10-Q 1 triton10-qx2019331.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2019
Or
o
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)
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 ý    No o
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 ý    No o
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 ý
 
 
 
Accelerated Filer o
 
 
Non-accelerated filer o
 
 
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company o
 
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o    No ý
As of April 22, 2019, there were 75,852,515 common shares at $0.01 par value of the registrant outstanding.
 



Triton International Limited
Index
 
 
Page No.
 
 
 
 
 
 


2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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.
Forward-looking statements in this report are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those described in the forward-looking statements, including, but not limited to, the risks and uncertainties described in the section entitled "Risk Factors" in our Annual Report on Form 10-K, filed with the SEC on February 19, 2019 (the "Form 10-K"), in this Report on Form 10-Q and in any other Form 10-Q filed or to be filed by us, as well as in the other documents we file with the SEC from time to time, and such risks and uncertainties are specifically incorporated herein by reference.
Forward-looking statements speak only as of the date the statements are made. Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. We caution you not to unduly rely on the forward-looking statements when evaluating the information presented in this report.

3





ITEM 1.    FINANCIAL STATEMENTS
TRITON INTERNATIONAL LIMITED
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
ASSETS:
 
 
 
Leasing equipment, net of accumulated depreciation of $2,634,305 and $2,533,446
$
8,796,491

 
$
8,923,451

Net investment in finance leases
465,480

 
478,065

Equipment held for sale
86,211

 
66,453

Revenue earning assets
9,348,182

 
9,467,969

Cash and cash equivalents
60,768

 
48,950

Restricted cash
116,551

 
110,589

Accounts receivable, net of allowances of $1,097 and $1,240
222,567

 
264,382

Goodwill
236,665

 
236,665

Lease intangibles, net of accumulated amortization of $216,340 and $205,532
82,117

 
92,925

Other assets
38,692

 
34,610

Fair value of derivative instruments
4,580

 
13,923

Total assets
$
10,110,122

 
$
10,270,013

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
Equipment purchases payable
$
38,463

 
$
22,392

Fair value of derivative instruments
19,487

 
10,966

Accounts payable and other accrued expenses
112,357

 
99,885

Net deferred income tax liability
286,495

 
282,129

Debt, net of unamortized debt costs of $43,684 and $44,889
7,364,725

 
7,529,432

Total liabilities
7,821,527

 
7,944,804

Shareholders' equity:
 
 
 
Preferred shares, $0.01 par value, 3,450,000 authorized, 3,450,000 and no shares issued and outstanding, respectively; at liquidation preference
86,250

 

Common shares, $0.01 par value, 270,000,000 shares authorized, 80,982,197 and 80,843,472 shares issued, respectively
811

 
809

Undesignated shares, $0.01 par value, 26,550,000 and 30,000,000 shares authorized, respectively, no shares issued and outstanding

 

Treasury shares, at cost, 4,489,682 and 1,853,148 shares, respectively
(141,407
)
 
(58,114
)
Additional paid-in capital
906,164

 
896,811

Accumulated earnings
1,400,491

 
1,349,627

Accumulated other comprehensive income (loss)
(1,034
)
 
14,563

Total shareholders' equity
2,251,275

 
2,203,696

Noncontrolling interests
37,320

 
121,513

Total equity
2,288,595

 
2,325,209

Total liabilities and equity
$
10,110,122

 
$
10,270,013

   

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these statements.

4




TRITON INTERNATIONAL LIMITED
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended 
March 31,
 
2019
 
2018
Leasing revenues:
 
 
 
Operating leases
$
330,422

 
$
310,231

Finance leases
10,437

 
4,866

Total leasing revenues
340,859

 
315,097

 
 
 
 
Equipment trading revenues
17,828

 
13,375

Equipment trading expenses
(14,241
)
 
(10,384
)
Trading margin
3,587

 
2,991

 
 
 
 
Net gain on sale of leasing equipment
8,469

 
9,218

 
 
 
 
Operating expenses:
 
 
 
Depreciation and amortization
134,609

 
130,433

Direct operating expenses
16,802

 
11,048

Administrative expenses
18,187

 
19,582

Transaction and other (income) costs

 
(29
)
Provision (reversal) for doubtful accounts
(142
)
 
(101
)
Total operating expenses
169,456

 
160,933

Operating income (loss)
183,459

 
166,373

Other expenses:
 
 
 
Interest and debt expense
83,520

 
75,098

Realized (gain) loss on derivative instruments, net
(704
)
 
(248
)
Unrealized (gain) loss on derivative instruments, net
986

 
(1,186
)
Other (income) expense, net
(1,004
)
 
(659
)
Total other expenses
82,798

 
73,005

Income (loss) before income taxes
100,661

 
93,368

Income tax expense (benefit)
7,850

 
10,503

Net income
$
92,811

 
$
82,865

Less: income (loss) attributable to noncontrolling interest
592

 
1,973

Less: dividend on preferred shares
305

 

Net income (loss) attributable to common shareholders
$
91,914

 
$
80,892

Net income per common share—Basic
$
1.18

 
$
1.01

Net income per common share—Diluted
$
1.17

 
$
1.00

Cash dividends paid per common share
$
0.52

 
$
0.45

Weighted average number of common shares outstanding—Basic
77,721

 
79,968

Dilutive restricted shares
549

 
604

Weighted average number of common shares outstanding—Diluted
78,270

 
80,572

   

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these statements.

5




TRITON INTERNATIONAL LIMITED
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
Three Months Ended 
March 31,
 
2019
 
2018
Net income (loss)
$
92,811

 
$
82,865

Other comprehensive income (loss):
 
 
 
Change in derivative instruments designated as cash flow hedges, net of income tax effect of ($2,144) and $3,354
(14,323
)
 
12,459

Reclassification of (gain) loss on derivative instruments designated as cash flow hedges, net of income tax effect of ($606) and ($352)
(1,749
)
 
(1,472
)
Cumulative effect for the adoption of ASU 2017-12, net of income tax effect of $277 and $0, respectively
432

 

Foreign currency translation adjustment
43

 
92

Other comprehensive income (loss), net of tax
(15,597
)
 
11,079

Comprehensive income
77,214

 
93,944

Less:
 
 
 
Other comprehensive income attributable to noncontrolling interest
592

 
1,973

Dividend on preferred shares
305

 

Comprehensive income attributable to common shareholders
$
76,317

 
$
91,971

   


















The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these statements.

