Triton International Limited — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Triton leases intermodal equipment, primarily maritime containers, and operates equipment leasing and equipment trading segments.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total leasing revenue | $338.6 million | $329.8 million | $679.4 million | $644.9 million |
| Equipment trading margin | $4.5 million | $4.0 million | $8.1 million | $7.0 million |
| Operating income | $176.6 million | $201.0 million | $360.1 million | $367.4 million |
| Net income | $86.1 million | $106.8 million | $178.9 million | $189.6 million |
| Net income attributable to common shareholders | $84.1 million | $104.9 million | $176.0 million | $185.8 million |
| Diluted EPS | $1.12 | $1.30 | $2.29 | $2.30 |
Q2 leasing revenue rose 2.7%, while net income declined 19.4%. The prior-year quarter included a $21.0 million gain on an office-building sale; Q2 2019 also had lower equipment-sale gains and higher direct operating and interest expenses. For the first half, leasing revenue increased 5.4%, but net income decreased 5.6%; the comparison also reflects the prior-year building-sale gain. Common dividends were $0.52 per share in Q2, unchanged year over year.
- Cash flow: First-half operating cash flow was $501.8 million, versus $455.2 million. Investing cash outflow was $43.5 million, versus $773.0 million, largely reflecting a $734.0 million reduction in leasing-equipment purchases. Financing cash outflow was $457.5 million, compared with $272.2 million of inflow.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $45.6 million and restricted cash was $114.8 million. Debt outstanding was $7.266 billion gross ($7.205 billion net on the balance sheet), down from $7.596 billion gross at year-end 2018. Total assets were $9.996 billion and total equity was $2.337 billion. Management reported $667.7 million of actual available credit-facility capacity and said resources were expected to cover obligations for the next 12 months. It cited $773.3 million of scheduled debt principal and $15.5 million of committed unpaid capital expenditures over that period.
- Interest exposure: The weighted-average interest rate on total debt was 4.10%. Fixed-rate and hedged debt totaled $6.111 billion, or 84.1% of debt; approximately 62% of floating-rate debt was hedged. Management estimated a 100-basis-point rate increase would add about $11.8 million to interest expense over 12 months.
Material changes and management commentary
- Average utilization was 97.2% in Q2, down from 98.8% a year earlier; utilization on July 19 was 96.8%. Management expected utilization to remain around its then-current range.
- Dry-container average lease rates decreased 1.3% year over year in Q2 and refrigerated-container rates decreased 4.3%; special-container rates were flat. Management said dry and refrigerated rates could continue to trend down, particularly if new-container prices remain low.
- Used dry-container disposal volume increased 60% year over year in Q2, while average disposal prices fell 14%. Selling prices remained above accounting residual values, and equipment-sale gains continued, but were lower than in the prior-year period.
- Management described supply and demand as generally balanced but said leasing transactions and container pickups remained slow despite the start of peak season. It expected a slight increase in Q3 lease activity, unlikely to reach 2017–2018 peak-season levels.
- The fleet totaled about 3.69 million units, or 7.56 million cost equivalent units, at June 30. Limited equipment procurement in 2019 reflected slower lease activity.
- Direct operating expenses increased, primarily from storage costs associated with lower utilization and repairs following increased container redeliveries. Interest expense also rose, reflecting higher average debt and, for the first half, a higher average effective rate.
Capital allocation, debt actions, and other items
- Triton issued 8.50% Series A preference shares in March and 8.00% Series B preference shares in June, raising $221.8 million net in total. Preference dividends are cumulative; the shares are redeemable at the company’s option after the applicable 2024 dates.
- The company repurchased 4.98 million common shares for $157.2 million during the first half, at an average $31.50 per share. A new $200 million repurchase authorization was approved in April; $146.7 million remained at June 30.
- Triton acquired the remaining third-party interests in Triton Container Investments LLC during the first half for an aggregate $103.0 million, bringing ownership to 100%.
- Debt actions included increasing an asset-backed warehouse facility’s capacity to $800 million, amending a $1.125 billion revolver to reduce its spread and extend maturity, and repaying a $210.3 million term loan. A new $325 million revolving facility was entered into after quarter-end.
- The company was in compliance with debt covenants at June 30. Management said pending or threatened ordinary-course legal matters were not expected to have a material effect; equipment purchase commitments were $4.5 million, payable in 2019.
- Management cited softer global economic conditions, U.S.–China trade uncertainty, customer financial strain, anticipated vessel capacity additions, and new environmental rules expected in January 2020 as risks to shipping customers and trade activity. The filing provides no numerical full-year earnings or revenue guidance.
Important facts for investors to verify
- Confirm actual borrowing availability: MD&A gives $667.7 million of actual availability, while another liquidity statement cites $1.352 billion of additional borrowing capacity; determine the scope and conditions behind the differing figures.
- Assess the durability of utilization, lease rates, and equipment-sale gains, given weaker Q2 utilization, falling dry and refrigerated rates, and lower used-container sale prices.
- Evaluate customer concentration and credit exposure: the two largest customers represented 35% of first-half lease billings, and management described shipping-line customer finances as pressured.
- Review debt maturities, refinancing capacity, interest-rate sensitivity, and the company’s stated 12-month debt principal and capital-expenditure requirements.
- Consider cash uses and senior claims, including common-share repurchases, common dividends, and cumulative 8.50% and 8.00% preference dividends.