Business context and reporting period
Trinity Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Its principal businesses are railcar leasing and management, railcar manufacturing and maintenance, and highway products. Results reflect the COVID-19 downturn and sharply weaker demand in rail markets, particularly frac-sand railcars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $509.2 million | $736.0 million | $1,124.4 million | $1,340.8 million |
| Operating profit (loss) | $(307.3) million | $107.0 million | $(234.3) million | $198.8 million |
| Net income (loss), attributable to Trinity | $(206.9) million | $36.4 million | $(45.2) million | $67.0 million |
| Basic and diluted EPS | $(1.76) | $0.28 | $(0.38) | $0.51 |
Q2 revenue fell 30.8%; six-month revenue fell 16.1%. The Q2 operating loss primarily reflects a $369.4 million impairment charge. The six-month tax benefit was $219.4 million, including a $166.0 million benefit from CARES Act tax-loss carrybacks and related tax remeasurement.
- Segments: Rail Products Group revenue declined 43.9% in Q2 and 31.8% for the six-month period; its operating margin was 1.9% and 3.6%, respectively, versus 9.2% and 8.6% a year earlier. Leasing Group operating profit declined 20.9% in Q2 and 7.8% for the six-month period, largely due to lower railcar-sale profits.
- Cash flow: Six-month cash provided by continuing operations was $327.8 million, compared with $4.0 million in 2019. Investing activities used $154.6 million; financing activities used $156.7 million. Cash, cash equivalents, and restricted cash totaled $293.9 million at June 30.
- Liquidity and debt: Management reported $709.0 million of committed liquidity: $157.0 million unrestricted cash, $284.5 million available under the revolver, and $267.5 million available under the TILC warehouse facility. Total debt was $4.825 billion, comprising $528.0 million recourse debt and $4.297 billion non-recourse leasing debt. The company reported compliance with its debt covenants at quarter-end.
- Balance sheet: Total assets were $8.665 billion and stockholders’ equity was $2.160 billion at June 30, 2020. Income tax receivable was $463.0 million.
Material changes versus the prior comparable period
- The $369.4 million non-cash impairment followed reduced frac-sand activity, customer rent-relief requests and bankruptcies, and a structural shift toward locally sourced in-basin sand. The impairment included $358.3 million for small cube covered hopper railcars and $11.1 million for related right-of-use assets.
- Railcar backlog fell 53.3% year over year to $1.337 billion. Six-month orders were 2,810 railcars versus 5,105; deliveries were 6,690 versus 9,760. The company removed 540 railcars valued at $81 million from backlog because of customers’ financial condition.
- Company-owned railcar fleet utilization was 94.7%, down from 97.8% a year earlier. The fleet totaled 104,085 railcars, up from 102,140.
- Six-month net investment in the lease fleet was $127.3 million versus $591.0 million. Railcar sales and gains were lower overall, including lower profits on fleet sales.
- Effective January 1, 2020, revised useful-life and salvage-value estimates reduced depreciation expense by approximately $7.7 million in Q2 and $15.4 million for the first half, increasing reported earnings.
Outlook, management commentary, risks and unusual items
- Management expected near-term operating results to decline as it adjusted production plans to lower orders and customer deferrals. It cited pressure on railcar lease rates, utilization, and new-equipment orders, while noting that supply-chain disruptions had been minimal and manufacturing continued operating.
- For full-year 2020, the company anticipated a net lease-fleet investment of $350–$450 million and manufacturing and corporate capital expenditures of $90–$100 million. It expected approximately $303 million of tax refunds in 2020 and about $150 million in 2021, subject to actual 2020 performance.
- Management said it had sufficient liquidity for planned 2020 requirements, but warned that pandemic impacts could affect demand, customer payments, operations, liquidity, dividends, and capital investment. Further impairment charges could occur if conditions or valuation assumptions worsen. The filing provides no formal earnings or EPS guidance.
- The company expected to settle its terminated pension plan in late 2020 and forecast a fourth-quarter pre-tax settlement charge of $155–$185 million, including a potential cash contribution not expected to exceed $15 million.
- Restructuring charges were $5.8 million for the first half, including severance and a headquarters-campus write-down, partly offset by a disposition gain. Additional restructuring was possible.
- On July 17, 2020, a subsidiary issued $225 million of additional non-recourse promissory notes. The company also amended its revolving-credit agreement to increase the maximum leverage ratio through December 31, 2021.
- Highway-products litigation remains a contingency: the federal False Claims Act judgment was reversed and the Supreme Court declined review, but state and local cases remain. The Missouri class action had an October 26, 2020 trial date. The company said losses were not probable for the described state, county, and municipal actions and could not estimate a loss range; it warned impacts could be material.
Important facts for investors to verify
- Whether the $463.0 million income-tax receivable is collected on the expected schedule, and whether anticipated carryback amounts remain supported by actual tax losses.
- Whether railcar utilization, leasing rates, customer payment performance, and new orders stabilize, especially for frac-sand equipment; also monitor backlog conversion and customer-related cancellations.
- Whether the small cube covered hopper impairment assumptions remain valid and whether additional impairments are recorded.
- Whether liquidity, covenant headroom, and debt servicing remain adequate as market conditions evolve; distinguish recourse debt from subsidiary-level non-recourse obligations.
- The final pension settlement charge and cash contribution, and developments in the outstanding highway-products litigation and other contingencies.
- The effect of the revised railcar useful-life estimates on recurring earnings, and whether the announced capital spending and fleet-investment ranges are maintained.