UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2018
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number - 001-37827
Triton International Limited
(Exact name of registrant as specified in the charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
98-1276572
(I.R.S. Employer Identification Number)
Canon's Court, 22 Victoria Street, Hamilton HM12, Bermuda
(Address of principal executive office)
(441) 294-8033
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange On Which Registered
Common shares, $0.01 par value per share
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
Non-accelerated filer
Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of voting common shares held by non-affiliates as of June 29, 2018 was approximately $1,586.0 million. As of February 8, 2019,
there were 78,743,418 common shares, $0.01 par value, of the Registrant outstanding.
Part of Form 10-K
Document Incorporated by Reference
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12, 13, and 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of the Registrant's proxy statement to be filed in connection with the Annual
Meeting of Shareholders of the Registrant to be held on April 25, 2019.
Table of Contents
Page No.
Item 1.
PART I
Business ..........................................................................................................................................................
Item 1A. Risk Factors.....................................................................................................................................................
Item 1B. Unresolved Staff Comments ...........................................................................................................................
Item 2.
Item 3.
Properties ........................................................................................................................................................
Legal Proceedings ...........................................................................................................................................
Item 4. Mine Safety Disclosures .................................................................................................................................
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity
Securities .........................................................................................................................................................
Item 6.
Selected Financial Data...................................................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................................................
Item 8.
Item 9.
Financial Statements and Supplementary Data...............................................................................................
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ........................
Item 9A. Controls and Procedures .................................................................................................................................
Item 9B. Other Information ...........................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance..............................................................................
Item 11. Executive Compensation.................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.......
Item 13. Certain Relationships and Related Transactions, and Director Independence................................................
Item 14. . Principal Accountant Fees and Services .........................................................................................................
PART IV
Item 15. . Exhibits and Financial Statement Schedules ..................................................................................................
Signatures .........................................................................................................................................................................
Index to Financial Statements ..........................................................................................................................................
Report of Independent Registered Public Accounting Firm ............................................................................................
Consolidated Balance Sheets ...........................................................................................................................................
Consolidated Statements of Operations ...........................................................................................................................
Consolidated Statements of Comprehensive Income.......................................................................................................
Consolidated Statements of Shareholders' Equity............................................................................................................
Consolidated Statements of Cash Flows ..........................................................................................................................
Notes to Consolidated Financial Statements ....................................................................................................................
Schedule I - Parent Company Condensed Financial Statements......................................................................................
Schedule II - Valuation and Qualifying Accounts ............................................................................................................
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, that involve substantial risks and uncertainties. In addition, we, or our executive officers on our behalf, may from
time to time make forward-looking statements in reports and other documents we file with the Securities and Exchange Commission,
or SEC, or in connection with oral statements made to the press, potential investors or others. All statements other than statements
of historical facts, including statements regarding our strategy, future operations, future financial position, future revenues, future
costs, prospects, plans and objectives of management are forward-looking statements. The words "expect," "estimate," "anticipate,"
"predict," "believe," "think," "plan," "will," "should," "intend," "seek," "potential" and similar expressions and variations are
intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond Triton's control.
Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such
statements and, therefore, you should not place undue reliance on any such statements. These factors include, without limitation,
economic, business, competitive, market and regulatory conditions and the following:
•
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decreases in the demand for leased containers;
decreases in market leasing rates for containers;
difficulties in re-leasing containers after their initial fixed-term leases;
customers' decisions to buy rather than lease containers;
dependence on a limited number of customers for a substantial portion of our revenues;
customer defaults;
decreases in the selling prices of used containers;
extensive competition in the container leasing industry;
difficulties stemming from the international nature of Triton's businesses;
decreases in demand for international trade;
disruption to Triton's operations resulting from political and economic policies of the United States and other countries,
particularly China, including but not limited to the impact of trade wars and tariffs;
disruption to Triton's operations from failure of or attacks on Triton's information technology systems;
disruption to Triton's operations as a result of natural disasters;
compliance with laws and regulations related to economic and trade sanctions, security, anti-terrorism, environmental
protection and corruption;
ability to obtain sufficient capital to support growth;
restrictions imposed by the terms of Triton's debt agreements;
changes in the tax laws in Bermuda, the United States and other countries; and
other risks and uncertainties, including those listed under the caption "Risk Factors."
The foregoing list of important factors should not be construed as exhaustive and should be read in conjunction with the other
cautionary statements that are included herein and elsewhere, including the risk factors included in this annual report on Form 10-
K. Any forward-looking statements made in this annual report on Form 10-K are qualified in their entirety by these cautionary
statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to, or effects on, Triton or its respective businesses or
operations. Except to the extent required by applicable law, we undertake no obligation to update publicly or revise any forward-
looking statement, whether as a result of new information, future developments or otherwise.
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MERGER OF TRITON CONTAINER INTERNATIONAL LIMITED AND TAL INTERNATIONAL GROUP, INC. TO
FORM TRITON INTERNATIONAL LIMITED
On November 9, 2015, Triton Container International Limited, an exempted company incorporated with limited liability under
the laws of Bermuda ("TCIL"), and TAL International Group, Inc., a Delaware corporation ("TAL"), announced that they entered
into a definitive Transaction Agreement (the "Transaction Agreement") to combine in an all-stock merger (the "Merger"). On July
12, 2016, TCIL and TAL combined under a newly-formed company, Triton International Limited ("Triton", "we", "our" or the
"Company"), which is domiciled in Bermuda and is listed on the New York Stock Exchange under the stock symbol "TRTN".
Post-Merger Organization Structure Relevant to this Form 10-K
On July 12, 2016, the transactions contemplated by the Transaction Agreement were approved by the stockholders of TAL
and became effective. Former TCIL shareholders owned approximately 55% of the outstanding equity of the Company and former
TAL stockholders owned approximately 45% of the outstanding equity of the Company on that date. The Company, through its
subsidiaries, leases intermodal transportation equipment, primarily maritime containers, and provides maritime container
management services through a worldwide network of subsidiary offices, third-party depots and other facilities. Triton operates
in both international and U.S. markets. The majority of Triton's business is derived from leasing its containers to shipping line
customers through a variety of long-term and short-term contractual lease arrangements. Triton also sells its own containers and
containers purchased from third parties for resale. Triton's registered office is located at Canon's Court, 22 Victoria Street, Hamilton
HM12, Bermuda.
Since completion of the Merger, Brian M. Sondey, who was the Chairman, President and Chief Executive Officer of TAL,
has served as the Chairman and Chief Executive Officer of Triton, and John Burns, who was the Chief Financial Officer of TAL,
has served as the Chief Financial Officer of Triton. Simon R. Vernon, who was the President and Chief Executive Officer of TCIL,
served as President of Triton until his retirement on February 28, 2018 and continues to serve as a member of the Board of Directors.
WEBSITE ACCESS TO COMPANY'S REPORTS AND CODE OF ETHICS
Our Internet website address is http://www.trtn.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or
furnished to, the SEC.
We have adopted a code of ethics that applies to all of our employees, officers, and directors, including our principal executive
officer and principal financial officer. The text of our code of ethics is posted within the Corporate Governance portion of the
Investors section of our website.
Also, copies of our annual report and Code of Ethics will be made available, free of charge, upon written request to:
Triton International Limited
Canon's Court
22 Victoria Street
Hamilton HM12, Bermuda
Attn: Marc Pearlin, Sr. Vice President, General Counsel and Secretary
Telephone: (441) 294-8033
SERVICE MARKS MATTERS
The following items referred to in this annual report are registered or unregistered service marks in the United States and/or
foreign jurisdictions pursuant to applicable intellectual property laws and are the property of Triton and its subsidiaries: Triton®,
TAL®, and
®.
4
ITEM 1. BUSINESS
Our Company
PART I
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.
Triton was formed on July 12, 2016 through an all-stock merger between Triton Container International Limited and TAL
International Group, Inc.
Our consolidated operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal
containers and chassis. As of December 31, 2018, our total fleet consisted of 3.7 million containers and chassis, representing 6.2
million twenty-foot equivalent units ("TEU") or 7.6 million cost equivalent units ("CEU"). We have an extensive global presence,
offering leasing services through 23 offices located in 16 countries, and we provide access to our containers through a network of
approximately 400 third-party container depot facilities located in approximately 45 countries as of December 31, 2018. Our
primary customers include the world's largest container shipping lines. We employed 243 people as of December 31, 2018. Our
field operations include a global sales force, a global container operations group, an equipment resale group, and a logistics services
group. Our registered office is located in Bermuda.
The most important driver of profitability in our business is the extent to which leasing revenues, which are driven primarily
by our owned equipment fleet size, utilization and average rental 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 because, in the ordinary course of our business, we
sell certain containers when they are returned to us.
Industry Overview
Intermodal containers provide a secure and cost-effective method of transporting raw materials, component parts and finished
goods because they can be used in multiple modes of transport. By making it possible to move cargo from a point of origin to a
final destination without repeated unpacking and repacking, containers reduce freight and labor costs. In addition, automated
handling of containers permits faster loading and unloading of vessels, more efficient utilization of transportation equipment and
reduced transit time. The protection provided by sealed containers also reduces cargo damage and the loss and theft of goods
during shipment.
Over the last thirty years, containerized trade has grown at a rate greater than that of general worldwide economic growth.
According to Clarkson Research Studies, worldwide containerized cargo volume increased at a compound annual growth rate
("CAGR") of 8.1% from 1987 to 2018. We believe that this high historical growth was due to several factors, including the shift
in global manufacturing capacity to lower labor cost areas such as China and India, the continued integration of developing high
growth economies into global trade patterns and the continued conversion of cargo from bulk shipping into containers. However,
worldwide containerized cargo volume growth has been lower over the last few years, averaging 4.1% CAGR from 2013 to 2018,
due to weak global economic growth and a significant reduction in the difference between global trade growth and global economic
growth.
Container leasing firms maintain inventories of new and used containers in a wide range of worldwide locations and supply
these containers primarily to shipping line customers under a variety of short and long-term lease structures. Based on container
fleet information reported by Drewry Maritime Research, we estimate that container lessors owned approximately 21.9 million
twenty-foot equivalent units ("TEU"), or approximately 53% of the total worldwide container fleet of 41.7 million TEU, as of the
end of 2018.
Leasing containers helps shipping lines improve their container fleet efficiency and provides shipping lines with an alternative
source of equipment financing. Given the uncertainty and variability of export volumes, and the fact that shipping lines have
difficulty in accurately forecasting their container requirements on a day-by-day, port-by-port basis, the availability of containers
for lease on short notice reduces shipping lines' need to purchase and maintain larger container inventory buffers. In addition, the
5
drop-off flexibility provided by operating leases also allows the shipping lines to adjust their container fleet sizes and the mix of
container types in their fleets both seasonally and over time and helps to balance their trade flows.
Spot leasing rates are typically a function of, among other things, new equipment prices (which are heavily influenced by
steel prices), interest rates and the equipment supply and demand balance at a particular time and location. Average leasing rates
on an entire portfolio of leases respond more gradually to changes in new equipment prices or changes in the balance of container
supply and demand because lease agreements are generally only re-priced upon the expiration of the lease. In addition, the value
that lessors receive upon resale of equipment is closely related to the cost of new equipment.
Our Equipment
Intermodal containers are designed to meet a number of criteria outlined by the International Standards Organization (ISO).
The standard criteria include the size of the container and the gross weight rating of the container. This standardization ensures
that containers can be used by the widest possible number of transporters and it facilitates container and vessel sharing by the
shipping lines. The standardization of the container is also an important element of the container leasing business since we can
operate one fleet of containers that can be used by all of our major customers.
Our fleet primarily consists of five types of equipment:
• Dry Containers. A dry container is a steel constructed box with a set of doors on one end. Dry containers come in lengths
of 20, 40 or 45 feet. They are 8 feet wide, and either 8½ or 9½ feet tall. Dry containers are the least expensive and most
widely used type of intermodal container and are used to carry general cargo such as manufactured component parts,
consumer staples, electronics and apparel.
•
• Refrigerated Containers. Refrigerated containers include an integrated cooling machine and an insulated container.
Refrigerated containers come in lengths of 20 or 40 feet. They are 8 feet wide, and are either 8½ or 9½ feet tall. These
containers are typically used to carry perishable cargo such as fresh and frozen produce.
Special Containers. Most of our special containers are open top and flat rack containers. Open top containers come in
similar sizes as dry containers, but do not have a fixed roof. Flat rack containers come in varying sizes and are steel
platforms with folding ends and no fixed sides. Open top and flat rack containers are generally used to move heavy or
bulky cargos, such as marble slabs, steel coils or factory components, that cannot be easily loaded on a fork lift through
the doors of a standard container.
Tank Containers. Tank containers are stainless steel cylindrical tanks enclosed in rectangular steel frames with the same
outside dimensions as 20 foot dry containers. These containers carry bulk liquids such as chemicals.
•
• Chassis. An intermodal chassis is a rectangular, wheeled steel frame, generally 23½, 40 or 45 feet in length, built
specifically for the purpose of transporting intermodal containers over the road. Longer sized chassis, designed to solely
accommodate rail containers, can be up to 53 feet in length. When mounted on a chassis, the container may be trucked
either to its destination or to a railroad terminal for loading onto a rail car. Our chassis are primarily used in the United
States.
Our Leases
Most of our revenues are derived from leasing our equipment to our core shipping line customers. The majority of our leases
are structured as operating leases, though we also provide customers with finance leases. Regardless of the lease type, we seek to
exceed our targeted return on our investments over the life cycle of the equipment by managing utilization, lease rates, and the
used equipment sale process.
Our lease products provide numerous operational and financial benefits to our shipping line customers. These benefits include:
• Operating Flexibility. The timing, location and daily volume of cargo movements for a shipping line are often
unpredictable. Leasing containers and chassis helps our customers manage this uncertainty and minimizes the requirement
for large inventory buffers by allowing them to pick-up leased equipment on short notice.
• Fleet Size and Mix Flexibility. The drop-off flexibility included in container and chassis operating leases allows our
customers to more quickly adjust the size of their fleets and the mix of container types in their fleets as their trade volumes
and patterns change due to seasonality, market changes or changes in company strategies.
• Alternative Source of Financing. Container and chassis leases provide an additional source of equipment financing to
help our customers manage the high level of investment required to maintain pace with the growth of the asset intensive
container shipping industry.
Operating Leases. Operating leases are structured to allow customers flexibility to pick-up equipment on short notice and
to drop-off equipment prior to the end of its useful life. Because of this flexibility, most of our containers and chassis will go
through several pick-up and drop-off cycles. Our operating lease contracts specify a per diem rate for equipment on-hire, where
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and when such equipment can be returned, how the customer will be charged for damage and the charge for lost or destroyed
equipment, among other things.
We categorize our operating leases as either long-term leases or service leases. Some leases have contractual terms that have
features reflective of both long-term and service leases. We classify such leases as either long-term or service leases, depending
upon which features we believe are predominant. Long-term leases typically have initial contractual terms ranging from three to
eight years. Our long-term leases require our customers to maintain specific units on-hire for the duration of the lease term, and
they provide us with predictable recurring cash flow. As of December 31, 2018, 66.6% of our on-hire containers and chassis were
under long-term operating leases.
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. As of December 31, 2018, 14.6% of
our on-hire containers and chassis were on long-term leases whose fixed terms have expired but for which the related units remain
on-hire and for which we continue to receive rental payments.
Some of our long-term leases give our customers Early Termination Options ("ETOs"). If exercised, ETOs allow customers
to return equipment prior to the expiration of the long-term lease. However, if an ETO is exercised, the customer is required to
pay a penalty per diem rate that is applied retroactively to the beginning of the lease. As a result of this retroactive penalty, ETOs
have historically been exercised infrequently.
Service leases allow our customers to pick-up and drop-off equipment during the term of the lease, subject to contractual
limitations. Service leases provide the customer with a higher level of flexibility than long-term leases and, as a result, typically
carry a higher per diem rate. The terms of our service leases can range from 12 months to five years, though because equipment
can be returned during the term of a service lease and since service leases are generally renewed or modified and extended upon
expiration, lease term does not dictate expected on-hire time for our equipment on service leases. As of December 31, 2018, 11.3%
of our on-hire containers and chassis were under service leases and this equipment has been on-hire for an average of 35 months.
Finance Leases. Finance leases provide our customers with an alternative method to finance their equipment acquisitions.
Finance leases are generally structured for specific quantities of equipment, generally require the customer to keep the equipment
on-hire for its remaining useful life, and typically provide the customer with a purchase option at the end of the lease term. As of
December 31, 2018, approximately 7.5% of our on-hire containers and chassis were under finance leases.
The following table provides a summary of our equipment lease portfolio by lease type, based on cost equivalent units (CEU),
as of December 31, 2018:
Lease Portfolio
Long-term leases............................................................................................................................................
Finance leases ................................................................................................................................................
Service leases .................................................................................................................................................
Expired long-term leases (units on-hire)........................................................................................................
Total ...............................................................................................................................................................
December 31, 2018
66.6%
7.5
11.3
14.6
100.0%
As of December 31, 2018, our long-term and finance leases had an average remaining duration of 47 months, assuming no
leases are renewed. However, we believe that many of our customers will renew operating leases for equipment that is less than
sale age at the expiration of the lease. In addition, our equipment on operating leases typically remains on-hire at the contractual
per diem rate for an additional six to twelve months beyond the end of the contractual lease term due to the logistical requirements
of our customers having to return the containers and chassis to specific drop-off locations.
Lease Documentation. In general, our lease agreements consist of two basic elements, a master lease agreement and a lease
addendum. Lease addenda typically contain the business terms (including daily rate, term duration and drop-off schedule, among
other things) for specific leasing transactions, while master lease agreements typically outline the general rights and obligations
of the lessor and lessee under all of the lease addenda covered by the master lease agreement (lease addenda will specify the master
lease agreement that governs the addenda). For most customers, we have a small number of master lease agreements (often one)
and a large number of lease addenda.
Our master lease agreements generally require the lessees to pay rentals, depot charges, taxes and other charges when due, to
maintain the equipment in good condition, to return the equipment in accordance with the return condition set forth in the master
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lease agreement, to use the equipment in compliance with all federal, state, local and foreign laws, and to pay us the specified
value of the equipment if the equipment is lost or destroyed. The default clause gives us certain legal remedies in the event that
the lessee is in breach of the lease.
The master lease agreements usually contain an exclusion of warranties clause and require lessees to defend and indemnify
us in most instances from third-party claims arising out of the lessee's use, operation, possession or lease of the equipment. Lessees
are generally required to maintain all risks physical damage insurance, comprehensive general liability insurance and to indemnify
us against loss. We also maintain our own off-hire physical damage insurance to cover our equipment when it is not on-hire to
lessees and third-party liability insurance for both on-hire and off-hire equipment. Nevertheless, such insurance or indemnities
may not fully protect us against damages arising from the use of our containers.
Logistics Management, Re-leasing, Depot Management and Equipment Disposals
We believe that managing the period after our equipment's lease is the most important aspect of our business. Successful
management of this period requires disciplined logistics management, extensive re-lease capability, careful cost control and
effective sales of used equipment.
Logistics Management. Since the late 1990's, the shipping industry has been characterized by large regional trade imbalances,
with loaded containers generally flowing from export oriented economies in Asia to North America and Western Europe. Because
of these trade imbalances, shipping lines have an incentive to return leased containers in North America and Europe to reduce the
cost of empty container backhaul. Triton attempts to mitigate the risk of these unbalanced trade flows by maintaining a large
portion of our fleet on long-term and finance leases and by contractually restricting the ability of our customers to return containers
outside of Asian demand locations.
In addition, we attempt to minimize the costs of any container imbalances by finding local users in surplus locations and by
moving empty containers as inexpensively as possible. While we believe we manage our logistics risks and costs effectively,
logistical risk remains an important element of our business due to competitive pressures, changing trade patterns and other market
factors and uncertainties.
Re-leasing. Since our operating leases allow customers to return containers and chassis prior to the end of their useful lives,
we typically are required to place containers and chassis on several leases during their useful lives. Initial lease transactions for
new containers and chassis can usually be generated with a limited sales and customer service infrastructure because initial leases
for new containers and chassis typically cover large volumes of units and are fairly standardized transactions. Used equipment,
on the other hand, is typically leased out in small transactions that are structured to accommodate pick-ups and returns in a variety
of locations. As a result, leasing companies benefit from having an extensive global marketing and operations infrastructure, a
large number of customers, and a high level of operating contact with these customers.
Depot Management. As of December 31, 2018, we managed our equipment fleet through approximately 400 third-party
owned and operated depot facilities located in 45 countries. Depot facilities are generally responsible for repairing our containers
and chassis when they are returned by lessees and for storing the equipment while it is off-hire. We have a global operations group
that is responsible for managing our depot contracts and they also regularly visit the depot facilities to conduct inventory and repair
audits. We also supplement our internal operations group with the use of independent inspection agents.
We are in constant communication with our depot partners through the use of electronic data interchange ("EDI"). Our depots
gather and prepare all information related to the activity of our equipment at their facilities and transmit the information via EDI
and the Internet to us. The information we receive from the depots updates our fully integrated container fleet management, tracking,
and billing system.
Most of the depot agency agreements follow a standard form and generally provide that the depot will be liable for loss or
damage of equipment and, in the event of loss or damage, will pay us the previously agreed loss value of the applicable equipment.
The agreements require the depots to maintain insurance against equipment loss or damage and we carry insurance to cover the
risk that the depots' insurance proves insufficient.
Our container repair standards and processes are generally managed in accordance with standards and procedures specified
by the Institute of International Container Lessors (IICL). The IICL establishes and documents the acceptable interchange condition
for containers and the repair procedures required to return damaged containers to the acceptable interchange condition. At the time
that containers are returned by lessees, the depot arranges an inspection of the containers to assess the repairs required to return
the containers to acceptable IICL condition. This inspection process also splits the damage into two components, customer damage
and normal wear and tear. Items typically designated as customer damage include dents in the container and debris left in the
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container, while items such as rust are typically designated as normal wear and tear.
Our leases are generally structured so that the lessee is responsible for the customer damage portion of the repair costs, and
customers are billed for damages at the time the equipment is returned. We sometimes offer our customers a repair service program
whereby we, for an additional payment by the lessee (in the form of a higher per-diem rate or a flat fee at off-hire), assume financial
responsibility for all or a portion of the cost of repairs upon return of the equipment.
Equipment Disposals. Our in-house equipment sales group has a worldwide team of specialists that manage the sale process
for our used containers and chassis from our lease fleet. We generally sell to portable storage companies, freight forwarders (who
often use the containers for one-way trips) and other purchasers of used containers. We believe we are one of the world's largest
sellers of used containers.
The sale prices we receive for our used containers are influenced by many factors, including the level of demand for used
containers compared to the number of used containers available for disposal in a particular location, the cost of new containers,
and the level of damage on the containers. While our total revenue is primarily made up of leasing revenues, gains or losses on
the sale of used containers can have a significant positive or negative impact on our profitability.
Equipment Trading. We also buy and sell new and used containers and chassis acquired from third parties. We typically
purchase our equipment trading fleet from our shipping line customers or other sellers of used or new equipment. Trading margins
are dependent on the volume of units purchased and resold, selling prices, costs paid for equipment sold and selling and
administrative costs.
Customers
Our customers are mainly international shipping lines, though we also lease containers to freight forwarding companies and
manufacturers. We believe that we have strong, long-standing relationships with our largest customers, most of whom we have
done business with for more than 30 years. We currently have equipment on-hire to more than 300 customers, although our twenty
largest customers account for 85% of our lease billings. The shipping industry has been consolidating for a number of years, and
further consolidation could increase the portion of our revenues that come from our largest customers. Our five largest customers
accounted for 54% of our lease billings, and our two largest customers, CMA CGM S.A. and Mediterranean Shipping Company
S.A., accounted for 20% and 14%, respectively, of our lease billings in 2018. A default by one of our major customers could have
a material adverse impact on our business, financial condition and future prospects.
Marketing and Customer Service
Our global marketing force and our customer service representatives are responsible for developing and maintaining
relationships with senior operations staff at our shipping line customers, negotiating lease contracts and maintaining day-to-day
coordination with junior level staff at our customers. This close customer communication is critical to our ability to provide
customers with a high level of service, helps us to negotiate lease contracts that satisfy both our financial return requirements and
our customers' operating needs, ensures that we are aware of our customers' potential equipment shortages, and provides customers
knowledge of our available equipment inventories.
Credit Controls
We monitor our customers' performance and our lease exposures on an ongoing basis. Our credit management processes are
aided by the long payment experience we have with most of our customers and our broad network of relationships in the shipping
industry that provides current information about our customers' market reputations. Credit criteria may include, but are not limited
to, customer payment history, customer financial position and performance (e.g., net worth, leverage and profitability), trade routes,
country of domicile and the type of, and location of, equipment that is to be supplied.
We experienced a major lessee default in 2016 when Hanjin Shipping Co. ("Hanjin"), one of our largest customers, filed for
bankruptcy court protection and defaulted on our lease agreements. Hanjin had approximately 87,000 of our containers on lease
with a net book value of $243.3 million. We recorded a loss of $29.7 million during the third quarter ended September 30, 2016,
comprised of bad debt expense and a charge for costs not expected to be recovered due to deductibles in our credit insurance
policies. As of December 31, 2018, we recovered approximately 95% of our containers previously leased to Hanjin.
While we recovered 95% of the containers previously on-hire to Hanjin, we incurred substantial costs in the recovery effort
including a write-off of outstanding receivables; payments to terminals, depots, Hanjin shipping agents and others in possession
9
of our containers to obtain the release of our containers; repair and handling costs; and positioning costs to move containers
recovered from locations with weak leasing demand to higher demand locations.
We historically maintained credit insurance to help mitigate the cost and risk of lessee defaults and this insurance coverage
reduced our costs resulting from the default of Hanjin, by approximately $67.0 million. However, our credit insurance policies
typically had annual terms, and in the aftermath of the Hanjin bankruptcy, the availability of credit insurance protection has become
much more limited and the cost of the more limited protection has increased substantially. We currently assess the cost and level
of this type of credit insurance protection offered to us as uneconomic, and have allowed this credit insurance coverage to lapse. We
have obtained a more limited credit insurance policy covering only accounts receivables for some of our customers. This policy
does not cover recovery costs, has exclusions and payment and other limitations, and therefore may not protect us from losses
arising from customer defaults. Therefore we may be forced to incur all of the losses resulting from future lessee defaults,
significantly increasing the likelihood that a lessee default would have a material adverse impact on our profitability and financial
condition.
Competition
We compete with at least six other major intermodal equipment leasing companies in addition to many smaller lessors,
manufacturers of intermodal equipment, and companies offering finance leases as distinct from operating leases. It is common for
our customers to utilize several leasing companies to meet their equipment needs.
Our competitors compete with us in many ways, including lease pricing, lease flexibility, supply reliability and customer
service. In times of weak demand or excess supply, leasing companies often respond by lowering leasing rates and increasing the
logistical flexibility offered in their lease agreements. In addition, new entrants into the leasing business are often aggressive on
pricing and lease flexibility. Furthermore, customers also have the option to purchase intermodal equipment and utilize owned
equipment instead of leasing, relying on their own fleets to satisfy their intermodal equipment needs and even leasing their excess
container stock to other shipping companies.
While we are forced to compete aggressively on price, we attempt to emphasize our supply reliability and high level of
customer service to our customers. We invest heavily to ensure adequate equipment availability in high demand locations, dedicate
large portions of our organization to building customer relationships and maintaining close day-to-day coordination with customers'
operating staffs, and have developed powerful and user-friendly systems that allow our customers to transact with us through the
Internet.
Suppliers
We have long-standing relationships with all of our major suppliers. We purchase most of our containers and chassis in China.
There are five large manufacturers of dry containers and four large manufacturers of refrigerated containers, though for both dry
containers and refrigerated containers, the largest manufacturer accounts for more than 40% of global production volume. Our
procurement and engineering staff reviews the designs for our containers and periodically audits the production facilities of our
suppliers. In addition, we use our Asian procurement and engineering group and third-party inspectors to visit factories when our
containers are being produced to provide an extra layer of quality control. Nevertheless, defects in our containers sometimes occur.
We work with the manufacturers to correct these defects, and our manufacturers have generally honored their warranty obligations
in such cases.
Systems and Information Technology
The efficient operation of our business is highly dependent on our information technology system to track transactions, bill
customers and provide the information needed to report our financial results. Our system allows customers to place pick-up and
drop-off orders on the Internet, view current inventories and check contractual terms in effect with respect to any given container
lease agreement. Our system also maintains a database, which accounts for the containers in our fleet and our leasing agreements,
processes leasing and sale transactions, and bills our customers for their use of and damage to our containers. The Company also
uses the information provided by these systems in our day-to-day business to make business decisions and improve our operations
and customer service.
Segments
We operate our business in one industry, intermodal transportation equipment, and have two business segments, which also
represent our reporting segments:
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• Equipment leasing—Our equipment leasing operations include the acquisition, leasing, re-leasing and ultimate sale of
multiple types of intermodal transportation equipment, primarily intermodal containers.
• 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.
Environmental
We face a number of environmental concerns, including potential liability due to accidental discharge from our containers,
potential equipment obsolescence or retrofitting expenses due to changes in environmental regulations, and increased risk of
container performance problems due to container design changes driven by environmental factors. While we maintain
environmental liability insurance coverage, and the terms of our leases and other arrangements for use of our containers place the
responsibility for environmental liability on the end user, we still may be subject to environmental liability in connection with our
current or historical operations. In certain countries like the United States, the owner of a leased container may be liable for the
costs of environmental damage from the discharge of the contents of the container even though the owner is not at fault. Our
lessees are required to indemnify us from environmental claims and our standard master tank container lease agreement insurance
clause requires our tank container lessees to provide pollution liability insurance.
We also face risks from changing environmental regulations, particularly with our refrigerated container product line. Many
countries, including the United States, restrict, prohibit or otherwise regulate the use of chemical refrigerants due to their ozone
depleting and global warming effects. . Our refrigerated containers currently use 404A or R134A refrigerant. While 404A and
R134A do not contain hydrochlorofluorocarbons ("CFCs"), which have been restricted since 1995, the European Union ("EU")
has instituted regulations beginning in 2011 to phase out the use of R134A in automobile air conditioning systems due to concern
that the release of R134A into the atmosphere may contribute to global warming. While the EU regulations do not currently restrict
the use of 404A or R134A in refrigerated containers or trailers, it has been proposed that, beginning in 2020 and 2025, respectively,
404A and R134A usage in refrigerated containers may be banned, although the final decision has not yet been made. Further,
certain manufacturers of refrigerated containers, including the largest manufacturer of cooling machines for refrigerated containers,
have begun testing units that utilize alternative refrigerants, such as R513a and H1234YF, as well as natural refrigerants such as
propane and carbon dioxide, that may have less global warming potential than 404A and R134A. If future regulations prohibit the
use or servicing of containers using 404A or R134A refrigerants, we could be forced to incur large retrofitting expenses. In addition,
refrigerated containers that are not retrofitted may become difficult to lease, command lower rental rates and disposal prices, or
may have to be scrapped.
Historically, the foam insulation in the walls of intermodal refrigerated containers required the use of a blowing agent that
contains CFCs, specifically HCFC-141b. The manufacturers producing our refrigerated containers have eliminated the use of this
blowing agent in the manufacturing process, but a large number of our refrigerated containers manufactured prior to 2014 contain
these CFCs. The EU prohibits the import and the placing on the market in the EU of intermodal containers with insulation made
with HCFC-141b (“EU regulation”). However, we believe international conventions governing free movement of intermodal
containers allow the use of such intermodal refrigerated containers in the EU if they have been admitted into EU countries on
temporary customs admission. Each country in the EU has its own individual and different regulations, and we have procedures
in place that we believe comply with the relevant EU and country regulations. However, if such intermodal refrigerated containers
exceed their temporary customs admission period and/or their custom admissions status changes (e.g., should such container be
off-hired) and such intermodal refrigerated containers are deemed placed on the market in the EU, or if our procedures are deemed
not to comply with EU or a country’s regulation, we could be subject to fines and penalties. Also, if future international conventions
or regulations prohibit the use or servicing of containers with foam insulation that utilized this blowing agent during the
manufacturing process, we could be forced to incur large retrofitting expenses and those containers that are not retrofitted may
become more difficult to lease and command lower rental rates and disposal prices.
