TRITON INTERNATIONAL LIMITED The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" as discussed elsewhere in this Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our Company
Triton International Limited ("Triton", "we", "our" or the "Company") is the world's largest lessor of intermodal containers. Intermodal containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Because of the handling efficiencies they provide, intermodal containers are the primary means by which many goods and materials are shipped internationally. We also lease chassis, which are used for the transportation of containers. We operate our business in one industry, intermodal transportation equipment, and have two business segments, which also represent our reporting segments: • Equipment leasing - we own, lease and ultimately dispose of containers and
chassis from our lease fleet.
• Equipment trading - we purchase containers from shipping line customers,
and other sellers of containers, and resell these containers to container
retailers and users of containers for storage or one-way shipment.
Operations
Our consolidated operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As ofDecember 31, 2019 , our total fleet consisted of 3.6 million containers and chassis, representing 6.1 million TEU or 6.9 million CEU. Our primary customers include the world's largest container shipping lines. For the year endedDecember 31, 2019 , our twenty largest customers accounted for 85% of our lease billings, our five largest customers accounted for 53% of our lease billings, and our two largest customers,CMA CGM S.A. andMediterranean Shipping Company S.A. , accounted for 21% and 14% of our lease billings, respectively. EffectiveDecember 31, 2019 , we revised our CEU factors to be more in line with the cost of new containers over the last several years. These new CEU factors are generally consistent with those published by theInternational Institute for Container Lessors ("IICL") and may differ among companies in the industry. We use the CEU factors to measure the size and performance of our container fleet. The change in CEU factors reduced the size of our fleet on a CEU basis by roughly 8% as ofDecember 31, 2019 and the majority of this change was due to a reduction in the CEU factor for forty-foot high cube refrigerated containers from 10.0 to 7.5. The utilization of our fleet on a CEU basis remained largely unchanged as the utilization of our refrigerated containers was in line with other container types. Fleet size and utilization information have been updated with these revised factors for all periods presented. The most important driver of profitability in our business is the extent to which leasing revenues, which are driven by our owned equipment fleet size, utilization and average lease rates, exceed our ownership and operating costs. Our profitability is also driven by the gains or losses we realize on the sale of used containers in the ordinary course of our business. We lease five types of equipment: (1) dry containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, (2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, (3) special containers, which are used for heavy and over-sized cargo such as marble slabs, building products and machinery, (4) tank containers, which are used to transport bulk liquid products such as chemicals, and (5) chassis, which are used for the transportation of containers. Our in-house equipment sales group manages the sale process for our used containers and chassis from our equipment leasing fleet and buys and sells used and new containers and chassis acquired from third parties. 35 --------------------------------------------------------------------------------
The following tables summarize our equipment fleet as of
Equipment Fleet in Units Equipment Fleet in TEU
December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2019 December 31, 2018 December 31, 2017
Dry 3,267,624 3,340,946 3,077,144 5,369,377 5,476,406 5,000,043
Refrigerated 225,520 228,778 218,429 435,148 440,781 419,673
Special 94,453 93,900 89,066 171,437 169,614 159,172
Tank 12,485 12,509 12,124 12,485 12,509 12,124
Chassis 24,515 24,832 22,523 45,154 45,787 41,068
Equipment leasing fleet 3,624,597 3,700,965 3,419,286 6,033,601 6,145,097 5,632,080
Equipment trading fleet 17,906 13,138 10,510 27,121 21,361 16,907
Total 3,642,503 3,714,103 3,429,796 6,060,722 6,166,458 5,648,987
Equipment Fleet in CEU(1)
December 31, 2019 December 31, 2018 December 31, 2017
Operating Leases 6,434,434 6,532,172 6,165,649
Finance Leases 423,638 442,585 286,970
Equipment trading fleet 37,232 39,008 40,891
Total 6,895,304 7,013,765 6,493,510
(1) In the equipment fleet tables above, we have included total fleet count
information based on CEU. CEU is a ratio used to convert the actual number of
containers in our fleet to a figure based on the relative purchase prices of
our various equipment types to that of a 20-foot dry container. For example,
the CEU ratio for a 40-foot high cube dry container is 1.70, and a 40-foot
high cube refrigerated container is 7.50. These factors may differ slightly
from CEU ratios used by others in the industry.
The following table summarizes the percentage of our equipment fleet in terms of
units and CEU as of
Percentage of
total fleet
Equipment Type in units Percent of total fleet in CEU
Dry 89.7 % 68.5 %
Refrigerated 6.2 24.2
Special 2.6 3.5
Tank 0.3 1.4
Chassis 0.7 1.9
Equipment leasing fleet 99.5 99.5
Equipment trading fleet 0.5 0.5
Total 100.0 % 100.0 %
We generally lease our equipment on a per diem basis to our customers under three types of leases: • Long-term leases typically have initial contractual terms ranging from
three to eight years and provide us with stable cash flow and low
transaction costs by requiring customers to maintain specific units
on-hire for the duration of the lease.
• Finance leases are typically structured as full payout leases and provide
for a predictable recurring revenue stream with the lowest cost to the
customer as customers are generally required to retain the equipment for
the duration of its useful life.
