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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2007
or

[ ]  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 20-1796526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
100 Manhattanville Road,
Purchase, New York
10577-2135
(Address of principal executive office) (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 [X]    No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [ ]                     Accelerated filer [X]                    Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes [ ]    No [X]

As of August 1, 2007, there were 33,259,724 shares of the Registrant’s common stock, $.001 par value outstanding.




TAL INTERNATIONAL GROUP, INC.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE ‘‘SAFE HARBOR’’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a ‘‘safe harbor’’ for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words ‘‘may’’, ‘‘might’’, ‘‘should’’, ‘‘estimate’’, ‘‘project’’, ‘‘plan’’, ‘‘anticipate’’, ‘‘expect’’, ‘‘intend’’, ‘‘outlook’’, ‘‘believe’’ and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under ‘‘Risk Factors’’ in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘‘SEC’’), on March 13, 2007, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to the Securities Exchange Act of 1934.

We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our filings with the SEC.

PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

The consolidated financial statements of TAL International Group, Inc. (‘‘TAL’’ or the ‘‘Company,’’) as of June 30, 2007 (unaudited) and December 31, 2006 and for the three and six months ended June 30, 2007 (unaudited) and June 30, 2006 (unaudited) 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. However, 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 March 13, 2007, from which the accompanying December 31, 2006 Balance Sheet information was derived, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to the Securities Exchange Act of 1934.

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TAL INTERNATIONAL GROUP, INC.

Consolidated Balance Sheets
(Dollars in thousands, except share data)


  June 30,
2007
December 31,
2006
  (Unaudited)  
Assets:    
Cash and cash equivalents (including restricted cash of $15,965 and $14,526) $ 45,536 $ 58,167
Accounts receivable, net of allowances of $600 and $266 42,930 39,318
Net investment in finance leases 176,021 152,586
Leasing equipment, net of accumulated depreciation and allowances of $247,076 and $208,756 1,199,623 1,080,523
Leasehold improvements and other fixed assets, net of accumulated depreciation and amortization of $2,588 and $2,132 2,898 2,855
Equipment held for sale 23,143 20,768
Goodwill 71,898 71,898
Deferred financing costs 6,502 6,957
Other assets (including fair value of derivative instruments) 34,743 22,591
Total assets $ 1,603,294 $ 1,455,663
Liabilities and stockholders’ equity:    
Accounts payable $ 100,457 $ 13,273
Accrued expenses (including fair value of derivative instruments) 39,454 50,453
Income taxes payable 347 219
Deferred income tax liability 51,958 34,651
Debt. 993,200 958,317
Total liabilities 1,185,416 1,056,913
Stockholders’ equity:    
Preferred stock, $.001 par value, 500,000 shares authorized, none issued
Common stock, $.001 par value, 100,000,000 shares authorized,
33,396,974 and 33,303,031 shares issued and outstanding, respectively
33 33
Treasury stock, at cost, 136,250 shares. (2,862 )  (2,862 ) 
Additional paid-in capital 394,739 394,440
Retained earnings 22,868 3,476
Accumulated other comprehensive income 3,100 3,663
Total stockholders’ equity 417,878 398,750
Total liabilities and stockholders’ equity $ 1,603,294 $ 1,455,663

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

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TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Operations
(Dollars and shares in thousands, except earnings per share)


