ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following Operating and Financial Review and Prospects should be read in conjunction with our audited Consolidated Financial Statements and related notes and other financial information included elsewhere in this Annual Report. In addition to historical consolidated financial information, the following discussion includes statements regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements, which are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties discussed under "Cautionary Note Regarding Forward-Looking Statements" and Item 3.D, "Risk Factors" in this Annual Report, and in any subsequent Reports on Form 6-K to be filed by us, as well as in the other documents we file with the SEC from time to time. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
For the discussion of the results of operations and financial condition for the year ended December 31, 2023 compared to the year ended December 31, 2022, refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" and "Liquidity and Capital Resources" sections in Item 7 of our 2023 Annual Report on Form 10-K, filed with the SEC on February 29, 2024, which discussion is incorporated herein by reference.
Our Company
Triton is the world's largest lessor of intermodal containers. Intermodal containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Because of the handling efficiencies they provide, intermodal containers are the primary means by which many goods and materials are shipped internationally. We also lease chassis, which are used for the transportation of containers.
We operate our business in one industry, intermodal transportation equipment, and have two business segments, which also represent our reportable segments:
•Equipment leasing - we own, lease and ultimately dispose of containers and chassis from our lease fleet.
•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.
Brookfield Infrastructure Transaction
Refer to Item 4.A, "History and Development of the Company" in this Annual Report.
Recent Developments
In connection with a share purchase agreement entered into between a third-party investor and Parent in December 2024, Triton expects to distribute all of the equity interests in Triton Container Finance VIII LLC ("TCF VIII"), a special purpose securitization subsidiary of Triton, to Parent (the "TCF VIII Distribution"). As of December 31, 2024, TCF VIII had total assets of approximately $1.9 billion and total indebtedness of approximately $1.4 billion, and for the year ended December 31, 2024, TCF VIII had leasing revenues of approximately $0.3 billion. The TCF VIII Distribution is expected to reduce Triton’s total shareholders’ equity by approximately $0.5 billion. Following the completion of the TCF VIII Distribution, we will continue to manage the containers in the TCF VIII securitization portfolio, for which we will be entitled to receive management fees. The TCF VIII Distribution is subject to a number of conditions precedent, including regulatory approvals, and is expected to be completed during the first half of 2025. There can be no assurance the TCF VIII Distribution will be completed within such time frame or at all. We and Brookfield Infrastructure also may pursue future managed container transactions.
Operations
Our consolidated operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of December 31, 2024, our total fleet consisted of 4.1 million containers and chassis, representing 7.0 million TEU or 7.6 million CEU. We have an extensive global presence, offering leasing services through a worldwide network of local offices, and we utilize third-party container depots spread across 47 countries to provide customers global access to our container fleet. Our primary customers include the world's largest container shipping lines.
The most important driver of profitability in our business is the extent to which leasing revenues, which are driven by our owned equipment fleet size, utilization and average lease rates, exceed our ownership and operating costs. Our profitability is also driven by the gains or losses we realize on the sale of used containers and the margins generated from trading new and used containers.
We lease five types of equipment: dry containers, refrigerated containers, special containers, tank containers, and chassis. Our in-house equipment sales group manages the sale process for our used containers and chassis from our equipment leasing fleet and sells used and new containers and chassis acquired from third parties.
The following table summarizes the percentage of our equipment fleet in terms of units and CEU as of December 31, 2024:
| | | | | | | | | | | |
| Equipment Type | Percentage of total fleet in units | | Percentage of total fleet in CEU |
| Dry | 90.9 | % | | 72.8 | % |
| Refrigerated | 5.0 | | | 20.1 | |
| Special | 2.4 | | | 3.4 | |
| Tank | 0.3 | | | 1.3 | |
| Chassis | 0.6 | | | 1.8 | |
| Equipment leasing fleet | 99.2 | % | | 99.4 | % |
| Equipment trading fleet | 0.8 | | | 0.6 | |
| Total | 100.0 | % | | 100.0 | % |
TEU and CEU are standard industry measures of fleet size and are used to measure the quantity of containers that make up our revenue earning assets. CEU is a ratio used to convert the actual number of containers in our fleet to a figure based on an estimate for the historical average 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 high cube dry container is 1.70, and a 40-foot high cube refrigerated container is 7.50. These factors may differ slightly from CEU ratios used by others in the industry.
