Textainer (TGH) - 2019 Q4 - Annual Report

Part I Identity of Directors, Senior Management and Advisers This section is not applicable as stated in the report - The report states that this item is not applicable[18] Offer Statistics and Expected Timetable This section is not applicable as stated in the report - The report states that this item is not applicable[19] Key Information This section presents key financial data for the past five years, capitalization details, and an extensive discussion of business, industry, and common share risk factors Selected Financial Data This section presents selected financial data for fiscal years 2015 through 2019, derived from audited consolidated financial statements, highlighting net income and total assets trends Selected Financial Data (Years Ended December 31) | Indicator | 2019 ($ in thousands) | 2018 ($ in thousands) | 2017 ($ in thousands) | | :--- | :--- | :--- | :--- | | Lease Rental Income | $619,760 | $612,704 | $549,454 | | Income from Operations | $222,684 | $194,426 | $143,866 | | Net Income Attributable to TGH | $56,724 | $50,378 | $19,365 | | Diluted EPS | $0.99 | $0.88 | $0.34 | | Total Assets | $5,202,617 | $4,768,769 | $4,401,252 | | Total Liabilities | $3,916,972 | $3,532,778 | $3,195,215 | | Total TGH Shareholders' Equity | $1,259,379 | $1,206,813 | $1,148,297 | | Utilization Rate | 97.40% | 98.10% | 96.40% | | Total Fleet in TEU (End of Period) | 3,500,812 | 3,354,724 | 3,279,892 | Risk Factors This section details significant risks to the company's business, financial condition, and share price, including global trade dependency, demand volatility, lessee defaults, high indebtedness, and dual listing implications - The demand and pricing for leased containers are subject to factors beyond the company's control, such as world trade growth, economic conditions, container prices, and shipping line consolidation[27][29][31] - The company has significant outstanding debt of $3.8 billion as of December 31, 2019, which reduces financial flexibility and requires substantial cash flow for servicing[57][58] - A substantial portion of lease billings comes from a limited number of lessees. In 2019, the top 20 customers accounted for 82.1% of total fleet billings, with the two largest customers, MSC and CMA-CGM, representing 15.4% and 13.1%, respectively[53] - The bankruptcy of Hanjin Shipping in 2016 had a substantial impact, causing significant costs from container recovery, unpaid rent, and re-leasing containers at lower rates. The company recovered 94% of its containers leased to Hanjin[37] - As a foreign private issuer, the company is exempt from certain NYSE corporate governance requirements, such as having a majority of independent directors on the board[158][159] - In December 2019, the company commenced a dual listing on the Johannesburg Stock Exchange (JSE). This followed the unbundling of shares by its major shareholder, Trencor, which reduced its stake from 47.5% to 5.3%. This dual listing introduces risks related to South African corporate governance practices and potential share price volatility[151][152] Information on the Company This section provides a comprehensive overview of Textainer's business, history, and organizational structure, detailing its operations as a leading intermodal container lessor, core segments, and global footprint History and Development of the Company This section outlines Textainer's history, including its 1993 Bermuda incorporation, NYSE and JSE listings, and significant events like the 2019 LAPCO fleet acquisition - In December 2019, the company acquired Leased Assets Pool Company Limited (LAPCO), which owned a fleet of approximately 161,000 TEU managed by Textainer. The purchase involved $65.5 million in cash and repayment of LAPCO's $126.3 million debt facility[178] - The company commenced a secondary listing of its common shares on the Johannesburg Stock Exchange (JSE) on December 11, 2019, under the symbol 'TXT'[177] Capital Expenditures and Proceeds from Asset Sales | Year | Capital Expenditures ($ in millions) | Proceeds from Sale of Assets ($ in millions) | | :--- | :--- | :--- | | 2019 | $748.4 million | $150.7 million | | 2018 | $854.4 million | $147.3 million | | 2017 | $300.1 million | $135.3 million | Business Overview Textainer operates as a leading global intermodal container lessor with a 3.5 million TEU fleet across three segments: Container Ownership, Management, and Resale, serving approximately 250 shipping lines - As of December 31, 2019, Textainer's total fleet was approximately 2.3 million containers, representing 3.5 million TEU[181][200] Fleet Composition by Ownership (as of Dec 31, 2019) | Ownership | TEU | % of Total TEU | | :--- | :--- | :--- | | Owned | 2,990,172 | 85.4% | | Managed | 510,640 | 14.6% | | Total | 3,500,812 | 100.0% | - The company leases containers under