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2007 2006 2007 2006
  (Unaudited) (Unaudited)
Revenues:        
Leasing revenues, including income recognized on finance leases of $4,397, $2,832, $8,598 and $5,117, respectively $ 68,847 $ 67,091 $ 137,028 $ 134,632
Equipment trading revenue 13,876 5,757 23,114 10,776
Management fee income 1,552 1,573 3,141 3,149
Other revenues 457 563 1,021 1,040
Total revenues 84,732 74,984 164,304 149,597
Expenses:        
Equipment trading expenses 11,268 4,714 18,667 8,939
Direct operating expenses 8,039 7,636 15,411 14,359
Administrative expenses 10,313 9,120 20,567 18,659
Depreciation and amortization 24,686 25,703 49,182 51,192
Provision (reversal) for doubtful accounts 212 (913 )  329 (442 ) 
Net (gain) on sale of leasing equipment (3,081 )  (1,084 )  (5,501 )  (976 ) 
Write-off of deferred financing costs 2,367 2,367
Interest and debt expense 12,195 11,124 24,106 23,580
Unrealized (gain) on interest rate swaps (11,240 )  (4,444 )  (8,049 )  (3,590 ) 
Total expenses 52,392 54,223 114,712 114,088
Income before income taxes 32,340 20,761 49,592 35,509
Income tax expense 11,576 7,441 17,742 12,684
Net income $ 20,764 $ 13,320 $ 31,850 $ 22,825
Net income per common share — Basic $ 0.63 $ 0.40 $ 0.96 $ 0.69
Net income per common share — Diluted $ 0.62 $ 0.40 $ 0.95 $ 0.68
Weighted average number of common shares outstanding — Basic 33,199 32,895 33,191 32,889
Weighted average number of common shares outstanding — Diluted 33,401 33,495 33,394 33,469
Cash dividends paid per common share $ 0.375 $ 0.675

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

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TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Cash Flows
(Dollars in thousands)


  Six months ended
June 30,
  2007 2006
  (Unaudited)
Cash flows from operating activities:    
Net income $ 31,850 $ 22,825
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 49,182 51,192
Write-off of deferred financing costs 2,367
Amortization of deferred financing costs 459 323
Net (gain) on sale of leasing equipment (5,501 )  (976 ) 
Unrealized (gain) on interest rate swaps (8,049 )  (3,590 ) 
Deferred income taxes 17,308 15,387
Stock compensation charge 245 4
Changes in operating assets and liabilities (11,818 )  (1,667 ) 
Net cash provided by operating activities 73,676 85,865
Cash flows from investing activities:    
Payments for leasing equipment (108,736 )  (71,255 ) 
Investment in finance leases (30,870 )  (26,482 ) 
Proceeds from sale of equipment, net of selling costs 29,682 26,315
Cash collections on financing leases, net of income earned 11,553 6,312
Other 119 135
Net cash used in investing activities (98,252 )  (64,975 ) 
Cash flows from financing activities:    
Stock options exercised 54
Dividends paid (22,417 ) 
Borrowings under debt facilities 153,709 727,000
Payments of finance fees related to new debt agreements (8,442 ) 
Payments under debt facilities (118,112 )  (721,333 ) 
Payment of capital lease obligation (1,289 ) 
Increase in restricted cash (1,439 )  (12,070 ) 
Net cash provided by (used in) financing activities 10,506 (14,845 ) 
Net (decrease) increase in cash and cash equivalents (14,070 )  6,045
Unrestricted cash and cash equivalents, beginning of period 43,641 27,259
Unrestricted cash and cash equivalents, end of period $ 29,571 $ 33,304
Supplemental non-cash investing activities:    
Purchases of leasing equipment financed through capital lease obligations $ 6,170
Accrued and unpaid purchases of leasing equipment $ 93,695 $ 28,924

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

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TAL INTERNATIONAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of the Business, Basis of Presentation, Recently Issued Accounting Pronouncements

A.    Description of the Business

TAL International Group, Inc. (‘‘TAL,’’ or the ‘‘Company’’) was formed on October 26, 2004 and commenced operations on November 4, 2004. TAL consists of the consolidated accounts of TAL International Container Corporation (‘‘TALI’’), formerly known as Transamerica Leasing Inc., Trans Ocean Ltd. (‘‘TOL’’) and their subsidiaries. Effective October 31, 2004, TAL acquired all of the outstanding capital stock of TALI and TOL for approximately $1.2 billion in cash (‘‘the Acquisition’’).