• Service leases command a premium per diem rate in exchange for providing
customers with greater operational flexibility by allowing non-scheduled
pick-up and drop-off of units during the lease term.
We also have expired long-term leases whose fixed terms have ended but for which
the related units remain on-hire and for which we continue to receive rental
payments pursuant to the terms of the initial contract. Some leases have
contractual terms that have features reflective of both long-term and service
leases and we classify such leases as either long-term or service leases,
depending upon which features we believe are predominant.
36
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The following table summarizes our lease portfolio by lease type, based on CEU
on-hire as of
December 31, December 31, December 31,
Lease Portfolio 2019 2018 2017
Long-term leases 69.5 % 66.7 % 71.3 %
Finance leases 6.8 6.7 4.7
Service leases 7.8 11.8 14.8
Expired long-term leases (units on-hire) 15.9 14.8 9.2
Total 100.0 % 100.0 % 100.0 %
As of
Operating Performance
Triton faced challenging market conditions during 2019, though our performance remained solid. Global containerized trade growth decreased in 2019 due to generally soft global economic conditions and the trade dispute betweenthe United States andChina , which resulted in increased tariffs and other trade restrictions. Low trade growth in 2019 led to decreased container and leasing demand, decreased new container prices and decreased market leasing rates. However, container supply was generally well balanced in 2019 due to reduced production of new containers, and our utilization and used container sale prices finished 2019 at fairly strong levels despite facing pressure throughout the year. We were also able to redirect our cash flow from capital spending to other high value uses including share repurchases and purchasing the third-party minority interests in a portfolio of our containers. Fleet size. During 2019, we invested$242.5 million in new containers compared to$856.1 million of combined depreciation expense, book value of container disposals, and principal payments on finance leases. As ofDecember 31, 2019 , our fleet had a net book value of$8.9 billion , which represents a decrease of 5.8% as compared toDecember 31, 2018 . The decrease in net book value of our revenue earning assets as reflected on the balance sheet fromDecember 31, 2018 toDecember 31, 2019 was due to limited procurement in 2019, reflecting low trade growth, weak leasing demand, and low new lease transaction activity. Aggressive competition among leasing companies also led to reduced projected returns on new container investments and caused us to further restrict new container investments. However, due to stronger market conditions in 2018, our much higher levels of container investments, and our resulting strong fleet growth during 2018, our average fleet size and the average net book value of our revenue earning assets increased from 2018 to 2019 despite our limited procurement. The change in average balances drives change in our annual leasing revenue and depreciation, and leasing revenue and depreciation expense decreased only slightly in 2019 despite the larger decrease in our fleet size over the course of the year. Similarly, the decrease in our fleet size during 2019 will limit our ability to increase our average fleet size and annual leasing revenue from 2019 to 2020 even if we significantly increase capital spending in 2020. Utilization(1). Our utilization averaged 96.9% during 2019, as compared to 98.6% in 2018. Our ending utilization was 95.4% as ofDecember 31, 2019 , as compared to 97.9% as ofDecember 31, 2018 . Our utilization decreased throughout 2019 due to low trade growth and weak leasing demand. However, container supply was generally well balanced in 2019 due to reduced production of new containers, and our utilization decreased gradually. As ofFebruary 7, 2020 , our utilization was 95.5%. The following tables summarize our equipment fleet utilization for the periods indicated below: Year Ended Quarter Ended Average Utilization December 31, December 31, September 30, June 30, March 31, 2019 96.9 % 95.8 % 96.7 % 97.2 % 97.7 % 2018 98.6 % 98.3 % 98.8 % 98.8 % 98.8 % 2017 97.1 % 98.4 % 97.8 % 96.6 % 95.4 % 37
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Quarter Ended
Ending Utilization December 31, September 30, June 30, March 31,
2019 95.4% 96.4% 97.1% 97.4%
2018 97.9% 98.7% 98.8% 98.8%
2017 98.7% 98.2% 97.3% 95.9%
(1) Utilization is computed by dividing our total units on lease (in CEU) by the
total units in our fleet (in CEU) excluding new units not yet leased and
off-hire units designated for sale.