Operating Performance
Our financial performance during 2024 was strong. During the first half of the year, we experienced strong container demand mostly as a result of the Red Sea conflict which caused lengthened voyage times and supply chain inefficiencies. These logistical disruptions, combined with an increase in the volume of cargo shipments led to a sharp increase in pick-up and sales activity in the first half of the year. Demand continued to be tight in the latter half of 2024 due to ongoing uncertainty surrounding the Red Sea diversions, although container pick-up activity moderated from the high levels experienced in the first half. Overall, we experienced an increase in container pick-ups, reduced container drop-off activity, an increase in our fleet utilization and strong disposal volumes and prices throughout 2024 due to the above factors.
As of December 31, 2024, the net book value of our revenue earning assets was $10.3 billion, down slightly from December 31, 2023. During 2024, we invested $916.0 million in new containers, which was offset by depreciation expense, a high volume of disposals and the write-off of $57.4 million related to a finance lease transaction entered into in the second quarter of 2024.
Our utilization increased in 2024 as compared to 2023 due to an increase in container pick-up activity, as well as a decrease in drop-off volumes. Average utilization for the years ended December 31, 2024 and 2023 was 98.6% and 96.9%, respectively, and ending utilization for the same periods was 99.1% and 96.5%. 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.
A.Operating Results
The following table presents our comparative operating results for the years ended as indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2024 | | 2023 | | | | Variance |
| Leasing revenues: | | | | | | | | | |
| Operating leases | $ | 1,426,947 | | | $ | 1,438,504 | | | | | $ | (11,557) | | | |
| Finance leases | 107,889 | | | 105,288 | | | | | 2,601 | | | |
| Total leasing revenues | 1,534,836 | | | 1,543,792 | | | | | (8,956) | | | |
| | | | | | | | | |
| Equipment trading revenues | 48,637 | | | 95,998 | | | | | (47,361) | | | |
| Equipment trading expenses | (44,341) | | | (88,099) | | | | | 43,758 | | | |
| Trading margin | 4,296 | | | 7,899 | | | | | (3,603) | | | |
| | | | | | | | | |
| Net gain (loss) on sale of leasing equipment | 12,369 | | | 58,615 | | | | | (46,246) | | | |
| | | | | | | | | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | | |
| Depreciation and amortization | 541,468 | | | 575,551 | | | | | (34,083) | | | |
| Direct operating expenses | 66,389 | | | 101,552 | | | | | (35,163) | | | |
| Administrative expenses | 91,201 | | | 88,839 | | | | | 2,362 | | | |
| Transaction and other costs | 26,986 | | | 79,000 | | | | | (52,014) | | | |
| Provision (reversal) for doubtful accounts | (1,192) | | | (3,369) | | | | | 2,177 | | | |
| | | | | | | | | |
| Total operating expenses | 724,852 | | | 841,573 | | | | | (116,721) | | | |
| Operating income (loss) | 826,649 | | | 768,733 | | | | | 57,916 | | | |
| Other (income) expenses: | | | | | | | | | |
| Interest and debt expense | 259,941 | | | 240,838 | | | | | 19,103 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other (income) expense, net | (290) | | | (658) | | | | | 368 | | | |
| Total other (income) expenses | 259,651 | | | 240,180 | | | | | 19,471 | | | |
| Income (loss) before income taxes | 566,998 | | | 528,553 | | | | | 38,445 | | | |
| Income tax expense (benefit) | $ | 48,803 | | | $ | 54,464 | | | | | $ | (5,661) | | | |
| Net income (loss) | 518,195 | | | 474,089 | | | | | 44,106 | | | |
| | | | | | | | | |
| Less: dividends on preferred shares | 52,112 | | | 52,112 | | | | | — | | | |
| Net income (loss) attributable to common shareholder | $ | 466,083 | | | $ | 421,977 | | | | | $ | 44,106 | | | |
Comparison of the Year Ended December 31, 2024 to the Year Ended December 31, 2023
Leasing revenues. Per diem revenue represents revenue earned under operating lease contracts. Fee and ancillary lease revenue represents 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. Finance lease revenue represents interest income earned under finance lease contracts. The following table summarizes our leasing revenue for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2024 | | 2023 | | Variance |
| Leasing revenues | | | | | |
| Operating leases: | | | | | |
| Per diem revenues | $ | 1,368,726 | | | $ | 1,371,048 | | | $ | (2,322) | |
| Fee and ancillary revenues | 58,221 | | | 67,456 | | | (9,235) | |
| Total operating lease revenues | 1,426,947 | | | 1,438,504 | | | (11,557) | |
| Finance leases | 107,889 | | | 105,288 | | | 2,601 | |
| Total leasing revenues | $ | 1,534,836 | | | $ | 1,543,792 | | | $ | (8,956) | |
Total leasing revenues were $1,534.8 million in 2024 compared to $1,543.8 million in 2023, a decrease of $9.0 million.
