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 in our Annual Report on Form 10-K filed for the fiscal year endedDecember 31, 2019 with theSEC onFebruary 14, 2020 (the "Form 10-K"), in this Report on Form 10-Q and in any other Form 10-Q filed or to be filed by us, and in other documents we file with theSEC from time to time. 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 ofSeptember 30, 2020 , our total fleet consisted of 3.6 million containers and chassis, representing 6.1 million twenty-foot equivalent units ("TEU") or 6.9 million cost equivalent units ("CEU"). We have an extensive global presence, offering leasing services through 19 offices and 3 independent agencies located in 16 countries and 428 third-party owned and operated depot facilities in 46 countries as ofSeptember 30, 2020 . Our primary customers include the world's largest container shipping lines. For the nine months endedSeptember 30, 2020 , our twenty largest customers accounted for 85% of our lease billings, our five largest customers accounted for 58% of our lease billings, and our two largest customers,CMA CGM S.A. andMediterranean Shipping Company S.A. , accounted for 21% and 15% of our lease billings, respectively. 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 on land. 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. 24 --------------------------------------------------------------------------------
The following tables summarize our equipment fleet as of
Equipment Fleet in Units Equipment Fleet in TEU
September 30, 2020 December 31, 2019 September 30, 2019 September 30, 2020 December 31, 2019 September 30, 2019
Dry 3,220,631 3,267,624 3,287,025 5,306,071 5,369,377 5,393,705
Refrigerated 226,627 225,520 226,114 437,886 435,148 436,129
Special 93,639 94,453 94,678 170,471 171,437 171,579
Tank 11,153 12,485 12,539 11,153 12,485 12,539
Chassis 24,916 24,515 24,704 45,380 45,154 45,498
Equipment leasing fleet 3,576,966 3,624,597 3,645,060 5,970,961 6,033,601 6,059,450
Equipment trading fleet 72,444 17,906 17,054 111,369 27,121 25,764
Total 3,649,410 3,642,503 3,662,114 6,082,330 6,060,722 6,085,214
Equipment Fleet in CEU (1)
September 30, 2020 December 31, 2019 September 30, 2019
Operating leases 6,492,628 6,434,434 6,455,594
Finance leases 308,513 423,638 431,043
Equipment trading fleet 109,469 37,232 36,998
Total 6,910,610 6,895,304 6,923,635
(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 Percentage of total
Equipment Type fleet in units fleet in CEU
Dry 88.2 % 67.4 %
Refrigerated 6.2 24.3
Special 2.6 3.5
Tank 0.3 1.3
Chassis 0.7 1.9
Equipment leasing fleet 98.0 98.4
Equipment trading fleet 2.0 1.6
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 or more 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 term.
•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.
25
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The following table summarizes our lease portfolio by lease type, based on CEU
on-hire as of September 30, 2020 , December 31, 2019 and September 30, 2019 :
Lease Portfolio September 30, 2020 December 31, 2019 September 30, 2019
Long-term leases 73.6 % 69.5 % 69.1 %
Finance leases 4.8 6.8 6.8
Service leases 7.2 7.8 8.4
Expired long-term leases (units on-hire) 14.4 15.9 15.7
Total 100.0 % 100.0 % 100.0 %
As of
COVID-19
The COVID-19 pandemic has meaningfully impacted global trade and our business in 2020. The pandemic and related economic shutdowns resulted in a significant decrease in trade volumes in the first half of the year, and we faced weak container demand and decreasing utilization and profitability in the first two quarters of 2020. However, with the easing of COVID-19 related restrictions inthe United States andEurope , global containerized trade has rebounded significantly in the third quarter and container export volumes fromChina now exceed pre-pandemic levels. This rebound has resulted in strong container demand and an increase in our utilization and profitability. While our shipping line customers generally expect trade volumes to remain solid through the end of the year, many countries are seeing a resurgence in COVID-19 cases and a number are re-instituting restrictions on social and business activity. Overall, there continues to be a high degree of uncertainty in the outlook for global trade and container demand. Operating Performance
Triton's operating and financial performance inflected upward during the third quarter of 2020 as a result of increased trade volumes and strong lease demand.
