TAL International Group, Inc. Reports Second Quarter 2014 Results

TAL International Group, Inc. (NYSE:TAL), one of the world’s largest lessors of intermodal freight containers and chassis, today reported results for the second quarter ended June 30, 2014.

Highlights:
  • TAL reported Adjusted pre-tax income of $1.45 per fully diluted common share for the second quarter of 2014, a decrease of 12.7% from the second quarter of 2013.
  • TAL reported leasing revenues of $144.7 million for the second quarter of 2014, an increase of 3.2% from the second quarter of 2013.
  • TAL continues to achieve strong operational performance. Utilization increased 0.8% during the quarter and averaged 97.3% for the second quarter of 2014.
  • TAL announced a quarterly dividend of $0.72 per share payable on September 24, 2014 to shareholders of record as of September 3, 2014.

Financial Results

The following table depicts TAL’s selected key financial information for the three and six months ended June 30, 2014 and 2013 (dollars in millions, except per share data):
           
Three Months Ended June 30,   Six Months Ended June 30,

2014
 

2013
 

% Change

2014
 

2013
 

% Change
Adjusted pre-tax income(1) $ 48.9 $ 55.9 (12.5 %) $ 96.4 $ 110.7 (12.9 %)
Adjusted pre-tax income(1) per share $ 1.45 $ 1.66 (12.7 %) $ 2.85 $ 3.29 (13.4 %)
Leasing revenues $ 144.7 $ 140.2 3.2 % $ 289.5 $ 278.0 4.1 %
Adjusted EBITDA(1) $ 142.1 $ 144.6 (1.7 %) $ 283.1 $ 286.5 (1.2 %)
Adjusted net income(1) $ 32.2 $ 36.1 (10.8 %) $ 63.2 $ 71.6 (11.7 %)
Adjusted net income(1) per share $ 0.95 $ 1.07 (11.2 %) $ 1.87 $ 2.13 (12.2 %)
Net income $ 29.4 $ 37.9 (22.4 %) $ 59.4 $ 75.4 (21.2 %)
Net income per share $ 0.87   $ 1.12   (22.3 %)   $ 1.76     $ 2.24     (21.4 %)
Note: All per share data is per fully diluted common share.
 

The Company focuses on adjusted pre-tax results since it considers gains and losses on interest rate swaps and the write-off of deferred financing costs to be unrelated to operating performance and since it does not expect to pay any significant income taxes for a number of years due to the availability of accelerated tax depreciation on its existing container fleet and anticipated future equipment purchases.

Operating Performance

“TAL achieved solid operational and financial results in the second quarter of 2014,” commented Brian M. Sondey, President and CEO of TAL International. “We generated Adjusted pre-tax income of $1.45 per share, an increase of 2.8% from the first quarter of 2014. We also continued to generate a high level of returns, and we achieved an Adjusted pre-tax return on tangible equity(1) of 19.9% in the second quarter of 2014.”

“While our Adjusted pre-tax income increased sequentially from the first to the second quarter of 2014, it was down 12.7% from the second quarter of last year, mainly due to a large decrease in our disposal gains. Our average used container selling prices were down nearly 20% compared to the second quarter of last year, reflecting the ongoing moderation of used container sale prices from the extreme peak levels reached in 2011. Our disposal gains also continue to be constrained by the low number of original TAL containers reaching sale age due to our low level of procurement in the late 1990’s and early 2000’s.”

“Demand for leased containers was quite strong in the second quarter. Trade volumes this year have so far outperformed our customers’ expectations, and the market share shift from owned to leased containers continues. Net container pick-up activity in the second quarter for TAL was the highest it has been since the second quarter of 2010. Our utilization increased 0.8% during the quarter to reach 97.7% as of June 30, 2014, and our utilization also currently stands at 97.7%.”

“While demand and pick-up volumes for leased containers have been stronger than expected, lease rates remain weak. New container prices and long-term interest rates remain at low levels, and low-cost financing for leasing companies remains widely available and continues to fuel aggressive competition for every deal. We have passed on an unusually large number of lease opportunities this year due to pricing and lease structuring concerns, but we also continue to actively invest in our fleet to ensure we remain our core customers’ supplier of choice. Year to date, we have purchased $460 million of containers for delivery in 2014. We expect our returns on this investment to be lower than normal due to the aggressive price competition in our market, but we believe our lease structuring discipline together with our market-leading sales and operational capabilities will allow us to generate solid profitability and continue to deliver investment returns that are at the upper end of our industry.”