Per diem revenues were $1,368.7 million in 2024 compared to $1,371.0 million in 2023, a decrease of $2.3 million. The primary reasons for the decrease were as follows:
•$6.0 million decrease due to a decrease of approximately 0.1 million CEU in the average number of containers on-hire. The number of containers on-hire decreased throughout 2023, resulting in a decrease in average on-hires in 2024, despite the increase in pick-up activity during the year; partially offset by a
•$1.8 million increase due to an increase in the average lease rates for our product lines; and a
•$2.7 million increase due to the lease intangible becoming fully amortized as of the third quarter of 2024.
Fee and ancillary lease revenues were $58.2 million in 2024 compared to $67.5 million in 2023, a decrease of $9.3 million, primarily due to a decrease in repair revenue as a result of a lower volume of redeliveries.
Finance lease revenues were $107.9 million in 2024 compared to $105.3 million in 2023, an increase of $2.6 million. The increase was primarily due to the addition of a large finance lease in the second quarter of 2024, partially offset by the runoff of the existing portfolio.
Trading margin. Trading margin was $4.3 million in 2024 compared to $7.9 million in 2023, a decrease of $3.6 million. Container trading margins decreased in 2024 primarily as a result of a decrease in volume of new production units sold.
Net gain (loss) on sale of leasing equipment. Gain on sale of leasing equipment was $12.4 million in 2024 compared to $58.6 million in 2023, a decrease of $46.2 million. The decrease was primarily due to a $57.4 million up-front loss on a finance lease transaction in 2024 that included certain containers purchased during the COVID-19 pandemic with carrying values that were higher than current market values. Additionally, in the prior year we had a gain from the buyout of a finance lease of $4.3 million that did not re-occur. Excluding activity related to finance leases, gain on sale of equipment increased in the current period primarily due to an increase in sales volume and the average sales price for used dry containers.
Depreciation and amortization. Depreciation and amortization was $541.5 million in 2024 compared to $575.6 million in 2023, a decrease of $34.1 million. The primary reasons for the decrease were as follows:
•$58.2 million decrease due to an increase in the number of containers that have become fully depreciated or reclassified to assets held for sale; partially offset by a
•$21.9 million increase due to new production units placed on-hire in the current year.
Direct operating expenses. Direct operating expenses primarily consist of our costs to repair equipment returned off lease, store equipment when it is not on lease and reposition equipment from locations with weak leasing demand. Direct operating expenses were $66.4 million in 2024 compared to $101.6 million in 2023, a decrease of $35.2 million. The primary reasons for the decrease were as follows:
•$26.9 million decrease in storage expense due to a decrease in the number of idle units; and a
•$5.8 million decrease in repair costs due to a lower volume of redeliveries.
Administrative expenses. Administrative expenses were $91.2 million in 2024 compared to $88.8 million in 2023, an increase of $2.4 million primarily due to an increase in overall compensation expense, partially offset by a decrease in costs associated with no longer having publicly traded common shares. In addition, we had foreign exchange losses in 2024 compared to gains in 2023.
Transaction and other costs. Transaction and other costs were $27.0 million in 2024 compared to $79.0 million in 2023, a decrease of $52.0 million primarily due to a decrease in employee compensation costs and advisory fees associated with the closing of the Merger.