Fleet size. As ofSeptember 30, 2020 , our revenue earning assets had a net book value of$8.7 billion , a decrease of 3.6% fromSeptember 30, 2019 . This decrease was primarily due to limited procurement of new containers in 2019 and the first half of 2020. During this period, global trade volumes and container demand were negatively impacted by the trade dispute betweenthe United States andChina and disruptions related to the global outbreak of COVID-19. Trade volumes rebounded sharply during the third quarter of 2020 and we experienced a surge of lease activity. While we accelerated container purchases during the third quarter, our ability to purchase large numbers of containers for quick delivery has been constrained by tight container manufacturing capacity. We have purchased approximately$800 million of new and sale-leaseback containers for delivery in 2020 and approximately$350 million for delivery in the first few months of 2021. Utilization. Our ending utilization increased 2.6% during the third quarter to reach 97.4% as ofSeptember 30, 2020 , reflecting a surge in leasing demand as global containerized trade volumes rebounded sharply. Average utilization was 96.1% during the third quarter of 2020, an increase of 1.1% from the second quarter of 2020 and a decrease of 0.6% from the third quarter of 2019. Our utilization decreased throughout 2019 and the first half of 2020 reflecting weak leasing demand due to the trade dispute betweenthe United States andChina and disruptions related to the global outbreak of COVID-19. As ofOctober 16, 2020 , our utilization was 97.6%. 26 -------------------------------------------------------------------------------- The following table summarizes the equipment fleet utilization for the periods indicated below: Quarter Ended June 30, March 31, December 31, September 30, September 30, 2020 2020 2020 2019 2019 Average Utilization(1) 96.1 % 95.0 % 95.4 % 95.8 % 96.7 % Ending Utilization(1) 97.4 % 94.8 % 95.3 % 95.4 % 96.4 %
(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 3.3% in the third quarter of 2020 compared to the third quarter of 2019 and 0.4% from the second quarter of 2020. The decrease was primarily driven by the impact of several large lease extensions completed during 2019 and the first half of 2020 at rates below our portfolio average, as well as by the pick-up of a large number of containers in the third quarter of 2020 on lifecycle leases, which often have lower rates due to the long expected on-hire time. Market lease rates for new dry containers are currently above the average dry container lease rates in our portfolio due to an increase in container prices and strong leasing demand. As ofOctober 16, 2020 , container factories are quoting roughly$2,500 for 20' dry containers. Average lease rates for our refrigerated container product line decreased by 4.2% in the third quarter of 2020 compared to the third quarter of 2019. The cost of refrigerated containers has trended down over the last few years, which has led to lower market lease rates. In addition, we have been experiencing larger differences in lease rates for older refrigerated containers compared to rates on new equipment, and we expect our average lease rates for refrigerated containers will continue to gradually trend down. The average lease rates for special containers remained flat in the third quarter of 2020 compared to the third quarter of 2019. Equipment disposals. Disposal volumes of our used dry containers increased by 38.0% in the third quarter of 2020 compared to the third quarter of 2019 and by 53.9% compared to the second quarter of 2020. The sharp increase in trade volumes has led to increased demand for sale containers, especially for one-way cargo shipments. Selling prices of our used dry containers were relatively flat compared to the third quarter of 2019 and increased by 3.3% compared to the second quarter of 2020. Used container disposal prices started to increase in the third quarter of 2020 in response to increased demand. 27 --------------------------------------------------------------------------------
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, dividends, and share repurchases.
