Triton International Ltd quarterly report, Q1 FY2017

Business context and reporting period

Triton International Limited leases intermodal equipment, primarily maritime containers, and operates equipment trading and management businesses. This unaudited Form 10-Q covers the three months ended March 31, 2017.

Results include TAL International following its July 2016 merger with Triton’s predecessor, TCIL. Because TCIL is the accounting acquirer, the first-quarter 2016 comparison reflects TCIL alone; reported year-over-year changes are therefore not directly comparable to organic growth.

Key financial results

Operating expenses were $165.8 million, including $117.9 million of depreciation and amortization. Interest and debt expense was $63.5 million; income tax expense was $7.1 million, an effective rate of 16.4% versus 9.0% in Q1 2016. The filing does not present a specific margin measure.

Debt, liquidity and capital

Quarter-end debt outstanding was $6.54 billion ($6.48 billion net of financing costs and purchase-accounting adjustment), versus $6.42 billion gross at December 31, 2016. Cash was $135.4 million and restricted cash was $57.6 million. The company reported $923.7 million of additional borrowing capacity and stated it expected available resources to cover obligations over the next 12 months.

Operating cash flow was more than offset by $265.7 million of leasing-equipment and finance-lease purchases, partly offset by $35.0 million of equipment sale proceeds and $15.6 million of net finance-lease collections. Financing provided $74.8 million, including $127.8 million of net borrowings before financing fees and other items. Triton paid $33.2 million in common dividends during the quarter.

At March 31, debt included $3.26 billion at fixed rates and $3.28 billion at floating rates. Swaps synthetically fixed part of floating debt; 80.1% of total debt was fixed or synthetically fixed. The company was in compliance with debt covenants.

Material changes and operating trends

• Reported leasing revenue rose $102.6 million year over year, primarily due to inclusion of TAL; management attributed a $7.3 million decline to the TCIL fleet. TAL also contributed materially to higher expenses and debt costs.
• Fleet utilization averaged 95.3%, up from 93.6% in Q4 2016 and 94.0% for the combined TCIL/TAL fleets in Q1 2016; May 11 utilization was 96.4%.
• Dry-container average lease rates fell 1.1% from Q4 2016 and 12.7% year over year, although management said current market rates had strengthened. Refrigerated rates fell 1.1% sequentially and 7.5% year over year.
• Used-container disposal results improved to a $5.2 million gain from a $1.8 million loss. Management cited higher sale prices and reversals of prior impairment charges, including $3.8 million on equipment still held for sale.
• Investments expanded the fleet to 6.73 million CEU, up 2.5% from year-end 2016. As of May 11, Triton had ordered approximately $930 million of new and sale-leaseback containers for 2017 delivery.

Outlook, risks and unusual items

Management described container-market conditions as rebounding, with modest trade growth and limited new container production creating a tight supply-demand balance. If those conditions persist, it expected utilization to rise further and dry-container lease rates to stabilize or potentially increase; it also expected used-container prices to rise if new-container prices and market tightness continued. These expectations are forward-looking and conditional.

Customer credit risk remains elevated: shipping lines face excess vessel capacity, weak freight rates and significant debt. CMA CGM represented 19% and Mediterranean Shipping Company 15% of Q1 lease billings; the 20 largest customers represented 81%.

Hanjin Shipping’s 2016 bankruptcy affected approximately 87,000 containers with a $243.3 million net book value. Triton had recovered or regained control of 91% of those containers, and 54% were back on lease or sold. It had negotiated a $45 million insurance advance, of which $11 million had been collected by May 11, 2017. Management expected insurance to offset most recovery and redeployment costs, subject to policy limits and deductibles; pre-default receivables were not insured. Triton allowed credit-insurance policies to lapse at expiration because available coverage had fallen and premiums had increased.

Other commitments and matters include $246.0 million of capital-expenditure commitments, $200.7 million of equipment purchases payable, and $40.3 million of retention and severance obligations. Management reported no material expected impact from routine litigation, while cautioning that outcomes could change. Disclosure controls were deemed effective, but the merged company was still using separate fleet and accounting systems and had not fully documented new consolidation processes; it planned further systems integration in Q2 2017.

On May 10, 2017, the board declared a $0.45 per-share quarterly dividend, payable June 22. In April, Triton issued $281 million of fixed-rate secured ABS notes at a 5.16% effective yield, scheduled to mature in April 2027.

Important facts for investors to verify

• Separate merger effects from underlying operating trends; Q1 2016 is a TCIL-only accounting comparison.
• Track utilization, market lease rates and 2017–2018 lease expirations, particularly if container-market conditions weaken.
• Monitor customer concentration, shipping-line credit quality, Hanjin recoveries and insurance collections.
• Confirm available borrowing capacity, debt maturities, covenant headroom, floating-rate exposure and committed equipment spending.
• Assess whether the planned accounting and fleet-system integration is completed and whether control documentation remains effective.
• Distinguish disposal gains from recurring performance, including the effect of prior impairment reversals.