6




TRITON INTERNATIONAL LIMITED
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
(Unaudited)
 
Preferred Shares
 
Common Shares
 
Treasury Shares
 
Add'l Paid in Capital
 
Accumulated Earnings
 
Accumulated Other Comprehensive Income
 
Non controlling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance as of December 31, 2017

 
$

 
80,687,757

 
$
807

 

 
$

 
$
889,168

 
$
1,159,367

 
$
26,942

 
$
133,542

 
$
2,209,826

Share-based compensation

 

 
156,833

 
1

 

 

 
2,511

 

 

 

 
2,512

Share repurchase to settle shareholder tax obligations

 

 
(28,838
)
 

 

 

 
(822
)
 

 

 

 
(822
)
Net income (loss)

 

 

 

 

 

 

 
80,892

 

 
1,973

 
82,865

Foreign currency translation adjustment

 

 

 

 

 

 

 

 
92

 

 
92

Change in derivative instruments designated as cash flow hedges, net of income tax effect of $3,354

 

 

 

 

 

 

 

 
12,459

 

 
12,459

Reclassification of realized loss on derivative instruments designated as cash flow hedges, net of income tax effect of ($352)

 

 

 

 

 

 

 

 
(1,472
)
 

 
(1,472
)
Tax reclassification - ASU 2018-02

 

 

 

 

 

 

 
3,029

 
(3,029
)
 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 
(4,251
)
 
(4,251
)
Common shares dividend declared

 

 

 

 

 

 

 
(36,440
)
 

 

 
(36,440
)
Balance as of March 31, 2018

 
$

 
80,815,752

 
$
808

 

 
$

 
$
890,857

 
$
1,206,848

 
$
34,992

 
$
131,264

 
$
2,264,769

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Issuance of preferred shares, net of offering expenses
3,450,000

 
86,250

 

 

 

 

 
(3,192
)
 

 

 

 
83,058

Share-based compensation

 

 
170,231

 
2

 

 

 
1,816

 

 

 

 
1,818

Treasury shares acquired

 

 

 

 
2,636,534

 
(83,293
)
 

 

 

 

 
(83,293
)
Share repurchase to settle shareholder tax obligations

 

 
(31,506
)
 

 

 

 
(978
)
 

 

 

 
(978
)
Net income (loss)

 

 

 

 

 

 

 
92,219

 

 
592

 
92,811

Foreign currency translation adjustment

 

 

 

 

 

 

 

 
43

 

 
43

Cumulative effect for the adoption of ASU 2017-12, net of income tax effect of $277

 

 

 

 

 

 

 
(432
)
 
432

 

 

Change in derivative instruments designated as cash flow hedges, net of income tax effect of ($2,144)

 

 

 

 

 

 

 

 
(14,323
)
 

 
(14,323
)
Reclassification of realized (gain) on derivative instruments designated as cash flow hedges, net of income tax effect of ($606)

 

 

 

 

 

 

 

 
(1,749
)
 

 
(1,749
)
Purchase of noncontrolling interest

 

 

 

 

 

 
11,707

 

 

 
(82,707
)
 
(71,000
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 
(2,078
)
 
(2,078
)
Common shares dividend declared

 

 

 

 

 

 

 
(40,923
)
 

 

 
(40,923
)
Balance as of March 31, 2019
3,450,000

 
$
86,250

 
80,982,197

 
$
811

 
4,489,682

 
$
(141,407
)
 
$
906,164

 
$
1,400,491

 
$
(1,034
)
 
$
37,320

 
$
2,288,595
















The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these statements.

7




TRITON INTERNATIONAL LIMITED
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Three months ended 
March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
92,811

 
$
82,865

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
134,609

 
130,433

Amortization of deferred debt cost and other debt related amortization
3,601

 
3,113

Lease related amortization
12,254

 
20,009

Share-based compensation expense
1,818

 
2,512

Net (gain) loss on sale of leasing equipment
(8,469
)
 
(9,218
)
Unrealized (gain) loss on derivative instruments
986

 
(1,186
)
Deferred income taxes
7,116

 
9,301

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
41,421

 
(1,071
)
Accounts payable and other accrued expenses
3,019

 
844

Net equipment sold for resale activity
(8,803
)
 
(5,185
)
Cash collections on finance lease receivables, net of income earned
17,125

 
14,771

Other assets
(1,757
)
 
(953
)
Net cash provided by (used in) operating activities
295,731

 
246,235

Cash flows from investing activities:
 
 
 
Purchases of leasing equipment and investments in finance leases
(43,981
)
 
(258,668
)
Proceeds from sale of equipment, net of selling costs
49,947

 
38,885

Other
26

 
55

Net cash provided by (used in) investing activities
5,992

 
(219,728
)
Cash flows from financing activities:
 
 
 
Issuance of preferred shares, net of underwriting discount and expenses
83,058

 

Purchases of treasury shares
(82,266
)
 

Redemption of common shares
(978
)
 
(822
)
Debt issuance costs
(1,962
)
 
(4,976
)
Borrowings under debt facilities
125,000

 
510,210

Payments under debt facilities and capital lease obligations
(293,290
)
 
(469,841
)
Dividends paid
(40,427
)
 
(36,008
)
Distributions to noncontrolling interests
(2,078
)
 
(4,249
)
Purchase of noncontrolling interest
(71,000
)
 

Net cash provided by (used in) financing activities
(283,943
)
 
(5,686
)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
17,780

 
$
20,821

Cash, cash equivalents and restricted cash, beginning of period
159,539

 
226,171

Cash, cash equivalents and restricted cash, end of period
$
177,319

 
$
246,992

Supplemental disclosures:
 
 
 
Interest paid
$
66,106

 
$
56,571

Income taxes paid (refunded)
$
155

 
$
244

Right-of-use asset for leased property
$
8,289

 
$

Supplemental non-cash investing activities:
 
 
 
Equipment purchases payable
$
38,463

 
$
125,978

   



The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these statements.

8


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Note 1—Description of the Business and Significant Accounting Policies

Description of the Business

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 the Company'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 equipment leasing fleet as well as containers specifically acquired for resale from third parties. The Company's registered office is located in Bermuda.

Basis of Presentation

The unaudited consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all information and footnotes required by GAAP for complete financial statements.

The interim consolidated balance sheet as of March 31, 2019 and the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of shareholders' equity, and the consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 are unaudited. The consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP. The unaudited interim financial statements have been prepared on a basis consistent with the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to state fairly the Company’s financial position, results of operations, comprehensive income, equity, and cash flows for the periods presented. The financial data and the other financial information disclosed in the notes to the financial statements related to these periods are also unaudited. The consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2019 or for any other future annual or interim period.