Outlook

Mr. Sondey concluded, “We currently expect leasing demand and our pick-up activity to remain strong through the third quarter. We will also benefit from a full quarter of leasing revenue from the large number of containers picked-up during the second quarter of this year. However, we expect some further reduction in our disposal gains, and we expect our trading margin to decrease in the third quarter from the second quarter level due to a lower volume of trading activity. Overall, we expect our Adjusted pre-tax income to increase slightly from the second to the third quarter.”

Dividend

TAL’s Board of Directors has approved and declared a $0.72 per share quarterly cash dividend on its issued and outstanding common stock, payable on September 24, 2014 to shareholders of record at the close of business on September 3, 2014. Based on the information available today, we believe this distribution will qualify as a return of capital rather than a taxable dividend for U.S. tax purposes. Investors should consult with a tax adviser to determine the proper tax treatment of this distribution.

Investors’ Webcast

TAL will hold a Webcast at 9 a.m. (New York time) on Thursday, July 24, 2014 to discuss its second quarter results. An archive of the Webcast will be available one hour after the live call through Friday, September 5, 2014. To access the live Webcast or archive, please visit the Company’s Web site at http://www.talinternational.com.

About TAL International Group, Inc.

TAL is one of the world's largest lessors of intermodal freight containers and chassis with 17 offices in 11 countries and approximately 230 third-party container depot facilities in 40 countries. The Company's global operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. TAL's fleet consists of approximately 1,298,000 containers and related equipment representing approximately 2,131,000 twenty-foot equivalent units (TEU). This places TAL among the world's largest independent lessors of intermodal containers and chassis as measured by fleet size.

Important Cautionary Information Regarding Forward-Looking Statements

Statements in this press release regarding TAL International Group, Inc.'s business that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that these statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. For a discussion of such risks and uncertainties, see "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2014.

The Company’s views, estimates, plans and outlook as described within this document may change subsequent to the release of this statement. The Company is under no obligation to modify or update any or all of the statements it has made herein despite any subsequent changes the Company may make in its views, estimates, plans or outlook for the future.

(1) Adjusted pre-tax income, Adjusted EBITDA, Adjusted net income, and Adjusted pre-tax return on tangible equity are non-GAAP measurements we believe are useful in evaluating our operating performance. The Company’s definition and calculation of Adjusted pre-tax income, Adjusted EBITDA, Adjusted net income, and Adjusted pre-tax return on tangible equity are outlined in the attached schedules.

Please see below for a detailed reconciliation of these financial measurements.

-Financial Tables Follow-
       
TAL INTERNATIONAL GROUP, INC.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
 
June 30, 2014 December 31, 2013
ASSETS:

Leasing equipment, net of accumulated depreciation and allowances of$977,884 and $910,713
$ 3,474,259 $ 3,414,904
Net investment in finance leases, net of allowances of $1,057 and $1,057 239,915 257,176
Equipment held for sale 50,314   58,042  
Revenue earning assets 3,764,488 3,730,122
Unrestricted cash and cash equivalents 57,802 68,875
Restricted cash 29,516 29,126
Accounts receivable, net of allowances of $863 and $948 83,838 74,174
Goodwill 74,523 74,523
Deferred financing costs 28,642 29,087
Other assets 11,567 11,898
Fair value of derivative instruments 12,189   27,491  
Total assets $ 4,062,565   $ 4,045,296  
LIABILITIES AND STOCKHOLDERS' EQUITY:
Equipment purchases payable $ 61,579 $ 112,268
Fair value of derivative instruments 3,616 1,900
Accounts payable and other accrued expenses 50,331 63,022
Net deferred income tax liability 383,727 358,255
Debt 2,868,075   2,817,933  
Total liabilities 3,367,328 3,353,378
Stockholders' equity:
Preferred stock, $0.001 par value, 500,000 shares authorized, none issued

Common stock, $0.001 par value, 100,000,000 shares authorized,37,006,283 and 36,858,778 shares issued respectively
37 37
Treasury stock, at cost, 3,011,843 shares (37,535 ) (37,535 )
Additional paid-in capital 502,327 498,854
Accumulated earnings 230,625 220,492
Accumulated other comprehensive (loss) income