various structures: term leases (75.1% of on-hire fleet), master leases (12.4%), spot leases (2.1%), and finance leases (10.4%) as of December 31, 2019[221][223][224][226] - Customer concentration is high, with the top 20 customers accounting for 82.1% of 2019 lease billings. The two largest customers, Mediterranean Shipping Company S.A. and CMA-CGM S.A., accounted for 15.4% and 13.1% of billings, respectively[248] - The company is a major supplier of leased marine containers to the U.S. Military under a contract with USTranscom, which was renewed in January 2019 for a base year with four option years through February 2024[237][238] Organizational Structure Textainer Group Holdings Limited operates as a Bermuda-based holding company with primary subsidiaries Textainer Limited and Textainer Equipment Management Limited, and a 50.1% stake in TAP Funding Ltd - Textainer Group Holdings Limited is a holding company with two primary direct subsidiaries: Textainer Equipment Management Limited (TEML) for management services and Textainer Limited (TL) for container ownership[170][175] - The company consolidates TAP Funding Ltd, a joint venture where it holds 50.1% of common shares and 66.7% of voting rights[260] - Following a secondary listing on the JSE and a share distribution, Trencor Limited's ownership stake in the company was reduced from 47.5% to approximately 5.3% as of December 31, 2019[262] Property, Plant and Equipment The company operates from 14 leased regional and area offices across 13 countries, with headquarters in Bermuda and administrative offices in San Francisco - The company operates from 14 regional and area offices in 13 countries, with its headquarters in Bermuda and administrative office in San Francisco[263] - All office space is leased. The lease for the San Francisco office expires in May 2027, the UK office in December 2024, and the Singapore office in November 2021[264] Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial condition and operating results, covering performance drivers, liquidity, capital resources, and critical accounting policies Operating Results This section analyzes the company's operating results for 2019, detailing changes in lease rental income, operating expenses, interest expense, and net income, along with segment performance Comparison of Revenues and Gain on Sale (2019 vs 2018) | Revenue/Gain Type | 2019 ($ in thousands) | 2018 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Lease Rental Income | 619,760 | 612,704 | 1.2% | | Management Fees - non-leasing | 7,590 | 8,529 | (11.0%) | | Trading Container Margin | 7,398 | 3,450 | 114.4% | | Gain on Sale of Owned Fleet | 21,397 | 36,071 | (40.7%) | Comparison of Operating Expenses (2019 vs 2018) | Expense Type | 2019 ($ in thousands) | 2018 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Direct Container Expense - Owned Fleet | 45,831 | 53,845 | (14.9%) | | Depreciation Expense | 260,372 | 249,500 | 4.4% | | Container Lessee Default Expense | 7,867 | 17,948 | (56.2%) | | General & Administrative Expense | 38,142 | 44,317 | (13.9%) | | Total Operating Expenses | 433,461 | 466,328 | (7.0%) | - The Container Ownership segment's income before tax decreased by 45.4% to $14.3 million in 2019, primarily due to higher interest and depreciation expenses and a lower gain on sale of containers[316][317] - The Container Management segment's income before tax increased by 36.5% to $27.7 million in 2019, driven by lower distribution expenses to investors and reduced G&A costs[316][317] Liquidity and Capital Resources This section details the company's liquidity and capital resources, outlining cash position, outstanding debt, available debt facilities, and cash flow activities for 2019 Outstanding Debt as of Dec 31, 2019 | Facility | Total Commitment ($ in thousands) | Current Borrowing ($ in thousands) | | :--- | :--- | :--- | | TL Revolving Credit Facility | 1,500,000 | 1,286,289 | | TMCL II Secured Debt Facility | 1,200,000 | 694,506 | | Various Bonds & Term Loans | 1,692,975 | 1,692,975 | | TAP Funding Revolving Credit | 190,000 | 153,525 | | Total | 4,582,975 | 3,827,295 | Cash Flow Summary (2019 vs 2018) | Cash Flow Activity | 2019 ($ in thousands) | 2018 ($ in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 428,545 | 316,119 | | Net Cash used in Investing Activities | (761,792) | (736,787) | | Net Cash from Financing Activities | 386,182 | 408,154 | - The company has entered into interest rate swap and cap agreements with a total notional amount of $1.031 billion as of December 31, 2019, to mitigate exposure from its $2.134 billion in floating-rate debt[345][346] Contractual Obligations This section provides a tabular disclosure of the company's contractual obligations as of December 31, 2019, detailing total obligations and payment schedules Contractual Obligations as of December 31, 