Trinity Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Trinity manufactures railcars, barges, construction and energy equipment, and leases and manages railcars. Management cautions that first-quarter results may not indicate full-year performance, reflecting seasonality and other factors.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1,460.5 million | $932.9 million | +56.6% |
| Operating profit | $391.3 million | $159.5 million | +145% |
| Income from continuing operations | $233.3 million | $72.2 million | +$161.1 million |
| Net income attributable to Trinity | $226.4 million | $79.1 million | +$147.3 million |
| Diluted EPS from continuing operations | $2.85 | $0.91 | +$1.94 |
| Operating margin | 26.8% | 17.1% | +9.7 percentage points |
| Cash from operating activities | $205.3 million | $101.8 million | +$103.5 million |
Revenue and profit gains reflected higher rail shipments, pricing and favorable product mix; increased leasing-group railcar sales and rental income; and higher energy-equipment activity, including acquisitions. Q1 2014 operating profit included $77.5 million of net gains on sales of lease-fleet railcars held more than one year, versus $6.8 million in Q1 2013. Leasing-group total operating profit was $230.3 million, including $77.5 million from those long-held railcar sales and $88.9 million from sales of railcars held one year or less. The unusually large railcar-sale contribution is important when assessing recurring earnings.
Interest expense was $46.3 million, down from $49.2 million. The effective tax rate declined to 32.5% from 36.3%. Dividends declared were $0.15 per common share, up from $0.11.
Cash, debt and liquidity
- Cash and cash equivalents were $532.2 million at March 31, 2014, up from $428.5 million at year-end. Short-term marketable securities were $256.4 million; together with cash, unrestricted liquidity was $788.6 million.
- Operating cash flow was $205.3 million. Investing activities used $23.6 million and financing activities used $78.0 million, producing a $103.7 million increase in cash.
- Total debt was $2,940.2 million, down from $2,989.8 million at December 31, 2013. It comprised $421.7 million recourse debt and $2,518.5 million non-recourse leasing debt. Most non-recourse debt is secured by leasing assets and is not Trinity-guaranteed; debt classification and subsidiary-level recourse matter in evaluating leverage.
- The $425 million revolving credit facility had no borrowings; $358 million remained available after letters of credit. The $475 million TILC warehouse facility had $133.2 million outstanding and $341.8 million available. Trinity reported compliance with its financial covenants.
Segments and material changes
- Rail: Revenue rose 37.1% to $857.4 million and operating profit rose 62.8% to $167.5 million. Deliveries were 6,890 railcars; orders were 9,625. Backlog was $5.24 billion, including $4.23 billion for external customers and $1.01 billion allocated to Leasing.
- Leasing: Revenue increased to $443.1 million from $134.4 million, principally due to railcar sales. Leasing and management revenue increased 11.8%; fleet utilization was 99.5%, compared with 98.4%. The company received $514.3 million in proceeds from railcar sales to Element Financial under a strategic alliance, including $277.9 million recorded as leasing-group revenue for cars owned one year or less and $222.7 million of proceeds from cars held longer.
- Construction Products: Revenue rose 9.0% to $113.1 million; operating profit was $21.7 million versus $7.7 million. Results included an $11.2 million gain on land dispositions. Aggregates benefited from acquisitions, while Highway Products revenue fell 17.2% amid lower volumes.
- Inland Barge: Revenue declined 7.1% to $136.9 million on lower deliveries and mix; operating profit increased 9.9% to $26.7 million, partly due to lower costs.
- Energy Equipment: Revenue grew 36.1% to $210.6 million and operating profit rose 53.7% to $22.9 million, reflecting higher volumes, mix and acquisitions.
Trinity completed three Energy Equipment acquisitions in the U.S. and Canada. Acquisition spending was $112.6 million net of cash acquired; $82.1 million of goodwill was recorded, principally associated with Energy Equipment.
Outlook, risks and contingencies
- Management described demand for railcars and barges serving oil, gas and chemicals as favorable, with demand beginning to strengthen in cement and agricultural markets. Coal-related demand remained weak. Highway Products faced slower commercial construction, state budget constraints and unfavorable weather.
- Management projected 2014 manufacturing and corporate capital expenditures of $250 million to $300 million and did not expect net investment in new railcars to consume cash after expected leased-railcar sale proceeds. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Rail and Inland Barge, and portions of Energy Equipment, operate in cyclical markets. Management cited demand, raw-material costs, capacity utilization, customer orders and credit, interest rates, litigation, and regulatory and environmental matters among factors that could affect results.
- The ET-Plus guardrail False Claims Act case was scheduled for trial in July 2014. Trinity disputed the allegations; management said loss was not probable and could not estimate a loss range, so no accrual was recorded.
- Trinity was named in litigation related to the 2013 Lac-Mégantic derailment; its subsidiary manufactured 35 of the 72 tank cars involved, and a partially owned subsidiary owned and leased 13. Management said loss was not probable and no loss range could be determined; no accrual was recorded.
- Other claims, including environmental and workplace matters, had estimated reasonably possible losses of $9.7 million to $30.4 million and recorded accruals of $20.1 million. The company separately reserved $11.3 million for probable and estimable environmental and workplace liabilities.
- Unrecognized tax benefits totaled $56.1 million; tax transfer-pricing matters remained under examination and mutual-agreement processes. The filing states no material change in previously disclosed risk factors or market risks.
Most important facts for investors to verify
- How much of Q1 profit depended on railcar dispositions, particularly the $77.5 million gain on cars held more than a year, and whether elevated sale activity is sustainable.
- Element alliance transaction details, including the distinction between sale proceeds, recognized revenue and gains, and the expected pace of future transactions.
- Rail and barge order conversion, backlog quality and delivery timing; the Leasing backlog is supported by customer lease commitments, but its final allocation may change.
- Liquidity and leverage at the leasing subsidiaries, including the non-recourse structure, collateral, refinancing and maturity schedule; $534.3 million of principal payments are scheduled for 2016.
- Developments in the ET-Plus, Lac-Mégantic and wind-tower contract litigation, as well as tax examinations and environmental or workplace exposures.
- Whether management’s demand and capital-spending assumptions hold, given cyclical markets, weak coal demand, construction-market pressures and the filing’s seasonality warning.