(217

)
10,070  
Total stockholders' equity 695,237   691,918  
Total liabilities and stockholders' equity $ 4,062,565   $ 4,045,296  
 
       
TAL INTERNATIONAL GROUP, INC.
Consolidated Statements of Income
(Dollars and shares in thousands, except earnings per share)
(Unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
2014   2013 2014   2013
Leasing revenues:
Operating leases

$

139,489

$

136,304

$

278,819

$

270,358
Finance leases

 

4,724

 

3,152

 

9,677

 

6,250
Other revenues

 

510

 

725
 

 

994

 

1,362
 
Total leasing revenues

 

144,723

 

140,181
 

 

289,490

 

277,970
 
 
Equipment trading revenues

 

18,794

 

31,781

 

31,281

 

50,067
Equipment trading expenses

 

16,579

 

27,494
 

 

27,418

 

43,105
 
Trading margin

 

2,215

 

4,287
 

 

3,863

 

6,962
 
 
Net gain on sale of leasing equipment

 

2,461

 

8,026

 

5,557

 

18,287
 
Operating expenses:
Depreciation and amortization

 

54,237

 

49,832

 

108,040

 

99,149
Direct operating expenses

 

8,267

 

6,218

 

16,949

 

12,180
Administrative expenses

 

11,128

 

10,614

 

22,960

 

22,518
Provision for doubtful accounts

 

5

 

1,585
 

 

36

 

1,503
 
Total operating expenses

 

73,637

 

68,249
 

 

147,985

 

135,350
 
Operating income

 

75,762

 

84,245

 

150,925

 

167,869
Other expenses:
Interest and debt expense

 

26,888

 

28,303

 

54,507

 

57,186
Write-off of deferred financing costs

 

3,729

 

2,578

 

4,899

 

2,578
Net loss (gain) on interest rate swaps

 

582

 

(5,268
)

 

955

 

(8,420
)
Total other expenses

 

31,199

 

25,613
 

 

60,361

 

51,344
 
Income before income taxes

 

44,563

 

58,632

 

90,564

 

116,525
Income tax expense

 

15,201

 

20,756
 

 

31,191

 

41,129
 
Net income $ 29,362 $ 37,876   $ 59,373 $ 75,396  
Net income per common share—Basic $ 0.87 $ 1.13   $ 1.77 $ 2.25  
Net income per common share—Diluted $ 0.87 $ 1.12   $ 1.76 $ 2.24  
Cash dividends paid per common share $ 0.72 $ 0.66 $ 1.44 $ 1.30
Weighted average number of common shares outstanding—Basic

 

33,619

 

33,484

 

33,614

 

33,477
Dilutive stock options and restricted stock

 

178

 

196
   

 

168
 

 

181
 
Weighted average number of common shares outstanding—Diluted

 

33,797

 

33,680
 

 

33,782

 

33,658
 
 
     
TAL INTERNATIONAL GROUP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
2014   2013
Cash flows from operating activities:
Net income $ 59,373 $ 75,396
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 108,040 99,149
Amortization of deferred financing costs 3,861 3,563
Amortization of net loss on terminated derivative instruments designated as cash flow hedges 1,463 1,548
Net (gain) on sale of leasing equipment (5,557 ) (18,287 )
Net loss (gain) on interest rate swaps 955 (8,420 )
Write-off of deferred financing costs 4,899 2,578
Deferred income taxes 31,191 40,989
Stock compensation charge 3,419 2,977
Changes in operating assets and liabilities:
Net equipment purchased for resale activity (4,627 ) (6,760 )
Net realized loss on interest rate swaps terminated prior to their contractual maturities (1,700 ) (24,235 )
Other changes in operating assets and liabilities (23,109 ) (26,274 )
Net cash provided by operating activities 178,208   142,224  
Cash flows from investing activities:
Purchases of leasing equipment and investments in finance leases (289,766 ) (372,576 )
Proceeds from sale of equipment, net of selling costs 83,503 71,983
Cash collections on finance lease receivables, net of income earned 24,100 19,446
Other 97   (268 )
Net cash (used in) investing activities (182,066 ) (281,415 )
Cash flows from financing activities:
Stock options exercised and stock related activity (234 ) (304 )
Financing fees paid under debt facilities (8,246 ) (7,871 )
Borrowings under debt facilities 912,935 868,207
Payments under debt facilities and capital lease obligations (862,871 ) (682,140 )
(Increase) decrease in restricted cash (390 ) 7,277
Common stock dividends paid (48,409 ) (43,528 )
Net cash (used in) provided by financing activities (7,215 ) 141,641  
Net (decrease) increase in unrestricted cash and cash equivalents $ (11,073 ) $ 2,450
Unrestricted cash and cash equivalents, beginning of period 68,875   65,843  
Unrestricted cash and cash equivalents, end of period $ 57,802   $ 68,293  
Supplemental non-cash investing activities:
Equipment purchases payable $ 61,579 $ 39,193
 

