially offset by a decrease of $4.3 million due to equipment becoming fully depreciated.
Direct operating expenses.    Direct operating expenses primarily consist of our costs to repair equipment returned off lease, to store the equipment when it is not on lease and to reposition equipment that has been returned to locations with weak leasing demand.
Direct operating expenses were $31.8 million in the nine months ended September 30, 2015, compared to $25.2 million in the same period in 2014, an increase of $6.6 million. This increase was primarily driven by an increase in redelivery and repair related costs of $4.1 million due to a higher volume of redeliveries. This increase also included higher storage costs of $2.4 million resulting from an increase in the number of idle units.
Administrative expenses.    Administrative expenses were $34.3 million in the nine months ended September 30, 2015 and 2014, respectively.
Provision for doubtful accounts.    We recorded a $0.1 million provision for doubtful accounts in the nine months ended September 30, 2015 and 2014, respectively.
Interest and debt expense.    Interest and debt expense was $89.3 million in the nine months ended September 30, 2015, compared to $81.2 million in the nine months ended September 30, 2014, an increase of $8.1 million. Interest and debt expense increased $7.6 million due to a higher average debt balance of $3,145.6 million for the nine months ended September 30, 2015, compared to $2,876.1 million for the nine months ended September 30, 2014. Interest and debt expense also increased $1.3 million in the nine months ended September 30, 2015 due to an early buyout on certain capital lease obligations. This increase was partially offset by a decrease of $0.8 million due to a lower effective interest rate of 3.69% in the nine months ended September 30, 2015, compared to 3.72% for the same period in 2014.
Net loss on interest rate swaps    Net loss on interest rate swaps was $1.0 million in the nine months ended September 30, 2015, compared to a loss of $0.4 million in the same period in 2014. While the large majority of our interest rate swap agreements have been designated as hedges and generally do not impact the income statement because the change in fair value is included in other comprehensive income, a small portion of our interest rate swaps are not designated as hedges and thus are subject to revaluation. The fair value of these non-designated interest rate swap agreements decreased during the nine months ended September 30, 2015 due to a decrease in long term interest rates. Under the majority of our interest rate swap agreements, we make interest payments based on fixed interest rates and receive payments based on the applicable prevailing variable interest rate. As long term interest rates decreased during 2015, the current market rate on interest rate swap agreements with similar terms decreased relative to our existing interest rate swap agreements, which caused the fair value of our existing interest rate swap agreements to decrease.
Income tax expense.    Income tax expense was $40.9 million in the nine months ended September 30, 2015, compared to $48.5 million in the same period in 2014. The effective tax rates for the nine months ended September 30, 2015 and 2014 were 35.3% and 34.5%, respectively. Our effective tax rate increased in 2015 due to changes in state apportionment factors in 2014 for several states that required an adjustment to the deferred tax balance.
While we record income tax expense, we do not currently pay any significant federal, state or foreign income taxes due to the availability of net operating loss carryovers and accelerated tax depreciation for our equipment. The majority of the expense recorded for income taxes is recorded as a deferred tax liability on the balance sheet. We anticipate that the deferred income tax liability will continue to grow for the foreseeable future.


29


Business Segments
We operate our business in one industry, intermodal transportation equipment, and in two business segments, Equipment leasing and Equipment trading.
Equipment leasing
We own, lease and ultimately dispose of containers and chassis from our leasing fleet, as well as manage containers owned by third parties. Equipment leasing segment revenues represent leasing revenues from operating and finance leases, fees earned on managed container leasing activities, as well as other revenues. Expenses related to equipment leasing include direct operating expenses, administrative expenses, depreciation expense and interest expense. The Equipment leasing segment also includes gains and losses on the sale of owned leasing equipment.
Equipment trading
We purchase containers from shipping line customers and other sellers of containers, and resell these containers to container retailers and users of containers for storage or one-way shipment. Equipment trading segment revenues represent the proceeds on the sale of containers purchased for resale. Expenses related to equipment trading include the cost of containers purchased for resale that were sold and related selling costs, as well as direct operating expenses, administrative expenses and interest expense.
Segment income before income taxes
The following table lists the income before income taxes for the Equipment leasing and Equipment trading segments for the periods indicated:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Income before income taxes(1)
 
 
 
 
 
 
 
 
 
 
 
Equipment leasing segment
$
33,768

 
$
45,928

 
(26.5
)%
 
$
109,458

 
$
134,253

 
(18.5
)%
Equipment trading segment
$
2,587

 
$
3,660

 
(29.3
)%
 
$
8,292

 
$
11,753

 
(29.4
)%
_______________________________________________________________________________
(1)
In the three months ended September 30, 2015 and 2014, income before income taxes excludes net losses on interest rate swaps of $0.7 million and net gains on interest rate swaps of $0.5 million, respectively, and the write-off of deferred financing costs of $0.9 million and $0.2 million for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, income before income taxes excludes net losses on interest rate swaps of $1.0 million and $0.4 million, respectively, and the write-off of deferred financing costs of $0.9 million and $5.1 million for the nine months ended September 30, 2015 and 2014, respectively.
Equipment leasing income before income taxes.   Income before income taxes for the Equipment leasing segment was $33.8 million in the three months ended September 30, 2015, compared to $45.9 million in the same period in 2014, a decrease of $12.1 million, which was primarily due to a decrease in the net leasing margin (leasing revenue net of depreciation and amortization, interest and debt expense, and direct operating and administrative expenses) of $8.4 million and a $3.8 million decrease in used container disposal gains.
 Income before income taxes for the Equipment leasing segment was $109.5 million in the nine months ended September 30, 2015, compared to $134.3 million in the same period in 2014, a decrease of $24.8 million, which was primarily due to a decrease of $13.4 million in the net leasing margin (leasing revenue net of depreciation and amortization, interest and debt expense, and direct operating and administrative expenses) and a decrease of $11.4 million in used container disposal gains.
Equipment trading income before income taxes.   Income before income taxes for the Equipment trading segment was $2.6 million in the three months ended September 30, 2015, compared to $3.7 million in the same period in 2014, a decrease of $1.1 million. This decrease was primarily due to a $0.6 million decrease in the leasing margin (leasing revenue net of depreciation and amortization, interest and debt expense, and direct operating and administrative expenses) and a $0.5 million decrease in the trading margin due to lower per unit margins partially offset by higher sales volumes.
 Income before income taxes for the Equipment trading segment was $8.3 million in the nine months ended September 30, 2015, compared to $11.8 million in the same period in 2014, a decrease of $3.5 million. This decrease was

