Trinity Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Figures are in U.S. dollars; share and per-share amounts reflect the 2-for-1 stock split.
Business context and results
Trinity operates railcar manufacturing and leasing businesses, construction products, inland barges, and energy equipment. Management attributed growth primarily to stronger rail demand, higher shipment volumes and pricing, improved leasing utilization and rental rates, railcar sales, and acquisitions.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,485.3 million | $1,066.1 million | $2,945.8 million | $1,999.0 million |
| Operating profit | $302.0 million | $183.4 million | $693.3 million | $342.9 million |
| Operating margin | 20.3% | 17.2% | 23.5% | 17.2% |
| Net income attributable to Trinity | $164.2 million | $84.0 million | $390.6 million | $163.1 million |
| Diluted EPS | $1.01 | $0.53 | $2.43 | $0.99 |
Revenue increased 39% for the quarter and 47% for the six-month period; operating profit rose 65% and 102%, respectively. Growth was broad-based, although Leasing Group results were boosted materially by railcar sales, including sales to Element Financial Corporation. For the six months, Trinity received $635.7 million from Element-related railcar sales; $331.4 million was recorded as Leasing Group revenue, $81.6 million as Rail Group revenue, and $222.7 million from older railcars was excluded from revenue and recognized as disposition proceeds/gains.
Cash flow, balance sheet and liquidity
- Cash flow: Six-month operating cash flow was $157.4 million, down from $273.6 million a year earlier, primarily reflecting higher receivables and inventory despite higher operating profit. Investing activities used $81.2 million versus $424.9 million in 2013; financing provided $210.6 million versus $33.7 million used in 2013. Cash increased $286.8 million to $715.3 million.
- Capital spending: Six-month capital expenditures were $157.0 million, including net lease-fleet additions. Management projected 2014 manufacturing and corporate capital expenditures of $250–$300 million and did not expect net investment in new railcars to consume cash after expected leased-railcar sale proceeds.
- Liquidity: Cash and short-term marketable securities totaled $933.8 million at June 30. The $425 million revolving facility had no borrowings; $357.9 million remained available after letters of credit. The TILC warehouse facility had $251.4 million available, subject to eligible unpledged equipment. Trinity reported compliance with revolver covenants.
- Debt: Total debt was $3.243 billion, versus $2.990 billion at year-end 2013; $2.818 billion was non-recourse leasing debt and $424.5 million was recourse debt. Cash and short-term securities less reported debt imply net debt of approximately $2.309 billion. The company issued $335.7 million of non-recourse railcar notes in May; stated rates were 2.86% and 4.09%.
- Other balance-sheet items: Total assets were $8.014 billion and stockholders’ equity, including noncontrolling interests, was $3.169 billion. Receivables and inventories increased notably from year-end, reflecting higher rail production needs.
Segments and material changes
- Rail: Six-month segment revenue rose 35.5% to $1.753 billion and operating profit rose 63% to $343.5 million, reflecting higher deliveries, pricing, and product mix. Backlog reached $5.467 billion, up from $5.054 billion; 19,505 railcars were ordered in the first half.
- Leasing: Six-month segment revenue increased 121.9% to $674.6 million and operating profit increased 142.3% to $332.7 million, substantially reflecting railcar sales as well as improved leasing rates and utilization. Fleet utilization was 99.7%, versus 98.7% a year earlier.
- Energy Equipment: Six-month revenue rose 42.6% to $438.2 million and operating profit rose 75.3% to $51.2 million, from higher volumes and acquisitions.
- Inland Barge: Six-month revenue increased 1.6% to $302.3 million and operating profit increased 27.4% to $57.6 million, mainly due to product mix and lower selling and administrative costs. Backlog declined to $466.7 million from $563.6 million.
- Construction Products: Six-month revenue rose 2.5% to $264.8 million and operating profit rose to $44.1 million from $26.7 million, including $11.6 million of property disposition gains. Highway Products revenue was down 10.1%; Aggregates benefited from acquisitions and higher volume.
Outlook, risks and unusual items
- Management described demand for railcars and barges serving oil, gas, and chemicals as favorable; demand in cement and agricultural markets had begun to strengthen. Coal-related demand remained weak. Commercial construction weakness, public-sector budget constraints, and unfavorable weather pressured Highway Products.
- Trinity agreed to acquire Meyer Steel Structures for approximately $600 million, subject to regulatory approval, with closing expected in Q3 2014. Several smaller acquisitions were completed in the first half. No full-year earnings guidance was provided in the supplied filing text.
- The company authorized a new $250 million share repurchase program, repurchased $12.5 million of shares in the first half, completed a 2-for-1 stock split, and increased the split-adjusted quarterly dividend 33% to $0.10 per share.
- ET-Plus litigation: A False Claims Act trial ended in a mistrial in July 2014, with retrial expected in fall 2014. The relator’s latest damages model was approximately $775.7 million, before fees, costs, and interest. Trinity disputed the allegations and recorded no accrual, stating loss was not considered probable and no reasonably possible loss range could be determined.
- Other contingencies: Trinity was named in litigation related to the Lac-Mégantic derailment; certain claims against the company were dismissed without prejudice, while other proceedings and appeals remained unresolved. The company recorded no accrual for those claims because loss was not considered probable and a range could not be determined. Other claims had estimated reasonably possible losses of $8.2–$28.4 million; recorded accruals were $18.1 million, including $10.1 million for environmental and workplace matters.
- Results are exposed to cyclical demand, weather, raw-material costs, customer credit and order timing, interest rates, and litigation and regulatory risks. The filing cautions that first-half results may not indicate full-year performance.
Key facts for investors to verify
- Whether the high first-half earnings and margins are sustainable without unusually large railcar sale gains and proceeds.
- Conversion and cash-settlement implications of the $450 million convertible notes, which were eligible for conversion beginning July 1, 2014; the stated conversion price was $25.31 per share.
- Closing, financing, integration costs, and expected returns for the approximately $600 million Meyer acquisition.
- Developments and potential exposure in the ET-Plus retrial, Lac-Mégantic-related litigation, and wind-tower contract litigation.
- Whether working-capital growth—especially receivables and inventories—converts to cash, and how railcar sale activity affects leasing earnings and fleet size.