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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2019
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
 
98-1276572
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

Canon's Court, 22 Victoria Street, Hamilton HM12, Bermuda
(Address of principal executive office)
(441294-8033
(Registrant's telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
   Common shares, $0.01 par value per share
TRTN
New York Stock Exchange
8.50% Series A Cumulative Redeemable Perpetual Preference Shares
TRTNpA
New York Stock Exchange
8.00% Series B Cumulative Redeemable Perpetual Preference Shares
TRTNpB
New York Stock Exchange

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 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
 
 
Accelerated Filer
 
 
Non-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. o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes     No 

As of July 19, 2019, there were 73,880,901 common shares at $0.01 par value per share 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)
 
June 30,
2019
 
December 31,
2018
ASSETS:
 
 
 
Leasing equipment, net of accumulated depreciation of $2,737,072 and $2,533,446
$
8,684,103

 
$
8,923,451

Net investment in finance leases
449,385

 
478,065

Equipment held for sale
91,768

 
66,453

Revenue earning assets
9,225,256

 
9,467,969

Cash and cash equivalents
45,622

 
48,950

Restricted cash
114,763

 
110,589

Accounts receivable, net of allowances of $1,279 and $1,240
250,673

 
264,382

Goodwill
236,665

 
236,665

Lease intangibles, net of accumulated amortization of $226,243 and $205,532
72,214

 
92,925

Other assets
48,958

 
34,610

Fair value of derivative instruments
1,682

 
13,923

Total assets
$
9,995,833

 
$
10,270,013

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
Equipment purchases payable
$
11,015

 
$
22,392

Fair value of derivative instruments
53,550

 
10,966

Accounts payable and other accrued expenses
100,221

 
99,885

Net deferred income tax liability
289,023

 
282,129

Debt, net of unamortized debt costs of $43,465 and $44,889
7,205,416

 
7,529,432

Total liabilities
7,659,225

 
7,944,804

Shareholders' equity:
 
 
 
Series A Preferred shares, $0.01 par value, 3,450,000 authorized, 3,450,000 and 0 shares issued and outstanding, respectively; at liquidation preference
86,250

 

Series B Preferred shares, $0.01 par value, 5,750,000 authorized, 5,750,000 and 0 shares issued and outstanding, respectively; at liquidation preference
143,750

 

Common shares, $0.01 par value, 270,000,000 shares authorized, 81,023,732 and 80,843,472 shares issued, respectively
811

 
809

Undesignated shares, $0.01 par value, 20,800,000 and 30,000,000 shares authorized, respectively, no shares issued and outstanding

 

Treasury shares, at cost, 6,837,508 and 1,853,148 shares, respectively
(215,349
)
 
(58,114
)
Additional paid-in capital
909,942

 
896,811

Accumulated earnings
1,445,646

 
1,349,627

Accumulated other comprehensive income (loss)
(34,442
)
 
14,563

Total shareholders' equity
2,336,608

 
2,203,696

Noncontrolling interests

 
121,513

Total equity
2,336,608

 
2,325,209

Total liabilities and equity
$
9,995,833

 
$
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 
June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Leasing revenues:
 
 
 
 
 
 
 
Operating leases
$
328,370

 
$
324,954

 
$
658,792

 
$
635,185

Finance leases
10,196

 
4,817

 
20,633

 
9,683

Total leasing revenues
338,566

 
329,771

 
679,425

 
644,868

 
 
 
 
 
 
 
 
Equipment trading revenues
23,209

 
18,099

 
41,037

 
31,474

Equipment trading expenses
(18,713
)
 
(14,105
)
 
(32,954
)
 
(24,489
)
Trading margin
4,496

 
3,994

 
8,083

 
6,985

 
 
 
 
 
 
 
 
Net gain on sale of leasing equipment
7,519

 
11,105

 
15,988

 
20,323

Net gain on sale of building

 
20,953

 

 
20,953

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Depreciation and amortization
135,348

 
133,894

 
269,957

 
264,327

Direct operating expenses
18,097

 
10,195

 
34,899

 
21,243

Administrative expenses
19,988

 
20,774

 
38,175

 
40,327

Provision (reversal) for doubtful accounts
521

 
(25
)
 
379

 
(126
)
Total operating expenses
173,954

 
164,838

 
343,410

 
325,771

Operating income (loss)
176,627

 
200,985

 
360,086

 
367,358

Other expenses:
 