For the trailing twelve months endedSeptember 30, 2020 , cash provided by operating activities, together with the proceeds from the sale of our leasing equipment, was$1,201.8 million . In addition, as ofSeptember 30, 2020 , we had$173.3 million of cash and cash equivalents and$1,449.0 million of maximum borrowing capacity under our current credit facilities. As ofSeptember 30, 2020 , our cash commitments in the next twelve months include$652.0 million of scheduled principal payments on our existing debt facilities and$649.6 million of committed but unpaid capital expenditures.
We believe that cash provided by operating activities, existing cash, proceeds from the sale of our leasing equipment, and availability under our credit facilities will be sufficient to meet our obligations over the next twelve months.
Asset-backed Securitization ("ABS") Note Issuances
During the three months endedSeptember 30, 2020 , the Company issued$2,313.1 million in ABS notes at a weighted average interest rate of 2.2%. The majority of the proceeds from these issuances were used to call$1,783.1 million of higher cost notes, which is expected to reduce our interest expense by more than$25 million over the next year.
Share Repurchase Program
During the nine months endedSeptember 30, 2020 , the Company repurchased a total of 3.8 million common shares at an average price per share of$28.39 for a total cost of$107.2 million under its Board authorized share repurchase program. Since the inception of the program inAugust 2018 , the Company has purchased over 12.5 million shares, or 15.5% of our common shares.
Preferred Share Offering
In
The Company used the net proceeds from this offering for general corporate purposes, including the purchase of containers, the repurchase of outstanding common shares, the payment of dividends, and the repayment or prepayment of outstanding indebtedness.
For additional information on the Share Repurchase Program and the Preferred
Share Offering, please refer to Note 5 - "Other Equity Matters" in the Notes to
the Unaudited Consolidated Financial Statements.
28
--------------------------------------------------------------------------------Debt Agreements
At
September 30, Maximum
2020 Borrowing Level
Institutional notes $ 1,694.2 $ 1,694.2
Asset-backed securitization term notes 2,986.8 2,986.8
Term loan facility 860.0 860.0
Asset-backed securitization warehouse 195.0 800.0
Revolving credit facilities 716.0 1,560.0
Finance lease obligations 17.9 17.9
Total debt outstanding 6,469.9 7,918.9
Unamortized debt costs (41.7) -
Unamortized debt premiums & discounts (0.6) -
Unamortized fair value debt adjustment 1.8 -
Debt, net of unamortized costs $
6,429.4
The maximum borrowing levels depicted in the table above may not reflect the actual availability under all of the credit facilities. Certain of these facilities are governed by borrowing bases that limit borrowing capacity to an established percentage of relevant assets. As ofSeptember 30, 2020 , the availability under these credit facilities without adding additional container assets to the borrowing base was approximately$724.1 million . As ofSeptember 30, 2020 , we had a combined$5,828.7 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 90% of total debt. Pursuant to the terms of certain debt agreements, we are required to maintain certain amounts in restricted cash accounts. As ofSeptember 30, 2020 , we had restricted cash of$163.5 million .
For additional information on our debt, please refer to Note 7 - "Debt" in the Notes to the Unaudited Consolidated Financial Statements.
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 ofSeptember 30, 2020 , we were in compliance with all such covenants. The table below reflects the key debt covenants for the Company that cover the majority of our debt agreements: TCIL TAL Financial Covenant Covenant Actual Covenant Actual Fixed charge coverage Shall not be less than Shall not be less than ratio 1.25:1 2.56:1 1.10:1 1.92:1 Shall not be less than Shall not be less than Minimum net worth$855 million $2,154.5 million $500 million $917.6 million Leverage ratio Shall not exceed 4.0:1 1.83:1 Shall not exceed 4.75:1 1.85:1 29
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Cash Flow
The following table sets forth certain cash flow information for the nine months
ended
Nine
Months Ended
September 30,
September 30, 2020 2019
Net cash provided by (used in) operating activities $ 682,341 $ 779,507
Net cash provided by (used in) investing activities $ (171,789) $ 2,270
Net cash provided by (used in) financing activities $
(342,781)
Operating Activities
Net cash provided by operating activities decreased by$97.2 million to$682.3 million in the nine months endedSeptember 30, 2020 compared to$779.5 million in the same period in 2019. The decrease is primarily due to reduced profitability and the timing of collections on accounts receivable.
