Business context and reporting period
Triton International Limited filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It leases intermodal equipment, primarily maritime containers, and also trades containers. Triton described itself as the world’s largest lessor of intermodal containers and chassis; at quarter-end its fleet totaled 3.25 million units, or 5.36 million TEU.
Comparisons with 2016 are materially affected by Triton’s July 12, 2016 merger with TAL: 2016 results before the merger reflect TCIL alone, while 2017 includes TAL. Management provides some combined pre-merger operating statistics, but the reported financial comparisons are not like-for-like.
Financial and operating highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total leasing revenue | $281.9 million | $158.3 million | $547.5 million | $321.4 million |
| Trading margin | $1.3 million | — | $1.7 million | — |
| Gain (loss) on sale of leasing equipment | $9.6 million | $(1.9) million | $14.8 million | $(3.8) million |
| Operating income | $130.4 million | $46.6 million | $235.7 million | $96.4 million |
| Net income | $48.0 million | $7.7 million | $84.3 million | $17.7 million |
| Net income attributable to shareholders | $45.7 million | $6.2 million | $80.3 million | $14.9 million |
| Diluted earnings per share | $0.62 | $0.15 | $1.08 | $0.37 |
Higher revenue and earnings reflect chiefly TAL’s inclusion, a larger fleet and stronger equipment-sale results; they should not be read as purely organic growth. Q2 interest and debt expense was $70.8 million (prior year $33.5 million); the six-month expense was $134.3 million (prior year $67.2 million). Effective tax rates were 19.3% and 18.1% for Q2 and the first half, respectively, up from 13.5% and 11.0%, mainly because TAL income is taxed at a higher U.S. rate. Cash dividends paid were $0.45 per share in Q2 and $0.90 per share for the first half.
- Cash flow, first half: operating activities provided $357.5 million; investing activities used $545.3 million; financing activities provided $244.3 million. Leasing-equipment and finance-lease purchases were $665.5 million, partly offset by $90.1 million of equipment-sale proceeds.
- Balance sheet at June 30: cash and cash equivalents were $169.7 million, restricted cash $112.1 million, and total assets $9.17 billion. Gross debt outstanding was $6.82 billion; debt net of deferred financing costs and purchase-price adjustment was $6.75 billion. Total equity was $1.82 billion.
- Liquidity and obligations: management reported $1.4 billion of additional borrowing capacity and believes available cash, operating cash flow, asset-sale proceeds, finance-lease collections and borrowing capacity will cover obligations over the next 12 months. It identified $790.1 million of scheduled principal payments and $649.0 million of committed but unpaid capital expenditures over that period. Separately, the contractual-obligations table lists $495.4 million of equipment purchase commitments at June 30; the filing does not clearly reconcile these capital-commitment figures.
- Margins and operating indicators: average fleet utilization rose to 96.5% in Q2 from 95.3% in Q1 and 93.3% in Q2 2016 on combined-fleet statistics; ending utilization was 97.1%. Dry-container average lease rates rose 2.2% sequentially but were down 6.9% year over year. Used dry-container sale prices rose 20% sequentially.
Changes, outlook, risks and unusual items
Management said market conditions remained favorable in Q2, driven by moderately positive containerized-trade growth, limited new-container supply and stronger leasing demand. It expected the favorable supply-demand balance to continue through the rest of 2017, while noting utilization was nearing practical limits, particularly for dry containers. As of July 31, Triton had ordered about 684,000 TEU of new and sale-leaseback containers for 2017 delivery, with about 185,000 TEU still undelivered; management expected further fleet growth in Q3. No formal earnings guidance is provided.
Management said market dry-container lease rates were above the fleet’s average rate and expected average dry rates to rise if favorable conditions persisted. It warned that a return to the depressed 2015–2016 market rates could materially hurt average rates and financial performance. Refrigerated-container average lease rates remained below market rates. Customer credit risk remains elevated amid shipping-line losses, high debt and vessel overcapacity. The 20 largest customers represented 83% of first-half lease billings; CMA CGM and MSC represented 19% and 15%, respectively.
Hanjin bankruptcy exposure remains a notable contingency. Triton had recovered or negotiated release of 92% of the approximately 87,000 containers previously on lease to Hanjin; about 70% had been re-leased or sold. The company reported collecting $44.5 million of a negotiated $45 million insurance advance and said anticipated losses were expected to be recoverable subject to deductibles. Policies did not cover pre-default receivables; lost-lease-revenue recovery is subject to policy limits and will not be recognized until received. Triton let its credit-insurance policies lapse at expiration after underwriters reduced coverage and raised premiums.
Debt increased during the period through new and expanded facilities and ABS note offerings. About 83.8% of debt was fixed-rate or synthetically fixed through swaps; a 100-basis-point increase in floating rates was estimated to increase interest expense by about $11.1 million over 12 months. The company reported compliance with all debt covenants. It also paid $16.1 million in retention bonuses in Q2. The board declared a subsequent $0.45-per-share quarterly dividend, payable September 22, 2017. Management considered disclosure controls effective; the company completed consolidation of fleet-management and general-ledger systems during Q2. Management did not expect ordinary-course litigation to have a material adverse effect, while cautioning that outcomes could differ.
Important facts for investors to verify
- Assess earnings and revenue trends on a merger-adjusted, comparable basis; reported 2016 financials exclude TAL before the merger date.
- Track customer credit quality, customer concentration and actual recovery or re-leasing of Hanjin equipment, including insurance proceeds, deductibles and uncovered claims.
- Verify whether favorable utilization, dry-container lease-rate and used-equipment pricing trends persist, and whether committed fleet purchases earn adequate returns.
- Monitor debt maturities, borrowing-base availability, interest-rate exposure, covenant headroom and the reconciliation of reported capital-expenditure commitments.
- Confirm the sustainability of dividends relative to operating cash flow, equipment investment and scheduled debt repayment.