An additional environmental concern affecting our operations relates to the construction materials used in our dry containers.
The floors of dry containers are plywood usually made from tropical hardwoods. Due to concerns regarding de-forestation of
tropical rain forests and climate change, many countries which have been the source of these hardwoods have implemented severe
restrictions on the cutting and export of these woods. Accordingly, container manufacturers have switched a significant portion
of production to more readily available alternatives such as birch, bamboo, and other farm-grown wood species. Container users
are also evaluating alternative designs that would limit the amount of plywood required and are also considering possible synthetic
materials to replace the plywood. These new woods or other alternatives have not proven their durability over the typical 13-15 year
life of a dry container, and if they cannot perform as well as the hardwoods have historically, the future repair and operating costs
for these containers could be significantly higher and the useful life of the containers may be decreased.
The paint systems used for dry containers have recently been modified for environmental reasons. Container manufacturers
have replaced solvent-based paint systems with water-based paint systems for dry container production. Water-based paint systems
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require more time and care for proper application, and there is an increased risk that the paint will not adhere properly to the steel
for the expected useful life of the containers. Poor paint coverage leads to premature rusting, increased maintenance cost over the
life of the container and could result in a shorter useful life. If water-based paint applications cannot perform as well as the solvent-
based applications have historically, the future repair and operating costs for these containers could be significantly higher and
the useful life of the containers may be decreased.
Currency
The U.S. dollar is the operating currency for the large majority of our leases and obligations, and most of our revenues and
expenses are denominated in U.S. dollars. However, we pay our subsidiaries' non-U.S. staff in local currencies, and our direct
operating expenses and disposal transactions for our older containers are often structured in foreign currencies. We record realized
and unrealized foreign currency exchange gains and losses primarily due to fluctuations in exchange rates related to our Euro and
Pound Sterling transactions and related assets and liabilities.
Employees
As of December 31, 2018, we employed 243 people in 23 offices, in 16 countries. We believe that our relations with our
employees are good and we are not a party to any collective bargaining agreements.
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ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks and uncertainties noted throughout this
report including those discussed below, which may affect the value of our securities. In addition to the risks discussed below, which
we believe to be the most significant risks facing the Company, there may be additional risks not presently known to us or that we
currently deem less significant that also may adversely affect our business, financial condition and results of operations, possibly
materially. Some statements in our risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary
Note Concerning Forward-Looking Statements” in this report.
Container leasing demand can be negatively affected by numerous market factors as well as external political and economic
events that are beyond our control. Decreasing leasing demand could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Demand for containers depends largely on the rate of world trade and economic growth. Demand for leased containers is also
driven by our customers’ “lease vs. buy” decisions. Cyclical recessions, tariffs and other trade actions, and political instability can
negatively affect lessors’ operating results because during economic downturns or periods of reduced trade, shipping lines tend to
lease fewer containers, or lease containers only at reduced rates, and tend to rely more on their own fleets to satisfy a greater
percentage of their requirements. As a result, during periods of weak global economic activity, container lessors typically experience
decreased leasing demand, decreased equipment utilization, lower average rental rates, decreased leasing revenue, decreased used
container resale prices and significantly decreased profitability. These effects can be severe.
For example, our profitability decreased significantly from the third quarter of 2008 to the third quarter of 2009 due to the
effects of the global financial crisis. In 2015 and for the first half of 2016, our operating performance and profitability were
negatively impacted due to slower global trade growth resulting in reduced demand for leased containers, higher operating costs
and decreasing utilization, lease rental revenue and used container sales prices.
Other general factors affecting demand for leased containers and our container utilization include:
•
•
•
•
•
•
•
the available supply and prices of new and used containers;
changes in economic conditions, the operating efficiency of customers and competitive pressures in the shipping industry;
the availability and terms of equipment financing for customers;
fluctuations in interest rates and foreign currency values;
import/export tariffs and restrictions, and customs procedures;
foreign exchange controls; and
other governmental regulations and political or economic factors that are inherently unpredictable and may be beyond
our control.
Any of the aforementioned factors may have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Increased tariffs or other trade actions could adversely affect our business, financial conditions and results of operations.
The international nature of the container industry exposes us to risks relating to the imposition of import and export duties
and quotas and domestic and foreign customs and tariffs. These risks have increased recently due to trade actions taken by the
United States and China that have led to increased tariffs on goods traded between these two countries, and the United States has
threatened to further increase tariffs if certain demands are not met. Given the importance of the United States and China in the
global economy, these increased tariffs could significantly reduce the volume of goods traded internationally and reduce the rate
of global economic growth, leading to decreased demand for leased containers, lower new container prices and decreased market
leasing rates. These impacts could have a materially adverse effect on our business, financial condition and results of operations.
Our customers may decide to lease fewer containers. Should shipping lines decide to buy a larger percentage of the containers
they operate, our utilization rate and level of investment would decrease, resulting in decreased leasing revenues, increased
storage costs, increased repositioning costs and lower growth.
We, like other suppliers of leased containers, are dependent upon decisions by shipping lines to lease rather than buy their
container equipment. Should shipping lines decide to buy a larger percentage of the containers they operate, our utilization rate
would decrease, resulting in decreased leasing revenues, increased storage costs and increased positioning costs. A decrease in the
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portion of leased containers operated by shipping lines would also reduce our investment opportunities and significantly constrain
our growth. Most of the factors affecting the lease vs. buy decisions of our customers are outside of our control.
Until recently, many widely-used accounting standards such as Generally Accepted Accounting Principles ("GAAP") and
International Financial Reporting Standards ("IFRS") generally did not require operating leases to be presented on the balance
sheet, which resulted in a lower level of reported financial leverage for leased containers relative to containers purchased with
debt. This difference in accounting treatment may have been a factor in shipping lines' decisions to lease rather than buy. For
reporting periods beginning in 2019, new guidance for operating leases require the recognition of a right-of-use (“ROU”) asset
and corresponding lease liability on the lessee’s balance sheet. Additionally, the International Accounting Standards Board has
issued similar changes to lease accounting under IFRS 16 Leases. Adoption of the standard under GAAP and/or IFRS may impact
our existing or potential customer’s willingness to enter into leases, the duration of our leases, or the economic decision to purchase
or lease containers.
Market lease rates may decrease due to a decrease in new container prices, weak leasing demand, increased competition or
other factors, resulting in reduced revenues, lower margins, and reduced profitability and cash flows.
Market leasing rates are typically a function of, among other things, new equipment prices (which are heavily influenced by
steel prices in China), interest rates, the type and length of the lease, and the equipment supply and demand balance at a particular
time and location. A decrease in leasing rates can have a materially adverse effect on our leasing revenues, profitability and cash
flow.
A decrease in market leasing rates negatively impacts the leasing rates on both new container investments and the existing
containers in our fleet. Most of our existing containers are on operating leases, which means that the lease term is shorter than the
expected life of the container, so the lease rate we receive for the container is subject to change at the expiration of the current
lease. As a result, during periods of low market lease rates, the average lease rate received for our containers is negatively impacted
by both the addition of new containers at low lease rates as well as, and more significantly by, the turnover of existing containers
from leases with higher lease rates to leases with lower lease rates.
Market leasing rates decreased during the fourth quarter of 2018 due to a decrease in new container prices and aggressive
competition among leasing companies, and as of December 31, 2018, market leasing rates were below the average leasing rates
in our lease portfolio. In addition, the portion of our containers on expired leases increased in 2018, increasing the number of
containers that could be subject to negative lease re-pricing. If market lease rates remain below our portfolio lease rates for an
extended period of time, as they did in 2015 and 2016, such lower average lease rates could materially impact our leasing revenue
and profitability.
Market conditions for container lessors have been extremely volatile.
Market conditions and the operating and financial performance of container leasing companies have been extremely volatile.
Market conditions such as steel and new container prices, global containerized trade growth, market lease rates and used container
sale prices were strong from 2010 through 2014, driving a high level of profitability for container leasing companies. Market
conditions subsequently deteriorated rapidly in 2015 and 2016, leading to a significant erosion in our operating and financial
performance. Market conditions rebounded at the end of 2016 and remained favorable through 2017 and 2018, leading to a recovery
in our operating and financial performance. However, there is no assurance this will continue. A reversal in market conditions back
to the difficult conditions faced in 2015 and 2016, would lead to decreased profitability, reduced cash flows and a deterioration in
our financial position.
We face significant credit risk. Lessee defaults adversely affect our business, financial condition, results of operations and cash
flow by decreasing revenues and increasing storage, positioning, collection, recovery and lost equipment expenses. The risk of
lessee defaults is currently elevated due to sustained excess vessel capacity and the resulting poor financial performance for
most of our shipping line customers.
Our containers and chassis are leased to numerous customers. Lease rentals and other charges, as well as indemnification for
damage to or loss of equipment, are payable under the leases and other arrangements by the lessees. Inherent in the nature of the
leases and other arrangements for use of the equipment is the risk that once the lease is consummated, we may not receive, or may
experience delay in receipt of, all of the amounts to be paid in respect of the equipment. A delay or diminution in amounts received
under the leases and other arrangements could adversely affect our business and financial prospects and our ability to make payments
on debt. In addition, not all of our customers provide detailed financial information regarding their operations. As a result, customer
14
credit risk is in part assessed on the basis of their reputation in the market, and there can be no assurance that they can or will fulfill
their obligations under the contracts we enter into with them. Our customers could incur financial difficulties, or otherwise have
difficulty making payments to us when due, for any number of factors that may be beyond our control and which we may be unable
to anticipate.
The cash flow from our equipment, principally lease rentals, management fees and proceeds from the sale of owned equipment,
is affected significantly by our ability to collect payments under leases and other arrangements for the use of the equipment and
our ability to replace cash flows from terminating leases by re-leasing or selling equipment on favorable terms. All of these factors
are subject to external economic conditions and performance by lessees and service providers that are beyond our control.
In addition, when lessees or sub-lessees of our containers and chassis default, we may fail to recover all of our equipment,
and the containers and chassis we do recover may be returned in damaged condition or to locations where we will not be able to
efficiently re-lease or sell them. As a result, we may have to repair and reposition these containers and chassis to other places
where we can re-lease or sell them and we may lose lease revenues and incur additional operating expenses in repossessing,
repositioning and storing the equipment.
We also often incur extra costs when repossessing containers from a defaulting lessee. These costs typically arise when our
lessee has also defaulted on payments owed to container terminals or depot facilities where the repossessed containers are located.
In such cases, the terminal or depot facility will sometimes seek to have us repay a portion of the unpaid bills as a condition before
releasing the containers back to us.
The likelihood of lessee defaults remains elevated. The container shipping industry has been suffering for several years from
excess vessel capacity and low freight rates. Most of our customers generated financial losses in 2018 and many are burdened by
high levels of debt. Ongoing deliveries of fuel efficient mega vessels will likely continue to pressure freight rates and our customers’
profitability. In addition, the implementation of the IMO 2020 global sulfur cap regulations is likely to increase the financial
pressures on shipping lines. These regulations will require our customers to either purchase more expensive, low sulfur fuel or
invest large amounts to install sulfur scrubbers for their existing ships. These extra expenses and investments could create significant
additional financial burdens for our customers.
We experienced a major lessee default in 2016 when Hanjin Shipping Co. ("Hanjin") filed for court protection and immediately
began a liquidation process. At that time, we had approximately 87,000 containers on lease to Hanjin with a net book value of
$243.3 million. We recorded a loss of $29.7 million during the third quarter ended September 30, 2016, comprised of bad debt
expense and a charge for costs not expected to be recovered due to deductibles in credit insurance policies. The impact of the
Hanjin bankruptcy was significantly lessened by credit insurance policies in place during 2016 which covered the value of containers
that are unrecoverable, cost incurred to recover containers and a portion of lost lease revenue. We have not been able to renew the
credit insurance at levels considered to be economical and may not be able to obtain such insurance in the future.
Our balance sheet includes an allowance for doubtful accounts as well as an equipment reserve related to the expected costs
of recovering and remarketing containers currently in the possession of customers that have either defaulted or that we believe
currently present a significant risk of loss. However, we do not maintain a general equipment reserve for equipment on-hire under
operating leases to performing customers. As a result, any major customer default could have a significant impact on our profitability
upon such default. Such a default could also have a material adverse effect on our business condition and financial prospects.
Our customer base highly is concentrated. A default from any of our largest customers, and especially our largest customer,
would have a material adverse effect on our business, financial condition and future prospects. In addition, a significant
reduction in leasing business from any of our large customers could have a material adverse impact on demand for our
containers and our financial performance.
Our five largest customers represented approximately 54% of our lease billings in 2018, with our single largest customer,
CMA CGM S.A., representing approximately 20% of lease billings in 2018, and our second largest customer Mediterranean
Shipping Company S.A., representing approximately 14% of lease billings in 2018. Furthermore, the shipping industry has been
consolidating for a number of years, and further consolidation is expected and could increase the portion of our revenues that come
from our largest customers.
Given the high concentration of our customer base, a default by any of our largest customers would result in a major reduction
in our leasing revenue, large repossession expenses, potentially large lost equipment charges and a material adverse impact on our
performance and financial condition. In addition, the loss or significant reduction in orders from any of our major customers could
15
materially reduce the demand for our containers and result in lower leasing revenue, higher operating expenses and diminished
growth prospects.
The implementation of new environmental regulations is expected to significantly increase the operating cost of our shipping
line customers, further pressuring their financial performance and increasing our credit risk.
As of January 1, 2020, the International Maritime Organization regulation referred to as IMO 2020 will require all vessels to
burn fuel with a sulfur content of no more than 0.5% unless fitted with an exhaust gas emissions cleaner (scrubber) capable of
reducing sulfur emissions to 0.5% or less. Low sulfur fuel is considerably more expensive than high sulfur fuel and the alternative
installation of scrubbers requires significant capital outlays. Whatever option a shipping line elects, the regulation will increase
costs for our customers with no assurance that these added costs can be passed on via higher freight rates. If the shipping lines are
unable to pass on these additional costs, our customers' financial performance will be further pressured which may negatively
impact their ability to make payments to us when due and have an adverse effect on our business and financial condition.
Credit insurance may not be available in the future to help defer the costs of future credit defaults.
We have historically maintained credit insurance to help mitigate the cost and risk of lessee defaults. Those insurance policies
typically covered the value of containers that were unrecoverable, cost incurred to recover containers and a portion of lost lease
revenue. This insurance coverage reduced our loss resulting from the default of Hanjin, by approximately $67.0 million.
However, in the aftermath of the Hanjin bankruptcy, the level of protection offered under this type of credit insurance has
become much more limited and the cost of the more limited protection has increased substantially. We assessed the cost and level
of credit insurance protection offered to the Company, determined that it is not economical and have allowed this credit insurance
coverage to lapse. Accordingly, we may be forced to incur all of the losses resulting from future lessee defaults, significantly
increasing the likelihood that a lessee default would have a material adverse impact on our profitability and financial condition.
Used container sales prices have been volatile. During periods of low used container sale prices, such as we experienced for
much of 2015 and 2016, used container sale prices can fall below our accounting residual values, leading to losses on the
disposal of our equipment.
Although our revenues primarily depend upon equipment leasing, our profitability is also affected by the gains or losses we
realize on the sale of used containers because, in the ordinary course of our business, we sell certain containers when they are
returned by customers upon lease expiration. The volatility of the selling prices and gains or losses from the disposal of such
equipment can be significant. Used container selling prices, which can vary substantially, depend upon, among other factors, the
cost of new containers, the global supply and demand balance for containers, the location of the containers, the supply and demand
balance for used containers at a particular location, the physical condition of the container, refurbishment needs, materials and
labor costs and obsolescence of certain equipment or technology. Most of these factors are outside of our control.
Containers are typically sold if it is in our best interest to do so after taking into consideration local and global leasing and
sale market conditions and the age, location and physical condition of the container. As these considerations vary, gains or losses
on sale of equipment will also fluctuate and may be significant if we sell large quantities of containers.
Used container selling prices and the gains or losses that we have recognized from selling used containers have varied widely.
Selling prices for used containers and disposal gains were exceptionally high from 2010 to 2012 due to a tight global supply and
demand balance for containers. Used container prices gradually declined from 2012 through 2014, then dropped steeply in 2015
and 2016 to levels below our estimated residual values, resulting in significant losses on sale of leasing equipment in 2016. Used
container sale prices have rebounded since 2016, but there is no assurance this rebound in sale prices will be sustained. If disposal
prices were to fall back below our residual values for an extended period, it would have a significantly negative impact on our
financial performance and cash flow.
Equipment trading results have been highly volatile and are subject to many factors outside of our control.
The profitability of our equipment trading activities has varied widely, and our equipment trading results in 2018 were unusually
strong. In 2018, we benefited from several block purchase transactions and our per-unit selling margins were supported by high
sale values for older containers. Our ability to sustain a high level of equipment trading profitability will require securing large
volumes of additional trading equipment and continuing to achieve high selling margins.
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Several factors could limit our trading volumes. Shipping lines that have sold containers to us could develop other means for
disposing their equipment or develop their own sales networks. In addition, we may limit our purchases if we have concerns that
used container selling prices might decrease.
Our equipment trading results would also be negatively impacted by a reduction in our selling margins by increased competition
for purchasing trading containers or by decreased sales prices. If sales prices rapidly deteriorate and we hold a large inventory of
equipment that was purchased when prices for equipment were higher, then our gross margins could become negative
We face extensive competition in the container leasing industry.
We may be unable to compete favorably in the highly competitive container leasing and sales business. We compete with six
other major leasing companies, many smaller container lessors, manufacturers of container equipment, companies offering finance
leases as distinct from operating leases, promoters of container ownership and leasing as a tax shelter investment, shipping lines
which sometimes lease their excess container stocks, and suppliers of alternative types of equipment for freight transport. Some
of these competitors may have greater financial resources and access to capital than us. Additionally, some of these competitors
may, at times, accumulate a high volume of underutilized inventories of containers, which could lead to significant downward
pressure on lease rates and margins.
Competition among container leasing companies involves many factors, including, among others, lease rates, lease terms
(including lease duration, and drop-off and repair provisions), customer service, and the location, availability, quality and individual
characteristics of equipment. The highly competitive nature of our industry may reduce our lease rates and margins and undermine
our ability to maintain our current level of container utilization or achieve our growth plans. In general, competition from other
leasing companies becomes more intense following a period of strong performance, such as we experienced in 2017 and 2018. As
a result, we expect increased competitive pressure.
We may incur future asset impairment charges.
An asset impairment charge may result from the occurrence of an adverse change in market conditions, unexpected adverse
events or management decisions that impact our estimates of expected cash flows generated from our long-lived assets. We review
our long-lived assets, including our container and chassis equipment, goodwill and other intangible assets for impairment, when
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We may be required to
recognize asset impairment charges in the future as a result of reductions in demand for specific container and chassis types, a
weak economic environment, challenging market conditions, events related to particular customers or asset types, or as a result
of asset or portfolio sale decisions by management.
The likelihood that we could incur asset impairment charges increases during periods of low new container prices, low market
lease rates and low used container selling prices. These conditions existed in the industry for much of 2015 and 2016. There is no
assurance these conditions will not return.
In addition, while used container selling prices are currently above our estimated residual values, they are extremely volatile
and if disposal prices fall back below our residual values for an extended period, we would likely need to revise our estimates for
residual values. Decreasing estimates for residual values would result in an immediate impairment charge on containers older than
the estimated useful life in our depreciation calculations, and would result in increased depreciation expense for all of our other
containers in subsequent periods. Asset impairment charges could significantly impact our profitability and could potentially cause
us to breach the financial covenants contained in some or all of our debt agreements. The impact of asset impairment charges and
a potential covenant default could be severe.
Financing may become more difficult to arrange and more expensive. If we are unable to finance capital expenditures efficiently,
our business and growth plans will be adversely affected.
We expect to make capital investments to, among other things, maintain and expand the size of our container fleet. If we are
unable to raise sufficient debt financing, we may be unable to achieve our targeted level of investment and growth. In addition, if
our financing costs increase, we may be unable to pass along the higher cost of financing to our customers through higher per
diem lease rates, which would reduce the profit margin and investment returns on new container investments.
During the difficult market environment in 2015 and 2016, many lenders to the container leasing industry became more
cautious, decreasing our sources of available debt financing and increasing our borrowing costs. Financing availability and costs
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have since improved, but there is no assurance this will continue. In addition, we are the largest container leasing exposure for
many of our lenders, and the amount of incremental loans available from our existing lenders may become constrained due to
single-name credit limitations.
In addition, our financing capacity could decrease, our financing costs and interest rates could increase, or our future access
to the financial markets could be limited, as a result of other risks and contingencies, many of which are beyond our control,
including: (i) the acceptance by credit markets of the structures and structural risks associated with our bank financing, private
placement financing and asset-backed financing arrangements; (ii) the credit ratings provided by credit rating agencies for our
corporate rating and those of our special purpose funding entities; (iii) third parties requiring changes in the terms and structure
of our financing arrangements, including increased credit enhancements (such as lower advance rates) or required cash collateral
and/or other liquid reserves; or (iv) changes in laws or regulations that negatively impact the terms on which the banks or other
creditors may finance us. If we are unsuccessful in obtaining sufficient additional financing on acceptable terms, on a timely basis,
or at all, such changes could have a material adverse effect on our liquidity, interest costs, financial condition, cash flows and
results of operations.
We have a substantial amount of debt outstanding on a consolidated basis and have significant debt service requirements. This
increases the risk that adverse changes in our operating performance, our industry or the financial markets could severely
diminish our financial performance and future business and growth prospects, and increases the chance that we might face
insolvency due to a default on our debt obligations.
As of December 31, 2018, we had outstanding indebtedness of approximately $7,529.4 million under our debt facilities. Total
interest and debt expense for the year ended December 31, 2018 was $322.7 million.
Our substantial amount of debt could have important consequences for investors, including:
• making it more difficult for us to satisfy our obligations with respect to our debt facilities. Any failure to comply with
such obligations, including a failure to make timely interest or principal payments, or a breach of financial or other
restrictive covenants, could result in an event of default under the agreements governing such indebtedness, which could
lead to, among other things, an acceleration of our indebtedness or foreclosure on the assets securing our indebtedness
and which could have a material adverse effect on our business, financial condition, future prospects and solvency;
requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby
reducing funds available for operations, capital expenditures, future business opportunities and other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital
expenditures, acquisitions or other purposes;
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• making it difficult for us to pay dividends on our common shares;
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increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and
placing us at a competitive disadvantage compared to our competitors having less debt.
Additionally, we may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot
refinance our indebtedness, we may have to take actions such as selling assets, seeking equity capital or reducing or delaying future
capital expenditures or other business investments, which could have a material adverse impact on our growth rate, profitability
and cash flow. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. Our indebtedness may
restrict our ability to sell assets and use the proceeds from such sales in certain ways.
Possible replacement of the LIBOR benchmark interest rate may have an impact on our business.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no
longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021. As a result, LIBOR may be
discontinued after 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through
2021 to allow for an orderly transition to an alternative reference rate. Financial services regulators and industry groups are
evaluating the phase-out of LIBOR and the development of alternate reference rate indices or reference rates.
As of December 31, 2018, we had $2,997.4 million of total debt outstanding on facilities with interest rates based on floating
rate indices, LIBOR. In addition, we had $1,565.6 million notional value of interest rate swaps in place that are indexed to LIBOR.
Potential changes to the underlying floating rate indices and reference rates may have an adverse impact on our assets or liabilities
indexed to LIBOR and could have a material adverse effect on our operating results and financial condition.
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Despite our substantial leverage, we and our subsidiaries may be able to incur additional indebtedness. This could further
exacerbate the risks described above.
We may incur substantial additional indebtedness in the future. To the extent that new indebtedness is added to current debt
levels, the risks described above would increase.
We will require a significant amount of cash to service and repay our outstanding indebtedness. This may limit our ability to
fund future capital expenditures, pursue future business opportunities, make acquisitions or return cash to our shareholders.
Our high level of indebtedness requires us to make large interest and principal payments. These debt service payments will
represent a significant portion of our cash flow, and if our operating cash flow decreases in the future, or if it becomes more difficult
for us to arrange financing to refinance existing debt facilities, our ability to finance capital expenditures, pursue future business
opportunities or return cash to our shareholders could be severely limited.
Our credit facilities impose significant operating and financial restrictions, which may prevent us from pursuing certain business
opportunities and taking certain actions.
Our asset-backed securities, institutional notes and other credit facilities impose, and the terms of any future indebtedness
may impose, significant operating, financial and other restrictions on the Company and our subsidiaries. These restrictions may
limit or prohibit, among other things, our ability to:
incur additional indebtedness;
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pay dividends on or redeem or repurchase our shares;
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issue additional share capital;
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• make loans and investments;
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create liens;
sell certain assets or merge with or into other companies;
enter into certain transactions with our shareholders and affiliates;
cause our subsidiaries to make dividends, distributions and other payments to us; and
otherwise conduct necessary corporate activities.
These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available
business opportunities. A breach of any of these restrictions could result in a default in respect of the related indebtedness. If a
default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately
due and payable and proceed against any collateral securing that indebtedness, which under certain circumstances could constitute
substantially all of our container assets.
We have a complex debt structure with numerous credit facilities containing various non-financial covenants which are not
standardized between facilities. This increases the risk of a technical default that could lead to the acceleration of our repayment
obligations in certain instances.
We have a significant number credit facilities containing numerous non-financial covenants, such as, but not limited to, reporting
and notification requirements, which are not standardized between facilities requiring extensive monitoring and compliance. Failure
to comply with any of these non-financial covenants could result in an event of default, which could trigger cross-defaults of
multiple facilities. Should we fail to comply with any of these non-financial covenants we may be unable to obtain waivers and
lenders could accelerate our debt repayment obligations and proceed against any collateral securing that indebtedness.
Environmental regulations may result in equipment obsolescence or require substantial investments to retrofit existing
equipment. Additionally, environmental concerns are leading to significant design changes for new containers that have not
been extensively tested, which increases the likelihood that we could face technical problems.
Many countries, including the United States, restrict, prohibit or otherwise regulate the use of chemical refrigerants due to
their ozone depleting and global warming effects. Our refrigerated containers currently use 404A or R134A refrigerant. While
404A and R134A do not contain hydrochlorofluorocarbons (CFCs), which have been restricted since 1995, the EU has instituted
regulations beginning in 2011 to phase out the use of R134A in automobile air conditioning systems due to concern that the release
of R134A into the atmosphere may contribute to global warming. While the EU regulations do not currently restrict the use of
404A or R134A in refrigerated containers or trailers, it has been proposed that, beginning in 2020 and 2025, respectively, 404A
and R134A usage in refrigerated containers may be banned, although the final decision has not yet been made. Further, certain
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manufacturers of refrigerated containers, including the largest manufacturer of cooling machines for refrigerated containers, have
begun testing units that utilize alternative refrigerants, such as R513a and H1234YF, as well as natural refrigerants such as propane
and carbon dioxide, that may have less global warming potential than 404A and R134A. If future regulations prohibit the use or
servicing of containers using 404A or R134A refrigerants, we could be forced to incur large retrofitting expenses. In addition,
refrigerated containers that are not retrofitted may become difficult to lease, command lower rental rates and disposal prices, or
may have to be scrapped.
Historically, the foam insulation in the walls of intermodal refrigerated containers required the use of a blowing agent that
contains CFCs, specifically HCFC-141b. The manufacturers producing our refrigerated containers have eliminated the use of this
blowing agent in the manufacturing process, but a large number of our refrigerated containers manufactured prior to 2014 contain
these CFCs. The EU prohibits the import and the placing on the market in the EU of intermodal containers with insulation made
with HCFC-141b (“EU regulation”). However, we believe international conventions governing free movement of intermodal
containers allow the use of such intermodal refrigerated containers in the EU if they have been admitted into EU countries on
temporary customs admission. Each country in the EU has its own individual and different regulations, and we have procedures
in place that we believe comply with the relevant EU and country regulations. However, if such intermodal refrigerated containers
exceed their temporary customs admission period and/or their custom admissions status changes (e.g., should such container be
off-hired) and such intermodal refrigerated containers are deemed placed on the market in the EU, or if our procedures are deemed
not to comply with EU or a country’s regulation, we could be subject to fines and penalties. Also, if future international conventions
or regulations prohibit the use or servicing of containers with foam insulation that utilized this blowing agent during the
manufacturing process, we could be forced to incur large retrofitting expenses and those containers that are not retrofitted may
become more difficult to lease and command lower rental rates and disposal prices.
An additional environmental concern affecting our operations relates to the construction materials used in our dry containers.
The floors of dry containers are plywood, usually made from tropical hardwoods. Due to concerns regarding the de-forestation of
tropical rain forests and climate change, many countries which have been the source of these hardwoods have implemented severe
restrictions on the cutting and export of these woods. Accordingly, container manufacturers have switched a significant portion of
production to more readily available alternatives such as birch, bamboo, and other farm-grown wood species. Container users are
also evaluating alternative designs that would limit the amount of plywood required and are also considering possible synthetic
materials to replace the plywood. These new woods or other alternatives have not proven their durability over the typical 13 to 15
year life of a dry container, and if they cannot perform as well as the hardwoods have historically performed, the future repair and
operating costs for these containers could be significantly higher and the useful life of the containers may be decreased.
For environmental reasons, container manufacturers have replaced solvent-based paint systems with water-based paint systems
for dry container production. Water-based paint systems require more time and care for proper application, and there is an increased
risk that the paint will not adhere properly to the steel for the expected useful life of the containers. Poor paint coverage leads to
premature rusting, increased maintenance cost over the life of the container and could result in a shorter useful life. If water-based
paint applications cannot perform as well as the solvent-based applications have historically performed, the future repair and
operating costs for these containers could be significantly higher and the useful life of the containers may be decreased.
China has implemented regulations restricting the import of solid wastes, and these regulations are limiting the importation
into China of old refrigerated containers destined for materials recycling. These regulations may limit the disposal demand for
non-working refrigerated containers and could result in a decrease in refrigerated container disposal prices which could have a
significant negative impact on our financial performance and cash flows.
Litigation to enforce our leases and recover our containers has inherent uncertainties. These uncertainties are increased for
our containers located in jurisdictions that have less developed legal systems.
While almost all of our lease agreements are governed by New York or California law and provide for the non-exclusive
jurisdiction of the courts located in the State of New York or the courts located in San Francisco, California or arbitration in San
Francisco, California, the ability to enforce the lessees’ obligations under the leases and other arrangements for use of the containers
often is subject to applicable laws in the jurisdiction in which enforcement is sought. It is not possible to predict, with any degree
of certainty, the jurisdictions in which enforcement proceedings may be commenced. Our containers are manufactured primarily
in China, and a substantial portion of our containers are leased out of Asia, primarily China, and are used by our customers in a
wide range of global trades. Litigation and enforcement proceedings have inherent uncertainties in any jurisdiction and are
expensive. These uncertainties are enhanced in countries that have less developed legal systems where the interpretation of laws
and regulations is not consistent, may be influenced by factors other than legal merits and may be cumbersome, time-consuming
and more expensive. For example, repossessing containers from defaulting lessees may be difficult and more expensive in
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jurisdictions whose laws do not confer the same security interests and rights to creditors and lessors as those in the United States
and where the legal systems are not as well developed. Additionally, even if we are successful in obtaining judgments against
defaulting customers, these customers may have limited owned assets and/or heavily encumbered assets and the collection and
enforcement of a monetary judgment against them may be unsuccessful. As a result, the remedies available and the relative success
and expedience of collection and enforcement proceedings with respect to the containers in various jurisdictions cannot be predicted.