2019 (in thousands) | Obligation Type | Total ($ in thousands) | Due in 2020 ($ in thousands) | Due in 2021-2022 ($ in thousands) | Due in 2023-2024 ($ in thousands) | Due 2025 & thereafter ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total debt obligations | $3,827,295 | $250,553 | $950,020 | $1,283,377 | $1,343,345 | | Interest on obligations | $533,645 | $135,866 | $226,719 | $126,219 | $44,841 | | Interest rate swaps/caps | $10,046 | $4,250 | $5,820 | $(24) | $0 | | Office lease obligations | $15,966 | $2,232 | $4,239 | $4,266 | $5,229 | | Container contracts payable | $9,394 | $9,394 | $0 | $0 | $0 | | Total | $4,396,346 | $402,295 | $1,186,798 | $1,413,838 | $1,393,415 | Directors, Senior Management and Employees This section provides information on the company's Board of Directors, senior management, and employees, including compensation details, share incentive plans, and workforce size - The Board of Directors consists of eight members, with directors serving staggered three-year terms. As of March 30, 2020, key executives include Olivier Ghesquiere (President & CEO) and Michael K. Chan (EVP & CFO)[384][385][387] - Aggregate direct compensation for the two executive officers in 2019 was approximately $1.75 million, including bonuses and vested stock. Non-officer directors received an aggregate of approximately $531,000[404][407] - The 2019 Share Incentive Plan was approved, increasing the number of shares available for issuance by 2.5 million. As of December 31, 2019, 2,461,153 shares were available for future issuance under this plan[408] - As of December 31, 2019, the company had approximately 170 employees and is not a party to any collective bargaining agreements[423] Major Shareholders and Related Party Transactions This section details the company's ownership structure, identifying major shareholders and beneficial ownership by directors, and outlines significant related party transactions including the LAPCO acquisition Major Shareholders as of December 31, 2019 | Holder | Beneficial Ownership (%) | | :--- | :--- | | Coronation Asset Management (Pty) Ltd. | 11.8% | | Isam K. Kabbani | 6.5% | | Trencor Limited | 5.3% | | Directors and Executive Officers (as a group) | 9.5% | - In December 2019, Trencor Limited reduced its ownership from 47.5% to 5.3% through a distribution of shares to its own shareholders, which now trade on the JSE[429][437] - The company acquired LAPCO from TAC Limited, a wholly-owned subsidiary of Trencor, on December 31, 2019. Two of Textainer's directors, Hennie Van der Merwe and David M. Nurek, are also directors of Trencor[437][443] - The company has a management agreement with Maccarone Container Fund, LLC, which is beneficially owned by director John Maccarone and his family[436] Financial Information This section confirms the inclusion of audited financial statements, absence of material legal proceedings, and discusses the discretionary dividend policy which was eliminated in Q4 2016 - The company's dividend policy is discretionary and subject to board approval, legal requirements, and debt covenants. The dividend was eliminated in Q4 2016 and has not been reinstated[142][452] - No significant changes have occurred since the date of the audited financial statements (December 31, 2019)[456] The Offer and Listing This section details the trading of the company's common shares, primarily listed on the NYSE under 'TGH' and secondarily on the JSE under 'TXT' since December 2019 - The company's common shares are primary listed on the NYSE under the symbol 'TGH' and secondary listed on the JSE under the symbol 'TXT'[457] Annual NYSE Stock Price Range | Year | High ($) | Low ($) | | :--- | :--- | :--- | | 2019 | 13.95 | 6.74 | | 2018 | 25.85 | 9.30 | | 2017 | 23.55 | 8.50 | Additional Information This section covers supplementary corporate information, including organizational documents, South African exchange controls, and a detailed summary of Bermuda and U.S. federal income tax consequences for the company and its shareholders - The company has obtained assurance from the Bermuda Minister of Finance that it will not be subject to any potential future Bermuda taxes on profits, income, or capital gains until March 31, 2035[474] - A portion of the company's income is treated as effectively connected with a U.S. trade or business and is subject to U.S. federal income tax[483][485] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the prior taxable year and does not expect to be one for the current year, but notes the determination is factual and made annually. The company does not intend to provide the information necessary for shareholders to make a QEF election[508][511] Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily interest rate fluctuations, and outlines mitigation strategies including derivative instruments and credit risk management - The company's primary market risk is interest rate risk. A hypothetical 1% increase in interest rates would increase net interest expense by an estimated $11.3 million annually[546] - To mitigate interest rate risk, the company uses derivative instruments. As of December 31, 2019, it had interest rate swap and cap agreements with a total notional amount of $1.03 billion[538][544][545] - Credit risk is concentrated, with customers in Taiwan, PRC, France, Switzerland, and Singapore accounting for 15.5%, 14.1%, 14.0%, 13.3%, and 11.1% of total fleet container lease billings in 2019, respectively[547] Part II Controls and Procedures Management and KPMG LLP concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[553][554] - Management concluded that the company's internal control over financial reporting was effective for the year ended December 31, 2019, based on the COSO framework[555] - KPMG LLP, the independent registered public accounting firm, audited the internal control over financial reporting and issued an unqualified opinion on its effectiveness as of December 31, 2019[558] Other Information This section covers various governance and compliance topics, including audit committee financial experts, accountant fees, share repurchase programs, and corporate governance practices for a foreign private issuer Audit Committee Financial Expert This section identifies Messrs. Shwiel and Cottingham as the audit committee financial experts, with all four committee members deemed independent - The Board of Directors has determined that Messrs. Hyman Shwiel and Dudley R. Cottingham are audit committee financial experts[559] Principal Accountant Fees and Services This section details fees billed by the principal accountant, KPMG LLP, for professional services in 2019 and 2018, all of which were pre-approved by the audit committee Accountant Fees (in thousands) | Fee Category | 2019 ($ in thousands) | 2018 ($ in thousands) | | :--- | :--- | :--- | | Audit Fees | $1,792 | $1,835 | | Audit-Related Fees | $30 | $173 | | Tax Fees | $6 | $14 | | Total Fees | $1,828 | $2,022 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section details the company's share repurchase program, including shares repurchased in 2019 and the subsequent increase in authorization in March 2020 - The company repurchased 878,637 common shares at an average price of $9.75 per share for a total cost of approximately $8.6 million during 2019[568][571] - In March 2020, the board of directors increased the share repurchase program authorization from $25 million to $50 million[568][820] Corporate Governance As a foreign private issuer, Textainer adheres to Bermuda corporate governance practices, leveraging NYSE exemptions while maintaining independent directors and established committees - The company is a foreign private issuer and follows Bermuda corporate governance practices in lieu of certain NYSE requirements[573] - While not required, as of March 2020, six of the eight directors are independent as defined by the NYSE[574] - The company has established audit, compensation, and nominating/governance committees and has adopted charters for each, along with corporate governance guidelines and a code of business conduct[575] Part III Financial Statements This section presents the company's audited consolidated financial statements for 2017-2019, including the independent auditor's report, key financial statements, and detailed notes on accounting policies and financial matters - The financial statements were audited by KPMG LLP, which provided an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[582][588] - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, which resulted in the recognition of right-of-use assets and lease liabilities for office space leases on the balance sheet[584][697] Consolidated Income Statement Highlights (in thousands) | Line Item | 2019 ($ in thousands) | 2018 ($ in thousands) | 2017 ($ in thousands) | | :--- | :--- | :--- | :--- | | Lease Rental Income | $619,760 | $612,704 | $549,454 | | Income from Operations | $222,684 | $194,426 | $143,866 | | Net Income Attributable to TGH | $56,724 | $50,378 | $19,365 | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2019 ($ in thousands) | Dec 31, 2018 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | $5,202,617 | $4,768,769 | | Containers, net | $4,156,151 | $4,134,016 | | Total Liabilities | $3,916,972 | $3,532,778 | | Total TGH Shareholders' Equity | $1,259,379 | $1,206,813 | Exhibits This section lists all exhibits filed with the Annual Report on Form 20-F, including organizational documents, material contracts, employment agreements, and various certifications - The report includes numerous exhibits, such as the company's organizational documents, key employment agreements, share incentive plans, and major debt facility agreements[832][833]