Trinity Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $973.6 | $1,111.7 | $2,756.4 | $3,484.5 |
| Operating profit | $153.0 | $183.6 | $404.8 | $578.6 |
| Net income | $67.9 | $89.6 | $173.6 | $290.5 |
| Net income attributable to Trinity | $66.9 | $84.2 | $164.0 | $276.0 |
| Diluted EPS | $0.43 | $0.55 | $1.06 | $1.81 |
- Revenue fell 12.4% in Q3 and 20.9% for the first nine months; operating profit declined 16.7% and 30.0%, respectively. Lower Rail and Inland Barge volumes were the primary drivers. Operating margin was approximately 15.7% for Q3 and 14.7% for 9M 2017, versus 16.5% and 16.6% in 2016.
- Rail Group revenue declined 31.7% in Q3 and 36.5% for 9M; operating profit fell 51.2% and 60.4%. Inland Barge revenue dropped 71.6% and 62.1%, respectively; the group recorded a Q3 operating loss of $0.7 million.
- Leasing Group operating profit increased 49.8% in Q3 and 16.2% for 9M, supported by railcar sales and, for 9M, lower maintenance and compliance costs. Construction Products and Energy Equipment operating profit declined in both comparison periods.
- Q3 selling, engineering and administrative expense increased 11.9%; 9M expense increased 7.9%, reflecting performance compensation and litigation costs. Headcount was down approximately 20% year over year as the company aligned costs with market conditions.
Cash flow, debt and liquidity
- For 9M 2017, operating cash flow was $488.2 million, down from $792.1 million. The filing attributes the decline mainly to lower net income and a $94.3 million increase in receivables.
- Investing activities used $217.0 million, versus $805.5 million in 9M 2016. Capital expenditures were $422.3 million, including net lease-fleet investment spending; proceeds from railcars owned more than one year were $160.3 million.
- Financing activities provided $40.1 million, including $534.1 million of debt issuance proceeds and $334.9 million of debt retirements. Cash and cash equivalents rose $311.3 million to $874.7 million.
- At September 30, 2017, unrestricted cash, cash equivalents and short-term marketable securities totaled $1,024.7 million. Total debt was $3,276.4 million: $862.9 million recourse and $2,413.5 million non-recourse. The $600 million corporate revolver had no borrowings and $517.4 million available after letters of credit; Trinity reported compliance with its financial covenants.
- The TILC non-recourse warehouse facility had $166.7 million outstanding and $833.3 million available subject to eligible, unpledged equipment. Its facility expires in April 2018, with outstanding amounts payable in April 2019 absent renewal.
Material changes, outlook and notable items
- Firm-order backlog was $2,445.0 million at September 30, down from $3,701.3 million a year earlier. Rail backlog was $2,445.0 million, including $1,509.1 million for external customers and $935.9 million for the Leasing Group; the Rail Group reported 9,720 orders for the first nine months. Inland Barge backlog was $126.0 million, and wind-tower backlog was $847.3 million.
- Management described demand as below normal and cited industrial-economy uncertainty and oversupply of railcars and barges as constraints on new orders. It is adjusting manufacturing capacity; the filing provides no quantified revenue or earnings guidance.
- Management projected 2017 manufacturing/corporate capital expenditures of $80–$95 million and a $190–$240 million net investment in the wholly owned lease fleet.
- In May and July, the company acquired lightweight aggregates and trench-shoring businesses for a combined purchase price of $48.3 million; preliminary goodwill recorded was $14.8 million.
- The Fifth Circuit unanimously reversed the $682.4 million ET Plus False Claims Act judgment on September 29, 2017, and entered judgment for Trinity. Further appeals remained possible; no loss accrual was recorded. Related state, county, municipal and product-liability matters remain, and the company said potential losses in certain class actions could be material but could not be estimated.
- Other claims and proceedings had a reasonably possible loss range of $3.2–$19.0 million; accrued amounts were $12.2 million, including environmental and workplace matters. A separate $3.5 million reserve covered probable, estimable environmental and workplace liabilities.
- Trinity plans to adopt the new revenue standard on January 1, 2018. It anticipates recognizing revenue over time, rather than upon delivery, for wind towers and utility structures; the financial impact could not yet be reasonably estimated.
- The quarterly dividend increased from $0.11 to $0.13 per share in May. The company repurchased $52.4 million of shares in 9M 2017; no program repurchases occurred in Q3. Remaining authorization was approximately $163 million.
Important facts for investors to verify
- Whether railcar and barge demand, order intake and backlog stabilize, and how backlog converts to deliveries and margins.
- Whether the ET Plus judgment reversal stands after any further appeal, and the development and potential exposure of related litigation.
- Cash conversion and receivables, including the tax receivable, and the funding needs of lease-fleet investment.
- Refinancing or renewal plans for the warehouse facility and the effect of the June 2018 holder put and redemption provisions on convertible notes.
- The eventual financial impact of the 2018 revenue-recognition change for wind towers and utility structures.