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K which was filed with the SEC on February 19, 2019. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain changes in presentation have been made to conform the prior period presentation to current period reporting.
 
Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, 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, goodwill and intangible assets. Actual results could differ from those estimates.

Concentration of Credit Risk

The Company's equipment leases 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 two largest customers CMA CGM S.A. and Mediterranean Shipping Company S.A., accounted for 21% and 14%, respectively, of the Company's lease billings during the three months ended March 31, 2019.





9


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Accounting Policy Updates

The Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) on January 1, 2019. The Company evaluates whether leases are classified as operating or capital in nature based on certain assumptions that require judgment, such as the asset's fair value, the asset's estimated residual value, the interest rate implicit in the lease, and the asset's economic useful life.

For operating leases, the Company records a lease liability based on the present value of the remaining minimum rental payments and corresponding Right-of-Use ("ROU") asset. The Company uses its estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. Lease incentives are recognized for periods of reduced rent or for larger than usual rent escalations over the term of the lease. The benefit of a rent-free period and the cost of future rent escalations are recognized on a straight-line basis over the term of the lease. The Company elected 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.

Capital leases are classified as revenue earning assets and the related depreciation is recorded on the assets. Debt related to capital leases is included in the Company’s debt obligations.

New Accounting Pronouncements

Recently Adopted Accounting Standards Updates

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequently issued amendments that replaced existing lease accounting guidance. The accounting standard requires lessees to recognize a lease liability and corresponding right-of-use asset on their balance sheets. The accounting that will be applied by lessors under ASC 842 is largely unchanged from previous GAAP. 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 adopted the standard on January 1, 2019, through a cumulative-effect adjustment. Additionally, the Company elected 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 elected the optional transition method and continued to apply the guidance in ASC 840, including its disclosure requirements, in the comparative prior year periods.

At adoption, the Company recognized a lease liability of $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 asset of $8.9 million. The Company assessed the requirements from both a lessee and lessor perspective and concluded the adoption of this standard did not have a significant impact on the consolidated financial statements.  As a result of this adoption, the Company reclassified $14.8 million of cash collections on finance lease receivables, net of income earned, from investing activities to operating activities on its consolidated statement of cash flows for the three months ended March 31, 2018.

Targeted Improvements to Accounting for Hedging Activities.

In August 2017, FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). 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 Company adopted the standard on January 1, 2019, and applied the modified retrospective approach. The Company has evaluated the impact of this ASU and concluded the adoption of this standard did not have a significant impact on the consolidated financial statements.





10


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Recently Issued Accounting Standards Updates

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). 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. 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.

Note 2—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):
 
March 31, 2019
 
December 31, 2018
Liabilities
 
 
 
Total debt - carrying value (1)
$
7,427,632

 
$
7,595,922

Total debt - fair value
$
7,466,058

 
$
7,559,063

                    
(1)
Excludes unamortized debt costs of $43.7 million and $44.9 million, purchase price debt adjustments of $14.3 million and $16.3 million, and unamortized debt discounts of $5.0 million and $5.3 million as of March 31, 2019 and December 31, 2018, 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 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 on sale of leasing equipment through the periods summarized below (in thousands):
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Equipment held for sale - assets at fair value (1)
$
8,429

 
$
5,750

Cumulative impairment charges (2)
$
(2,501
)
 
$
(1,846
)
                    
(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 costs 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.

The Company recognized net impairment charges of $1.4 million and $0.9 million for the three months ended March 31, 2019 and 2018, respectively.



11


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Fair Value of Derivative Instruments

The Company has elected to use the income approach to value its interest rate swap 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 Company presents the gross assets and liabilities of its derivative financial instruments on the consolidated balance sheet. Any amounts of cash collateral received or posted related to derivative instruments are included in Other Assets on the consolidated balance sheet and are presented in operating activities of the consolidated statements of cash flows. As of March 31, 2019, the Company had posted $1.3 million as cash collateral related to interest rate swap contracts.

The fair value of derivative instruments on the Company's consolidated balance sheets as of March 31, 2019 and December 31, 2018 was as follows (in thousands):
 
Asset Derivatives
Liability Derivatives
Derivative Instrument
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Interest rate swap contracts, designated
$
2,173

 
$
10,531

 
$
19,487

 
$
10,966

Interest rate swap contracts, not designated
2,407

 
3,392

 

 

Total derivatives
$
4,580

 
$
13,923

 
$
19,487

 
$
10,966


Fair Value of Other Assets and Liabilities

Cash and cash equivalents, restricted cash, accounts receivable, equipment purchases payable and accounts payable carrying 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 3—Intangible Assets

Intangible assets are comprised of above market lease intangibles and customer intangibles related to the chassis and tank customer lists from a business combination. The following table summarizes the intangible assets amortization as of March 31, 2019 (in thousands):
Years ending December 31,
Above market lease intangibles
 
Customer intangibles (1)
 
Total intangible assets
2019
$
25,960

 
$
404

 
$
26,364

2020
22,491

 

 
22,491

2021
16,549

 

 
16,549

2022
10,497

 

 
10,497

2023
4,657

 

 
4,657

2024 and thereafter
1,963

 

 
1,963

Total
$
82,117

 
$
404

 
$
82,521

                
(1)
Customer intangibles are included in other assets on the consolidated balance sheets.

Note 4—Share-Based Compensation

The Company recognizes share-based compensation expense for share-based payment transactions based on the grant date’s fair value. The expense is recognized over the employee's requisite service period, which is generally the vesting period of the equity award. The Company recognized $1.8 million and $2.5 million of share-based compensation expense in administrative expenses for the three months ended March 31, 2019 and 2018, respectively. Share-based compensation expense includes charges for performance-based shares that are deemed probable to vest.


12


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of March 31, 2019, the total unrecognized compensation expense related to non-vested restricted shares was approximately $12.6 million, which is expected to be recognized through 2021.

During the three months ended March 31, 2019, the Company issued 168,731 time-based and performance-based restricted shares, and canceled 31,506 vested shares to settle payroll taxes on behalf of employees. Additional shares may be accrued and issued based upon the Company's performance measured against selected peers. On February 12, 2019, the Company issued1,500 shares to a non-employee director at a fair value of $33.30 per share that vested immediately.