The success of our recovery efforts for defaulted leases has been hampered by undeveloped creditor protections and legal
systems in a number of countries. In these situations, we experienced an increase in average recovery costs per unit and a decrease
in the percentage of containers recovered in default situations primarily due to excessive charges applied to our containers by the
depot or terminal facilities that had been storing the containers for the defaulted lessee. In these cases, the payments demanded by
the depot or terminal operators often significantly exceeded the amount of storage costs that the Company would have reasonably
expected to pay for the release of the containers. However, legal remedies were limited in many of the jurisdictions where the
containers were being stored, and we were sometimes forced to accept the excessive storage charges to gain control of our containers.
If the number and size of defaults increases in the future, and if a large percentage of the defaulted containers are being stored in
countries with less developed legal systems, losses resulting from recovery payments and unrecovered containers could be large
and our profitability significantly reduced.
Manufacturers of equipment may be unwilling or unable to honor manufacturer warranties covering defects in our equipment.
We obtain warranties from the manufacturers of equipment that we purchase. When defects in the containers occur we work
with the manufacturers to identify and rectify the problems. However, there is no assurance that manufacturers will be willing or
able to honor warranty obligations. In addition, manufactures warranties often do not cover the full expected life of our containers.
If the manufacturer is unwilling or unable to honor warranties covering failures occurring within the warranty period or if defects
are discovered in containers that are no longer covered by manufacturers’ warranties, we could be required to expend significant
amounts of money to repair the containers, the useful lives of the containers could be shortened and the value of the containers
reduced.
A shortage of mature tropical hardwood has forced manufacturers to use younger and alternative species of wood to make
container floors. Manufacturers have switched a significant portion of production to more readily available alternatives such as
birch, bamboo, bamboo-wood combined panels, and other farm-grown wood species. Container users are also evaluating alternative
designs that would limit the amount of plywood required and are also considering possible synthetic materials to replace the
plywood. These new woods or other alternatives have not proven their durability over the typical 13 to 15 year life of a dry container.
It is likely that the number and magnitude of warranty claims related to premature floor failures will increase.
Another example relates to the Chinese Central Government imposing Volatile Organic Compound ("VOC") and Air Quality
standards in South China in July 2016 and in all of China in April 2017. As a result of this standard, manufacturers changed from
solvent-based paint systems to water-based paint systems. Water-based paint systems have not proven their durability over the
typical 13 to 15 year life of a dry container in a marine environment. It is possible that the number and magnitude of warranty
claims related to premature paint failures will increase.
If container manufacturers do not honor warranties covering these failures, or if the failures occur after the warranty period
expires, we could be required to expend significant amounts of money to repair or sell containers earlier than expected. This could
have a material adverse effect on our operating results and financial condition.
Changes in market price or availability of containers in China could adversely affect our ability to maintain our supply of
containers.
The vast majority of intermodal containers are currently manufactured in China, and we currently purchase substantially all
of our dry containers, special containers and refrigerated containers from manufacturers based there. In addition, the container
manufacturing industry in China is highly concentrated. In the event that it were to become more expensive for us to procure
containers in China because of further consolidation among container suppliers, a dispute with one of our manufacturers, increased
tariffs imposed by the United States or other governments or for any other reason, we would have to seek alternative sources of
supply. We may not be able to make alternative arrangements quickly enough to meet our equipment needs, and the alternative
arrangements may increase our costs, reduce our profitability and make us less competitive in the market.
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We may incur significant costs associated with relocation of leased equipment.
When lessees return equipment to locations where supply exceeds demand, containers are routinely repositioned to higher
demand areas. Positioning expenses vary depending on geographic location, distance, freight rates and other factors. Positioning
expenses can be significant if a large portion of our containers are returned to locations with weak demand.
We currently seek to limit the number of containers that can be returned to areas where demand for such containers is not
expected to be strong. However, future market conditions may not enable us to continue such practices. In addition, we may not
be successful in accurately anticipating which port locations will be characterized by weak or strong demand in the future, and
current contracts will not provide much protection against positioning costs if ports that are expected to be strong demand ports
turn out to be surplus container ports when the equipment is returned to such ports upon lease expiration. In particular, we could
incur significant positioning costs in the future if trade flows change from net exports to net imports in locations such as the main
ports in China that are currently considered to be high demand locations and where our leases typically allow large numbers of
containers to be returned.
Sustained China and Asian economic, social or political instability could reduce demand for leasing.
Many of the shipping lines to which we lease containers are entities domiciled in Asian countries. In addition, many of our
customers are substantially dependent upon shipments of goods exported from China and other Asian countries. From time to
time, there have been economic disruptions, financial turmoil and political instability in this region. If these events were to occur
again in the future, they could adversely affect our customers and lead to reduced demand for our containers or otherwise have an
adverse effect on market conditions and our performance.
It may become more expensive for us to store our off-hire containers.
We are dependent on third-party depot operators to repair and store our equipment in port areas throughout the world. In many
of these locations the land occupied by these depots is increasingly being considered as prime real estate. Accordingly, some depots
are seeking to increase the rates we pay to store our containers, and some local communities are increasing restrictions on depot
operations which increase their costs of operation and in some cases force depots to relocate to sites further from the port areas.
Additionally, depots in prime locations may become filled to capacity based on market conditions and may refuse additional
containers due to space constraints. As a result of these factors, the cost of maintaining and storing our off-hire containers could
increase significantly.
We rely on our information technology systems to conduct our business. If there are disruptions and these systems fail to
adequately perform their functions, or if we experience an interruption in our operation, our business and financial results
could be adversely affected.
The efficient operation of our business is highly dependent on our information technology systems including our equipment
tracking and billing systems and our customer interface systems. These systems allow customers to place pick-up and drop-off
orders, view current inventory and check contractual terms in effect with respect to any given container lease agreement. These
systems also process and track transactions, such as container pick-ups, drop-offs and repairs, and bill customers for the use of
and damage to our equipment. If our information technology systems are damaged or an interruption is caused by a computer
systems failure, viruses, fire, natural disasters or power loss, the disruption to our normal business operations and impact on our
costs, competitiveness and financial results could be significant.
Security breaches and other disruptions could compromise our information technology systems and expose us to liability, which
could cause our business and reputation to suffer.
In the ordinary course of our business, we will collect and store sensitive data on our systems and networks, including our
proprietary business information and that of our customers and suppliers, and personally identifiable information of our customers
and employees. The secure storage, processing, maintenance and transmission of this information is critical to our operations.
Despite the security measures we employ, our information technology systems and networks may be vulnerable to attacks by
hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise such systems
and networks and the information stored therein could be accessed, publicly disclosed and/or lost or stolen. Any such access,
disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information, disruption to our operations, damage to our reputation and/or loss of competitive position.
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A number of key personnel are critical to the success of our business.
We have senior executives and other management level employees with extensive industry experience. We rely on this
knowledge and experience in our strategic planning and in our day-to-day business operations. Our success depends in large part
upon our ability to retain our senior management, the loss of one or more of whom could have a material adverse effect on our
business. Our success also depends on our ability to retain our experienced sales force and technical personnel as well as to recruit
new skilled sales, marketing and technical personnel. Competition for experienced managers in our industry can be intense. If we
fail to retain and recruit the necessary personnel, our business and our ability to retain customers and provide acceptable levels of
customer service could suffer.
The international nature of the container industry exposes us to numerous risks.
We are subject to risks inherent in conducting business across national boundaries, any one of which could adversely impact
our business. These risks include:
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regional or local economic downturns;
changes in governmental policy or regulation;
domestic and foreign customs and tariffs, import and export duties and quotas;
restrictions on the transfer of funds into or out of countries in which we operate;
compliance with U.S. Treasury and EU sanctions regulations restricting doing business with certain nations or specially
designated nationals;
international incidents;
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• military conflicts;
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government instability;
nationalization of foreign assets;
government protectionism;
compliance with export controls, including those of the U.S. Department of Commerce;
compliance with import procedures and controls, including those of the U.S. Department of Homeland Security;
potentially negative consequences from changes in tax laws;
requirements relating to withholding taxes on remittances and other payments by subsidiaries and customers;
labor or other disruptions at key ports;
difficulty in staffing and managing widespread operations;
difficulty in registering intellectual property or inadequate intellectual property protection in foreign jurisdictions; and
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions.
Any one or more of these factors could impair our current or future international operations and, as a result, harm our overall
business.
The lack of an international title registry for containers increases the risk of ownership disputes.
There is no internationally recognized system for recording or filing to evidence our title to containers nor is there an
internationally recognized system for filing security interests in containers. Although this has not occurred to date, the lack of a
title recordation system with respect to containers could result in disputes with lessees, end-users, or third parties who may
improperly claim ownership of the containers.
Certain liens may arise on our containers.
Depot operators, container terminals, repairmen and transporters may come into possession of our containers from time to
time and have sums due to them from the lessees or sublessees of the containers. In the event of nonpayment of those charges by
the lessees or sublessees, we may be delayed in, or entirely barred from, taking possession of our containers, or we may be required
to make payments or incur expenses to discharge such liens on the containers.
For example, in the aftermath of the Hanjin bankruptcy, we were forced to make substantial payments to container terminals,
container depots and other parties who took possession of our containers previously on-hire to Hanjin and demanded to be
reimbursed for payments owed to them by Hanjin as a condition for the release of our containers.
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Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and
affect our reported operating results.
GAAP is subject to interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various bodies
formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a
significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective.
New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the
future. Changes to existing rules or the questioning of current practices may have a material adverse effect on our reported financial
results or the way in which we conduct our business.
Because of our significant international operations, we could be materially adversely affected by violations of the U.S. Foreign
Corrupt Practices Act, the U.K. Bribery Act and similar anti-corruption and anti-bribery laws and regulations.
We operate on a global basis, with the vast majority of our revenue generated from leasing our containers to lessees for use
in international trade. We are also dependent on third-party depot operators to repair and store our containers in port locations
throughout the world. Our business operations are subject to anti-corruption and anti-bribery laws and regulations, including
restrictions imposed by the U.S. Foreign Corrupt Practices Act (the “FCPA”), the United Kingdom Bribery Act of 2010 (the “U.K.
Bribery Act”), and the Bermuda Bribery Act 2016 (“Bermuda Bribery Act”). The FCPA, the U.K. Bribery Act, the Bermuda Bribery
Act and similar anti-corruption and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries
and agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining
business. Any determination of a violation or an investigation into violations of the FCPA, the U.K. Bribery Act, the Bermuda
Bribery Act or similar anti-corruption and anti-bribery laws could have a material and adverse effect on our business, results of
operations and financial condition.
A failure to comply with United States Treasury and other economic sanction laws and regulations and export control laws
and regulations could have a material adverse effect on our business, results of operations or financial condition. We may be
unable to ensure that our agents and/or customers comply with applicable sanctions and export control laws.
We face several risks inherent in conducting our business internationally, including compliance with applicable economic
sanctions laws and regulations, such as laws and regulations administered by the U.S. Department of Treasury’s Office of Foreign
Assets Control (“OFAC”), the U.S. Department of State and the U.S. Department of Commerce. We must also comply with all
applicable export control laws and regulations of the United States (including but not limited to the U.S. Export Administration
Regulations) and other countries. Any determination of a violation or an investigation into violations of export controls or economic
sanctions laws and regulations could result in significant criminal or civil fines, penalties or other sanctions and repercussions,
including reputational harm that could materially affect our business, results of operations or financial condition.
We may incur increased costs associated with the implementation of security regulations, which could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
We may be subject to regulations promulgated in various countries, including the United States, seeking to protect the integrity
of international commerce and prevent the use of containers for international terrorism or other illicit activities. For example, the
Container Safety Initiative, the Customs-Trade Partnership Against Terrorism and Operation Safe Commerce are among the
programs administered by the U.S. Department of Homeland Security that are designed to enhance security for cargo moving
throughout the international transportation system by identifying existing vulnerabilities in the supply chain and developing
improved methods for ensuring the security of containerized cargo entering and leaving the United States. Moreover, the
International Convention for Safe Containers, 1972 (CSC), as amended, adopted by the International Maritime Organization,
applies to containers and seeks to maintain a high level of safety of human life in the transport and handling of containers by
providing uniform international safety regulations. As these regulations develop and change, we may incur increased compliance
costs due to the acquisition of new, regulation compliant containers and/or the adaptation of existing containers to meet any new
requirements imposed by such regulations. Additionally, certain companies are currently developing or may in the future develop
products designed to enhance the security of containers transported in international commerce. We may adopt such products and
may incur increased costs, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Terrorist attacks could negatively impact our operations and profitability and may expose us to liability and reputational damage.
Terrorist attacks may negatively affect our operations and profitability. Such attacks have contributed to economic instability
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in the United States, Europe and elsewhere, and further acts of terrorism, violence or war could similarly affect world trade and
the industries in which we and our customers operate. In addition, terrorist attacks or hostilities may directly impact ports our
containers enter and exit, depots, our physical facilities or those of our suppliers or customers and could impact our sales and our
supply chain. A severe disruption to the worldwide ports system and flow of goods could result in a reduction in the level of
international trade and lower demand for our containers. The consequences of any terrorist attacks or hostilities are unpredictable,
and we may not be able to foresee events that could have an adverse effect on our operations.
It is also possible that one of our containers could be involved in a terrorist attack. Although our lease agreements typically
require our customers to indemnify us against all damages and liabilities arising out of the use of our containers and we carry
insurance to potentially offset any costs in the event that our customer indemnifications prove to be insufficient, the insurance
does not cover certain types of terrorist attacks and we may not be fully protected from liability or the reputational damage that
could arise from a terrorist attack which utilizes one of our containers.
Environmental liability may adversely affect our business and financial situation.
We are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including
those governing the discharge of pollutants to air and water, the management and disposal of hazardous substances and wastes
and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and third-party claims for
property damage and personal injury, as a result of violations of or liabilities under environmental laws and regulations in connection
with our current or historical operations. Under some environmental laws in the United States and certain other countries, the
owner of a leased container may be liable for environmental damage, cleanup or other costs in the event of a spill or discharge of
material from a container without regard to the owner’s fault. We have not yet experienced any such claims, although we cannot
assure you that we will not be subject to such claims in the future. Liability insurance policies, including ours, usually exclude
claims for environmental damage. Some of our lessees may have separate insurance coverage for environmental damage, but we
cannot assure you that any such policies would cover or otherwise offset any liability we may have as the owner of a leased
container.
Changes in U.S. tax rules as part of the 2017 U.S. tax legislation could negatively impact our income tax provisions or future
cash tax payments.
Our subsidiaries record U.S. tax provisions in their financial statements. Certain of our U.S. subsidiaries currently do not pay
meaningful U.S. income taxes primarily due to the benefit they currently receive from accelerated tax depreciation of their container
investments. However, the changes in U.S. tax law passed on December 22, 2017 limiting the deductibility of interest expense
above certain levels could increase our taxable income and lead to higher cash tax payments in the future.
A reduction in our level of continuing investment in our U.S. subsidiaries or future U.S. tax rule changes may negatively impact
our income tax provisions or future cash tax payments.
Our U.S. subsidiaries record tax provisions in their financial statements. Certain of these subsidiaries currently do not pay
any meaningful U.S. income taxes primarily due to the benefit they currently receive, and we expect they will continue to receive,
from accelerated tax depreciation of their container investments. A change in the rules governing the tax depreciation for these
U.S. subsidiaries’ containers, in particular, a change that increases the period over which they must depreciate their containers for
tax purposes, could reduce or eliminate this tax benefit and significantly increase these U.S. subsidiaries’ cash tax payments.
In addition, even under current tax rules, these U.S. subsidiaries will need to make ongoing investments in new containers in
order to continue to benefit from the tax deferral generated by accelerated tax depreciation. If these U.S. subsidiaries are unable
to do so, the favorable tax treatment from accelerated tax depreciation would diminish, and they could face significantly increased
cash tax payments.
In addition, our net deferred tax liability balance includes a deferred tax asset for U.S. federal and various states resulting
from net operating loss carryforwards. A reduction to our future earnings, which will lower taxable income, may require the
Company to record a charge against earnings in the form of a valuation allowance, if it is determined that it is more-likely-than-
not that some or all of the loss carryforwards will not be realized.
Our U.S. investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company for
U.S. federal income tax purposes.
25
Based upon the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”) for
U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences for direct or indirect U.S.
investors in our common shares. For example, if we are a PFIC, our U.S. investors could become subject to increased tax liabilities
under U.S. tax laws and regulations and could become subject to burdensome reporting requirements. The determination of whether
or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets from time to time.
Specifically, for any taxable year, we will be classified as a PFIC for U.S. tax purposes if either:
75% or more of the our gross income in a taxable year is passive income; or
the average percentage of our assets (which includes cash) by value in a taxable year which produce or are held for the
production of passive income is at least 50%.
•
•
In applying these tests, we are treated as owning or generating directly our pro rata share of the assets and income of any
corporation in which we own at least 25% by value. If you are a U.S. holder and we are a PFIC for any taxable year during which
you own our common shares, you could be subject to adverse U.S. tax consequences. In such a case, under the PFIC rules, unless
a U.S. holder is permitted to and does elect otherwise under the Code, such U.S. holder would be subject to special tax rules with
respect to excess distributions and any gain from the disposition of our common shares. In particular, the excess distribution or
gain will be treated as if it had been recognized ratably over the holder’s holding period for our common shares, and amounts
allocated to prior years starting with our first taxable year during which we were a PFIC will be subject to U.S. federal income
tax at the highest prevailing tax rates on ordinary income for that year plus an interest charge.
Based on the composition of our income, valuation of our assets and our election to treat certain of our subsidiaries as
disregarded entities for U.S. federal income tax purposes, we do not expect that we should be treated as a PFIC for the current
taxable year or for the foreseeable future. However, because the PFIC determination in our case is made by taking into account
all of the relevant facts and circumstances regarding our business without the benefit of clearly defined bright line rules, it is
possible that we may be a PFIC for any taxable year or that the U.S. Internal Revenue Service (the “IRS”) may challenge our
determination concerning our PFIC status.
We may become subject to unanticipated tax liabilities that may have a material adverse effect on our results of operations.
We are a Bermuda company, and we believe that the income derived from our operations will not be subject to tax in Bermuda,
which currently has no corporate income tax. We further believe that a significant portion of the income derived from our operations
will not be subject to tax in many other countries in which our customers or containers are located. However, this belief is based
on the anticipated nature and conduct of our business, which may change. It is also based on our understanding of the tax laws of
the countries in which our customers use containers. The tax positions we take in various jurisdictions are subject to review and
possible challenge by taxing authorities and to possible changes in law that may have retroactive effect.
Bermuda recently enacted the Economic Substance Act 2018 requiring affected Bermuda registered companies to maintain
a substantial economic presence in Bermuda. While detailed guidelines have yet to be issued, this legislation could require us to
incur substantial additional cost, and/or incur significant penalties and possibly require us to re-domicile our company to a
jurisdiction with higher tax rates. Our results of operations could be materially and adversely affected if we become subject to
these or other unanticipated tax liabilities.
The calculation of our income tax expense requires judgment and the use of estimates.
We periodically assess our tax positions based on current tax developments, including enacted statutory, judicial and regulatory
guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities
and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted as we
consider appropriate through the income tax provision. We account for income tax positions on uncertainties by recognizing the
effect of income tax positions only if those positions are more-likely-than-not of being sustained, and maintain reserves for income
tax positions we believe are not more-likely-than-not of being sustained. Recognized income tax positions are measured at the
largest amount that is greater than 50% likely of being realized. However, due to the significant judgment required in estimating
those reserves, actual amounts paid, if any, could differ significantly from those estimates.
Fluctuations in foreign exchange rates could reduce our profitability.
While the majority of our revenues and costs are billed in U.S. dollars, our operations and used container sales in locations
outside of the U.S. have exposure to foreign currency. Most of our non-U.S. dollar transactions are individually small amounts
26
and in various denominations and thus are not suitable for cost-effective hedging. Fluctuations in the value of foreign currencies
relative to the U.S. dollar can negatively impact our cash flow and profitability.
In addition, trade growth and the direction of trade flows can be influenced by large changes in relative currency values,
potentially leading to decreased demand for our containers or increased container positioning costs.
Most of our equipment fleet is manufactured in China. Although the purchase price is typically in U.S. dollars, our manufacturers
pay labor and other costs in the local currency, the Chinese yuan. To the extent that our manufacturers’ costs change due to changes
in the valuation of the Chinese yuan, the dollar price we pay for equipment could be affected.
Our operations could be affected by natural or man-made events in the locations in which our customers or suppliers operate.
We have operations in locations subject to severe weather conditions, natural disasters, the outbreak of contagious disease,
or man-made incidents such as chemical explosions, any of which could disrupt our operations. In addition, our suppliers and
customers also have operations in such locations. For example, in 2011, the northern region of Japan experienced a severe earthquake
followed by a series of tsunamis resulting in material damage to the Japanese economy. In 2015, a chemical explosion and fire in
the port of Tianjin, China damaged or destroyed a small number of our containers and disrupted operations in the port. Similarly,
outbreaks of pandemic or contagious diseases, such as H1N1 (swine) flu and the Ebola virus, could significantly reduce the demand
for international shipping or could prevent our containers from being discharged in the affected areas or in other locations after
having visited the affected areas. Any future natural or man-made disasters or health concerns in the world where we have business
operations could lead to disruption of the regional and global economies, which could result in a decrease in demand for leased
containers.
Increases in the cost of or the lack of availability of contingent liability, physical damage and directors' and officers’ liability
insurance could increase our risk exposure and reduce our profitability.
Our lessees and depots are required to maintain all risks physical damage insurance, comprehensive general liability insurance
and to indemnify us against loss. We also maintain our own contingent liability insurance and off-hire physical damage insurance.
Nevertheless, lessees’ and depots’ insurance or indemnities and our future insurance may not fully protect us. The cost of such
insurance may increase or become prohibitively expensive and such insurance may not continue to be available.
We also maintain directors' and officers' liability insurance. We may be required to incur substantial costs to maintain existing
or increased levels of coverage or such coverage may not continue to be available, which would make it more difficult and expensive
to attract and retain our directors and officers.
Labor activism and unrest, or failure to maintain satisfactory labor relations, could adversely affect our business, financial
condition and results of operations.
Labor activism and unrest could materially adversely affect our operations and thereby materially adversely affect our financial
condition and prospects. We may experience labor unrest, activism, disputes or actions in the future, some of which may be
significant and could materially adversely affect our business, financial condition and results of operations.
The price of our common shares has been highly volatile and may decline regardless of our operating performance.
The trading price of our common shares has been and is likely to remain highly volatile. Factors affecting the trading price
of our common shares may include:
•
•
•
•
•
•
•
•
•
•
broad market and industry factors including global and political instability, trade actions, and interest rate and currency
changes;
variations in our financial results;
changes in financial estimates or investment recommendations by securities analysts following our business;
the public's response to our press releases, other public announcements and filings with the SEC;
changes in accounting standards, policies, guidance or interpretations or principles;
future sales of common shares by our directors, officers and significant shareholders;
announcements of technological innovations or enhanced or new products by us or our competitors;
the failure to achieve operating results consistent with securities analysts’ projections;
the operating and stock price performance of other companies that investors may deem comparable to us;
changes in our dividend policy and share repurchase programs;
27
•
•
•
•
fluctuations in the worldwide equity markets;
recruitment or departure of key personnel;
failure to timely address changing customer preferences; and
other events or factors, including those resulting from, the perceived or actual threat of impending natural disasters, coups,
missile launches, terrorism or war, as well as the actual occurrence of such events or responses to such events.
In addition, if the market for intermodal equipment leasing company stocks or the stock market in general experiences a loss
of investor confidence, the trading price of our common shares could decline for reasons unrelated to our business or financial
results. The trading price of our common shares might also decline in reaction to events that affect other companies in our industry
even if these events do not directly affect us.
If securities analysts do not publish research or reports about our business or if they downgrade our shares, the price of our
common shares could decline.
The trading market for our common shares relies in part on the research and reports that industry or financial analysts publish
about us, our business or our industry. We have no influence or control over these analysts. Furthermore, if one or more analysts
covering our Company downgrades our shares, the price of our shares could decline. If one or more of these analysts ceases
coverage of us, we could lose visibility in the market, which in turn could cause our share price to decline.
Our failure to comply with required public company corporate governance and financial reporting practices and regulations
could materially and adversely impact our financial condition, operating results and the price of our common shares. Further,
our internal controls over financial reporting may not detect all errors or omissions in the financial statements.
We are subject to the regulatory compliance and reporting requirements applicable to us as a public company, including those
issued by the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange (the "NYSE"). Failure to meet
these requirements may lead to adverse regulatory consequences, and could lead to defaults under our loan agreements or a negative
reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. If we fail to maintain
effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner
or otherwise comply with the standards applicable to us as a public company. Any failure to timely provide the required financial
information could materially and adversely impact our financial condition and the market value of our common shares. Furthermore,
testing and maintaining internal controls can divert our management’s attention from other matters that are important to our business.
The Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), requires that we maintain effective internal controls
for financial reporting and disclosure controls and procedures. If we do not maintain compliance with the requirements of Section
404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identifies deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, we could suffer a loss of investor confidence in the
reliability of our financial statements, which could cause the market price of our shares to decline. We can also be subject to
sanctions or investigations by the NYSE, the SEC or other regulatory authorities for failure to comply with public company
corporate governance and financial reporting practices and regulations.
Section 404 of the Sarbanes-Oxley Act requires an annual management assessment of the effectiveness of internal controls
over financial reporting and a report by our independent registered public accounting firm on the effectiveness on such internal
controls. If we fail to maintain the adequacy of internal controls over financial accounting, we may not be able to conclude on an
ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and
related regulations. No system of internal controls can provide absolute assurance that the financial statements are accurate and
free of material errors. As a result, the risk exists that our internal controls may not detect all errors or omissions in the financial
statements.
Changes in laws and regulations could adversely affect our business.
All aspects of our business, including leasing, pricing, sales, litigation and intellectual property rights are subject to extensive
legislation and regulation. Changes in applicable federal and state laws and agency regulations, as well as the laws and regulations
of foreign jurisdictions, could have a material adverse effect on our business.
28
Concentration of ownership among our significant shareholders may prevent new investors from influencing significant
corporate decisions and may result in conflicts of interest.
As of December 31, 2018, certain affiliates of Vestar Capital Partners, Inc. ("Vestar") beneficially owned approximately 13.5%
of our outstanding common shares, an affiliate of Bharti Global Limited ("Bharti") beneficially owned approximately 10.4% of
our outstanding common shares and certain affiliates of Warburg Pincus LLC ("Warburg Pincus") beneficially owned approximately
9.0% of our outstanding common shares. As of such date, Vestar, Bharti and Warburg Pincus (collectively, the "Sponsor
Shareholders"), in the aggregate, beneficially owned approximately 33.0% of our outstanding common shares. Under the
shareholder agreements with the Sponsor Shareholders (the "Sponsor Shareholder Agreements"), Warburg Pincus and Bharti
(collectively, the "Warburg Shareholder Group") have the ongoing right to designate two nominees for election to serve on our
Board, and Vestar has the ongoing right to designate one nominee for election to serve on our Board, in each case subject to the
approval by our Nominating and Corporate Governance Committee of any individuals so designated. The rights of the Warburg
Shareholder Group and Vestar to designate nominees for election to serve on our Board are subject to reduction as their respective
ownership of our common shares declines. The Sponsor Shareholders Agreements provide certain restrictions on the Sponsor
Shareholders, which are further described in the Registration Statement on Form S-4 that we filed with the SEC on December 24,
2015, as amended (the "Form S-4"), under “Related Agreements - The Sponsor Shareholders Agreements.” However, the
concentration of influence in the Sponsor Shareholders may delay, deter or prevent acts that would be favored by our other
shareholders, who may have interests different from those of the Sponsor Shareholders. For example, the Sponsor Shareholders
could delay or prevent an acquisition, merger or amalgamation deemed beneficial to other shareholders, or cause, or seek to cause,
us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our
other shareholders or adversely affect us or our other shareholders. Our Sponsor Shareholders may be able to cause or prevent a
change in control or a change in the composition of our Board and could preclude any unsolicited acquisition of us. This may have
the effect of delaying, preventing or deterring a change in control. In addition, this significant concentration of share ownership
may materially adversely affect the trading price of our common shares because investors often perceive disadvantages in owning
common shares in companies with significant concentrations of ownership.
Further, our by-laws provide that we, on behalf of our subsidiaries, renounce any interest or expectancy we or our subsidiaries
may have in (or in being offered an opportunity to participate in) business opportunities that are from time to time presented to
any of Warburg Pincus, Vestar, and Bharti and their respective affiliated funds, or any of their respective officers, directors, agents,
shareholders, members, partners, affiliates and subsidiaries (other than us and our subsidiaries), even if the opportunity is one that
we or our subsidiaries might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity
to do so. Our bye-laws provide that no such person will be liable to us or any of our subsidiaries (for breach of any duty or
otherwise), as a director or officer or otherwise, by reason of the fact that such person pursues or acquires such business opportunity,
directs such business opportunity to another person or fails to present such business opportunity, or information regarding such
business opportunity, to us or our subsidiaries; provided, that the foregoing will not apply to any such person who is a director or
officer, if such business opportunity is expressly offered to such director or officer in writing solely in his or her capacity as a
director or officer. This may cause the strategic interests of the Sponsor Shareholders to differ from, and conflict with, our interests
and our other shareholders' interests in material respects.
Future sales of our common shares, or the perception in the public markets that such sales may occur, may depress our share
price.
Sales of substantial amounts of our common shares in the public market or the perception that such sales could occur, could
adversely affect the price of our common shares and could impair our ability to raise capital through the sale of additional shares
and result in long-lived asset impairment.
In addition, to the extent that Warburg Pincus, Vestar, Bharti or other significant shareholders sell, or indicate an intent to sell,
substantial amounts of our common shares in the public market, the trading price of our common shares could decline significantly.
These factors could also make it more difficult for us to raise additional funds through future offerings of our common shares or
other securities.
Issuing additional common shares or other equity securities or securities convertible into equity for financing or in connection
with our incentive plans, acquisitions or otherwise may dilute the economic and voting rights of our existing shareholders or reduce
the market price of our common shares or both. Upon liquidation, holders of our debt securities, if issued, and lenders with respect
to other borrowings would receive a distribution of our available assets prior to the holders of our common shares. Debt securities
convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the
number of equity securities issuable upon conversion. Our decision to issue securities in any future offering will depend on market
29
conditions and other factors beyond our control, which may materially adversely affect the amount, timing or nature of future
offerings. Thus, holders of our common shares bear the risk that our future offerings may reduce the market price of our common
shares.
In the future, we may also issue securities in connection with investments or acquisitions. The amount of our common shares
issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding common shares.
Any issuance of additional securities in connection with investments or acquisitions may result in dilution to you.
We are incorporated in Bermuda and a significant portion of our assets will be located outside the United States. As a result,
it may not be possible for shareholders to enforce civil liability provisions of the federal or state securities laws of the United
States against the Company.
We are incorporated under the laws of Bermuda and a significant portion of our assets are located outside the United States.
It may not be possible to enforce court judgments obtained in the United States against us in Bermuda or in countries, other than
the United States, where we will have assets, based on the civil liability provisions of the federal or state securities laws of the
United States. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce
judgments of United States courts obtained against us or our officers or directors based on the civil liability provisions of the
federal or state securities laws of the United States or would hear actions against us or those persons based on those laws. We have
been advised by our legal advisors in Bermuda that the United States and Bermuda do not currently have a treaty providing for
the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the
payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely
on United States federal or state securities laws, would not automatically be enforceable in Bermuda. Similarly, those judgments
may not be enforceable in countries, other than the United States, where we have assets.
Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.
Our shareholders might have more difficulty protecting their interests than would shareholders of a corporation incorporated
in a jurisdiction of the United States. As a Bermuda company, we are governed by the Bermuda Companies Act. The Bermuda
Companies Act differs in some material respects from laws generally applicable to United States corporations and shareholders,
including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits
and indemnification of directors. See "Description of Our Common Shares" in the Form S-4.
Certain provisions of the Sponsor Shareholders Agreements, our memorandum of association and amended and restated bye-
laws and Bermuda law could hinder, delay or prevent a change in control that you might consider favorable, which could also
adversely affect the price of our common shares.