Average lease rates. Average lease rates for our dry container product line decreased by 1.6% in 2019 compared to 2018, primarily reflecting the impact of several large lease extensions completed during 2019 at rates below our portfolio average. Market lease rates were low throughout 2019 due to weak lease demand, a decrease in new container prices, a decrease in interest rates and aggressive competition for available lease transactions. Market lease rates are currently well below our average portfolio lease rates. Our average dry container lease rates will continue to trend down if new container prices remain at their current level. Average lease rates for our refrigerated container product line decreased by 4.3% in 2019 compared to 2018. The cost of refrigerated containers has trended down over the last few years, which has led to lower market lease rates. Market lease rates for refrigerated containers have also been pressured for several years by new leasing company entrants. Market lease rates for refrigerated containers remain below the average lease rates of our refrigerated container lease portfolio, and we expect our average lease rates for refrigerated containers to continue to gradually trend down. The average lease rates for our special container product line decreased by 0.2% in 2019 compared to 2018. Current market lease rates for special containers are below the average lease rates in our lease portfolio, but we experienced limited lease renewal and new lease activity in 2019. Equipment disposals. Disposal volumes of our used dry containers increased by 65.2% in 2019, mainly as a result of increased container redeliveries. Average used dry container disposal prices decreased by 10.5% in 2019 as compared to 2018, reflecting an increase in inventories of containers held for sale and lower new container prices. We continue to generate gains on used container disposals as our average used container selling prices currently are above our accounting residual values. Credit Risk. We had minimal credit losses in 2019. However, our credit risk remains elevated due to the ongoing financial pressure faced by our shipping line customers. The container shipping industry has faced several years of weak freight rates and poor financial results due to excess vessel capacity resulting from aggressive ordering of mega container vessels, compounded this year by lower than expected trade growth. A number of our customers have recently generated financial losses and many are burdened with high levels of debt. In addition, we anticipate the high volume of new vessels entering service over the next several years will complicate our customers' efforts to increase freight rates. Furthermore, new environmental regulations that are effective inJanuary 2020 will increase the cost of fuel and have caused our shipping line customers to make large capital outlays. As a result, we expect our customers' financial performance will remain under pressure for some time. The tariffs imposed on certain goods traded betweenthe United States andChina and the uncertainty surrounding future trade agreements could lead to reduced trade and lower freight rates and further increase the financial pressure on our customers. We currently have a credit insurance policy covering accounts receivable owed by some of our customers. This policy offers significantly reduced protections against a major customer default compared to the credit insurance policy we had in place prior to 2018. In addition, this policy has exclusions and other limitations. Coronavirus Outbreak. We have been closely following developments relating to the recent novel coronavirus outbreak inChina . The quarantines and related work and travel restrictions implemented inChina to contain the outbreak have significantly reduced factory production, which has led to very low volumes of exports fromChina inFebruary 2020 and reduced container demand. We expect the disruptions and resulting export reductions to continue through the first quarter of 2020. Beyond then, the impact of the coronavirus outbreak on our business is unclear. Previous trade disruptions have had a mix of positive and negative impacts on container supply and demand. The balance of these effects in this case will likely be driven by how long the disruptions last and whether economic disruptions spread to other countries. 38
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Liquidity and Capital Resources
Our principal sources of liquidity are cash flows provided by operating activities, proceeds from the sale of our leasing equipment, and borrowings under our credit facilities. Our principal uses of cash include capital expenditures, debt service requirements, paying dividends, and repurchasing our common shares.
For the year endedDecember 31, 2019 , cash provided by operating activities, together with the proceeds from the sale of our leasing equipment, was$1,279.2 million . In addition, as ofDecember 31, 2019 we had$62.3 million of cash and cash equivalents and$1,580.0 million of additional borrowing capacity under our current credit facilities.
As of
We believe that cash provided by operating activities, existing cash, proceeds from the sale of our leasing equipment, and availability under our borrowing facilities will be sufficient to meet our obligations over the next twelve months.
Preferred Share Issuances
In 2019, the Company completed several series of preferred share offerings
("Series") and generated gross proceeds of
Share Repurchase Program
During the year ended
Dividends
During the year endedDecember 31, 2019 , the Company paid$12.3 million of dividends related to preferred shares. Additionally, the Company paid dividends on outstanding common shares totaling$153.9 million and$160.3 million for the years endedDecember 31, 2019 and 2018, respectively. For more information, please see Note 10 - "Other Equity Matters" in Part IV, Item 15 of this Annual Report on Form 10-K. Debt Agreements
As of
December 31, 2019 December 31, 2018
Institutional notes $ 1,957.6 $ 2,198.2
Asset-backed securitization term notes 2,719.2
3,063.8
Term loan facilities 1,200.4
1,543.4
Asset-backed securitization warehouse 370.0 340.0 Revolving credit facilities 410.0 375.0 Finance lease obligations 27.0 75.5 Total debt outstanding $ 6,684.2 $ 7,595.9 Unamortized debt costs (39.8 ) (44.9 ) Unamortized debt premiums & discounts (4.1 ) (5.3 ) Unamortized fair value debt adjustment (8.8 )
(16.3 )
Debt, net of unamortized costs $ 6,631.5 $
7,529.4
The maximum 2019 borrowing levels for the Asset-backed Securitization warehouse
("ABS") and the revolving credit facility are $800.0 million and $1,560.0
million , respectively. These facilities are governed by borrowing bases that
limit borrowing capacity to an established percentage of relevant assets. As of
December 31, 2019 , the actual availability under these credit facilities was
approximately $845.9 million .
39
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As of December 31, 2019 , we had a combined $5,783.5 million of total debt on
facilities with fixed interest rates or floating interest rates that have been
synthetically fixed through interest rate swap contracts. This accounts for 87%
of total debt.
Pursuant to the terms of certain debt agreements, we are also required to
maintain certain restricted cash accounts. As of
For additional information on our debt, please see Note 6 - "Debt" in Part IV, Item 15 of this Annual Report on Form 10-K.
