Trinity Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions of dollars except per-share data. Trinity manufactures railcars, barges, highway and energy equipment, and operates a railcar leasing business.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,676.8 | $1,485.3 | $3,303.5 | $2,945.8 |
| Operating profit | $382.9 | $302.0 | $716.0 | $693.3 |
| Net income | $220.8 | $173.1 | $409.8 | $406.1 |
| Net income attributable to Trinity | $212.0 | $164.2 | $392.2 | $390.6 |
| Diluted EPS | $1.33 | $1.01 | $2.46 | $2.43 |
| Operating margin | 22.8% | 20.3% | 21.7% | 23.5% |
- Q2 revenue rose 12.9% and operating profit rose 26.8%; six-month revenue rose 12.1% and operating profit rose 3.3%. Six-month net income attributable to Trinity increased only $1.6.
- Q2 growth reflected higher rail shipments and pricing, increased barge and energy-equipment volumes, and improved leasing and management results. For the first half, leasing-group operating profit fell 21.7%, largely because railcar sales were lower than in 2014.
- Six-month cash from operations was $282.0, up from $157.4. Investing used $262.6 and financing used $323.5; cash declined $304.1 to $583.8. Capital spending was $520.1, including substantial lease-fleet investment.
- At June 30, total debt was $3,340.3: $835.4 recourse and $2,504.9 non-recourse. The company had $583.8 unrestricted cash, $511.4 available under its corporate revolver, and $677.9 unused under the leasing warehouse facility subject to eligible equipment. It reported compliance with credit-facility covenants.
- Q2 dividends declared were $0.11 per share, up from $0.10. The company repurchased $75.0 of shares in the first half.
Material changes and business trends
- Rail Group revenue increased 28.6% for the first half and operating profit increased 28.2%. Railcar backlog was $6,897.4, versus $5,466.8 a year earlier, including $4,939.8 for external customers and $1,957.6 for leasing.
- Energy Equipment revenue rose 32.8% and operating profit rose 43.6% for the first half, mainly reflecting acquisitions and higher wind-tower and utility-structure volumes. Inland Barge revenue rose 12.8% and operating profit rose 18.4%; management noted weaker demand in oil-and-gas barge markets but longer-term favorable conditions in chemical, petrochemical, and agricultural markets.
- Construction Products first-half operating profit decreased 32.9%; management cited lower Highway Products volumes, litigation-related effects, and higher legal and compensation costs. Highway Products revenue fell 11.1%; aggregate growth partly offset the decline.
- Leasing and management revenue rose 10.7% for the first half, but revenue from railcars sold within one year of acquisition fell to $138.6 from $363.7. Leasing-fleet utilization was 98.9%, versus 99.7% a year earlier.
- Other notable transactions: Trinity acquired a lightweight-aggregates business for $46.2 and sold its galvanizing business for $51.3, recording a $7.8 gain. It repaid approximately $340.0 of leasing-sub subsidiary promissory notes. The corporate revolving facility was renewed through 2020 and increased to $600.0.
Outlook, risks, and unusual items
- Management said railcar demand and orders remained favorable across industries, while barge orders serving oil and gas had slowed. Results are exposed to cyclical demand, seasonality in Construction Products, customer order timing, input costs, interest rates, and manufacturing capacity utilization.
- For 2015, management projected manufacturing and corporate capital expenditures of $250–$300 and net cash investment in new lease-fleet railcars of $160–$185. No full-year earnings or revenue guidance is provided in the filing.
- The ET Plus guardrail shipments were suspended in October 2014; no ET Plus sales revenue was reported for the first half of 2015. A federal court entered a $682.4 judgment in a False Claims Act case in June 2015. The judgment was stayed pending appeals after Trinity posted a $686.0 bond. The company disputes the allegations and said it did not consider a loss probable, so it recorded no accrual. A new-trial motion was pending, with appeal intended if denied.
- ET Plus-related risks also include state false-claims actions, class actions, product-liability cases, a Department of Justice subpoena, and potential further litigation. The company said possible impacts of some cases could be material but could not estimate a loss range. It awaited findings from a second FHWA task force before deciding whether to resume shipments.
- First-half earnings included $45.0 of gains on sales of railcars held more than one year and $10.9 of other property-disposition gains. Such gains, along with sales of lease-fleet railcars, can make period comparisons uneven. One Rail Group customer represented 11% of consolidated receivables at quarter-end.
- Other contingencies include tax examinations and $64.7 of unrecognized tax benefits; the filing does not provide a clear estimate of the ultimate resolution of the principal transfer-pricing matters.
Important facts for investors to verify
- Subsequent rulings, appeals, bond costs, and any developments in the ET Plus litigation, investigations, product-liability claims, and shipment resumption.
- How much of the railcar backlog converts to deliveries, revenue, and cash, and whether demand, pricing, and fleet utilization remain strong.
- The sustainability of earnings excluding railcar-sale and property-disposition gains, and the effect of lower railcar sales on leasing results and cash generation.
- Lease-fleet capital needs, non-recourse debt and collateral restrictions, access to available credit, and compliance with debt covenants.
- Collection of the concentrated Rail Group receivable and the outcome of tax examinations and other contingencies.