|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Fleet in Units(1)
|
|
Equipment Fleet in TEU(1)
|
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2015
|
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2015
|
Dry
|
1,382,101
|
|
|
1,351,170
|
|
|
1,259,633
|
|
|
2,248,374
|
|
|
2,190,940
|
|
|
2,045,480
|
|
Refrigerated
|
71,521
|
|
|
70,505
|
|
|
66,078
|
|
|
136,240
|
|
|
134,204
|
|
|
125,489
|
|
Special
|
55,457
|
|
|
56,118
|
|
|
57,544
|
|
|
100,853
|
|
|
102,081
|
|
|
104,931
|
|
Tank
|
11,422
|
|
|
11,243
|
|
|
9,555
|
|
|
11,422
|
|
|
11,243
|
|
|
9,555
|
|
Chassis
|
21,806
|
|
|
21,216
|
|
|
19,885
|
|
|
39,395
|
|
|
38,210
|
|
|
35,443
|
|
Equipment leasing fleet
|
1,542,307
|
|
|
1,510,252
|
|
|
1,412,695
|
|
|
2,536,284
|
|
|
2,476,678
|
|
|
2,320,898
|
|
Equipment trading fleet
|
19,874
|
|
|
21,135
|
|
|
31,264
|
|
|
33,423
|
|
|
35,989
|
|
|
50,865
|
|
Total
|
1,562,181
|
|
|
1,531,387
|
|
|
1,443,959
|
|
|
2,569,707
|
|
|
2,512,667
|
|
|
2,371,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Fleet in CEU(1)
|
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2015
|
Operating leases
|
2,864,482
|
|
|
2,801,607
|
|
|
2,598,409
|
|
Finance leases
|
197,156
|
|
|
197,225
|
|
|
197,739
|
|
Equipment trading fleet
|
98,041
|
|
|
107,079
|
|
|
114,614
|
|
Total
|
3,159,679
|
|
|
3,105,911
|
|
|
2,910,762
|
|
_______________________________________________________________________________
(1) As of
March 31, 2016
, managed equipment accounted for
0.9%
,
1.0%
, and
0.7%
of our equipment fleet in units, TEU, and CEU, respectively.
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 standard height dry container is 1.6, and a 40 foot high cube refrigerated container is 10.0. The CEU ratios used in this calculation may differ slightly from current actual cost ratios and CEU ratios used by others in the industry.
We lease five types of equipment: (1) dry freight 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 domestically. 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.
The percentage of our equipment fleet by equipment type as of
March 31, 2016
and the percentage of our leasing revenues by equipment type for the
three
months ended
March 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
Equipment Type
|
Percent of
total fleet in
units
|
|
Percent of total
fleet in CEU
|
|
Percent of
leasing
revenues
|
Dry
|
88.5
|
%
|
|
62.0
|
%
|
|
64.4
|
%
|
Refrigerated
|
4.6
|
|
|
22.0
|
|
|
20.7
|
|
Special
|
3.5
|
|
|
4.3
|
|
|
6.6
|
|
Tank
|
0.7
|
|
|
5.8
|
|
|
3.6
|
|
Chassis
|
1.4
|
|
|
2.8
|
|
|
3.4
|
|
Equipment leasing fleet
|
98.7
|
|
|
96.9
|
|
|
98.7
|
|
Equipment trading fleet
|
1.3
|
|
|
3.1
|
|
|
1.3
|
|
Total
|
100.0
|
%
|
|
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, finance leases and service leases. Long-term leases, typically with initial contractual terms ranging from three to eight years, 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, which are typically structured as full payout leases, provide for a predictable recurring revenue stream with the lowest cost to the customer because 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 a greater level of operational flexibility by allowing the 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.
