Business context and reporting period
Triton International Limited’s Form 10-Q covers the quarter and six months ended June 30, 2016. At quarter-end, Triton was a pre-operating holding company wholly owned by Triton Container International Limited (TCIL); its statements therefore show only formation-related activity, not the operating businesses. Triton completed its combination with TCIL and TAL International Group, Inc. (TAL) on July 12, 2016. TCIL was the accounting acquirer; former TCIL shareholders owned approximately 55% and former TAL shareholders approximately 45% of Triton after closing. The filing provides separate supplemental historical financial statements for TCIL and TAL, plus unaudited pro forma results.
Key financial metrics
Amounts below are in millions of U.S. dollars unless stated otherwise. TCIL and TAL figures are their separate historical results, not a single reported Triton operating result.
| Metric | TCIL | TAL |
|---|---|---|
| Q2 2016 revenue | $158.3 leasing revenue | $141.3 leasing revenue; $11.5 equipment-trading revenue |
| Q2 2016 net income | $7.7, including $6.2 attributable to shareholders | Net loss of $2.0 |
| First-half 2016 revenue | $321.4 leasing revenue | $290.5 leasing revenue; $22.8 equipment-trading revenue |
| First-half 2016 net income | $17.7, including $14.9 attributable to shareholders | $4.5 |
| Debt, June 30, 2016 | $3,042.3 principal; $3,021.0 net of deferred financing costs | $3,170.2 principal; $3,146.5 net of deferred financing costs |
| Cash, June 30, 2016 | $89.8 unrestricted; $20.9 restricted | $54.3 unrestricted; $28.4 restricted |
For the first half, TCIL operating cash flow was $189.3 million and investing cash flow was $4.1 million provided; financing used $160.2 million. TAL operating cash flow was $178.2 million; investing used $63.3 million and financing used $119.5 million. First-half capital expenditure and finance-lease investment cash outflows were $64.1 million for TCIL and $145.7 million for TAL.
Unaudited pro forma combined results, assuming the transaction occurred January 1, 2015, show first-half 2016 revenue of $546.4 million and net income of $7.0 million, versus $593.2 million and $108.2 million, respectively, in first-half 2015. The filing does not provide a clear pro forma quarterly result.
Material changes versus the prior comparable period
- TCIL first-half leasing revenue declined to $321.4 million from $359.1 million; net income declined to $17.7 million from $83.8 million. Q2 net income was $7.7 million versus $40.0 million a year earlier. TCIL recorded a first-half $3.8 million net loss on leasing-equipment sales, compared with a $6.3 million gain in 2015.
- TAL first-half leasing revenue fell to $290.5 million from $299.8 million, while net income fell to $4.5 million from $52.4 million. Q2 shifted from $26.7 million net income to a $2.0 million net loss. A first-half $29.4 million loss on leasing-equipment sales, versus a $2.1 million loss in 2015, was a major adverse item.
- TCIL debt, net of financing costs, decreased from $3,166.9 million at December 31, 2015 to $3,021.0 million at June 30, 2016; TAL debt on the same basis decreased from $3,216.5 million to $3,146.5 million. TCIL unrestricted cash rose to $89.8 million from $56.7 million, while TAL unrestricted cash declined to $54.3 million from $58.9 million.
Outlook, risks and unusual items
- The combination’s preliminary purchase-price allocation estimates consideration of approximately $510.3 million and includes $361.8 million of identifiable intangible assets and $153.6 million of goodwill. The allocation is preliminary and may change materially. TAL’s results enter Triton’s consolidated results from July 13, 2016.
- TCIL reported $6.9 million of transaction and other non-recurring costs for the first half; TAL reported $4.5 million. TAL’s first-half effective tax rate was 62.2%, affected by non-deductible transaction costs and tax expense related to restricted-stock vesting.
- After closing, TCIL recognized $30.6 million of severance costs and expected to accrue a further $7.0 million of retention expenses. These are subsequent-period items, not included in the June 30 results.
- TCIL and TAL reported compliance with their debt covenants at June 30. Both use interest-rate swaps to manage floating-rate exposure. TAL had $1,123.0 million of swap notional and reported $67.2 million of derivative liabilities at quarter-end; TCIL reported $6.8 million of derivative liabilities.
- TCIL had approximately $3.7 million of container purchase commitments; TAL had approximately $25.4 million of capital expenditure commitments. TAL’s residual-value guarantee notification period expired in 2016, and it recognized $1.1 million previously deferred in other revenue.
- Triton declared a $0.45-per-share quarterly cash dividend on August 11, payable September 22, 2016 to holders of record September 8. The filing gives no operating guidance or forecast. Management stated that the pre-merger Triton entity had no significant market risks because it had not conducted material operations.
Most important facts for investors to verify
- Use TCIL and TAL supplemental statements, not Triton’s nominal standalone statements, to assess pre-merger operating performance; do not treat the unaudited pro forma figures as reported post-merger results.
- Track the finalized acquisition accounting, including fair values, goodwill, intangible assets, deferred taxes and resulting depreciation and amortization.
- Assess the combined company’s debt maturities, liquidity, restricted cash, covenant terms and interest-rate exposure; debt and cash figures above are for the separate predecessor businesses.
- Monitor container resale values and utilization, given the equipment-sale losses and weak trading margin, as well as any further severance, retention or transaction-related charges.
- Review the merger-related and post-merger risk factors referenced in the proxy statement/prospectus. Triton reported its disclosure controls effective as of June 30, 2016.