The Company provides long-term leases, service leases and finance leases of maritime containers and related equipment, along with 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 provides container sales and positioning services, 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, and leases chassis used for the transportation of containers domestically.

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 with the current year’s presentation.

C.    Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (‘‘SFAS No. 159’’) which permits companies to choose to measure many financial instruments and certain other items at fair value. The Statement’s objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is required to adopt the provisions of SFAS No. 159 during the first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its consolidated results of operations and financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (‘‘SFAS No. 157’’) which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (GAAP). Under SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. The new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Company is required to adopt the provisions of SFAS No. 157 during the first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated results of operations and financial position.

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In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. See Note 8 for additional discussion of the Company’s adoption of FIN 48 on January 1, 2007.

Note 2 — Treasury Stock and Dividends Paid

Treasury Stock

On March 13, 2006, the Company’s Board of Directors authorized a stock buyback program for the repurchase of up to 1.5 million shares of its common stock. The Company repurchased 136,250 shares of its outstanding common stock in the open market during the year ended December 31, 2006 at a total cost of approximately $2.9 million.

Dividends Paid

On March 9, 2007, the Company paid a quarterly dividend of $0.30 per share or an aggregate of approximately $10.0 million on its issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on February 23, 2007.

On May 30, 2007, the Company paid a quarterly dividend of $0.375 per share or an aggregate of approximately $12.5 million on its issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on May 17, 2007.

Note 3 — Stock-Based Compensation Plans

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. 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).

There was approximately six thousand dollars and thirteen thousand dollars of compensation cost reflected in administrative expense in the Company’s statement of operations for the three months and six months ended June 30, 2007, respectively, related to the Company’s stock-based compensation plans as a result of 21,000 new options granted during the year ended December 31, 2006. Total unrecognized compensation cost of approximately seventy-one thousand dollars as of June 30, 2007 related to the new options granted during the year ended December 31, 2006 will be recognized over the remaining vesting period of approximately 3 years.

In addition, approximately one hundred thirty-five thousand dollars and two hundred thirty-three thousand dollars of compensation cost is reflected in administrative expense in the Company’s statement of operations for the three and six months ended June 30, 2007, respectively, related to the Company’s stock-based compensation plans as a result of the issuance of 60,000 shares of restricted stock on January 26, 2007. On that date, the Company’s closing stock price was $26.30, which resulted in a total fair value of the restricted shares of approximately $1.6 million. The restricted stock will become fully vested on January 1, 2010. Total unrecognized compensation cost of approximately $1.3 million as of June 30, 2007 related to the restricted stock will be recognized over the remaining vesting period of approximately 2.5 years.

Cash received from employee exercises of stock options for both the three and six months ended June 30, 2007 was approximately fifty-four thousand dollars. TAL did not recognize any tax benefits associated with these exercises.

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Stock option activity under the Plans from January 1, 2007 to June 30, 2007 was as follows:


  Options Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (Yrs)
Aggregate
Intrinsic
Value
$ in 000’s
Outstanding January 1, 2007 665,477 $ 17.24 8.8  
Granted      
Exercised (33,943 )  $ 1.60   $ 818
Canceled      
Outstanding June 30, 2007 631,534 $ 18.08 8.3 $ 7,345
Exercisable:        
June 30, 2007 612,909 $ 17.92 8.3 $ 7,226

Note 4 — Debt

Debt consisted of the following (amounts in thousands):    


  June 30,
2007
December 31,
2006
Asset backed securitization (ABS)    
Term notes $ 600,667 $ 634,667
Warehouse facility 232,000 132,500
Revolving credit facilities* 91,500 126,500
Finance lease facility 12,500 12,500
Port equipment facility 14,937 12,868
Other debt 4,445 842
Capital lease obligations 37,151 38,440
Total $ 993,200 $ 958,317
* In June 2007, the $10 million Swing Line Facility was terminated.

