Triton International Ltd. — Q3 2019 Form 10-Q
Business context and period. Triton leases intermodal equipment, primarily shipping containers, and also trades equipment. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted.
Key financial metrics
| Metric | Q3 2019 | Nine months 2019 |
|---|---|---|
| Leasing revenue | $336.7 million, down 3.8% | $1,016.1 million, up 2.1% |
| Equipment trading margin | $4.2 million, down $1.7 million | $12.2 million, down $0.6 million |
| Operating income | $174.6 million, down 7.9% | $534.7 million, down 4.0% |
| Net income | $90.6 million, down 5.3% | $269.5 million, down 5.5% |
| Net income attributable to common shareholders | $85.9 million, down 8.8% | $261.9 million, down 6.5% |
| Basic / diluted EPS | $1.18 / $1.17 | $3.49 / $3.47 |
| Operating cash flow | Not separately stated for the quarter | $779.5 million, versus $764.2 million |
Q3 common dividends were $0.52 per share; nine-month common dividends were $1.56 per share. Interest and debt expense was $77.4 million in Q3 and $243.2 million year to date. The filing does not present a conventional operating-margin measure.
Balance sheet, debt and liquidity
- At September 30, 2019, total assets were $9.80 billion, cash and cash equivalents $46.8 million, restricted cash $111.3 million, and shareholders’ equity $2.31 billion.
- Debt outstanding before unamortized adjustments was $7.04 billion, down from $7.60 billion at December 31, 2018; balance-sheet debt, net of adjustments, was $6.99 billion. About 84.7% of debt was fixed-rate or hedged. The company reported compliance with debt covenants.
- Management cited $703.3 million of actual borrowing availability at quarter-end and said operating cash flow, cash, equipment-sale proceeds and facility availability should cover obligations over the next 12 months. Separately, the MD&A cites $1.377 billion of additional borrowing capacity; investors should reconcile these figures.
- Nine-month investing cash flow was positive $2.3 million, compared with $1.20 billion used in 2018, mainly reflecting substantially lower equipment purchases. Financing used $783.2 million, including debt repayments, $209.6 million of treasury-share purchases and $103.0 million to acquire remaining noncontrolling interests; preferred-share proceeds partly offset these uses.
Material changes versus prior periods
- Q3 leasing revenue declined as lower fleet size, utilization and average per-diem rates outweighed higher finance-lease and ancillary revenue. Some contracts renegotiated in late 2018 shifted from operating to finance leases, affecting reported revenue and depreciation.
- Nine-month leasing revenue increased, but operating income and net income fell. Direct operating expenses rose $22.6 million year over year, largely from storage of idle equipment and redelivery-related repair and handling costs. Nine-month interest expense rose $6.6 million.
- Q3 average utilization was 96.7%, versus 98.7% a year earlier; quarter-end utilization was 96.3%. Average dry-container lease rates fell 2.6% and refrigerated rates fell 4.8% year over year.
- Used dry-container disposal volume rose 98.8% in Q3, while average selling prices fell 12.4%. Equipment-sale gains were $6.2 million in Q3 and $22.2 million year to date, both below 2018 comparatives. The 2018 nine-month comparison also included a $21.0 million building-sale gain.
- Triton issued $230.0 million gross of Series A and B preferred shares in 2019, with stated annual dividend rates of 8.5% and 8.0%. It repurchased 6.59 million common shares for $209.1 million during the first nine months.
Outlook, commentary and risks
- Management described market conditions as unseasonably soft: leasing transactions and container pickups were slow despite the traditional summer peak. It expected activity to remain slow and utilization to decline further in Q4 as peak season ended. No quantitative earnings or revenue guidance was provided.
- Management cited softer global trade, U.S.–China trade tensions and tariffs, lower new-container prices, competitive pressure on lease rates, and the prospect of continued rate declines. It also expects pressure on shipping-line customers from weak freight rates, high debt, vessel capacity and higher fuel costs associated with environmental rules effective in January 2020.
- Customer credit risk remains elevated despite minimal Q3 credit losses. The two largest customers represented 35% of nine-month lease billings; the top five represented 53% and top 20 represented 85%.
- Approximately 63% of floating-rate debt was hedged. Management estimated that a 100-basis-point rate increase would raise net interest expense by about $11.3 million over the next 12 months. Derivative liabilities were $75.8 million at quarter-end, versus $11.0 million at 2018 year-end.
- Equipment purchase commitments were $68.6 million payable in 2019. Management also cited $103.5 million of committed but unpaid capital expenditures within the next 12 months. Ordinary-course legal matters were not expected to materially affect results, based on information available.
Important facts for investors to verify
- Reconcile the $703.3 million actual facility availability with the $1.377 billion of additional borrowing capacity cited elsewhere in the MD&A.
- Track utilization, lease-rate trends, idle-container storage costs and customer redeliveries, particularly as Q4 seasonality and trade uncertainty affect demand.
- Assess exposure to major shipping-line customers and their financial condition, including concentration in lease billings and the finance-lease portfolio.
- Review scheduled debt service, facility borrowing-base restrictions, interest-rate hedging and liquidity needs alongside ongoing dividends and share repurchases.
- Confirm the effect of preferred dividends on common-shareholder earnings and cash returns. The board declared the next common dividend of $0.52 per share and preferred dividends payable in December 2019.