 
 
 
 
 
 
Interest and debt expense
82,260

 
79,027

 
165,780

 
154,125

Realized (gain) loss on derivative instruments, net
(669
)
 
(492
)
 
(1,373
)
 
(740
)
Unrealized (gain) loss on derivative instruments, net
1,267

 
(111
)
 
2,253

 
(1,297
)
Debt termination expense
558

 
503

 
558

 
503

Other (income) expense, net
(927
)
 
(585
)
 
(1,931
)
 
(1,244
)
Total other expenses
82,489

 
78,342

 
165,287

 
151,347

Income (loss) before income taxes
94,138

 
122,643

 
194,799

 
216,011

Income tax expense (benefit)
8,042

 
15,890

 
15,892

 
26,393

Net income
$
86,096

 
$
106,753

 
$
178,907

 
$
189,618

Less: income (loss) attributable to noncontrolling interest

 
1,883

 
592

 
3,856

Less: dividend on preferred shares
2,025

 

 
2,330

 

Net income (loss) attributable to common shareholders
$
84,071

 
$
104,870

 
$
175,985

 
$
185,762

Net income per common share—Basic
$
1.13

 
$
1.31

 
$
2.31

 
$
2.32

Net income per common share—Diluted
$
1.12

 
$
1.30

 
$
2.29

 
$
2.30

Cash dividends paid per common share
$
0.52

 
$
0.52

 
$
1.04

 
$
0.97

Weighted average number of common shares outstanding—Basic
74,598

 
80,044

 
76,151

 
80,007

Dilutive restricted shares
617

 
611

 
583

 
589

Weighted average number of common shares outstanding—Diluted
75,215

 
80,655

 
76,734

 
80,596

   



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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
86,096

 
$
106,753

 
$
178,907

 
$
189,618

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in derivative instruments designated as cash flow hedges, net of income tax effect of ($3,813), $1,350, ($5,957) and $4,704, respectively
(31,517
)
 
5,005

 
(45,840
)
 
17,464

Reclassification of (gain) loss on derivative instruments designated as cash flow hedges, net of income tax effect of ($591), ($393), ($1,197) and ($745), respectively
(1,716
)
 
(1,461
)
 
(3,465
)
 
(2,933
)
Cumulative effect for the adoption of ASU 2017-12, net of income tax effect of $0, $0, $277 and $0, respectively

 

 
432

 

Foreign currency translation adjustment
(175
)
 
(178
)
 
(132
)
 
(86
)
Other comprehensive income (loss), net of tax
(33,408
)
 
3,366

 
(49,005
)
 
14,445

Comprehensive income
52,688

 
110,119

 
129,902

 
204,063

Less:
 
 
 
 
 
 
 
Other comprehensive income attributable to noncontrolling interest

 
1,883

 
592

 
3,856

Dividend on preferred shares
2,025

 

 
2,330

 

Comprehensive income attributable to common shareholders
$
50,663

 
$
108,236

 
$
126,980

 
$
200,207

   


















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, 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

Other comprehensive income (loss)

 

 

 

 

 

 

 
(432
)
 
(15,597
)
 

 
(16,029
)
Purchase of noncontrolling interests

 

 

 

 

 

 
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

Issuance of preferred shares, net of offering expenses
5,750,000

 
143,750

 

 

 

 

 
(5,018
)
 

 

 

 
138,732

Share-based compensation

 

 
41,535

 

 

 

 
3,653

 

 

 

 
3,653

Treasury shares acquired

 

 

 

 
2,347,826

 
(73,942
)
 

 

 

 

 
(73,942
)
Net income (loss)

 

 

 

 

 

 

 
86,096

 

 

 
86,096

Other comprehensive income (loss)

 

 

 

 

 

 

 

 
(33,408
)
 

 
(33,408
)
Purchase of noncontrolling interests

 

 

 

 

 

 
5,143

 

 

 
(37,320
)
 
(32,177
)
Common shares dividend declared

 

 

 

 

 

 

 
(39,108
)
 

 

 
(39,108
)
Preferred shares dividend declared

 

 

 

 

 

 

 
(1,833
)
 

 

 
(1,833
)
Balance as of June 30, 2019
9,200,000

 
$
230,000

 
81,023,732

 
$
811

 
6,837,508

 
$
(215,349
)
 
$
909,942

 
$
1,445,646

 
$
(34,442
)
 