Provision (reversal) for doubtful accounts. Reversal for doubtful accounts was $1.2 million in 2024 compared to a reversal of $3.4 million in 2023 largely due to the reversal of reserves of $2.1 million in 2024 and $3.5 million in 2023 as a result of recoveries related to a customer default that occurred in 2022. Partially offsetting the reversal in 2024 were reserves of $0.9 million recorded for customer receivables not expected to be collected.
Interest and debt expense. Interest and debt expense was $259.9 million in 2024 compared to $240.8 million in 2023, an increase of $19.1 million. The primary reasons for the increase were as follows:
•$28.8 million increase due to an increase in the average effective interest rate to 3.47% from 3.08% due to the maturity of lower interest fixed-rate debt in the third quarter of 2023 and the second quarter of 2024, which was repaid with higher rate variable debt borrowings; partially offset by a
•$10.0 million decrease in interest expense due to a reduction in the average debt balance of $322.8 million.
Income tax expense (benefit). Income tax expense was $48.8 million in 2024 compared to $54.5 million in 2023, a decrease of $5.7 million. The decrease in income tax expense was primarily the result of a decrease in the effective tax rate partially offset by an increase in pre-tax income. The Company's effective tax rate was 8.6% in 2024 compared to 10.3% in 2023. The decrease in the effective tax rate was primarily due to a tax benefit from the purchase of investment tax credits and an adjustment to our deferred tax liability as a result of a decrease in the portion of the Company's income sourced to the U.S. These decreases were partially offset by an increase in non-deductible compensation resulting from the payout of employee incentive compensation costs related to the Merger.
Segments
Our leasing segment is discussed in our operating results comparisons and the trading segment is discussed in the trading margin comparison within the results of operations comparisons.
For additional information on our segments, refer to Note 12 - "Segment and Geographic Information" in the Notes to the Consolidated Financial Statements.
B. Liquidity and Capital Resources
Our principal sources of liquidity are cash flows provided by operating activities, proceeds from the sale of our leasing equipment, borrowings under our debt facilities and proceeds from other financing activities. Our principal uses of cash include capital expenditures, debt service, and dividends.
For the year ended December 31, 2024, cash provided by operating activities, together with the proceeds from the sale of our leasing equipment, was $1,488.0 million. In addition, as of December 31, 2024, we had $58.2 million of unrestricted cash and cash equivalents and $1,980.0 million of maximum borrowing capacity remaining under our existing credit facilities.
As of December 31, 2024, our cash commitments in the next twelve months include $511.9 million of scheduled principal payments on our existing debt facilities, and $20.6 million of committed but unpaid capital expenditures, primarily for the purchase of new equipment.
We believe that cash generated from operating activities, existing cash, proceeds from the sale of our leasing equipment, and availability under our credit facilities will be sufficient to meet our obligations over the next twelve months and beyond.
Capital Activity
During the year ended December 31, 2024, the Company paid dividends on preference shares of $52.1 million and paid cash dividends of $600.0 million on the common shares of the Company to Parent. The Company also paid $5.5 million in distributions to Parent for the reimbursement of or payment of costs primarily related to the Merger.
In February 2025, the Company issued 6,000,000 Series F Cumulative Redeemable Perpetual Preference Shares for aggregate net proceeds of $144.6 million.
For additional information on capital activity and dividends, refer to Note 11 - "Other Equity Matters" and Note 17 – "Subsequent Events" in the Notes to the Consolidated Financial Statements.