The following table (based on CEU) provides a summary of our equipment leasing fleet portfolio by lease type, as of the dates indicated below:
|
|
|
|
|
|
|
|
|
|
Lease Portfolio
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Long-term leases
|
68.7
|
%
|
|
68.7
|
%
|
|
67.8
|
%
|
Finance leases
|
7.7
|
|
|
7.7
|
|
|
7.8
|
|
Service leases
|
15.2
|
|
|
15.7
|
|
|
18.0
|
|
Expired long-term leases (units on-hire)
|
8.4
|
|
|
7.9
|
|
|
6.4
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
As of
March 31, 2016
,
December 31, 2015
and
March 31, 2015
, our long-term and finance leases combined had average remaining contract terms of approximately
42 months
, respectively, assuming no leases are renewed.
Operating Performance
Our profitability is primarily determined by the extent to which our leasing and other revenues exceed our ownership, operating and administrative expenses. Our profitability is also impacted by the gains or losses that are realized on the sale of our used equipment and the net sales margins on our equipment trading activities.
Our leasing revenues are primarily driven by the size of our owned fleet, our equipment utilization and the average lease rates in our lease portfolio. Our leasing revenues also include ancillary fees driven by container pick-up and drop-off volumes. Leasing revenues for the
first
quarter of
2016
increased
0.1%
from the
first
quarter of
2015
.
Fleet size.
As of
March 31, 2016
, our owned fleet included
3,136,974
CEU, an increase of
1.8%
from
December 31, 2015
and an increase of
8.7%
from
March 31, 2015
. The
increase
in our fleet size from
March 31, 2015
was primarily due to purchases of new containers and completion of several large sale-leaseback transactions in 2015 and 2016. We purchased
$625 million
of new and sale-leaseback containers for delivery in 2015.
As of
May 4, 2016
, we have invested approximately
$134 million
in new and sale-leaseback containers for delivery in
2016
, which is well below our investment level at this time last year. Trade growth and leasing demand were less than expected in 2015, and a larger number of new containers purchased last year remain in container factories awaiting lease-out or pick-up. Expectations for trade growth in
2016
among market forecasters and our customers remain varied. Our level of investment for the remainder of the year depends on the level of global containerized trade growth and leasing demand as we head into the traditional summer peak season.
Utilization.
Our average utilization was
92.2%
during the
first
quarter of
2016
, a decrease from
93.7%
in the fourth quarter of
2015
and a decrease from
97.9%
in the
first
quarter of
2015
. Weaker than expected trade growth over the last year has led to increased drop-off volumes, limited pick-up activity, and lower utilization. Drop-off volumes in our sale-leaseback portfolio have been particularly high since these leases are generally structured to provide maximum redelivery flexibility.
However, our utilization remains solid and continues to be supported by the high percentage of our units that are on-hire to customers on long-term or finance leases. If containerized trade growth improves from the weak levels in 2015, we would expect increased leasing demand to drive improved utilization. However, if we experience another year of little or no trade growth, utilization would likely decrease further.
The following tables set forth our equipment fleet utilization(1) for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
2016
|
|
December 31,
2015
|
|
September 30,
2015
|
|
June 30,
2015
|
|
March 31,
2015
|
Average Utilization
|
92.2
|
%
|
|
93.7
|
%
|
|
95.8
|
%
|
|
97.1
|
%
|
|
97.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
September 30,
2015
|
|
June 30,
2015
|
|
March 31,
2015
|
Ending Utilization
|
91.4
|
%
|
|
93.0
|
%
|
|
94.7
|
%
|
|
96.6
|
%
|
|
97.7
|
%
|
_______________________________________________________________________________
|
|
(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 in the
first
quarter of
2016
for our dry container product line
decreased
by
8.8%
from the
first
quarter of
2015
. New container prices have decreased significantly over the last several years due to a significant drop in steel prices in China. Very low long-term interest rates and aggressive competition for new leasing transactions has combined with falling container prices to push market lease rates to historical low levels and market lease rates for dry containers are currently well below our portfolio average. Low market lease rates negatively impact our overall average lease rates as we add new containers to our fleet and as leases covering existing containers expire and are re-priced. If market lease rates remain near their current low level, we expect the decrease in our average dry container lease rates will accelerate for the remainder of 2016 and 2017 due to the large number of leases with high lease rates that are scheduled to expire in those years.