Debt Covenants
We are subject to certain financial covenants related to leverage, interest coverage and net worth as defined in our debt agreements. The debt agreements are the obligations of our subsidiaries and all related debt covenants are calculated at the subsidiary level. Failure to comply with these covenants could result in a default under the related credit agreements and the acceleration of our outstanding debt if we were unable to obtain a waiver from the creditors. As ofDecember 31, 2019 , we were in compliance with all covenants. The table below reflects the key covenants for the Company that cover the majority of our debt agreements: TCIL TAL Financial Covenant Covenant Actual Covenant Actual Fixed charge Shall not be less Shall not be less coverage ratio than 1.25:1 2.76:1 than 1.10:1 2.21:1 Shall not be less$2,105.3 Shall not be less Minimum net worth than$855 million million than$500 million $881.7 million Shall not exceed Shall not exceed Leverage ratio 4.0:1 1.87:1 4.75:1 2.30:1 Cash Flow
The following table sets forth certain cash flow information for the years ended
Year Ended
2019 2018 2017
Net cash provided by (used in) operating activities $ 1,061,906 $ 994,222 $ 867,468
Net cash provided by (used in) investing activities $ (23,720 ) $ (1,412,781 ) $ (1,372,064 )
Net cash provided by (used in) financing activities $ (1,028,753 ) $ 351,927 $ 567,275
Operating Activities
Net cash provided by operating activities increased by $67.7 million to $1,061.9
million in 2019, compared to $994.2 million in 2018. The change was primarily
due to the timing of collections in accounts receivable partially offset by a
decrease in pre-tax income as a result of lower utilization.
Net cash provided by operating activities increased by $126.7 million to $994.2
million in 2018, compared to $867.5 million in 2017. The change was primarily
due to an increase in pre-tax income as a result of a larger fleet size and
higher utilization.
Investing Activities
Net cash used in investing activities decreased by$1,389.1 million to$23.7 million in 2019 compared to$1,412.8 million in 2018 primarily due to a$1,363.3 million decrease in leasing equipment purchases.
Net cash used in investing activities increased by
Financing Activities
Net cash used in financing activities increased by$1,380.7 million to$1,028.8 million in 2019 compared to cash provided by financing activities of$351.9 million in 2018. The increase was primarily due to net debt payments in 2019 as a result of limited procurement in 2019, compared to substantial net borrowings made in 2018 to finance much larger investments in our container 40 -------------------------------------------------------------------------------- fleet. Additionally, in 2019 we repurchased common shares for$222.2 million and acquired all third party partnership interests inTriton Container Investments LLC for$103.0 million . These uses of cash in 2019 were partially offset by net proceeds of$392.2 million from preferred share offerings. Net cash provided by financing activities decreased by$215.3 million to$351.9 million in 2018 compared to$567.3 million in 2017. The decrease was primarily due to proceeds of$192.9 million from issuances of common shares in 2017 compared with no issuance in 2018. Additionally,$56.3 million of the decrease was due to the repurchase of common shares in 2018. These changes were partially offset by an increase in net borrowings. 41 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes our results of operations for the years ended
Year Ended December 31, Variance
2019 2018 2017 2019 vs 2018 2018 vs 2017
Leasing revenues:
Operating leases $ 1,307,218 $ 1,328,756 $ 1,141,165 $ (21,538 ) $ 187,591
Finance leases 40,051 21,547 22,352 18,504 (805 )
Total leasing revenues 1,347,269 1,350,303 1,163,517 (3,034 ) 186,786
Equipment trading revenues 83,993 83,039 37,419 954 45,620
Equipment trading expenses (69,485 ) (64,118 ) (33,235 ) (5,367 ) (30,883 )
Trading margin 14,508 18,921 4,184 (4,413 ) 14,737
Net gain (loss) on sale of
leasing equipment 27,041 35,377 35,812 (8,336 ) (435 )
Net gain (loss) on sale of
building - 20,953 - (20,953 ) 20,953
Operating expenses: Depreciation and amortization 536,131 545,138 500,720
(9,007 ) 44,418
Direct operating expenses 79,074 48,326 62,891 30,748 (14,565 )
Administrative expenses 75,867 80,033 87,609 (4,166 ) (7,576 )
Transaction and other costs
(income) - 88 9,272 (88 ) (9,184 )
Provision (reversal) for
doubtful accounts 590 (231 ) 3,347 821 (3,578 )
Insurance recovery income - - (6,764 ) - 6,764
Total operating expenses 691,662 673,354 657,075 18,308 16,279
Operating income (loss) 697,156 752,200 546,438 (55,044 ) 205,762
Other expenses:
Interest and debt expense 316,170 322,731 282,347 (6,561 ) 40,384
Realized (gain) loss on
derivative instruments, net (2,237 ) (2,072 ) 900 (165 ) (2,972 )
Unrealized (gain) loss on
derivative instruments, net 3,107 430 (1,397 ) 2,677 1,827
Debt termination expense 2,543 6,090 6,973 (3,547 ) (883 )
Other (income) expense, net (3,257 ) (2,292 ) (2,637 ) (965 ) 345
Total other expenses 316,326 324,887 286,186 (8,561 ) 38,701
Income (loss) before income
taxes 380,830 427,313 260,252 (46,483 ) 167,061
Income tax expense (benefit) 27,551 70,641 (93,274 ) (43,090 ) 163,915 Net income (loss)
$ 353,279 $ 356,672 $ 353,526 $ (3,393 ) $ 3,146 Less: income (loss) attributable to noncontrolling interest 592 7,117 8,928 (6,525 ) (1,811 ) Less: dividend on preferred shares 13,646 - - 13,646 - Net income (loss) attributable to common shareholders$ 339,041 $ 349,555 $ 344,598 $ (10,514 ) $ 4,957 42