Debt Agreements
As of December 31, 2024, our outstanding indebtedness was comprised of the following (amounts in millions): | | | | | | | | | | | |
| December 31, 2024 |
| Outstanding Borrowings | | Maximum Borrowing Level |
| | | |
| Secured Debt Financings | | | |
| Securitization term instruments | $ | 3,032.7 | | | $ | 3,032.7 | |
| Securitization warehouse | 60.0 | | | 1,125.0 | |
| | | |
| Total secured debt financings | 3,092.7 | | | 4,157.7 | |
| Unsecured Debt Financings | | | |
| Senior notes | 1,800.0 | | | 1,800.0 | |
| Credit facility: | | | |
| Revolving credit tranche | 1,085.0 | | | 2,000.0 | |
| Term loan tranche | 1,680.0 | | | 1,680.0 | |
| Total unsecured debt financings | 4,565.0 | | | 5,480.0 | |
| Total debt financings | 7,657.7 | | | 9,637.7 | |
| Unamortized debt costs | (48.7) | | | |
| Unamortized debt premiums & discounts | (3.3) | | | |
| Debt, net of unamortized costs | $ | 7,605.7 | | | $ | 9,637.7 | |
The maximum borrowing levels depicted in the table above may not reflect the actual availability under all of the credit facilities. Certain of these facilities are governed by either borrowing bases or an unencumbered asset test that limits borrowing capacity. Based on those limitations, the availability under the ABS warehouse and the revolving credit tranche under the credit facility at December 31, 2024 was approximately $827.0 million.
As of December 31, 2024, we had a combined $6,699.0 million of total debt on facilities with fixed interest rates or floating interest rates that have been synthetically fixed through interest rate swap contracts. This accounts for 87.5% of our total debt.
For additional information on our debt, refer to Note 7 - "Debt" in the Notes to the Consolidated Financial Statements.
Debt Activity
In the fourth quarter of 2024, in connection with the TCF VIII Distribution, the Company cancelled the related TCF VIII standby letters of credit, and funded restricted cash to be held by the indenture trustee in the amount of $21.3 million in order to satisfy the restricted cash balance requirements equal to nine months of interest expense on the TCF VIII ABS facility. As of December 31, 2024, the current value of the remaining standby letters of credit for our ABS facilities, as amended, is $31.9 million. Refer to Note 16 – "Related Party Transactions" for additional details regarding the TCF VIII Distribution.
During the third quarter of 2024, the Company amended and restated its existing $2,000.0 million revolving credit facility to, among other things, add a new $1,750.0 million term loan tranche under the credit facility. In conjunction with the addition of the term loan tranche under the credit facility, the Company terminated the former term loan credit facility. The amendment
and restatement also transitioned the reference rate from term to daily Secured Overnight Financing Rate ("SOFR"), increased the accordion feature available under the credit facility from $500.0 million to $1,000.0 million (or more in certain instances) and extended the maturity date of the credit facility to July 9, 2029.
During the second and third quarters of 2024, the Company issued ABS fixed-rate notes in the amount of $450.0 million and $351.9 million at weighted average interest rates of 5.55% and 5.63% and expected maturity dates of May 2034 and February 2035, respectively. The proceeds from these issuances were primarily used to pay down borrowings under the Company's revolving credit facilities.
In the second quarter of 2024, the Company’s $500.0 million 1.15% senior notes matured. Payment at maturity was primarily funded by borrowings under Triton’s revolving credit facility.
In the first quarter of 2024, the Company obtained $57.0 million in irrevocable standby letters of credit to satisfy the restricted cash balance requirements equal to nine months of interest expense on the ABS facilities, inclusive of a $18.7 million irrevocable standby letter of credit related to the ABS fixed-rate notes issued in the second quarter of 2024. The restricted cash balance held by the indenture trustee in designated bank accounts of $38.3 million was released to the Company subsequent to the issuance of the letters of credit, proceeds of which were used for general corporate purposes. The Company also amended its $1,125.0 million ABS warehouse facility to extend the conversion date to January 22, 2027, after which borrowings will convert to term notes with a final maturity date of January 22, 2031 and pay interest at daily compounded SOFR plus 2.60%.
We may, from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for debt, in open-market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources, will be on such terms and at prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Debt Covenants
We are subject to certain financial covenants related to leverage and interest coverage as defined in our debt agreements. Failure to comply with these covenants could result in a default under the related credit agreements and the acceleration of our outstanding debt if we were unable to obtain a waiver from the creditors. As of December 31, 2024, we were in compliance with all such covenants.
Credit Ratings
Our investment-grade corporate and long-term debt credit ratings enable us to lower our cost of funds and broaden our access to attractively priced capital. While a ratings downgrade, on its own, would not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of our financings. Additionally, under the terms of our senior notes and certain series of our preference shares, certain ratings downgrades following the occurrence of a change of control, as more fully described in the relevant agreements governing those instruments, could give holders of those instruments certain redemption or conversion rights. The Company's long-term debt and corporate rating of BBB- from Fitch Ratings and BBB from S&P Global Ratings remained unchanged in 2024.
