Trinity Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017. Trinity operates railcar manufacturing and leasing, construction products, inland barges, and energy equipment businesses. All amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $877.3 | $1,187.9; down 26.1% |
| Operating profit | $116.6 | $203.4; down 42.7% |
| Operating margin | 13.3% | 17.1% |
| Net income attributable to Trinity | $46.0 | $97.2 |
| Diluted EPS | $0.30 | $0.64 |
| Operating cash flow | $220.1 | $286.1 |
| Capital expenditures | $187.2 | $249.1 |
- Leasing revenue was $178.6, versus $177.8 a year earlier. Manufacturing revenue fell to $698.7 from $1,010.1.
- Cash and cash equivalents were $586.7; short-term marketable securities were $192.1. Together, unrestricted cash and securities totaled $778.8. Restricted cash was $183.8.
- Total debt was $3,036.0, comprising $854.5 recourse and $2,181.5 non-recourse debt. The company had no revolver borrowings; $507.7 remained available under its $600 million credit facility after letters of credit. An additional $798 million was available under the non-recourse TILC warehouse facility, subject to eligible unpledged equipment.
- Cash increased $23.3 during the quarter. Investing used $140.5 and financing used $56.3. Operating cash flow declined year over year, primarily with lower net income.
- Quarter-end backlog: Rail Group $2,706.7, including $719.8 allocated to Leasing; Inland Barge $109.9; wind towers $1,038.1. Rail and barge backlogs were substantially below the prior-year levels, while wind-tower backlog rose from $263.4.
Material changes and operating results
- Rail revenue decreased 43.5% and operating profit fell to $50.7 from $157.2; railcar deliveries were lower, and backlog value fell 42.6% year over year. Q1 orders totaled 970 railcars.
- Inland Barge revenue fell 43.4% and operating profit declined to $6.4 from $12.6, mainly due to lower deliveries and product mix.
- Energy Equipment revenue declined 6.6% and operating profit fell to $29.8 from $37.4, primarily because of lower wind-tower and other product shipments.
- Construction Products revenue and operating profit were broadly stable: revenue was $123.1 and operating profit $15.6.
- Leasing revenue was broadly stable, while operating profit increased to $85.0 from $74.2. Fleet additions and lower maintenance and compliance costs helped; the group reported 97.5% fleet utilization. No leased railcars were sold in the quarter, compared with $22.8 of sales proceeds in Q1 2016.
- Consolidated selling, engineering, and administrative expenses rose 6.0%, mainly due to legal and litigation-related costs. Management said headcount had declined about 27% since March 2016 as costs were realigned with market conditions.
Outlook, risks, and unusual items
- Management described demand as weak across many products and services, citing industrial-economy uncertainty and oversupply of North American railcars and barges. It is adjusting manufacturing capacity to demand. Results are subject to cyclicality and, for construction products, seasonality.
- For 2017, manufacturing and corporate capital expenditures were projected at $100–$130 million. Planned net investment in the wholly owned lease fleet was $180–$230 million after leased-railcar sale proceeds. No full-year earnings guidance was provided in the filing text.
- The ET-Plus False Claims Act case remains on appeal. A 2015 district-court judgment totaled $682.4 million, stayed pending appeal and supported by a $686 million unsecured supersedeas bond with a current annual premium of $3.7 million. Trinity said it did not believe a loss was probable and recorded no accrual. The Fifth Circuit ruling was pending at filing.
- Related state, county, municipal, product-liability, shareholder, and derivative matters remain risks. The company reported no probable loss accrual for the specified state and municipal, shareholder, and derivative cases; it could not estimate possible losses for those actions, which could be material. Other claims had a stated reasonably possible loss range of $6.1–$23.1 million and recorded accruals of $15.4 million.
- Q1 effective tax rate was 28.7%, versus 36.0%, including a $5.8 million benefit associated with closure of the IRS audit of 2006–2009 tax years. IRS examinations of 2013 and 2015 tax years were ongoing.
- The company adopted share-based compensation guidance in January 2017, with a $0.6 million cumulative adjustment to opening retained earnings; the quarter’s tax-provision impact was not significant. It planned to adopt the new revenue standard in 2018 and anticipated a timing change for wind towers and utility structures, with impact not yet reasonably estimable.
- Management said it believed liquidity and capital resources were adequate. The filing cautions that quarterly results may not indicate full-year results. Management reported effective disclosure controls and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Monitor the Fifth Circuit appeal and related ET-Plus litigation, including the judgment, bond costs, and potential exposure from other proceedings.
- Track rail and barge orders, deliveries, pricing, and backlog conversion against continuing market oversupply and weak demand.
- Assess execution and margins on the large wind-tower backlog, and the eventual accounting and earnings effects of the 2018 revenue-standard adoption.
- Review liquidity availability and debt maturities, distinguishing recourse debt from subsidiary non-recourse debt and restricted or asset-dependent financing capacity.
- Check whether planned 2017 capital spending and lease-fleet investment align with utilization, rental rates, cash generation, and demand.