Business context and reporting period
Trinity Industries, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017. Its principal businesses are railcar manufacturing and leasing, construction products, inland barges, and energy equipment. Results are seasonal and cyclical; first-quarter performance may not indicate full-year results.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $831.3 million | $877.3 million |
| Operating profit | $98.6 million | $115.9 million |
| Net income | $41.6 million | $51.7 million |
| Net income attributable to Trinity | $40.2 million | $46.0 million |
| Diluted EPS | $0.26 | $0.30 |
| Cash from operating activities | $173.7 million | $220.1 million |
- Revenue decreased 5.2% and operating profit decreased 14.9%. Operating margin was approximately 11.9%, versus 13.2% a year earlier. Net income attributable to Trinity fell approximately 12.6%.
- Operating cash flow was lower, mainly reflecting lower net income and deferred taxes. Investing used $241.5 million, including $318.2 million of leasing capital expenditures; financing used $103.3 million. Cash, cash equivalents, and restricted cash decreased $171.1 million to $802.7 million.
- At March 31, cash and cash equivalents were $625.4 million, short-term marketable securities $220.8 million, and restricted cash $177.3 million. Unrestricted cash, equivalents, and securities totaled $846.2 million.
- Total debt was $3.223 billion: $871.0 million recourse and $2.352 billion non-recourse. The $600 million revolver had no borrowings and $521.2 million available after letters of credit; the company reported compliance with financial covenants. The leasing warehouse facility had $595.5 million available, subject to eligible unpledged equipment.
- Total stockholders’ equity was $4.831 billion. The quarterly dividend declared was $0.13 per common share.
Material changes and segment results
- Rail Group: Revenue rose 25.1% to $598.5 million and operating profit rose to $58.9 million from $50.5 million, driven by higher railcar deliveries. Backlog was $2.140 billion, down from $2.707 billion year over year; 4,705 railcars were ordered and 5,725 shipped in the quarter.
- Construction Products: Revenue increased 1.5% to $125.0 million and operating profit rose to $19.4 million from $15.5 million, supported by aggregates and acquired trench-shoring activity. Highway-products revenue declined.
- Inland Barge: Revenue fell 50.9% to $30.8 million and the segment recorded a $0.7 million operating loss, versus $6.3 million profit, principally due to fewer deliveries. Backlog was $124.5 million, up from $109.9 million.
- Energy Equipment: Revenue declined 11.2% to $226.7 million and operating profit fell 28.0% to $21.3 million. Lower wind-tower shipments were partly offset by stronger utility-structure activity. Backlog for wind towers and utility structures was $809.7 million, versus $1.2 billion a year earlier.
- Leasing: Revenue declined 2.4% to $174.6 million and operating profit fell 16.4% to $71.1 million. Lower average lease rates and utilization and higher maintenance and compliance costs contributed; fleet utilization was 96.1%, versus 97.5% a year earlier.
- Manufacturing and leasing cost pressures, including costs of adjusting production capacity to demand, and $7.9 million of proposed-spin-off transaction costs affected results. Selling, engineering, and administrative expenses were 12.6% of revenue, compared with 11.7%.
Outlook, management commentary, risks, and unusual items
- Management projected 2018 manufacturing and corporate capital expenditures of $100 million to $150 million and approximately $520 million of net lease-fleet investment, after deferred profit on new railcars, fleet modifications, and railcar-sale proceeds.
- The company expected a tax-free spin-off of infrastructure-related businesses in the fourth quarter of 2018, subject to approvals, SEC filings, and other conditions. The company may abandon or change the transaction; completion and timing are not assured.
- On April 23, 2018, after quarter-end, Trinity elected to redeem approximately $449.4 million principal amount of convertible subordinated notes on June 1, 2018. Holders could convert through May 30; the company intended to settle conversions entirely in cash and expected to use cash on hand and non-recourse financing. This is a material near-term funding and capital-allocation event.
- Trinity repurchased 1,519,503 shares for approximately $50 million in Q1 under a $500 million authorization, leaving approximately $450 million. It also acquired certain inland-barge business assets in March for $25 million net of cash acquired.
- Adoption of the new revenue standard changed timing for wind towers and certain utility structures. For Q1, reported revenue and operating profit were each $18 million and $4 million lower, respectively, than they would have been without adoption; comparative 2017 figures were not restated. The adoption reduced retained earnings by $4 million, net of tax, at January 1, 2018.
- The Fifth Circuit reversed the $682.4 million ET-Plus False Claims Act judgment; the relator’s U.S. Supreme Court petition remained pending. Trinity said loss was not probable and recorded no accrual for that case. Related state, local, and municipal matters could be material, but the company could not estimate a loss range; the Missouri class action remained a significant litigation risk. Other reasonably possible claims were estimated at $6.3 million to $29.2 million, with $21.3 million accrued for claims including product liability, environmental, and workplace matters.
- Management cited cyclical demand, customer order and delivery timing, pricing and product mix, steel and other input costs, interest rates, litigation, regulatory and environmental matters, and spin-off execution and tax treatment among factors that could affect results. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether railcar, barge, and wind/utility-equipment orders and backlogs translate into deliveries and margins, especially as rail and wind/utility backlogs declined year over year.
- Leasing trends in rates, utilization, maintenance costs, and the economics of the planned $520 million net fleet investment.
- Cash requirements and financing terms for the June 2018 convertible-note redemption or conversions, alongside planned repurchases and capital spending.
- Progress, costs, tax qualification, and timing of the proposed infrastructure spin-off.
- Developments in ET-Plus litigation, including the Supreme Court petition, Missouri class action, and other claims for which potential losses are not estimable.
- The ongoing effects of revenue-recognition timing and the company’s evolving estimates under the Tax Cuts and Jobs Act.