Average lease rates in the
first
quarter of
2016
for our refrigerated container product line
decreased
by
4.4%
from the
first
quarter of
2015
. For several years our average lease rates for refrigerated containers have been negatively impacted by the addition of new refrigerated containers placed on lease at rates lower than our portfolio average. The cost of refrigerated
containers has trended down over the last few years, which has led to lower market lease rates. Lease rates for new refrigerated containers are also being negatively impacted by aggressive pricing from new entrants seeking to build market share.
The average lease rates for special containers
decreased
approximately
0.7%
in the
first
quarter of
2016
compared to the
first
quarter of
2015
. This
decrease
is mainly the result of certain lease renegotiations.
Equipment disposals.
During the
first
quarter of
2016
, we recognized a
$13.9 million
loss on the sale of our used containers, compared to a loss of
$1.4 million
in the
first
quarter of
2015
. This decrease is primarily due to lower average sale prices. Average used container selling prices in the
first
quarter
2016
decreased approximately
22%
from our average prices in the
first
quarter of
2015
due to the impact of lower new container prices, increased disposal volumes by leasing companies and shipping lines in response to the weaker containerized trade volumes, and decreased demand for containers for one-way shipments.
Our disposal losses in the
first
quarter of
2016
included impairment charges taken against our inventory of containers held for sale. We regularly assess the market value of our containers held for sale and mark the containers to the lower of cost or market. The decrease in disposal prices over the last year resulted in an impairment loss of
$11.8 million
for the three months ended
March 31, 2016
compared to
$2.3 million
in the same period in
2015
. The size of the impairment losses was driven by a combination of much lower sales prices and a much larger inventory of containers held for sale. Lower demand and higher drop off volumes has resulted in the inventory of containers held for sale growing from approximately
24,000
units in the
first
quarter of
2015
to approximately
62,000
units in the
first
quarter of
2016
.
Equipment ownership expenses.
Our ownership expenses, which consist of depreciation and interest expense,
increased
by
$4.8 million
or
5.5%
in the
first
quarter of
2016
as compared to the
first
quarter of
2015
.
Depreciation expense
increased
by
$4.8 million
or
8.2%
largely due to an increase in the size of our depreciable fleet.
Interest and debt expense was
$29.2 million
in the
three
months ended
March 31, 2016
, and
March 31, 2015
, respectively. Interest expense decreased due to a lower effective interest rate which was entirely offset by an increase in interest expense due to an increase in debt balance as a result of an increase in the size of our fleet.
Credit performance.
We recorded a
$0.3 million
reversal
for doubtful accounts during the
first
quarter of
2016
, compared to a small reversal during the
first
quarter of
2015
. While our credit performance was strong during the
first
quarter of
2016
, our overall concern about credit risk has increased this year. Many of the major shipping lines have reported modest or negative profitability over the last several years due to persistent excess vessel capacity and their operating performance was further pressured by the low level of trade growth over the last year. Several large shipping lines are also currently undertaking significant financial restructurings due to high current financial leverage and ongoing sizable losses. We anticipate that the high volume of new vessels entering service over the next several years will complicate our customers’ efforts to increase freight rates, and we expect our customers’ financial performance will remain under pressure for some time.
Operating expenses.
Direct operating expenses were
$18.0 million
in the three months ended
March 31, 2016
, compared to
$8.8 million
in the same period in
2015
, an
increase
of
$9.2 million
. This increase was primarily driven by higher storage costs of $7.4 million resulting from an increase in the number of idle units, and higher repair related costs of $1.5 million due to a higher volume of redeliveries.
Our administrative expenses
increased
$1.0 million
to
$13.0 million
in the
first
quarter of
2016
, compared to
$12.0 million
in the
first
quarter of
2015
. The increase was mainly due to
$2.0 million
of transaction costs related to the pending merger with Triton, partially offset by lower stock compensation expense.