Investing Activities
Net cash used in investing activities was$171.8 million in the nine months endedSeptember 30, 2020 compared to net cash provided by investing activities of$2.3 million in the same period in 2019, or a change of$174.1 million . The change was primarily due to a$193.9 million increase in payments for leasing equipment partially offset by a$19.8 million increase in cash proceeds from the sale of equipment. Financing Activities Net cash used in financing activities decreased by$440.4 million to$342.8 million in the nine months endedSeptember 30, 2020 , compared to$783.2 million in the same period in 2019. The decrease was primarily due to a decrease of$336.4 million in net repayments of debt and a$102.4 million decrease in share repurchases. This was partially offset by a decrease in proceeds from the issuance of preferred shares of$76.5 million . Additionally, we paid$103.0 million in the first half of 2019 for the purchase of noncontrolling interests that did not reoccur in 2020. 30 --------------------------------------------------------------------------------
Results of Operations
The following table summarizes our comparative results of operations for the three months endedSeptember 30, 2020 andSeptember 30, 2019 (in thousands). Three Months Ended September 30, 2020 2019 Variance Leasing revenues: Operating leases$ 320,352 $ 326,800 $ (6,448) Finance leases 7,405 9,868 (2,463) Total leasing revenues 327,757 336,668 (8,911) Equipment trading revenues 26,094 25,796 298 Equipment trading expenses (22,225) (21,646) (579) Trading margin 3,869 4,150 (281) Net gain on sale of leasing equipment 10,737 6,196 4,541 Operating expenses: Depreciation and amortization 136,248 133,367 2,881 Direct operating expenses 25,992 20,457 5,535 Administrative expenses 21,395 18,496 2,899 Provision (reversal) for doubtful accounts (45) 126 (171) Total operating expenses 183,590 172,446 11,144 Operating income (loss) 158,773 174,568 (15,795) Other expenses: Interest and debt expense 62,776 77,401 (14,625) Realized (gain) loss on derivative instruments, net - (539) 539 Unrealized (gain) loss on derivative instruments, net - 504 (504) Debt termination expense 24,345 1,870 22,475 Other (income) expense, net (631) (116) (515) Total other expenses 86,490 79,120 7,370 Income (loss) before income taxes 72,283 95,448 (23,165) Income tax expense (benefit) 15,825 4,845 10,980 Net income (loss)$ 56,458 $ 90,603 $ (34,145) Less: dividend on preferred shares 10,512 4,708 5,804
Net income (loss) attributable to common shareholders
85,895
31
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Comparison of the three months ended
Leasing revenues. Per diem revenue represents revenue earned under operating
lease contracts. Fee and ancillary lease revenue represents 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 revenue represents interest income earned under finance lease
contracts. The following table summarizes our leasing revenue for the periods
indicated below (in thousands):
Three Months Ended September 30,
2020 2019 Variance
Leasing revenues:
Operating leases
Per diem revenues $ 304,510 $ 311,199 $ (6,689)
Fee and ancillary revenues 15,842 15,601 241
Total operating lease revenues 320,352 326,800 (6,448)
Finance leases 7,405 9,868 (2,463)
Total leasing revenues $ 327,757 $ 336,668 $ (8,911)
Total leasing revenues were $327.8 million , net of lease intangible amortization
of $5.4 million , for the three months ended September 30, 2020 , compared to
$336.7 million , net of lease intangible amortization of $8.7 million , in the
same period in 2019, a decrease of $8.9 million .
