Triton International Limited — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Triton leases intermodal containers and chassis and also trades containers. The 2016 comparison is not fully comparable: TAL’s results were consolidated only after the July 12, 2016 merger, while 2017 includes the full periods.
Financial and operating highlights
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total leasing revenue | $302.1 million | $247.8 million | $849.7 million | $569.1 million |
| Equipment trading margin | $1.4 million | $0.2 million | $3.1 million | $0.2 million |
| Gain (loss) on sale of leasing equipment | $10.3 million | $(12.3) million | $25.1 million | $(16.1) million |
| Operating income (loss) | $149.3 million | $(3.8) million | $385.0 million | $92.6 million |
| Net income (loss) | $59.5 million | $(49.1) million | $143.9 million | $(31.4) million |
| Net income (loss) attributable to shareholders | $57.2 million | $(51.2) million | $137.4 million | $(36.3) million |
| Diluted earnings (loss) per share | $0.75 | $(0.74) | $1.84 | $(0.72) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $574.8 million | $337.5 million |
Q3 leasing revenue rose 22% year over year, primarily reflecting more equipment on hire and the full-quarter inclusion of TAL; average per diem rates were lower. Q3 operating expenses fell substantially from 2016, when merger-related costs and Hanjin-related doubtful-account provisions were significant. Interest and debt expense increased to $73.8 million in Q3 from $55.4 million, reflecting higher average debt and rates. No consolidated margin figure is stated in the filing.
Balance sheet at September 30, 2017: Total assets were $9.38 billion; debt outstanding was $6.86 billion ($6.79 billion net of financing costs and purchase-price adjustments); cash and cash equivalents were $146.3 million; restricted cash was $84.2 million; and total equity was $2.04 billion. Management reported $1.7 billion of additional borrowing capacity, subject to facility borrowing-base limits. Debt covenants were met.
Cash investment and funding: Nine-month investing cash use was $1.00 billion, including $1.19 billion of equipment purchases and finance-lease investments. Financing cash provided was $461.9 million, including net borrowings and $192.9 million of net share-offering proceeds. Cash increased $33.1 million over the period. The company reported $263.2 million of capital expenditure commitments and $94.1 million of equipment purchases payable at quarter-end.
Material changes and operating conditions
- The fleet reached 6.93 million cost-equivalent units, up 5.6% from year-end 2016. Average utilization was 97.6% in Q3, versus 96.5% in Q2 and 92.4% in Q3 2016; quarter-end utilization was 98.0%.
- Used dry-container sale prices increased 8% sequentially and 51% year over year in Q3. The company recorded a $10.3 million equipment-sale gain, versus a $12.3 million loss a year earlier.
- Q3 2017 included only $0.8 million of doubtful-account provision, compared with $22.4 million in Q3 2016, which included Hanjin-related charges. By September 30, 2017, Triton had recovered or negotiated release of 93% of Hanjin containers; about 82% had been re-leased or sold.
- The company issued $192.9 million of net proceeds from a common-share offering and completed multiple debt financings. Gross debt increased by about $449 million from December 31, 2016.
Outlook, risks and unusual items
- Management described container market conditions as favorable, supported by stronger-than-expected trade growth, limited new-container supply and strong leasing demand. It expected favorable supply-demand conditions to continue in 2018, while noting utilization was near maximum, limiting further improvement.
- As of November 8, 2017, Triton had ordered approximately 790,000 cost-equivalent units valued at about $1.6 billion for 2017 delivery; about 122,000 units remained undelivered. Management expected fleet growth in Q4. This is operating commentary, not formal earnings guidance.
- Management expected dry-container lease rates could rise further if current market conditions and new-container prices held. It warned that a return to 2015–2016 market lease rates could materially harm dry-container rates and financial performance. Refrigerated-container portfolio rates were declining year over year, and management expected them to continue trending down.
- Customer credit risk remains elevated because shipping lines face debt, weak freight economics and expected vessel capacity additions. CMA CGM and MSC accounted for 19% and 14% of nine-month lease billings; the top five customers represented 55%.
- Triton had collected a $45 million advance insurance payment related to Hanjin and believed further covered losses were recoverable subject to deductibles. It allowed credit insurance policies to lapse at expiration after insurers offered reduced coverage at materially higher premiums.
- Management said operating cash, cash balances, asset-sale proceeds, finance-lease collections and available borrowing capacity should cover obligations for the next 12 months. Its stated next-12-month commitments included $704.8 million of scheduled debt principal and $357.3 million of committed but unpaid capital expenditures.
- About 89.1% of debt was fixed-rate or synthetically fixed through swaps. Management estimated a 100-basis-point rise in floating rates would add approximately $9.3 million to interest expense over 12 months. A $4.1 million deferred-financing-cost write-off was recorded in 2017.
- The board declared a $0.45 per-share quarterly dividend payable December 22, 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting. Routine litigation was not expected by management to have a material adverse effect, though outcomes remain uncertain.
Important facts for investors to verify
- Separate underlying operating improvement from merger-driven comparability effects, equipment-sale gains and the unusually high 2016 merger and Hanjin charges.
- Track utilization, dry and refrigerated lease-rate trends, fleet deliveries and container resale prices, including whether current favorable market conditions persist.
- Assess customer concentration and credit quality, insurance availability and potential exposure from customer defaults.
- Review debt maturities, borrowing-base availability, covenant headroom, floating-rate exposure and the ability to fund capital commitments and dividends.
- Reconcile reported cash and liquidity with restricted cash, scheduled debt principal, equipment commitments and actual borrowing availability.