Trinity Industries, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. Trinity is a diversified industrial company, with rail manufacturing and leasing alongside construction products, inland barges, and energy equipment. The company reported persistent below-normal demand and cited oversupply of railcars and barges as a constraint on new orders.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $3.663 billion | $4.588 billion |
| Operating profit | $549.1 million | $742.2 million |
| Operating margin | 15.0% | 16.2% |
| Income before taxes | $372.0 million | $566.8 million |
| Net income attributable to Trinity | $702.5 million | $343.6 million |
| Diluted earnings per share | $4.52 | $2.25 |
| Cash from operations | $761.6 million | $1.090 billion |
| Total debt | $3.242 billion | $3.057 billion |
- Net income includes a provisional $476.2 million tax benefit from the Tax Cuts and Jobs Act. The reported 2017 effective tax rate was negative 91.8%; earnings growth therefore does not reflect operating improvement alone.
- Operating cash flow declined 30.1%. Investing cash outflow was $472.7 million and financing cash outflow was $73.7 million; cash and cash equivalents increased $215.2 million to $778.6 million.
- Capital expenditures were $712.7 million, including substantial railcar fleet investment. Operating cash flow less total capital expenditures was approximately $48.9 million; the filing does not label this measure as free cash flow.
- Cash, cash equivalents, and short-term marketable securities totaled $1.098 billion. The $600 million revolving facility had no borrowings and $521.1 million available after letters of credit. The separate railcar warehouse facility had $849.3 million unused, subject to eligible unpledged equipment.
- Recourse debt was $866.8 million and non-recourse debt was $2.376 billion. Total debt to total capital improved to 40.0% from 41.5%. Much of the non-recourse debt is supported by railcar assets and lease cash flows.
- The company declared dividends of $0.50 per share for 2017, up from $0.44 in 2016.
Material changes and segment results
- Consolidated revenue fell 20.2% and operating profit fell 26.0%, principally from lower railcar and barge shipments. Operating costs decreased 19.0%, while selling, engineering, and administrative expenses increased 11.6%.
- Rail Group revenue declined 32.3% to $2.084 billion and operating profit declined 53.0% to $216.1 million; margin fell to 10.4% from 14.9%. Railcar shipments were 18,395 versus 27,240; year-end backlog was 22,585 cars valued at $2.164 billion, down from $3.008 billion.
- Inland Barge revenue fell 60.8% to $157.9 million and operating profit fell 85.9% to $6.4 million; backlog was $98.2 million versus $120.0 million.
- Leasing Group revenue rose 2.0% to $843.2 million and operating profit rose 23.4% to $444.5 million, helped by railcar sales and fleet growth. The owned or leased fleet was 88,590 cars at 96.8% utilization. The operating profit included $83.5 million of gains from sales of railcars held more than one year.
- Energy Equipment revenue declined 3.7% to $974.9 million and operating profit fell 24.2% to $100.9 million. Wind-tower backlog fell to $780.8 million from $1.148 billion. Construction Products revenue declined 3.6% and operating profit 8.5%; acquisitions partly offset lower highway-products and aggregates volumes.
- Trinity acquired two lightweight-aggregate businesses and a trench-shoring business in 2017, for a combined purchase price of $63.0 million; $47.5 million was paid net of cash acquired. The October acquisition included $14.7 million of stock consideration.
Outlook, commentary, risks, and unusual items
- Management projected 2018 manufacturing and corporate capital expenditures of $100 million to $150 million and approximately $500 million of net investment in the railcar lease fleet, after deferred profit, fleet modifications, and proceeds from railcar sales. No consolidated revenue or earnings guidance was provided.
- Management expected approximately 65% of railcar backlog to deliver in 2018, substantially all barge backlog in 2018, and approximately 33% of wind-tower backlog in 2018. The company continued to adjust manufacturing capacity to demand.
- The board approved pursuit of a tax-free spin-off of infrastructure-related businesses, then expected in the fourth quarter of 2018. The transaction remained conditional and could be changed or abandoned. Risks include execution costs and distraction, customer and employee uncertainty, separation liabilities, tax qualification, and potential changes in business volatility and stock value.
- The Highway Products False Claims Act judgment of $682.4 million was unanimously reversed by the Fifth Circuit in September 2017; rehearing was denied. The relator petitioned the Supreme Court for review on February 12, 2018. The supersedeas bond was released January 29, 2018. Trinity recorded no accrual for that case, stating a loss was not probable. Other highway-product class actions and product-liability matters remain; some potential exposures could be material and certain loss ranges could not be estimated.
- At year-end, other claims and contingencies had a reasonably possible loss range of $4.4 million to $27.0 million and recorded accruals of $17.8 million, including environmental and workplace matters. Non-cancelable purchase obligations totaled $724.0 million.
- The $449.4 million principal amount of convertible subordinated notes gives holders a right to require repurchase on June 1, 2018; the notes were convertible as of January 1, 2018. The $150.7 million warehouse-facility borrowing was due to expire in April 2018, with renewal terms relevant to liquidity.
- Auditors issued unqualified opinions on the financial statements and internal controls. The company reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- How much 2017 earnings and EPS depend on the provisional tax benefit, and whether 2018 tax adjustments change that benefit.
- Whether railcar and barge demand, orders, pricing, and backlogs stabilize, and how quickly production capacity is aligned with demand.
- Whether leasing returns remain strong as utilization, lease rates, fleet investment, asset-sale gains, and railcar resale values change.
- The timing, final terms, costs, tax treatment, and liabilities of the proposed spin-off, including any updates to the expected completion date.
- The status and potential financial exposure of the Supreme Court petition and remaining highway-products and product-liability cases.
- Renewal or repayment of the warehouse facility, the 2018 convertible-note holder put, and the funding needs associated with planned fleet investment and contractual commitments.