Note 5—Other Equity Matters

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.

During the three months ended March 31, 2019, the Company repurchased 2,636,534 common shares at an average price per-share of $31.56 for a total of $83.3 million. As of March 31, 2019, the Company purchased $141.4 million of the $200.0 million common share repurchase authorized by the Board in August 2018. 

Preferred Share Offering

In March 2019, the Company completed a public offering of 8.50% Series A Cumulative Redeemable Perpetual Preference Shares ("Series A shares"), selling 3,450,000 shares and generating $86.3 million of gross proceeds. The estimated costs associated with the offering, inclusive of underwriting discount and other offering expenses, were $3.2 million. The Company intends to use the net proceeds from the offering for general corporate purposes, including purchasing containers, repurchasing outstanding common shares, payment of dividends and repaying or repurchasing outstanding indebtedness.

Dividends on the Series A shares are cumulative from the date of original issue and will be payable quarterly in arrears on the 15th day of March, June, September and December of each year, when, as and if declared by the Company's Board of Directors. Dividends will be payable out of amounts legally available at the rate equal to 8.50% per annum of the $25.00 liquidation preference per share, or $2.125 per share per year.

At any time on or after March 15, 2024, the Series A shares may be redeemed at the Company's option, in whole or in part, out of funds legally available at a redemption price of $25.00 per share plus an amount equal to all accumulated and unpaid dividends thereon to, but not including, the date of redemption, whether or not declared. The Company may also redeem the Series A shares in the event of a Change of Control Triggering Event as defined in the Certificate of Designations (the "Certificate of Designations") relating to the Series A shares. In addition, upon the occurrence of a Change of Control Triggering Event, holders of the Series A shares will have the right to convert their Series A shares into common shares in accordance with the Certificate of Designations. Holders of the Series A shares generally have no voting rights, except as provided in the following sentence or as provided by Bermuda law. If the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive), holders will be entitled to elect two additional directors to the Board of Directors and the size of the Board of Directors will be increased to accommodate such election. Such right to elect two directors will continue until such time as there are no accumulated and unpaid dividends in arrears.










13


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Dividends

The Company paid the following quarterly dividends during the three months ended March 31, 2019 and 2018 on its issued and outstanding common shares:
Record Date
Payment Date
 
Aggregate Payment
 
Per Share
Payment
March 12, 2019
March 28, 2019
 
$40.4 Million
 
$0.52
March 12, 2018
March 28, 2018
 
$36.0 Million
 
$0.45

As of March 31, 2019, the Company had cumulative unpaid dividends on its outstanding Series A Preferred Shares of $0.3 million.

Accumulated Other Comprehensive Income

The following table summarizes the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2019 and 2018 (in thousands):
 
Cash Flow
Hedges
 
Foreign
Currency
Translation
 
Accumulated Other Comprehensive (Loss) Income
Balance as of December 31, 2018
$
19,043

 
$
(4,480
)
 
$
14,563

Change in derivative instruments designated as cash flow hedges
(14,323
)
 

 
(14,323
)
Reclassification of (gain) loss on derivative instruments designated as cash flow hedges
(1,749
)
 

 
(1,749
)
Cumulative effect for the adoption of ASU 2017-12
432

 

 
432

Foreign currency translation adjustment

 
43

 
43

Other comprehensive income (loss)
(15,640
)
 
43

 
(15,597
)
Balance as of March 31, 2019
$
3,403

 
$
(4,437
)
 
$
(1,034
)
 
Cash Flow
Hedges
 
Foreign
Currency
Translation
 
Accumulated Other Comprehensive (Loss) Income
Balance as of December 31, 2017
$
31,215

 
$
(4,273
)
 
26,942

Change in derivative instruments designated as cash flow hedges
12,459

 

 
12,459

Reclassification of (gain) loss on derivative instruments designated as cash flow hedges
(1,472
)
 

 
(1,472
)
Tax reclassification to accumulated earnings for the adoption of ASU 2018-02
(3,029
)
 

 
(3,029
)
Foreign currency translation adjustment

 
92

 
92

Other comprehensive income (loss)
7,958

 
92

 
8,050

Balance as of March 31, 2018
$
39,173

 
$
(4,181
)
 
$
34,992


The following table summarizes the reclassifications out of accumulated other comprehensive income (in thousands):
 
Amounts Reclassified From Accumulated Other Comprehensive Income
Affected Line Item
in the Consolidated
Statements of Income
 
Three Months Ended 
March 31,
 
2019
 
2018
Amounts reclassified from accumulated other comprehensive income before income tax
$
(2,355
)
 
$
(1,824
)
Interest and debt expense
Income tax expense (benefit)
606

 
352

Income tax expense
Amounts reclassified from accumulated other comprehensive income, net of tax
$
(1,749
)
 
$
(1,472
)
Net income


14


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 6—Leases

Lessee

The Company leases multiple office facilities which are contracted under various cancelable and non-cancelable operating leases, most of which provide extension or early termination options. The Company's leases contain one or more options to renew with terms that can extend its current obligations through 2026. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

As of March 31, 2019, the weighted average implicit rate was 4.18% and the weighted average remaining lease term was 3.9 years.

The following table summarizes the components of the Company's leases (in thousands):
 
Financial statement caption
March 31, 2019
Balance Sheet
 
 
Right-of-use asset - operating
Other Assets
8,289

Lease liability - operating
Accounts payable and other accrued expenses
9,813

Income Statement
 
 
Operating lease cost(1)
Administrative expenses
734

                    
(1)
Includes short-term leases that are immaterial.

For the three months ended March 31, 2019, cash paid for amounts included in the measurement of lease liabilities of $0.8 million was presented in operating activities on the consolidated statement of cash flows.

The following table summarizes the maturities of lease liabilities as of March 31, 2019 (in thousands):
Years ending December 31,
 
2019
2,000

2020
2,542

2021
2,146

2022
1,882

2023
1,243

2024 and thereafter

Total
9,813


Lessor
     
The following table summarizes the components of the net investment in finance leases (in thousands):
 
March 31,
2019
 
December 31,
2018
Future minimum lease payment receivable(1)
$
552,603

 
574,422

Estimated residual receivable(2)
107,386

 
107,598

Gross finance lease receivables
659,989

 
682,020

Unearned income(3)
(194,509
)
 
(203,955
)
Net investment in finance leases(4)
$
465,480

 
$
478,065

                    
(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 March 31, 2019 and December 31, 2018.
(2)
The Company's leases generally include a bargain purchase option and therefore, the Company has immaterial residual value risk for assets that are subject to direct finance leases.
(3)
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 March 31, 2019 and December 31, 2018.
(4)
As of March 31, 2019, three major customers represented 51%, 25% and 13% of the Company's finance lease portfolio. As of December 31, 2018, three major customers represented 50%, 24% and 13% 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.

