Trinity Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020. Amounts are in U.S. dollars, in millions except per-share data. Trinity provides railcar leasing, manufacturing, maintenance and related services, as well as highway products.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $398.8 | $615.2 |
| Operating profit | $60.2 | $73.0 |
| Income from continuing operations | $1.7 | $162.5 |
| Net income attributable to Trinity | $3.3 | $161.7 |
| Diluted EPS | $0.03 | $1.33 |
| Operating cash flow from continuing operations | $70.1 | $173.8 |
| Free cash flow after investments and dividends (non-GAAP) | $90.2 | $57.4 |
Operating margin was approximately 15.1%, versus 11.9% a year earlier. Interest expense, net, was $51.3, down from $58.9. Q1 2021 tax expense was $6.0; the effective tax rate was 77.9%, or 28.6% excluding an adjustment to a previously recognized CARES Act carryback benefit. The prior-year tax benefit was unusually large due to CARES Act carryback claims.
At March 31, 2021, cash and cash equivalents were $178.1 and restricted cash was $107.4. Total debt was $5,165.1, comprising $398.2 recourse and $4,766.9 non-recourse debt. Total committed liquidity was $772.4: $178.1 cash, $358.2 available under the revolving facility and $236.1 available under the TILC warehouse facility. The income tax receivable was $440.5, primarily related to filed carryback claims.
Material changes and segment performance
- Consolidated revenue declined 35.2% and operating profit declined 17.5% year over year. Lower railcar deliveries and reduced lease-fleet sales were principal contributors.
- Railcar Leasing and Management: Revenue was $183.5, down 22.3%; operating profit was $78.3, down 15.7%. Lower lease rates, utilization and railcar-sale volume offset fleet growth. Fleet utilization was 94.5%, versus 95.4% a year earlier.
- Rail Products: Revenue was $261.0, down 48.8%; the segment recorded an operating loss of $8.8, versus $25.1 profit. Deliveries fell to 1,895 from 3,705; orders were 1,410 versus 1,970. Backlog was $989.9, down 36.5%, with about 55.3% expected to be delivered in 2021.
- All Other: Revenue rose 7.4% to $68.1 and operating profit rose to $15.3 from $9.3, aided by gains on property dispositions.
- Cash from operations decreased from $173.8 to $70.1, largely reflecting different working-capital movements. Investing used $96.0, including a $90.6 net lease-fleet investment and $16.6 for an acquisition. Financing provided $83.4, including net debt proceeds of $142.4; Trinity also paid $23.2 in dividends and repurchased $35.7 of shares.
Beginning in Q4 2020, Trinity changed the presentation of lease-fleet railcar sales prospectively: all such sales are now presented as net gains or losses on asset dispositions. This makes reported revenue and cost comparisons less directly comparable with Q1 2020; the change did not affect operating profit, net income, EPS or the balance sheet.
Outlook, risks and unusual items
- Management said pandemic-related economic pressures negatively affected Q1 results and expected results to remain under pressure in the near term. It cited continued weakness in railcar lease rates, utilization and new equipment orders, despite improving railcar loading volumes and storage levels. No specific earnings guidance was provided.
- For full-year 2021, Trinity anticipated a net lease-fleet investment of $300–$350 and manufacturing and other capital expenditures of $45–$60. Management reported $772.4 of committed liquidity and said it believed liquidity and capital resources were sufficient for planned 2021 needs.
- Steel prices had risen sharply since Q4 2020 and could pressure demand and near-term manufacturing profit. Other identified risks include COVID-19 effects, cyclical demand, customer credit, supply-chain availability and costs, interest rates, and potential impairment charges.
- The company amended its revolving-credit covenants for near-term flexibility and reported compliance at quarter-end. It extended and increased the TILC warehouse facility to $1.0 billion through March 15, 2024. LIBOR-based contracts extending beyond June 2023 may face rate and borrowing-cost changes when LIBOR is phased out.
- Highway-products litigation remains a contingency. Trinity said it did not consider a loss probable in the pending state qui tam actions, recorded no accrual for them, and could not estimate a loss range; potential impacts could be material. A Missouri class action trial was scheduled for April 2022. Other claims had a stated reasonably possible loss range of $8.7–$17.2, including approximately $5.3 of indemnity and recourse rights.
- A March 2021 tornado damaged a rail maintenance facility in Georgia. Trinity recorded a probable insurance receivable of about $1.2 for property damage and expected the facility to resume operations in Q2; potential business-interruption recoveries were not yet recorded.
- Other unusual items include a $0.3 net restructuring gain in Q1 2021 and an acquisition of railcar-cleaning technology for $16.6 net cash, which management said did not significantly affect the financial statements.
Important facts for investors to verify
- Whether Rail Products deliveries, orders and backlog stabilize, and how quickly the $989.9 backlog converts to revenue.
- Trends in lease rates and fleet utilization, and the returns from the planned $300–$350 net fleet investment.
- Availability and terms of committed liquidity, covenant headroom, and the amount of debt that is non-recourse versus recourse.
- Collection timing and outcome of the $440.5 income tax receivable and any resulting tax-rate effects.
- Developments in the unresolved highway-products litigation, including potential financial exposure that Trinity says cannot currently be estimated.
- Effects of steel-price increases, COVID-19 and the Georgia tornado on operations, costs and cash flows.