-------------------------------------------------------------------------------- Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Leasing revenues. Per diem revenues represent revenue earned under operating lease contracts. Fee and ancillary lease revenues represent fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses. Finance lease revenues represent interest income earned under finance lease contracts. The following table summarizes our leasing revenues for the periods indicated below (in thousands): Year Ended December 31, Leasing revenues 2019 2018 Variance Operating lease revenues: Per diem revenues$ 1,244,297 $ 1,278,354 $ (34,057 ) Fee and ancillary revenues 62,921 50,402 12,519
Total operating lease revenues 1,307,218 1,328,756 (21,538 ) Finance lease revenues
40,051 21,547 18,504
Total leasing revenues
Total leasing revenues were$1,347.3 million , net of lease intangible amortization of$36.8 million , in 2019 compared to$1,350.3 million , net of lease intangible amortization of$61.5 million , in 2018, a decrease of$3.0 million . Per diem revenues were$1,244.3 million in 2019 compared to$1,278.4 million in 2018, a decrease of$34.1 million . The primary reasons for this decrease are as follows: •$32.7 million decrease due to the reclassification of certain contracts
from operating leases to finance leases in the fourth quarter of 2018 as a
result of the renegotiation and extension of the contracts;
•
•
year; partially offset by
•
Fee and ancillary lease revenues were$62.9 million in 2019 compared to$50.4 million in 2018, an increase of$12.5 million . The increase was primarily due to an increase in redelivery fees as a result of a 52% increase in the volume of redeliveries. Finance lease revenues were$40.1 million in 2019 compared to$21.5 million in 2018, an increase of$18.6 million . The increase was due to the addition of several finance leases, primarily in the fourth quarter of 2018, as a result of the renegotiation and extension of certain contracts that were reclassified from operating leases to finance leases. This increase was partially offset by the runoff of the existing portfolio. Trading margin. Trading margin was$14.5 million in 2019 compared to$18.9 million in 2018, a decrease of$4.4 million . The decrease was primarily due to a decrease in per unit margins, partially offset by an increase in trading volume. Net gain (loss) on sale of leasing equipment. Gain on sale of equipment was$27.0 million in 2019 compared to$35.4 million in 2018, a decrease of$8.4 million . The decrease was primarily due to a 10.5% decrease in average used dry container selling prices, partially offset by a 65.2% increase in selling volumes. Net gain (loss) on sale of building. OnApril 20, 2018 we completed the sale of an office building for net proceeds of$27.6 million and recognized a gain of$21.0 million . Depreciation and amortization. Depreciation and amortization was$536.1 million in 2019 compared to$545.1 million in 2018, a decrease of$9.0 million . The primary reasons for this decrease are as follows: •$17.7 million decrease due to the reclassification of certain contracts
from operating leases to finance leases in the fourth quarter of 2018 as a
result of the renegotiation and extension of the contracts; and
•
are fully depreciated; partially offset by a
•$26.7 million increase due to a net increase in the average size of our depreciable fleet. Direct operating expenses. Direct operating expenses primarily consist of our costs to repair equipment returned off lease, to store the equipment when it is not on lease and reposition equipment from locations with weak leasing demand. Direct operating expenses were$79.1 million in 2019 compared to$48.3 million in 2018, an increase of$30.8 million . The primary reasons for the increase are as follows: •$20.5 million increase in storage expense due to an increase in idle units; and
•
the volume of redeliveries.
43-------------------------------------------------------------------------------- Administrative expenses. Administrative expenses were$75.9 million in 2019 compared to$80.0 million in 2018, a decrease of$4.1 million . The primary reasons for this decrease are as follows: •$2.5 million decrease due to a decrease in employee incentive
compensation; and
•
Interest and debt expense. Interest and debt expense was$316.2 million in 2019 compared to$322.7 million in 2018, a decrease of$6.5 million . The primary reasons for this decrease are as follows: •$5.8 million decrease due to a reduction in the average effective interest rate to 4.31% in 2019 compared to 4.39% in 2018; and •$0.7 million decrease due to a slight reduction in the average debt balance outstanding. Realized (gain) loss on derivative instruments, net. Realized gain on derivative instruments, net was$2.2 million in 2019, compared to$2.1 million in 2018, an increase of$0.1 million . The increase is primarily due to an increase in the average one-month LIBOR rate, mostly offset by the reduction of the underlying derivative notional amounts due to the amortization of certain interest rate swap contracts during the year endedDecember 31, 2019 . Unrealized loss (gain) on derivative instruments, net. Unrealized loss on derivative instruments, net was$3.1 million in 2019, compared to$0.4 million in 2018, an increase of$2.7 million . The unrealized loss in 2019 was primarily due to a decrease in long-term interest rates during 2019.
