Trinity Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Trinity manufactures railcars, barges, construction and energy-related products, and leases and manages railcars. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $942.3 | $905.5 | $1,773.6 | $1,782.8 |
| Operating profit | $125.5 | $134.6 | $224.1 | $250.5 |
| Operating margin | 13.3% | 14.9% | 12.6% | 14.1% |
| Net income attributable to Trinity | $64.1 | $51.1 | $104.3 | $97.1 |
| Diluted EPS | $0.43 | $0.33 | $0.68 | $0.63 |
| Interest expense | $43.8 | $45.7 | $90.1 | $90.7 |
Q2 revenue rose 4.1%, while operating profit fell 6.8%; the six-month figures were down 0.5% and 10.5%, respectively. Net income attributable to Trinity increased in both periods, helped in part by lower effective tax rates: 23.9% in Q2 and 24.8% for the half, versus 40.9% and 35.5% in 2017. The federal statutory rate fell to 21% following tax reform.
Segments and material changes
- Rail Group: Revenue increased 23.5% in Q2 and 24.3% for the half; operating profit rose to $57.7 and $116.6, respectively, driven mainly by higher railcar deliveries. Six-month railcar orders totaled 13,025; backlog was $2.664 billion, down from $2.715 billion a year earlier.
- Construction Products: Operating profit increased to $31.4 in Q2 and $50.8 for the half, supported by construction aggregates volumes and the prior-year trench-shoring acquisition.
- Inland Barge: Q2 operating profit improved to $2.9, but six-month profit fell to $2.2 as deliveries declined. Backlog rose to $198.4 million from $90.7 million.
- Energy Equipment: Operating profit declined to $13.1 in Q2 and $34.4 for the half, mainly due to lower wind-tower volumes; Q2 also reflected utility-structure pricing, production inefficiencies, and unfavorable mix. Wind-tower and utility-structure backlog was $780.1 million, down from $1.074 billion.
- Leasing: Revenue increased, partly due to railcar sales, but operating profit fell 17.1% in Q2 and 16.8% for the half. Management cited lower rental rates, higher maintenance and compliance costs, and railcar-sale mix. Fleet utilization was 97.1%, versus 97.5% a year earlier.
Adoption of the new revenue standard increased Q2 revenue and operating profit by $3.3 million and $0.4 million, respectively, but reduced six-month revenue and operating profit by $14.7 million and $3.6 million. The change primarily affects when wind-tower and certain utility-structure revenue is recognized.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $348.3, compared with $336.1 in 2017. Investing used $204.4; financing used $362.8. Cash, cash equivalents, and restricted cash declined by $218.9 to $754.9.
- At June 30, unrestricted cash, cash equivalents, and short-term marketable securities totaled $637.7, down from $1,098.1 at year-end 2017. Restricted cash was $142.2.
- Total debt was $3,227.3, versus $3,242.4 at year-end. Recourse debt declined to $424.4 from $866.8, while non-recourse debt increased to $2,802.9 from $2,375.6. Most non-recourse debt is leasing-related and secured by railcars or related assets.
- The $600 million revolving credit facility had no borrowings and $521.2 available after letters of credit. The company reported compliance with its financial covenants. A separate railcar warehouse facility had $598.9 available, subject to eligible unpledged equipment.
- Leasing capital expenditures, net of the stated cost of certain sold railcars, were $503.2 for the half; manufacturing and other capital expenditures were $33.9. Total capital expenditures were $537.1.
Outlook, management commentary, and risks
- Management projected 2018 manufacturing/corporate capital expenditures of $100–$135 million, excluding spin-off costs, and a $600–$825 million net investment in the railcar lease fleet after planned fleet modifications and railcar-sale proceeds. No full-year earnings guidance is provided in the supplied filing text.
- Trinity expected to complete a tax-free spin-off of its infrastructure-related businesses into Arcosa in Q4 2018. Completion remained subject to regulatory filings, board approval, and customary conditions; the company could change or abandon the plan.
- In April–July 2018, holders converted approximately $448.5 million of convertible notes. Trinity elected cash settlement; by July 3, conversion settlements totaled approximately $646.6 million. The notes were fully retired, and the company said this avoided issuance of up to 5.7 million shares.
- Trinity repurchased $100.1 million of shares in the first half under a $500 million authorization, leaving approximately $400 million available. The quarterly dividend declared was $0.13 per share.
- The company gave notice to exercise a purchase option for railcars held by independent trusts for $223.6 million in January 2019, potentially accelerated to Q4 2018. Trinity stated it does not guarantee the related subsidiaries’ lease obligations.
- Material contingencies include ET-Plus guardrail-related litigation. The Fifth Circuit reversed a $682.4 million judgment in Trinity’s favor; the relator’s Supreme Court petition remained pending. Related state and local actions and a certified Missouri class action also remained. Trinity recorded no accrual for these matters because it did not consider a loss probable, and said possible impacts could be material but could not be estimated. Other reasonably possible losses were estimated at $5.1–$26.4 million; recorded accruals were $23.0 million.
- Management highlighted cyclical end markets, customer demand and order timing, steel and other input costs, interest rates, litigation and product-compliance exposure, and execution and tax risks tied to the proposed spin-off. It reported no material change in market risks or risk factors from the prior annual filing.
Important facts for investors to verify
- Progress, timing, tax treatment, costs, and separation terms for the planned Arcosa spin-off.
- Cash and debt effects of the convertible-note cash settlements completed after quarter-end, including July settlement timing.
- Developments in ET-Plus litigation and whether any new information changes the company’s loss assessment or accruals.
- Rail, barge, and energy backlog conversion, delivery timing, and margin trends, especially the decline in wind-tower and utility-structure backlog.
- Actual 2018 lease-fleet investment, utilization, rental rates, and maintenance costs versus the stated capital-investment outlook.
- Effects of the revenue-standard transition and subsequent refinements to estimates under the Tax Cuts and Jobs Act.