Trinity Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in millions except per-share data. Comparisons are with the corresponding 2017 periods.
Business context
Trinity operated five principal groups: Rail, Construction Products, Inland Barge, Energy Equipment, and Railcar Leasing and Management Services. The company planned to separate its infrastructure businesses into Arcosa. As of the filing, the distribution was expected November 1, 2018, at one Arcosa share for every three Trinity shares held on the October 17 record date, subject to closing conditions.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $930.9 | $973.6 | $2,704.5 | $2,756.4 |
| Operating profit | $78.9 | $152.4 | $303.0 | $402.9 |
| Income before taxes | $39.0 | $107.6 | $181.5 | $271.4 |
| Net income attributable to Trinity | $27.7 | $66.9 | $132.0 | $164.0 |
| Diluted EPS | $0.19 | $0.43 | $0.87 | $1.06 |
Q3 and nine-month operating profit declined 48% and 25%, respectively. Net income attributable to Trinity fell 59% in Q3 and 20% for the nine-month period. Interest expense was $42.8 in Q3 and $132.9 for nine months, down from $46.8 and $137.5, respectively. Effective tax rates were 27.4% for Q3 and 25.4% for nine months, compared with 36.9% and 36.0% in 2017.
- Cash flow: Operating cash flow was $319.9 for nine months, versus $488.2 a year earlier. Investing used $311.0 and financing used $416.8; cash, cash equivalents, and restricted cash decreased $407.9 to $565.9.
- Balance sheet: Cash and cash equivalents were $427.4; restricted cash was $138.5. Total debt was $3,275.7, including $424.2 recourse and $2,851.5 non-recourse debt. Stockholders’ equity, including noncontrolling interest, was $4,639.4.
- Available facilities: $521.2 remained available under the $600.0 million revolving credit facility, with no borrowings outstanding; $521.3 was available under the TILC warehouse facility, subject to eligible unpledged equipment. Trinity reported compliance with its financial covenants.
- Capital allocation: The company repurchased $150.1 of shares in the first nine months under a $500 million program, with approximately $350 million remaining. Dividends paid were $58.1.
Material changes and operating drivers
- Rail: Q3 group revenue rose 2.9%, but operating profit fell to $32.9 from $50.5, reflecting lower railcar deliveries, pricing pressure on certain car types, and production inefficiencies. Nine-month operating profit improved to $149.5 from $137.7. Railcar backlog was $3,200.8, up from $2,445.0 a year earlier; 20,750 railcars were ordered in the first nine months.
- Construction Products: Q3 revenue increased 15% and operating profit rose to $29.1 from $16.8, mainly on higher highway-products volumes. Nine-month operating profit was $79.9 versus $54.5.
- Inland Barge: Q3 revenue increased with higher deliveries and the group returned to operating profit of $3.0 from a $0.7 loss. Nine-month revenue and profit were broadly lower.
- Energy Equipment: Q3 revenue decreased 11% and the group recorded a $13.7 operating loss, versus $26.3 profit. Lower wind-tower volumes, a $24.8 impairment tied to planned divestitures, and a $6.1 inventory reserve on a single customer order weighed on results. Nine-month operating profit declined to $20.7 from $80.0. Wind tower and utility structure backlog was $700.3, down from $972.0.
- Leasing: Q3 group revenue fell 17% and operating profit fell 24%; nine-month operating profit declined 19%. Management cited lower average rental rates, lower advisory fees, and lower gains/profit from railcar sales. Fleet utilization was 97.6% at quarter-end.
Outlook, unusual items, and risks
- No specific consolidated earnings or revenue guidance is provided. Management cautioned that interim results may not indicate full-year results and noted cyclical industries, seasonal construction demand, and variability in railcar sales.
- Management expected to contribute approximately $200 million in cash to Arcosa in connection with the planned spin-off. The separation involved conditions and risks, including potential tax consequences if it did not qualify as tax-free.
- The company redeemed or cash-settled its convertible notes in 2018; settlement of converted notes totaled approximately $646.6 million. It elected cash settlement rather than issuing shares. The notes were fully retired.
- A planned divestiture of certain Energy Equipment businesses led to a $24.8 million impairment charge; completion was expected within 12 months. On October 17, 2018, the Leasing Group acquired an entity holding about 4,150 railcars for $75.4 million cash and assumed approximately $283.9 million of debt.
- The ET-Plus False Claims Act judgment of $682.4 million had been reversed by the Fifth Circuit; a relator’s petition for Supreme Court review remained pending. Related state, local, product-liability, and shareholder matters continued. Trinity said losses were not considered probable for the specified FCA and related actions and had not accrued for them; potential impacts of certain actions could be material. Accruals for other matters totaled $25.9 million, with a stated reasonably possible loss range of $4.2 million to $27.4 million.
- Other risks include demand and pricing cycles, steel and input costs, production capacity and efficiency, interest rates, litigation, environmental and regulatory matters, and execution and tax treatment of the spin-off. The company said there had been no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether the Arcosa distribution closed as planned, the final cash contribution, and the resulting post-spin financial profile of Trinity.
- Whether the Q3 margin and profit pressure in Rail, Leasing, and Energy Equipment persisted or reversed, and how much improvement came from one-off items.
- Cash generation and liquidity after the cash settlement of convertible notes, rail-fleet investment, share repurchases, and the Arcosa contribution.
- Debt maturity and funding exposure, distinguishing recourse obligations from asset-backed non-recourse debt and evaluating restricted cash and collateral.
- Developments in the ET-Plus and related litigation, including appellate outcomes, potential losses, insurance coverage, and any changes to accruals.
- Conversion and delivery of the railcar, barge, and Energy Equipment backlogs into revenue, particularly given lower wind-tower backlog and production constraints.