Trinity Industries, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter earnings report. Trinity supplies railcar leasing, manufacturing, maintenance and modification services, as well as highway safety products.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $1,999.4 million | $3,005.1 million |
| Operating profit (loss) | $(124.5) million | $416.3 million |
| Continuing-operations income (loss) | $(226.1) million | $139.2 million |
| Net income (loss) attributable to Trinity | $(147.3) million | $137.6 million |
| Operating cash flow from continuing operations | $651.8 million | $396.7 million |
| Free cash flow after investments and dividends (non-GAAP) | $112.8 million | $144.8 million |
- Revenue fell 33.5%, primarily due to fewer Rail Products Group deliveries and fewer railcars sold from the lease fleet. Operating margin was approximately negative 6.2%, versus positive 13.9% in 2019.
- Rail Products Group revenue declined 45.9% to $1,609.5 million and operating profit fell 86.9% to $36.3 million; its operating margin was 2.3%, compared with 9.3%.
- Leasing Group revenue declined 28.2% to $802.3 million, mainly from lower railcar sales. Leasing and management operating profit was $336.0 million, up 6.8%; total segment operating profit declined 13.0% to $353.7 million. Fleet utilization was 94.5%, down from 96.0%.
- Year-end backlog was $1.0 billion, down 44.6%; orders were 5,980 railcars and deliveries were 11,530. About 61% of backlog value was expected to be delivered in 2021.
- Cash and cash equivalents were $132.0 million. Total debt was $5.017 billion, including $448.2 million of recourse debt and $4.569 billion of non-recourse debt. Total stockholders’ equity was $2.016 billion.
- Committed liquidity was $727.4 million: $132.0 million cash, $364.8 million available under the revolving facility, and $230.6 million available under the leasing warehouse facility. The company reported compliance with its debt covenants at year-end.
Material changes and unusual items
- The company recorded $396.4 million of long-lived-asset impairment charges, including $369.4 million related to small cube covered hopper railcars serving the frac-sand market. Management cited reduced fracking activity and a shift toward locally sourced in-basin sand. The impairment was based on significant unobservable valuation assumptions; further impairment is possible.
- A $151.5 million non-cash pension settlement charge followed termination and settlement of the company’s qualified pension plan. The company reported no remaining funded pension plan obligations after settlement.
- The income tax benefit was $268.4 million, including a stated $180.4 million net benefit from CARES Act loss carrybacks and related tax effects. The income tax receivable rose to $445.8 million from $14.7 million.
- Railcar useful-life and salvage-value estimate changes reduced 2020 depreciation expense by approximately $30.8 million and increased net income by approximately $23.7 million, or $0.20 per share.
- Operating cash flow rose year over year, but included substantial non-cash impairment and pension adjustments; the increase should be considered alongside working-capital movements and the large tax receivable.
- The company paid $91.7 million in dividends and repurchased $191.3 million of shares during 2020. The quarterly dividend was increased 11% to $0.21 per share in December; a new $250 million repurchase authorization was approved, with $182.2 million remaining at year-end.
Outlook, risks and contingencies
- Management said results would remain under near-term pressure from COVID-19, cyclical demand, lower railcar loadings, underutilized industry capacity and pressure on lease rates and utilization. It did not provide specific earnings or revenue guidance.
- For 2021, Trinity anticipated net lease-fleet investment of $300–$350 million and manufacturing and other capital expenditures of $45–$60 million. These are plans, not guaranteed outcomes.
- Management reported approximately $11.0 million of 2020 restructuring charges and expected to pursue additional cost-saving opportunities. Operations continued during the pandemic with enhanced safety measures; management reported limited supply-chain disruption and insignificant increases in delinquencies outside small cube covered hoppers.
- Material risks include rail and manufacturing cyclicality, COVID-19 impacts, customer credit and lease renewals, steel and component costs, Mexico operations and trade exposure, refinancing and interest-rate risk, and possible further asset impairments. LIBOR-based contracts extend beyond the announced 2023 phaseout.
- Highway-products litigation remains a contingency. The federal False Claims Act judgment was reversed and the U.S. Supreme Court declined review, ending that action. State qui tam cases and a Missouri class action remained pending; the company said potential financial impacts were unknown and could be material, and recorded no accrual for those actions because management did not consider a loss probable.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The impairment of small cube covered hopper railcars was identified as a critical audit matter.
Important facts for investors to verify
- Whether lease utilization, renewal rates and pricing stabilize, particularly for small cube covered hopper cars, and whether further impairments occur.
- How much of the $1.0 billion backlog converts to deliveries and cash, and whether customer cancellations or credit deterioration affect it.
- The composition and accessibility of liquidity, debt maturities and covenant headroom, including the distinction between parent recourse debt and asset-backed non-recourse debt.
- The timing and collectability of the $445.8 million income tax receivable and the extent to which operating cash flow is sustainable without comparable tax refunds or working-capital benefits.
- Developments in the pending highway-products litigation and any related insurance coverage, settlements or accruals.
- Whether projected 2021 fleet investment and capital expenditures, dividends and buybacks remain consistent with demand, cash generation and financing needs.