Dividends
We paid the following quarterly dividends during the
three
months ended
March 31, 2016
and
2015
on our issued and outstanding common stock:
|
|
|
|
|
|
|
Record Date
|
Payment Date
|
|
Aggregate
Payment
|
|
Per Share
Payment
|
March 10, 2016
|
March 24, 2016
|
|
$14.8 Million
|
|
$0.45
|
March 3, 2015
|
March 24, 2015
|
|
$23.7 Million
|
|
$0.72
|
Historically, most of our dividends have been treated as a non-taxable return of capital, and based on our current estimates we believe that our dividends paid in
2016
will also be treated as a non-taxable return of capital to TAL shareholders. The taxability of the dividends to TAL shareholders does not impact TAL's corporate tax position. Investors should consult with a tax adviser to determine the proper tax treatment of these distributions.
Merger
On
November 9, 2015, TAL and Triton announced that they have entered into a definitive agreement under which the companies will combine in an all-stock merger. Under the terms of the Transaction Agreement, TAL and Triton will combine under a newly-formed holding company, Triton International Limited (“Holdco”), which will be domiciled in Bermuda and is expected to be listed on the New York Stock Exchange. TAL International shareholders will receive one common share of Holdco for each share of TAL International stock owned. The transaction is subject to the approval of TAL's shareholders and a special meeting of shareholders has been scheduled for June 14, 2016.
Treasury Stock & Stock Repurchase Program
In the first quarter of
2016
, TAL had no repurchases of shares. TAL repurchased
81,915
shares in the first quarter of
2015
, at an average price of
$41.40
per share. As part of the joint announcement of the TAL and Triton transaction on November 9, 2015, a share repurchase program of up to
$250 million
was announced, which supplants all prior stock repurchase programs.
Results of Operations
The following table summarizes our results of operations for the
three
months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Leasing revenues:
|
|
|
|
Operating leases
|
$
|
144,898
|
|
|
$
|
144,568
|
|
Finance leases
|
3,107
|
|
|
4,024
|
|
Other revenues
|
1,218
|
|
|
383
|
|
Total leasing revenues
|
149,223
|
|
|
148,975
|
|
|
|
|
|
Equipment trading revenues
|
11,292
|
|
|
16,845
|
|
Equipment trading expenses
|
(11,265
|
)
|
|
(15,431
|
)
|
Trading margin
|
27
|
|
|
1,414
|
|
|
|
|
|
Net (loss) on sale of leasing equipment
|
(13,930
|
)
|
|
(1,449
|
)
|
|
|
|
|
Operating expenses:
|
|
|
|
Depreciation and amortization
|
63,226
|
|
|
58,384
|
|
Direct operating expenses
|
17,959
|
|
|
8,822
|
|
Administrative expenses
|
12,952
|
|
|
11,982
|
|
(Reversal) for doubtful accounts
|
(309
|
)
|
|
(23
|
)
|
Total operating expenses
|
93,828
|
|
|
79,165
|
|
Operating income
|
41,492
|
|
|
69,775
|
|
Other expenses:
|
|
|
|
Interest and debt expense
|
29,151
|
|
|
29,243
|
|
Write-off of deferred financing costs
|
363
|
|
|
—
|
|
Net loss on interest rate swaps
|
813
|
|
|
716
|
|
Total other expenses
|
30,327
|
|
|
29,959
|
|
Income before income taxes
|
11,165
|
|
|
39,816
|
|
Income tax expense
|
4,743
|
|
|
14,059
|
|
Net income
|
$
|
6,422
|
|
|
$
|
25,757
|
|
Comparison of
Three Months Ended March 31, 2016
to
Three Months Ended March 31, 2015
Leasing revenues.