Interest Rate Swaps

During the six months ended June 30, 2007, the Company entered into new interest rate swap contracts which are included in the summary table below to fix the floating interest rates on a portion of the borrowings under its debt facilities:


Total Notional
Amount of
New Swaps
Entered in 2007
Weighted Average
Fixed Leg
Interest Rate
Weighted Average
Remaining Term**
$227.6 million 4.93 %  5.1 years

As of June 30, 2007, the Company had in place total interest rate swap contracts to fix the floating interest rates on a portion of the borrowings under its debt facilities as summarized below:    


Total Notional
Amount at
June 30, 2007
Weighted Average
Fixed Leg
Interest Rate
Weighted Average
Remaining Term **
$880.3 million 4.41 %  4.7 years
** weighted average remaining term does not include amortization of the notional amount.

As of April 12, 2006, in conjunction with the issuance of the ABS notes, the Company de-designated all of its existing interest rate swap contracts. Previously, the Company had designated all existing interest rate swap contracts as cash flow hedges, in accordance with Statement of Financial

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Accounting Standards No.133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. Therefore, during the designation period beginning November 1, 2005 through April 12, 2006, substantially all changes in the fair value of the interest rate swap contracts were reflected in accumulated other comprehensive income. Changes in the fair value of these interest rate swap contracts in periods before and after designation have been recognized in the consolidated statements of operations as unrealized losses or gains on interest rate swaps.

At the time of de-designation, the change in fair value reflected in accumulated other comprehensive income was $7.5 million. This amount is being recognized in income as unrealized (gain) loss on interest rate swaps using the interest method over the remaining life of the contracts. As of June 30, 2007, the unamortized pre-tax balance of the change in fair value reflected in accumulated other comprehensive income was approximately $4.2 million. The amount of other comprehensive income which will be amortized to income over the next 12 months is approximately $1.5 million. Amounts recorded in accumulated other comprehensive income would be reclassified into earnings upon termination of these interest rate swap contracts and related debt instruments prior to their contractual maturity.

The fair values of the interest rate swap contracts were reflected in the consolidated balance sheets as follows ($ in millions):


  June 30,
2007
December 31,
2006
Net fair value of interest rate swaps $ 18.9 $ 11.9
Swap assets (included in other assets) $ 19.5 $ 13.9
Swap liabilities (included in accrued liabilities) $ (0.6 )  $ (2.0 ) 

The unrealized gains on the interest rate swaps were reflected in the consolidated statements of operations as follows ($ in millions):


Three Months Ended
June 30,
Six Months Ended
June 30,
2007 2006 2007 2006
$11.2 $ 4.4 $ 8.0 $ 3.6

These gains predominantly represents the change in fair value of the interest rate swap contracts, as well as amortization of other comprehensive income amounts previously recorded during the designation period of the interest rate swaps.

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Note 5 — Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2007 and 2006 (in thousands, except earnings per share):


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2007 2006 2007 2006
Numerator:        
Net income applicable to common stockholders for basic and diluted earnings per share $ 20,764 $ 13,320 $ 31,850 $ 22,825
Denominator:        
Weighted average shares outstanding for basic earnings per share 33,199 32,895 33,191 32,889
Dilutive stock options 202 600 203 580
Weighted average shares for diluted earnings per share 33,401 33,495 33,394 33,469
Earnings per share:        
Basic $ 0.63 $ 0.40 $ 0.96 $ 0.69
Diluted $ 0.62 $ 0.40 $ 0.95 $ 0.68

Note 6 — Segment and Geographic Information

Industry Segment Information

The Company operates in one industry segment, intermodal equipment leasing.

