Triton International Limited — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Triton leases and sells intermodal transport equipment, primarily maritime containers. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Leasing revenue | $327.8m | $336.7m | $970.6m | $1,016.1m |
| Equipment trading margin | $3.9m | $4.2m | $7.8m | $12.2m |
| Operating income | $158.8m | $174.6m | $451.0m | $534.7m |
| Net income | $56.5m | $90.6m | $204.1m | $269.5m |
| Net income attributable to common shareholders | $45.9m | $85.9m | $173.2m | $261.9m |
| Diluted earnings per common share | $0.67 | $1.17 | $2.48 | $3.47 |
- Q3 revenue from operating and finance leases was down 2.6% year over year; nine-month leasing revenue declined 4.5%. The filing attributes the nine-month decrease chiefly to fewer average units on-hire and lower average per diem rates.
- Q3 operating income fell $15.8m year over year, while net income fell $34.1m. Lower interest expense was more than offset by higher operating costs, a $24.3m debt termination charge and higher taxes. Nine-month interest and debt expense declined $44.5m, but operating income and net income were lower.
- Cash from operations was $682.3m for the first nine months, versus $779.5m a year earlier. Investing activities used $171.8m, compared with $2.3m provided in 2019; financing activities used $342.8m, versus $783.2m.
- At September 30, cash and cash equivalents were $173.3m, restricted cash $163.5m, total assets $9.62bn and shareholders’ equity $2.52bn. Debt was $6.47bn outstanding ($6.43bn net of unamortized costs), versus $6.68bn outstanding at year-end 2019.
- Available borrowing capacity under credit facilities without adding assets to the borrowing base was approximately $724.1m. The company reported covenant compliance. About 90% of debt was fixed-rate or hedged; management estimated a 100-basis-point increase on unhedged debt would add about $6.3m to interest expense over the next 12 months.
- Common dividends were $0.52 per share in each of the first three quarters. The board subsequently declared a $0.57 per-share dividend payable in December 2020.
Material changes and management commentary
- COVID-19 weakened trade, container demand, utilization and profitability in the first half of 2020. Management said trade and leasing demand rebounded sharply in Q3, with ending utilization reaching 97.4% at September 30 and 97.6% on October 16. Management noted continued uncertainty due to renewed COVID-19 restrictions in some countries.
- Dry-container average lease rates decreased 3.3% year over year in Q3; refrigerated rates decreased 4.2%. Used dry-container disposal volume increased 38.0% year over year in Q3, and selling prices were relatively flat year over year but rose 3.3% from Q2.
- Container manufacturing capacity constrained the company’s ability to respond quickly to demand. Triton reported approximately $800m of new and sale-leaseback containers purchased for 2020 delivery and approximately $350m for delivery in early 2021.
- Q3 ABS issuance totaled $2.31bn at a weighted-average rate of 2.2%; most proceeds funded calls of $1.78bn of existing notes. The company expects this refinancing to reduce interest expense by more than $25m over the following year. The associated prepayment and write-off costs contributed to the $24.3m Q3 debt termination expense.
- Direct operating expenses rose $23.5m in the first nine months, primarily from storage costs for idle units and higher repair, handling and repositioning expenses. The doubtful-account provision increased to $4.6m from $0.5m, mainly from reserves against one mid-sized customer’s receivables following extended payment delays.
Outlook, risks and commitments
- No specific earnings or revenue guidance is provided. Management said it believed operating cash flow, cash, equipment-sale proceeds and facility availability would be sufficient to meet obligations over the next 12 months.
- Management cited $652.0m of scheduled debt principal payments and $649.6m of committed but unpaid capital expenditures due over the next 12 months. The filing separately reports $552.8m of equipment purchase commitments payable in 2020 and 2021, in addition to $96.8m of equipment purchases payable at quarter-end.
- Customer concentration is material: the two largest customers represented 36% of nine-month lease billings; the top five represented 58%, and the top 20 represented 85%. Two customers represented 83% of the finance-lease portfolio at September 30.
- Key disclosed risks include renewed pandemic impacts on trade, lease rates, container sales, customer credit and funding access; customer defaults; competition; trade and geopolitical disruption; technology and operational interruptions; and the LIBOR transition. Management said pending ordinary-course legal matters were not expected to have a material effect based on information then available.
- Derivative fair value was a $154.6m liability at September 30, compared with a $36.1m liability at year-end 2019. Accumulated other comprehensive loss was $152.5m, largely reflecting cash-flow hedge losses. The filing expects $30.5m of unrealized hedge losses to be reclassified to income over the next 12 months.
Important facts for investors to verify
- Whether the Q3 rebound in trade and utilization persisted, and how it affected lease rates, new-container availability and profitability.
- Customer payment performance and credit exposure, particularly to the largest shipping-line customers and the customer with extended payment delays.
- Liquidity and covenant headroom against debt maturities, committed equipment purchases, capital expenditure needs and required restricted cash.
- Whether the ABS refinancing delivers the expected interest savings, and how debt termination costs and hedge-related fair-value movements affect reported earnings and equity.
- The sustainability of common and preferred dividends alongside share repurchases and planned fleet investment.