Trinity Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 unless otherwise noted. Trinity’s businesses are primarily railcar leasing, manufacturing, maintenance and related services. Arcosa was spun off on November 1, 2018, and its historical results are presented as discontinued operations, affecting year-over-year comparability.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $604.8 million | $533.2 million | Up 13.4% |
| Operating profit | $91.8 million | $62.1 million | Up 47.8%; operating margin approximately 15.2%, versus 11.6% |
| Income from continuing operations | $31.2 million | $15.2 million | Up; diluted continuing-operations EPS was $0.24 versus $0.09 |
| Net income attributable to Trinity | $30.6 million | $40.2 million | Lower chiefly because Q1 2018 included $26.4 million of discontinued-operations income |
| Diluted EPS attributable to Trinity | $0.23 | $0.26 | Continuing-operations EPS improved, while discontinued-operations EPS declined |
| Operating cash flow, continuing operations | $(125.9) million | $73.8 million | Driven largely by working-capital outflows |
| Capital expenditures | $476.5 million | $326.4 million | Primarily investment in the railcar lease fleet |
Segments: Leasing Group revenue was $200.4 million, up 14.8%, and operating profit was $85.8 million, up 20.7%; its operating margin rose to 42.8% from 40.7%. Rail Products Group revenue was $603.6 million including intersegment sales, up 2.6%, while operating profit decreased to $50.6 million from $51.5 million and margin was 8.4% versus 8.8%. All Other operating profit was $6.6 million versus $5.8 million.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $73.9 million; restricted cash was $114.2 million. Cash, cash equivalents and restricted cash totaled $188.1 million.
- Total debt was $4.466 billion, up from $4.029 billion at December 31, 2018. This comprised $647.5 million of recourse debt and $3.819 billion of non-recourse leasing debt. Most leasing debt is secured by railcars and is non-recourse to Trinity.
- The $450 million revolving credit facility had $250 million outstanding and $142.5 million available after letters of credit. The separate TILC warehouse facility had $149.5 million available, subject to eligible unpledged equipment. Trinity reported compliance with its financial covenants.
- Stockholders’ equity was $2.565 billion. The quarterly dividend was increased 31%, from $0.13 to $0.17 per share. A new $350 million repurchase authorization runs through December 31, 2020.
Material changes and operating developments
- Leasing fleet utilization was 98.4%, versus 96.1% a year earlier; company-owned railcars numbered 101,005, up from 92,595. Leasing and management revenue grew 7.2%, partly offset by lower average lease rates.
- Trinity purchased 6,779 previously leased railcars on January 14, 2019 for $218.4 million, funding the purchase with cash and revolving-credit borrowings.
- Rail Products backlog was $3.253 billion, up 52.0% from $2.140 billion a year earlier. The segment received orders for 3,000 railcars and delivered 4,505, compared with 4,705 orders and 5,725 deliveries in Q1 2018. About 59% of backlog was expected to be delivered in 2019.
- Backlog was reduced by approximately 3,050 railcars valued at $240 million after a leasing customer’s financial condition raised concerns. Negotiations over consideration for terminating the underlying leases were ongoing.
- Operating cash flow fell sharply as receivables, inventories and other assets used $158.5 million, with working-capital changes overall using $232.3 million. Management attributed the increase in working capital needs primarily to higher railcar manufacturing work-in-process inventory.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said Q1 results may not indicate full-year results; demand is cyclical, and All Other historically has higher revenue in the second and third quarters. Production inefficiencies in Rail Products related to product mix and preparation for anticipated higher production were a Q1 headwind.
- In April 2019, a subsidiary issued $528.3 million of non-recourse secured railcar notes at a fixed 3.82% rate. Proceeds were intended to repay approximately $347 million of warehouse borrowings, $125 million under the corporate revolver and for general purposes.
- The U.S. Supreme Court denied review of the ET-Plus False Claims Act case, ending that action after the Fifth Circuit had ruled for Trinity. Related state qui tam, class, and product-liability matters remain; the company said losses in specified state actions were not considered probable and recorded no accrual for them. Potential impacts were described as unknown and could be material; the company could not estimate a loss range. Other matters had a stated reasonably possible loss range of $20.7 million to $35.0 million, including approximately $14.7 million of indemnity and third-party recourse rights.
- Trinity adopted the new lease accounting standard effective January 1, 2019, recognizing operating lease right-of-use assets and liabilities; management said adoption did not significantly affect consolidated results or cash flows. The Q1 cash flow comparison also reflects the prior-year discontinued operations associated with Arcosa.
- Management cited risks including cyclical demand, customer credit, railcar orders and deliveries, steel and component costs, interest rates, litigation, environmental and regulatory matters, and the ability to realize benefits of the Arcosa separation. The company reported effective disclosure controls and no material changes in internal controls over financial reporting.
Most important facts for investors to verify
- Whether the customer’s financial condition leads to termination of the approximately $240 million railcar commitments, and the final settlement amount.
- Backlog conversion, railcar order trends, production efficiency, and whether the expected 2019 deliveries materialize.
- Lease-fleet utilization, average lease rates, railcar sale gains, and the returns and funding costs on fleet investment.
- Working-capital recovery and liquidity after the large Q1 operating cash outflow and fleet capital spending.
- Debt growth, refinancing activity, available borrowing capacity, covenant compliance, and the consequences of the outstanding legal matters.