Trinity Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are to Q1 2015 unless noted. Trinity operates rail manufacturing and leasing, construction products, inland barge, and energy equipment businesses. Management cautions that first-quarter results may not indicate full-year performance because of seasonal and cyclical factors.
Financial performance
- Revenue: $1.188 billion, down 27.0% from $1.627 billion. Manufacturing revenue was $1.010 billion and leasing revenue was $177.8 million.
- Profit: Operating profit was $203.4 million, down 38.9%; operating margin was approximately 17.1%, versus 20.5%. Net income was $102.1 million; net income attributable to Trinity was $97.2 million, or $0.64 per diluted share, versus $180.2 million, or $1.13 per diluted share.
- Segment changes: Rail Group revenue fell 26.0% and operating profit fell to $157.2 million from $212.7 million. Inland Barge revenue declined 27.6% and profit fell to $12.6 million from $27.5 million. Leasing Group revenue fell 27.1% and profit fell 39.6%, principally because of fewer railcar sales. Construction Products revenue rose 10.7% and profit rose to $15.9 million from $8.3 million. Energy Equipment profit was essentially unchanged at $37.4 million despite revenue declining 8.9%.
- Cash flow: Operating cash flow was $286.1 million, compared with $109.4 million. The increase reflected, among other factors, lower receivables and a higher deferred-tax provision. Investing used $356.1 million, including $249.1 million of capital expenditures; financing used $80.3 million. Cash and cash equivalents declined $150.3 million to $635.7 million.
- Liquidity: Cash plus short-term marketable securities totaled $835.6 million; restricted cash was an additional $185.6 million. The $600 million revolving facility had no borrowings and $506.6 million available after letters of credit. Management stated it believes capital resources are adequate.
- Debt: Total debt was $3.171 billion, down from $3.195 billion at year-end. This includes $840.4 million of recourse debt and $2.331 billion of non-recourse leasing debt. The non-recourse debt is generally secured by railcars and lease cash flows; Trinity states it does not guarantee debt of its partially owned leasing subsidiaries. The company was in compliance with revolving-credit financial covenants.
- Other metrics: The effective tax rate rose to 36.0% from 33.5%. Dividends declared were $0.11 per share, versus $0.10. Trinity repurchased 2.07 million shares for approximately $34.7 million.
Material changes and operating trends
- Lower railcar and barge deliveries, reduced railcar sales from the leasing fleet, product mix, and weaker activity in parts of Energy Equipment drove the overall revenue and profit declines. Management also cited costs of aligning production capacity with demand.
- Railcar backlog was $4.717 billion, down from $6.808 billion a year earlier; the railcar count declined to 43,360 from 57,190. Q1 rail manufacturing orders were 1,620 railcars, compared with 4,865 in Q1 2015. Average backlog selling price was 8.6% lower year over year.
- Inland Barge backlog declined to $318.7 million from $565.4 million; wind tower backlog declined to $263.4 million from $390.7 million. Leasing fleet utilization was 97.2%, versus 99.3% a year earlier.
- Leased-railcar sale proceeds were $22.8 million, down from $172.4 million. Leasing and management revenue increased 2.6%, but operating profit declined due to higher maintenance expense and lower utilization.
Outlook, risks, contingencies, and unusual items
- Spending outlook: Management projected 2016 manufacturing and corporate capital expenditures of $150–$200 million, gross lease-fleet investment of approximately $925 million, and $300–$400 million of leased-railcar sales to partly offset that investment. These are stated expectations, not guaranteed outcomes.
- Demand and cyclicality: Management said macroeconomic uncertainty, lower oil prices, a strong U.S. dollar, and weakness in commodity markets were limiting some customers’ long-term investment plans. The company said it was adjusting manufacturing capacity to demand. The filing provides no earnings or revenue guidance.
- ET-Plus litigation: A federal False Claims Act judgment of $682.4 million was stayed pending appeal after Trinity posted a $686 million supersedeas bond. Trinity filed its opening appeal brief in March 2016 and said it did not consider a loss probable; accordingly, no accrual was recorded for that judgment. Trinity cites eight successful post-verdict crash tests and favorable FHWA/AASHTO task-force findings. Shipment of the product resumed in Q4 2015; Q1 2016 U.S. sales were approximately $0.8 million.
- Other ET-Plus-related exposure includes state qui tam suits, county and municipal class actions, a federal grand jury subpoena, and product-liability cases. Some suits were stayed, but potential class-action losses were described as unknown and not reasonably estimable. Management did not consider losses probable for the cited actions and recorded no accrual for them.
- Other claims, including product warranty, personal injury, environmental, and workplace matters, had a stated reasonably possible loss range of $3.3–$16.6 million; total accruals were $20.7 million, including environmental and workplace matters. The filing reports $4.0 million reserved for environmental and workplace liabilities.
- Trinity reported the Lac-Mégantic derailment claims resolved within available insurance in an amount not material to its financial statements; a court dismissal order was issued April 6, 2016, subject to appeal.
- The filing identifies cyclicality, customer order timing and credit, raw-material costs, interest rates, litigation and bonding costs, and product compliance as risks. It reports no material change in market risks from year-end 2015 and no material change in internal controls.
Most important facts for investors to verify
- Subsequent developments and potential financial exposure from the ET-Plus appeal, the $682.4 million judgment, the bond, related class actions, and the federal investigation.
- Whether railcar orders, backlog, delivery volumes, selling prices, and fleet utilization stabilize or continue to weaken.
- Execution and funding of the projected $925 million gross lease-fleet investment and expected railcar disposals, including the resulting cash flow and debt requirements.
- The composition and availability of reported liquidity, including restricted cash, subsidiary-level cash and debt, and non-recourse financing terms.
- Future earnings sensitivity to production realignment costs, maintenance expense, product mix, lower energy-market demand, and the effective tax rate.