TRINITY INDUSTRIES INC annual report, FY2015

Full document

Trinity Industries, Inc. — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless stated otherwise.

Business context and reporting period

Trinity is a diversified industrial company serving transportation, energy, construction, and chemical markets. Its five principal groups are Rail, Railcar Leasing and Management Services, Construction Products, Energy Equipment, and Inland Barge. Operations are concentrated in North America, including significant manufacturing operations in Mexico.

Financial performance and liquidity

  • Revenue: $6.393 billion, up 3.6% from $6.170 billion in 2014.
  • Operating profit and margin: $1.439 billion, up 15.0%; operating margin was 22.5%, versus 20.3%.
  • Net income: $826.0 million, compared with $709.3 million. Net income attributable to Trinity was $796.5 million, or $5.08 diluted EPS, versus $678.2 million and $4.19.
  • Cash flow: Cash from operating activities was $939.7 million, up from $819.2 million. Investing activities used $511.3 million; financing activities used $530.3 million. Cash and cash equivalents ended the year at $786.0 million.
  • Investment: Capital expenditures were $1.030 billion, including $833.8 million for net additions to the railcar lease fleet. Manufacturing and corporate capital expenditures were projected at $150–$200 million for 2016.
  • Debt and equity: Total debt was $3.195 billion, down from $3.515 billion; this included $836.7 million recourse debt and $2.359 billion non-recourse debt. The reported total-debt-to-total-capital ratio fell to 44.1% from 50.8%. Stockholders’ equity was $4.049 billion.
  • Liquidity: Unrestricted cash, cash equivalents, and short-term marketable securities totaled $870.9 million. The $600 million corporate revolver had $508.4 million available after letters of credit; a separate railcar warehouse facility had $735.7 million available, subject to eligible unpledged equipment.
  • Shareholder returns: Dividends declared were $0.43 per share for 2015, up from $0.375. Trinity repurchased 3.95 million shares for $115.0 million and authorized a new $250 million repurchase program for 2016–2017.

Material changes versus 2014

  • Rail Group revenue rose 16.9% to $4.462 billion and operating profit increased 28.7% to $931.6 million, supported by higher deliveries, improved pricing, and efficiencies.
  • Leasing Group revenue declined 1.2% to $1.105 billion as lower sales of railcars owned one year or less offset 10.7% growth in leasing and management revenue. Operating profit rose 17.4% to $606.2 million, including higher gains on sales of older railcars.
  • Energy Equipment revenue increased 12.2% to $1.114 billion and operating profit increased 39.6% to $150.9 million; acquisition-related activity was a significant contributor.
  • Construction Products revenue fell 3.5% to $532.6 million and operating profit fell 16.7% to $54.5 million, principally reflecting weaker highway-products volumes and higher selling, engineering, and administrative costs.
  • Inland Barge revenue and operating profit each increased 2.3%, to $652.9 million and $117.0 million, respectively.
  • Railcar backlog declined to 48,885 cars valued at $5.401 billion from 61,035 cars and $7.215 billion. The filing attributes the decrease to orders and deliveries; the average selling price in backlog was 6.5% lower, partly due to product mix.

Outlook, management commentary, and key risks

  • Management described demand as mixed. Lower oil prices, a strong U.S. dollar, weaker commodity markets, and macroeconomic uncertainty slowed new orders in some businesses; management also cited positive demand fundamentals in automotive, construction, petrochemical, and wind markets.
  • Management said it was aligning manufacturing capacity with demand. About 51% of railcar backlog was expected to ship in 2016; substantially all barge and wind-tower backlog was expected to ship during 2016. Expected 2016 net cash investment in new lease-fleet railcars was approximately $385 million after expected sales proceeds. The filing does not provide a full-year earnings or revenue forecast.
  • Railcar backlog orders assigned to the Leasing Group were supported by external lease commitments, but customers may elect to purchase cars from the Rail Group instead. Railcar fleet utilization was 97.7%, down from 99.5%; the fleet totaled 76,765 cars.
  • Highway Products litigation: A federal False Claims Act jury verdict led to a $682.4 million judgment, including treble damages, penalties, and costs. Trinity appealed, disputed the allegations, and stated that it did not consider a loss probable; accordingly, it recorded no accrual. It posted a $686.0 million supersedeas bond. Eight FHWA-requested crash tests were passed, and FHWA/AASHTO task-force findings included no performance limitations unique to the ET Plus. Shipments resumed in the fourth quarter, with insignificant 2015 revenue.
  • Related exposure includes state false-claims actions, county and municipal class actions, product-liability suits, shareholder class actions, and a Department of Justice subpoena seeking ET 2000 and ET Plus documents. The filing says potential losses for certain county and municipal actions could be material but could not be estimated; no loss was considered probable for those actions at year-end.
  • Other principal risks include cyclical demand, rail safety regulation, steel and component availability and pricing, lease rates and fleet utilization, access to capital, environmental and product-liability exposure, labor availability, and operations in Mexico. The filing reports no goodwill or long-lived-asset impairment for 2015.

Most important facts for investors to verify

  • Track the appeal and related ET Plus cases, the supersedeas bond cost and status, and any change in management’s assessment or accruals.
  • Monitor the pace and pricing of railcar orders, backlog conversion, and whether the backlog decline continues.
  • Assess whether lease-fleet utilization, lease rates, railcar resale gains, and Element alliance proceeds remain supportive of Leasing Group earnings and cash flow.
  • Compare actual 2016 capital spending and lease-fleet investment with management’s stated projections, and review funding needs and debt maturities.
  • Evaluate the sustainability of 2015 profit growth given acquisition contributions, gains on older railcar sales, higher legal expenses, and the mixed end-market outlook.