Geographic Segment Information

The Company’s customers use the containers for their global trade utilizing many worldwide trade routes. The following table represents the allocation of domestic (U.S.) and international revenues for the periods indicated based on the customers’ primary domicile (in thousands):


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2007 2006 2007 2006
Total revenues:        
Domestic $ 8,237 $ 7,474 $ 16,261 $ 14,778
Asia 39,762 35,120 77,460 69,263
Europe 30,143 27,470 57,898 55,932
Other International 6,590 4,920 12,685 9,624
Total $ 84,732 $ 74,984 $ 164,304 $ 149,597

As substantially all of the Company’s containers are used internationally, where no one container is domiciled in one particular place for a prolonged period of time, all of the Company’s containers are considered to be international.

Note 7 — Commitments and Contingencies

At June 30, 2007, commitments for capital expenditures totaled approximately $80.9 million, principally through the remainder of 2007.

Note 8 — Income Taxes

The consolidated income tax expense for the three and six month periods ended June 30, 2007 and 2006 was determined based upon estimates of the Company’s consolidated effective income tax

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rates for the years ending December 31, 2007 and 2006, respectively. 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.

The Company adopted the provisions of FIN 48 effective January 1, 2007 and reported the effect of adoption in the first quarter 2007 Form 10-Q. In accordance with the requirements of FIN 48, the Company evaluated all of its tax positions, and determined the cumulative effect of all uncertain tax positions and resulting unrecognized tax benefits did not have a material effect on the Company’s consolidated results of operations and financial position. The Company’s current and deferred income tax liability after adoption of FIN 48 are the same as they were prior to adoption. There have been no material changes in unrecognized tax benefits since the adoption of FIN 48.

Note 9 — Comprehensive Income

The following table provides a reconciliation of the Company’s net income to comprehensive income (in thousands):


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2007 2006 2007 2006
Net income $ 20,764 $ 13,320 $ 31,850 $ 22,825
Other comprehensive income:        
Foreign currency translation adjustments 97 129 119 135
Amortization of net unrealized gains in other comprehensive income and unrealized (loss) gain on derivative instruments designated as cash flow hedges (net of tax (benefit) expense of $(153), $(7), $(378) and $2,775, respectively) (277 )  (39 )  (682 )  4,983
Total $ 20,584 $ 13,410 $ 31,287 $ 27,943

The balance included in comprehensive income for cumulative translation adjustments as of June 30, 2007 and December 31, 2006 was $422 and $303, respectively.

Note 10 — Subsequent Events

Quarterly Dividend

On August 3, 2007, the Company’s Board of Directors approved and declared a $0.375 per share quarterly cash dividend on its issued and outstanding common stock, payable on August 29, 2007 to shareholders of record at the close of business on August 15, 2007.

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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 Securities and Exchange Commission on March 13, 2007. 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 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.

Our operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of June 30, 2007, our fleet consisted of 678,552 containers and chassis, including 67,726 containers under management for third parties, representing approximately 1.1 million twenty-foot equivalent units (TEU). We have an extensive global presence, offering leasing services through 19 offices in 11 countries and approximately 188 third party container depot facilities in 38 countries as of June 30, 2007. Our customers are among the world’s largest shipping lines.

We primarily lease four principal 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 oversized cargo such as marble slabs, building products and machinery, and (4) chassis which are used for the transportation of containers domestically. We also manage our own container disposals, act as the disposal agent for a number of our shipping line customers, and buy and sell used containers through our Trader group. As of June 30, 2007, dry, refrigerated, special containers and Trader represented approximately 85%, 5%, 7% and 2% of our fleet on a unit basis, respectively. Our chassis equipment, which was first purchased in the fourth quarter of 2005, represented 1% of our fleet on a unit basis as of June 30, 2007. In addition, in December 2006 we entered into our first port equipment finance transaction in which we financed several container cranes, reach stackers, tractors, trailers and related equipment. In June 2007 we placed our first purchase order for tank containers with delivery expected later this year. Tank containers are used to transport bulk liquids.

