Textainer (TGH) - 2021 Q4 - Annual Report

Part I Key Information This section outlines principal risks including global trade dependency, customer concentration, debt covenants, and potential PFIC tax implications Risk Factors Details business, financial, operational, international, and tax risks, including global economic dependency, high debt, and dual listing challenges - The company's business is highly dependent on external factors like global economic conditions and container prices[24] - 89.8% of 2021 lease rental income came from the top 20 lessees, indicating high customer concentration[37] - The company operates with $5.38 billion in debt as of December 31, 2021, limiting financial flexibility and imposing restrictive covenants[24][61] - Potential adverse U.S. tax consequences exist for investors if the company is characterized as a Passive Foreign Investment Company (PFIC)[27][128] - Dual listing on NYSE and JSE poses risks, including pressure for South African governance and equity issuance limitations[152][153][154] Information on the Company Provides an overview of Textainer's business, history, and operations, detailing its container leasing segments, global network, and fleet History and Development of the Company Textainer, founded in 1979 and listed on NYSE/JSE, recently completed key acquisitions and issued preference shares - In December 2019, the company acquired Leased Assets Pool Company Limited (LAPCO), adding approximately 161,000 TEU to its fleet[176] - In January 2021, the company acquired the remaining 49.9% of TAP Funding Ltd., making it a wholly-owned subsidiary[177] - In 2021, the company completed public offerings for two series of perpetual preference shares: 7.00% Series A and 6.25% Series B[178] Business Overview Textainer, a leading global container lessor, operates a 4.3 million TEU fleet across ownership, management, and resale segments - The company operates one of the world's largest container fleets with approximately 2.7 million containers, representing 4.3 million TEU[181] Business Segments as of December 31, 2021 | Segment | Description | Fleet Percentage | | :--- | :--- | :--- | | Container Ownership | Owns containers, accounting for the majority of the fleet | ~93% | | Container Management | Manages containers for 10 unaffiliated investors | ~7% | | Container Resale | Sells containers from its fleet at the end of their useful life and also trades containers | N/A | Total On-Hire Fleet by Lease Type (as of Dec 31, 2021) | Lease Type | % of Total On-Hire Fleet (TEU) | % of Total On-Hire Fleet (CEU) | | :--- | :--- | :--- | | Term leases | 72.6% | 73.0% | | Finance leases | 23.0% | 22.6% | | Master leases | 3.4% | 3.4% | | Spot leases | 1.0% | 1.0% | - Customer concentration is high, with the top 20 customers accounting for 89.8% and the top 5 for 59.1% of the total fleet's 2021 lease rental income[238] Organizational Structure Textainer Group Holdings Limited is the Bermuda parent, with two wholly-owned subsidiaries for container management and ownership - Textainer Group Holdings Limited's two main direct subsidiaries are Textainer Equipment Management Limited (TEML) for management services and Textainer Limited (TL) for container ownership[174] Property, Plant and Equipment The company leases all 14 global offices, including its Bermuda headquarters, with key leases expiring by 2027 - The company leases all 14 of its office spaces worldwide, with the main administrative office lease in San Francisco expiring in May 2027[255][256] Operating and Financial Review and Prospects Reviews 2021 financial performance, highlighting strong revenue growth, high utilization, and significant container investment Operating Results 2021 operating results show lease rental income up 24.9% to $750.7 million and income before taxes up 290.3% Comparison of Revenues and Gain on Sale (2021 vs 2020) | Item | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Lease rental income | 750,730 | 600,873 | 24.9% | | Trading container margin | 10,760 | 3,532 | 204.6% | | Gain on sale of owned fleet containers, net | 67,229 | 27,230 | 146.9% | Comparison of Operating Expenses (2021 vs 2020) | Item | 2021 ($ thousands) | 2020 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Direct container expense - owned fleet | 23,384 | 55,222 | (57.7%) | | Depreciation expense | 281,575 | 261,665 | 7.6% | | General and administrative expense | 46,462 | 41,880 | 10.9% | | Total operating expenses | 401,948 | 415,307 | (3.2%) | - Income before income taxes for the Container Ownership segment increased by 473.4% from $41.8 million in 2020 to $239.9 million in 2021, driven by higher lease income and gains on sale[295] Liquidity and Capital Resources Details 2021 liquidity with $282.6 million cash, $863.4 million borrowing capacity, and $5.38 billion total debt - As of December 31, 2021, the company had cash and cash equivalents of $282.6 million and available borrowing capacity of $863.4 million[300] - In 2021, the company paid $2.1 billion for containers and fixed assets and had