Trinity Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars. Trinity is a North American railcar leasing, manufacturing, maintenance and modification company, with a smaller highway-products and logistics business. Arcosa was spun off in November 2018; its results are presented as discontinued operations.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $3,005.1 million | $2,509.1 million | +19.8% |
| Operating profit | $416.3 million | $315.1 million | +32.1% |
| Operating margin | 13.9% | 12.6% | +1.3 percentage points |
| Income from continuing operations | $139.2 million | $109.0 million | +27.7% |
| Net income attributable to Trinity | $137.6 million | $159.3 million | -13.6% |
| Diluted EPS from continuing operations | $1.09 | $0.70 | Higher |
| Diluted EPS, including discontinued operations | $1.07 | $1.07 | Flat |
| Net cash from continuing operating activities | $396.7 million | $274.2 million | Higher |
| Free cash flow (non-GAAP) | $423.3 million | $390.0 million | Higher |
Revenue growth reflected more railcars sold from the lease fleet, expansion of the fleet and leasing services, favorable railcar product mix, higher deliveries, and maintenance-services growth. Operating profit benefited from railcar sales, manufacturing mix, and lower corporate expenses. Higher interest costs and a 30.6% effective tax rate (28.1% in 2018) partly offset operating gains. FY2019 net income was lower principally because 2018 included income from Arcosa discontinued operations; FY2019 included a $3.1 million discontinued-operations loss.
Fourth quarter: Revenue was $850.7 million and operating profit $97.2 million, compared with $735.0 million and $89.8 million, respectively, in Q4 2018. Income from continuing operations was $22.3 million versus $28.0 million; net income attributable to Trinity was $21.6 million versus $27.3 million. Q4 2019 included a $14.7 million restructuring charge and a $9.7 million non-cash deferred-tax impact related to a planned maintenance-services facility.
Liquidity, debt and capital allocation
- At year-end, unrestricted cash and cash equivalents were $166.2 million; restricted cash was $111.4 million. Trinity reported $289.5 million available on its $450 million revolving credit facility and $396.6 million available under the TILC warehouse facility, subject to eligible unpledged equipment.
- Total debt was $4.88 billion, up from $4.03 billion: $522.8 million recourse and $4.36 billion non-recourse. Most non-recourse debt is held by leasing subsidiaries and secured by railcars and related lease cash flows. Total debt to total capital was 67.2%, versus 61.1% in 2018.
- Net interest expense rose to $214.5 million from $167.4 million, primarily due to higher leasing-group debt and lower interest income. Variable-rate debt was 22.5% of total debt; management estimated a one-percentage-point rate increase would add $5.3 million to FY2020 interest expense after hedges.
- Operating cash flow from continuing operations was $396.7 million. Investing cash outflow was $993.3 million, including a $916.5 million net investment in the lease fleet. FY2019 capital expenditures were $1.22 billion.
- FY2019 dividends paid were $82.1 million; the quarterly dividend was raised to $0.19 per share in December. Share repurchases under the 2019 program were $224.7 million for the year, leaving $125.3 million of authorization at year-end.
Business changes, outlook and unusual items
- Railcar lease fleet reached 103,705 cars, up 4.5%, but utilization fell to 96.0% from 98.5%. Average fleet age was 9.6 years and average remaining lease term 3.3 years.
- Railcar orders fell to 10,220 from 28,795, while deliveries rose to 21,960 from 20,105. Railcar backlog declined 49.8% to $1.83 billion from $3.65 billion; about 59% was expected to deliver in 2020, with the remainder through 2023. Backlog adjustments included removals associated with customers’ financial condition and compensated cancellations.
- Management said demand weakened in 2019 amid trade-policy uncertainty, declining industrial production and rail loadings, and growing underutilized railcar supply. It expected these pressures to continue in the near term, affecting lease rates, utilization and new-equipment orders.
- For 2020, management projected net lease-fleet investment of $425–$475 million and manufacturing and corporate capital expenditures of $90–$100 million. It estimated annual savings of $8–$10 million from the initial restructuring phase and expected to identify further savings opportunities.
- Effective January 1, 2020, revised railcar useful-life and salvage-value estimates were expected to extend weighted-average useful life from about 34 to 37 years and reduce 2020 depreciation expense by $27–$33 million.
- The qualified pension plan was terminated effective December 31, 2019, subject to approvals, with settlement expected in late 2020 or early 2021. Estimated pre-tax settlement charges are $155–$185 million, including recognition of accumulated actuarial losses; any additional cash contribution was not expected to exceed $15 million.
- Highway-products litigation remains a contingency. The federal False Claims Act judgment was reversed and the Supreme Court denied review, ending that action. State qui tam and other lawsuits remain pending; the company reported no accrual for those actions because it did not consider a loss probable. A separate shareholder class-action settlement of $7.5 million awaited final court approval. Management disclosed a reasonably possible loss range of $21.6–$35.3 million for other matters, including indemnification and third-party recourse.
- CEO E. Jean Savage was appointed effective February 17, 2020. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether railcar demand, lease rates and fleet utilization stabilize, and whether the sharply lower backlog converts to deliveries as planned.
- How much of earnings and cash generation depends on railcar fleet sales versus recurring leasing and services, including the sustainability of fleet-sale margins.
- Debt growth, refinancing access and covenant headroom, particularly given the high debt-to-capital ratio, LIBOR-linked obligations and leasing-fleet investment needs.
- Actual pension-settlement costs and cash funding, and whether restructuring savings and lower depreciation translate into sustained earnings and cash flow.
- Developments in the pending highway-products cases and the final approval and payment of the shareholder settlement.
- Effects of share repurchases and dividend increases on liquidity and capital allocation as operating conditions weaken.