The following table sets forth TAL’s equipment fleet utilization(2) as of and for the quarter ended June 30, 2014:
           

Average and Ending Utilization for the Quarter Ended June 30, 2014
Average Utilization   Ending Utilization
97.3%   97.7%
 
            (2) Utilization is computed by dividing TAL’s total units on lease (in cost equivalent units, or "CEUs") by the total units in TAL’s fleet (in CEUs) excluding new units not yet leased and off-hire units designated for sale.

The following table provides the composition of TAL’s equipment fleet as of June 30, 2014 (in units, TEUs and CEUs):
     
June 30, 2014
Equipment Fleet in Units   Equipment Fleet in TEUs
Owned   Managed   Total   Owned   Managed   Total
Dry 1,104,005   16,818   1,120,823   1,785,811   29,629   1,815,440
Refrigerated 66,293 51 66,344 126,725 89 126,814
Special 54,396 1,264 55,660 98,440 2,153 100,593
Tank 8,940 8,940 8,940 8,940
Chassis 13,495         13,495     24,056         24,056  
Equipment leasing fleet 1,247,129 18,133 1,265,262 2,043,972 31,871 2,075,843
Equipment trading fleet 32,939         32,939     54,807         54,807  
Total 1,280,068     18,133     1,298,201     2,098,779     31,871     2,130,650  
Percentage 98.6 %   1.4 %   100.0 %   98.5 %   1.5 %   100.0 %
 
June 30, 2014
Equipment Fleet in CEUs
Owned Managed Total
Operating Leases 2,318,769 27,808 2,346,577
Finance Leases 210,017 831 210,848
Equipment trading fleet 121,308         121,308  
Total 2,650,094     28,639     2,678,733  
Percentage 98.9 %   1.1 %   100.0 %
 

Non-GAAP Financial Measures

We use the terms "EBITDA", “Adjusted EBITDA”, "Adjusted pre-tax income", "Adjusted net income", and "Adjusted pre-tax return on tangible equity" throughout this press release.

EBITDA is defined as net income before interest and debt expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding gains and losses on interest rate swaps, plus principal payments on finance leases.

Adjusted pre-tax income is defined as income before income taxes as further adjusted for certain items which are described in more detail below, which management believes are not representative of our operating performance. Adjusted pre-tax income excludes gains and losses on interest rate swaps and the write-off of deferred financing costs. Adjusted net income is defined as net income further adjusted for the items discussed above, net of income tax.

Adjusted pre-tax return on tangible equity is defined as the current quarter's Annualized adjusted pre-tax income divided by an average adjusted tangible equity. Adjusted tangible equity is defined as total stockholders' equity plus net deferred income tax liability and the net fair value of derivative instruments less goodwill.

EBITDA, Adjusted EBITDA, Adjusted pre-tax income, Adjusted net income, and Adjusted pre-tax return on tangible equity are not presentations made in accordance with U.S. GAAP. EBITDA, Adjusted EBITDA, Adjusted pre-tax income, Adjusted net income, and Adjusted pre-tax return on tangible equity should not be considered as alternatives to, or more meaningful than, amounts determined in accordance with U.S. GAAP, including net income, or net cash from operating activities.

We believe that EBITDA, Adjusted EBITDA, Adjusted pre-tax income, Adjusted net income, and Adjusted pre-tax return on tangible equity are useful to an investor in evaluating our operating performance because:

-- these measures are widely used by securities analysts and investors to measure a company's operating performance without regard to items such as interest and debt expense, income tax expense, depreciation and amortization, and gains and losses on interest rate swaps, which can vary substantially from company to company depending upon accounting methods and the book value of assets, capital structure and the method by which assets were acquired;

-- these measures help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure, our asset base and certain non-routine events which we do not expect to occur in the future; and

-- these measures are used by our management for various purposes, including as measures of operating performance to assist in comparing performance from period to period on a consistent basis, in presentations to our board of directors concerning our financial performance and as a basis for strategic planning and forecasting.