$

 
$
2,336,608


`
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

Tax reclassification to accumulated earnings for the adoption of ASU 2018-02

 

 

 

 

 

 

 
3,029

 
(3,029
)
 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 
11,079

 

 
11,079

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

Share-based compensation

 

 
39,320

 
1

 

 

 
3,148

 

 

 

 
3,149

Net income (loss)

 

 

 

 

 

 

 
104,870

 

 
1,883

 
106,753

Other comprehensive income (loss)

 

 

 

 

 

 

 

 
3,366

 

 
3,366

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 
(3,492
)
 
(3,492
)
Common shares dividend declared

 

 

 

 

 

 

 
(42,289
)
 

 

 
(42,289
)
Balance as of June 30, 2018

 
$

 
80,855,072

 
$
809

 

 
$

 
$
894,005

 
$
1,269,429

 
$
38,358

 
$
129,655

 
$
2,332,256








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)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
178,907

 
$
189,618

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
269,957

 
264,327

Amortization of deferred debt cost and other debt related amortization
6,849

 
6,627

Lease related amortization
23,835

 
37,722

Share-based compensation expense
5,471

 
5,661

Net (gain) loss on sale of leasing equipment
(15,988
)
 
(20,323
)
Net (gain) loss on sale of building

 
(20,953
)
Unrealized (gain) loss on derivative instruments
2,253

 
(1,297
)
Debt termination expense
558

 
503

Deferred income taxes
13,910

 
23,946

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
12,545

 
(30,551
)
Accounts payable and other accrued expenses
(8,860
)
 
(16,788
)
Net equipment sold for resale activity
(8,517
)
 
(11,686
)
Cash collections on finance lease receivables, net of income earned
33,680

 
29,598

Other assets
(12,786
)
 
(1,218
)
Net cash provided by (used in) operating activities
501,814

 
455,186

Cash flows from investing activities:
 
 
 
Purchases of leasing equipment and investments in finance leases
(149,986
)
 
(884,007
)
Proceeds from sale of equipment, net of selling costs
106,603

 
83,443

Proceeds from the sale of building

 
27,630

Other
(130
)
 
(64
)
Net cash provided by (used in) investing activities
(43,513
)
 
(772,998
)
Cash flows from financing activities:
 
 
 
Issuance of preferred shares, net of underwriting discount and expenses
221,790

 

Purchases of treasury shares
(157,075
)
 

Redemption of common shares for withholding taxes
(978
)
 
(822
)
Debt issuance costs
(5,455
)
 
(9,567
)
Borrowings under debt facilities
1,143,000

 
1,417,985

Payments under debt facilities and capital lease obligations
(1,472,827
)
 
(1,049,996
)
Dividends paid on preferred and common shares
(80,793
)
 
(77,638
)
Distributions to noncontrolling interests
(2,078
)
 
(7,743
)
Purchase of noncontrolling interests
(103,039
)
 

Net cash provided by (used in) financing activities
(457,455
)
 
272,219

Net increase (decrease) in cash, cash equivalents and restricted cash
$
846

 
$
(45,593
)
Cash, cash equivalents and restricted cash, beginning of period
159,539

 
226,171

Cash, cash equivalents and restricted cash, end of period
$
160,385

 
$
180,578

Supplemental disclosures:
 
 
 
Interest paid
$
160,211

 
$
148,007

Income taxes paid (refunded)
$
2,216

 
$
541

Right-of-use asset for leased property
$
7,862

 
$

Supplemental non-cash investing activities:
 
 
 
Equipment purchases payable
$
11,015

 
$
159,454

   
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 June 30, 2019; the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of shareholders' equity for the three and six months ended June 30, 2019 and 2018, and the consolidated statements of cash flows for the six months ended June 30, 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 and six months ended June 30, 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 six months ended June 30, 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 $29.6 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 six months ended June 30, 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.





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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):
 
June 30, 2019
 
December 31, 2018
Liabilities
 
 
 
Total debt - carrying value (1)
$
7,266,096

 
$
7,595,922

Total debt - fair value
$
7,342,573

 
$
7,559,063


                    
(1)
Excludes unamortized debt costs of $43.5 million and $44.9 million, purchase price debt adjustments of $12.6 million and $16.3 million, and unamortized debt discounts of $4.7 million and $5.3 million as of June 30, 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):
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Equipment held for sale - assets at fair value (1)
$
10,006

 
$
5,750

Cumulative impairment charges (2)
$
(2,707
)
 
$
(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 $1.3 million and $2.7 million for the three and six months ended June 30, 2019, respectively and net impairment charges of $0.5 million and $1.4 million for the three and six months ended June 30, 2018, respectively.