15


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Contractual maturities of the Company’s gross finance lease receivables subsequent to March 31, 2019 are as follows (in thousands):
Years ending December 31,
 
2019
83,494

2020
120,130

2021
85,258

2022
78,828

2023
60,929

2024 and thereafter
231,350

Total
659,989


The Company considers an account past due when a payment has not been received in accordance with the terms of the related lease agreement and 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. Any accounts in arrears are transferred out of finance lease to determine if a reserve needs to be applied. As of March 31, 2019, the Company does not have an allowance on its gross finance lease receivables.

The Company evaluates potential losses in its finance lease portfolio by regularly reviewing the specific receivables in the
portfolio and analyzing loss experience.

Note 7—Debt

Debt consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Institutional notes
$
2,167,257

 
$
2,198,200

Asset-backed securitization term notes
2,967,601

 
3,063,821

Term loan facilities
1,504,375

 
1,543,375

Asset-backed securitization warehouse
350,000

 
340,000

Revolving credit facilities
365,000

 
375,000

Capital lease obligations
73,399

 
75,526

Total debt outstanding
7,427,632

 
7,595,922

Debt costs
(43,684
)
 
(44,889
)
Unamortized debt premiums & discounts
(4,971
)
 
(5,293
)
Unamortized fair value debt adjustment
(14,252
)
 
(16,308
)
Debt, net of unamortized debt costs
$
7,364,725

 
$
7,529,432


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 March 31, 2019 and December 31, 2018, the Company was in compliance with all financial covenants in accordance with the terms of its debt agreements.

As of March 31, 2019, the Company had $4,484.6 million of total debt outstanding on facilities with fixed interest rates. These fixed rate facilities had a contractual weighted average interest rate of 4.26%, are scheduled to mature between 2019 and 2029, and had a weighted average remaining term of 3.8 years as of March 31, 2019.

As of March 31, 2019, the Company had $2,943.1 million of debt outstanding on facilities with interest rates based on floating rate indices (LIBOR). These floating rate facilities had a contractual weighted average interest rate of 4.22%, are scheduled to mature between 2019 and 2025, and had a weighted average remaining term of 3.5 years as of March 31, 2019.


16


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 March 31, 2019, the Company had interest rate swaps in place with a notional amount of $1,753.3 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 4.06% as of March 31, 2019.

As of March 31, 2019, the Company had $6,237.9 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 84.0% of total debt. These facilities had a contractual weighted average interest rate of 4.17% and a weighted average remaining term of 4.0 years as of March 31, 2019.

Overall, the Company's total debt had a contractual weighted average interest rate of 4.18% as of March 31, 2019, including the impact of the swap contracts.

The Company did not record any debt termination expense for the three months ended March 31, 2019 and 2018.

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 4.73% as of March 31, 2019 and are scheduled to mature between 2020 and 2029.

Asset-Backed Securitization Term Notes

Under the Company’s Asset-Backed Securitization (“ABS”) facilities, indirect wholly-owned subsidiaries of the Company issue asset-backed notes. The ABS 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.

These asset-backed securitization term notes had a contractual weighted average interest rate of 3.95% as of March 31, 2019 and are scheduled to mature between 2022 and 2028.

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 4.06% as of March 31, 2019, and are scheduled to mature between 2019 and 2023.

Asset-Backed Securitization Warehouse Facilities

Under the Company’s asset-backed warehouse facilities, indirect wholly-owned subsidiaries of the Company issue asset-backed notes. The asset-backed warehouse 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.

17


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




The Company's asset-backed warehouse facilities have a combined maximum borrowing capacity of $1,200.0 million as of March 31, 2019. One facility has a borrowing capacity of $400.0 million, which 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%.

On February 8, 2019, the Company increased its borrowing capacity on a second facility by $300.0 million to $800.0 million. This facility is available on a revolving basis until December 13, 2021, paying interest at LIBOR plus 1.75%, after which any borrowings will convert to term notes with a maturity date of December 15, 2025, paying interest at LIBOR plus2.85%.

During the revolving period, the borrowing capacity under these facilities are 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 months of interest expense.

As of March 31, 2019, the asset-backed warehouse facilities had a contractual weighted average interest rate of 4.24%.

Revolving Credit Facilities

The 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 these facilities is 83%. The revolving credit facilities had a contractual weighted average interest rate of 4.49% as of March 31, 2019 and are scheduled to mature between 2022 and 2023.

Capital Lease Obligations

The Company has entered into a series of direct finance 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 three to ten years from the transaction date. These agreements have fixed interest rates ranging from 3.60% to 4.93%, and mature between 2019 and 2024.

Note 8—Derivative Instruments

Interest Rate Hedging

The Company enters into interest rate swap 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.

During the three months ended March 31, 2019, the Company entered into the following interest rate swaps:
Date Effective
 
Notional Amount
 
Indexed To
 
Scheduled Maturity
March 29, 2019
 
$100.0 million
 
1 month LIBOR
 
March 31, 2026
March 29, 2019
 
$100.0 million
 
1 month LIBOR
 
March 31, 2026



18


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of March 31, 2019, the Company had interest rate swap agreements in place to fix interest rates on a portion of its borrowings under debt facilities with floating interest rates as summarized below:
Derivatives
 
Net Notional Amount
 
Weighted Average
Fixed Leg (Pay) Interest Rate
 
Weighted Average
Remaining Term
Interest Rate Swap
 
$1,753.3 million
 
2.24%
 
4.4 years

The following table summarizes the impact of derivative instruments on the consolidated statements of operations and the consolidated statements of comprehensive income on a pretax basis (in thousands):
 
 
 
Three Months Ended  
March 31,
Derivative instrument
Financial statement caption
 
2019
 
2018
Non-designated interest rate swaps
Realized (gain) loss on derivative instruments, net
 
$
(704
)
 
$
(248
)
Non-designated interest rate swaps
Unrealized (gain) loss on derivative instruments, net
 
$
986

 
$
(1,186
)
Designated interest rate swaps
Other comprehensive (income) loss
 
$
16,467

 
$
(15,813
)
Designated interest rate swaps
Interest and debt (income) expense
 
$
(2,355
)
 
$
(1,824
)

Note 9—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 service offered.