commitments for an additional $486.9 million for delivery in 2022[304] - The company repurchased $72.2 million of its common shares in 2021 under its share repurchase program[309] - Total outstanding debt principal was $5.38 billion as of December 31, 2021, with approximately 92% being fixed-rate or hedged[311] Critical Accounting Estimates Details critical accounting estimates for container rental equipment, focusing on depreciation and valuation, reviewed annually - The company estimates useful lives for its containers, ranging from 12 years for refrigerated containers to 13-14 years for standard dry freight containers, and 20 years for tank containers[329][330] - Estimates for residual values and useful lives are reviewed annually, using a ten-year historical sales data analysis to account for industry cyclicality[332] - For containers held for sale, the company recorded a net reversal of impairment charges of $0.4 million in 2021, compared to impairment charges of $11.1 million in 2020 and $14.2 million in 2019, reflecting fluctuations in used container prices[336] Directors, Senior Management and Employees Details the company's nine-member Board of Directors, two senior executive officers, and their compensation structure Directors and Senior Management Outlines the nine-member staggered Board of Directors and two senior executive officers, detailing their roles and biographies - The Board of Directors consists of nine members with staggered three-year terms[339][340] - Key executive officers are Olivier Ghesquiere, President and Chief Executive Officer, and Michael K. Chan, Executive Vice President and Chief Financial Officer[342] Compensation Details executive and director compensation, including cash retainers, performance bonuses, and equity awards - Aggregate direct compensation for the two senior executives (CEO and CFO) was approximately $3.7 million for the year ended December 31, 2021[360] - Non-officer directors receive an annual cash retainer of $60,000 and a restricted stock grant valued at $120,000, with additional compensation for the Chairman and committee members[362][363] - Executive equity compensation is heavily weighted towards performance, with 75% of awards being Performance-based Share Units (PSUs) tied to Total Shareholder Return (TSR) over a three-year period[371] Major Shareholders and Related Party Transactions Details major shareholders as of Dec 31, 2021, and discloses related party transactions, including a management agreement Major Shareholders (as of Dec 31, 2021) | Shareholder | Beneficial Ownership (%) | | :--- | :--- | | Coronation Asset Management (Pty) Ltd. | 12.2% | | MandG Investment Managers (Pty) Ltd. | 10.2% | | Dimensional Fund Advisors LP | 6.1% | | Directors and Executive Officers (as a group) | 4.1% | - As of June 2020, Trencor Limited no longer holds any shares in the Company after distributing its remaining stake to its own shareholders[395] - The company has a management agreement with Maccarone Container Fund, LLC, an entity beneficially owned by Director John Maccarone and his family, for which it received approximately $17,000 in management fees in 2021[393] Financial Information References audited financial statements and discusses the company's dividend policy, including the Q4 2021 common share dividend reinstatement - The company's audited consolidated financial statements for the three-year period ended December 31, 2021, are included under Item 18 of this report[402] - In Q4 2021, the company reinstated its common share dividend, declaring a cash dividend of $0.25 per share[404] - The company also pays cumulative quarterly dividends on its Series A and Series B Preferred Shares, which rank senior to common shares[407] The Offer and Listing Details the company's common share listings on the NYSE ('TGH') and JSE ('TXT'), including historical stock price data - The company's common shares are listed on the NYSE under the symbol 'TGH' and on the JSE under the symbol 'TXT'[412] Annual Stock Price Range (NYSE) | Year | High ($) | Low ($) | | :--- | :--- | :--- | | 2021 | 40.33 | 17.73 | | 2020 | 19.82 | 6.51 | | 2019 | 13.95 | 6.74 | Additional Information Covers supplementary corporate information, including incorporation, material contracts, exchange controls, and Bermuda/U.S. tax consequences - The company is an exempted company incorporated under the laws of Bermuda[421] - Due to its secondary listing on the JSE, the company is subject to South Africa's exchange control regulations, which restrict the exporting of capital[424] - The company has obtained assurance from the Bermuda Minister of Finance that it will not be subject to any newly enacted Bermuda tax on profits, income, or capital gains until March 31, 2035[429] - 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[439] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the prior taxable year and intends to conduct business to avoid this classification, but notes the determination is fact-intensive and made annually[463] Quantitative and Qualitative Disclosures