Trinity Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Share and per-share data reflect the 2-for-1 stock split.
Business context and results
Trinity manufactures railcars, barges, highway and construction products, and energy equipment, and leases and manages railcars. Management attributed growth to stronger rail demand, higher shipments and improved product mix, increased leasing-fleet utilization and rental rates, railcar sales, and 2014 acquisitions. Results are cyclical and seasonal; management cautioned that nine-month results may not indicate full-year performance.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,562.8 | $1,110.3 | $4,508.6 | $3,109.3 |
| Operating profit | $281.2 | $205.6 | $974.5 | $548.5 |
| Operating margin | 18.0% | 18.5% | 21.6% | 17.6% |
| Net income attributable to Trinity | $149.4 | $99.6 | $540.0 | $262.7 |
| Diluted EPS | $0.90 | $0.63 | $3.33 | $1.62 |
Q3 revenue increased 41% and operating profit rose 37%; nine-month revenue increased 45% and operating profit rose 78%. Nine-month results benefited materially from leasing-group railcar sales, including $90.2 million of net gains on sales of railcars held more than one year, compared with $9.6 million in the prior-year period. Q3 operating margin was below the year-ago level despite higher operating profit.
Cash flow, balance sheet, debt, and liquidity
- Cash flow, nine months: Operating cash flow was $332.6 million, down from $374.7 million. Investing used $621.2 million, including $711.8 million for acquisitions; financing provided $523.8 million. Cash increased $235.2 million to $663.7 million.
- Working capital demands: Receivables increased $155.5 million and inventories increased $226.3 million from year-end, weighing on operating cash flow.
- Balance sheet: Total assets were $8,544.9 million and stockholders’ equity, including noncontrolling interests, was $3,302.9 million at September 30. Cash was $663.7 million; restricted cash was a further $237.9 million.
- Debt: Total debt was $3,595.6 million, up from $2,989.8 million at December 31, 2013. This included $826.3 million of recourse debt and $2,769.3 million of non-recourse leasing debt. Non-recourse obligations are generally secured by leasing assets and are not guaranteed by Trinity.
- Liquidity: Trinity reported $339.7 million available under its $425 million revolver after letters of credit, and $312.6 million available under its railcar warehouse facility, subject to eligible unpledged collateral. Management cited approximately $1.3 billion in cash and available committed facilities in discussing liquidity. The company reported compliance with revolver covenants.
Material changes and operating outlook
- Rail Group nine-month revenue rose 37% and operating profit rose 60%; backlog was $6.11 billion versus $5.09 billion a year earlier. The company received orders for 33,625 railcars during the first nine months.
- Leasing Group nine-month revenue increased 94% and operating profit 99%, with railcar sales and gains a major contributor. Fleet utilization was 99.7% versus 98.5% a year earlier.
- Trinity acquired Meyer Steel Structures in August for approximately $593 million, along with other businesses during the year. Acquisition accounting for Meyer remained preliminary; its purchase price allocation could change materially.
- Management described demand for railcars and barges serving oil, gas, and chemicals as favorable, with automotive and agricultural demand beginning to strengthen. Coal-related demand remained weak. Highway Products faced commercial-construction weakness, government budget constraints, and unfavorable weather.
- Management projected 2014 manufacturing and corporate capital expenditures of $250–$300 million and expected net cash investment in new railcars to be minimal, if any, after expected leased-railcar sale proceeds. No full-year earnings guidance was provided in the supplied filing text.
Risks, contingencies, and unusual items
- ET-Plus litigation: After quarter-end, on October 20, a jury found against Trinity and awarded $175 million in damages in a False Claims Act case concerning its ET-Plus guardrail end-terminal. The filing states the award could be trebled to $525 million, with civil penalties potentially bringing the stated range to $525–$709 million, excluding fees, costs, and interest. No accrual was recorded because management did not consider a loss probable at filing; the court had not entered final judgment or set penalties. Trinity planned post-trial motions and an appeal.
- Following the verdict, FHWA requested additional crash testing. Trinity announced October 24 that it would stop ET-Plus shipments pending testing; some states had already suspended purchases or removed the product from qualified lists. Potential financial effects, including possible recalls or additional claims, were unknown and could be material. U.S. ET-Plus sales were approximately $33 million in the first nine months, less than 1% of consolidated revenue.
- Related product-liability lawsuits and investigations concerning officers and directors may result in further legal expense or exposure. The filing also describes litigation relating to the Lac-Mégantic derailment; Trinity said loss was not then considered probable and a loss range could not be determined.
- Other claims had an estimated reasonably possible loss range of $7.3–$32.4 million, excluding the ET-Plus matter; recorded accruals were $19.1 million. Environmental and workplace liabilities included a $10.3 million reserve.
- Tax audits include unresolved U.S.-Mexico transfer-pricing issues. Unrecognized tax benefits totaled $58.9 million, including interest and penalties where applicable.
- Other notable items include a $400 million 4.55% senior-note issuance due 2024, the $593 million Meyer acquisition, a new $250 million share repurchase authorization, and a 33% increase in the quarterly dividend to $0.10 per split-adjusted share.
Key facts for investors to verify
- Developments in the ET-Plus case: final judgment, civil penalties, appeal, bond requirements, FHWA testing results, shipment resumption, and state actions or recall exposure.
- Whether growth and backlog convert into deliveries, revenue, and cash flow, particularly given railcar demand, weaker coal-related demand, and cyclical markets.
- How much earnings and cash generation depend on railcar fleet sales and gains, including the Element alliance, versus recurring leasing and manufacturing operations.
- Acquisition integration and final Meyer purchase-price allocation, alongside the effect of acquisitions on margins, debt, and cash needs.
- Debt growth, refinancing and maturity requirements, covenant headroom, and the availability of warehouse borrowing capacity; distinguish recourse from non-recourse obligations and restricted cash.
- Collection of receivables, inventory growth, and the effect of working-capital investment on operating cash flow.