Certain provisions under the Sponsor Shareholders Agreements, our memorandum of association and amended and restated
bye-laws and Bermuda law could discourage, delay or prevent a transaction involving a change in control, even if doing so would
benefit our shareholders. These provisions may include customary anti-takeover provisions and certain rights of our Sponsor
Shareholders with respect to the designation of directors for nomination and election to our Board, including the ability to appoint
members to each board committee.
Anti-takeover provisions could substantially impede the ability of our public shareholders to benefit from a change in control
or change of our management and Board of Directors and, as a result, may materially adversely affect the market price of our
common shares and your ability to realize any potential change of control premium. These provisions could also discourage proxy
contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other
corporate actions you desire.
We may not be able to protect our intellectual property rights, which could materially affect our business.
Our ability to obtain, protect and enforce our intellectual property rights is subject to general litigation risks, as well as the
uncertainty as to the registrability, validity and enforceability of our intellectual property rights in each applicable country.
We rely on our trademarks to distinguish our services from the services of competitors, and have registered or applied to
register a number of these trademarks. However, our trademark applications may not be approved. Third parties may also oppose
our trademark applications or otherwise challenge our ownership or use of trademarks. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could
30
require us to devote resources to advertising and marketing of these new brands. Additionally, from time to time, third parties
adopt or use names similar to ours, thereby impeding our ability to build brand identity and possibly leading to consumer confusion
or to dilution of our trademarks. We may not have sufficient resources or desire to defend or enforce our intellectual property
rights, and even if we seek to enforce them, there is no guarantee that we will be able to prevent such third-party uses. Furthermore,
such enforcement efforts may be expensive, time consuming and could divert management’s attention from managing our business.
We may be subject to claims by others that we are infringing on their intellectual property rights, which could harm our business
and negatively impact our results of operations.
Third parties may assert claims that we infringe their intellectual property rights and these claims, with or without merit, could
be time-consuming to litigate, cause the Company to incur substantial costs and divert management resources and attention in
defending the claim. In some jurisdictions, plaintiffs can also seek injunctive relief that may prevent the marketing and selling of
our services that infringe on the plaintiff’s intellectual property rights. To resolve these claims, we may enter into licensing
agreements with restrictive terms or significant fees, stop selling or redesign affected services, or pay damages to satisfy contractual
obligations to others. If we do not resolve these claims in advance of a trial, there is no guarantee that we will be successful in
court. These outcomes may have a material adverse impact on our operating results and financial condition.
31
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Office Locations. As of December 31, 2018, our employees are located in 23 offices in 16 countries including our registered
office in Bermuda.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are a party to litigation matters arising in connection with the normal course of our business. While we
cannot predict the outcome of these matters, in the opinion of our management, any liability arising from these matters will not
have a material adverse effect on our business. Nevertheless, unexpected adverse future events, such as an unforeseen development
in our existing proceedings, a significant increase in the number of new cases or changes in our current insurance arrangements
could result in liabilities that have a material adverse impact on our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares have been listed on the New York Stock Exchange (the “NYSE”) under the symbol "TRTN" since July 13,
2016. Prior to that time, there was no public market for our common shares.
On February 7, 2019, there were 60 holders of record of our common shares and 39,087 beneficial holders, based on information
obtained from our transfer agent.
The following table provides certain information with respect to our purchases of the Company’s common shares during the
fourth quarter for the year ended December 31, 2018.
Issuer Purchases of Common Shares(1)
Period
October 1, 2018 through October 31, 2018 ......................
November 1, 2018 through November 30, 2018 ..............
December 1, 2018 through December 31, 2018 ...............
Total ..................................................................................
Total number
of shares
purchased
Average price
paid per share
942,823 $
270,642 $
605,983 $
1,819,448
30.76
34.00
30.96
Total number
of shares
purchased as
part of publicly
announced plan
Approximate
dollar value of
shares that may
yet be
purchased
under the plan
(in thousands)
942,823 $
270,642 $
605,983 $
1,819,448 $
169,866
160,658
141,886
141,886
(1) On August 1, 2018, the Company's Board of Directors authorized the repurchase of up to $200.0 million of its common shares. The share repurchase authorization will
terminate upon completing repurchases of $200.0 million of common shares unless earlier terminated by the Board.
33
Performance Graph
The graph below compares our cumulative shareholder returns with the S&P 500 Stock Index and the Russell 2000 Stock
Index for the period from July 13, 2016 (the first day our common shares were traded) through December 31, 2018. The graph
assumes that the value of the investment in our common shares, the S&P 500 Stock Index and the Russell 2000 Stock Index was
$100 on July 13, 2016 and that all dividends were reinvested.
Comparison of Cumulative Total Return
July 13, 2016 through December 31, 2018
Company / Index
July 13, 2016
December 31, 2016
December 31, 2017
December 31, 2018
Base Period as of
INDEXED RETURNS FOR THE YEARS ENDED
Triton International Limited ......................
S&P 500 Index ..........................................
Russell 2000 Index ....................................
$100.00
$100.00
$100.00
$105.49
$105.06
$113.77
$264.66
$127.99
$130.43
$232.76
$122.38
$116.07
34
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial, operating and other data of Triton. The selected
historical consolidated statements of operations data, balance sheet data and other financial data for each of the five years ended
December 31, 2018 were derived from the Company's audited Consolidated Financial Statements and related notes. The data below
should be read in conjunction with, and is qualified by reference to, our Management's Discussion and Analysis and our Consolidated
Financial Statements and notes thereto contained elsewhere in this report. The historical results are not necessarily indicative of
the results to be expected in any future period. The following financial data for Triton included herein for the periods prior to the
date of the Merger on July 12, 2016 are for TCIL operations alone as TCIL was treated as the acquirer in the Merger for accounting
purposes.
35
Statements of Operations Data:
Leasing revenues:
Year Ended December 31,
(In thousands, except per share data)
2018
2017
2016
2015
2014
Operating leases ........................................................... $ 1,328,756
Finance leases ..............................................................
21,547
Total leasing revenues ................................................
1,350,303
Equipment trading revenues(1)........................................
Equipment trading expenses(1)........................................
Trading margin ..........................................................
Net gain (loss) on sale of leasing equipment..................
Net gain (loss) on sale of building .................................
Operating expenses:
Depreciation and amortization(2) ....................................
Direct operating expenses ..............................................
Administrative expenses ................................................
Transaction and other costs(3) .........................................
Provision (reversal) for doubtful accounts .....................
Insurance recovery income.............................................
Total operating expenses..............................................
Operating income ......................................................
Other expenses (income):
Interest and debt expense ...............................................
Realized (gain) loss on derivative instruments, net........
Unrealized (gain) loss on derivative instruments, net(4) .
Debt termination expense...............................................
Other (income) expense, net...........................................
Total other expenses .....................................................
Income (loss) before income taxes.................................
Income tax expense (benefit) .........................................
$ 1,141,165
$ 813,357
$ 699,810
$ 699,188
22,352
1,163,517
37,419
(33,235)
4,184
35,812
—
15,337
828,694
16,418
(15,800)
618
(20,347)
—
8,029
8,027
707,839
707,215
—
—
—
2,013
—
—
—
—
31,616
—
83,039
(64,118)
18,921
35,377
20,953
545,138
500,720
392,592
300,470
258,489
48,326
80,033
88
(231)
—
673,354
752,200
322,731
(2,072)
430
6,090
(2,292)
324,887
427,313
70,641
62,891
87,609
9,272
3,347
(6,764)
657,075
546,438
84,256
65,618
66,916
23,304
—
632,686
176,279
54,440
53,435
22,185
(2,156)
—
428,374
281,478
58,014
55,659
30,477
1,324
—
403,963
334,868
282,347
184,014
140,644
137,370
900
(1,397)
6,973
(2,637)
286,186
260,252
(93,274)
3,438
(4,405)
141
(1,076)
182,112
(5,833)
(48)
5,496
2,240
1,170
211
149,761
131,717
4,048
9,385
3,798
7,468
(689)
157,332
177,536
6,232
Net income (loss) ........................................................... $
Less: income attributable to non-controlling interest.....
356,672
$ 353,526
7,117
8,928
Net income (loss) attributable to shareholders .......... $
Earnings Per Share Data:
Net income (loss) per common share—Basic ................ $
Net income (loss) per common share—Diluted ............. $
Weighted average common shares and non-voting
common shares outstanding:
349,555
$ 344,598
4.38
4.35
$
$
4.55
4.52
$
$
$
$
(5,785) $ 127,669
$ 171,304
7,732
16,580
21,837
(13,517) $ 111,089
$ 149,467
(0.24) $
(0.24) $
2.75
2.71
$
$
3.73
3.52
Basic.............................................................................
Diluted..........................................................................
79,782
80,364
75,679
76,188
56,032
56,032
40,429
40,932
Cash dividends paid per common share ......................... $
2.01
$
1.80
$
1.35
$
— $
40,021
42,458
5.38
(1) Triton acquired the Equipment trading segment as part of the Merger on July 12, 2016 and had no such reporting segment prior to that date.
(2) Depreciation expense was increased by $1.8 million per quarter beginning October 1, 2015 as the result of a decrease in residual value estimates and an increase in the useful life
estimates for certain dry containers included in Triton’s depreciation policy.
Includes retention and stock compensation expense pursuant to the Merger and the plans established as part of TCIL's 2011 re-capitalization.
(3)
(4) Unrealized (gains) losses on derivative instruments, net are primarily due to changes in interest rates, and reflect changes in the fair value of interest rate swaps not designated as
cash flow hedges.
36
2018
2017
2016
2015
2014
As of December 31,
(In thousands)
Balance Sheet Data (end of period):
Cash and cash equivalents (including
restricted cash) ......................................... $
Accounts receivable, net ..........................
Revenue earning assets, net .....................
Total assets...............................................
Debt, net of unamortized debt costs.........
Shareholders' equity.................................
Non-controlling interests .........................
Total equity (including non-controlling
interests)...................................................
Other Financial Data:
Capital expenditures.................................
Proceeds from sale of equipment, net of
selling costs..............................................
159,539
$
226,171
$
163,492
$
79,264
$
264,382
9,467,969
10,270,013
7,529,432
2,203,696
121,513
199,876
8,703,570
9,577,625
6,911,725
2,076,284
133,542
173,585
7,817,192
8,713,571
6,353,449
1,663,233
143,504
110,970
4,428,699
4,658,997
3,166,903
1,217,329
160,504
97,059
112,596
4,613,372
4,863,259
3,364,510
1,106,160
190,851
2,325,209
2,209,826
1,806,737
1,377,833
1,297,011
1,603,507
1,562,863
629,332
398,799
809,446
163,256
190,744
145,572
171,719
195,282
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
Triton was formed on July 12, 2016 through an all-stock merger between Triton Container International Limited and TAL
International Group, Inc.
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 of December 31, 2018, our total fleet consisted of 3.7 million containers and chassis, representing 6.2
million twenty-foot equivalent units ("TEU") or 7.6 million cost equivalent units ("CEU"). We have an extensive global presence,
offering leasing services through 23 offices in 16 countries and approximately 400 third-party container depot facilities in
approximately 45 countries as of December 31, 2018. Our primary customers include the world's largest container shipping lines.
For the year ended December 31, 2018, our twenty largest customers accounted for 85% of our lease billings, our five largest
customers accounted for 54% of our lease billings, and our two largest customers, CMA CGM S.A. and Mediterranean Shipping
Company S.A., accounted for 20% and 14% of our lease billings, respectively.
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.
38
The following tables summarize our equipment fleet as of December 31, 2018, 2017 and 2016, indicated in units, TEU and
CEU.
Equipment Fleet in Units
Equipment Fleet in TEU
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2018
December 31,
2017
December 31,
2016
Dry.........................................................
Refrigerated ...........................................
Special ...................................................
Tank .......................................................
Chassis...................................................
Equipment leasing fleet ......................
Equipment trading fleet ......................
Total.................................................
3,340,946
228,778
93,900
12,509
24,832
3,700,965
13,138
3,714,103
3,077,144
218,429
89,066
12,124
22,523
3,419,286
10,510
3,429,796
2,737,982
217,243
92,957
11,961
22,128
3,082,271
15,927
3,098,198
5,476,406
5,000,043
4,424,905
440,781
169,614
12,509
45,787
6,145,097
21,361
6,166,458
419,673
159,172
12,124
41,068
5,632,080
16,907
5,648,987
416,992
164,977
11,961
40,233
5,059,068
26,276
5,085,344
December 31, 2018
December 31, 2017
December 31, 2016
Equipment Fleet in CEU(1)
Operating Leases ....................................................................
Finance Leases .......................................................................
Equipment trading fleet ..........................................................
Total........................................................................................
7,009,605
538,867
47,476
7,595,948
6,678,282
328,024
51,762
7,058,068
6,126,320
368,468
72,646
6,567,434
(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
1.68, and a 40-foot high cube refrigerated container is 10.0. The CEU ratios used in this calculation are from our debt agreements and 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 December 31, 2018:
Equipment Type
Percentage of
total fleet
in units
Percent of total fleet
in CEU
Dry ...............................................................................................................................................
89.9%
Refrigerated .................................................................................................................................
Special..........................................................................................................................................
Tank .............................................................................................................................................
Chassis .........................................................................................................................................
Equipment leasing fleet.............................................................................................................
Equipment trading fleet.............................................................................................................
6.2
2.5
0.3
0.7
99.6
0.4
62.9%
29.6
2.9
2.6
1.4
99.4
0.6
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 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.
39
The following table summarizes our lease portfolio by lease type, based on CEU on-hire as of December 31, 2018, 2017 and
2016:
Lease Portfolio
December 31,
2018
December 31,
2017
December 31,
2016
Long-term leases ....................................................................................................................................
66.6%
72.2%
69.7%
Finance leases.........................................................................................................................................
Service leases .........................................................................................................................................
Expired long-term leases (units on-hire) ................................................................................................
7.5
11.3
14.6
4.9
14.1
8.8
6.3
18.5
5.5
Total........................................................................................................................................................
100.0%
100.0%
100.0%
As of December 31, 2018, 2017 and 2016, our long-term and finance leases combined had an average remaining contractual
term of approximately 47 months, 43 months, and 39 months, respectively, assuming no leases are renewed.
Operating Performance
Market conditions remained favorable during much of 2018. Demand for our containers was supported by several factors,
including solid trade growth, an increased preference for leasing relative to direct container purchases by our shipping line customers,
and a strong leasing share for Triton. The supply of containers remained well controlled, with a moderate inventory of available
new containers and a very limited inventory of available used leasing containers. Pick-up activity for our containers remained
strong throughout most of 2018, reflecting solid trade growth and a favorable supply / demand environment for containers. Pick-
up activity slowed in the fourth quarter, which typically represents the slow shipping season for dry containers.
The ongoing trade dispute and the imposition of higher tariffs on goods traded between the United States and China has created
uncertainty surrounding future global economic and trade growth, though it seems the initial round of increased tariffs implemented
in the second half of 2018 did not negatively impact containerized trade in 2018. Looking forward, our customers have indicated
to us that they believe the increased tariffs will not have a significant impact on overall global container trading volumes in 2019,
but they have also indicated that they face more uncertainty on trade volumes than usual.
Fleet size. During 2018, we invested $1.5 billion in new and sale-leaseback containers. As of December 31, 2018, our fleet
had a net book value of $9,468.0 million, which represent an increase of 8.8% as compared to December 31, 2017.
Our continued high level of investment in 2018 was driven by solid containerized trade growth, a continued increase in the
share of new containers purchased by leasing companies and our strong share of new leasing transactions. Market forecasters
estimate that global containerized trade grew 5.1% in 2018, and we estimate that approximately 55% of new shipping containers
were purchased by leasing companies in 2018. Our shipping line customers have generally been increasing their reliance on leased
containers to conserve capital investment. Our customers have been facing difficult market conditions for several years, including
excess vessel capacity, weak freight rates, and low profitability.
Utilization. Our utilization averaged 98.6% during 2018, as compared to 96.9% in 2017. Our ending utilization was 97.8%
as of December 31, 2018, as compared to 98.6% as of December 31, 2017. Our high utilization in 2018 was supported by strong
demand for leased containers due to solid trade growth and an increased preference for leasing. Our utilization decreased in the
fourth quarter of 2018 reflecting reduced demand due to the end of the peak shipping season for dry containers. As of February 8,
2019, our utilization was 97.6%.
The following tables summarize our equipment fleet utilization(1) for the periods indicated below.
Average Utilization
Year Ended
December 31,
2018 ........................................................
2017 ........................................................
2016 (2) ....................................................
98.6%
96.9%
93.3%
Quarter Ended
December 31,
September 30,
June 30,
March 31,
98.7%
97.6%
92.4%
98.8%
96.5%
93.3%
98.6%
95.3%
94.0%
98.2%
98.3%
93.6%
40
Ending Utilization
December 31,
September 30,
June 30,
March 31,
2018 ........................................................................................
2017 ........................................................................................
2016 (2) ....................................................................................
97.8%
98.6%
94.8%
98.6%
98.0%
92.6%
98.7%
97.1%
93.7%
98.7%
95.8%
93.5%
Quarter Ended
(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.
(2) For the periods prior to the July 12, 2016 Merger, the utilization reflects the combined utilization of the TCIL and TAL equipment fleets.
Average lease rates. Average lease rates for our dry container product line increased by 4.0% in 2018 compared to 2017.
Market lease rates for dry containers were slightly above our portfolio average lease rates for most of 2018. Container prices and
market lease rates decreased towards the end of 2018, and are now below our portfolio average.
We have a large number of dry container leases which are expired or will expire in 2019. The average rates on these leases
are above current market lease rates. We could face increased pressure on our average dry container lease rates if new container
prices and market lease rates remain at their current level or were to decrease further.
Average lease rates for our refrigerated container product line decreased by 2.3% in 2018 compared to 2017. 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 0.9% in 2018 compared to 2017. Current market
lease rates for special containers are comparable to the average lease rates in our lease portfolio.
Equipment disposals. Average used dry container disposal prices increased by 20.9% in 2018 as compared to 2017, reflecting
the tight supply / demand for leasing containers. Our volume of owned container disposals decreased in 2018, also reflecting the
tight supply of available containers. Used container sale prices are currently high relative to the price for new containers, and we
may face pressure on used container sale prices if new container prices remain at their current level. However, we expect the
disposal volume of our owned containers to increase in 2019. Our equipment trading results were strong in 2018. We completed
several block purchases of older containers from our shipping line customers, significantly increasing our trading volumes, and
used container sale prices remained high throughout the year, leading to high per-unit margins. We expect our trading volumes
to remain elevated in 2019, though we may face pressure on per unit margins if used container sale prices decrease.
Credit Risk. We faced minimal credit losses in 2018. However, our credit risk is currently elevated due to the ongoing
financial pressure faced by our shipping line customers. The container shipping industry has faced several years of excess vessel
capacity, weak freight rates and poor financial results due to aggressive ordering of mega container vessels. Most 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, and new
environmental regulations expected to become effective in January 2020 will increase the cost of fuel and potentially require 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 increased tariffs imposed on certain goods traded between the United States and China and the
threat of additional tariffs could lead to reduced trade and lower freight rates and further increase the financial pressure on our
customers.
We expect it will become more difficult for us to mitigate our exposure to credit risks in the future through the purchase of
credit insurance. We let our credit insurance policies lapse at expiration in December 2016 and early 2017 since underwriters
offered significantly reduced coverage and required a meaningful increase in insurance premiums as a result of the bankruptcy of
Hanjin Shipping Co. We currently have a more limited 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
we had in place previously, and the policy has exclusions and payment and other limitations. We continue to monitor the availability
and pricing of credit insurance and related products.
41
Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2018, 2017 and 2016 (in
thousands):
Leasing revenues:
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016(1)
Operating leases ................................................................................................ $ 1,328,756
Finance leases ...................................................................................................
21,547
Total leasing revenues .....................................................................................
1,350,303
Equipment trading revenues ................................................................................
Equipment trading expenses................................................................................
Trading margin................................................................................................
Net gain (loss) on sale of leasing equipment.......................................................
Net gain (loss) on sale of building.......................................................................
Operating expenses:
Depreciation and amortization ............................................................................
Direct operating expenses....................................................................................
Administrative expenses......................................................................................
Transaction and other costs (income)..................................................................
Provision (reversal) for doubtful accounts ..........................................................
Insurance recovery income..................................................................................
Total operating expenses ...................................................................................
Operating income (loss)..................................................................................
Other expenses:
Interest and debt expense.....................................................................................
Realized (gain) loss on derivative instruments, net.............................................
Unrealized (gain) loss on derivative instruments, net .........................................
Debt termination expense ....................................................................................
Other (income) expense, net................................................................................
Total other expenses ........................................................................................
Income (loss) before income taxes ......................................................................
Income tax expense (benefit)...............................................................................
Net income (loss) ................................................................................................ $
Less: income (loss) attributable to non-controlling interest ................................
Net income (loss) attributable to shareholders ............................................... $
83,039
(64,118)
18,921
35,377
20,953
545,138
48,326
80,033
88
(231)
—
673,354
752,200
322,731
(2,072)
430
6,090
(2,292)
324,887
427,313
70,641
356,672
7,117
349,555
$ 1,141,165
$
813,357
22,352
1,163,517
37,419
(33,235)
4,184
35,812
—
15,337
828,694
16,418
(15,800)
618
(20,347)
—
500,720
392,592
62,891
87,609
9,272
3,347
(6,764)
657,075
546,438
282,347
900
(1,397)
6,973
(2,637)
286,186
260,252
(93,274)
353,526
8,928
344,598
$
$
84,256
65,618
66,916
23,304
—
632,686
176,279
184,014
3,438
(4,405)
141
(1,076)
182,112
(5,833)
(48)
(5,785)
7,732
(13,517)
$
$
(1) The results for December 31, 2016 are impacted by the Merger on a comparative basis. TCIL has been treated as the acquirer in the Merger for accounting purposes, and
therefore, the results of our operations, included herein, for the periods prior to the Merger on July 12, 2016 are for TCIL operations alone
42
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
The following table summarizes our comparative results for the periods indicated (in thousands):
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Variance
Leasing revenues:
Operating leases .................................................................................................. $ 1,328,756
Finance leases .....................................................................................................
21,547
Total leasing revenues .......................................................................................
1,350,303
$ 1,141,165
$
22,352
1,163,517
Equipment trading revenues ..................................................................................
Equipment trading expenses..................................................................................
Trading margin..................................................................................................
Net gain (loss) on sale of leasing equipment.........................................................
Net gain (loss) on sale of building.........................................................................
Operating expenses:
Depreciation and amortization ..............................................................................
Direct operating expenses......................................................................................
Administrative expenses........................................................................................
Transaction and other costs (income)....................................................................
Provision (reversal) for doubtful accounts ............................................................
Insurance recovery income....................................................................................
Total operating expenses .....................................................................................
Operating income (loss)....................................................................................
Other expenses:
Interest and debt expense.......................................................................................
Realized (gain) loss on derivative instruments, net...............................................
Unrealized (gain) loss on derivative instruments, net ...........................................
Debt termination expense ......................................................................................
Other (income) expense, net..................................................................................
Total other expenses ..........................................................................................
Income (loss) before income taxes ........................................................................
Income tax expense (benefit).................................................................................
Net income (loss) .................................................................................................. $
83,039
(64,118)
18,921
35,377
20,953
545,138
48,326
80,033
88
(231)
—
673,354
752,200
322,731
(2,072)
430
6,090
(2,292)
324,887
427,313
70,641
356,672
$
Less: income (loss) attributable to non-controlling interest ..................................
7,117
37,419
(33,235)
4,184
35,812
—
500,720
62,891
87,609
9,272
3,347
(6,764)
657,075
546,438
282,347
900
(1,397)
6,973
(2,637)
286,186
260,252
(93,274)
353,526
8,928
187,591
(805)
186,786
45,620
(30,883)
14,737
(435)
20,953
44,418
(14,565)
(7,576)
(9,184)
(3,578)
6,764
16,279
205,762
40,384
(2,972)
1,827
(883)
345
38,701
167,061
163,915
$
3,146
(1,811)
Net income (loss) attributable to shareholders ...................................................... $
349,555
$
344,598
$
4,957
43
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):
Leasing revenues
Operating lease revenues:
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Variance
Per diem revenues .......................................................................................... $ 1,278,354
50,402
Fee and ancillary revenues.............................................................................
Total operating lease revenues.......................................................................
Finance lease revenues .......................................................................................
21,547
Total leasing revenues.................................................................................... $ 1,350,303
1,328,756
$ 1,100,507
$
177,847
40,658
1,141,165
22,352
$ 1,163,517
$
9,744
187,591
(805)
186,786
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 671,636 CEU in the average number of containers on-hire under operating
leases;
$24.0 million increase due to an increase in average CEU per diem rates;
$27.0 million increase due to reduced lease intangible amortization; partially offset by
$6.6 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.
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, 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, 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 $18.9 million in 2018 compared to $4.2 million in 2017, an increase of $14.7 million.
The primary reasons for this increase are as follows:
•
•
$11.3 million increase due to an increase in trading volume; and
$3.4 million increase due to an increase in per unit margin.
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. On April 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
$13.6 million decrease due to an increase in the number of containers that are fully depreciated;
$5.8 million decrease due to an increase in other fully depreciated assets; and
$3.5 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.
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.
44
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 number of
our containers that were off-hire
$1.5 million decrease due to a decrease in inspection costs due to less new equipment purchases; partially offset by a
$2.2 million increase due to an increase in repair costs as a result of an 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 stronger U.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 $6.1 million in 2018 compared to $7.0 million in 2017. The
decrease of $0.9 million was mainly due to fewer debt facilities being amended or terminated.
Income taxes. Income tax expense was $70.6 million in 2018 compared to an income tax benefit of $93.3 million in 2017,
an increase in income tax expense of $163.9 million. The primary reasons for the increase are as follows:
•
•
$24.7 million increase related to a U.S. entity to foreign entity 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 non-controlling interests. Income attributable to non-controlling 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 non-controlling interests maintain their ownership.
45
Comparison of the Year Ended December 31, 2017 to Year Ended December 31, 2016
The following table summarizes our comparative results for the periods indicated (in thousands):
Year Ended
December 31,
2017
Year Ended
December 31,
2016(1)
Variance
Leasing revenues:
Operating leases .................................................................................................. $ 1,141,165
Finance leases .....................................................................................................
22,352
Total leasing revenues .......................................................................................
1,163,517
Equipment trading revenues ..................................................................................
Equipment trading expenses..................................................................................
Trading margin..................................................................................................
37,419
(33,235)
4,184
$
813,357
$
327,808
15,337
828,694
16,418
(15,800)
618
7,015
334,823
21,001
(17,435)
3,566
Net gain (loss) on sale of leasing equipment.........................................................
35,812
(20,347)
56,159
Operating expenses:
Depreciation and amortization ..............................................................................
Direct operating expenses......................................................................................
Administrative expenses........................................................................................
Transaction and other costs (income)....................................................................
Provision (reversal) for doubtful accounts ............................................................
Insurance recovery income....................................................................................
Total operating expenses .....................................................................................
Operating income (loss)....................................................................................
Other expenses:
Interest and debt expense.......................................................................................
Realized loss (gain) on derivative instruments, net...............................................
Unrealized (gain) loss on derivative instruments, net ...........................................
Debt termination expense ......................................................................................
Other (income) expense, net..................................................................................
Total other expenses ..........................................................................................
Income (loss) before income taxes ........................................................................
Income tax expense (benefit).................................................................................
Net income (loss) .................................................................................................. $
500,720
392,592
62,891
87,609
9,272
3,347
(6,764)
657,075
546,438
282,347
900
(1,397)
6,973
(2,637)
286,186
260,252
(93,274)
353,526
$
84,256
65,618
66,916
23,304
—
632,686
176,279
184,014
3,438
(4,405)
141
(1,076)
182,112
(5,833)
(48)
(5,785) $
Less: income (loss) attributable to non-controlling interest ..................................
8,928
7,732
108,128
(21,365)
21,991
(57,644)
(19,957)
(6,764)
24,389
370,159
98,333
(2,538)
3,008
6,832
(1,561)
104,074
266,085
(93,226)
359,311
1,196
Net income (loss) attributable to shareholders ...................................................... $
344,598
$
(13,517) $
358,115
(1) Our operating performance and revenues were significantly impacted by the Merger on July 12, 2016 and the subsequent inclusion of TAL's results of operations and equipment
fleet in our financial results and operating metrics. TCIL has been treated as the acquirer in the Merger for accounting purposes, and therefore, the results of operations for Triton,
included herein, for the periods prior to the date of the Merger are for TCIL operations alone.
46
Leasing revenues. Per diem revenues 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 summarize our leasing revenues for the periods indicated below (in thousands):
Leasing revenue
Operating lease revenues:
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Variance
Per diem revenues .......................................................................................... $ 1,100,507
40,658
Fee and ancillary revenues.............................................................................
Total operating lease revenues.......................................................................
Finance leases .....................................................................................................
22,352
Total leasing revenues.................................................................................... $ 1,163,517
1,141,165
$
762,011
$
51,346
813,357
15,337
828,694
$
$
338,496
(10,688)
327,808
7,015
334,823
Total leasing revenues were $1,163.5 million, net of lease intangible amortization of $88.6 million, in 2017 compared to
$828.7 million, net of lease intangible amortization of $55.5 million, in 2016, an increase of $334.8 million.
Per diem revenues were $1,100.5 million in 2017 compared to $762.0 million in 2016, an increase of $338.5 million. The
primary reasons for this increase are as follows:
•
•
•
$223.6 million increase due to the inclusion of TAL's per diem revenues for the full year in 2017 while TAL’s per diem
revenues were included only after July 12th in 2016;
$128.3 million increase due to an increase of 1,131,167 CEU in the average number of containers on-hire under operating
leases; partially offset by a
$14.9 million decrease due to a decrease in average CEU per diem rates.
Fee and ancillary lease revenues were $40.7 million in 2017 compared to $51.3 million in 2016, a decrease of $10.7 million.
The primary reasons for this decrease are as follows:
•
•
$10.2 million increase due to the inclusion of TAL's fees and ancillary lease revenues for the full year in 2017 while TAL’s
fee and ancillary lease revenues were included only after July 12th in 2016; and a
$20.9 million decrease in redelivery fees due to a decrease in the volume of customer redeliveries resulting from strong
lease demand.
Finance lease revenues were $22.4 million in 2017 compared to $15.3 million in 2016, an increase of $7.0 million. The primary
reasons for this increase are as follows:
•
•
•
$3.9 million increase due to the inclusion of TAL's finance lease revenues for the full year in 2017 while TAL’s finance
lease revenues were included only after July 12th in 2016;
$4.7 million increase due to the inclusion of a finance lease contract that commenced in September 2016 for the twelve
months in 2017 as compared to four months in 2016; and
$1.6 million decrease due to the amortization of the existing portfolio.
Trading margin. Prior to the Merger, Triton did not have a trading business. Trading margin was $4.2 million in 2017
compared to $0.6 million in 2016. The increase of $3.6 million is the result of the inclusion of the trading business for a full year
in 2017, while the trading business was only included after July 12th in 2016, as well as a result of an increase in the trading disposal
volume and margins.
47
Net gain (loss) on sale of leasing equipment. Gain on sale of equipment was $35.8 million in 2017 compared to a loss on
sale of equipment of $20.3 million in 2016, an increase of $56.1 million. The primary reasons for this increase are as follows:
•
•
$8.9 million increase due to the inclusion of TAL's gains on sale of leasing equipment for the full year in 2017 while
TAL's gains on sale of leasing equipment were included only after July 12th in 2016; and a
$47.2 million increase due to an approximately 50% increase in our average used container selling prices.
Depreciation and amortization. Depreciation and amortization was $500.7 million in 2017 compared to $392.6 million in
2016, an increase of $108.1 million. The primary reasons for this increase are as follows:
•
•
•
•
$95.8 million increase due to the inclusion of TAL's depreciation and amortization for the full year in 2017 while TAL's
depreciation and amortization was included only after July 12th in 2016;
$33.2 million increase due to a net increase in the size of our depreciable fleet; partially offset by a
$13.1 million decrease due to an impairment charge recorded as depreciation expense in 2016. There was no impairment
charge recorded as depreciation expense in 2017; and
$7.0 million decrease due to equipment becoming fully depreciated.