About Market Risk Discusses primary market risks: interest rate and credit risk, noting 92% of debt is fixed or hedged to mitigate rate volatility - The company's main market risks are interest rate risk and credit risk; foreign exchange risk is minimal[494][495] - As of December 31, 2021, approximately 92% of the company's debt is either fixed-rate or hedged with interest rate swaps to mitigate interest rate volatility[499] - A hypothetical 1% increase in interest rates on unhedged debt would result in an estimated $6.2 million increase in interest expense over the next twelve months[499] Part II Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[509][510] - Management concluded that the company's internal control over financial reporting was effective for the year ended December 31, 2021, based on the COSO framework[511] Audit Committee Financial Expert The Audit and Risk Committee has five independent members, with Mr. Shwiel, Mr. Cottingham, and Ms. Tang identified as financial experts - The Board of Directors has determined that three members of its five-person Audit and Risk Committee—Mr. Shwiel, Mr. Cottingham, and Ms. Tang—are audit committee financial experts[515] Code of Ethics The company adopted a Code of Business Conduct and Ethics applicable to all directors and employees, with no waivers in 2021 - The company has a Code of Business Conduct and Ethics applicable to all directors and employees, covering topics such as conflicts of interest, disclosure, and legal compliance[516][517] Principal Accountant Fees and Services Details KPMG LLP's fees for 2021 ($2.458 million) and 2020 ($2.131 million), categorized by audit, audit-related, and tax services Principal Accountant Fees (in thousands) | Fee Category | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Audit Fees | 1,883 | 1,888 | | Audit-Related Fees | 555 | 235 | | Tax Fees | 20 | 8 | | Total Fees | 2,458 | 2,131 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers Details the company's share repurchase program, which was increased to $200 million, with $72.2 million repurchased in 2021 - The company's share repurchase program was increased to a total authorization of $200 million in September 2021[524] Share Repurchases in 2021 | Metric | Value | | :--- | :--- | | Total Shares Purchased | 2,426,725 | | Average Price Paid per Share | $29.70 | | Total Cost | ~$72.2 million | Change in Registrant's Certifying Accountant The company will change its independent auditor from KPMG LLP to Deloitte & Touche LLP for the fiscal year ending December 31, 2022 - The company will change its independent registered public accounting firm from KPMG LLP to Deloitte & Touche LLP for the fiscal year ending December 31, 2022[529] - There were no disagreements with the outgoing auditor, KPMG, on any matter of accounting principles or practices during the two most recent fiscal years[531] Corporate Governance As a foreign private issuer, the company follows Bermuda law and voluntarily adopts corporate governance practices similar to NYSE standards - As a foreign private issuer, the company is exempt from many NYSE corporate governance rules but follows Bermuda law and has voluntarily adopted several practices similar to NYSE standards[534] - The company has established an independent audit and risk committee, a compensation committee, and a corporate governance and nominating committee, consistent with best practices[536] Part III Financial Statements Contains the complete audited consolidated financial statements for Textainer Group Holdings Limited for the three-year period ended 2021 Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on financial statements and internal controls, identifying residual value assessment as a critical audit matter - KPMG LLP provided an unqualified audit opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[543][554] - The audit identified the assessment of residual values for four key container types as a Critical Audit Matter, highlighting the significant judgment and complexity involved in this estimate[547][550] Consolidated Financial Statements Presents the company's financial performance and position, showing significant increases in net income, total assets, and equity in 2021 Consolidated Statement of Operations Highlights (in thousands) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Lease Rental Income | $750,730 | $600,873 | $619,760 | | Income from Operations | $430,131 | $221,599 | $222,684 | | Net Income | $284,288 | $73,673 | $56,556 | | Net Income Attributable to Common Shareholders | $273,459 | $72,822 | $56,724 | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,367,444 | $5,741,376 | | Containers, net | $4,731,878 | $4,125,052 | | Total Liabilities | $5,586,190 | $4,454,658 | | Total Equity | $1,781,254 | $1,286,718 | Consolidated Cash Flow Highlights (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $611,783 | $396,255 | | Net cash used in investing activities | $(1,930,129) | $(689,902) | | Net cash provided by financing activities | $1,395,832 | $220,730 |