Trinity Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Trinity’s businesses are primarily railcar leasing, manufacturing, maintenance and related services. Arcosa was spun off on November 1, 2018; its results are presented as discontinued operations, affecting comparisons with 2018.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $813.6M | $606.9M | $2,154.4M | $1,774.1M |
| Operating profit | $120.3M | $75.2M | $319.1M | $225.3M |
| Continuing-operations income | $48.1M | $28.5M | $116.9M | $81.0M |
| Net income attributable to Trinity | $49.0M | $27.7M | $116.0M | $132.0M |
| Diluted EPS from continuing operations | $0.39 | $0.19 | $0.90 | $0.51 |
- Q3 revenue rose 34.1% and operating profit rose 60.0% year over year. For the nine-month period, revenue increased 21.4% and operating profit increased 41.6%.
- Consolidated operating margin was approximately 14.8% in Q3 2019 versus 12.4% in Q3 2018, calculated from reported revenue and operating profit. Rail Products Group margin was 9.0% versus 5.6%; Leasing Group total operating margin was 35.4% versus 40.5%.
- Nine-month net income was lower than in 2018 despite higher continuing-operations income, principally because 2018 included $54.4M of income from discontinued operations; 2019 had a $2.3M discontinued-operations loss.
- Net cash from continuing operating activities was $164.0M for the first nine months, compared with $179.5M. Investing activities used $723.3M, including substantial lease-fleet investment; financing activities provided $423.6M.
- At September 30, cash and cash equivalents were $97.6M and restricted cash was $117.5M. Total debt was $4,685.2M: $472.7M recourse and $4,212.5M non-recourse. The company reported $339.5M available under its revolving credit facility and $204.2M available under its warehouse facility. It was in compliance with revolving-credit financial covenants.
- Effective tax rates were 27.5% for Q3 and 26.1% for the first nine months, compared with 19.0% and 23.5%, respectively, in 2018.
Material changes and operating trends
- Rail Products Group revenue increased 45.3% in Q3 and 23.4% for the first nine months, supported by higher deliveries, pricing and product mix, and maintenance-services growth. Its nine-month operating profit increased 43.8%.
- Leasing Group revenue increased 43.5% in Q3 and 30.6% for the first nine months, with higher lease-fleet sales and leasing and management revenue. Nine-month sales of leased railcars totaled $412.3M versus $204.2M.
- All Other Group revenue declined 11.7% in Q3 and 2.4% year to date, mainly from lower demand and shipping volumes in highway products. Its Q3 operating profit fell 58.9%.
- Railcar backlog was $2.45B at September 30, down 23.6% from $3.20B a year earlier. The company received 7,635 railcar orders and delivered 15,080 in the first nine months, versus 20,750 orders and 14,820 deliveries in 2018. Fleet utilization was 96.7%, compared with 97.6% a year earlier.
- Corporate selling, engineering and administrative costs declined, reflecting post-spin cost reductions and lower litigation-related expenses. Interest expense, net increased to $54.0M in Q3 and $160.8M year to date, driven mainly by higher Leasing Group debt and lower interest income.
Outlook, risks and unusual items
- Management said economic uncertainty, tariffs and trade policies, and pressure on railcar loading volumes were weighing on demand, lease rates, utilization and new railcar orders; it expected the trend to continue in the near term.
- For full-year 2019, Trinity anticipated net lease-fleet investment of $850M–$950M and manufacturing and corporate capital expenditures of $110M–$120M. The filing provides no clear full-year earnings guidance.
- Management expected a Q4 restructuring charge of approximately $10M–$20M, mainly asset write-downs and employee transition costs, with expected annualized savings of $8M–$10M. Further streamlining opportunities were expected to be identified in 2020.
- The board approved termination of the consolidated pension plan effective December 31, 2019, with settlement expected in late 2020 or early 2021, subject to approvals. Trinity expects pre-tax settlement charges of $145M–$195M; any additional cash contribution is not expected to exceed $25M. The actual outcome depends on interest rates, plan returns, participant elections and other factors.
- In October 2019, a subsidiary issued an additional $386.5M of non-recourse secured railcar notes, at fixed rates of 2.39% and 3.10%. Proceeds were intended partly to repay warehouse-facility and revolving-credit borrowings.
- The federal False Claims Act action concerning the ET-Plus guardrail system ended after the Supreme Court denied review. Related state actions and a Missouri class action remained pending; Trinity said a loss was not probable and recorded no accrual for those actions, but potential financial impacts could be material and the company could not estimate a loss range. A shareholder class-action settlement of $7.5M was subject to court approval; Trinity had accrued $2.5M net of insurance recoveries.
- For other matters, the filing disclosed reasonably possible losses of $29.6M–$46.2M, including approximately $24.0M of indemnity and third-party recourse rights; total recorded accruals were $33.8M. Environmental and workplace reserves were $1.4M.
- Other risks include cyclical demand, customer creditworthiness, steel and component costs, interest rates, litigation, regulatory and environmental matters, and execution of the post-spin strategy. Management stated disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether railcar order trends, backlog and fleet utilization stabilize, and whether backlog converts to deliveries as planned.
- How much earnings growth depends on railcar fleet sales, product mix and gains on dispositions, versus recurring leasing and service revenue.
- Whether lease-fleet investment and debt financing remain consistent with liquidity, covenant capacity and expected returns.
- The timing and final cash and non-cash costs of the pension-plan settlement and the expected restructuring savings.
- Developments in pending ET-Plus and other litigation, including the Missouri class action and shareholder settlement approval.