The following tables summarize segment information and the consolidated totals reported (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
 
Equipment
Leasing
 
Equipment
Trading
 
Totals
Total leasing revenues
$
340,070

 
$
789

 
$
340,859

 
$
314,429

 
$
668

 
$
315,097

Trading margin

 
3,587

 
3,587

 

 
2,991

 
2,991

Net gain on sale of leasing equipment
8,469

 

 
8,469

 
9,218

 

 
9,218

Depreciation and amortization expense
134,422

 
187

 
134,609

 
129,854

 
579

 
130,433

Interest and debt expense
83,174

 
346

 
83,520

 
74,774

 
324

 
75,098

Realized (gain) loss on derivative instruments, net
(702
)
 
(2
)
 
(704
)
 
(248
)
 

 
(248
)
Income before income taxes(1)
98,466

 
3,181

 
101,647

 
89,966

 
2,216

 
92,182

Purchases of leasing equipment and investments in finance leases(2)
$
43,981

 
$

 
$
43,981

 
$
258,668

 
$

 
$
258,668

                    
(1)
Segment income before income taxes excludes unrealized gains or losses on derivative instruments and debt termination expense. The Company recorded unrealized losses on derivative instruments of $1.0 million for the three months ended March 31, 2019 and unrealized gains on derivative instruments of $1.2 million for the three months ended March 31, 2018. There was no debt termination expense for the three months ended March 31, 2019 and 2018.
(2)
Represents cash disbursements for purchases of leasing equipment and investments in finance leases 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.



19


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
March 31, 2019
 
December 31, 2018
 
Equipment Leasing
 
Equipment Trading
 
Totals
 
Equipment Leasing
 
Equipment Trading
 
Totals
Equipment held for sale
$
58,339

 
$
27,872

 
$
86,211

 
$
46,968

 
$
19,485

 
$
66,453

Goodwill
220,864

 
15,801

 
236,665

 
220,864

 
15,801

 
236,665

Total assets
$
10,057,643

 
$
52,479

 
$
10,110,122

 
$
10,224,421

 
$
45,592

 
$
10,270,013


There are no intercompany revenues or expenses between segments. Certain administrative expenses have been allocated between segments based on an estimate of services provided to each segment. 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.

The following table summarizes the geographic allocation of equipment leasing revenues for the three months ended March 31, 2019 and 2018 based on the Company's customers' primary domicile (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Total equipment leasing revenues:
 
 
 
Asia
$
137,450

 
$
130,190

Europe
162,557

 
143,649

Americas
30,782

 
31,050

Bermuda
678

 
613

Other International
9,392

 
9,595

Total
$
340,859

 
$
315,097


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 summarizes the geographic allocation of equipment trading revenues for the three months ended March 31, 2019 and 2018 based on the location of the sale (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Total equipment trading revenues:
 
 
 
Asia
$
3,292

 
$
2,454

Europe
4,871

 
4,289

Americas
6,765

 
4,984

Bermuda

 

Other International
2,900

 
1,648

Total
$
17,828

 
$
13,375



20


TRITON INTERNATIONAL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 10—Commitments and Contingencies

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.

Container Equipment Purchase Commitments

At March 31, 2019, the Company had commitments to purchase equipment in the amount of $75.8 million payable in 2019.

Note 11—Income Taxes

The Company's effective tax rates were 7.8% and 11.2% for the three months ended March 31, 2019 and 2018, respectively. The Company has computed the provision for income taxes based on the estimated annual effective tax rate and the application of discrete items, if any, in the applicable period.

Note 12—Related Party Transactions

The Company holds 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 equity investment in TriStar is included in other assets on the consolidated balance sheet. The following table summarizes payments, direct finance lease, and a loan payable balance with TriStar (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Payments received from TriStar on direct finance leases
$
460

 
$
512

 
March 31,
2019
 
December 31,
2018
Direct finance lease balance
$
11,580

 
$
10,710


Note 13—Noncontrolling Interest

During the first quarter of 2019, the Company acquired from third party investors an additional 30% of membership interest in Triton Container Investments LLC for an aggregate of $71.0 million in cash, bringing the Company's total membership interest in Triton Container Investments LLC to 86%. The effective date of the purchase was January 1, 2019.

Note 14—Subsequent Events

The Company's Board of Directors has approved and declared a cash dividend of $0.53125 per share on its issued and outstanding 8.5% Series A Preference shares, payable June 17, 2019 to holders of record at the close of business on June 10, 2019.

The Company's Board of Directors also approved and declared a quarterly cash dividend of $0.52 per share on its issued and outstanding common shares, payable on June 27, 2019 to holders of record at the close of business on June 6, 2019.

On April 25, 2019, The Company's Board of Directors authorized a new $200.0 million share repurchase program replacing the previous authorization.



21



ITEM 2.    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 in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2018 with the SEC on February 19, 2019 (the "Form 10-K"), in this Report on Form 10-Q and in any other Form 10-Q filed or to be filed by us, and in other documents we file with the SEC from time to time. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our Company

Triton International Limited ("Triton", "we", "our", and the "Company") is the world's largest lessor of intermodal containers. Intermodal containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Because of the handling efficiencies they provide, intermodal containers are the primary means by which many goods and materials are shipped internationally. We also lease chassis which are used for the transportation of containers.

We operate our business in one industry, intermodal transportation equipment, and have two business segments, which also represent our reporting segments:
Equipment leasing - we own, lease and ultimately dispose of containers and chassis from our lease fleet.
Equipment trading - we purchase containers from shipping line customers, and other sellers of containers, and resell these containers to container retailers and users of containers for storage or one-way shipment.

Operations

Our consolidated operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of March 31, 2019, our total fleet consisted of 3.7 million containers and chassis, representing 6.1 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 March 31, 2019. Our primary customers include the world's largest container shipping lines. For the three months ended March 31, 2019, 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 21% and 14% of our lease billings, respectively.

The most important driver of profitability in our business is the extent to which leasing revenues, which are driven by our owned equipment fleet size, utilization and average 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 in the ordinary course of our business.

We lease five types of equipment: (1) dry containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, (2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, (3) special containers, which are used for heavy and over-sized cargo such as marble slabs, building products and machinery, (4) tank containers, which are used to transport bulk liquid products such as chemicals, and (5) chassis, which are used for the transportation of containers. Our in-house equipment sales group manages the sale process for our used containers and chassis from our equipment leasing fleet and buys and sells used and new containers and chassis acquired from third parties.


