Trinity Industries, Inc. (NYSE: TRN) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet figures are as of September 30, 2020. Amounts are in millions of dollars except per-share data, percentages, and railcar counts. Trinity operates railcar leasing and management, rail products, and highway products businesses.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $459.4 | $813.6 | $1,583.8 | $2,154.4 |
| Operating profit (loss) | $72.9 | $120.3 | $(161.4) | $319.1 |
| Income (loss) from continuing operations | $25.9 | $48.1 | $(99.4) | $116.9 |
| Net income (loss) attributable to Trinity | $25.1 | $49.0 | $(20.1) | $116.0 |
| Diluted EPS attributable to Trinity | $0.21 | $0.39 | $(0.17) | $0.88 |
- Q3 revenue declined 43.5% year over year; nine-month revenue declined 26.5%. Lower Rail Products deliveries and fewer railcars sold from the lease fleet were the primary drivers.
- Q3 operating margin was approximately 15.9%, versus 14.8% a year earlier. Nine-month operating loss included a $369.4 non-cash impairment charge, primarily related to small cube covered hopper railcars.
- Rail Products Group Q3 revenue fell 48.1% to $381.2 and operating profit fell to $3.2 from $65.4; operating margin was 0.8% versus 8.9%. Leasing Group Q3 revenue fell 43.7% to $183.9, largely reflecting lower railcar-sale activity; leasing and management operating profit rose 8.8% to $86.8.
- Nine-month net cash from continuing operating activities was $456.8, compared with $166.3 in 2019. Management’s non-GAAP Free Cash Flow before leasing capital expenditures was $457.0, versus $217.2.
- Cash and cash equivalents were $120.8; restricted cash was $101.1. Total debt was $4,935.1, comprising $523.1 recourse debt and $4,412.0 non-recourse debt. Debt increased from $4,881.9 at year-end 2019.
- Total committed liquidity was $719.0: $120.8 cash, $278.7 available under the revolving facility, and $319.5 available under the TILC warehouse facility. The company reported compliance with debt covenants; actual maximum leverage was 2.45 against a 3.75 limit, and interest coverage was 5.13 against a 2.25 minimum.
- Operating cash flow was partly offset by investing outflows of $361.0 and financing outflows of $151.3; cash, cash equivalents, and restricted cash decreased $55.7 during the nine months.
Material changes and unusual items
- The $369.4 impairment followed weaker frac-sand railcar demand amid lower oil prices, reduced fracking activity, and a shift toward locally sourced in-basin sand. The charge comprised $358.3 for owned small cube covered hopper railcars and $11.1 for leased-in related assets. Management reported no additional impairment in Q3, but noted estimates depend on significant assumptions.
- CARES Act tax-loss carrybacks generated a $174.6 tax benefit for the nine months. The income tax receivable was $485.0, including amounts related to prior-year carrybacks and an anticipated 2020 carryback; management expected approximately $169.7 of the latter to be realized in 2021.
- Management revised useful lives and salvage values for certain leased railcars, increasing weighted-average estimated useful life from about 34 to 37 years. The change reduced depreciation expense by $23.1 for the nine months and increased net income by $17.7, or $0.15 per share.
- Railcar backlog was $1.155 billion, down 52.8% from $2.446 billion a year earlier. Nine-month orders were 4,810 railcars and deliveries were 9,295, compared with 7,635 orders and 15,080 deliveries in 2019. Fleet utilization was 94.8%, down from 96.7%.
- Restructuring charges were $10.5 for the nine months, including workforce reductions and asset-related charges, partly offset by a disposition gain. The existing $350.0 share-repurchase authorization was completed in Q3; an October 2020 program authorized up to a further $250.0 through December 2021.
Outlook, risks, and contingencies
- Management said near-term results were expected to remain under pressure as it adjusted production plans to lower order volumes. It reported minimal supply-chain disruption and said it expected sufficient operating capacity for manufacturing targets for the remainder of 2020; it cautioned that pandemic effects and future performance remained uncertain.
- Full-year 2020 projected net investment in the lease fleet was $425–$475; manufacturing and corporate capital expenditures were projected at $95–$105.
- Management expected a fourth-quarter 2020 pension-plan settlement and projected a pre-tax, non-cash settlement charge of $145–$160. The actual charge and any cash contribution or surplus depend on rates, plan returns, participant elections, and other factors.
- COVID-19, cyclical rail demand, lower lease rates and utilization, customer credit, commodity exposure, and possible additional impairments or restructuring remain material risks. The filing says future pandemic impacts could not be reliably quantified.
- Highway-products litigation remains pending, including state qui tam actions and a certified Missouri county class action scheduled for trial in February 2021. The company said it did not consider a loss probable for the identified state, county, and municipal actions, recorded no accrual for them, and could not estimate a loss range; potential financial impacts could be material. Other matters had a stated reasonably possible loss range of $7.9–$16.8, including $5.8 of indemnity and recourse rights.
- LIBOR-based contracts extend beyond 2021; transition to a replacement benchmark could affect borrowing costs. An October 2020 subsidiary debt issuance and redemption were disclosed as subsequent events.
Investor verification points
- Assess how much reported earnings and cash generation depend on the large impairment add-back, CARES Act tax benefits, and reduced depreciation from revised railcar-life estimates.
- Track railcar orders, backlog conversion, production volumes, lease rates, and fleet utilization as demand conditions evolve.
- Review liquidity availability, covenant headroom, debt maturities and non-recourse structures, and the capacity to fund planned fleet investment, dividends, and repurchases.
- Monitor the pension settlement charge and cash outcome, as well as the status and potential exposure of the Missouri and other highway-products litigation.
- Evaluate the assumptions underlying the covered hopper impairment valuation and any subsequent changes in customer credit, railcar utilization, and market demand.