The principal components of our leasing revenues are presented in the following table. Per diem revenue represents daily usage revenue earned under operating lease contracts; fee and ancillary lease revenue represent fees billed for the pick-up and drop-off of containers in certain geographic locations and billings of certain reimbursable operating costs such as repair and handling expenses; and finance lease revenue represents interest income earned under finance lease contracts.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Leasing revenues:
|
|
|
|
Operating lease revenues:
|
|
|
|
Per diem revenue
|
$
|
131,999
|
|
|
$
|
137,208
|
|
Fee and ancillary lease revenue
|
12,899
|
|
|
7,360
|
|
Total operating lease revenue
|
144,898
|
|
|
144,568
|
|
Finance lease revenue
|
3,107
|
|
|
4,024
|
|
Other revenues
|
1,218
|
|
|
383
|
|
Total leasing revenues
|
$
|
149,223
|
|
|
$
|
148,975
|
|
Total leasing revenues were
$149.2 million
in the
three
months ended
March 31, 2016
, compared to
$149.0 million
in the same period in
2015
,
an increase
of
$0.2 million
, or
0.1%
.
Per diem revenue
decreased
by
$5.2 million
, or
3.8%
, compared to the
three
months ended
March 31, 2015
. The primary reasons for this
decrease
are as follows:
|
|
•
|
$8.6 million
decrease
due to
lower
average per diem rates; partially offset by a
|
|
|
•
|
$3.4 million
increase
due to
an increase
of approximately
66,000
CEU in the average number of containers on-hire under operating leases.
|
Fee and ancillary lease revenue
increased
by
$5.5 million
compared to the
three
months ended
March 31, 2015
primarily due to an increase in drop-off volumes.
Finance lease revenue
decreased
by
$0.9 million
in the
three
months ended
March 31, 2016
, compared to the same period in
2015
, primarily due to a decrease in the average size of our finance lease portfolio and a decrease in the portfolio average interest rate.
Other revenues
increased
by
$0.8 million
mainly due to the recognition of a previously deferred fee related to TAL performing as guarantor of a purchase option contained in a lease between a lessee and bank.
Equipment Trading Activities.
Equipment trading revenues represent the proceeds on the sale of equipment purchased for resale. Equipment trading expenses represent the cost of equipment sold, including costs associated with the acquisition, maintenance and selling of trading inventory, such as positioning, repairs, handling and storage costs, and estimated direct selling and administrative costs.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Equipment trading revenues
|
$
|
11,292
|
|
|
$
|
16,845
|
|
Equipment trading expenses
|
(11,265
|
)
|
|
(15,431
|
)
|
Equipment trading margin
|
$
|
27
|
|
|
$
|
1,414
|
|
The equipment trading margin was minimal in the
three
months ended
March 31, 2016
, compared to
$1.4 million
in the same period in
2015
, a
decrease
of $1.4 million. The trading margin
decreased
by
$0.9 million
mainly due to lower selling prices and by
$0.5 million
due to
a decrease
in sales volumes.
Net (loss) on sale of leasing equipment.
Loss on sale of equipment was
$13.9 million
in the
three
months ended
March 31, 2016
, compared to a loss on sale of equipment of
$1.4 million
in the same period in
2015
,
a decrease
of
$12.5 million
. The decrease in sales results was mainly due to a
22%
decrease in used dry container selling prices.
Depreciation and amortization.
Depreciation and amortization was
$63.2 million
in the
three
months ended
March 31, 2016
, compared to
$58.4 million
in the same period in
2015
,
an increase
of
$4.8 million
or
8.2%
. Depreciation expense
increased
by
$7.0 million
due to the net
increase
in the size of our depreciable fleet, partially offset by a
decrease
of
$2.2 million
due to equipment becoming fully depreciated.
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
$18.0 million
in the
three
months ended
March 31, 2016
, compared to
$8.8 million
in the same period in
2015
,
an increase
of
$9.2 million
. This increase was primarily driven by higher storage costs of $7.4 million resulting from an increase in the number of idle units, and higher repair related costs of $1.5 million due to a higher volume of redeliveries.
Administrative expenses.
Administrative expenses were
$13.0 million
in the
three
months ended
March 31, 2016
compared to
$12.0 million
the
three
months ended
March 31, 2015
. The increase was mainly due to an increase of
$2.0 million
in transaction costs related to the pending merger with Triton, partially offset by lower stock compensation expense.
