TRINITY INDUSTRIES INC annual report, FY2014

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Trinity Industries, Inc. — FY2014 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. Trinity is a diversified industrial company serving transportation, energy, chemical, and construction markets. Its businesses include railcar manufacturing and leasing, construction products and aggregates, inland barges, and energy equipment. Figures are in U.S. dollars; per-share figures reflect the 2-for-1 stock split.

Financial performance and liquidity

  • FY2014 revenue: $6.17 billion, up 41.3% from $4.37 billion in 2013. Growth reflected higher railcar shipments, pricing and product mix; increased leasing and railcar-sale revenue; and acquisitions.
  • Operating profit: $1.251 billion, up 61.9% from $772.9 million. Operating margin increased to 20.3% from 17.7%.
  • Net income: $709.3 million from continuing operations, versus $386.1 million; net income attributable to Trinity shareholders was $678.2 million, versus $375.5 million. Diluted continuing-operations EPS was $4.19, versus $2.34.
  • Fourth quarter: Revenue was $1.661 billion, operating profit $276.5 million, net income attributable to Trinity $138.2 million, and diluted continuing-operations EPS $0.86. In Q4 2013, the comparable figures were $1.256 billion, $224.4 million, $112.8 million, and $0.72, respectively.
  • Segment operating profit: Rail Group $724.1 million; Leasing Group $516.3 million; Inland Barge $114.4 million; Energy Equipment $108.1 million; Construction Products $65.4 million. All Other recorded a $25.6 million loss; corporate costs were $119.0 million.
  • Cash flow and investment: Operating cash flow was $819.2 million, compared with $662.2 million. Capital expenditures were $464.6 million, including $245.3 million for net lease-fleet additions. Acquisitions used $714.4 million of cash; total investing cash outflow was $814.7 million.
  • Cash and liquidity: Year-end cash and cash equivalents were $887.9 million and short-term marketable securities $75.0 million. Management reported approximately $1.6 billion of available liquidity, including $336.4 million available under the revolving credit facility and $334.6 million under the railcar warehouse facility.
  • Debt and equity: Total debt was $3.553 billion, including $829.3 million recourse and $2.724 billion non-recourse debt. The reported ratio of total debt to total capital was 51.1%, versus 52.1% in 2013. Stockholders’ equity was $3.397 billion, up from $2.749 billion.
  • Returns to shareholders: Declared dividends were $0.375 per share for 2014, compared with $0.270 in 2013. Trinity repurchased 747,246 shares for $31.5 million during the year.

Material changes versus 2013

  • Rail Group revenue rose 33.1% to $3.817 billion and operating profit rose 47.9% to $724.1 million. Shipments increased to 30,255 railcars; year-end backlog grew to 61,035 cars, valued at $7.215 billion, from $5.017 billion.
  • Leasing Group revenue increased 73.3% to $1.118 billion and operating profit increased 74.0% to $516.3 million, driven substantially by railcar sales, including sales to Element Financial. The lease fleet had 75,930 cars and 99.5% utilization at year-end.
  • Energy Equipment revenue rose 49.1% to $992.3 million, with acquisitions contributing materially. The August acquisition of Meyer Steel Structures cost approximately $595.6 million; 2014 acquisitions added $187.4 million of revenue and $2.4 million of operating profit from their acquisition dates.
  • Inland Barge revenue and operating profit increased 10.7% and 19.2%, respectively. Construction Products revenue rose 5.1%; highway-products revenue declined 5.4%, partly offset by aggregates growth.
  • Cash and short-term securities increased to $962.9 million from $578.2 million. Debt increased to $3.553 billion from $2.990 billion, in part following issuance of $400 million of 4.55% senior notes due 2024 and railcar-related financing.
  • Goodwill increased to $773.2 million from $278.2 million, principally reflecting acquisitions. No goodwill impairment was recorded.

Outlook, commentary, risks and unusual items

  • Management described railcar demand as favorable across a range of industries. It noted slower recent demand for barges serving oil and gas, with longer-term opportunities in chemical and petrochemical markets and strong recent agricultural hopper-barge demand. Federal and state budget constraints and pending litigation weighed on Highway Products.
  • For 2015, management projected manufacturing and corporate capital expenditures of $250 million to $300 million, and net cash investment in new lease-fleet railcars of $55 million to $70 million after expected railcar-sale proceeds. Approximately 55% of railcar backlog, all Inland Barge backlog, and approximately 57% of wind-tower backlog were expected to be delivered in 2015. No earnings guidance was provided.
  • ET-Plus litigation is the principal disclosed uncertainty. A jury found against the Company in a False Claims Act case and awarded $175 million in damages; the filing states the award could be trebled to $525 million, with civil penalties potentially bringing the stated range to $525 million–$709 million, excluding fees, costs, and interest. Trinity disputed the allegations and planned post-trial motions and appeal. It recorded no accrual because it did not consider a loss probable. The FHWA requested additional crash tests; as of the filing, it had released results showing the first four tests passed at the 27¾-inch height, while review of all eight tests remained pending. The Company had also stopped ET-Plus shipments pending testing and analysis. State actions, class actions, product-liability claims, and possible recalls could create additional material exposure.
  • For the Lac-Mégantic derailment litigation, Trinity recorded an $11.4 million accrual and $10.2 million of expected third-party recoveries; it said an additional probable loss could not then be determined. Other reasonably possible claims were estimated at $3.9 million to $29.3 million, excluding the highway-products litigation.
  • Regulators in the U.S. and Canada were considering rules for transporting flammable materials by rail, with regulatory certainty expected in 2015. The scope and cost impact were uncertain. Other key risks include cyclical demand, customer order deferrals or cancellations, steel and component costs and availability, railcar lease re-marketing, interest rates and access to capital, environmental and product liability, and operations in Mexico.
  • The company reported an unqualified audit opinion on its financial statements and internal controls. The Meyer acquisition was excluded from management’s internal-control assessment for 2014 while integration and evaluation continued.

Most important facts for investors to verify

  • Developments and final exposure in the ET-Plus False Claims Act case, including court rulings, appeals, penalties, state and class actions, crash-test findings, shipment resumption, and any reserve or insurance impact.
  • Whether the exceptionally high railcar backlog converts to deliveries, revenue, and cash on expected timing and margins; confirm customer-backed leasing orders and cancellation or deferral terms.
  • How much FY2014 profit and cash generation depended on railcar fleet sales to Element, and whether such sales are repeatable; distinguish sale revenue from proceeds on cars held more than one year.
  • Acquisition integration and returns, particularly Meyer, including final purchase-price allocation, goodwill, and subsequent operating contribution.
  • Debt maturities, refinancing and covenant capacity, and the distinction between Trinity recourse debt and subsidiary non-recourse debt; monitor renewal of the TILC warehouse facility, which was extended through June 2015.
  • 2015 capital spending, lease-fleet investment, and cash conversion, including the effects of working-capital needs, litigation, and pension funding.