Triton International Limited — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Triton leases and trades intermodal transportation equipment, primarily maritime containers. It reported one industry and two segments: equipment leasing and equipment trading.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Leasing revenue | $350.1m | $302.1m | $994.9m | $849.7m |
| Equipment trading margin | $5.8m | $1.4m | $12.8m | $3.1m |
| Operating income | $189.5m | $149.3m | $556.8m | $385.0m |
| Net income attributable to shareholders | $94.2m | $57.2m | $280.0m | $137.4m |
| Diluted earnings per share | $1.17 | $0.75 | $3.47 | $1.84 |
| Cash dividends per common share | $0.52 | $0.45 | $1.49 | $1.35 |
- For Q3, leasing revenue increased about 16% and shareholder net income about 65% year over year. Management attributed revenue growth principally to more containers on lease, higher average per-diem rates and lower amortization of lease intangibles.
- For the first nine months, operating cash flow was $719.0m, versus $574.8m. Investing cash flow was negative $1,152.4m, including $1,347.2m of leasing-equipment purchases and finance-lease investments. Financing cash flow was positive $409.7m. Cash, cash equivalents and restricted cash totaled $202.5m at period-end.
- At September 30, unrestricted cash was $75.2m and restricted cash was $127.3m. Debt, net of debt costs and fair-value adjustments, was $7,472.8m, up from $6,911.7m at December 31, 2017. Total debt outstanding before those adjustments was $7,535.6m. The contractual weighted-average interest rate was 4.21%; 85.1% of debt was fixed-rate or synthetically fixed. A 100-basis-point rise in rates on unhedged floating-rate debt was estimated to add approximately $11m of interest expense over 12 months.
- Management reported approximately $401.6m of actual availability under credit facilities, despite also citing $1,003.0m of “additional borrowing capacity” in its liquidity discussion. The filing says cash, operating cash flow, equipment-sale proceeds, finance-lease collections and borrowing availability should cover obligations for the next 12 months. Scheduled debt principal payments and committed but unpaid capital expenditures over that period were $810.9m and $239.2m, respectively.
Material changes and unusual items
- Fleet expansion supported results: the leasing fleet was 3.70m units at quarter-end, and fleet net book value was $9.5bn. Average utilization was 98.7%, compared with 97.6% in Q3 2017.
- Nine-month operating income included a $21.0m gain on sale of an office building; net proceeds were $27.6m and were used to repay its $18.3m mortgage balance plus accrued interest. The building gain was not present in the comparable 2017 period.
- Interest and debt expense rose to $82.5m in Q3 from $73.8m, and to $236.6m for nine months from $208.1m, reflecting higher average debt and higher effective interest rates. Effective tax rates declined to 9.3% for Q3 and 11.3% for nine months, primarily following the U.S. federal corporate tax rate reduction.
- The board authorized up to $200m of share repurchases in August. Triton repurchased 33,700 shares for $1.1m in Q3, leaving $198.9m authorized. A $0.52-per-share quarterly dividend was declared after quarter-end, payable December 20, 2018.
- The company adopted several accounting updates in 2018; management said they had no significant financial-statement impact or, for revenue recognition, minimal impact. It planned to adopt the new lease standard on January 1, 2019 and did not expect a significant impact.
Outlook, commentary and risks
- Management described Q3 container demand and supply conditions as favorable, citing solid trade growth, strong leasing demand and limited availability of used leasing containers. It expected utilization to decline gradually in Q4 as peak shipping season ended; utilization was 98.4% on October 31.
- Management expected used-container sale prices to ease slightly in Q4 with seasonal demand. Dry-container average lease rates were 3.0% higher year over year in Q3, but market rates had softened late in the quarter. Refrigerated-container average lease rates fell 1.0% year over year and were expected to continue trending down gradually.
- Trade tariffs and uncertainty about 2019 trade growth were identified as risks. A 10% U.S. tariff on Chinese-manufactured chassis took effect September 24, 2018, with a scheduled increase to 25% on January 1, 2019. Most chassis Triton buys are manufactured in China; the company intended to seek higher rental rates and sale prices to offset the tariff.
- Customer credit risk remained elevated: shipping lines faced debt, weak freight rates and vessel overcapacity. Triton’s two largest customers accounted for 20% and 14% of nine-month lease billings, respectively; its 20 largest customers accounted for 85%. Credit insurance was more limited than the coverage previously held. New vessel deliveries and environmental regulations expected in 2020 could add pressure on customers.
- Legal and regulatory matters arose in the ordinary course; management did not expect them to materially affect the company based on information then available. The company was in compliance with debt covenants at quarter-end. Forward-looking statements remain subject to risks and uncertainties; no specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Reconcile the liquidity disclosures: the $1,003.0m borrowing-capacity statement versus $401.6m of actual facility availability, and assess capacity against near-term debt maturities and capital commitments.
- Assess whether fleet growth and near-99% utilization can be sustained as peak-season demand fades, and track lease rates, container prices and fleet investment returns.
- Evaluate exposure to shipping-line credit deterioration and customer concentration, including the scope and limitations of current credit insurance.
- Monitor the chassis tariff’s scheduled increase, possible effects on procurement costs and the company’s ability to pass costs through to customers.
- Separate recurring operating performance from the $21.0m building gain, and consider the effects of rising borrowing costs and the size and pace of any share repurchases.