Interest and debt expense.
Interest and debt expense was
$29.2 million
in the
three
months ended
March 31, 2016
, and
March 31, 2015
, respectively. Interest and debt expense
decreased
$2.0 million
due to a
lower
effective interest rate of
3.56%
in the
three
months ended
March 31, 2016
, compared to
3.81%
for the same period in
2015
. This decrease was offset by an
increase
of
$2.0 million
due to a
higher
average debt balance of
$3,237.8 million
for the
three
months ended
March 31, 2016
, compared to
$3,070.4 million
for the
three
months ended
March 31, 2015
.
Net loss on interest rate swaps
Net
loss
on interest rate swaps was
$0.8 million
in the
three
months ended
March 31, 2016
, compared to a
loss
of
$0.7 million
in the same period in
2015
. While the large majority of our interest rate swap agreements have been designated as hedges and generally do not impact the income statement as their market value changes, a small portion of our interest rate swaps are not designated as hedges and thus are subject to revaluation. The fair value of these non-designated interest rate swap agreements decreased during the
three
months ended
March 31, 2016
due to a decrease in long-term interest rates. Under our interest rate swap agreements, we make interest payments based on fixed interest rates and receive payments based on the applicable prevailing variable interest rate. As long-term interest rates decreased during the
three
months ended
March 31, 2016
, the current market rate on interest rate swap agreements with similar terms decreased relative to our existing interest rate swap agreements, which caused the fair value of our existing interest rate swap agreements to decrease.
Income tax expense.
Income tax expense was
$4.7 million
in the
three
months ended
March 31, 2016
, compared to
$14.1 million
in the same period in
2015
. The effective tax rates for the
three
months ended
March 31, 2016
and
2015
were
42.5%
and
35.3%
, respectively. The higher effective tax rate reported for the three months ended
March 31, 2016
was mainly attributable to additional tax expense recorded based on the decrease in our stock price between the grant date and vesting date for restricted stock that was granted to employees in 2013 and vested on January 1, 2016.
While we record income tax expense, we do not currently pay any significant federal, state or foreign income taxes due to the availability of net operating loss (NOL) carryovers and accelerated tax depreciation for our equipment. The majority of the expense recorded for income taxes is recorded as a deferred tax liability on the balance sheet. We anticipate that the deferred income tax liability will continue to grow for the foreseeable future.
Business Segments
We operate our business in
one
industry, intermodal transportation equipment, and in
two
business segments, Equipment leasing and Equipment trading.
Equipment leasing
We own, lease and ultimately dispose of containers and chassis from our leasing fleet, as well as manage containers owned by third parties. Equipment leasing segment revenues represent leasing revenues from operating and finance leases, fees earned on managed container leasing activities, as well as other revenues. Expenses related to equipment leasing include direct operating expenses, administrative expenses, depreciation expense and interest expense. The Equipment leasing segment also includes gains and losses on the sale of owned leasing equipment.
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. Equipment trading segment revenues represent the proceeds on the sale of containers purchased for resale. Expenses related to equipment trading include the cost of containers purchased for resale that were sold and related selling costs, as well as direct operating expenses, administrative expenses and interest expense.
Segment income before income taxes
The following table lists the income before income taxes for the Equipment leasing and Equipment trading segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
% Change
|
|
(in thousands)
|
|
|
Income before income taxes(1)
|
|
|
|
|
|
Equipment leasing segment
|
$
|
11,408
|
|
|
$
|
37,807
|
|
|
(69.8
|
)%
|
Equipment trading segment
|
$
|
933
|
|
|
$
|
2,725
|
|
|
(65.8
|
)%
|
_______________________________________________________________________________
|
|
(1)
|
In the
three
months ended
March 31, 2016
and
2015
, income before income taxes excludes net losses on interest rate swaps of
$0.8 million
and
$0.7 million
, respectively, and the write-off of deferred financing costs of
$0.4 million
for the
three
months ended
March 31, 2016
. There was
no
write-off of deferred financing costs for the
three
months ended March 31,
2015
.
|
Equipment leasing income before income taxes.