Debt termination expense. Debt termination expense was
Income taxes. Income tax expense was$27.6 million in 2019 compared to$70.6 million in 2018, a decrease in income tax expense of$43.0 million . The primary reasons for this decrease are as follows: •$24.7 million decrease related to a taxable gain in 2018 from aU.S.
entity to foreign entity intra-company asset sale that did not re-occur in
2019;
• $8.9 million decrease due to an increase in the portion of income
generated in lower tax jurisdictions during 2019; and
•
Income attributable to noncontrolling interests. Income attributable to noncontrolling interests was$0.6 million in 2019 compared to$7.1 million in 2018, a decrease of$6.5 million . All third-party partnership interests inTriton Container Investments LLC were acquired by the company during the first half of 2019. 44
-------------------------------------------------------------------------------- Comparison of the Year EndedDecember 31, 2018 to the Year EndedDecember 31, 2017 Leasing revenues. Per diem revenues represent revenue earned under operating lease contracts. Fee and ancillary lease revenues represent fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses. Finance lease revenues represent interest income earned under finance lease contracts. The following table summarizes our leasing revenues for the periods indicated below (in thousands): Year Ended December 31, Leasing revenues 2018 2017 Variance Operating lease revenues: Per diem revenues$ 1,278,354 $ 1,100,507 $ 177,847 Fee and ancillary revenues 50,402 40,658 9,744
Total operating lease revenues 1,328,756 1,141,165 187,591 Finance lease revenues
21,547 22,352 (805 )
Total leasing revenues
Total leasing revenues were$1,350.3 million , net of lease intangible amortization of$61.5 million , in 2018 compared to$1,163.5 million , net of lease intangible amortization of$88.6 million , in 2017, an increase of$186.8 million . Per diem revenues were$1,278.4 million in 2018 compared to$1,100.5 million in 2017, an increase of$177.9 million . The primary reasons for this increase are as follows: •$133.4 million increase due to an increase of 650,140 CEU in the average
number of containers on-hire under operating leases;
•
•
partially offset by
•
from operating leases to finance leases in the fourth quarter of 2018 as a
result of the renegotiation and extension of the contracts.
Fee and ancillary lease revenues were$50.4 million in 2018 compared to$40.7 million in 2017, an increase of$9.7 million . The increase was primarily due to higher redelivery and repair fee revenue of$11.0 million associated with higher volumes of redeliveries, especially in the fourth quarter of 2018, partially offset by reduced handling fees of$1.3 million . Finance lease revenues were$21.5 million in 2018 compared to$22.4 million in 2017, a decrease of$0.9 million . The scheduled runoff of the existing portfolio was partially offset by the addition of several finance leases, primarily in the fourth quarter of 2018, as a result of the renegotiation and extension of certain contracts that were reclassified from operating leases to finance leases.
Trading margin. Trading margin was
•
Net gain (loss) on sale of leasing equipment. Gain on sale of equipment was$35.4 million in 2018 compared to a gain on sale of equipment of$35.8 million in 2017, a decrease of$0.4 million . The decrease was primarily due to a 27.3% reduction in the volume of containers sold, partially offset by a 20.9% increase in average used container selling prices. Net gain (loss) on sale of building. OnApril 20, 2018 we completed the sale of an office building for net proceeds of$27.6 million and recognized a gain of$21.0 million . Depreciation and amortization. Depreciation and amortization was$545.1 million in 2018 compared to$500.7 million in 2017, an increase of$44.4 million . The primary reasons for this increase are as follows: •$66.6 million increase due to a net increase in the size of our depreciable fleet; partially offset by a
•
are fully depreciated;
•
assets; and
•
from operating leases to finance leases in the fourth quarter of 2018 as a
result of the renegotiation and extension of the contracts.
45-------------------------------------------------------------------------------- Direct operating expenses. Direct operating expenses primarily consist of our costs to repair equipment returned off lease, store the equipment when it is not on lease and reposition equipment that has been returned to locations with weak leasing demand. Direct operating expenses were$48.3 million in 2018 compared to$62.9 million in 2017, a decrease of$14.6 million . The primary reasons for the decrease are as follows: •$15.4 million decrease due to a decrease in storage, handling, and repositioning costs due to a decrease in the average number of our containers that were off-hire during the year; •$1.5 million decrease due to a decrease in inspection costs due to less new equipment purchases; partially offset by a
•
increase in the volume of redeliveries in the fourth quarter of 2018.