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The following tables provide the composition of our equipment fleet as of the dates indicated below (in both units and TEU’s):


  Equipment Fleet in Units
  June 30, 2007 December 31, 2006 June 30, 2006
  Owned Managed Total Owned Managed Total Owned Managed Total
Dry 526,740 52,493 579,233 492,497 54,675 547,172 487,116 57,128 544,244
Refrigerated 34,657 986 35,643 33,990 1,048 35,038 33,222 1,508 34,730
Special 30,641 14,247 44,888 27,418 14,765 42,183 27,045 15,357 42,402
Chassis 7,978 7,978 6,579 6,579 4,268 4,268
Subtotal 600,016 67,726 667,742 560,484 70,488 630,972 551,651 73,993 625,644
Trader 10,810 10,810 8,815 8,815 8,286 8,286
Total 610,826 67,726 678,552 569,299 70,488 639,787 559,937 73,993 633,930

  Equipment Fleet in TEU’s
  June 30, 2007 December 31, 2006 June 30, 2006
  Owned Managed Total Owned Managed Total Owned Managed Total
Dry 844,481 90,127 934,608 787,687 93,525 881,212 776,631 97,546 874,177
Refrigerated 63,149 1,571 64,720 61,208 1,652 62,860 59,548 2,167 61,715
Special 49,865 23,795 73,660 43,449 24,495 67,944 42,228 25,283 67,511
Chassis 13,956 13,956 11,508 11,508 7,738 7,738
Subtotal 971,451 115,493 1,086,944 903,852 119,672 1,023,524 886,145 124,996 1,011,141
Trader 15,468 15,468 13,799 13,799 11,581 11,581
Total 986,919 115,493 1,102,412 917,651 119,672 1,037,323 897,726 124,996 1,022,722

We generally lease our equipment on a per diem basis to our customers under three types of leases: long-term leases, service leases and finance leases. Long-term leases, typically with terms of 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. 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. Finance leases, which are typically structured as full payout leases, provide for a predictable recurring revenue stream with the lowest daily cost to the customer because customers are generally required to retain the equipment for the duration of its useful life. As of June 30, 2007, approximately 90% of our containers and chassis were on-hire to customers, with approximately 55% of our equipment on long-term leases, approximately 26% on service leases or long-term leases whose fixed terms have expired but for which the related units remain on-hire and for which we continue to receive rental payments, and approximately 9% on finance leases. In addition, approximately 8% of our fleet was available for lease and approximately 2% was available for sale.

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The following table provides a summary of our lease portfolio, based on units in the fleet as of the dates indicated below:


Lease Portfolio June 30,
2007
December 31,
2006
June 30,
2006
Long-term lease 55.2 %  58.1 %  58.2 % 
Service lease 25.9 27.2 25.6
Finance lease 8.6 8.2 7.1
Total leased 89.7 93.5 90.9
Used units available for lease 2.8 2.8 3.9
New units available for lease 5.4 1.6 1.9
Available for sale 2.1 2.1 3.3
Total portfolio 100.0 %  100.0 %  100.0 % 

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 gain or loss that we realize on the sale of our used containers. Our profitability for the first half of 2007 was supported by high starting utilization in all of our major product lines and strong gains on the sale of used containers.

Our leasing revenue is primarily driven by our owned fleet size, utilization and average rental rates. Our leasing revenue is also impacted by the mix of leases in our portfolio. As of June 30, 2007, our owned fleet included 986,919 TEU, an increase of 7.5% from December 31, 2006 and up 9.9% from June 30, 2006. The increase in fleet size was mainly due to the delivery of a large number of containers during the first half of 2007. We typically order the bulk of our dry containers in the first half of the year so that the equipment will be available for lease during the peak summer months for dry containers. As of June 30, 2007, our revenue earning assets (leasing equipment, net investment in finance leases, and equipment held for sale) totaled approximately $1.4 billion, an increase of approximately $145 million, or 11.5% over December 31, 2006 and an increase of approximately $204 million, or 17.0% over June 30, 2006. Our revenue earning asset growth was higher on a dollar basis, since our new chassis and port equipment investments are much more expensive than dry containers on a per TEU basis. In addition, the growth of our fleet has decreased the average age and increased the average net book value of the units in our owned fleet.