Income before income taxes for the Equipment leasing segment was
$11.4 million
in the
three
months ended
March 31, 2016
, compared to
$37.8 million
in the same period in
2015
, a
decrease
of
$26.4 million
, which was primarily due to a decrease of $13.9 million in the net leasing margin (leasing revenue net of depreciation and amortization, interest and debt expense, and direct operating and administrative expenses) and a decrease of $12.5 million in used container disposal gains.
Equipment trading income before income taxes.
Income before income taxes for the Equipment trading segment was
$0.9 million
in the
three
months ended
March 31, 2016
, compared to
$2.7 million
in the same period in
2015
, a
decrease
of
$1.8 million
. This
decrease
was primarily due to a $1.4 million decrease in the trading margin primarily due to lower per unit margins on equipment sold and lower sales volumes. Leasing margin decreased by $0.4 million due to less on-hire units.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows provided by operating activities, proceeds from the sale of our leasing equipment, principal payments on finance lease receivables and borrowings under our credit facilities. Our cash in-flows and borrowings are used to finance capital expenditures, meet debt service requirements and pay dividends.
We continue to have sizable cash in-flows. For the twelve months ended
March 31, 2016
, cash provided by operating activities, together with the proceeds from the sale of our leasing equipment and principal payments on our finance leases, was
$565.2 million
. In addition, as of
March 31, 2016
we had
$73.7 million
of unrestricted cash and
$319.1 million
of additional borrowing capacity under our current credit facilities.
As of
March 31, 2016
, major committed cash outflows in the next 12 months include
$295.5 million
of scheduled principal payments on our existing debt facilities and
$65.6 million
of committed but unpaid capital expenditures.
We believe that cash provided by operating activities and existing cash, proceeds from the sale of our leasing equipment, principal payments on our finance lease receivables and availability under our borrowing facilities will be sufficient to meet our obligations over the next 12 months.
At
March 31, 2016
, our outstanding indebtedness was comprised of the following (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Current
Amount
Outstanding
|
|
Maximum
Borrowing
Commitment
|
Asset backed securitization (ABS) term notes
|
$
|
1,038.9
|
|
|
$
|
1,038.9
|
|
Term loan facilities
|
1,071.7
|
|
|
1,155.8
|
|
Asset backed warehouse facility
|
620.0
|
|
|
750.0
|
|
Revolving credit facilities
|
445.0
|
|
|
550.0
|
|
Capital lease obligations
|
57.2
|
|
|
57.2
|
|
Total Debt
|
$
|
3,232.8
|
|
|
$
|
3,551.9
|
|
Deferred financing costs
|
(24.4
|
)
|
|
—
|
|
Debt, net of unamortized deferred financing costs
|
$
|
3,208.4
|
|
|
$
|
3,551.9
|
|
Certain of these facilities are governed by borrowing bases that limit borrowing capacity to an established percentage of relevant assets. Thus, the maximum commitment levels depicted in the chart above may not reflect the actual availability under all of the credit facilities.
As of
March 31, 2016
, we had
$1,273.8 million
of debt outstanding on facilities with fixed interest rates and
$1,959.0 million
of debt outstanding on facilities with interest rates based on floating rate indices (primarily LIBOR). We economically hedge the risks associated with fluctuations in interest rates on our floating rate borrowings by entering into interest rate swap agreements that convert a portion of our floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. As of
March 31, 2016
, we had interest rate swaps in place with a notional amount of
$1,123.0 million
to fix the floating interest rates on a portion of our floating rate debt obligations.