Per diem revenues were $304.5 million for the three months ended September 30,
2020 compared to $311.2 million in the same period in 2019, a decrease of $6.7
million . The primary reasons for this decrease are as follows:
•$9.5 million decrease due to a decrease in average per diem rates reflecting
the impact of several large lease extension transactions at rates below our
portfolio average and the pick-up of a large number of containers in the third
quarter of 2020 on lifecycle leases at rates below our portfolio average; and
•$3.9 million decrease due to a decrease in average units on-hire; partially
offset by
•$3.4 million increase due to the reclassification of certain contracts from
finance leases to operating leases in the first quarter of 2020 as a result of
the renegotiation of the contracts and the elimination of purchase options; and
•$3.3 million increase due to a decrease in lease intangible amortization.
Fee and ancillary lease revenues were
Finance lease revenues were$7.4 million for the three months endedSeptember 30, 2020 compared to$9.9 million in the same period in 2019, a decrease of$2.5 million . The decrease was primarily due to the reclassification of certain finance leases to operating leases in the first quarter of 2020 as a result of the renegotiation of certain contracts and the runoff of the existing portfolio. Trading margin. Trading margin was$3.9 million for the three months endedSeptember 30, 2020 compared to$4.2 million in the same period in 2019, a decrease of$0.3 million . The decrease was due to a decrease in per unit margins as a result of a decrease in selling prices, partially offset by an increase in sales volume.
Net gain on sale of leasing equipment. Gain on sale of equipment was
32
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Depreciation and amortization. Depreciation and amortization was $136.2 million
for the three months ended September 30, 2020 compared to $133.4 million in the
same period in 2019, an increase of $2.8 million . The primary reasons for the
increase are as follows:
•$4.5 million increase due to an increase in the number of new production units
being placed on-hire; and
•$1.9 million increase due to the reclassification of certain contracts from
finance leases to operating leases in the first quarter of 2020 as a result of
the renegotiation of the contracts and the elimination of purchase options;
partially offset by;
•$3.4 million decrease due to an increase in containers that have become fully
depreciated or reclassified to assets held for sale.
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 to reposition equipment from locations with weak leasing
demand. Direct operating expenses were $26.0 million for the three months ended
September 30, 2020 compared to $20.5 million in the same period in 2019, an
increase of $5.5 million . The primary reasons for the increase are as follows:
•$2.6 million increase in storage expense due to an increase in idle units; and
•$2.1 million increase in handling and repair expense due to higher net pick-up
and drop-off activity.
Administrative expenses. Administrative expenses were $21.4 million for the
three months ended September 30, 2020 compared to $18.5 million in the same
period in 2019, an increase of $2.9 million . The primary reasons for the
increase are as follows:
•$3.3 million increase due to an increase in our annual incentive expense; and
•$0.6 million increase due to an increase in professional fees; partially offset
by
•$0.9 million decrease in travel expense due to travel restrictions caused by
the COVID-19 pandemic.
Interest and debt expense. Interest and debt expense was $62.8 million for the
three months ended September 30, 2020 , compared to $77.4 million in the same
period in 2019, a decrease of $14.6 million . The primary reasons for the
decrease are as follows:
•$7.5 million decrease due to a decrease in the average debt balance of $697.5
million ; and
•$7.1 million decrease due to a decrease in the average effective interest rate
to 3.79% from 4.22%.
Debt termination expense. Debt termination expense was $24.3 million for the
three months ended September 30, 2020 compared to $1.9 million in the same
period in 2019, an increase of $22.4 million . This increase was primarily due to
write-offs for unamortized debt and other costs related to the $1.8 billion
prepayment of ABS notes in September 2020 .