We expect that the growth of our owned fleet will slow in the second half of 2007, especially on a TEU basis. Through June 30, 2007, we have placed orders for approximately 135,000 TEU of new equipment, and have already taken delivery of approximately 110,000 TEU. We have secured lease commitments for a significant portion of these new units, but further procurement will be contingent on the pace of our success with leasing out the remaining uncommitted units.

We sold approximately 15,000 TEU of our owned containers, or 1.6% of our beginning owned container fleet, in the second quarter of 2007. Based on the age profile of our fleet and scheduled lease expirations, we expect our rate of disposals will increase significantly for several years beginning in 2008 before decreasing significantly for several years thereafter. During years of above-average disposals, our TEU growth rate may be constrained if we are unable to generate a sufficient number of attractive lease transactions for an expanded level of container purchases.

The following table sets forth our average fleet utilization for the periods indicated below:


  June 30,
2007
March 31,
2007
June 30,
2006
June 30,
2007
June 30,
2006
  3 months 3 months 3 months 6 months 6 months
Average Utilization 90.3 %  92.1 %  89.8 %  91.2 %  88.9 % 

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The following table sets forth our ending fleet utilization for the periods indicated below:


  June 30,
2007
March 31,
2007
December 31,
2006
June 30,
2006
Ending Utilization 89.7 %  90.8 %  93.5 %  90.9 % 
Ending Utilization (excluding new off-hire units) 94.8 %  93.9 %  95.0 %  92.7 % 

Our average utilization was 90.3% in the second quarter of 2007, an increase of 0.5% from the second quarter of 2006, and a decrease of 1.8% from the first quarter of 2007. Ending utilization for the second quarter of 2007 decreased 1.1% from the first quarter of 2007 to 89.7%. The improvement in our utilization in the second quarter of 2007 relative to the second quarter of 2006 was mainly the result of the significant increase in utilization we achieved in the second half of 2006. During 2007, our utilization has trended downward due to the large number of new units purchased but not yet picked-up by customers. As indicated above, we typically order the majority of our new dry containers in the first and second quarters in anticipation of the summer peak season for dry containers. New off-hire units available for lease have increased from 1.6% of our fleet as of December 31, 2006 to 5.4% as of June 30, 2007. We expect the number of new units available for lease to decrease in the second half of 2007 as deliveries of new units slow and we continue to place units on-hire during the remaining peak months for dry containers.

Idle new units typically have a limited impact on our profitability since they usually do not incur storage or depreciation charges. Utilization of our units exclusive of new off-hire units was 94.8% at the end of the second quarter of 2007 compared to 92.7% as of June 30, 2006 and 95.0% as of December 31, 2006. We expect that the utilization of our existing fleet will be supported for the balance of 2007 by strong cargo growth, a continued low volume of drop-offs and peak season dry container requirements in the third quarter.

Leasing demand for our refrigerated and special containers remained strong in the second quarter of 2007, and our volume of lease-outs in the quarter was generally limited by our lack of equipment availability. The utilization of our refrigerated and special containers does not heavily influence our overall utilization since they represent only approximately 12% of our fleet. However, these container types are significantly more expensive than dry containers, generate higher per diem lease rates and currently represent approximately 35% of our leasing revenue. We have increased procurement levels for refrigerated containers and special containers in response to the ongoing high level of demand. Leasing demand for our chassis product line remained relatively weak during the second quarter.