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 $62.9 million in 2017 compared to $84.3 million in 2016, a decrease of $21.4 million. The primary
reasons for this decrease are as follows:
•
•
•
$20.2 million increase due to the inclusion of TAL's direct operating expenses for the full year in 2017 while TAL’s direct
operating expenses were included only after July 12th in 2016;
$22.2 million decrease due to a decrease in storage expenses resulting from decreases in the number of idle units; and
$16.5 million decrease due to a decrease in equipment repair and handling expenses resulting from decreases in the
number of containers redelivered.
Administrative expenses. Administrative expenses were $87.6 million in 2017 compared to $65.6 million in 2016, an increase
of $22.0 million. The primary reasons for this increase are as follows:
•
•
•
•
•
$23.5 million increase due to the inclusion of TAL administrative expenses for the full year in 2017 while TAL’s
administrative expenses were included only after July 12th in 2016;
$3.0 million increase due to an increase in bonus expense as a result of improved financial performance;
$3.5 million increase due to a benefit in 2016 caused by a reclassification of accrued bonus expense from administrative
expense to transaction and other costs that did not re-occur in 2017;
$3.5 million increase due to an increase in our professional fees and directors' share-based compensation expense; partially
offset by a
$14.5 million decrease due to a decrease in employee compensation and benefit expense as a result of synergies gained
from the Merger in addition to the $7.7 million in savings recognized in 2016. The $23.5 million increase in administrative
expenses due to the inclusion of TAL administrative expenses in 2017, includes a benefit of $3.3 million related to
employee compensation and benefit savings as a result of synergies gained from the Merger.
Transaction and other (income) costs. Transaction and other costs include severance and employee compensation costs,
legal costs and other professional fees. Transaction and other costs related to the Merger were $8.8 million in 2017 compared to
$60.4 million in 2016. We accrued significant legal and other professional fees and employee severance expenses related to the
Merger in 2016.
Transaction and other costs also include retention and stock compensation costs pursuant to the plans established in 2011.
Transaction and other costs unrelated to the Merger were $0.5 million in 2017 and $6.5 million in 2016. The decrease in transaction
and other costs unrelated to the Merger was mainly due to a reduction in stock compensation accruals on incentive stock initially
granted in 2011.
Provision for doubtful accounts. Provision for doubtful accounts was $3.3 million in 2017 compared to $23.3 million in
2016. The 2016 provision for doubtful accounts is largely related to the lease default by Hanjin.
Insurance recovery income. Insurance recovery income was $6.8 million in 2017 due to the recognition of a gain related
to the satisfaction of our credit insurance claims with respect to the lease default by Hanjin. There was no insurance recovery
income in 2016.
48
Interest and debt expense. Interest and debt expense was $282.3 million in 2017 compared to $184.0 million in 2016, an
increase of $98.3 million. The primary reasons for this increase are as follows:
• $65.2 million increase due to the inclusion of TAL's interest and debt expense for the full year in 2017 while TAL’s interest
and debt expense was included only after July 12th in 2016;
• $18.3 million increase due to a higher average debt balance during 2017 compared to 2016; and
• $14.8 million increase due to an increase in the average effective interest rate to 4.33% in 2017 compared to 4.02% in
2016.
Realized (gain) loss on derivative instruments, net. Realized loss on derivative instruments, net was $0.9 million in 2017,
compared to $3.4 million in 2016, a decrease of $2.5 million. The decrease in the realized loss on derivative instruments, net is
mainly due to the reduction of the underlying swap notional amounts due to amortization and the termination of three interest rate
swaps and an increase in the average one-month LIBOR rate in 2017 compared to 2016. TAL's inclusion for the full year-to-date
period in 2017 compared to partial inclusion in 2016 increased the realized loss on derivative instruments, net by $0.1 million in
the 2017.
Unrealized (gain) loss on derivative instruments, net. Unrealized gain on derivative instruments, net was $1.4 million in
2017, compared to $4.4 million in 2016, a decrease of $3.0 million. Long-term interest rates increased to a lesser extent between
December 31, 2016 to December 31, 2017 compared to the increase between December 31, 2015 to December 31, 2016.
Debt termination expense. Write-off of debt costs was $7.0 million in 2017 compared to $0.1 million in 2016. The increase
of $6.9 million was mainly due to the amendment or termination of certain existing debt facilities and the resulting write-off of
the unamortized debt costs related to those facilities.
Income taxes. Income tax benefit was $93.3 million in 2017 compared to an income tax benefit of $0.05 million in 2016,
an increase in income tax benefit of $93.2 million. As a result of the U.S. Tax Cuts and Jobs Act and the related reduction of the
U.S. Corporate tax rate from 35% to 21%, we recorded a one-time tax benefit of $139.4 million in the fourth quarter in 2017 to
reflect the deferred tax liability at the lower corporate tax rate. This benefit was partially offset by a tax provision for income taxes
on operating income at the effective tax rate of 17.7%.
Income attributable to non-controlling interests. Income attributable to non-controlling interests was $8.9 million in 2017
compared to $7.7 million in 2016, an increase of $1.2 million. The increase was a result of higher income from gains on the
disposition of container rental equipment attributable to the non-controlling interests, partially offset by a reduction in the size of
the portfolio of containers owned by the entity in which the non-controlling interests maintain their ownership and a continuing
decrease in the proportion of disposition income attributable to the non-controlling interests compared to the portion allocated to
Triton.
49
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" of the Notes to
Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows provided by operating activities, proceeds from the sale of our leasing
equipment, principal payments on finance lease receivables, and borrowings under our credit facilities. Our principal uses of cash
include capital expenditures, debt service requirements and paying dividends.
For the year ended December 31, 2018, cash provided by operating activities, together with the proceeds from the sale of our
leasing equipment and principal payments on our finance leases, was $1,157.5 million. In addition, as of December 31, 2018 we
had $49.0 million of cash and cash equivalents and $1.4 billion of additional borrowing capacity under our current credit facilities.
As of December 31, 2018, our cash commitments in the next 12 months include $972.3 million of scheduled principal payments
on our existing debt facilities, and $50.6 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, principal
payments on our finance lease receivables and availability under our borrowing facilities will be sufficient to meet our obligations
over the next twelve months.
Debt Agreements
As of December 31, 2018, our outstanding indebtedness was comprised of the following (amounts in millions):
Institutional notes....................................................................................................... $
Asset-backed securitization term notes......................................................................
Term loan facilities ....................................................................................................
Asset-backed securitization warehouse .....................................................................
Revolving credit facilities ..........................................................................................
Capital lease obligations ............................................................................................
Total debt outstanding ............................................................................................. $
Debt costs...................................................................................................................
Unamortized debt premiums & discounts..................................................................
Unamortized fair value debt adjustment ....................................................................
Debt, net of unamortized debt costs........................................................................... $
Amount
Outstanding
Maximum
Borrowing
Level
2,198.2
3,063.8
1,543.4
340.0
375.0
75.5
7,595.9
(44.9)
(5.3)
(16.3)
7,529.4
$
$
$
2,198.2
3,063.8
1,543.4
900.0
1,235.0
75.5
9,015.9
—
—
—
9,015.9
The maximum borrowing levels depicted in the chart 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 of December 31, 2018, the actual availability under all of our credit facilities was approximately $425.2
million.
As of December 31, 2018, we had a combined $6,164.1 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 81.2% of total debt.
Pursuant to the terms of certain debt agreements, we are also required to maintain certain restricted cash accounts. As of
December 31, 2018, we had restricted cash of $110.6 million.
50
For additional information on our debt, please see Note 6 - "Debt" of the Notes to Consolidated Financial Statements included
in Part IV, Item 15 of this Annual Report on Form 10-K.
Debt Covenants
We are subject to certain financial covenants under 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 of December 31, 2018, we were in compliance with all such covenants.
Non-GAAP Measures
We primarily rely on our results measured in accordance with generally accepted accounting principles ("GAAP") in evaluating
our business. The covenant descriptions below include non-GAAP financial measures that are defined in our debt agreements.
Fixed Charge Coverage Ratio, Minimum Consolidated Tangible Net Worth ("CTNW"), Funded Debt Ratio, Earnings Before
Interest and Taxes ("EBIT"), Cash Interest Expense, Tangible Net Worth ("TNW"), and Indebtedness are non-GAAP financial
measures defined in our debt agreements that are used to determine our compliance with certain covenants contained in our debt
agreements and should not be used as a substitute for analysis of our results as reported under GAAP. However, we believe that
the inclusion of this non-GAAP information provides additional information to investors regarding our debt covenant compliance.
TCIL Covenants
The Fixed Charge Coverage Ratio is the rolling six-quarter ratio of consolidated net income of our TCIL subsidiary available
for fixed charges to fixed charges. Consolidated net income available for fixed charges excludes non-cash gains and losses on
derivatives instruments, plus cash distributions received from certain unrestricted subsidiaries, plus all fixed charges. Fixed charges
are the sum of interest expense and operating rental payments less interest income and the amortization of debt costs.
CTNW of our TCIL subsidiary comprises the equity of TCIL and its restricted subsidiaries, excluding any non-cash gains
and/or losses from derivative instruments, less the sum of all intangible assets and restricted investments of TCIL and its subsidiaries.
For the purpose of calculating CTNW, TCIL's investments in certain unrestricted subsidiaries are included in equity.
Funded Debt Ratio is the total debt of our TCIL subsidiary to CTNW.
TAL Covenants
EBIT to Cash Interest Expense is the rolling four-quarter ratio of EBIT to Cash Interest Expense for our TAL subsidiary. EBIT
is calculated as earnings before interest expense, income taxes, net gain or losses on interest rate swaps, certain non-cash charges,
and Merger costs. Cash Interest Expense is calculated as interest expense paid in cash and excludes interest income and amortization
of debt costs.
TNW is calculated as total tangible assets less total indebtedness for our TAL subsidiary.
Indebtedness to TNW is calculated as the ratio of Indebtedness to TNW for our TAL subsidiary.
The compliance levels of our primary financial covenants as of December 31, 2018 are summarized as follows:
Financial Covenant
Entity
Covenant Threshold
Actual Value
Fixed Charge Coverage Ratio ...........................................
TCIL .....................................
Shall not be less than 1.25:1
2.58:1
Minimum Consolidated Tangible Net Worth ....................
TCIL .....................................
Shall not be less than $855 million
$1,705.4 million
Funded Debt Ratio.............................................................
TCIL .....................................
Shall not exceed 4.0:1
EBIT to Cash Interest Expense..........................................
TAL.......................................
Shall not be less than 1.10:1
3.33:1
2.21:1
Minimum Tangible Net Worth...........................................
TAL.......................................
Shall not be less than $300 million
$982.7 million
Indebtedness to TNW ........................................................
TAL.......................................
Shall not exceed 4.75:1
2.20:1
51
Share Repurchase
On August 1, 2018, the Company's Board of Directors authorized the repurchase of up to $200.0 million of its common shares.
During the year ended December 31, 2018, the Company repurchased 1,853,148 common shares at an average price per-share of
$31.34 for a total of $58.1 million. As of February 8, 2019, $134.9 million remains available of the $200.0 million common share
repurchase authorized by the Board in August 2018.
Cash Flow
The following table sets forth certain cash flow information for the years ended December 31, 2018, 2017, and 2016 (in
thousands):
$
Net cash provided by (used in) operating activities .............................................. $
Net cash provided by (used in) investing activities .............................................. $ (1,348,409) $ (1,311,391) $
$
Net cash provided by (used in) financing activities .............................................. $
567,275
351,927
$
$
Year Ended
December 31,
2018
929,850
Year Ended
December 31,
2017
806,795
Year Ended
December 31,
2016
484,188
(395,446)
(63,629)
Operating Activities
Net cash provided by operating activities increased by $123.1 million to $929.9 million in 2018, compared to $806.8 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.
Net cash provided by operating activities increased by $322.6 million to $806.8 million in 2017, compared to $484.2 million
in 2016. Operating cash flows increased by $115.4 million due to the inclusion of TAL’s cash flows for the full year in 2017 while
TAL’s operating cash flows were included only after July 12, 2016. The remaining increase was mainly due to an increased level
of profitability as a result of the increase in our fleet size and utilization.
Investing Activities
Net cash used in investing activities increased by $37.0 million to $1,348.4 million in 2018 compared to $1,311.4 million in
2017 primarily due to an increase in purchases of leasing equipment and a decrease in the volume of container disposals.
Net cash used in investing activities increased by $916.0 million to $1,311.4 million in 2017 compared to $395.4 million in
2016. This increase was primarily due to an increase in the purchase of leasing equipment of $933.6 million and by $50.3 million
of cash acquired in the Merger in 2016 that did not re-occur in 2017. These increases were partially offset by a $67.1 million
increase in cash provided by proceeds from the sale of equipment and principal payments on finance leases.
Financing Activities
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.
Net cash provided by financing activities increased by $630.9 million to $567.3 million in 2017 compared to cash used in
financing activities of $63.6 million in 2016. The increase was primarily due to net borrowings, inclusive of debt issuance costs,
under debt facilities of $528.6 million in 2017 compared to $53.3 million in 2016. In addition, we had proceeds from issuances
of common shares of $192.9 million in 2017 compared to $7.4 million of share redemptions in 2016. These increases in cash
provided by financing activities were partially offset by an increase in dividend payments of $50.8 million.
Contractual Obligations
We are party to various operating and capital 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
52
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 December 31, 2018:
Contractual Obligations by Period
Contractual Obligations:
Total
2019
2020
2021
2022
2023
2024 and
thereafter
Principal debt obligations ................................ $ 7,520.4
Interest on debt obligations(1)...........................
Capital lease obligations(2) ...............................
Operating leases (mainly facilities) .................
1,234.0
11.9
86.2
Purchase obligations:
Equipment purchases payable.......................
Equipment purchase commitments ...............
Severance benefit commitment........................
22.4
28.2
1.2
$
964.3
$
825.7
$
812.3
$ 1,707.2
$ 1,476.1
$ 1,734.8
(dollars in millions)
303.4
11.2
3.2
22.4
28.2
1.2
265.5
10.8
2.9
—
—
—
229.6
10.8
2.4
—
—
—
177.0
10.8
2.0
—
—
—
117.4
18.7
1.4
—
—
—
141.1
23.9
—
—
—
—
Total contractual obligations............................ $ 8,904.3
$ 1,333.9
$ 1,104.9
$ 1,055.1
$ 1,897.0
$ 1,613.6
$ 1,899.8
(1) Amounts include actual interest for fixed debt and estimated interest for floating rate debt based on December 31, 2018 rates and the net effect of our interest rate swaps.
(2) Amounts include interest.
Off-Balance Sheet Arrangements
As of December 31, 2018, 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.
53
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. Used units
are typically purchased with an existing lease in place or were previously owned by one of our third party owner investors.
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. The Company completed its annual depreciation policy review during the
fourth quarter of 2018 and concluded no change was necessary.
On January 1, 2018, we changed the estimated residual values for 20-foot refrigerated containers and 40-foot high cube
refrigerated containers to $2,350 and $3,350, respectively, as compared to the previous ranges of $2,250 to $2,500 for 20-foot
refrigerated containers and $3,250 to $3,500 for 40-foot high cube refrigerated containers. The estimated residual values for 40-
foot flat rack containers and 40-foot open top containers were changed to $1,700 and $2,300, respectively, as compared to the
previous ranges of $1,500 to $3,000 for 40-foot flat rack containers and $2,300 to $2,500 for 40-foot open top containers. In
addition, the useful lives for 40-foot flat rack containers and 40-foot open top containers was changed to 16 years from the previous
range of 12 to 14 years. The effects of changes to residual value and useful life estimates were immaterial to our consolidated
financial statements.
The estimated useful lives and residual values for each major equipment type for the periods are indicated below as follows:
Equipment Type
Dry containers
As of December 31, 2018
As of December 31, 2017
Depreciable Life
Residual Value
Depreciable Life
Residual Value
20-foot dry container ........................................
40-foot dry container ........................................
40-foot high cube dry container........................
13 years
13 years
13 years
Refrigerated containers
20-foot refrigerated container ...........................
40-foot high cube refrigerated container ..........
12 years
12 years
Special containers
40-foot flat rack container ................................
40-foot open top container................................
Tank containers ...................................................
Chassis ................................................................
16 years
16 years
20 years
20 years
$
$
$
$
$
$
$
$
$
1,000
1,200
1,400
2,350
3,350
1,700
2,300
3,000
1,200
13 years
13 years
13 years
12 years
12 years
$
$
$
1,000
1,200
1,400
$2,250 to $2,500
$3,250 to $3,500
12 to 14 years
12 to 14 years
20 years
20 years
$1,500 to $3,000
$2,300 to $2,500
3,000
$
1,200
$
Depreciation on leasing equipment commences on the date of initial on-hire.
For leasing equipment acquired through sale-leaseback transactions, 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.
54
The net book value of our leasing equipment by equipment type is as follows (in thousands):
Dry container units .............................................................................................................................
$
6,666,560
$
5,941,097
Refrigerated container units ...............................................................................................................
1,676,331
Special container units........................................................................................................................
Tank container units ...........................................................................................................................
Chassis................................................................................................................................................
322,607
107,284
150,669
1,897,385
287,869
105,821
132,312
Total....................................................................................................................................................
$
8,923,451
$
8,364,484
December 31, 2018 December 31, 2017
Included in the amounts above are units not on lease at December 31, 2018 and 2017 with a total net book value of $551.1
million and $509.5 million, respectively. Amortization on equipment purchased under capital lease obligations is included in
depreciation and amortization expense on the consolidated statements of operations.
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 December 31, 2018, and 2017.
For the year ended December 31, 2016, the Company recorded $13.1 million of impairment charges in depreciation and amortization
expense related to leasing equipment.
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.
We acquired the Equipment Trading segment as part of the Merger on July 12, 2016 and had no such reporting segment prior
to that date. 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.
During the years ended December 31, 2018, 2017 and 2016, we recorded the following net gains or losses on equipment
held for sale on the consolidated statements of operations (in thousands):
55
Impairment (loss) reversal on equipment held for sale......................................... $
Gain (loss) on sale of equipment-net of selling costs ...........................................
Net gain (loss) on sale of leasing equipment ........................................................ $
(3,933) $
39,310
35,377
$
3
35,809
35,812
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
(19,399)
(948)
(20,347)
$
$
Goodwill
Goodwill is tested for impairment at least annually on October 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 ended December 31,
2018 and concluded there was no impairment. Since inception through December 31, 2018, we did not have any goodwill
impairment.
For additional information on our accounting policies, please see Note 2 - "Summary of Significant Accounting Policies" of
the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-
K for a full description of recent accounting pronouncements.
56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, values or cash flows that may result from changes in the price of a financial
instrument. The fair value of a financial instrument, derivative or non-derivative, might change as a result of changes in interest
rates, exchange rates, commodity prices, equity prices and other market changes. We have operations internationally and we are
exposed to market risks in the ordinary course of our business. These risks include interest rate and foreign currency exchange
rate risks.
Interest Rate Risk
We enter into interest rate swap and cap agreements to fix the interest rates on a portion of our floating rate debt. We assess
and manage the external and internal risk associated with these derivative instruments in accordance with our overall operating
goals. External risk is defined as those risks outside of our direct control, including counterparty credit risk, liquidity risk, systemic
risk and legal risk. Internal risk relates to those operational risks within the management oversight structure and includes actions
taken in contravention of our policy.
The primary external risk of our interest rate swap and cap agreements is counterparty credit exposure, which is defined as
the ability of a counterparty to perform its financial obligations under a derivative agreement. All of our derivative agreements are
with highly-rated financial institutions. Credit exposures are measured based on the market value of outstanding derivative
instruments. Both current and potential exposures are calculated for each derivative agreement to monitor counterparty credit
exposure.
As of December 31, 2018, we had interest rate swap and cap agreements in place to fix or limit interest rates on a portion of
our borrowings under debt facilities with floating interest rates as summarized below:
Derivatives
Interest Rate Swap.................
Interest Rate Cap ...................
Notional Amount
$1,565.6 million
$381.7 million
Weighted Average
Fixed Leg (Pay) Interest Rate
2.24%
n/a
Cap Rate
n/a
2.9%
Weighted Average
Remaining Term
4.4 years
0.1 years
Certain of our interest rate swap and cap agreements are designated as cash flow hedges for accounting purposes, and any
unrealized gains or losses related to the changes in fair value are recognized in accumulated comprehensive income and re-classed
to interest and debt expense as they are realized. A portion of our swap portfolio is not designated and changes in the fair value of
non-designated interest rate swap agreements are recognized on the consolidated statements of operations as unrealized gain or
loss on derivative instruments, net and reclassified to realized gain or loss on derivative instruments as they are realized.
Approximately 52% of our floating rate debt is hedged using interest rate swaps which helps mitigate the impact of changes
in short-term interest rates. However, a 100 basis point increase in the interest rates on our floating rate debt (primarily LIBOR)
would result in an increase of approximately $13.5 million in interest expense, net of realized gains on our swap instruments, over
the next 12 months.
Foreign currency exchange rate risk
Although we have significant foreign-based operations, the majority of our revenues and our operating expenses for the years
ended December 31, 2018, 2017, and 2016 were denominated in U.S. dollars. We pay our non-U.S. employees in local currencies
and certain operating expenses are denominated in foreign currencies. This activity is primarily denominated in the euro and the
British pound. For the year ended December 31, 2018, we recognized $1.0 million in net foreign currency exchange loss in
administrative expenses. Net foreign currency exchange gains and losses during the years ended December 31, 2017 and 2016
were immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedules listed under Item 15—Exhibits and Financial
Statement Schedules are filed as a part of this Item 8. Supplementary financial information may be found in Note 16 to the
Consolidated Financial Statements.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Report Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this Annual Report on Form 10-K. Based upon management's evaluation of these disclosure controls and
procedures, our Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded, as of the end of the
period covered by this Annual Report on Form 10-K, that our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
We assessed our internal control over financial reporting as of December 31, 2018 and based our assessment on criteria
established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on our assessment, we have concluded that our internal control over financial reporting was effective as of December 31,
2018.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in
this Annual Report on Form 10-K and, as part of the audit, has issued a report on the effectiveness of our internal control over
financial reporting as of December 31, 2018.
Changes in Internal Controls
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules
13a-15(d) or 15d-15(d) of the Exchange Act during the three months ended December 31, 2018 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
58
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Triton International Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Triton International Limited and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements
of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2018, and the related notes and financial statement Schedule I - Condensed Financial Information of Registrant and
Schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated
February 19, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
New York, New York
February 19, 2019
/s/ KPMG LLP
59
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference from the sections captioned "Election of Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our proxy statement to be issued in
connection with the Annual General Meeting of Shareholders to be held on April 25, 2019, which will be filed with the SEC within
120 days after the end of our fiscal year ended December 31, 2018 (the "2019 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from the sections captioned "Director Compensation
Table", "Compensation of Executive Officers, Compensation Discussion and Analysis", "Summary Compensation Table", and
"Grants of Plan-Based Awards Table", "CEO-Average Worker Pay Ratio", and the other tables and information following the
"Grants of Plan-Based Awards Table" in the 2019 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
The information required by this Item is incorporated herein by reference from the sections captioned "Equity Compensation
Plan Information" and "Information Regarding Beneficial Ownership of Management and Principal Shareholders" in the 2019
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference from the sections captioned "Certain Relationships
and Related Transactions" and "Corporate Governance and Related Matters" in the 2019 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference from the section captioned "Audit Fees" in the 2019
Proxy Statement.
60
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are included in Item 8 of this report:
PART IV
Report of Independent Registered Public Accounting Firm........................................................................................
Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 ......................................................
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016.............................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 ........
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2018, 2017 and 2016 .............
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016............................
Notes to Consolidated Financial Statements ...............................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
(a)(2) Financial Statement Schedules
The following financial statement schedules for the Company are filed as part of this report:
Schedule I - Parent Company Condensed Financial Statements.................................................................................
Schedule II - Valuation and Qualifying Accounts .......................................................................................................
S-1
S-4
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown
in the accompanying Consolidated Financial Statements or notes thereto.
(a)(3) List of Exhibits
The following exhibits are filed as part of and incorporated by reference into this Annual Report on Form 10-K:
Exhibit
No.
3.1
4.1
10.1
10.2
10.3
10.4
10.5
10.6
Description
Amended and Restated By-Laws of Triton International Limited, dated July 12, 2016 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed July 14, 2016)
Memorandum of Association of Triton International Limited, dated September 29, 2015 (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q, filed June 23, 2016)
Form of Indemnification Agreement (incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K, filed July 14, 2016)
TAL International Group, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, filed July 14, 2016)
Triton Container International Limited 2016 Equity Incentive Plan (incorporated by reference to Exhibit 3.1
to the Company's Current Report on Form 8-K, filed July 14, 2016)
Triton International Limited 2016 Equity Incentive Plan (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, filed July 14, 2016)
Warburg Pincus Shareholders Agreement, as amended (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, filed July 14, 2016)
Vestar Shareholders Agreement, as amended (incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K, filed July 14, 2016)
61
Exhibit
No.
10.7
10.8
10.9
Ninth Restated and Amended Credit Agreement, dated as of April 15, 2016, by and among Triton Container
International Limited, as Borrower, various lenders, and Bank of America, N.A., as Administrative Agent and
an Issuer, and other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on June 22, 2017)
Description
First Amendment, dated as of February 6, 2017, to the Ninth Restated and Amended Credit Agreement, dated
as of April 15, 2016, by and among Triton Container International Limited, as the Borrower, various lenders
and Bank of America, N.A., as Administrative Agent and an Issuer, and other parties thereto (incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June 22, 2017)
Second Amendment, dated June 16, 2017, to the Ninth Restated and Amended Credit Agreement, dated as of
April 15, 2016, by and among Triton Container International Limited, as Borrower, various lenders, Bank of
America, N.A., as Administrative Agent and an Issuer, and other parties thereto (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on June 22, 2017)
10.10
Term Loan Agreement dated as of November 30, 2018 by and among Triton Container International Limited,
as Borrower, various lenders, and PNC Bank, National Association, as a lender and Administrative Agent
21.1
23.1
24.1
31.1
31.2
*
*
*
*
*
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Powers of Attorney (included on the signature page to this Annual Report on Form 10-K)
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act of 1934, as amended
32.1
** Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
** Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Instance Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
† Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will furnish the omitted schedules
to the U.S. Securities and Exchange Commission upon request by the Commission.
* Filed herewith.
** Furnished herewith.
(b) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) set forth above.
62
(c) Financial Statement Schedules
The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) set
forth above.
63
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 19, 2019
TRITON INTERNATIONAL LIMITED
By:
/s/ BRIAN M. SONDEY
Brian M. Sondey
Chairman of the Board, Director and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Triton International Limited hereby severally constitute and appoint Brian M.
Sondey and John Burns and each of them singly, our true and lawful attorneys, with the power to them and each of them singly,
to sign for us and in our names in the capacities indicated below, any amendments to this Annual Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities to enable Triton International Limited to comply with
the provisions of the Securities Exchange Act of 1934, as amended, and all the requirements of the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant, in the capacities indicated, on the 19th day of February, 2019.
64
Signature
Title(s)
/s/ BRIAN M. SONDEY
Brian M. Sondey
/s/ JOHN BURNS
John Burns
/s/ MICHELLE GALLAGHER
Michelle Gallagher
/s/ ROBERT L. ROSNER
Robert L. Rosner
/s/ ROBERT W. ALSPAUGH
Robert W. Alspaugh
/s/ KAREN AUSTIN
Karen Austin
/s/ MALCOLM P. BAKER
Malcolm P. Baker
/s/ DAVID A. COULTER
David A. Coulter
/s/ CLAUDE GERMAIN
Claude Germain
/s/ KENNETH HANAU
Kenneth Hanau
/s/ JOHN S. HEXTALL
John S. Hextall
/s/ SIMON R. VERNON
Simon R. Vernon
Chairman of the Board, Director and Chief Executive Officer
Chief Financial Officer
Vice President and Controller (Principal Accounting Officer)
Lead Director
Director
Director
Director
Director
Director
Director
Director
Director
65
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ............................................................................................
Consolidated Balance Sheets as of December 31, 2018 and 2017 ..................................................................................
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 .................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016.............
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2018, 2017 and 2016 .................
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 ................................
Notes to Consolidated Financial Statements....................................................................................................................
Schedule I - Parent Company Condensed Financial Statements .....................................................................................
Schedule II—Valuation and Qualifying Accounts...........................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
S-1
S-4
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Triton International Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Triton International Limited and subsidiaries (the Company)
as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, shareholders’ equity,
and cash flows for each of the years in the three year period ended December 31, 2018, and the related notes and financial statement
Schedule I - Condensed Financial Information of Registrant and Schedule II - Valuation and Qualifying Accounts (collectively,
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 19, 2019 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
New York, New York
February 19, 2019
F-2
TRITON INTERNATIONAL LIMITED
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS:
Leasing equipment, net of accumulated depreciation of $2,533,446 and $2,218,897 ... $
Net investment in finance leases ....................................................................................
Equipment held for sale..................................................................................................
Revenue earning assets ..............................................................................................
Cash and cash equivalents..............................................................................................
Restricted cash................................................................................................................
Accounts receivable, net of allowances of $1,240 and $3,002 ......................................
Goodwill.........................................................................................................................
Lease intangibles, net of accumulated amortization of $205,532 and $144,081 ...........
Other assets ....................................................................................................................
Fair value of derivative instruments...............................................................................
December 31,
2018
December 31,
2017
8,923,451
$
8,364,484
478,065
66,453
9,467,969
48,950
110,589
264,382
236,665
92,925
34,610
13,923
295,891
43,195
8,703,570
132,031
94,140
199,876
236,665
154,376
49,591
7,376
Total assets................................................................................................................ $
10,270,013
$
9,577,625
LIABILITIES AND SHAREHOLDERS' EQUITY:
Equipment purchases payable ........................................................................................ $
Fair value of derivative instruments...............................................................................
Accounts payable and other accrued expenses ..............................................................
Net deferred income tax liability....................................................................................
Debt, net of unamortized debt costs of $44,889 and $40,636 ........................................
Total liabilities ............................................................................................................
Shareholders' equity:
Common shares, $0.01 par value, 270,000,000 and 294,000,000 shares authorized,
80,843,472 and 80,687,757 shares issued, respectively.................................................
Undesignated shares, $0.01 par value, 30,000,000 and 6,000,000 shares authorized,
no shares issued and outstanding ...................................................................................
Treasury shares, at cost, 1,853,148 shares and no shares, respectively .........................
Additional paid-in capital...............................................................................................
Accumulated earnings ....................................................................................................
Accumulated other comprehensive income ...................................................................
Total shareholders' equity .........................................................................................
Non-controlling interests................................................................................................
Total equity ................................................................................................................. $
Total liabilities and equity....................................................................................... $
22,392
$
10,966
99,885
282,129
7,529,432
7,944,804
809
—
(58,114)
896,811
1,349,627
14,563
2,203,696
121,513
2,325,209
10,270,013
$
$
128,133
2,503
109,999
215,439
6,911,725
7,367,799
807
—
—
889,168
1,159,367
26,942
2,076,284
133,542
2,209,826
9,577,625
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
F-3
TRITON INTERNATIONAL LIMITED
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Leasing revenues:
Operating leases ......................................................................................................... $
1,328,756
$
1,141,165
$
Finance leases.............................................................................................................
21,547
Total leasing revenues ..............................................................................................
1,350,303
Equipment trading revenues..........................................................................................
Equipment trading expenses .........................................................................................
Trading margin.........................................................................................................
Net gain (loss) on sale of leasing equipment ................................................................
Net gain (loss) on sale of building ................................................................................
Operating expenses:
Depreciation and amortization ......................................................................................
Direct operating expenses .............................................................................................
Administrative expenses ...............................................................................................
Transaction and other costs (income) ...........................................................................
Provision (reversal) for doubtful accounts....................................................................
Insurance recovery income ...........................................................................................
