Triton International Ltd quarterly report, Q3 FY2020

Triton International Limited — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. Triton leases and sells intermodal transport equipment, primarily maritime containers. Financial statements are unaudited; amounts below are in U.S. dollars.

Financial performance and position

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Leasing revenue	$327.8m	$336.7m	$970.6m	$1,016.1m
Equipment trading margin	$3.9m	$4.2m	$7.8m	$12.2m
Operating income	$158.8m	$174.6m	$451.0m	$534.7m
Net income	$56.5m	$90.6m	$204.1m	$269.5m
Net income attributable to common shareholders	$45.9m	$85.9m	$173.2m	$261.9m
Diluted earnings per common share	$0.67	$1.17	$2.48	$3.47

Q3 revenue from operating and finance leases was down 2.6% year over year; nine-month leasing revenue declined 4.5%. The filing attributes the nine-month decrease chiefly to fewer average units on-hire and lower average per diem rates.
Q3 operating income fell $15.8m year over year, while net income fell $34.1m. Lower interest expense was more than offset by higher operating costs, a $24.3m debt termination charge and higher taxes. Nine-month interest and debt expense declined $44.5m, but operating income and net income were lower.
Cash from operations was $682.3m for the first nine months, versus $779.5m a year earlier. Investing activities used $171.8m, compared with $2.3m provided in 2019; financing activities used $342.8m, versus $783.2m.
At September 30, cash and cash equivalents were $173.3m, restricted cash $163.5m, total assets $9.62bn and shareholders’ equity $2.52bn. Debt was $6.47bn outstanding ($6.43bn net of unamortized costs), versus $6.68bn outstanding at year-end 2019.
Available borrowing capacity under credit facilities without adding assets to the borrowing base was approximately $724.1m. The company reported covenant compliance. About 90% of debt was fixed-rate or hedged; management estimated a 100-basis-point increase on unhedged debt would add about $6.3m to interest expense over the next 12 months.
Common dividends were $0.52 per share in each of the first three quarters. The board subsequently declared a $0.57 per-share dividend payable in December 2020.

Material changes and management commentary

COVID-19 weakened trade, container demand, utilization and profitability in the first half of 2020. Management said trade and leasing demand rebounded sharply in Q3, with ending utilization reaching 97.4% at September 30 and 97.6% on October 16. Management noted continued uncertainty due to renewed COVID-19 restrictions in some countries.
Dry-container average lease rates decreased 3.3% year over year in Q3; refrigerated rates decreased 4.2%. Used dry-container disposal volume increased 38.0% year over year in Q3, and selling prices were relatively flat year over year but rose 3.3% from Q2.
Container manufacturing capacity constrained the company’s ability to respond quickly to demand. Triton reported approximately $800m of new and sale-leaseback containers purchased for 2020 delivery and approximately $350m for delivery in early 2021.
Q3 ABS issuance totaled $2.31bn at a weighted-average rate of 2.2%; most proceeds funded calls of $1.78bn of existing notes. The company expects this refinancing to reduce interest expense by more than $25m over the following year. The associated prepayment and write-off costs contributed to the $24.3m Q3 debt termination expense.
Direct operating expenses rose $23.5m in the first nine months, primarily from storage costs for idle units and higher repair, handling and repositioning expenses. The doubtful-account provision increased to $4.6m from $0.5m, mainly from reserves against one mid-sized customer’s receivables following extended payment delays.

Outlook, risks and commitments

No specific earnings or revenue guidance is provided. Management said it believed operating cash flow, cash, equipment-sale proceeds and facility availability would be sufficient to meet obligations over the next 12 months.
Management cited $652.0m of scheduled debt principal payments and $649.6m of committed but unpaid capital expenditures due over the next 12 months. The filing separately reports $552.8m of equipment purchase commitments payable in 2020 and 2021, in addition to $96.8m of equipment purchases payable at quarter-end.
Customer concentration is material: the two largest customers represented 36% of nine-month lease billings; the top five represented 58%, and the top 20 represented 85%. Two customers represented 83% of the finance-lease portfolio at September 30.
Key disclosed risks include renewed pandemic impacts on trade, lease rates, container sales, customer credit and funding access; customer defaults; competition; trade and geopolitical disruption; technology and operational interruptions; and the LIBOR transition. Management said pending ordinary-course legal matters were not expected to have a material effect based on information then available.
Derivative fair value was a $154.6m liability at September 30, compared with a $36.1m liability at year-end 2019. Accumulated other comprehensive loss was $152.5m, largely reflecting cash-flow hedge losses. The filing expects $30.5m of unrealized hedge losses to be reclassified to income over the next 12 months.

Important facts for investors to verify

Whether the Q3 rebound in trade and utilization persisted, and how it affected lease rates, new-container availability and profitability.
Customer payment performance and credit exposure, particularly to the largest shipping-line customers and the customer with extended payment delays.
Liquidity and covenant headroom against debt maturities, committed equipment purchases, capital expenditure needs and required restricted cash.
Whether the ABS refinancing delivers the expected interest savings, and how debt termination costs and hedge-related fair-value movements affect reported earnings and equity.
The sustainability of common and preferred dividends alongside share repurchases and planned fleet investment.