Trinity Industries, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2019. Trinity’s continuing operations primarily comprise North American railcar leasing, manufacturing, maintenance and related services, with highway products and logistics in All Other. Arcosa was spun off on November 1, 2018; its results are presented as discontinued operations, so prior-period consolidated comparisons include Arcosa income where noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $736.0 million | $634.0 million | $1,340.8 million | $1,167.2 million |
| Operating profit | $107.0 million | $88.0 million | $198.8 million | $150.1 million |
| Continuing-operations income | $37.6 million | $37.3 million | $68.8 million | $52.5 million |
| Net income attributable to Trinity | $36.4 million | $64.1 million | $67.0 million | $104.3 million |
| Diluted EPS, continuing operations | $0.29 | $0.24 | $0.52 | $0.32 |
| Net cash from operating activities, continuing operations | — | $2.9 million | $219.8 million |
Consolidated operating margin was approximately 14.5% in Q2 and 14.8% for the six-month period, versus 13.9% and 12.9%, respectively, a year earlier. Q2 cost of revenues was $578.5 million; net interest expense was $55.4 million. The effective tax rate was 27.3% for Q2 and 25.1% year to date.
At June 30, 2019, cash and cash equivalents were $102.8 million, with restricted cash of $113.7 million. Total debt was $4.616 billion, comprising $397.6 million recourse debt and $4.218 billion non-recourse debt, primarily at leasing subsidiaries. Stockholders’ equity was $2.530 billion. Available borrowing was $414.5 million under the corporate revolver and $238.9 million under the TILC warehouse facility; the company reported compliance with its credit-facility financial covenants.
For the six months, investing cash outflow was $611.9 million, including net leasing capital expenditures; financing provided $474.7 million. Cash, cash equivalents and restricted cash declined by $134.3 million to $216.5 million. Operating cash flow was sharply lower year over year, chiefly because receivables, inventories and other assets used $164.5 million and payables and other liabilities used a further $51.3 million.
Material changes and operating trends
- Q2 revenue increased 16.1% and operating profit increased 21.6% year over year. For the first half, revenue rose 14.9% and operating profit rose 32.4%.
- Leasing revenue and profit benefited from a larger fleet and increased railcar sales. The fleet totaled 102,140 company-owned railcars and was 97.8% utilized, compared with 94,135 cars and 97.1% utilization a year earlier. Q2 Leasing Group operating profit margin declined to 37.8% from 43.0%, reflecting a higher share of railcar sales; leasing-and-management margin was 41.0% versus 42.3%.
- Rail Products Group revenue increased 25.8% in Q2 and 14.0% year to date; operating profit rose 40.2% and 18.6%, respectively. Favorable pricing and product mix and maintenance-services growth helped, while first-half production inefficiencies and lower railcar deliveries partly offset gains. Backlog was $2.866 billion, up 7.6%; 5,105 railcar orders were received and 9,760 delivered in the first half, compared with 13,025 orders and 10,830 deliveries in 2018.
- All Other operating profit decreased to $6.2 million in Q2 and $12.8 million year to date, from $12.4 million and $18.2 million. Management cited prior-year litigation-related insurance recoveries and property-disposition gains; Q2 highway-products demand and shipping volumes also declined.
- Net income attributable to Trinity fell versus 2018 despite higher continuing-operations income, primarily because prior-year results included Arcosa discontinued-operations income of $28.2 million for Q2 and $54.6 million for the first half; 2019 discontinued operations recorded losses.
Outlook, management commentary and risks
- Management forecast a 2019 net investment in the lease fleet of $0.9–$1.1 billion and manufacturing and corporate capital expenditures of $120–$140 million. No earnings or revenue guidance is provided in the filing.
- In April, a wholly owned leasing subsidiary issued $528.3 million of secured railcar notes at a 3.82% fixed coupon, with a stated final maturity in 2049. In January, the Leasing Group purchased 6,779 previously leased railcars for $218.4 million.
- The company repurchased 5.6 million shares for approximately $133 million in the first half and had $287 million of authorization remaining at June 30. The quarterly dividend increased 31%, from $0.13 to $0.17 per share.
- Management cautioned that rail markets are cyclical and sensitive to customer demand, commodity prices, leasing rates, customer creditworthiness, steel and other input costs, production levels, interest rates, and order timing. Results may also be affected by seasonality in highway products.
- Highway-products litigation remains a material uncertainty. The U.S. Supreme Court denied review of the federal False Claims Act case, ending that action, but state qui tam and product-liability matters remain. The company stated that a loss was not considered probable for the remaining state actions, recorded no accrual for them, and could not estimate a loss range. A Missouri class action trial was scheduled for April 2020. Other matters had estimated reasonably possible losses of $24.5–$41.0 million, including approximately $19.0 million of indemnity and third-party recourse; recorded accruals were $29.2 million.
- Management said interim results may not indicate full-year performance. The company adopted lease accounting standard ASC 842 in 2019; comparative periods were not recast. The filing reported effective disclosure controls and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Whether very low first-half operating cash flow reflects temporary working-capital investment or a more persistent cash-conversion issue.
- How leasing-fleet investment, added debt and higher interest expense affect returns, leverage and liquidity; much of reported debt is non-recourse but secured by rail assets.
- Railcar backlog conversion, order intake and customer credit exposure, including the removal of approximately 3,050 committed railcars valued at $240 million from backlog because of one customer’s financial condition.
- Whether higher railcar sales and fleet utilization are sustainable and how fleet growth, depreciation and average lease rates affect leasing margins.
- Developments and potential costs in remaining ET-Plus-related litigation and other contingencies.
- Execution against the disclosed 2019 fleet-investment and manufacturing-capex ranges, and the effects of share repurchases and dividends on available capital.