Total operating expenses ............................................................................................
Operating income (loss)...........................................................................................
Other expenses:
Interest and debt expense ..............................................................................................
Realized (gain) loss on derivative instruments, net ......................................................
Unrealized (gain) loss on derivative instruments, net...................................................
Debt termination expense..............................................................................................
Other (income) expense, net .........................................................................................
Total other expenses .................................................................................................
Income (loss) before income taxes................................................................................
Income tax expense (benefit) ........................................................................................
Net income (loss).......................................................................................................... $
Less: income (loss) attributable to non-controlling interest..........................................
Net income (loss) attributable to shareholders.............................................................. $
Net income per common share—Basic......................................................................... $
Net income per common share—Diluted...................................................................... $
Cash dividends paid per common share........................................................................ $
Weighted average number of common shares outstanding—Basic..............................
Dilutive restricted shares ............................................................................................
Weighted average number of common shares outstanding—Diluted...........................
83,039
(64,118)
18,921
35,377
20,953
545,138
48,326
80,033
88
(231)
—
673,354
752,200
322,731
(2,072)
430
6,090
(2,292)
324,887
427,313
70,641
356,672
7,117
349,555
4.38
4.35
2.01
79,782
582
80,364
$
$
$
$
$
22,352
1,163,517
37,419
(33,235)
4,184
35,812
—
813,357
15,337
828,694
16,418
(15,800)
618
(20,347)
—
500,720
392,592
62,891
87,609
9,272
3,347
(6,764)
657,075
546,438
84,256
65,618
66,916
23,304
—
632,686
176,279
282,347
184,014
900
(1,397)
6,973
(2,637)
286,186
260,252
(93,274)
353,526
8,928
344,598
4.55
4.52
1.80
75,679
509
76,188
$
$
$
$
$
3,438
(4,405)
141
(1,076)
182,112
(5,833)
(48)
(5,785)
7,732
(13,517)
(0.24)
(0.24)
1.35
56,032
—
56,032
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
F-4
TRITON INTERNATIONAL LIMITED
Consolidated Statements of Comprehensive Income
(In thousands)
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Net income (loss) ............................................................................................ $
Other comprehensive income (loss):
Change in derivative instruments designated as cash flow hedges, net of
income tax effect of $1,814, ($234), and $16,512 ........................................
Reclassification of (gain) loss on derivative instruments designated as
cash flow hedges, net of income tax effect of ($1,570), $171, and $423 .....
Foreign currency translation adjustment.......................................................
Other comprehensive income (loss), net of tax ...............................................
Comprehensive income ...................................................................................
Less:
Other comprehensive income attributable to noncontrolling interest .............
Comprehensive income attributable to shareholders................................. $
356,672
$
353,526
$
(5,785)
(3,933)
(407)
30,405
(5,210)
(207)
(9,350)
347,322
440
151
184
353,710
7,117
8,928
340,205
$
344,782
$
777
(758)
30,424
24,639
7,732
16,907
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
F-5
TRITON INTERNATIONAL LIMITED
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
Class A, Class B and
Common Shares*
Treasury Shares
Balance at January 1, 2016 ................................................................
40,428,585
$
505
— $
— $ 176,088
$
1,044,402
$
(3,666)
$
160,504
$1,377,833
Shares
Amount
Shares
Amount
Add'l
Paid in
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
Income
Non-
controlling
Interest
Total
Equity
Issuance of common shares ..................................................................
605,334
Share-based compensation ...................................................................
Adjustment to fair market value classified service-based options .......
—
—
Settlement of liability classified service-based share options ..............
517,912
Share repurchase to settle shareholder tax obligations.........................
(247,005)
Redemption / Cancellation of common shares .....................................
(263,393)
Net income (loss)..................................................................................
Foreign currency translation adjustment ..............................................
—
—
7
—
—
5
(2)
(3)
—
—
Issuance and conversion of Triton shares due to Merger .....................
33,334,592
232
Change in derivative instruments designated as cash flow hedges,
net of income tax effect of $16,512......................................................
Reclassification of realized loss on derivative instruments designated
as cash flow hedges, net of income tax effect of $423 .........................
Distributions to non-controlling interests .............................................
Common shares dividend declared.......................................................
—
—
—
—
—
—
—
—
Balance as of December 31, 2016 ......................................................
74,376,025
$
744
Issuance of common shares ..................................................................
6,313,694
Share-based compensation ...................................................................
Cumulative adjustment for adoption of ASU 2016-09.........................
—
—
Share repurchase to settle shareholder tax obligations.........................
(1,962)
Net income (loss)..................................................................................
Foreign currency translation adjustment ..............................................
Change in derivative instruments designated as cash flow hedges,
net of income tax effect of ($234) ........................................................
Reclassification of realized loss on derivative instruments designated
as cash flow hedges, net of income tax effect of $171 .........................
Distributions to non-controlling interests .............................................
Common shares dividend declared.......................................................
—
—
—
—
—
—
63
—
—
—
—
—
—
—
—
—
Balance as of December 31, 2017 ......................................................
80,687,757
$
807
Share-based compensation ...................................................................
200,341
Treasury shares acquired ......................................................................
—
Share repurchase to settle shareholder tax obligations.........................
(44,626)
Net income (loss)..................................................................................
Foreign currency translation adjustment ..............................................
Change in derivative instruments designated as cash flow hedges,
net of income tax effect of $1,814........................................................
Reclassification of realized (gain) on derivative instruments
designated as cash flow hedges, net of income tax effect of ($1,570) .
Tax reclassifications to accumulated earnings for the adoption of
ASU 2018-02........................................................................................
Distributions to non-controlling interests .............................................
Common shares dividend declared.......................................................
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2)
5,399
(907)
7,075
(3,175)
(4,014)
—
—
509,954
—
—
—
—
—
—
—
—
(216)
—
(13,517)
—
—
—
—
—
(85,356)
—
—
—
—
—
—
—
(758)
—
30,405
777
—
—
—
—
—
—
—
—
7,732
—
—
—
—
5
5,399
(907)
7,080
(3,393)
(4,017)
(5,785)
(758)
510,186
30,405
777
(24,732)
(24,732)
—
(85,356)
— $ 690,418
$
945,313
$
26,758
$
143,504
$1,806,737
—
—
—
—
—
—
—
—
—
—
193,109
5,641
—
—
—
—
—
—
—
—
—
—
6,582
(70)
344,598
—
—
—
—
(137,056)
—
—
—
—
—
151
(407)
440
—
—
—
—
—
—
193,172
5,641
6,582
(70)
8,928
353,526
—
—
—
151
(407)
440
(18,890)
(18,890)
—
(137,056)
— $ 889,168
$
1,159,367
$
26,942
$
133,542
$2,209,826
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,853,148
(58,114)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,028
—
(1,385)
—
—
—
—
—
—
—
—
—
—
349,555
—
—
3,029
—
(162,324)
—
—
—
—
(207)
(3,933)
(5,210)
(3,029)
—
—
—
—
—
9,030
(58,114)
(1,385)
7,117
356,672
—
—
—
—
(207)
(3,933)
(5,210)
—
(19,146)
(19,146)
—
(162,324)
Balance as of December 31, 2018 ......................................................
80,843,472
$
809
1,853,148
$ (58,114)
$ 896,811
$
1,349,627
$
14,563
$
121,513
$2,325,209
*
As a result of the Merger transaction completed on July 12, 2016, all Class A and B common shares held by TCIL shareholders were exchanged for Triton common shares at a 0.80 ratio, and therefore, the
historical number of shares, options, and per share amounts were retroactively adjusted.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
F-6
TRITON INTERNATIONAL LIMITED
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)................................................................................................................................................. $
356,672
$
353,526
$
(5,785)
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization .........................................................................................................................
Amortization of deferred financing cost and other debt related amortization .................................................
Lease related amortization ...............................................................................................................................
Share-based compensation expense .................................................................................................................
Net (gain) loss on sale of leasing equipment ...................................................................................................
Net (gain) loss on sale of building ...................................................................................................................
Unrealized (gain) loss on derivative instruments.............................................................................................
Debt termination expense.................................................................................................................................
Deferred income taxes......................................................................................................................................
Changes in operating assets and liabilities:......................................................................................................
Accounts receivable......................................................................................................................................
Accounts payable and accrued expenses ......................................................................................................
Net equipment sold for resale activity ..........................................................................................................
Cash received (paid) for settlement of interest rate swaps ...........................................................................
Other assets ...................................................................................................................................................
Net cash provided by (used in) operating activities..............................................................................
Cash flows from investing activities:
545,138
15,005
70,275
9,030
(35,377)
(20,953)
430
6,090
66,467
(65,385)
(14,449)
(2,341)
187
(939)
929,850
500,720
13,401
92,787
5,641
(35,812)
—
(1,397)
6,973
(94,678)
(5,967)
(42,402)
8,821
2,117
3,065
392,592
5,934
55,539
5,399
20,347
—
(4,405)
141
(809)
(1,602)
10,694
4,031
(37)
2,149
806,795
484,188
Purchases of leasing equipment and investments in finance leases ....................................................................
(1,603,507)
(1,562,863)
Proceeds from sale of equipment, net of selling costs.........................................................................................
Proceeds from the sale of building ......................................................................................................................
Cash collections on finance lease receivables, net of income earned .................................................................
Cash and cash equivalents acquired ....................................................................................................................
Other ....................................................................................................................................................................
163,256
27,630
64,372
—
(160)
190,744
—
60,673
—
55
Net cash provided by (used in) investing activities...............................................................................
(1,348,409)
(1,311,391)
Cash flows from financing activities:
Issuance of common shares, net of underwriter expenses...................................................................................
Purchases of treasury shares ................................................................................................................................
Redemption of common shares ...........................................................................................................................
Debt issuance costs..............................................................................................................................................
Borrowings under debt facilities..........................................................................................................................
Payments under debt facilities and capital lease obligations...............................................................................
Dividends paid.....................................................................................................................................................
Distributions to noncontrolling interests .............................................................................................................
Other ....................................................................................................................................................................
Net cash provided by (used in) financing activities ..............................................................................
—
(56,274)
(1,385)
(19,575)
4,043,637
(3,435,041)
(160,289)
(19,146)
—
351,927
Net (decrease) increase in cash, cash equivalents and restricted cash.......................................................... $
(66,632)
$
Cash, cash equivalents and restricted cash, beginning of period.........................................................................
Cash, cash equivalents and restricted cash, end of period............................................................................. $
Supplemental disclosures:
Interest paid ......................................................................................................................................................... $
Income taxes paid (refunded) .............................................................................................................................. $
Supplemental non-cash investing activities:
226,171
159,539
308,827
4,484
Equipment purchases payable ............................................................................................................................. $
22,392
$
$
$
$
192,931
—
(70)
(34,494)
3,102,825
(2,539,711)
(135,557)
(18,890)
241
567,275
62,679
163,492
226,171
269,601
(288)
128,133
$
$
$
$
$
Shares issued to acquire TAL .............................................................................................................................. $
— $
— $
(629,332)
145,572
—
38,650
50,349
(685)
(395,446)
—
—
(7,410)
(6,554)
661,971
(602,152)
(84,752)
(24,732)
—
(63,629)
25,113
138,379
163,492
181,559
309
83,567
510,186
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
F-7
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description of the Business and Basis of Presentation
Description of the Business and Basis of Presentation
Triton International Limited (“Triton” or the “Company”), through its subsidiaries, leases intermodal transportation equipment,
primarily maritime containers, and provides maritime container management services through a worldwide network of service
subsidiaries, third-party depots and other facilities. The majority of Triton’s business is derived from leasing its containers to
shipping line customers through a variety of long-term and short-term contractual lease arrangements. The Company also sells
containers from its existing fleet as well as containers specifically acquired for resale from third parties. The Company's registered
office is located in Bermuda.
Triton was formed on July 12, 2016, by an all stock merger (the "Merger") of Triton Container International Limited ("TCIL")
and TAL International Group, Inc. ("TAL").
The consolidated financial statements of Triton presented herein represent the historical financial statements of TCIL, the
accounting acquirer, and include the results of operations of TAL after July 12, 2016, the date of the completion of the Merger.
The consolidated financial statements include the accounts of the Company and its subsidiaries. Certain reclassifications have
been made to the accompanying prior period financial statements and notes to conform to the current year's presentation.
Note 2—Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and subsidiaries in which it has a controlling
interest, and variable interest entities (VIEs) of which the Company is the primary beneficiary. The equity method of accounting
is applied when the Company does not have a controlling interest in an entity but exerts significant influence over the entity. All
significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of
revenues and expenses during the reporting period and disclosure of contingent assets and liabilities in the financial statements.
Such estimates include, but are not limited to, the Company's estimates in connection with leasing equipment including residual
values and depreciable lives, values of assets held for sale and other long-lived assets, provision for income tax, allowance for
doubtful accounts, share-based compensation and goodwill and intangible assets. Actual results could differ from those estimates.
Segment Reporting
The Company conducts its business activities in one industry, intermodal transportation equipment, and has two reporting
segments, Equipment leasing and Equipment trading. The Company also segregates total equipment leasing revenues and total
equipment trading revenues by geographic location based upon the primary domicile of the Company’s customers.
Prior to the Merger on July 12, 2016, the Company had only one segment, the Equipment Leasing segment. As a result of
the Merger, the Equipment Trading segment was acquired.
Concentration of Credit Risk
The Company's equipment lease and trade receivables subject it to potential credit risk. The Company extends credit to its
customers based upon an evaluation of each customer's financial condition and credit history. Evaluations of the financial condition
and associated credit risk of customers are performed on an ongoing basis. The Company's largest customer, CMA CGM S.A.,
accounted for 20%, 19%, and 17% of its lease billings during 2018, 2017, and 2016, respectively, and accounted for 29% and 23%
of its accounts receivable as of December 31, 2018 and 2017, respectively. The Company's second largest customer, Mediterranean
Shipping Company S.A. accounted for 14%, 14%, and 15% of its lease billings during 2018, 2017, and 2016, respectively, and
5% and 8% of its accounts receivable as of December 31, 2018 and 2017, respectively.
F-8
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other financial instruments that are exposed to concentration of credit risk are cash and cash equivalents, and restricted cash
balances. Cash and cash equivalents, and restricted cash are held with financial institutions of high quality. Balances may exceed
the amount of insurance provided on such deposits.
Fair Value Measurements
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The determination of fair value may require an entity to make
significant judgments or develop assumptions about market participants to reflect risks specific to the asset being valued.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments having original maturities of three
months or less at the time of purchase.
Restricted Cash
The Company’s restricted cash relates to amounts held at financial institutions pursuant to certain debt arrangements. The
restricted cash balances represent cash proceeds collected and required to be used to pay debt service and other related expenses.
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is estimated based upon a review of the collectibility of its receivables. This
review is based on the risk profile of the receivables, credit quality indicators such as the level of past-due amounts and economic
conditions. Generally, the Company does not require collateral on accounts receivable balances. An account is considered past
due when a payment has not been received in accordance with the contractual terms. Changes in economic conditions or other
events may necessitate additions or deductions to the allowance for doubtful accounts. The allowance for doubtful accounts is
intended to provide for losses in the receivables, and requires the application of estimates and judgments as to the outcome of
collection efforts, among other things. The Company believes its allowance for doubtful accounts is adequate to provide for credit
losses inherent in its existing receivables.
To the extent amounts are expected to be recoverable from insurance policies, the Company records a receivable based on
amounts incurred not to exceed insurance limits.
The Company experienced a major lessee default in 2016 when Hanjin Shipping Co. ("Hanjin"), a lessee of the Company,
filed for court protection and immediately began a liquidation process. At that time, the Company had approximately 87,000
container units on lease to Hanjin with a net book value of $243.3 million. The Company recorded a loss of $29.7 million during
the third quarter ended September 30, 2016, comprised of bad debt expense and a charge for costs not expected to be recovered
due to deductibles in credit insurance policies. As of December 31, 2018, the Company recovered approximately 95% of its
containers previously leased to Hanjin.
The impact of the Hanjin liquidation was significantly lessened by credit insurance policies in place during 2016 which covered
the majority of the recovery costs, the value of the containers that were unrecoverable and a portion of the lost lease revenue. The
insurance policies did not cover Triton's pre-default receivables. The Company collected total payments from its insurance providers
of $67.0 million in satisfaction of its claims and recorded a gain of $6.8 million to insurance recovery income within operating
expenses for the year ended December 31, 2017. The net gain represents insurance proceeds received in excess of recovery costs
incurred and the net book value of those units written off as unrecoverable.
Net Investment in Finance Leases
The Company has entered into various rental agreements that qualify as direct financing leases or sales-type leases. These
leases are usually long-term in nature, typically ranging for a period of three to twelve years, and typically include an option to
purchase the equipment at the end of the lease term at a bargain purchase price. At the inception of a direct financing lease or
a sales-type lease, a net investment is recorded based on the gross investment (representing the total future minimum lease
payments due under the lease plus the estimated residual value), net of unearned income.
F-9
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For a direct financing lease, unearned income represents the excess of the gross investment over the net book value of the
leased equipment at lease inception. For a sales-type lease, unearned income represents the excess of the gross investment over
the fair value of the leased equipment (calculated as the present value of both the total future minimum lease payments due under
the lease and the estimated residual value) at lease inception.
At the inception of a sales-type lease, gain (loss) is defined as the difference between (i) the net investment in the lease
and (ii) the net book value of the subject containers on the Company’s books at the commencement of the lease.
Leasing Equipment
The Company purchases new equipment from equipment manufacturers for the purpose of leasing such equipment to
customers. The Company also purchases used equipment with the intention of selling such equipment in one or more years from
the date of purchase. Used units are typically purchased with an existing lease in place or were previously owned by one of the
Company's third party owner investors.
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 the Company's leasing equipment are based on historical disposal experience
and the Company's expectations for future used container sale prices. The Company reviews estimates used in its depreciation
policy on a regular basis to determine whether changes have taken place that would suggest that a change in its depreciation
estimates for useful lives or the assigned residual values of its equipment is warranted. The Company completed its annual
depreciation policy review during the fourth quarter of 2018 and concluded no change was necessary.
On January 1, 2018, the Company changed the estimated residual values for 20-foot refrigerated containers and 40-foot high
cube refrigerated containers to $2,350 and $3,350, respectively, as compared to the previous ranges of $2,250 to $2,500 for 20-
foot refrigerated containers and $3,250 to $3,500 for 40-foot high cube refrigerated containers. The estimated residual values for
40-foot flat rack containers and 40-foot open top containers were changed to $1,700 and $2,300, respectively, as compared to the
previous ranges of $1,500 to $3,000 for 40-foot flat rack containers and $2,300 to $2,500 for 40-foot open top containers. In
addition, the useful lives for 40-foot flat rack containers and 40-foot open top containers was changed to 16 years from the previous
range of 12 to 14 years. The effects of changes to residual value and useful life estimates were immaterial to our consolidated
financial statements.
The estimated useful lives and residual values for each major equipment type for the periods indicated below were as follows:
Equipment Type
Dry containers
20-foot dry container ......................................
40-foot dry container ......................................
40-foot high cube dry container .....................
Refrigerated containers
20-foot refrigerated container.........................
40-foot high cube refrigerated container ........
Special containers
40-foot flat rack container ..............................
40-foot open top container .............................
Tank containers.................................................
Chassis
As of December 31, 2018
As of December 31, 2017
Depreciable Life
Residual Value
Depreciable Life
Residual Value
1,000
1,200
1,400
2,350
3,350
1,700
2,300
3,000
1,200
13 years
13 years
13 years
12 years
12 years
$
$
$
1,000
1,200
1,400
$2,250 to $2,500
$3,250 to $3,500
12 to 14 years
12 to 14 years
20 years
20 years
$1,500 to $3,000
$2,300 to $2,500
3,000
$
1,200
$
13 years
13 years
13 years
12 years
12 years
16 years
16 years
20 years
20 years
$
$
$
$
$
$
$
$
$
F-10
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation on leasing equipment commences on the date of initial on-hire.
For leasing equipment acquired through sale-leaseback transactions, the Company adjusts its estimates for remaining useful
life and residual values based on current conditions in the sales market for older containers and the Company's expectations for
how long the equipment will remain on-hire to the current lessee.
The net book value of the Company's leasing equipment by equipment type as of the dates indicated was (in thousands):
Dry container units ..............................................................................................................
$
6,666,560
$
5,941,097
Refrigerated container units ................................................................................................
1,676,331
1,897,385
Special container units.........................................................................................................
Tank container units.............................................................................................................
Chassis.................................................................................................................................
322,607
107,284
150,669
287,869
105,821
132,312
Total .....................................................................................................................................
$
8,923,451
$
8,364,484
December 31, 2018 December 31, 2017
Included in the amounts above are units not on lease at December 31, 2018 and 2017 with a total net book value of $551.1
million and $509.5 million, respectively. Amortization on equipment purchased under capital lease obligations is included in
depreciation and amortization expense on the consolidated statements of operations.
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 its
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. The Company considers 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
the Company's historical experience and management's judgment of market conditions.
The Company did not record any impairment charges related to leasing equipment for the years ended December 31, 2018
and 2017. For the year ended December 31, 2016, the Company recorded $13.1 million of impairment charges in depreciation and
amortization expense related to leasing equipment.
Equipment Held for Sale
When leasing equipment is returned off lease, the Company makes a determination of whether to repair and re-lease the
equipment or sell the equipment. At the time the Company determines that equipment will be sold, it reclassifies 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 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 to fair value 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.
F-11
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company acquired the Equipment Trading segment as part of the Merger on July 12, 2016 and had no such reporting
segment prior to that date. 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.
During the years ended December 31, 2018, 2017, and 2016, the Company recorded the following net gains or losses on
sale of leasing equipment held for sale on the consolidated statements of operations (in thousands):
Impairment (loss) reversal on equipment held for sale......................................... $
Gain (loss) on sale of equipment-net of selling costs ...........................................
Net gain (loss) on sale of leasing equipment ........................................................ $
(3,933) $
39,310
35,377
$
3
35,809
35,812
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
(19,399)
(948)
(20,347)
$
$
Property, Furniture and Equipment
Costs of major additions of property, furniture, equipment and improvements are capitalized and are included in other assets
on the consolidated balance sheets. The original cost is depreciated on a straight-line basis over the estimated useful lives of such
property, furniture and equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease
term or the estimated useful lives of the leased assets. Other fixed assets, which consist primarily of computer software and
hardware, are recorded at cost and amortized on a straight-line basis over their respective estimated useful lives, which range from
three to seven years. Expenditures for maintenance and repairs are expensed as they are incurred.
Business Combinations
The Company allocates the purchase price to assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Determining the
fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to future cash flows, discount rates, asset lives and market multiples,
among other items.
Goodwill
Goodwill is tested for impairment at least annually on October 31st of each fiscal year or more frequently if events occur or
circumstances indicate that the fair value of a reporting unit may be below its carrying value. Goodwill has been allocated to the
Company’s reporting units.
In evaluating goodwill for impairment, the Company has 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,
the Company considers individual factors such as macroeconomic conditions, changes in its industry and the markets in which
the Company operates, as well as its reporting units' historical and expected future financial performance. If, after assessing the
totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is
greater than its carrying amount, then the quantitative goodwill impairment test is unnecessary. The quantitative goodwill
impairment test compares the fair value of a reporting unit with its 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.
The Company elected to perform the qualitative assessment for its evaluation of goodwill impairment during the year ended
December 31, 2018 and concluded there was no impairment. Since inception through December 31, 2018, the Company has not
recorded any goodwill impairment.
Intangible Assets
Intangible assets with finite useful lives such as acquired lease intangibles and customer relationships are initially recorded
at fair value and are amortized over their respective estimated useful lives and subsequently reviewed for impairment whenever
F-12
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company has not
recorded any impairment charges related to intangible assets for the years ended December 31, 2018, 2017, and 2016.
Revenue Recognition
Operating Leases with Customers
The Company enters into long-term leases and service leases with ocean carriers, principally as lessor in operating lease, for
marine cargo equipment. Long-term leases provide Triton's customers with specified equipment for a specified term. The Company's
leasing revenues are based upon the number of equipment units leased, the applicable per diem rate and the length of the lease.
Long-term leases typically have initial contractual terms ranging from three to eight years. Revenues are recognized on a straight-
line basis over the life of the respective lease. Advance billings are deferred and recognized in the period earned. Service leases
do not specify the exact number of equipment units to be leased or the term that each unit will remain on-hire, but allow the lessee
to pick-up and drop-off units at various locations specified in the lease agreement. Under a service lease, rental revenue is based
on the number of equipment units on-hire for a given period. Revenue for customers considered to be non-performing is deferred
and recognized when the amounts are received.
The Company recognizes billings to customers for damages and certain other operating costs as leasing revenue as it is earned
based on the terms of the contractual agreements with the customer. As principal, the Company is responsible for fulfillment of
the services, supplier selection and service specifications, and has ultimate responsibility to pay the supplier for the services whether
or not it collects the amount billed to the lessee.
Finance Leases with Customers
The Company enters into finance leases as lessor for some of the equipment in its fleet. The net investment in finance leases
represents the receivables due from lessees, net of unearned income and amounts previously billed, which are included in accounts
receivable. Unearned income is recognized on a level yield basis over the lease term and is recorded as leasing revenue. Finance
leases are usually long-term in nature and typically include an option to purchase the equipment at the end of the lease term for
an amount determined to be a bargain.
Equipment Trading Revenues and Expenses
Equipment trading revenues represent the proceeds from the sale of equipment purchased for resale and are recognized as
units are sold and delivered to the customer. The related expenses represent the cost of equipment sold as well as other selling
costs that are recognized as incurred and are reflected as equipment trading expenses on the consolidated statements of operations.
Direct Operating Expenses
Direct operating expenses are directly related to the Company's equipment under and available for lease. These expenses
primarily consist of the Company's costs to repair and maintain the equipment, to reposition the equipment and to store the equipment
when it is not on lease. These costs are recognized when incurred. Certain positioning costs may be capitalized when incurred to
place new equipment on an initial lease.
Debt Costs
Debt costs represent the fees incurred in connection with debt obligation arrangements. These costs are capitalized and
amortized using the effective interest method or on a straight-line basis over the term of the related obligation, depending on the
type of debt obligation to which they relate. Unamortized debt costs may be written off when the related debt obligations are
refinanced or extinguished prior to maturity.
Derivative Instruments
The Company uses derivatives in the management of its interest rate exposure on its long-term borrowings. The Company
records derivative instruments on its balance sheet at fair value and establishes criteria for both the designation and effectiveness
of hedging activities.
F-13
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has entered into interest rate swap agreements with certain financial institutions. The interest rate swap
agreements require the Company to make payments to counterparties at fixed rates in return for receipts based upon variable rates
indexed to the London Interbank Offered Rate (“LIBOR”).
Derivative instruments are designated or non-designated for hedge accounting purposes. The fair value of the derivative
instruments is measured at each balance sheet date and is reflected on a gross basis on the consolidated balance sheets. The change
in fair value of the derivative instruments designated as a cash flow hedge are recorded on the consolidated balance sheets in
accumulated other comprehensive income (loss) and are re-classified to interest expense when realized. The change in fair value
of non-designated derivative instruments is recorded in the consolidated statements of operations as unrealized loss (gain) on
derivative instruments, net and are reclassified to realized loss (gain) on derivative instruments when realized.
Income Taxes
The Company uses the liability method of accounting for income taxes, which requires recognition of deferred tax assets and
liabilities based on the expected future tax consequences of temporary differences that currently exist between the tax basis and
financial reporting basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any change
in the tax rate which has an effect on deferred tax assets and liabilities is recognized as an increase or decrease to income in the
period that includes the enactment date of the law that resulted in the change in tax rate.
The Company recognizes the effect of income tax positions which are more-likely-than-not of being sustained. If a position
does not meet the more-likely-than-not criteria, the Company records a reserve against the tax position such that a tax benefit is
recognized only in the amount that has a greater than 50% likelihood of being recognized. The full impact of any change in
recognition or measurement of an uncertain tax position is reflected in the period in which such change occurs. Potential interest
and penalties associated with such uncertain tax positions are recorded as a component of income tax expense.
Foreign Currency Translation and Remeasurement
The Company uses U.S. dollar as its reporting currency. The net assets and operations of foreign subsidiaries included in the
consolidated financial statements are attributable primarily to the Company's U.K. subsidiary. The accounts of this subsidiary have
been converted at rates of exchange in effect at year end as to balance sheet accounts and at the historical weighted average of
exchange rates for the statements of operations accounts. The effects of changes in exchange rates in translating foreign subsidiaries'
financial statements are included in shareholders' equity as accumulated other comprehensive (loss) income.
The Company also has certain cash accounts, certain finance lease receivables and certain obligations that are denominated
in currencies other than the Company's functional currency. These assets and liabilities are generally denominated in euros or
British pounds, and are remeasured at each balance sheet date at the exchange rates in effect as of those dates. The impact of
changes in exchange rates on the remeasurement of assets and liabilities are included in administrative expenses on the consolidated
statements of operations. Transaction losses were $1.0 million for the year ended December 31, 2018 and were immaterial for the
years ended December 31, 2017 and 2016.
Share-based Compensation
The Company measures and recognizes share-based awards granted to employees based on estimated fair values. Share-based
awards may be subject to forfeiture if certain employment conditions are not met. The Company does not estimate forfeitures in
its expense calculations as forfeiture history has been minor. Time based awards are measured at the grant date and are recognized
as compensation expense over the employee's requisite service period, generally the vesting period of the equity award, on a
straight-line basis. Performance-based awards are recognized as compensation expense when satisfaction of the performance
condition is considered probable.
Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to shareholders by the weighted average number of
common shares outstanding for the period. Any potential issuance of common shares, including those that are contingent and do
not participate in dividends, are excluded from the weighted average number of common shares outstanding. Diluted earnings per
share reflect the potential dilution that would occur if securities exercisable or convertible into common shares were exercised or
converted into common shares, utilizing the treasury share method.
F-14
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company excluded 207,991, nil, and 169,403 of anti-dilutive restricted common shares from its calculation of diluted
earnings per share for the years ended December 31, 2018, 2017, and 2016.
Recently Adopted Accounting Standards Updates
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), amending previous
updates regarding this topic. Leasing revenue recognition is specifically excluded from this ASU, and therefore, the new standard
only applied to equipment trading revenues and sales of leasing equipment. The adoption of this ASU had minimal impact on the
Company since the majority of its sales contracts are for containers and do not contain multiple elements. The standard allows for
either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective”
adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company
adopted the standard on January 1, 2018, using the modified retrospective approach. The adoption of Topic 606 did not impact its
leasing revenue recognition model because, as noted above, leasing revenue recognition, including ancillary fees, is specifically
excluded from this ASU.
The Company has assessed the requirements of the new revenue standard with respect to its equipment trading revenue and
sales of leasing equipment and has concluded that the timing and amount of recognition was not materially affected based on the
fact that there generally are no long-term contracts, multiple element arrangements, or significant customer acquisition costs related
to these revenue streams. The Company also considered the requirement to present disaggregated revenue for its equipment trading
revenue and sales of leasing equipment upon the adoption of Topic 606. The Company currently presents these revenue items
separately in its statements of operations. As a result, the Company concluded that the adoption of Topic 606 did not have a
significant impact on either the timing of its revenue recognition or manner of presentation.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts
and Cash Payments. The updated amendment provides guidance as to where certain cash flow items are presented, including debt
prepayment or debt extinguishment costs and proceeds from the settlement of insurance claims. The Company adopted the standard
on January 1, 2018. The adoption of this ASU did not have an impact on the consolidated financial statements since none of the
cash flow items specified in the guidance changed the Company's presentation in the consolidated statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other than Inventory. The ASU eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory.