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



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.

For information on the fair value of derivative instruments, please refer to Note 8 - “Derivative Instruments” in the Notes to the Unaudited Consolidated Financial Statements.

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 June 30, 2019 (in thousands):
Years ending December 31,
Above market lease intangibles
 
Customer intangibles (1)
 
Total intangible assets
2019
$
16,057

 
$
47

 
$
16,104

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
$
72,214

 
$
47

 
$
72,261

                
(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 fair value as of the grant date. The expense is recognized over the employee's requisite service period, which is generally the vesting period of the equity award. The Company recognized share-based compensation expense in administrative expenses of $3.7 million and $5.5 million for the three and six months ended June 30, 2019, respectively, and recognized $3.2 million and $5.7 million for the three and six months ended June 30, 2018, respectively. Share-based compensation expense includes charges for performance-based shares that are deemed probable to vest.

As of June 30, 2019, the total unrecognized compensation expense related to non-vested restricted shares was approximately $10.7 million, which is expected to be recognized through 2021.

During the six months ended June 30, 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. The Company also issued 43,035 shares to non-employee directors at fair value that vested immediately.

Note 5—Other Equity Matters

Share Repurchase Program

On April 25, 2019, the Company's Board of Directors authorized a new $200.0 million repurchase program for its common shares, replacing the previous repurchase program authorized on August 1, 2018. 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

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



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 six months ended June 30, 2019, the Company repurchased a total of 4,984,360 common shares at an average price per share of $31.50 for a total of $157.2 million under both the current and previous authorization. As of June 30, 2019, the Company has a total of $146.7 million remaining under the current authorization.

Preferred Shares

The Company intends to use the net proceeds from preferred share offerings for general corporate purposes, including the purchase of containers, the repurchase of outstanding common shares, the payment of dividends, and the repayment or repurchase of outstanding indebtedness.

Series A

In March 2019, the Company completed a public offering of 8.50% Series A Cumulative Redeemable Perpetual Preference Shares ("Series A"), selling 3,450,000 shares and generating gross proceeds of $86.3 million. The estimated costs associated with the offering, inclusive of underwriting discount and other offering expenses, were $3.2 million. At any time on or after March 15, 2024, the Series A may be redeemed at the Company's option.

Series B

In June 2019, the Company completed a public offering of 8.00% Series B Cumulative Redeemable Perpetual Preference Shares ("Series B"), selling 5,750,000 shares and generating gross proceeds of $143.8 million. The estimated costs associated with the offering, inclusive of underwriting discount and other offering expenses, were $5.0 million. At any time on or after September 15, 2024, the Series B may be redeemed at the Company's option.

Dividends

Dividends on shares of each Series 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 equal to the stated rate per annum of the $25.00 liquidation preference per share.

The Company paid dividends of $1.8 million or $0.53125 per share on the Series A for the three and six months ended June 30, 2019. As of June 30, 2019, the Company had cumulative unpaid preferred dividends of $0.5 million.

Redemption Provisions

Preferred shares may be redeemed at the Company's option, at any time on or after the redemption date for each Series, 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 each Series of preferred shares in the event of a Change of Control Triggering Event as defined in the applicable Certificate of Designations (the "Certificate of Designations"). In addition, upon the occurrence of a Change of Control Triggering Event, holders of preferred shares will have the right to convert their preferred shares into common shares in accordance with the applicable Certificate of Designations. Holders of preferred 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.

Common Share Dividends

The Company paid the following quarterly dividends during the six months ended June 30, 2019 and 2018 on its issued and outstanding common shares:

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



Record Date
Payment Date
 
Aggregate Payment
 
Per Share
Payment
June 6, 2019
June 27, 2019
 
$38.6 Million
 
$0.52
March 12, 2019
March 28, 2019
 
$40.4 Million
 
$0.52
June 1, 2018
June 22, 2018
 
$41.6 Million
 
$0.52
March 12, 2018
March 28, 2018
 
$36.0 Million
 
$0.45

Accumulated Other Comprehensive Income

The following table summarizes the components of accumulated other comprehensive income, net of tax, for the six months ended June 30, 2019 and 2018 (in thousands):