22



The following tables summarize our equipment fleet as of March 31, 2019, December 31, 2018 and March 31, 2018 indicated in units, TEU and CEU.
 
Equipment Fleet in Units
 
Equipment Fleet in TEU
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Dry
3,322,723

 
3,340,946

 
3,103,671

 
5,448,267

 
5,476,406

 
5,039,302

Refrigerated
229,971

 
228,778

 
221,810

 
443,402

 
440,781

 
426,335

Special
93,361

 
93,900

 
90,867

 
168,755

 
169,614

 
163,155

Tank
12,600

 
12,509

 
12,188

 
12,600

 
12,509

 
12,188

Chassis
24,879

 
24,832

 
22,477

 
45,885

 
45,787

 
40,996

Equipment leasing fleet
3,683,534

 
3,700,965

 
3,451,013

 
6,118,909

 
6,145,097

 
5,681,976

Equipment trading fleet
17,504

 
13,138

 
12,022

 
27,014

 
21,361

 
19,245

Total
3,701,038

 
3,714,103

 
3,463,035

 
6,145,923

 
6,166,458

 
5,701,221


 
Equipment Fleet in CEU (1)
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Operating leases
6,997,855

 
7,009,605

 
6,752,636

Finance leases
539,854

 
538,867

 
329,659

Equipment trading fleet
50,117

 
47,476

 
53,454

Total
7,587,826

 
7,595,948

 
7,135,749

                    
(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 March 31, 2019:
Equipment Type
Percentage of total fleet in units
 
Percentage of total fleet in CEU
Dry
89.8
%
 
62.5
%
Refrigerated
6.2

 
29.8

Special
2.5

 
2.9

Tank
0.3

 
2.7

Chassis
0.7

 
1.4

Equipment leasing fleet
99.5

 
99.3

Equipment trading fleet
0.5

 
0.7

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.

23




The following table summarizes our lease portfolio by lease type, based on CEU on-hire as of March 31, 2019, December 31, 2018 and March 31, 2018:
Lease Portfolio
March 31,
2019(1)

December 31,
2018

March 31,
2018
Long-term leases
64.8
%
 
66.6
%
 
69.7
%
Finance leases
7.6

 
7.5

 
4.9

Service leases
11.1

 
11.3

 
15.9

Expired long-term leases (units on-hire)
16.5

 
14.6

 
9.5

Total
100.0
%
 
100.0
%
 
100.0
%
                    
(1)     Including the impact of leases renegotiated during April 2019, long-term leases increased to 66.9%, offset by a decrease to service leases.

As of March 31, 2019, December 31, 2018 and March 31, 2018, our long-term and finance leases combined had an average remaining contractual term of approximately 49 months, 47 months, and 42 months, respectively, assuming no leases are renewed.

Operating Performance

Triton's operating performance remained solid in the first quarter of 2019, though market conditions were mixed. Key metrics such as fleet utilization and used container sale prices remained strong, while new lease transaction activity and container pick-ups were slow.

The first quarter typically represents the slow season for dry containers, and this typical seasonal weakness has likely been compounded by increased uncertainty related to the ongoing trade dispute between the United States and China. However, industry forecasters and our customers continue to expect moderate trade growth in 2019, and we expect lease transaction activity and container pick-ups to accelerate as we move toward the traditional summer peak season for dry containers.

Fleet size. As of March 31, 2019, our fleet had a net book value of $9.3 billion, which represents an increase of 6.6% as compared to March 31, 2018. The increase in our fleet size was largely due to a $1.5 billion investment in new containers during 2018. Procurement levels have been limited in the first quarter of 2019 due to the slower pace of new lease transaction activity, and through April 22, 2019, we have invested $143.2 million in containers for delivery in 2019.

Utilization. Our utilization averaged 97.6% during the first quarter of 2019, down 1.0% from the first quarter of 2018. The overall supply / demand balance for containers remains generally tight, though normal drop-off activity coupled with decreased levels of container pick-ups caused our utilization to decrease during the last two quarters. In general, we expect our utilization will remain fairly high throughout 2019, though the trajectory will depend on the level of container demand we experience as we approach the traditional summer peak season for dry containers. As of April 22, 2019, our utilization was 97.3%.

The following table summarizes the equipment fleet utilization(1) for the periods indicated below:
 
Quarter Ended
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
June 30,
2018
 
March 31,
2018
Average Utilization (1)
97.6
%
 
98.2
%
 
98.7
%
 
98.8
%
 
98.6
%
Ending Utilization (1)
97.4
%
 
97.8
%
 
98.6
%
 
98.7
%
 
98.7
%
                    
(1)
Utilization is computed by dividing our total units on lease (in CEU) by the total units in our fleet (in CEU) excluding new units not yet leased and off-hire units designated for sale.

Average lease rates. Average lease rates for our dry container product line increased by 0.7% in the first quarter of 2019 compared to the first quarter of 2018 but declined 1.0% from the fourth quarter of 2018 reflecting the impact of several large lease extensions completed during the first quarter 2019 at rates below our portfolio average. Market lease rates decreased during the fourth quarter 2018 and first quarter 2019 mainly due to a decrease in new container prices. New dry container prices have partially rebounded, though market lease rates remain below our portfolio average.

Average lease rates for our refrigerated container product line decreased by 3.6% in the first quarter of 2019 compared to the first quarter of 2018. The cost of refrigerated containers has trended down over the last few years, which has led to lower market

24



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 special containers decreased by 0.9% in the first quarter of 2019 compared to the first quarter of 2018. Current market lease rates for special containers are comparable to the average lease rates in our lease portfolio.

Equipment disposals. Disposal volumes of our used dry containers increased 39.0% in the first quarter of 2019 from the first quarter of 2018 mainly as a result of increased redeliveries. Average used dry container disposal prices decreased by 5.5% in the first quarter of 2019 compared to the first quarter of 2018, reflecting an increase in inventories of containers held for sale and lower new container prices, though our average used container selling prices remain above our accounting residual values.

Credit Risk.    We faced minimal credit losses in the first quarter of 2019. However, our credit risk remains elevated due to the ongoing financial pressure faced by our shipping line customers. The container shipping industry has faced several years of 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.


25



Results of Operations

The following table summarizes our comparative results of operations for the three months ended March 31, 2019 and 2018 (in thousands).
 