As a result, the tax expense from the intercompany sale of assets, other than inventory, and associated changes to deferred taxes
will be recognized when the sale occurs even though the pre-tax effects of the transaction have not been recognized. The Company
adopted the standard on January 1, 2018. The adoption of this ASU did not have a significant impact on its consolidated financial
statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash
equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide
a definition of restricted cash or restricted cash equivalents. The Company adopted this guidance on January 1, 2018 using the
retrospective approach. As a result, the Company recorded an increase of $43.8 million in net cash provided by financing activities
for the year ended December 31, 2017 and an increase of $31.4 million used in financing activities for the year ended December 31,
2016 related to presentation changes of its restricted cash balance from financing activities to the cash, cash equivalents and
restricted cash balance within the consolidated statements of cash flows.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting. ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or
conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that
modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification
and would not be required if the changes are considered non-substantive. The Company adopted the standard on January 1, 2018
on a prospective basis. The adoption of this ASU did not have an impact on the consolidated financial statements since the Company
did not modify its share-based payment awards since adoption of the standard.
F-15
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from
accumulated other comprehensive income to accumulated earnings for tax effects resulting from the Tax Cuts and Jobs Act (the
“Act”) and requires certain new disclosures. ASU 2018-02 will be effective for the Company for fiscal years beginning after
December 15, 2018, with early adoption permitted. The update should be applied either in the period of adoption or retrospectively
to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The Company
elected to adopt this ASU on January 1, 2018 by making a one-time reclassification in the period of change of stranded tax effects
from accumulated other comprehensive income to accumulated earnings related to the change in tax rates resulting from the Act.
The reclassified amount of $3.0 million represents the difference between the amount initially recorded directly to accumulated
other comprehensive income at the previously enacted U.S. federal corporate income tax rate as of December 31, 2017 and the
amount that would have been recorded directly to accumulated other comprehensive income as of December 31, 2017 by using
the newly enacted U.S. federal corporate income tax rate.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 118. The amendments in this ASU add various Securities and Exchange Commission (“SEC)
paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts
and Jobs Act (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with
the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that
timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements
and if possible to provide a reasonable estimate. The Company recorded the effects of the change in the tax law pursuant to SAB
118 as of December 31, 2017. The Company adopted the standard on January 1, 2018. There were no updates to the amounts
recorded as of December 31, 2017 during 2018.
Recently Issued Accounting Standards Updates
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequently issued amendments thereto, that
replaced existing lease accounting guidance. The accounting standard will require lessees to recognize a right of use (“ROU”)
asset and a corresponding lease liability on their balance sheets. The accounting that will be applied by lessors under ASC 842 is
largely unchanged from previous GAAP. The majority of the Company’s leases with its customers will continue to be classified
as operating leases. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee
accounting model and ASC 606, Revenue from Contracts with Customers.
The Company plans to adopt the standard on its effective date of January 1, 2019 through a cumulative-effect adjustment.
Additionally, the Company will elect the “package of practical expedients” which provides: (1) An entity need not reassess whether
any expired or existing contracts are or contain leases; (2) An entity need not reassess the lease classification for any expired or
existing leases; and (3) An entity need not reassess initial direct costs for any existing leases. Furthermore, the Company will elect
the optional transition method and continue to apply the guidance in ASC 840, including its disclosure requirements, in the
comparative periods.
On adoption, the Company expects to recognize a lease liability of approximately $10.5 million based on the present value
of the remaining minimum rental payments under current leasing standards for existing operating leases and corresponding ROU
assets of approximately $9.0 million. The Company expects to elect the short-term lease recognition exemption whereby a lease
liability and corresponding ROU asset will not be recognized when leases, at the commencement date, have a lease term of 12
months or less.
The Company has assessed the requirements from both a lessee and lessor perspective and concluded the adoption of this
standard will not have a significant impact on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The guidance affects trade receivables and net investments in leases and requires the measurement
of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions
and reasonable and supportable forecasts that affect collectability. The new guidance will be effective for fiscal years and interim
periods beginning after December 15, 2019 and early adoption is permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Different components of the guidance require modified retrospective and/or
prospective adoption. Based on the composition of the Company's receivables, current market conditions and historical credit loss
activity, the Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
F-16
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2017, FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities. ASU 2017-12 changes the recognition and presentation requirements of hedge accounting, including:
eliminating the requirement to separately measure and report hedge ineffectiveness; and presenting all items that affect earnings
in the same income statement line item as the hedged item. The ASU also provides new alternatives for: applying hedge accounting
to additional hedging strategies; measuring the hedged item in fair value hedges of interest rate risk; reducing the cost and complexity
of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the
critical terms match method; and reducing the risk of material error correction if a company applies the shortcut method
inappropriately. The Company plans to adopt the standard on its effective date of January 1, 2019 and will apply the modified
retrospective approach upon adoption. The Company has evaluated the impact of this ASU and concluded the adoption of this
standard will not have a significant impact on the consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. The amendments in this ASU represent changes
to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and
effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments do not require
transition guidance and will be effective upon issuance. However, many of the amendments in this ASU do have transition guidance
with effective dates for annual periods beginning after December 15, 2018. The Company does not expect the adoption of this
ASU to have a significant impact on the consolidated financial statements.
Note 3—Fair Value of Financial Instruments
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company uses the following fair value hierarchy when
selecting inputs for its valuation techniques, with the highest priority given to Level 1:
• Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 - inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
• Level 3 - unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would use in pricing.
Fair Value of Debt
The Company does not measure debt, net of unamortized debt costs, at fair value in its consolidated balance sheets. The fair
value was measured using Level 2 inputs and the carrying value and fair value are summarized in the following table (in thousands):
Liabilities
Total Debt - carrying value(1) ........................................................................................... $
Total Debt - fair value ...................................................................................................... $
7,595,922
7,559,063
$
$
6,986,333
6,991,537
December 31, 2018
December 31, 2017
(1) Excludes unamortized debt costs of $44.9 million and $40.6 million, purchase price debt adjustments of $16.3 million and $27.5 million, and unamortized debt discounts of $5.3
million and $6.5 million as of December 31, 2018 and 2017, respectively.
Fair Value of Equipment Held for Sale
The Company’s equipment held for sale fair value is measured using Level 2 inputs and is based on recent sales prices and
other factors. Equipment held for sale is recorded at the lower of fair value, less costs to sell, or carrying value and an impairment
charge is recorded when the carrying value of the asset exceeds its fair value. The following table summarizes the portion of the
Company’s equipment held for sale measured at fair value and the cumulative impairment charges recorded to net gain (loss) on
sale of leasing equipment through the periods summarized below (in thousands):
Assets
Equipment held for sale - assets at fair value(1) ............................................................. $
Cumulative impairment charges(2) ................................................................................. $
$
5,750
(1,846) $
6,104
(2,242)
December 31, 2018
December 31, 2017
(1) Represents the fair value of containers included in equipment held for sale in the consolidated balance sheets that have been impaired to write down the carrying value of the
containers to their estimated fair value less cost to sell.
(2) Represents the cumulative impairment charges recognized on equipment held for sale from the date of designated held for sale status to the indicated period end date.
F-17
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recognized net impairment charges of $3.9 million for the year ended December 31, 2018, an immaterial net
impairment reversal for the year ended December 31, 2017, and net impairment charges of $19.4 million for the year ended
December 31, 2016.
Fair Value of Derivative Instruments
The Company has elected to use the income approach to value its interest rate swap and cap agreements, using Level 2 market
expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount
(discounted). The Level 2 inputs for the interest rate swap and cap valuations are inputs other than quoted prices that are observable
for the asset or liability (specifically LIBOR and swap rates, basis swap adjustments and credit risk at commonly quoted intervals).
The fair value of derivative instruments on its consolidated balance sheets as of December 31, 2018 and December 31, 2017
were as follows (in thousands):
Derivative Instrument
Asset Derivatives
Liability Derivatives
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
Interest rate cap and swap contracts, designated..................................... $
Interest rate swap contracts, not designated ............................................
Total derivatives ...................................................................................... $
10,531
3,392
13,923
$
$
3,554
3,822
7,376
$
$
10,966
—
10,966
$
$
2,503
—
2,503
Fair Value of Other Assets and Liabilities
Cash and cash equivalents, restricted cash, accounts receivable, equipment purchases payable, and accounts payable carrying
value amounts approximate fair values because of the short-term nature of these instruments. The Company’s other financial and
non-financial assets, which include leasing equipment, net investment in finance leases, intangible assets and goodwill, are not
required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment
test is required and the Company determines that these other financial and non-financial assets are impaired after completing an
evaluation, these assets would be written down to their fair value.
Note 4—Business Combination
The Company completed the Merger on July 12, 2016 and has accounted for the transaction as a business combination under
the acquisition method of accounting. TCIL was treated as the acquirer for accounting purposes. The fair value of the consideration,
or the purchase price, was $510.2 million. This amount was derived based on the fair value of the shares issued to former TAL
stockholders on the closing date of July 12, 2016 when the closing stock price was $15.28 per share. The Company finalized the
allocation of the purchase price to the fair value of the TAL assets acquired and liabilities assumed as of December 31, 2016.
Intangible assets acquired are comprised of a lease intangible for leases acquired with lease rates that were above market and
a customer intangible related to the chassis and tank customer lists acquired. The following table summarizes the intangible assets
amortization as of December 31, 2018 (in thousands):
Years ending December 31,
2019 ......................................................................................................................... $
2020 .........................................................................................................................
2021 .........................................................................................................................
2022 .........................................................................................................................
2023 .........................................................................................................................
2024 and thereafter ..................................................................................................
Total ......................................................................................................................... $
Above market
lease
intangibles
Customer
intangibles (1)
758
$
—
—
—
—
—
758
$
$
$
Total
intangible
assets
37,518
22,491
16,549
10,497
4,657
1,971
93,683
36,760
22,491
16,549
10,497
4,657
1,971
92,925
(1) Customer intangibles are included in other assets on the consolidated balance sheets.
F-18
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company incurred transaction and other costs related to the Merger which are included in transaction and other costs on
the consolidated statements of operations.
Note 5—Restricted Cash
The components of restricted cash as of December 31, 2018 and December 31, 2017 were as follows (in thousands):
Collection accounts......................................................................................................... $
Trust accounts .................................................................................................................
Other restricted cash accounts ........................................................................................
Total restricted cash ........................................................................................................ $
20,873
$
6,174
83,542
110,589
$
23,676
14,601
55,863
94,140
December 31, 2018
December 31, 2017
Collection accounts
The Company maintains certain bank accounts (collectively, the “Collection Accounts”). Cash proceeds collected from leasing
and disposition invoices are deposited into the Collection Accounts. Similarly, all expenses related to the operation of the containers
are paid from the Collection Accounts. The Company is required to maintain as restricted cash the portion of the balances in the
Collections Account that relate to certain units that are financed.
Trust accounts
Pursuant to certain debt agreements, cash is transferred from the Collection Accounts to separate accounts (the “Trust
Accounts”). The Trust Accounts are maintained by the Company on behalf of certain asset-backed noteholders. The cash in the
Trust Accounts is used to pay related Asset-Backed Securitization ("ABS") debt service and related expenses. After such payments,
any remaining cash in these accounts is transferred to certain unrestricted bank accounts of the Company and is included in cash
and cash equivalents on the consolidated balance sheets.
Other restricted cash accounts
Pursuant to certain asset-backed debt agreements, cash is transferred to separate accounts on a monthly basis in order to
maintain an amount equal to projected interest expense for a specified number of months.
Note 6—Debt
Debt consisted of the following (in thousands):
December 31, 2018
December 31, 2017
Institutional notes ........................................................................................................... $
Asset-backed securitization term notes ..........................................................................
Term loan facilities.........................................................................................................
Asset-backed securitization warehouse..........................................................................
Revolving credit facilities ..............................................................................................
Capital lease obligations.................................................................................................
Total debt outstanding..................................................................................................
Debt costs .......................................................................................................................
Unamortized debt premiums & discounts ......................................................................
Unamortized fair value debt adjustment ........................................................................
Debt, net of unamortized debt costs............................................................................. $
2,198,200
3,063,821
1,543,375
340,000
375,000
75,526
7,595,922
(44,889)
(5,293)
(16,308)
7,529,432
$
$
2,381,000
2,384,926
1,701,998
110,000
305,000
103,409
6,986,333
(40,636)
(6,456)
(27,516)
6,911,725
The Company is subject to certain financial covenants under its debt agreements. The agreements remain the obligations of
the respective subsidiaries, and all related debt covenants are calculated at the subsidiary level. As of December 31, 2018 and
2017, the Company was in compliance with all financial covenants in accordance with the terms of its debt agreements.
F-19
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2018, the Company had $4,598.5 million of total debt outstanding on facilities with fixed interest rates.
These fixed rate facilities had a contractual weighted average interest rate of 4.24%, are scheduled to mature between 2019 and
2029, and had a weighted average remaining term of 3.9 years as of December 31, 2018.
As of December 31, 2018, the Company had $2,997.4 million of total debt outstanding on facilities with interest rates based
on floating rate indices (primarily LIBOR). These floating rate facilities had a contractual weighted average interest rate of 4.23%,
are scheduled to mature between 2019 and 2025, and had a weighted average remaining term of 3.7 years as of December 31,
2018.
The Company hedges the risks associated with fluctuations in interest rates on a portion of its floating rate borrowings by
entering into interest rate swap agreements that convert a portion of its floating rate debt to a fixed rate basis, thus reducing the
impact of interest rate changes on future interest expense. As of December 31, 2018, the Company had interest rate swaps in place
with a notional amount of $1,565.6 million to fix the floating interest rates on a portion of its floating rate debt obligations, with
a weighted average fixed leg interest rate of 2.24% and a weighted average remaining term of 4.4 years. Including the impact of
the Company's interest rate swaps, the contractual weighted average interest rate on its floating rate facilities was 4.08% as of
December 31, 2018.
As of December 31, 2018, the Company had $6,164.1 million of total debt with fixed interest rates or floating interest rates
that have been synthetically fixed through interest rate swap contracts. This accounts for 81% of total debt. These facilities had a
contractual weighted average interest rate of 4.17% and a weighted average remaining term of 4.1 years as of December 31, 2018.
Overall, the Company's total debt had a contractual weighted average interest rate of 4.18% as of December 31, 2018, including
the impact of the swap contracts.
The Company recorded $6.1 million, $7.0 million, $0.1 million of debt termination expense for the years ended December 31,
2018, 2017 and 2016, respectively.
Debt Facilities
Effective April 1, 2017, both TCIL and TAL obtained the necessary consents from lenders and noteholders to appoint TCIL
as manager of all of TAL’s container fleet including those containers in special purpose entities of TAL.
Institutional Notes
In accordance with the institutional note agreements, interest payments on the Company's institutional notes are due semi-
annually. Institutional note maturities typically range from 7 - 12 years, with level principal payments due annually following an
interest-only period. The Company's institutional notes are pre-payable (in whole or in part) at the Company's option at any time,
subject to certain provisions in the note agreements, including the payment of a make-whole premium in respect to such prepayment.
These facilities provide for an advance rate against the net book values of designated eligible equipment generally in the range
from 83% to 85%. These institutional notes had a contractual weighted average interest rate of 4.71% as of December 31, 2018
and are scheduled to mature between 2020 and 2029.
Asset-Backed Securitization Term Notes
Under the Company’s ABS facilities, indirect wholly-owned subsidiaries of the Company issue asset-backed notes. The
issuance of asset-backed notes is the primary business objective of those subsidiaries. The facilities are intended to be bankruptcy
remote so that such assets are not available to creditors of the Company or its affiliates until and unless the related secured borrowings
have been fully discharged. These transactions do not meet accounting requirements for sales treatment and are recorded as secured
borrowings.
The Company’s borrowings under the ABS facilities amortize in monthly installments, typically in level payments over five
or more years. These facilities provide for an advance rate against the net book values of designated eligible equipment generally
in the range from 77% to 87%. The net book values for purposes of calculating eligible equipment is determined according to the
related debt agreement and may be different than those calculated per U.S. GAAP. The Company is required to maintain restricted
cash balances on deposit in designated bank accounts equal to three to nine months of interest expense depending on the terms of
each facility.
F-20
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These ABS term notes had a contractual weighted average interest rate of 3.96% as of December 31, 2018 and are scheduled
to mature between 2022 and 2028.
During the year ended December 31, 2018, the Company completed offerings of the following Class A and B fixed rate asset-
backed notes:
Date Completed
March 20, 2018
June 20, 2018
August 9, 2018
Total Offering
$450.0 million
$367.9 million
$260.6 million
Contractual Weighted
Average Interest Rate
3.99%
4.23%
3.67%
Scheduled Maturity
March 20, 2028
June 20, 2028
August 21, 2023
On September 14, 2018, the Company extinguished a term note and paid the remaining balance of $4.7 million.
Term Loan Facilities
The term loan facilities amortize in monthly or quarterly installments. These facilities provide for an advance rate against the
net book values of designated eligible equipment generally in the range from 79% to 83%. These term loan facilities had a contractual
weighted average interest rate of 4.07% as of December 31, 2018, and are scheduled to mature between 2019 and 2023.
On April 20, 2018, the Company sold an office building for net proceeds of $27.6 million and recorded a gain on sale of $21.0
million. The proceeds of the sale were used to pay off the mortgage balance of $18.3 million plus accrued interest of $0.1 million.
On May 31, 2018, the Company extinguished a term loan and paid the outstanding balance of $93.9 million.
On August 1, 2018, the Company amended a term loan agreement and extended the maturity date to April 20, 2022.
On September 28, 2018, the Company concurrently extinguished a term loan and entered into a new revolving credit facility
with a maturity date of September 28, 2023. The outstanding term loan balance of $52.5 million was repaid using proceeds drawn
from the revolving credit facility.
On November 30, 2018, the Company entered into a new term loan of $1.0 billion. The term loan has a contractual interest
rate of LIBOR plus 1.50% and a scheduled maturity date of November 30, 2023. Concurrently, the Company utilized proceeds
from the new term loan to extinguish three term loans with total outstanding balances of $682.3 million.
On December 27, 2018, the Company extinguished a term loan and paid the outstanding balance of $155.6 million.
Asset-Backed Securitization Warehouse Facilities
Under the Company’s ABS warehouse facilities, indirect wholly-owned subsidiaries of the Company issue asset-backed notes.
The issuance of asset-backed notes is the primary business objective of those subsidiaries. The facilities are intended to be bankruptcy
remote so that such assets are not available to creditors of the Company or its affiliates until and unless the related secured borrowings
have been fully discharged. These transactions do not meet accounting requirements for sales treatment and are recorded as secured
borrowings.
The Company's ABS warehouse facilities have a maximum combined borrowing capacity of $900.0 million as of December 31,
2018. A borrowing capacity of $400.0 million is available on a revolving basis until September 28, 2020, after which any borrowings
would convert to term notes with a maturity date of September 20, 2024. This facility has a contractual interest rate of one-month
LIBOR plus 1.85% margin until the conversion date when it would have a contractual interest rate of one-month LIBOR plus
2.85%.
During the revolving period, the borrowing capacity under the facilities is determined by applying an advance rate against
the net book values of designated eligible equipment. The advance rate for these facilities is 81%. The net book values for purposes
of calculating eligible equipment is determined according to the related debt agreement and may be different than those calculated
per U.S. GAAP. The Company is required to maintain restricted cash balances on deposit in designated bank accounts equal to
three to five months of interest expense.
F-21
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 20, 2018, the Company terminated a warehouse facility. There was no outstanding balance at the date of termination.
On December 13, 2018, the Company entered into an ABS warehouse facility with a borrowing capacity of $500.0 million.
The facility is available on a revolving basis until December 13, 2021 paying interest at LIBOR plus 1.75%, after which any
borrowings would convert to term notes with a maturity date of December 15, 2025 paying interest at LIBOR plus 2.85%.
As of December 31, 2018, the ABS warehouse facilities had a contractual weighted average interest rate of 4.22%.
Revolving Credit Facilities
The Company's revolving credit facilities have a maximum borrowing capacity of $1,235.0 million. These facilities provide
for an advance rate against the net book values of designated eligible equipment. The approximate average advance rate for the
two facilities is 83%. The revolving credit facilities had a contractual weighted average interest rate of 4.48% as of December 31,
2018 and are scheduled to mature between 2022 and 2023.
On May 8, 2018, the Company increased its credit limit on one of its revolving credit facilities from $1,025.0 million to
$1,125.0 million. This revolving credit facility’s contractual interest rate remained at one-month LIBOR plus 2.00%.
On September 28, 2018, the Company entered into a new $110.0 million revolving credit facility. This facility has an
interest rate of one-month LIBOR plus 1.85% and a scheduled maturity date of September 28, 2023.
On December 20, 2018, the Company terminated a revolving credit facility by paying off the remaining principal plus
accrued interest balance of $45.1 million.
Debt maturities excluding capital lease obligations (in thousands):
Years ending December 31,
2019.................................................................................................................................................................. $
2020..................................................................................................................................................................
2021..................................................................................................................................................................
2022..................................................................................................................................................................
2023..................................................................................................................................................................
2024 and thereafter...........................................................................................................................................
Total.................................................................................................................................................................. $
964,278
825,737
812,325
1,707,174
1,476,092
1,734,790
7,520,396
Capital Lease Obligations
The Company has entered into a series of capital lease transactions with various financial institutions to finance chassis and
containers. Each lease is accounted for as a capital lease, with interest expense recognized on a level yield basis over the period
preceding early purchase options, if any, which is generally 3 to 10 years from the transaction date. These agreements have fixed
interest rates ranging from 3.60% to 4.93%, and mature between 2019 and 2024.
F-22
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2018, future lease payments under these capital leases were as follows (in thousands):
Years ending December 31,
2019.................................................................................................................................................................. $
2020..................................................................................................................................................................
2021..................................................................................................................................................................
2022..................................................................................................................................................................
2023..................................................................................................................................................................
2024 and thereafter...........................................................................................................................................
Total future payments.......................................................................................................................................
Less: amount representing interest ...................................................................................................................
Capital lease obligations................................................................................................................................... $
11,210
10,766
10,766
10,766
18,734
23,925
86,167
(10,641)
75,526
Note 7—Derivative Instruments
Interest Rate Swaps / Caps
The Company has entered into interest rate swap and cap agreements to manage interest rate risk exposure. Interest rate swap
agreements are utilized to limit the Company's exposure to interest rate risk by converting a portion of its floating rate debt to a
fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt
of floating rate amounts in exchange for fixed rate interest payments over the lives of the agreements without an exchange of the
underlying principal amounts. The counterparties to the Company's interest rate swap agreements are highly rated financial
institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap agreements, the Company's
exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the
agreements. The Company does not anticipate any non-performance by the counterparties. Substantially all of the assets of certain
indirect, wholly owned subsidiaries of the Company have been pledged as collateral for the underlying indebtedness and the
amounts payable under the interest rate swap agreements for each of these entities. In addition, certain assets of the Company's
subsidiaries, are pledged as collateral for various credit facilities and the amounts payable under certain interest rate swap
agreements.
On January 18, 2018, the Company entered into an interest rate cap agreement for a total notional amount of $400.0 million.
The agreement is amortizing over a one-year term. The Company has designated this interest rate cap agreement as a cash flow
hedge for accounting purposes.
During the year ended December 31, 2018, the Company entered into the following interest rate swaps:
Date Completed
September 5, 2018
September 21, 2018
September 21, 2018
Notional Amount
$257.6 million
$100.0 million
$200.0 million
Indexed To
3 month LIBOR
1 month LIBOR
1 month LIBOR
Scheduled Maturity
August 20, 2023
September 28, 2025
September 30, 2025
During the year ended December 31, 2018, the Company canceled the following interest rate swaps:
Date Canceled
December 20, 2018
Notional Amount
$50.0 million
Funds Received
$0.2 million
F-23
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2018, the Company had interest rate swap and cap agreements in place to fix or limit the floating interest
rates on a portion of the borrowings under its debt facilities summarized below:
Derivatives
Notional
Amount
Weighted Average
Fixed Leg (Pay) Interest Rate
Interest Rate Swap.................
Interest Rate Cap ...................
$1,565.6 million
$381.7 million
2.24%
n/a
Cap Rate
n/a
2.90%
Weighted Average
Remaining Term
4.4 years
0.1 years
The following table represents pre-tax amounts in accumulated other comprehensive (loss) related to interest rate swap
agreements expected to be recognized in income over the next twelve months (in thousands):
Unrealized gain (loss) on derivative instruments designated as cash flow hedges .................................. $
Net gain (loss) on terminated derivative instruments designated as cash flow hedges............................
9,199
631
December 31, 2018
The following table summarizes the impact of derivative instruments on the consolidated statements of operations and the
consolidated statements of comprehensive income (loss) (in thousands):
Derivative instrument
Financial statement caption
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Non-designated derivative
instruments.........................................
Realized (gain) loss on derivative
instruments, net.............................
$
Non-designated derivative
instruments.........................................
Unrealized (gain) loss on
derivative instruments, net............
Designated derivative instruments.....
Designated derivative instruments.....
Other comprehensive loss
(income)........................................
Interest and debt (income)
expense .........................................
(2,072) $
900
$
3,438
430
2,119
(6,780)
(1,397)
641
611
(4,405)
(46,917)
1,200
Note 8—Net Investment in Finance Leases
The following table represents the components of the net investment in finance leases (in thousands):
Future minimum lease payment receivable(1) ................................................................. $
Estimated residual receivable..........................................................................................
Gross finance lease receivables.......................................................................................
Unearned income(2) .........................................................................................................
Net investment in finance leases(3) .................................................................................. $
574,422
$
107,598
682,020
(203,955)
478,065
$
283,374
64,560
347,934
(52,043)
295,891
December 31, 2018
December 31, 2017
(1) At the inception of the lease, the Company records the total minimum lease payments net of executory costs, if any. The gross finance lease receivable is reduced as billed to the
customer and reclassified to accounts receivable until paid. There were no executory costs included in gross finance lease receivables as of December 31, 2018 and 2017.
(2) The difference between the gross finance lease receivable and the fair value of the equipment at the lease inception is recorded as unearned income. Unearned income together
with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of
December 31, 2018 and 2017.
(3) As of December 31, 2018, three major customers represented 50%, 24% and 13% of the Company's finance lease portfolio. As of December 31, 2017, two major customers
represented 46% and 28% of the Company's finance lease portfolio. No other customer represented more than 10% of the Company's finance lease portfolio in each of those years.
F-24
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual maturities of the Company’s gross finance lease receivables subsequent to December 31, 2018 are as follows
(in thousands):
Years ending December 31,
2019 .................................................................................................................................................................. $
2020 ..................................................................................................................................................................
2021 ..................................................................................................................................................................
2022 ..................................................................................................................................................................
2023 ..................................................................................................................................................................
2024 and thereafter ...........................................................................................................................................
Total .................................................................................................................................................................. $
109,184
119,197
84,266
78,327
60,528
230,518
682,020
The Company evaluates potential losses in its finance lease portfolio by regularly reviewing the specific receivables in the
portfolio and analyzing loss experience.
The Company maintains allowances, if necessary, for doubtful accounts and estimated losses resulting from the inability of
its lessees to make required payments under finance leases. These allowances are based on, but not limited to, each lessee’s payment
history, management’s current assessment of each lessee’s financial condition and the recoverability. The Company currently does
not have an allowance on its gross finance lease receivables.
Note 9—Share-Based Compensation and Other Equity Matters
2016 Triton Plan
On July 8, 2016, the Company’s 2016 Equity Incentive Plan (“2016 Equity Plan”) became effective. The 2016 Equity Plan
provides for the granting of service-based and performance-based restricted shares to executives, employees and directors. The
maximum aggregate number of shares that may be issued under the 2016 Equity Plan is initially 5,000,000 common shares. Any
awards issued under the 2016 Equity Plan that are forfeited by the participant, will become available for future grant under the
2016 Equity Plan.
The following table summarizes the Company’s restricted share activity for the year ended December 31, 2018:
Number of
Shares
Outstanding
Weighted
Average Fair
Value
Non-vested balance at December 31, 2017.....................................................................................
Shares granted .................................................................................................................................
Shares vested(1)................................................................................................................................
Shares forfeited ...............................................................................................................................
Non-vested balance at December 31, 2018.....................................................................................
752,014
360,846
(201,510)
(5,855)
905,495
$
$
16.10
28.23
18.21
29.17
20.38
(1) Plan participants tendered 44,626 common shares to satisfy income tax withholding obligations. These shares were subsequently retired by the Company.
Additional shares may be granted based upon the satisfaction of certain performance criteria.
The share-based compensation expense for the years ended December 31, 2018, 2017 and 2016 included in administrative
expenses on the consolidated statements of operations was $9.0 million, $5.6 million, and $5.4 million, respectively. Included in
the expense are certain performance-based share expense where achievement of the performance condition was deemed probable.
As of December 31, 2018, the total unrecognized compensation costs related to restricted shares is approximately $7.0 million,
which is expected to be recognized over the remaining weighted average vesting period of approximately 1.6 years.
On September 7, 2016, the Company approved the grants of 47,075 restricted shares to non-employee directors at a fair value
of $14.55 per share that vested immediately. On May 10, 2017, the Company approved the grants of 38,675 restricted shares to
directors at a fair value of $28.04 per share that vested immediately. On May 2, 2018, the Company approved the grants of 39,320
restricted shares to directors at a fair value of $31.85 per share that vested immediately.
F-25
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All TCIL share counts in the following descriptions have been retroactively converted to reflect the share exchange ratios of
0.80 for TCIL related to the Merger.
TCIL Restricted Shares
On July 8, 2016, TCIL issued 113,942 restricted shares at a fair value of $13.68 per share. The Company recognized $0.5
million of compensation costs which are included in transaction and other costs on the consolidated statements of operations for
the year ended December 31, 2016. These unvested TCIL restricted shares converted to Triton restricted shares upon the Merger.
TAL Stock Based Compensation Plan
TAL’s previously existing stock-based compensation plans consisted of the 2005 Management Omnibus Incentive Plan and
the 2014 Equity Incentive Plan. The TAL restricted shares granted in 2014 and 2015 vested on July 12, 2016 upon the closing of
the Merger and were included in the purchase price consideration. TAL granted 140,000 restricted shares in January 2016 that
were converted to Triton restricted shares upon the Merger.
TCIL Share Options
TCIL adopted a share-based compensation plan (the “Option Plan”) for the benefit of certain executives of TCIL and its
consolidated subsidiaries effective May 23, 2011.
As a result of the Merger, TCIL settled and canceled all vested and unvested market based options for fully vested Class A
and B common shares. There was no compensation costs related to options for the years ended December 31, 2018 and 2017. The
Company recognized $2.3 million compensation costs reported as transaction and other costs on the consolidated statements of
operations for the year ended December 31, 2016 related to options granted during the years 2011 through 2013 and the settlement
and cancellation.
TCIL Non-Employee Director Equity Plan
On July 12, 2016, 26,058 of restricted Class A common shares that were issued to participants of the non-employee director
equity plan, became fully vested and the remaining unamortized compensation costs of $0.4 million was expensed and recorded
in transaction and other costs on the consolidated statements of operations.
There was no compensation expense related to the TCIL non-employee director equity plan during the year ended December
31, 2018 and 2017. For the year ended December 31, 2016, compensation expense of $0.3 million was included in administrative
expenses on the consolidated statements of operations.
Equity Issuance
On September 12, 2017, the Company completed a common share offering in which it sold 5,350,000 common shares at a
public offering price of $32.75 per share. On September 22, 2017, the Company sold an additional 802,500 common shares at a
public offering price of $32.75 per share pursuant to the full exercise of an option granted to the underwriters in connection with
the offering. The aggregate net proceeds received by the Company from the offering, including the exercise of the option, amounted
to $192.9 million after deducting underwriting discounts and commissions, and before deducting total expenses incurred in
connection with the offering of approximately $1.3 million. The net proceeds were used for general corporate purposes, including
the purchase of containers.
Share Repurchase Program
On August 1, 2018, the Company's Board of Directors authorized the repurchase of up to $200.0 million of its common shares.
Purchases under the repurchase program may be made in the open market or privately negotiated transactions, and may include
transactions pursuant to a repurchase plan administered in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange
Act of 1934, as amended. Purchases may be made from time to time at the Company’s discretion and the timing and amount of
any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The
repurchase program does not obligate the Company to acquire any particular amount of common shares, and the Company may
suspend or discontinue the repurchase program at any time.