We have provided reconciliations of net income, the most directly comparable U.S. GAAP measure, to EBITDA and Adjusted EBITDA in the tables below for the three and six months ended June 30, 2014 and 2013. We have provided reconciliations of income before income taxes and net income, the most directly comparable U.S. GAAP measures, to Adjusted pre-tax income and Adjusted net income in the tables below for the three and six months ended June 30, 2014 and 2013.

We have also provided a reconciliation of Adjusted pre-tax return on tangible equity in the tables below for the current quarter.
TAL INTERNATIONAL GROUP, INC.
Non-GAAP Reconciliations of EBITDA and Adjusted EBITDA
(Dollars in Thousands)
 
      Three Months Ended June 30,   Six Months Ended June 30,
2014   2013     2014   2013  
Net income $ 29,362   $ 37,876   $ 59,373   $ 75,396
Add:
Depreciation and amortization 54,237 49,832 108,040 99,149
Interest and debt expense 26,888 28,303 54,507 57,186
Write-off of deferred financing costs 3,729 2,578 4,899 2,578
Income tax expense 15,201   20,756     31,191   41,129  
EBITDA 129,417 139,345 258,010 275,438
Add:
Net loss (gain) on interest rate swaps 582 (5,268 ) 955 (8,420 )
Principal payments on finance lease 12,096   10,495     24,100   19,446  
Adjusted EBITDA $ 142,095   $ 144,572     $ 283,065   $ 286,464  
 
TAL INTERNATIONAL GROUP, INC.
Non-GAAP Reconciliations of Adjusted Pre-tax Income and Adjusted Net Income
(Dollars and Shares in Thousands, Except Per Share Data)
 
Three Months Ended June 30,   Six Months Ended June 30,
2014   2013     2014   2013  
Income before income taxes $ 44,563 $ 58,632 $ 90,564 $ 116,525
Add:
Write-off of deferred financing costs 3,729 2,578 4,899 2,578
Net loss (gain) on interest rate swaps 582   (5,268 )   955   (8,420 )
Adjusted pre-tax income $ 48,874   $ 55,942     $ 96,418   $ 110,683  
Adjusted pre-tax income per fully diluted common share $1.45   $1.66     $2.85   $3.29  
Weighted average number of common shares outstanding—Diluted 33,797 33,680 33,782 33,658
 
 
Three Months Ended June 30,   Six Months Ended June 30,
2014   2013     2014   2013  
Net income $ 29,362 $ 37,876 $ 59,373 $ 75,396
Add:
Write-off of deferred financing costs, net of tax(a) 2,450 1,668 3,212 1,668
Net loss (gain) on interest rate swaps, net of tax(a) 382   (3,405 )   626   (5,448 )
Adjusted net income(a) $ 32,194   $ 36,139     $ 63,211   $ 71,616  
Adjusted net income per fully diluted common share $0.95   $1.07     $1.87   $2.13  
Weighted average number of common shares outstanding—Diluted 33,797 33,680 33,782 33,658
 

(a) The differences between Adjusted net income and reported net income in the three and six months ended June 30, 2014 and 2013 were due to net losses and gains on interest rate swaps and the write-off of deferred financing costs. TAL uses interest rate swaps to synthetically fix the interest rates for most of its floating rate debt so that the duration of the fixed interest rates more closely matches the expected duration of TAL’s lease portfolio.

TAL INTERNATIONAL GROUP, INC.Non-GAAP Reconciliations of Adjusted Pre-tax Return on Tangible Equity (Dollars and Shares inThousands, Except Per Share Data)
       
Three Months Ended June 30, 2014   Three Months EndedMarch 31, 2014
Total stockholders' equity

$

695,237

$

694,510
Net deferred income tax liability 383,727 371,644
Net fair value of derivative instruments (asset) (8,573 ) (18,725 )
Goodwill   (74,523 )     (74,523 )
Total adjusted tangible equity

$

995,868
   

$

972,906
 
Average adjusted tangible equity(a)

$

984,387
Adjusted pre-tax income 48,874
Annualized adjusted pre-tax income (Adjusted pre-tax income * 4)

$

195,496
Adjusted pre-tax return on tangible equity 19.9 %

(a) Calculated by taking the average of the current quarter's and the prior quarter's ending total adjusted tangible equity.

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