Trinity Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context and reporting period
Trinity operates railcar manufacturing and leasing, construction products, inland barge, and energy equipment businesses. Results are cyclical and affected by customer capital spending, commodity and energy markets, product mix, and the timing of railcar sales. Management said market uncertainty continued to constrain new orders and that it was aligning manufacturing capacity with demand.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,111.7 | $1,542.2 | $3,484.5 | $4,845.7 |
| Operating profit | $183.6 | $364.9 | $578.6 | $1,080.9 |
| Operating margin | 16.5% | 23.7% | 16.6% | 22.3% |
| Net income attributable to Trinity | $84.2 | $204.3 | $276.0 | $596.5 |
| Diluted earnings per share | $0.55 | $1.31 | $1.81 | $3.78 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $792.1 | $630.3 |
Q3 interest expense was $45.3, versus $46.7 a year earlier; nine-month interest expense was $136.7, versus $148.8. The nine-month effective tax rate was 35.6%, compared with 33.7%.
At September 30, 2016, cash and cash equivalents were $557.8, short-term marketable securities $284.7, and restricted cash $183.9. Total debt was $3,107.1, comprising $847.4 of recourse debt and $2,259.7 of non-recourse debt. Total debt decreased from $3,195.4 at year-end 2015. Total assets were $9,135.6 and stockholders’ equity, including noncontrolling interests, was $4,254.4.
Cash decreased by $228.2 during the first nine months. Operating cash flow of $792.1 was more than offset by $805.5 of investing outflows and $214.8 of financing outflows. Investing included $555.2 of net leasing capital expenditures and $101.1 of manufacturing and other capital expenditures.
Material changes versus the prior comparable period
- Revenue fell 27.9% in Q3 and 28.1% for the first nine months; operating profit declined 49.7% and 46.5%, respectively. Management attributed the decreases mainly to lower Rail and Inland Barge volumes and fewer leased-railcar sales.
- Rail Group revenue declined 32.8% in Q3 and 32.1% year to date; operating profit fell 53.6% and 47.3%. Rail backlog was $3,701.3, down from $6,253.2 a year earlier, and nine-month railcar orders were 5,790 versus 19,690.
- Inland Barge revenue decreased 40.0% in Q3 and 35.1% year to date; operating profit decreased 58.4% and 59.9%. Barge backlog fell to $177.3 from $373.1.
- Leasing Group operating profit decreased 49.1% in Q3 and 34.9% year to date, primarily reflecting lower railcar sales. Leasing and management revenue was relatively stable, but fleet utilization eased to 97.1% from 98.5%.
- Energy Equipment revenue declined 16.5% in Q3 and 13.3% year to date, as lower utility structures and other product volumes more than offset wind tower growth. Construction Products operating profit increased, supported by lower costs and improved efficiencies.
- Gains on sales of railcars owned more than one year were $13.5 year to date, compared with $102.8 in 2015; proceeds from leased-railcar sales were $171.9 versus $700.4.
Outlook, management commentary, risks, and contingencies
- Management projected 2016 manufacturing and corporate capital expenditures of $120–$140 and gross cash investment in the lease fleet of approximately $845. No earnings guidance was provided in the filing.
- Wind tower backlog was approximately $1.0 billion, including a $940 million May 2016 order expected to be delivered over three years beginning in 2017. Rail and barge backlogs were materially below prior-year levels.
- Management reported $842.5 of unrestricted cash and short-term securities, $506.7 available under the $600 million revolving facility, and $763.2 available under the non-recourse TILC warehouse facility, subject to eligible unpledged equipment. The company reported compliance with revolving-credit financial covenants.
- The largest disclosed contingency is the ET-Plus False Claims Act case: a $682.4 judgment, including trebled damages, penalties, and costs, was stayed pending appeal and secured by an unsecured $686.0 supersedeas bond. The appeal was fully briefed; oral argument was scheduled for December 2016. Trinity said it did not believe a loss was probable and recorded no accrual. Annual bond premium was $3.7.
- Other ET-Plus-related state, county, municipal, product-liability, and shareholder actions remain. The filing says potential financial impacts of certain class actions could be material but that the company could not estimate a loss range; no accrual was recorded where loss was not considered probable. The Department of Justice closed its investigation in August 2016 without enforcement action.
- Other reasonably possible losses for claims and lawsuits were estimated at $5.0–$13.6; total accruals for contingencies, including environmental and workplace matters, were $21.0. Environmental and workplace reserves included $3.7.
- Management cited cyclical demand, the extended energy-sector downturn, a strong dollar, commodity-price weakness, customer access to capital, and litigation costs among the risks to results. The filing cautions that interim results may not indicate full-year performance.
Most important facts for investors to verify
- Progress and outcome of the ET-Plus appeal and related litigation, including possible exposure beyond recorded accruals.
- Whether railcar and barge orders, backlogs, volumes, and pricing stabilize; assess the lower rail backlog and railcar order pace.
- Execution, timing, and profitability of the $940 million wind tower order and the broader wind tower backlog.
- Leasing fleet utilization, maintenance costs, railcar sale activity, and the returns on planned lease-fleet investment.
- Cash generation and liquidity after capital spending, debt service, and potential legal or other cash requirements; distinguish recourse from subsidiary non-recourse debt.
- Any changes to management’s capital expenditure expectations, demand outlook, or contingent liabilities in subsequent filings.