Average lease rates for our dry container product line in the second quarter of 2007 decreased by 2.1% from the average level of the second quarter of 2006. The decrease in average dry container leasing rates was primarily caused by several large lease extension transactions completed during the second and third quarters of 2006. Average lease rates for dry containers in the second quarter of 2007 were flat from the average level in the first quarter of 2007. New dry container prices decreased during the second quarter, though they remain over $1,800 for a 20’ dry container. Based on new container prices, we would normally expect that market leasing rates for new dry containers would be above our portfolio average. However, we continue to see very aggressive pricing for new container leases, and we are not currently getting a rate benefit from new container transactions.

Average lease rates for refrigerated containers in the second quarter of 2007 decreased by 6.4% from the average level in the second quarter of 2006 mainly due to a large lease extension transaction completed at the beginning of the third quarter of 2006. Average leasing rates for refrigerated containers were also relatively flat from the first quarter of 2007, though new refrigerated container prices are lower than they were three to eight years ago, and market leasing rates for new containers are slightly below our portfolio average.

Average lease rates for special containers were flat during the second quarter of 2007 compared to the second quarter of 2006 and the first quarter of 2007.

During the second quarter of 2007, the percentage of our units on finance leases increased to 8.6% compared to 7.1% as of June 30, 2006. Finance lease revenue increased from $2.8 million to $4.4 million for the three months ended June 30, 2007 as compared to the prior year period. While

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our finance lease revenue was $1.6 million higher for the three months ended June 30, 2007 compared to the comparable period in 2006, the increase in the portion of our units covered by finance leases resulted in a smaller increase in per diem leasing revenue compared to the amount we would have recognized if the units were placed on operating leases. For a finance lease, the lease payment from the customer is split into interest and principal components, and we only recognize the interest component as revenue while the principal component decreases the carrying value of the finance lease on the balance sheet. For an operating lease, the entire lease payment is recognized as revenue, while the carrying value of the container equipment is reduced through depreciation expense. For the second quarter of 2007, our finance lease billings exceeded our recognized finance lease revenue by $6.4 million.

During the second quarter of 2007, we recognized a $3.1 million gain on the sale of our used containers compared to a $1.1 million gain in the second quarter of 2006. The improvement compared to the second quarter of 2006 mainly resulted from higher sales volumes and higher unit prices for containers sold in 2007. In the second quarter of 2007, selling prices for used containers were supported by high selling prices for new containers and high utilization of leasing company and shipping line containers.

On March 9, 2007, the Company paid a quarterly dividend of $0.30 per share or an aggregate of approximately $10.0 million on its issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on February 23, 2007.

On May 30, 2007, the Company paid a quarterly dividend of $0.375 per share or an aggregate of approximately $12.5 million on its issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on May 17, 2007.

Results of Operations

The following table summarizes our results of operations for the three months and six months ended June 30, 2007 and 2006 in dollars and as a percentage of total revenues:


  Three Months Ended June 30, Six Months Ended June 30,
  2007 2006 2007 2006
  Dollars Percent Dollars Percent Dollars Percent Dollars Percent
Leasing revenues $ 68,847 81.3 %  $ 67,091 89.5 %  $ 137,028 83.4 %  $ 134,632 90.0 % 
Equipment trading revenue 13,876 16.4 5,757 7.7 23,114 14.1 10,776 7.2
Management fee income 1,552 1.8 1,573 2.1 3,141 1.9 3,149 2.1
Other revenues 457 0.5 563 0.7 1,021 0.6 1,040 0.7
Total revenues 84,732 100.0 74,984 100.0 164,304 100.0 149,597 100.0
Equipment trading expenses 11,268 13.3 4,714 6.3 18,667 11.4 8,939 6.0
Direct operating expenses 8,039 9.5 7,636 10.2 15,411 9.4 14,359 9.6
Administrative expenses 10,313 12.2 9,120 12.2 20,567 12.5 18,659 12.5
Depreciation and amortization 24,686 29.1 25,703 34.3 49,182 29.9 51,192 34.2
Provision (reversal) for doubtful accounts 212 0.2 (913 )  (1.2 )  329 0.2 (442 )