Trinity Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Trinity manufactures railcars, barges, construction and energy equipment, and operates a railcar leasing and management business.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,184.9 million | $1,676.8 million | $2,372.8 million | $3,303.5 million |
| Operating profit | $191.6 million | $382.9 million | $395.0 million | $716.0 million |
| Net income attributable to Trinity | $94.6 million | $212.0 million | $191.8 million | $392.2 million |
| Diluted EPS | $0.62 | $1.33 | $1.25 | $2.46 |
| Operating margin | 16.2% | 22.8% | 16.6% | 21.7% |
For the first half, operating cash flow was $486.4 million, versus $282.0 million a year earlier. Investing activities used $496.8 million and financing activities used $161.6 million; cash and cash equivalents fell $172.0 million to $614.0 million. Cash plus short-term marketable securities totaled $814.0 million, excluding restricted cash.
Total debt was $3,129.6 million at June 30, down from $3,195.4 million at year-end 2015. It included $843.9 million of recourse debt and $2,285.7 million of non-recourse leasing debt. The $600 million revolving facility had no borrowings and $507.4 million available after letters of credit; the company reported compliance with its financial covenants. The leasing warehouse facility had $759.5 million available, subject to eligible unpledged equipment.
Material changes and business trends
- Revenue declined 29% in Q2 and 28% for the first half, principally from lower Rail and Inland Barge volumes. Rail Group revenue fell 37.6% in Q2 and 31.7% year to date; Inland Barge revenue fell 37.0% and 32.8%, respectively.
- Rail Group operating profit fell 61.0% in Q2 and 44.1% for the first half. Rail backlog was $4.29 billion, down from $6.90 billion a year earlier; the average selling price in backlog was 7.4% lower. The company received orders for 4,530 railcars in the first half.
- Inland Barge operating profit fell 60.6% year to date. Its backlog was $251.0 million, versus $454.0 million a year earlier.
- Leasing Group operating profit declined 14.5% in Q2 and 26.3% year to date, reflecting lower profit from railcar sales, higher maintenance costs, and lower fleet utilization. Utilization was 96.4%, compared with 98.9% a year earlier.
- Construction Products first-half revenue rose 2.5% and operating profit rose 26.4%, supported by Highway Products and Aggregates. Energy Equipment first-half revenue fell 11.7%, while operating profit was nearly unchanged.
- Selling, engineering, and administrative expenses were lower in dollars, but increased as a share of revenue to 9.0% in Q2 and 8.6% year to date, from 6.8% and 6.4%.
Outlook, liquidity, and risks
- No earnings or revenue guidance is stated. Management cited cyclical markets, uncertainty limiting customer orders, lower oil and commodity prices, and a strong U.S. dollar; it said it is aligning manufacturing capacity with demand. Headcount was down about 13% year over year.
- For 2016, management expected manufacturing and corporate capital expenditures of $140–$180 million, gross cash investment in the lease fleet of about $880 million, and $300–$400 million of leased-railcar sales to the RIV platform.
- A May 2016 wind-tower order valued at $940 million is expected to be delivered over three years beginning in 2017. Wind-tower backlog was $1.1 billion at June 30, 2016, versus $502.6 million a year earlier.
- The company faces a $682.4 million False Claims Act judgment concerning its ET-Plus guardrail product and is appealing it; the appeal was fully briefed in July 2016. The judgment is stayed pending appeal under a $686 million unsecured bond with a stated annual premium of $3.7 million. Management does not consider a loss probable and recorded no accrual.
- Related exposure includes state, county, and municipal actions, product-liability suits, a shareholder class action, and a Department of Justice subpoena. The company said losses in certain county and municipal class actions could be material but could not estimate a range; it recorded no accrual for those matters. A Wisconsin action was dismissed with prejudice in July 2016.
- Other stated uncertainties include customer credit and order timing, steel and other input costs, capacity utilization, interest rates, litigation and bonding costs, and environmental and regulatory matters. Accrued liabilities included $21.4 million for contingencies; the company cited a reasonably possible loss range of $3.1–$18.2 million for specified matters.
Investor verification points
- Track the Fifth Circuit appeal and any developments in the ET-Plus state, local, product-liability, and shareholder cases; verify subsequent accrual or cash requirements.
- Assess whether the reduced rail and barge backlogs, lower railcar prices, and leasing utilization affect future shipments and margins.
- Monitor delivery execution and profitability for the $940 million wind-tower order, alongside planned lease-fleet investment and railcar sales.
- Reconcile reported operating cash flow with deferred-tax effects and working-capital movements; assess liquidity available outside restricted or subsidiary-level funds.
- Review the maturity and refinancing profile of recourse and non-recourse debt, including the convertible notes and leasing warehouse facility.