Debt Covenants
We are subject to certain financial covenants under our debt agreements. As of
March 31, 2016
, we were in compliance with all such covenants. Below are the primary financial covenants to which we are subject:
|
|
•
|
Minimum Earnings Before Interest and Taxes ("Covenant EBIT") to Cash Interest Expense;
|
|
|
•
|
Minimum Tangible Net Worth ("TNW"); and
|
|
|
•
|
Maximum Indebtedness to TNW.
|
Non-GAAP Measures
We primarily rely on our results measured in accordance with generally accepted accounting principles ("GAAP") in evaluating our business. Covenant EBIT, Cash Interest Expense, TNW, and Indebtedness are non-GAAP financial measures defined in our debt agreements that are used to determine our compliance with certain covenants contained in our debt agreements and should not be used as a substitute for analysis of our results as reported under GAAP. However, we believe that the inclusion of this non-GAAP information provides additional information to investors regarding our debt covenant compliance.
Minimum Covenant EBIT to Cash Interest Expense
For the purpose of this covenant, Covenant EBIT is calculated based on the cumulative sum of our earnings for the last four quarters (excluding income taxes, interest expense, amortization, net gain or loss on interest rate swaps and certain non-cash charges). Cash Interest Expense is calculated based on interest expense adjusted to exclude interest income, amortization of deferred financing costs, and the difference between current and prior period interest expense accruals.
Minimum Covenant EBIT to Cash Interest Expense is calculated on a consolidated basis and for certain of our wholly-owned special purpose entities ("SPEs"), whose primary activity is to issue asset backed notes. Covenant EBIT for each of our SPEs is calculated based on the net earnings generated by the assets pledged as collateral for the underlying debt issued. The
actual Covenant EBIT to Cash Interest Expense ratio for each SPE may differ depending on the specific net earnings associated with those pledged assets. As of
March 31, 2016
, the minimum and actual consolidated Covenant EBIT to Cash Interest Expense ratio and Covenant EBIT to Cash Interest Expense ratio for each of the issuers of our debt facilities whose initial borrowing capacity was approximately $200 million or greater were as follows:
|
|
|
|
|
Entity/Issuer
|
Minimum
Covenant EBIT to
Cash Interest
Expense Ratio
|
|
Actual
Covenant EBIT to
Cash Interest
Expense Ratio
|
Consolidated
|
1.10
|
|
2.09
|
TAL Advantage III, LLC
|
1.30
|
|
2.23
|
TAL Advantage V, LLC
|
1.10
|
|
2.35*
|
*
Reflects the weighted average for all series of notes issued by TAL Advantage V, LLC. Each series of notes must comply separately with this covenant, and as of
March 31, 2016
, each series is in compliance.
Minimum TNW and Maximum Indebtedness to TNW Covenants
We are required to meet consolidated Minimum TNW and Maximum Indebtedness to TNW covenants. For the purpose of calculating these covenants, all amounts are based on the consolidated balance sheet of TAL International Group, Inc. TNW is calculated as total tangible assets less total indebtedness, which includes equipment purchases payable and, in certain cases, the fair value of derivative instruments liability.
For the majority of our debt facilities, the Minimum TNW is calculated as $321.4 million plus 50% of cumulative net income or loss since January 1, 2006, which as of
March 31, 2016
was
$745.2 million
. As of
March 31, 2016
, the actual TNW for each of our SPEs and for the $450 million revolving credit facility was
$1,087.3 million
. As of
March 31, 2016
, the maximum and actual Indebtedness to TNW ratios for each of our debt facilities whose initial borrowing capacity was approximately $200 million or greater was as follows:
|
|
|
|
|
Entity/Issuer
|
Maximum
Indebtedness
to TNW Ratio
|
|
Actual
Indebtedness
to TNW Ratio
|
Consolidated
|
4.75
|
|
3.22
|
TAL Advantage III, LLC
|
4.75
|
|
3.02
|
TAL Advantage V, LLC
|
4.75
|
|
3.02
|
As of
March 31, 2016
, our outstanding debt on facilities whose initial borrowing capacity was approximately $200 million or greater was approximately
$2.8 billion
. Outstanding debt on the remaining facilities of $0.4 billion have various other debt covenants, all of which the Company is in compliance with as of
March 31, 2016
.
Failure to comply with these covenants could result in a default under the related credit agreements and/or could result in the acceleration of our outstanding debt if we were unable to obtain a waiver from the creditors.