F-26
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2018, the Company repurchased 1,853,148 common shares at an average price per-share
of $31.34 for a total of $58.1 million. As of December 31, 2018, $141.9 million remains available for common share repurchases.
The changes in the Company's common shares and treasury shares during the years ending December 31, 2018, 2017 and
2016 are shown in the table below:
Balance as of January 1, 2016 ...........................................
Share-based compensation ...................................................
Settlement of liability classified service-based share
options ..................................................................................
Share repurchase to settle shareholder tax obligations.........
Redemption / Cancellation of common shares.....................
Issuance and conversion of Triton shares due to Merger .....
Balance as of December 31, 2016 ......................................
Issuance of common shares..................................................
Share-based compensation ...................................................
Share repurchase to settle shareholder tax obligations.........
Balance as of December 31, 2017 ......................................
Share-based compensation ...................................................
Share repurchase to settle shareholder tax obligations.........
Repurchase of common shares .............................................
Balance as of December 31, 2018 ......................................
Class A
Common
Shares(1)
35,628,585
140,237
517,912
(232,715)
(32,536)
(36,021,483)
—
—
—
—
—
—
—
—
—
Class B
Common
Shares (1)
4,800,000
—
—
—
—
(4,800,000)
—
—
—
—
—
—
—
—
—
Common Shares
—
465,097
Treasury Shares
—
—
—
(14,290)
(230,857)
74,156,075
74,376,025
6,152,500
161,194
(1,962)
80,687,757
200,341
(44,626)
—
80,843,472
—
—
—
—
—
—
—
—
—
—
—
(1,853,148)
(1,853,148)
(1) As a result of the Merger transaction completed on July 12, 2016, all Class A and B common shares held by TCIL shareholders were exchanged for Triton common shares
at a 0.80 ratio, and therefore, the historical number of shares, options, and per share amounts were retroactively adjusted.
Dividends
The Company paid the following quarterly dividends during the years ended December 31, 2018, 2017, and 2016 on its issued
and outstanding common shares adjusted for the effects of the Merger:
Payment Date
Record Date
December 3, 2018............................................................ December 20, 2018 ....
September 4, 2018 ........................................................... September 25, 2018 ...
June 1, 2018..................................................................... June 22, 2018 .............
March 12, 2018................................................................ March 28, 2018 ..........
December 1, 2017............................................................ December 22, 2017 ....
September 1, 2017 ........................................................... September 22, 2017 ...
June 1, 2017..................................................................... June 22, 2017 .............
March 20, 2017................................................................ March 30, 2017 ..........
December 2, 2016............................................................ December 22, 2016 ....
September 8, 2016 ........................................................... September 22, 2016 ...
July 8, 2016(1) .................................................................. July 11, 2016 ..............
__________________________________________
(1) This dividend was prior to the Merger and represents TCIL dividend payments only.
Aggregate Payment
Per Share
Payment
$41.0 Million
$41.6 Million
$41.6 Million
$36.0 Million
$36.0 Million
$33.2 Million
$33.2 Million
$33.2 Million
$33.2 Million
$33.3 Million
$18.3 Million
$0.52
$0.52
$0.52
$0.45
$0.45
$0.45
$0.45
$0.45
$0.45
$0.45
$0.45
F-27
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive income (loss), net of tax, for the years
ended December 31, 2018, 2017, and 2016 (in thousands):
Cash Flow
Hedges
Foreign
Currency
Translation
Accumulated
Other
Comprehensive
(Loss) Income
Balance as of December 31, 2015 ....................................................................... $
Change in derivative instruments designated as cash flow hedges.......................
— $
30,405
(3,666) $
—
Reclassification of loss on derivative instruments designated as cash flow
hedges....................................................................................................................
Foreign currency translation adjustment...............................................................
Other comprehensive income (loss)......................................................................
Balance as of December 31, 2016 ....................................................................... $
Change in derivative instruments designated as cash flow hedges.......................
Reclassification of loss on derivative instruments designated as cash flow
hedges....................................................................................................................
Foreign currency translation adjustment...............................................................
Other comprehensive income (loss)
Balance as of December 31, 2017 ....................................................................... $
Change in derivative instruments designated as cash flow hedges.......................
Reclassification of gain on derivative instruments designated as cash flow
hedges....................................................................................................................
Tax reclassifications to accumulated earnings for the adoption of ASU 2018-02
Foreign currency translation adjustment...............................................................
Other comprehensive income (loss)......................................................................
Balance as of December 31, 2018 ....................................................................... $
777
—
31,182
31,182
(407)
$
440
—
33
$
31,215
(3,933)
(5,210)
(3,029)
—
(12,172)
19,043
$
—
(758)
(758)
(4,424) $
—
—
151
151
(4,273) $
—
—
—
(207)
(207)
(4,480) $
(3,666)
30,405
777
(758)
30,424
26,758
(407)
440
151
184
26,942
(3,933)
(5,210)
(3,029)
(207)
(12,379)
14,563
The following table summarizes the reclassifications out of accumulated other comprehensive income (loss) (in thousands):
Amounts Reclassified From Accumulated Other
Comprehensive Income (Loss)
December 31,
2018
December 31,
2017
December 31,
2016
Affected Line Item
in the Consolidated
Statements of Operations
Amounts reclassified from Accumulated other
comprehensive (loss) before income tax .................... $
Income tax (benefit)....................................................
Amounts reclassified from Accumulated other
comprehensive (loss), net of tax ................................. $
(6,780) $
1,570
$
611
(171)
1,200
(423)
Interest and debt
expense
Income tax expense
(5,210) $
440
$
777 Net income
Note 10—Non-Controlling Interests
The members of Triton Container Investments LLC, (“TCI”) have made varying capital contributions with respect to
investments in eleven different groups of containers, each referred to as a “Tranche”. Pursuant to the terms of TCI’s limited liability
company operating agreement (the “Operating Agreement”), TCI’s assets, liabilities and results of operations are allocated by
Tranche to those members who invested in each Tranche.
As further provided in the Operating Agreement, TCI allocates all profits and losses, and may make periodic distributions,
to its members. Such distributions were subject to restrictions contained in its various debt agreements.
The Operating Agreement provides for the TCI investors to initially receive:
•
90% of container disposition proceeds cash flows up to a certain targeted amount, by Tranche, after which the TCI
investors’ sharing in additional disposition proceeds cash flows declines pursuant to a schedule to 50%; and
F-28
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•
10% of all non-disposition proceeds cash flows up to a certain targeted amount, by Tranche, after which the TCI investors’
sharing in additional non-disposition proceeds cash flows increases pursuant to a schedule to 50%.
All remaining disposition and non-disposition proceeds cash flows are for the account of TCIL.
Because the terms of the Operating Agreement reflect a profit sharing arrangement in which the investors’ economic rights
differ from their legal ownership interests, the non-controlling interests in TCI’s earnings are based on the terms of the contractual
arrangement. Income is allocated to non-controlling interests consistent with the allocation of operating cash flows and disposition
proceeds over the Tranche lives.
TCIL, a wholly owned subsidiary of the Company, contributed more than 50% of TCI’s consolidated members’ capital and
controls TCI’s operations as its manager and therefore, TCI is consolidated into the Company. While TCIL, as manager, is limited
by the Operating Agreement and cannot take certain actions that are inconsistent with the purpose of TCI, the TCI investors do
not have the substantive ability to dissolve TCI or otherwise remove TCIL as manager without cause and do not have substantive
participating rights.
Non-controlling interests included in the Company’s consolidated financial statements are comprised of (i) the amount of the
initial investment made by the TCI investors, plus or minus (ii) the profits and/or losses allocated to the TCI investors pursuant to
the terms of the Operating Agreement, plus or minus (iii) additional cash contributions made by and/or cash distributions received
by the TCI investors. The income allocated to the TCI investors is determined based on a formula contained in the Operating
Agreement and amounts allocated to non-controlling interests will vary based on the operating performance of the containers and
the sale proceeds from the containers once the containers are retired from the fleet. Consolidated income tax expense is calculated
based upon income attributable to the Company and, accordingly excludes income tax on the income attributable to the TCI
investors, which is the responsibility of the owners of such interests. The Company held membership interests in TCI representing
56.0% and 55.6% of TCI’s total members’ capital as of December 31, 2018 and 2017, respectively.
Note 11—Segment and Geographic Information
Segment Information
The Company operates its business in one industry, intermodal transportation equipment, and has two operating segments
which also represent its reporting segments:
• Equipment leasing - the Company owns, leases and ultimately disposes of containers and chassis from its lease fleet.
• Equipment trading - the Company purchases containers from shipping line customers, and other sellers of containers,
and resells these containers to container retailers and users of containers for storage or one-way shipment. Included in
the equipment trading segment revenues are leasing revenues from equipment purchased for resale that is currently on
lease until the containers are dropped off.
These operating segments were determined based on the chief operating decision maker's review and resource allocation of
the products and services offered.
The following tables summarizes our segment information and the consolidated totals reported (in thousands):
As of and for the Year Ended December 31, 2018
Equipment Leasing
Equipment Trading
Totals
Total leasing revenues ................................................................................. $
1,346,031
$
4,272
$
1,350,303
Trading margin ............................................................................................
Net gain on sale of leasing equipment ........................................................
Depreciation and amortization expense ......................................................
Interest and debt expense ............................................................................
Realized (gain) loss on derivative instruments, net.....................................
Income (loss) before income taxes(1).........................................................
Equipment held for sale...............................................................................
Goodwill......................................................................................................
—
35,377
544,167
321,290
(2,066)
416,270
46,968
220,864
Total assets ..................................................................................................
Purchases of leasing equipment and investments in finance leases(2) .........
10,224,421
1,603,507
F-29
18,921
—
971
1,441
(6)
17,563
19,485
15,801
45,592
—
18,921
35,377
545,138
322,731
(2,072)
433,833
66,453
236,665
10,270,013
1,603,507
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of and for the Year Ended December 31, 2017
Equipment Leasing
Equipment Trading
Totals
Total leasing revenues ................................................................................. $
1,160,196
$
3,321
$
1,163,517
Trading margin ............................................................................................
Net gain on sale of leasing equipment ........................................................
Depreciation and amortization expense ......................................................
Interest and debt expense ............................................................................
Realized (gain) loss on derivative instruments, net.....................................
Income (loss) before income taxes(1).........................................................
Equipment held for sale...............................................................................
Goodwill......................................................................................................
Total assets ..................................................................................................
Purchases of leasing equipment and investments in finance leases(2) .........
—
35,812
500,099
280,909
900
262,574
31,534
220,864
9,534,330
1,562,863
4,184
—
621
1,438
—
3,254
11,661
15,801
43,295
—
4,184
35,812
500,720
282,347
900
265,828
43,195
236,665
9,577,625
1,562,863
As of and for the Year Ended December 31, 2016(3)
Equipment Leasing
Equipment Trading
Totals
Total leasing revenues ................................................................................. $
827,111
$
1,583
$
Trading margin ............................................................................................
Net gain on sale of leasing equipment ........................................................
Depreciation and amortization expense ......................................................
Interest and debt expense ............................................................................
Realized (gain) loss on derivative instruments, net.....................................
Income (loss) before income taxes(1).........................................................
Equipment held for sale...............................................................................
Goodwill......................................................................................................
Total assets ..................................................................................................
Purchases of leasing equipment and investments in finance leases(2) .........
—
(20,347)
392,250
183,377
3,438
(6,302)
81,804
220,864
8,660,786
629,176
618
—
342
637
—
(3,795)
18,059
15,801
52,785
156
828,694
618
(20,347)
392,592
184,014
3,438
(10,097)
99,863
236,665
8,713,571
629,332
(1) Segment income (loss) before income taxes excludes unrealized loss on interest rate swaps of $0.4 million for the years ended December 31, 2018, and unrealized gain of $1.4
million and $4.4 million, for the years ended December 31, 2017 and 2016, respectively, and debt termination expense of $6.1 million, $7.0 million, and $0.1 million for the years
ended December 31, 2018, 2017, and 2016, respectively.
(2) Represents cash disbursements for purchases of leasing equipment and investments in finance lease as reflected in the consolidated statements of cash flows for the periods indicated,
but excludes cash flows associated with the purchase of equipment held for resale.
(3) Prior to the Merger, all income and assets were attributed to the Equipment leasing segment.
There are no intercompany revenues or expenses between segments; certain administrative expenses are allocated between
segments based on an estimate of services provided. A portion of the Company's equipment purchased for resale was purchased
through certain sale-leaseback transactions with its shipping line customers. Due to the expected longer term nature of these
transactions, these purchases are reflected as leasing equipment as opposed to equipment held for sale and the cash flows associated
with these transactions are reflected as purchases of leasing equipment and proceeds from the sale of equipment in investing
activities in the Company's consolidated statements of cash flows.
Geographic Segment Information
The Company generates the majority of its leasing revenues from international containers which are deployed by its customers
in a wide variety of global trade routes. The majority of the Company's leasing related revenue is denominated in U.S. dollars.
F-30
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the geographic allocation of equipment leasing revenues for the years ended December 31,
2018, 2017, and 2016 based on customers' primary domicile (in thousands):
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Total equipment leasing revenues:
Asia...................................................................................................................................... $
553,928
$
491,996
$
Europe .................................................................................................................................
Americas..............................................................................................................................
Bermuda ..............................................................................................................................
Other International ..............................................................................................................
630,031
124,885
2,988
38,471
518,598
111,558
1,745
39,620
Total .................................................................................................................................. $
1,350,303
$
1,163,517
$
397,500
334,118
58,945
464
37,667
828,694
Since the majority of the Company's containers are used internationally, where no one container is domiciled in one particular
place for a prolonged period of time, all of the Company's long-lived assets are considered to be international.
The following table represents the geographic allocation of equipment trading revenues for the years ended December 31, 2018,
2017 and 2016 based on the location of the sale (in thousands):
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016(1)
Total equipment trading revenues:
Asia........................................................................................................................................ $
18,536
$
17,342
$
Europe....................................................................................................................................
Americas................................................................................................................................
Bermuda ................................................................................................................................
Other International.................................................................................................................
21,211
34,167
—
9,125
8,383
7,747
22
3,925
Total .................................................................................................................................... $
83,039
$
37,419
$
7,410
4,439
3,082
—
1,487
16,418
(1) Prior to the Merger on July 12, 2016, the Company had no equipment trading revenues.
Note 12—Income Taxes
The Company is a Bermuda exempted company. Bermuda does not impose a corporate income tax. The Company is subject
to taxation in certain foreign jurisdictions on a portion of its income attributable to such jurisdictions. The two main subsidiaries
of Triton are TCIL and TAL. TCIL is a Bermuda exempted company and therefore no income tax is imposed. However, a portion
of TCIL’s income is subject to taxation in the U.S. and certain other foreign jurisdictions. TAL is a U.S. company and therefore is
subject to taxation in the U.S.
Effects of the Tax Cuts and Jobs Act
U.S. income tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted on December
22, 2017. Though certain key aspects of the law were recognized in accordance with ASC 740, Accounting for Income Taxes in
2017, other significant provisions were not effective and did not result in accounting effects for the Company until 2018.
The significant provisions that became effective and materially impacted the Company’s income taxes in 2018 include: an
incremental tax (base erosion anti-abuse tax or BEAT) on excessive amounts paid to foreign related parties and limitations on the
deductibility of named executive officer’s compensation. The impact on these provisions is recorded in the financial statements
in 2018, consistent with the general principles of measurement and recognition of income taxes in accordance with ASC 740,
Accounting for Income Taxes.
F-31
—
(80)
841
761
—
(709)
(100)
(809)
(48)
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the total income taxes for the periods indicated (in thousands):
December 31,
2018
December 31,
2017
December 31,
2016
Current taxes:
Bermuda.............................................................................................................. $
U.S. .....................................................................................................................
Foreign................................................................................................................
— $
— $
3,164
1,072
$
4,236
$
36
839
875
$
Deferred taxes:
Bermuda.............................................................................................................. $
U.S. .....................................................................................................................
Foreign................................................................................................................
— $
— $
67,136
(731)
66,405
(94,079)
(70)
(94,149)
(93,274) $
Total income taxes................................................................................................. $
70,641
$
The components of income (loss) before income taxes for the periods indicated below were as follows (in thousands):
Bermuda sources................................................................................................. $
U.S. sources ........................................................................................................
Foreign sources...................................................................................................
Income (loss) before income taxes........................................................................ $
December 31,
2018
128,905
288,386
10,022
427,313
December 31,
2017
134,849
125,799
(396)
260,252
$
$
December 31,
2016
$
$
765
(7,451)
853
(5,833)
The difference between the Bermuda statutory income tax rate and the effective tax rate on the consolidated statements of
operations for the periods indicated below were as follows:
Bermuda tax rate ...................................................................................................
Change in enacted tax act......................................................................................
U.S. income taxed at other than the statutory rate ................................................
Effect of uncertain tax positions ...........................................................................
Foreign income taxed at other than the statutory rate ...........................................
Effect of permanent differences ............................................................................
Other discrete items ..............................................................................................
Effective income tax rate ......................................................................................
December 31,
2018
December 31,
2017
December 31,
2016
—%
1.02%
14.67%
0.07%
0.18%
0.28%
0.31%
16.53%
— %
(53.55)%
17.10 %
0.21 %
0.10 %
0.04 %
0.26 %
(35.84)%
— %
— %
41.68 %
(10.16)%
(4.15)%
(1.58)%
(24.97)%
0.82 %
F-32
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income tax assets and liabilities are comprised of the following (in thousands):
December 31, 2018
December 31, 2017
Deferred income tax assets:..............................................................................................
Net operating loss carryforwards ................................................................................... $
Passive activity loss carryforwards................................................................................
Allowance for losses ......................................................................................................
Derivative instruments ...................................................................................................
Deferred income.............................................................................................................
Accrued liabilities and other payables ...........................................................................
Total gross deferred tax assets .......................................................................................
Less: Valuation allowance..............................................................................................
Net deferred tax assets ................................................................................................... $
Deferred income tax liabilities: ........................................................................................
Accelerated depreciation................................................................................................ $
Goodwill and other intangible amortization ..................................................................
Derivative instruments ...................................................................................................
Deferred income.............................................................................................................
Deferred partnership income (loss) (TCI)......................................................................
Other ..............................................................................................................................
Total gross deferred tax liability ....................................................................................
Net deferred income tax liability ................................................................................... $
60,173
—
98
934
359
3,875
65,439
—
65,439
318,779
2,981
2,306
19,294
967
3,241
347,568
282,129
$
$
$
$
197,089
7
622
1,529
261
631
200,139
—
200,139
382,961
2,141
790
27,347
1,134
1,205
415,578
215,439
The Company has not recorded a valuation allowance for deferred tax assets as of December 31, 2018 and December 31,
2017.
The Merger resulted in an ownership change under the Internal Revenue Code and certain state taxing authorities whereby
federal net operating losses immediately prior to the Merger of $700 million will be subject to certain limitations. The Company
does not expect such limitations to impact the ability to utilize net operating losses prior to their expiration.
In assessing the potential future realization of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. The
Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the
periods during which the deferred tax assets are deductible, the Company believes it is more likely than not that the Company will
realize the benefits of these deductible differences at December 31, 2018.
Certain income taxes on unremitted earnings have not been reflected on the consolidated financial statements because such
earnings are intended to be permanently reinvested in those jurisdictions. Such earnings and related withholding taxes are estimated
to be approximately $60 million and $18 million, respectively, at December 31, 2018.
Net operating loss carryforwards for foreign income tax purposes of $280.1 million are available to offset future U.S. taxable
income from 2019 through 2037.
The Company files income tax returns in several jurisdictions including the U.S. and certain U.S. states.
F-33
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes unrecognized tax benefit amounts as follows (in thousands):
Beginning balance at January 1 ..................................................................................... $
Increase related to current year’s tax position ...............................................................
Lapse of statute of limitations........................................................................................
Foreign exchange adjustment ........................................................................................
Ending balance at December 31 .................................................................................... $
December 31, 2018
8,250
1,652
(1,367)
55
8,590
December 31, 2017
7,777
$
1,315
(898)
56
8,250
$
All unrecognized tax benefits as of December 31, 2018 will impact income tax expense when recognized, however, $7.2
million of the unrecognized tax benefit is expected to have no net impact on after-tax income as a result of offsetting reimbursements
from third parties. It is reasonably possible that the total amount of unrecognized tax benefit as of December 31, 2018 will decrease
by $1.4 million within the next twelve months due to statute of limitations lapses. This reduction will impact income tax expense
when recognized. The 2015, 2016, 2017, and 2018 tax years remain subject to examination by major tax jurisdictions.
The following table summarizes interest and penalty expense as follows (in thousands):
Interest expense (benefit) ...................................................................................... $
Penalty expense (benefit) ...................................................................................... $
98
$
(158) $
144
$
(64) $
121
(29)
December 31,
2018
December 31,
2017
December 31,
2016
The following table summarizes the components of income taxes payable included in accounts payable and other accrued
expenses on the consolidated balance sheets were as follows (in thousands):
Corporate income taxes payable..................................................................................... $
Unrecognized tax benefits ..............................................................................................
Interest accrued...............................................................................................................
Penalties..........................................................................................................................
Income taxes payable ................................................................................................... $
December 31, 2018
906
8,590
922
402
10,820
December 31, 2017
56
$
8,250
824
561
9,691
$
Note 13—Other Postemployment Benefits
The Company’s U.S. employees participate in a defined contribution plan. Under the provisions of the plan, an employee is
fully vested with respect to Company contributions after four years of service. The Company matches employee contributions of
100% up to a maximum of $6,000 of qualified compensation and may, at its discretion, make voluntary contributions. The Company's
contributions were $0.7 million, $1.0 million, and $0.7 million for each of the years ended December 31, 2018, 2017, and 2016,
respectively.
Note 14—Rental Income Under Operating Leases
The following is the minimum future rental income as of December 31, 2018 under non-cancelable operating leases, assuming
the minimum contractual lease term (in thousands):
Years ending December 31,
2019.................................................................................................................................................................. $
2020..................................................................................................................................................................
2021..................................................................................................................................................................
2022..................................................................................................................................................................
2023..................................................................................................................................................................
2024 and thereafter...........................................................................................................................................
Total.................................................................................................................................................................. $
823,641
697,766
589,542
478,160
328,216
594,529
3,511,854
F-34
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15—Commitments and Contingencies
Lease Commitments
The Company has cancelable and non-cancelable operating lease agreements principally for facilities and for office equipment
used in the Company’s operations. Total operating lease rental expense included in administrative expenses on the consolidated
statements of operations was $2.9 million, $2.4 million, and $2.3 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
Future minimum rental commitments under non-cancelable operating leases having an original term of more than one year
as of December 31, 2018 were as follows (in thousands):
Years ending December 31,
2019.................................................................................................................................................................. $
2020..................................................................................................................................................................
2021..................................................................................................................................................................
2022..................................................................................................................................................................
2023..................................................................................................................................................................
2024 and thereafter...........................................................................................................................................
Total.................................................................................................................................................................. $
3,234
2,933
2,409
2,041
1,298
—
11,915
Container Equipment Purchase Commitments
As of December 31, 2018, the Company had commitments to purchase equipment in the amount of $28.2 million payable in
2019.
Contingencies
The Company is party to various pending or threatened legal or regulatory proceedings arising in the ordinary course of its
business. Based upon information presently available, the Company does not expect any liabilities arising from these matters to
have a material effect on the consolidated financial position, results of operations or cash flows of the Company.
Employment Agreements and Indemnification Agreements
The Company has entered into employment arrangements and indemnification agreements with certain executive officers and
with certain employees. The agreements specify various employment-related matters, including annual compensation, performance
incentive bonuses, and severance benefits in the event of termination with or without cause.
Retention Bonus Plan
TCIL established a bonus plan in 2011 to award bonuses to certain employees for continued service (the “Retention Bonus
Plan”) and in 2015, established an incremental retention bonus plan (the “Plan”) to award bonuses to certain employees for continued
service who were not included in the Retention Bonus Plan. In accordance with the terms of the Retention Bonus Plan agreement,
specified bonus amounts, plus interest compounded annually, were paid to all participants on the earlier of their termination date
or June 2017.
TAL established a bonus plan in 2015 to award bonuses to certain TAL employees for continued service (the “TAL Retention
Bonus Plan”). In accordance with the terms of the TAL Retention Bonus Plan agreement, the specified bonus amounts were paid
to all participants on the earlier of their termination date or July 2017.
F-35
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Severance Plan
The Company established severance plans in order to provide severance benefits to eligible employees who are involuntarily
terminated for reasons other than cause, or who resign for “good reason”. Employees eligible for benefits under the severance
plans would receive a severance award and other benefits based upon their tenure. The following table summarizes changes to the
Company's total severance balance (in thousands):
Balance at December 31, 2016 .................................................................................................................. $
Accrual ....................................................................................................................................................
Payments..................................................................................................................................................
Balance at December 31, 2017 ..................................................................................................................
Accrual ....................................................................................................................................................
Payments..................................................................................................................................................
Balance at December 31, 2018 .................................................................................................................. $
Total
20,718
6,023
(17,064)
9,677
—
(8,462)
1,215
Note 16—Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain key interim financial information for the years ended December 31, 2018 and 2017:
(In thousands, except per share amounts)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
Total leasing revenues.................................................................................. $ 315,097
2,991
Trading margin............................................................................................. $
9,218
Net gain on sale of leasing equipment ......................................................... $
80,892
Net income attributable to shareholders ...................................................... $
1.01
Net income per basic common share ........................................................... $
1.00
Net income per diluted common share ........................................................ $
2017
Total leasing revenues.................................................................................. $ 265,602
392
Trading margin............................................................................................. $
5,161
Net gain on sale of leasing equipment ......................................................... $
34,611
Net income attributable to shareholders ...................................................... $
0.47
Net income per basic common share ........................................................... $
0.47
Net income per diluted common share ........................................................ $
$ 329,771
3,994
$
$
11,105
$ 104,870
1.31
$
1.30
$
$ 281,939
1,328
$
9,639
$
45,671
$
0.62
$
0.62
$
$ 350,078
5,810
$
7,055
$
94,236
$
1.18
$
1.17
$
$ 302,120
1,369
$
10,263
$
57,156
$
0.76
$
0.75
$
$ 355,357
6,126
$
7,999
$
69,557
$
0.88
$
0.87
$
$ 313,856
$
1,095
10,749
$
$ 207,160
2.59
$
2.57
$
Note 17—Related Party Transactions
The Company has a 50% interest in TriStar Container Services (Asia) Private Limited (“TriStar”), which is primarily engaged
in the selling and leasing of container equipment in the domestic and short sea markets in India. The Company's investment in
TriStar is included in other assets on the consolidated balance sheet and accounted for using the equity method. The following
table summarizes payments, direct finance lease, and loan payable balances with TriStar (in thousands):
Payments received from TriStar on direct finance leases............................................... $
Payments received from TriStar on loan payable ........................................................... $
Direct finance lease balance ........................................................................................... $
Loan payable balance ..................................................................................................... $
1,848
$
— $
10,710
$
— $
1,897
128
10,648
—
December 31, 2018
December 31, 2017
F-36
TRITON INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Subsequent Events
On February 8, 2019, the Company increased its borrowing capacity under one of its ABS warehouse facilities by $300.0
million to a maximum borrowing capacity of $800.0 million. No other terms were changed in the agreement.
On February 12, 2019, the Company's Board of Directors approved and declared a $0.52 per share quarterly cash dividend
on its issued and outstanding common shares, payable on March 28, 2019 to shareholders of record at the close of business on
March 12, 2019.
F-37
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRITON INTERNATIONAL LIMITED
Parent Company Condensed Balance Sheets
(In thousands, except share data)
ASSETS:
Cash and cash equivalents ........................................................................................................... $
Investment in subsidiaries ...........................................................................................................
Other assets..................................................................................................................................
Total assets ............................................................................................................................... $
2
$
—
2,250,159
10
2,250,171
$
2,078,936
—
2,078,936
December 31,
2018
December 31,
2017
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and other accrued expenses............................................................................
Intercompany payable .................................................................................................................
Intercompany loan .......................................................................................................................
Total liabilities .........................................................................................................................
Shareholders' equity
Common shares, $0.01 par value, 270,000,000 and 294,000,000 shares authorized,
80,843,472 and 80,687,757 shares issued, respectively ..............................................................
Undesignated shares, $0.01 par value, 30,000,000 and 6,000,000 shares authorized, no shares
issued and outstanding.................................................................................................................
Treasury shares, at cost, 1,853,148 shares and no shares, respectively.......................................
Additional paid-in capital ............................................................................................................
Accumulated earnings .................................................................................................................
Accumulated other comprehensive income.................................................................................
Total shareholders' equity ......................................................................................................
5,988
487
40,000
46,475
809
—
(58,114)
896,811
1,349,627
14,563
2,652
—
—
2,652
807
—
—
889,168
1,159,367
26,942
2,203,696
2,076,284
Total liabilities and shareholders' equity............................................................................ $
2,250,171
$
2,078,936
S-1
TRITON INTERNATIONAL LIMITED
Parent Company Condensed Statements of Operations
(In thousands)
Year Ended December 31,
2018
2017
2016
Revenues:
Revenues............................................................................................................ $
Total revenues ................................................................................................
— $
—
— $
—
—
—
Operating expenses:
Administrative expenses ......................................................................................
Transaction and other costs (income) ..................................................................
Operating income (loss)................................................................................
Other expenses:
Interest and debt expense .....................................................................................
Net income (losses) from subsidiaries .................................................................
Total other income (expenses)....................................................................
Income (loss) before income taxes ......................................................................
Income tax expense (benefit) ...............................................................................
Net income (loss) ................................................................................................ $
5,343
—
(5,343)
57
354,955
354,898
349,555
—
4,011
—
(4,011)
—
348,609
348,609
344,598
—
349,555
$
344,598
$
276
10,706
(10,982)
—
(2,535)
(2,535)
(13,517)
—
(13,517)
S-2
TRITON INTERNATIONAL LIMITED
Parent Company Condensed Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss).................................................................................... $
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Net (income) loss from subsidiaries.....................................................
Dividends received from subsidiaries ..................................................
Share-based compensation expense .....................................................
Other.....................................................................................................
Net cash provided by (used in) operating activities .................
Cash flows from investing activities:
Investment in subsidiary.......................................................................
Net cash provided by (used in) investing activities ..................
Cash flows from financing activities:
Issuance of common shares, net of underwriter expenses......................
Purchases of treasury shares ...................................................................
Intercompany loan ..................................................................................
Dividends paid ........................................................................................
Net cash provided by (used in) financing activities..................
Net increase (decrease) in cash and cash equivalents........................ $
Cash, cash equivalents and restricted cash, beginning of period............
Cash, cash equivalents and restricted cash, end of period................ $
Year Ended December 31,
2018
2017
2016
349,555
$
344,598
$
(13,517)
(354,955)
220,304
1,252
409
216,565
(40,000)
(40,000)
—
(56,274)
40,000
(160,289)
(176,563)
2
—
2
(348,609)
197,171
1,084
2,622
196,866
(254,240)
(254,240)
192,931
—
—
(135,557)
57,374
$
$
— $
—
— $
2,535
77,376
—
—
66,394
—
—
—
—
—
(66,394)
(66,394)
—
—
—
S-3
SCHEDULE II
TRITON INTERNATIONAL LIMITED
Valuation and Qualifying Accounts
Years ended December 31, 2018, 2017, and 2016
(In thousands)
Finance Lease-Allowance for doubtful accounts:
Beginning Balance ............................................................................................................ $
Additions / (Reversals)......................................................................................................
(Write-offs) / Reversals .....................................................................................................
Ending Balance ................................................................................................................. $
For the year ended December 31,
2017
2018
2016
— $
—
—
— $
$
527
(527)
—
— $
526
1
—
527
Accounts Receivable-Allowance for doubtful accounts:
Beginning Balance ............................................................................................................ $
Additions / (Reversals)......................................................................................................
(Write-offs) / Reversals .....................................................................................................
Ending Balance ................................................................................................................. $
3,002
(568)
(1,194)
1,240
$
$
28,082
581
(25,661)
3,002
$
$
8,297
19,811
(26)
28,082
S-4