Administrative expenses. Administrative expenses were$80.0 million in 2018 compared to$87.6 million in 2017, a decrease of$7.6 million . The decrease was primarily due to a decrease in payroll and benefit expenses and professional fees of$6.9 million partially offset by an increase in foreign currency exchange loss of$1.1 million due to a strongerU.S. dollar. Transaction and other costs (income). Transaction and other costs include severance and employee compensation costs, legal costs and other professional fees related to the Merger in 2016. Transaction and other costs were minimal in 2018 compared to$9.3 million in 2017. We accrued employee severance expenses in 2017, while Merger related activities were mostly complete by the start of 2018. Provision for doubtful accounts. Provision for doubtful accounts was a benefit of$0.2 million in 2018 compared to$3.3 million expense in 2017, a decrease of$3.5 million . The decrease in 2018 was due to recoveries of previously reserved balances as well as a decrease in new provisions. Insurance recovery income. There was no significant insurance recovery income in 2018 compared to$6.8 million in 2017. The insurance recovery income was due to the recognition of income related to the satisfaction of our credit insurance claims with respect to the lease default by Hanjin in 2016. Interest and debt expense. Interest and debt expense was$322.7 million in 2018 compared to$282.3 million in 2017, an increase of$40.4 million . The primary reasons for this increase are as follows: •$22.3 million increase due to an increase in the average debt balance of$531.0 million during 2018 compared to 2017; and •$18.1 million increase due to an increase in the average effective
interest rate to 4.39% in 2018 compared to 4.14% in 2017. The increase in
the effective interest rate was primarily due to an increase in short-term
interest rates on our unhedged variable-rate debt facilities.
Realized (gain) loss on derivative instruments, net. Realized gain on derivative instruments, net was$2.1 million in 2018, compared to a loss of$0.9 million in 2017, an increase of$3.0 million . The increase is primarily due to an increase in average one-month LIBOR, partially offset by a reduction of the underlying swap notional amounts due to the amortization, terminations and expirations of certain interest rate swap contracts. Unrealized loss (gain) on derivative instruments, net. Unrealized loss on derivative instruments, net was$0.4 million in 2018, compared to a gain of$1.4 million in 2017, a decrease of$1.8 million . The unrealized loss in 2018 was due to a decrease in long-term interest rates compared to an increase in long-term interest rates in the comparative period in 2017. The loss was partially offset by a decrease in the notional value of our swap portfolio.
Debt termination expense. Debt termination expense was
Income taxes. Income tax expense was
intra-company asset sale; and
• $139.4 million increase due to a one-time tax benefit recorded in 2017
that did not reoccur. The one-time benefit in 2017 reflected a decrease in
our deferred tax liability resulting from the reduction of the U.S.
corporate tax rate from 35% to 21% as part of the U.S. Tax Cuts and Jobs
Act.
Income attributable to noncontrolling interests. Income attributable to
noncontrolling interests was $7.1 million in 2018 compared to $8.9 million in
2017, a decrease of $1.8 million . The decrease is primarily due to a reduction
in the size of the portfolio of containers owned by the entity in which the
noncontrolling interests maintain their ownership.
46
--------------------------------------------------------------------------------Segments
Our leasing segment is discussed in our results of operations comparisons and the trading segment is discussed in the trading margin comparison within the results of operations comparisons.
For additional information on our segments, please see Note 11 - "Segment and Geographic Information" in Part IV, Item 15 of this Annual Report on Form 10-K.
Contractual Obligations
We are party to various operating and finance leases and are obligated to make payments related to our borrowings. We are also obligated under various commercial commitments, including obligations to our equipment manufacturers. Our equipment manufacturer obligations are in the form of conventional accounts payable and are satisfied by cash flows from operations and financing activities.
The following table summarizes our contractual obligations and commercial
commitments as of
Contractual Obligations by Period
2025 and
Contractual Obligations: Total 2020 2021 2022 2023 2024 thereafter
(dollars in millions)
Principal debt
obligations $ 6,657.1 $ 822.5 $ 827.1 $ 1,048.9 $ 1,638.1 $ 1,052.2 $ 1,268.3
Interest on debt
obligations(1) 955.4 255.1 220.6 183.0 141.7 78.0 77.0
Finance lease
obligations(2) 30.7 4.4 4.4 4.4 4.4 13.1 -
Operating leases (mainly
facilities) 9.9 3.3 2.8 2.3 1.4 0.1 -
Purchase obligations:
Equipment purchases
payable 24.7 24.7 - - - - -
Equipment purchase
commitments 42.7 42.7 - - - - -
Total contractual
obligations $ 7,720.5 $ 1,152.7 $ 1,054.9 $ 1,238.6 $ 1,785.6 $ 1,143.4 $ 1,345.3 (1) Amounts include actual interest for fixed debt, estimated interest for
floating-rate debt and interest rate swaps which are in a payable position
based on
(2) Amounts include interest.
Off-Balance Sheet Arrangements
As ofDecember 31, 2019 , we did not have any relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. 47 --------------------------------------------------------------------------------
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Leasing Equipment
We purchase new equipment from equipment manufacturers for the purpose of leasing such equipment to customers. We also purchase used equipment with the intention of selling such equipment in one or more years from the date of purchase.
Leasing equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful lives. Capitalized costs for new container rental equipment include the manufactured cost of the container, inspection, delivery, and associated costs incurred in moving the container from the manufacturer to the initial on-hire location of such container. Repair and maintenance costs that do not extend the lives of the container rental equipment are charged to direct operating expenses at the time the costs are incurred. The estimated useful lives and residual values of our leasing equipment are based on historical disposal experience and our expectations for future used container sale prices. We review the estimates used in our depreciation policies on a regular basis to determine whether changes have taken place that would suggest that a change in our depreciation estimates of useful lives of our equipment or the assigned residual values is warranted. For 2019, the Company completed its annual depreciation policy review during the fourth quarter and concluded no change was necessary.