Income taxes. Income tax expense was
33
--------------------------------------------------------------------------------Results of Operations
The following table summarizes our comparative results of operations for the
nine months ended
Nine Months Ended September 30,
2020 2019 Variance
Leasing revenues:
Operating leases $ 946,579 $ 985,592 $ (39,013)
Finance leases 24,043 30,501 (6,458)
Total leasing revenues 970,622 1,016,093 (45,471)
Equipment trading revenues 58,377 66,833 (8,456)
Equipment trading expenses (50,555) (54,600) 4,045
Trading margin 7,822 12,233 (4,411)
Net gain on sale of leasing equipment 19,351 22,184 (2,833)
Operating expenses:
Depreciation and amortization 402,235 403,324 (1,089)
Direct operating expenses 78,859 55,356 23,503
Administrative expenses 61,092 56,671 4,421
Provision (reversal) for doubtful accounts 4,608 505 4,103
Total operating expenses 546,794 515,856 30,938
Operating income (loss) 451,001 534,654 (83,653)
Other expenses:
Interest and debt expense 198,652 243,181 (44,529)Realized (gain) loss on derivative instruments, net (224)
(1,912) 1,688 Unrealized (gain) loss on derivative instruments, net 286 2,757 (2,471) Debt termination expense 24,376 2,428 21,948 Other (income) expense, net (4,241) (2,047) (2,194) Total other expenses 218,849 244,407 (25,558) Income (loss) before income taxes 232,152 290,247 (58,095) Income tax expense (benefit) 28,070 20,737 7,333 Net income (loss)$ 204,082 $
269,510
- 592 (592)
Less: dividend on preferred shares 30,850 7,038 23,812
Net income (loss) attributable to common shareholders
261,880
34
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Comparison of the nine months ended
Leasing revenues. Per diem revenue represents revenue earned under operating
lease contracts. Fee and ancillary lease revenue represents 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 revenue represents interest income earned under finance lease
contracts. The following table summarizes our leasing revenue for the periods
indicated below (in thousands):
Nine Months Ended September 30,
2020 2019 Variance
Leasing revenues:
Operating leases
Per diem revenues $ 897,744 $ 938,593 $ (40,849)
Fee and ancillary revenues 48,835 46,999 1,836
Total operating lease revenues 946,579 985,592 (39,013)
Finance leases 24,043 30,501 (6,458)
Total leasing revenues $ 970,622 Total leasing revenues were$970.6 million , net of lease intangible amortization of$17.3 million , for the nine months endedSeptember 30, 2020 , compared to$1,016.1 million , net of lease intangible amortization of$29.4 million , in the same period in 2019, a decrease of$45.5 million . Per diem revenues were$897.7 million for the nine months endedSeptember 30, 2020 compared to$938.6 million in the same period in 2019, a decrease of$40.9 million . The primary reasons for this decrease are as follows: •$34.3 million decrease due to a decrease in average units on-hire; and •$27.8 million decrease due to a decrease in average per diem rates reflecting the impact of several large lease extension transactions and the pick-up of a large number of containers in the third quarter of 2020 on lifecycle leases at rates below our portfolio average; partially offset by •$12.1 million increase due to a decrease in lease intangible amortization; and •$9.1 million increase due to the reclassification of certain contracts from finance leases to operating leases in the first quarter of 2020 as a result of the renegotiation of the contracts and the elimination of purchase options.
Fee and ancillary lease revenues were
Finance lease revenues were$24.0 million for the nine months endedSeptember 30, 2020 compared to$30.5 million in the same period in 2019, a decrease of$6.5 million . The decrease was due to the reclassification of certain finance leases to operating leases in the first quarter of 2020 as a result of the renegotiation of certain contracts and the runoff of the existing portfolio.