Three months ended 
March 31,
 
2019
 
2018
 
Variance
Leasing revenues:
 
 
 
 
 
Operating leases
$
330,422

 
$
310,231

 
$
20,191

Finance leases
10,437

 
4,866

 
5,571

Total leasing revenues
340,859

 
315,097

 
25,762

 
 
 
 
 
 
Equipment trading revenues
17,828

 
13,375

 
4,453

Equipment trading expenses
(14,241
)
 
(10,384
)
 
(3,857
)
Trading margin
3,587

 
2,991

 
596

 
 
 
 
 
 
Net gain on sale of leasing equipment
8,469

 
9,218

 
(749
)
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Depreciation and amortization
134,609

 
130,433

 
4,176

Direct operating expenses
16,802

 
11,048

 
5,754

Administrative expenses
18,187

 
19,582

 
(1,395
)
Transaction and other (income) costs

 
(29
)
 
29

Provision (reversal) for doubtful accounts
(142
)
 
(101
)
 
(41
)
Total operating expenses
169,456

 
160,933

 
8,523

Operating income (loss)
183,459

 
166,373

 
17,086

Other expenses:
 
 
 
 
 
Interest and debt expense
83,520

 
75,098

 
8,422

Realized (gain) loss on derivative instruments, net
(704
)
 
(248
)
 
(456
)
Unrealized (gain) loss on derivative instruments, net
986

 
(1,186
)
 
2,172

Other (income) expense, net
(1,004
)
 
(659
)
 
(345
)
Total other expenses
82,798

 
73,005

 
9,793

Income (loss) before income taxes
100,661

 
93,368

 
7,293

Income tax expense (benefit)
7,850

 
10,503

 
(2,653
)
Net income
$
92,811

 
$
82,865

 
$
9,946

Less: income (loss) attributable to noncontrolling interest
592

 
1,973

 
(1,381
)
Less: dividend on preferred shares
305

 

 
305

Net income (loss) attributable to common shareholders
$
91,914

 
$
80,892

 
$
11,022


26



Comparison of the three months ended March 31, 2019 and 2018

Leasing revenues.    Per diem revenue represents revenue earned under operating lease contracts. Fee and ancillary lease revenue represents fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses. Finance lease revenue represents interest income earned under finance lease contracts. The following table summarizes our leasing revenue for the periods indicated below (in thousands):
 
Three months ended 
March 31,
 
2019
 
2018
 
Variance
Leasing revenues:
 
 
 
 
 
Operating leases
 
 
 
 
 
Per diem revenues
$
315,352

 
$
300,692

 
$
14,660

Fee and ancillary revenues
15,070

 
9,539

 
5,531

Total operating lease revenues
330,422

 
310,231

 
20,191

Finance leases
10,437

 
4,866

 
5,571

Total leasing revenues
$
340,859

 
$
315,097

 
$
25,762


Total leasing revenues were $340.9 million, net of lease intangible amortization of $10.7 million, for the three months ended March 31, 2019, compared to $315.1 million, net of lease intangible amortization of $17.3 million, in the same period in 2018, an increase of $25.8 million.

Per diem revenues were $315.4 million for the three months ended March 31, 2019 compared to $300.7 million in the same period in 2018, an increase of $14.7 million. The primary reasons for this increase are as follows:
$17.2 million increase due to an increase of 373,566 CEU in the average number of containers on-hire under operating leases;
$6.6 million increase due to reduced lease intangible amortization; partially offset by
$9.7 million decrease due to the reclassification of certain contracts from operating leases to finance leases in the fourth quarter of 2018 as a result of the renegotiation and extension of the contracts.

Fee and ancillary lease revenues were $15.1 million for the three months ended March 31, 2019 compared to $9.5 million in the same period in 2018, an increase of $5.6 million. The increase was primarily due to an increase in redelivery fees associated with a higher volume of container redeliveries.

Finance lease revenues were $10.4 million for the three months ended March 31, 2019 compared to $4.9 million in the same period in 2018, an increase of $5.5 million. The increase was due to the addition of several finance leases, primarily in the fourth quarter of 2018, as a result of the renegotiation and extension of certain contracts that were reclassified from operating leases to finance leases. This increase was partially offset by the runoff of the existing portfolio.

Trading margin.    Trading margin was $3.6 million for the three months ended March 31, 2019 compared to $3.0 million in the same period in 2018, an increase of $0.6 million. The increase was due to an increase in trading volume and per unit margins.

Net gain (loss) on sale of leasing equipment.    Gain on sale of equipment was $8.5 million for the three months ended March 31, 2019 compared to $9.2 million in the same period in 2018, a decrease of $0.7 million. The decrease was primarily due to a 5.5% decrease in average used dry container selling prices, which also contributed to an increase in impairment charges of $0.4 million. These decreases were partially offset by a 39.0% increase in selling volumes and an increase in disposal gains of $0.7 million related to units declared lost by customers.

Depreciation and amortization.    Depreciation and amortization was $134.6 million for the three months ended March 31, 2019 compared to $130.4 million in the same period in 2018, an increase of $4.2 million. The primary reasons for the increase are as follows:
$14.3 million increase due to a net increase in the size of our depreciable fleet, partially offset by
$4.9 million decrease due to an increase in the number of containers that are fully depreciated; and
$5.3 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.


27



Direct operating expenses.    Direct operating expenses primarily consist of our costs to repair equipment returned off lease, to store the equipment when it is not on lease and to reposition equipment that has been returned to locations with weak leasing demand. Direct operating expenses were $16.8 million for the three months ended March 31, 2019 compared to $11.0 million in the same period in 2018, an increase of $5.8 million. The increase was primarily due to an increase of $3.5 million in storage expense as a result of a decrease in utilization and a $2.3 million increase in repair expense due to an increase in the volume of redeliveries.

Administrative expenses.    Administrative expenses were $18.2 million for the three months ended March 31, 2019 compared to $19.6 million in the same period in 2018, a decrease of $1.4 million primarily due to a decrease of $0.9 million in payroll and benefit expenses and a decrease of $0.5 million in professional fees.

Provision (reversal) for doubtful accounts.    Reversal for doubtful accounts was $0.1 million for the three months ended March 31, 2019 and 2018 due to recoveries on previously reserved customer balances.

Interest and debt expense.    Interest and debt expense was $83.5 million for the three months ended March 31, 2019, compared to $75.1 million in the same period in 2018, an increase