The estimated useful lives and residual values for each major equipment type for the periods are indicated below as follows:
As of December 31, 2019 and 2018
Equipment Type Depreciable Life Residual Value
Dry containers
20-foot dry container 13 years $ 1,000
40-foot dry container 13 years $ 1,200
40-foot high cube dry container 13 years $ 1,400
Refrigerated containers 20-foot refrigerated container 12 years $
2,350
40-foot high cube refrigerated container 12 years $ 3,350 Special containers 40-foot flat rack container 16 years $ 1,700 40-foot open top container 16 years $ 2,300 Tank containers 20 years $ 3,000 Chassis 20 years $ 1,200
Depreciation on leasing equipment commences on the date of initial on-hire.
For leasing equipment purchased for resale that may be leased for a period of
time, we adjust our estimates for remaining useful life and residual values
based on current conditions in the sales market for older containers and our
expectations for how long the equipment will remain on-hire to the current
lessee.
48--------------------------------------------------------------------------------
The net book value of our leasing equipment by equipment type is as follows (in thousands):
December 31, 2019 December 31, 2018
Dry container $ 6,308,038 $ 6,666,560
Refrigerated container 1,520,747 1,676,331
Special container 321,099 322,607
Tank container 101,677 107,284
Chassis 140,986 150,669
Total $ 8,392,547 $ 8,923,451
Included in the amounts above are units not on lease at
Valuation of Leasing Equipment
Leasing equipment is reviewed for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying value to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds our estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying value of the asset exceeds the fair value of the asset. Key indicators of impairment on leasing equipment include, among other factors, a sustained decrease in operating profitability, a sustained decrease in utilization, or indications of technological obsolescence. When testing for impairment, leasing equipment is generally grouped by equipment type, and is tested separately from other groups of assets and liabilities. Some of the significant estimates and assumptions used to determine future undiscounted cash flows and the measurement for impairment are the remaining useful life, expected utilization, expected future lease rates and expected disposal prices of the equipment. We consider the assumptions on expected utilization and the remaining useful life to have the greatest impact on its estimate of future undiscounted cash flows. These estimates are principally based on our historical experience and management's judgment of market conditions.
We did not record any impairment charges related to leasing equipment for the
years ended
Equipment Held for Sale
When leasing equipment is returned off lease, we make a determination of whether
to repair and re-lease the equipment or sell the equipment. At the time we
determine that equipment will be sold, we reclassify the appropriate amounts
previously recorded as leasing equipment to equipment held for sale. Equipment
held for sale is carried at the lower of its estimated fair value, based on
current transactions, less costs to sell, or carrying value. Depreciation
expense on equipment held for sale is halted and disposals generally occur
within 90 days. Initial write downs of equipment held for sale are recorded as
an impairment charge and are included in net gain or loss on sale of leasing
equipment. Subsequent increases or decreases to the fair value of those assets
are recorded as adjustments to the carrying value of the equipment held for
sale, however, any such adjustments may not exceed the respective equipment's
carrying value at the time it was initially classified as held for sale.
Realized gains and losses resulting from the sale of equipment held for sale are
recorded as net gain or loss on sale of leasing equipment, and cash flows
associated with the disposal of equipment held for sale are classified as cash
flows from investing activities.
Equipment purchased for resale and included in the Equipment Trading segment is
reported as equipment held for sale when the time frame between when equipment
is purchased and when it is sold is expected to be less than one year.
49--------------------------------------------------------------------------------
During the years ended
Year Ended
2019 2018 2017
Impairment (loss) reversal on equipment held for sale$ (5,299 ) $ (3,933 ) $ 3 Gain (loss) on sale of equipment, net of selling costs 32,340 39,310 35,809 Net gain on sale of leasing equipment$ 27,041 $ 35,377 $ 35,812 GoodwillGoodwill is tested for impairment at least annually onOctober 31 of each fiscal year or more frequently if events occur or circumstances exist that indicate that the fair value of a reporting unit may be below its carrying value.Goodwill has been allocated to our reporting units which are also our operating segments. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary. Among other relevant events and circumstances that affect the fair value of reporting units, we consider individual factors such as macroeconomic conditions, changes in our industry and the markets in which we operate, as well as our reporting units' historical and expected future financial performance. If, after assessing the totality of events or circumstances, we determine it is more-likely-than-not that the fair value of a reporting unit is greater than our carrying amount, then the quantitative goodwill impairment test is unnecessary. The quantitative goodwill impairment test compares the fair value of a reporting unit with our carrying amount, including goodwill. If the carrying amount of the reporting unit is less than its fair value, no impairment exists. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. We elected to perform the qualitative assessment for our evaluation of goodwill impairment during the year endedDecember 31, 2019 and concluded there was no impairment. Since inception throughDecember 31, 2019 , we did not have any goodwill impairment.
For additional information on our accounting policies, please see Note 2 - "Summary of Significant Accounting Policies" in Part IV, Item 15 of this Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 - "Summary of Significant Accounting Policies" in Part IV, Item 15 of this Annual Report on Form 10-K for a full description of recent accounting pronouncements.
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