Triton International Ltd. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited. Triton leases intermodal equipment, principally maritime containers, and operates equipment-leasing and equipment-trading segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Leasing revenue | $321.4 million | $338.6 million | $642.9 million | $679.4 million |
| Equipment trading margin | $2.0 million | $4.5 million | $4.0 million | $8.1 million |
| Operating income | $144.2 million | $176.6 million | $292.2 million | $360.1 million |
| Net income | $70.6 million | $86.1 million | $147.6 million | $178.9 million |
| Net income attributable to common shareholders | $60.1 million | $84.1 million | $127.3 million | $176.0 million |
| Diluted EPS | $0.86 | $1.12 | $1.80 | $2.29 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $416.6 million | $501.8 million |
Liquidity and debt: At June 30, cash and cash equivalents were $252.4 million, restricted cash was $98.5 million, total debt outstanding was $6.61 billion ($6.57 billion net of specified unamortized items), and shareholders’ equity was $2.51 billion. The company reported approximately $576.6 million available under specified credit facilities without adding assets to borrowing bases; it also reported $1.17 billion of maximum borrowing capacity, which is not equivalent to immediately available capacity. Management said liquidity sources should cover obligations over the next 12 months. Scheduled principal payments in that period were $822.5 million; committed but unpaid capital expenditures were $92.5 million.
Margins and fleet indicators: Q2 operating income was $144.2 million on total leasing revenue of $321.4 million; the filing does not provide a single consolidated operating-margin measure. Average utilization was 95.0% in Q2, versus 97.2% a year earlier. Dry-container average lease rates fell 3.3% year over year; refrigerated rates fell 3.9%. The common dividend was $0.52 per share in Q2, unchanged from Q2 2019.
Material changes versus comparable periods
- Q2 leasing revenue fell $17.2 million year over year, primarily from fewer average units on-hire and lower average per-diem rates. Lower utilization and below-portfolio-rate lease extensions also weighed on revenue.
- Q2 operating income declined $32.4 million and net income declined $15.5 million year over year. Direct operating expense increased $11.5 million, principally from storage, repairs and repositioning; gains on leasing-equipment sales fell $3.0 million.
- Interest and debt expense declined $15.4 million in Q2, reflecting lower average debt and a lower average effective interest rate. This partly offset lower operating results.
- For the first half, operating cash flow declined $85.2 million to $416.6 million. Investing cash outflow was $118.0 million, compared with $43.5 million a year earlier, largely due to increased leasing-equipment purchases.
- First-half provision for doubtful accounts rose to $4.7 million from $0.4 million, mainly due to extended payment delays at one mid-sized customer. Preferred-share dividends also increased following the January 2020 Series D issuance, reducing income attributable to common shareholders.
- Debt net of specified unamortized items decreased from $6.63 billion at December 31, 2019 to $6.57 billion at June 30, 2020. During the first half, Triton issued $150 million of Series D preferred shares and repurchased 3.4 million common shares for $96.3 million.
Outlook, commentary and risks
- Management said customer container volumes were down 15% or more in Q2 and leasing demand was weak in the first half. Leasing demand increased in July as restrictions eased, but management said it was too early to determine whether the rebound would persist.
- Management reported that utilization declined gradually, ending Q2 at 94.8%, and was 95.0% as of July 22. Container drop-offs remained moderate, supported by lease-portfolio protections, low new-container production and operational challenges affecting customers.
- Used dry-container selling prices fell 7.1% year over year in Q2 but were relatively stable through the first half. Management said current prices remained above residual values. New-container prices increased in 2020 as manufacturers reduced shifts.
- COVID-19 creates material uncertainty around global trade, container demand and lease rates, customer credit and payment performance, container movement, access to capital and covenant compliance. Management said customer credit risk would remain elevated while disruptions continued; the pandemic’s duration and impact could not be determined.
- Triton was in compliance with its financial covenants at June 30. Approximately 82% of debt was fixed-rate or hedged; management estimated that a 100-basis-point increase on unhedged debt would add approximately $11.8 million to interest expense over 12 months.
- Other risks include customer concentration, used-container prices, competition, LIBOR transition, and reliance on debt facilities. The two largest customers represented 36% of first-half lease billings. No specific earnings or revenue guidance was provided.
- Management said pending ordinary-course legal matters were not expected to have a material effect based on information available. Triton had $45.9 million of equipment purchase commitments payable in 2020. A $0.52 common-share dividend for Q3 was declared after quarter-end.
Important facts for investors to verify
- Whether July’s improvement in leasing demand continued, and how utilization and lease rates evolved after the reporting date.
- Customer payment performance and credit exposure, particularly given the reserve increase and concentration in major shipping-line customers.
- Actual borrowing availability under asset-based facilities, scheduled debt repayments, and compliance with subsidiary-level covenants.
- Whether operating costs for storage, repairs and repositioning, and used-container sale proceeds, stabilize or further pressure earnings and cash generation.
- The effect of preferred dividends and common-share repurchases on per-share returns, equity and liquidity.