Cash Flow
The following table sets forth certain cash flow information for the periods presented (in thousands):
| | | | | | | | | | | | | | |
| Year Ended December 31, | |
| | 2024 | | 2023 | Variance |
| Net cash provided by (used in) operating activities | $ | 1,113,368 | | | $ | 1,150,208 | | $ | (36,840) | |
| Net cash provided by (used in) investing activities | $ | (555,108) | | | $ | 144,291 | | $ | (699,399) | |
| Net cash provided by (used in) financing activities | $ | (537,770) | | | $ | (1,331,582) | | $ | 793,812 | |
Operating Activities
Net cash provided by operating activities decreased by $36.8 million to $1,113.4 million in 2024, compared to $1,150.2 million in 2023. The decrease was primarily due to a decrease in accounts payable and other accrued expenses of $54.7 million driven by the payout of employee incentive and retention costs associated with the Merger of $59.5 million and a decrease in cash collections on finance lease receivables due to a large buyout of $52.7 million of equipment under a finance lease in 2023, that did not re-occur in 2024. In addition, net sales of Trading equipment was lower in the current year compared to prior year. These decreases were partially offset by higher profitability in the current period of $41.5 million and a $35.9 million increase in the change in accounts receivable due to the timing of payments.
Investing Activities
Net cash used in investing activities was $555.1 million in 2024 compared to net cash provided by investing activities of $144.3 million in 2023, a change of $699.4 million. The change was primarily due to a $721.2 million increase in the purchases of leasing equipment.
Financing Activities
Net cash used in financing activities decreased by $793.8 million to $537.8 million in 2024, compared to $1,331.6 million in 2023. The decrease was primarily due to a decrease in net debt repayments of $756.2 million and a decrease in capital distributions of $48.0 million in 2024.
C. Research and Development, Patents and Licenses, etc.
We do not carry out research and development activities and our business and profitability are not materially dependent upon any patents or licenses. The following items referred to in this Annual Report are registered or unregistered service marks in the United States and/or foreign jurisdictions pursuant to applicable intellectual property laws and are the property of Triton and its subsidiaries: Triton®, TAL®, and 
®.
D. Trend Information
Refer to Item 5, "Operating and Financial Review and Prospects" for a description of identifiable trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity either increasing or decreasing at present or in the foreseeable future. Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our revenues, net income, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
E. Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which requires us to make estimates and assumptions that affect the amounts and disclosures reported in the Consolidated Financial Statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
Leasing Equipment
We purchase new equipment from manufacturers for the purpose of leasing to customers. We also purchase used equipment with the intention of selling in one or more years from the date of purchase.
Leasing equipment is recorded at cost and depreciated to a residual amount for each equipment type on a straight-line basis over its estimated useful life. Capitalized costs for new equipment include the manufactured cost of the equipment, inspection, delivery, and associated costs incurred in moving the equipment from the manufacturer to the initial on-hire location. Repair and maintenance costs that do not extend the lives of the leasing equipment are charged to direct operating expenses at the time the costs are incurred.
The estimated useful lives and residual values of our leasing equipment are based on our expectations of how long we will lease the equipment and used container sales prices at the time we expect to sell the equipment. We evaluate estimates used in our depreciation policies on a regular basis to determine whether changes, such as industry events, technological advances or changes in standardization for containers have taken place that would suggest that a change in our depreciation estimates for useful lives or residual values is warranted. Our evaluation utilizes over fifteen years of historical sales experience for each major equipment type which takes into consideration varying business cycles, including unusually high and low markets. Any changes to depreciation estimates are applied prospectively. Due to the size of the depreciable fleet, a change in residual values could result in either large increases or decreases to annual depreciation expense depending on the direction of the change in residual values. We completed the 2024 annual review of depreciable lives and residual value estimates as of December 31, 2024 and increased useful lives for our Dry containers and Refrigerated containers to 15 and 13 years, respectively. In addition, we decreased the residual value of our Refrigerated containers. These changes will be effective January 1, 2025 on a prospective basis. Based on the equipment fleet as of December 31, 2024, we anticipate that these changes in estimate will decrease our depreciation expense by approximately $80.0 million in 2025.
