Business context and reporting period
Trinity Industries, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Its businesses include railcar manufacturing and leasing, construction products, inland barges, and energy equipment. Unless stated otherwise, amounts are in U.S. dollars and millions.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,542.2 | $1,562.8 | $4,845.7 | $4,508.6 |
| Operating profit | $364.9 | $281.2 | $1,080.9 | $974.5 |
| Net income attributable to Trinity | $204.3 | $149.4 | $596.5 | $540.0 |
| Diluted EPS | $1.31 | $0.91 | $3.78 | $3.33 |
| Operating margin | 23.7% | 18.0% | 22.3% | 21.6% |
Quarterly revenue declined 1.3%, while nine-month revenue increased 7.5%. Operating profit rose 29.8% for the quarter and 10.9% year to date. The quarterly improvement included higher leasing-group railcar-sale profits, including $57.8 of gains on railcars held over one year, versus $3.0 a year earlier. Nine-month earnings growth reflected stronger Rail, Inland Barge, and Energy Equipment results; leasing profit was nearly flat as lower railcar-sale profits offset higher leasing and management earnings.
- Cash flow: Operating cash flow was $630.3 for the nine months, up from $332.6. Investing used $382.9 and financing used $457.5; cash and equivalents fell $210.1 to $677.8.
- Investment and capital returns: Nine-month capital expenditures were $787.3, including lease-fleet investment. The company repurchased $115.0 of shares and paid $48.0 in common dividends. Quarterly dividend was raised 10%, to $0.11 per share.
- Debt and liquidity: Total debt was $3,284.5 at September 30, down from $3,553.0 at year-end; $838.3 was recourse and $2,446.2 non-recourse. The $600.0 corporate revolver had $508.4 available after letters of credit, with no borrowings. The leasing warehouse facility had $708.3 unused capacity, subject to eligible unpledged equipment. The company reported covenant compliance.
- Backlog and fleet: Rail Group backlog was $6,253.2, up 2.4% year over year, and extended into 2020; nine-month railcar orders were 19,690. Inland Barge backlog was $373.1 versus $475.4, and wind-tower backlog was $424.4 versus $528.6. Leasing fleet utilization was 98.5%, compared with 99.7% a year earlier.
Material changes, outlook, and risks
Rail Group revenue and operating profit grew on higher deliveries, improved pricing, and efficiencies, although product mix tempered growth. Energy Equipment benefited substantially from acquisition-related volume. Construction Products weakened, particularly Highway Products. Leasing and management revenue increased with fleet additions and higher rental rates, but nine-month railcar-sale revenue fell to $211.2 from $411.1.
Management described demand as mixed. Lower oil prices, a strong dollar, and weakness in commodity markets increased customer uncertainty and slowed orders in some businesses; management also cited positive demand fundamentals in automotive, construction, and petrochemicals. No consolidated earnings guidance is stated in the provided filing text. Management projected 2015 manufacturing and corporate capital expenditures of $200–$240 and net cash investment in lease-fleet additions of $280–$480, after expected sale proceeds and the purchase of trust-owned railcars.
The Element Financial railcar-sale alliance was extended on October 14, 2015 for $1 billion through December 2019. The company had received $1,604.2 in proceeds under the alliance since its inception.
ET-Plus litigation is a significant contingency. A federal False Claims Act judgment entered in June 2015 totaled $682.4; Trinity appealed and obtained a stay pending appeal by posting a $686.0 supersedeas bond, with an initial annual premium of $3.9. Trinity said it did not consider a loss probable and recorded no accrual. The company cited successful FHWA-requested crash tests and favorable FHWA/AASHTO task-force findings. However, state, county, and municipal claims, including a Canadian class action seeking $500.0, remained unresolved; the company said potential losses could be material but could not be estimated. ET-Plus shipments had been suspended, and there were no U.S. ET-Plus sales in the first nine months of 2015. A Department of Justice subpoena sought documents relating to ET 2000 and ET Plus products. The filing also discusses shareholder class actions and product-liability suits.
Other matters include tax examinations with unresolved transfer-pricing issues and $65.6 of unrecognized tax benefits. For other claims, the company reported $29.3 of accruals and a reasonably possible loss range of $7.0–$26.8, excluding the separately discussed highway-products litigation except specified product-liability matters. The filing identifies cyclical demand, commodity and input costs, interest rates, customer credit, litigation, and product compliance as risks.
Important facts for investors to verify
- Progress and potential financial exposure from the ET-Plus appeal, related state and class actions, product-liability claims, and the DOJ subpoena; no accrual was recorded for the principal False Claims Act judgment or the state and municipal actions.
- Whether railcar orders, backlog conversion, pricing, and leasing-fleet utilization hold up amid the mixed demand environment and weaker energy-market conditions.
- Actual lease-fleet investment and railcar-sale proceeds versus management’s 2015 projected net investment range; these affect cash generation and reported leasing results.
- Debt maturities, refinancing and covenant headroom, and the availability of warehouse capacity, which is equipment-dependent; also assess the extent to which non-recourse debt is supported by pledged assets and lease cash flows.
- Resolution of transfer-pricing tax audits and the timing and impact of other contingent liabilities.