30


primarily due to a decrease in the leasing margin (leasing revenue net of depreciation and amortization, interest and debt expense, and direct operating and administrative expenses) of $2.0 million and a $1.5 million decrease in the trading margin due to lower per unit margins on equipment sold partially offset by higher sales volumes.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows provided by operating activities, proceeds from the sale of our leasing equipment, principal payments on finance lease receivables and borrowings under our credit facilities. Our cash in-flows and borrowings are used to finance capital expenditures, meet debt service requirements and pay dividends.
We continue to have sizable cash in-flows. For the twelve months ended September 30, 2015, cash provided by operating activities, together with the proceeds from the sale of our leasing equipment and principal payments on our finance leases, was $597.0 million. In addition, as of September 30, 2015 we had $66.8 million of unrestricted cash and $346.9 million of additional borrowing capacity under our current credit facilities.
As of September 30, 2015, major committed cash outflows in the next 12 months include $345.5 million of scheduled principal payments on our existing debt facilities and $16.8 million of committed but unpaid capital expenditures.
We believe that cash provided by operating activities and existing cash, proceeds from the sale of our leasing equipment, principal payments on our finance lease receivables and availability under our borrowing facilities will be sufficient to meet our obligations over the next 12 months.
At September 30, 2015, our outstanding indebtedness was comprised of the following (amounts in millions):
 
Current
Amount
Outstanding
 
Maximum
Borrowing
Commitment
Asset backed securitization (ABS) term notes
$
1,212.2

 
$
1,212.2

Term loan facilities
961.6

 
1,083.5

Asset backed warehouse facility
610.0

 
650.0

Revolving credit facilities
365.0

 
550.0

Capital lease obligations
73.3

 
73.3

Total Debt
$
3,222.1

 
$
3,569.0

The maximum commitment levels depicted in the chart above may not reflect the actual availability under all of the credit facilities. Certain of these facilities are governed by borrowing bases that limit borrowing capacity to an established percentage of relevant assets.
As of September 30, 2015, we had $1,361.6 million of debt outstanding on facilities with fixed interest rates and $1,860.5 million of debt outstanding on facilities with interest rates based on floating rate indices (primarily LIBOR). We economically hedge the risks associated with fluctuations in interest rates on our floating rate borrowings by entering into interest rate swap agreements that convert a portion of our floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. As of September 30, 2015, we had interest rate swaps in place with a net notional amount of $1,135.0 million to fix the floating interest rates on a portion of our floating rate debt obligations.
Debt Covenants
We are subject to certain financial covenants under our debt agreements. As of September 30, 2015, we were in compliance with all such covenants. Below are the primary financial covenants to which we are subject:
Minimum Earnings Before Interest and Taxes ("Covenant EBIT") to Cash Interest Expense;
Minimum Tangible Net Worth ("TNW"); and
Maximum Indebtedness to TNW.
Non-GAAP Measures
We primarily rely on our results measured in accordance with generally accepted accounting principles ("GAAP") in evaluating our business. Covenant EBIT, Cash Interest Expense, TNW, and Indebtedness are non-GAAP financial measures defined in our debt agreements that are used to determine our compliance with certain covenants contained in our debt agreements and should not be used as a substitute for analysis of our results as reported under GAAP. However, we believe that

31


the inclusion of this non-GAAP information provides additional information to investors regarding our debt covenant compliance.
Minimum Covenant EBIT to Cash Interest Expense
For the purpose of this covenant, Covenant EBIT is calculated based on the cumulative sum of our earnings for the last four quarters (excluding income taxes, interest expense, amortization, net gain or loss on interest rate swaps and certain non-cash charges). Cash Interest Expense is calculated based on interest expense adjusted to exclude interest income, amortization of deferred financing costs, and the difference between current and prior period interest expense accruals.
Minimum Covenant EBIT to Cash Interest Expense is calculated on a consolidated basis and for certain of our wholly-owned special purpose entities ("SPEs"), whose primary activity is to issue asset backed notes. Covenant EBIT for each of our SPEs is calculated based on the net earnings generated by the assets pledged as collateral for the underlying debt issued. The actual Covenant EBIT to Cash Interest Expense ratio for each SPE may differ depending on the specific net earnings associated with those pledged assets. As of September 30, 2015, the minimum and actual consolidated Covenant EBIT to Cash Interest Expense ratio and Covenant EBIT to Cash Interest Expense ratio for each of the issuers of our debt facilities whose initial borrowing capacity was approximately $200 million or greater were as follows:
Entity/Issuer
Minimum
Covenant EBIT to
Cash Interest
Expense Ratio
 
Actual
Covenant EBIT to
Cash Interest
Expense Ratio
Consolidated
1.10
 
2.66
TAL Advantage I, LLC
1.10