Trinity Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Figures are in millions of dollars except per-share data. Share and per-share amounts reflect the company’s 2-for-1 stock split.
Business context and results
Trinity operates railcar manufacturing, construction products, inland barge, energy equipment, and railcar leasing and management businesses. Management cautions that quarterly results may not indicate full-year results; construction products are seasonal, and several businesses are cyclical.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1,626.7 | $1,460.5 | +11.4% |
| Operating profit | $333.1 | $391.3 | -14.9% |
| Operating margin | 20.5% | 26.8% | -6.3 percentage points |
| Net income | $189.0 | $233.0 | -18.9% |
| Net income attributable to Trinity | $180.2 | $226.4 | -20.4% |
| Diluted EPS | $1.13 | $1.42 | -20.4% |
| Interest expense | $51.5 | $46.3 | +$5.2 |
Revenue growth was led by Rail, where higher deliveries, pricing, and product mix lifted revenue 33.5%; Energy Equipment revenue rose 42.5%, primarily reflecting acquisitions; and Inland Barge revenue increased 11.8%. Leasing and management revenue rose 10.6%, but lower railcar sales reduced total Leasing Group revenue 44.8% and operating profit 46.7%. Those lower sales were the main reason consolidated operating profit declined. Construction Products operating profit fell to $8.3 from $21.7 million, including the absence of prior-year property disposition gains and higher legal and compensation costs.
Rail Group backlog was $6.81 billion, up from $5.24 billion a year earlier; Inland Barge backlog was $565.4 million versus $508.0 million. Wind tower backlog was $390.7 million versus $476.7 million. Rail manufacturing received orders for 4,865 railcars in the quarter. Fleet utilization was 99.3%, compared with 99.5% a year earlier.
Cash flow, financial position, and liquidity
| Cash flow measure | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating activities | $109.4 | $205.3 |
| Investing activities | $(323.1) | $(23.6) |
| Financing activities | $(83.5) | $(78.0) |
| Change in cash and cash equivalents | $(297.2) | $103.7 |
Operating cash flow declined primarily because of lower lease-fleet railcar sales and reduced accrued liabilities. Investing cash outflow included leasing capital expenditures and a $121.1 million purchase of railcars previously leased from an independent owner trust. Cash and cash equivalents were $590.7 million at quarter-end, down from $887.9 million at December 31, 2014; short-term marketable securities were $100.0 million. Management reported unrestricted cash and cash equivalents plus short-term securities of $690.7 million.
Total debt was $3.49 billion, down from $3.55 billion at year-end: $832.3 million recourse and $2.65 billion non-recourse. The $425 million revolving credit facility had no borrowings and $336.4 million available after letters of credit; Trinity reported compliance with its financial covenants. In April 2015, the TILC warehouse facility was increased to $1 billion and extended through April 2018; $642.3 million was available subject to eligible, unpledged equipment. Much of the non-recourse debt is secured by railcars and related assets and is not a direct corporate guarantee.
Management projected 2015 manufacturing and corporate capital expenditures of $250–$300 million and net cash investment in new lease-fleet railcars of $105–$125 million, after expected railcar sale proceeds and the trust-railcar purchase. The company repurchased 721,040 shares for approximately $25 million and declared a $0.10 per-share dividend in Q1.
Outlook, risks, and unusual items
- Management said demand and orders for new railcars remained favorable across a broad range of industries. Barge demand tied to oil and gas had recently slowed, while management cited longer-term favorable conditions in chemical and petrochemical markets and recent strength in agricultural hopper barges. No consolidated earnings or EPS guidance was provided.
- ET-Plus litigation: A federal jury verdict awarded $175 million in damages, automatically trebled to $525 million under the False Claims Act; potential civil penalties could bring the stated range to $525–$709 million, excluding fees, costs, and interest. The court had not entered final judgment or set penalties. Trinity said it did not consider a loss probable and recorded no accrual. The company intended to pursue post-trial motions and appeal if necessary.
- The FHWA reported that the ET Plus passed eight requested crash tests, and a joint FHWA-AASHTO task force found no evidence of multiple versions in its field review. Further evaluation was pending. Trinity said 41 states had removed the product from qualified-products lists; additional state actions, lawsuits, recalls, or product-liability claims could have material financial effects. The company was not then shipping the product pending further analysis.
- Other ET-Plus matters included state and class-action proceedings, including a Canadian class action seeking $400 million in compensatory and $100 million in punitive damages, as well as product-liability cases and law-firm investigations. Financial impacts of several actions were unknown.
- In the Lac-Mégantic derailment litigation, Trinity reported a non-significant net loss accrual after expected third-party recoveries; proceedings and potential additional claims remained. Other reasonably possible losses for ordinary claims were estimated at $3.5–$23.7 million, excluding the ET-Plus matters.
- Other risks identified include cyclical demand, customer order timing and credit, raw-material availability and cost, interest rates, legal and regulatory matters, and product compliance. The company said there had been no material change in market risks from its 2014 Form 10-K.
Important facts for investors to verify
- Subsequent court rulings, appeals, penalties, bond requirements, and developments in ET-Plus state, class-action, and product-liability cases; assess whether any accrual or disclosure changes.
- Whether railcar demand, backlog conversion, shipment volumes, pricing, and leasing-fleet sales support earnings and cash generation after the unusually low Q1 railcar-sale volume.
- Execution of the stated capital-spending and lease-fleet investment plans, and their effect on liquidity and debt.
- Availability and terms of the renewed warehouse facility, revolving-credit covenant compliance, and the distinction between recourse and asset-backed non-recourse debt.
- Potential effects of acquisitions, including the preliminary purchase-price allocation for Meyer Steel Structures, and integration controls.
- Tax transfer-pricing disputes and other open examinations; the filing reported $63.3 million of unrecognized tax benefits at March 31, 2015.