The estimated useful life for each major equipment type for the years ended December 31, 2024 and 2023 was 13 years for Dry containers; 12 years for Refrigerated containers; 16 years for Special containers; and 20 years for Tank containers and Chassis.
Depreciation on leasing equipment commences on the date of initial on-hire.
For equipment purchased for resale that may be leased for a period of time, we adjust our estimates for remaining useful life and residual values based on our expectations for how long the equipment will remain on-hire to the current lessee and the expected sales market for older containers when these units are redelivered.
Valuation of Leasing Equipment
Leasing equipment is evaluated for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying value to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds our estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying value of the asset exceeds the fair value of the asset. Key indicators of impairment on leasing equipment include, among other factors, a sustained decrease in operating profitability, a sustained decrease in utilization, or indications of technological obsolescence.
When testing for impairment, leasing equipment is generally grouped by equipment type, and is tested separately from other groups of assets and liabilities. Some of the significant estimates and assumptions used to determine future undiscounted cash flows and the measurement for impairment are the remaining useful life, expected utilization, expected future lease rates and expected disposal prices of the equipment. We consider the assumptions on expected utilization and the remaining useful life to have the greatest impact on the estimate of future undiscounted cash flows. These estimates are principally based on our historical experience and management's judgment of market conditions at the time the calculations are prepared.
There were no key indicators of impairment and we did not record any impairment charges related to leasing equipment for the years ended December 31, 2024, 2023 and 2022.
Equipment Held for Sale
When leasing equipment is returned off lease, we make a determination of whether to repair and re-lease the equipment or sell the equipment. At the time we determine that equipment will be sold, we reclassify the carrying value of leasing equipment to equipment held for sale. Equipment held for sale is recorded at the lower of its estimated fair value, less costs to sell, or carrying value at the time identified for sale. Depreciation expense on equipment held for sale is halted and disposals generally occur within 90 days. Initial write downs of equipment held for sale to fair value are recorded as an impairment charge and are included in Net gain (loss) on sale of leasing equipment. Subsequent increases or decreases to the fair value of those assets are recorded as adjustments to the carrying value of the equipment held for sale, however, any such adjustments may not exceed the respective equipment's carrying value at the time it was initially classified as held for sale. Realized gains and losses resulting from the sale of equipment held for sale are recorded in Net gain (loss) on sale of leasing equipment, and cash flows associated with the sale of equipment held for sale are classified as cash flows from investing activities.
Equipment purchased for our equipment trading segment is also included in Equipment held for sale. Gains and losses resulting from the sale of this equipment is recorded in Trading margin, and cash flows associated with the purchase and sale of this equipment are classified as cash flows from operating activities.
Goodwill
Goodwill is tested for impairment at least annually on October 31 of each fiscal year or more frequently if events occur or circumstances exist that indicate that the fair value of a reporting unit may be below its carrying value. Goodwill has been allocated to our reporting units, which are the same as our reportable segments.
In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary. Among the relevant events and circumstances that affect the fair value of reporting units, we consider individual factors such as macroeconomic conditions, changes in our industry and the markets in which we operate, as well as our reporting units' historical and expected future financial performance. If, after assessing the totality of events and circumstances, we determine it is more-likely-than-not that the fair value of a reporting unit is less than our carrying amount, then a quantitative goodwill impairment test is performed. The quantitative goodwill impairment test compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of the reporting unit is less than its fair value, no impairment exists. If the carrying value of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
We elected to perform the qualitative assessment for our evaluation of goodwill impairment during the year ended December 31, 2024 and concluded there was no impairment. We have not recorded any impairment charges related to goodwill for the years ended December 31, 2024, 2023, and 2022.
For additional information on our significant accounting policies and recent accounting pronouncements, refer to Note 2 - "Summary of Significant Accounting Policies" to our Consolidated Financial Statements in Item 18, "Financial Statements" in this Annual Report.
