Triton International Ltd annual report, FY2017

Triton International Limited — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. This is an annual report, not a standalone fourth-quarter filing. Triton is a global container and chassis lessor, with equipment leasing and equipment trading segments. Triton was formed by the July 2016 merger of TCIL and TAL; because TCIL was the accounting acquirer, 2016 results include TAL only from the merger date, limiting year-over-year comparability.

Key financial and operating metrics

Metric	2017	2016
Operating- and finance-lease revenue	$1,163.5 million	$828.7 million
Equipment trading revenue / trading margin	$37.4 million / $4.2 million	$16.4 million / $0.6 million
Gain (loss) on sale of leasing equipment	$35.8 million	$(20.3) million
Operating income	$546.4 million	$176.3 million
Net income (loss) attributable to shareholders	$344.6 million	$(13.5) million
Diluted earnings (loss) per share	$4.52	$(0.24)
Cash provided by operating activities	$806.8 million	$484.2 million
Capital expenditures for leasing equipment and finance leases	$1,562.9 million	$629.3 million
Debt, net of unamortized costs	$6,911.7 million at year-end	$6,353.4 million at year-end

Fourth-quarter 2017 disclosures report leasing revenue of $313.9 million, trading margin of $1.1 million, leasing-equipment sale gains of $10.7 million, shareholder-attributable net income of $207.2 million, and diluted EPS of $2.57. The quarter included the substantial tax-related benefit described below.

At year-end, cash and cash equivalents were $132.0 million, with a further $94.1 million of restricted cash. Total assets were $9.58 billion and total equity, including non-controlling interests, was $2.21 billion. The company reported $6.98 billion of debt outstanding before unamortized debt costs and fair-value adjustments. It said actual availability under its credit facilities was approximately $490 million; a separate liquidity discussion refers to $1.3 billion of additional borrowing capacity, so investors should reconcile those figures.

Operating cash flow less investing cash outflow was negative $504.6 million, reflecting the elevated fleet investment. Triton paid $1.80 per share in dividends during 2017 and declared a further $0.45-per-share quarterly dividend for March 2018.

Material changes and operating performance

• Management described market conditions as having rebounded in 2017 after weakness in 2015 and much of 2016. It cited stronger trade growth, constrained new-container supply, and reduced purchases by some competitors and shipping lines.
• Average utilization rose to 96.9% for 2017 from 93.3% in 2016; year-end utilization was 98.6%, versus 94.8% a year earlier. The fleet reached 7.06 million cost equivalent units, up 7.5%.
• Triton invested approximately $1.6 billion in new containers and bought about 750,000 CEUs. Revenue-earning assets, net, increased 11.3% to $8.7 billion.
• Average lease rates declined year over year for dry containers (3.9%), refrigerated containers (7.1%) and special containers (2.9%). Used dry-container sale prices rose almost 50%, supporting the swing from a 2016 disposal loss to a 2017 gain.
• Reported 2017 net income benefited from a one-time $139.4 million deferred-tax benefit following the U.S. Tax Cuts and Jobs Act, which reduced the federal corporate tax rate from 35% to 21%. The full-year income-tax benefit was $93.3 million.
• Interest and debt expense increased to $282.3 million from $184.0 million, reflecting full-year inclusion of TAL, higher average debt and a higher average effective interest rate. Average effective interest rate was 4.33% in 2017 versus 4.02% in 2016.
• Transaction and other costs declined to $9.3 million from $66.9 million, primarily as merger-related costs fell. The company issued 6.15 million common shares in 2017 and received net proceeds of approximately $192.9 million before offering expenses.

Outlook, risks and unusual items

• Management expected dry-container average lease rates to improve further if new-container prices and favorable market conditions persisted. It expected the effect of many 2018 dry-container lease expirations to be limited under those conditions, but warned that a return to 2015–2016 market rates could materially reduce revenue, profit and cash flow.
• Refrigerated-container market rates remained below portfolio averages; management expected portfolio rates to continue trending down. Used dry-container sale prices were expected to rise in early 2018, although lower disposal volumes could weigh on disposal gains. These are conditional expectations, not formal earnings guidance.
• Customer credit risk and concentration are significant: the five largest customers generated 55% of 2017 lease billings; CMA CGM accounted for 19% and Mediterranean Shipping Company for 14%. Management also cited planned consolidation among three Japanese shipping lines, which together represented about 20% of billings.
• After Hanjin’s 2016 bankruptcy, Triton had recovered approximately 94% of the roughly 87,000 containers previously on lease to Hanjin. It received $67.0 million of insurance proceeds and recorded $6.8 million of insurance recovery income in 2017. Broad credit insurance had lapsed as coverage became more limited and expensive; the company had only more limited receivables coverage for some customers.
• Leverage is substantial. Gross debt was approximately $6.98 billion; net debt was 78.8% of the net book value of revenue-earning assets. Scheduled 2018 debt principal was approximately $716.7 million in the contractual-obligations table, alongside $404.1 million of committed but unpaid capital expenditures reported in the liquidity discussion. Management said available resources should meet obligations over the next 12 months. Triton reported compliance with all debt covenants at year-end.
• Approximately 86% of debt was fixed-rate or effectively fixed through swaps. Management estimated that a 100-basis-point increase in rates on floating-rate debt would add about $12.8 million to interest expense over the next 12 months.
• Other risks include global trade and protectionism, lease-rate and used-container-price volatility, customer defaults, refinancing and covenant restrictions, container repositioning costs, environmental and refrigerant regulation, and foreign legal and operational risks. The company also identified potential higher U.S. cash taxes from the new interest-deductibility limit and other Tax Act provisions.
• The 2017 depreciation-policy review adjusted certain refrigerated and special-container residual values and extended estimated useful lives for certain special containers, effective January 1, 2018; management said the effect would have been immaterial if adopted in October 2017. No leasing-equipment impairment was recorded in 2017.
• Management and KPMG reported effective internal control over financial reporting as of December 31, 2017, and KPMG issued an unqualified opinion on the consolidated financial statements.

Important facts for investors to verify

• Reconcile the stated $1.3 billion of additional borrowing capacity with the separately reported $490 million of actual facility availability.
• Assess earnings excluding the $139.4 million one-time tax benefit, disposal gains, merger-related costs and other significant non-recurring items.
• Review lease expirations and renewal pricing, particularly 2018 dry-container leases, and test results under weaker utilization, lease-rate and used-container-price assumptions.
• Evaluate the credit quality and concentration of major shipping-line customers, the limited remaining credit insurance, and the costs and recovery outcomes of any future default.
• Examine debt maturities, refinancing access, interest-rate exposure, covenant headroom and the funding needed for fleet investment, capital commitments and dividends.
• Account for merger-driven differences when comparing 2017 with 2016; the reported periods do not represent equivalent full-year businesses.