Trading margin. Trading margin was
Net gain (loss) on sale of leasing equipment. Gain on sale of equipment was$19.4 million for the nine months endedSeptember 30, 2020 compared to$22.2 million in the same period in 2019, a decrease of$2.8 million . The primary reasons for the decrease are as follows: •$2.1 million decrease due to a 5.0% decrease in average used dry container selling prices, partially offset by a 20.3% increase in selling volumes; and •$1.5 million decrease due to a gain recognized in the first quarter of 2019 related to units declared lost by a customer which did not reoccur in 2020. 35 -------------------------------------------------------------------------------- Depreciation and amortization. Depreciation and amortization was$402.2 million for the nine months endedSeptember 30, 2020 compared to$403.3 million in the same period in 2019, a decrease of$1.1 million . The primary reasons for the decrease are as follows: •$16.7 million decrease due to an increase in containers that have become fully depreciated or reclassified to assets held for sale; partially offset by •$10.1 million increase due to an increase in the number of new production units being placed on-hire; and •$5.1 million increase due to the reclassification of certain contracts from finance leases to operating leases in the first quarter of 2020 as a result of the renegotiation of the contracts and the elimination of purchase options. 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 to reposition equipment from locations with weak leasing demand. Direct operating expenses were$78.9 million for the nine months endedSeptember 30, 2020 compared to$55.4 million in the same period in 2019, an increase of$23.5 million . The primary reasons for the increase are as follows: •$15.0 million increase in storage expense due to an increase in idle units; •$5.2 million increase in repair and handling expense due to higher net pick-up and drop-off activity; and •$2.8 million increase in positioning expense due to customer pick-up requirements from specific locations. Administrative expenses. Administrative expenses were$61.1 million for the nine months endedSeptember 30, 2020 compared to$56.7 million in the same period in 2019, an increase of$4.4 million . The primary reasons for this increase are as follows: •$3.5 million increase due to an increase in our annual incentive expense; •$2.2 million increase due to an increase in professional fees; •$1.4 million increase due to higher compensation costs; and •$0.6 million increase due to an increase in share-based compensation; partially offset by •$2.1 million decrease in travel expense due to travel restrictions caused by the COVID-19 pandemic. Provision (reversal) for doubtful accounts. Provision for doubtful accounts was$4.6 million for the nine months endedSeptember 30, 2020 compared to$0.5 million in the same period in 2019, an increase of$4.1 million . The increase is primarily due to reserves recorded in the first quarter of 2020 against the receivables from one of our mid-sized customers where we had been experiencing extended payment delays. Interest and debt expense. Interest and debt expense was$198.7 million for the nine months endedSeptember 30, 2020 , compared to$243.2 million in the same period in 2019, a decrease of$44.5 million . The primary reasons for the decrease are as follows: •$26.0 million decrease due to a decrease in the average debt balance of$784.5 million ; and •$19.4 million decrease due to a decrease in the average effective interest rate to 3.97% from 4.35%. Debt termination expense. Debt termination expense was$24.4 million for the nine months endedSeptember 30, 2020 compared to$2.4 million in the same period in 2019, an increase of$22.0 million . The increase was primarily due to write-offs for unamortized debt and other costs related to the$1.8 billion prepayment of ABS notes inSeptember 2020 . Income taxes. Income tax expense was$28.1 million for the nine months endedSeptember 30, 2020 compared to$20.7 million in the same period in 2019, an increase in income tax expense of$7.4 million . The increase in income tax expense was primarily due to an$8.6 million increase related to an intra-company asset sale from aU.S. entity to foreign entity that occurred during the nine months endedSeptember 30, 2020 , partially offset by a decrease in taxes as a result of decrease in pre-tax income. 36 --------------------------------------------------------------------------------
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 Remaining 2020 2021 2022 2023 2024 thereafter
(dollars in millions)
Principal debt obligations $ 6,452.0 $ 138.0 $ 659.1 $ 735.7 $ 1,553.6 $ 1,330.0 $ 2,035.6
Interest on debt obligations(1) 838.8 51.7 193.1 168.2 139.9 94.2 191.7
Finance lease obligations(2) 19.9 0.8 3.1 3.1 3.1 9.8 - Operating leases (mainly facilities) 7.3 0.7 2.9 2.2 1.4 0.1 - Purchase obligations: Equipment purchases payable 96.8 96.8 - - - - - Equipment purchase commitments 552.8 352.8 200.0 - - - -
Total contractual obligations
(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 onSeptember 30, 2020 rates. (2)Amounts include interest.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2020 , 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.
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. Our critical accounting policies are discussed in our Form 10-K.
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