Trinity Industries, Inc. (NYSE: TRN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in millions except per-share data, percentages, and railcar counts. Trinity operates railcar leasing and management and rail products businesses; its former highway products business is reported as discontinued operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $821.3 | $496.6 | $2,185.4 | $1,386.1 |
| Operating profit | $100.2 | $92.7 | $268.3 | $220.5 |
| Income from continuing operations | $26.3 | $29.7 | $66.6 | $56.1 |
| Net income attributable to Trinity | $21.8 | $25.8 | $43.2 | $28.8 |
| Diluted EPS attributable to Trinity | $0.26 | $0.31 | $0.52 | $0.34 |
| Net interest expense | $68.8 | $55.0 | $197.8 | $148.2 |
Revenue increased 65.4% in Q3 and 57.7% for the nine-month period, principally from higher external railcar deliveries, improved lease rates and utilization, and the RSI Logistics acquisition. Operating profit rose 8.1% and 21.7%, respectively. Approximate consolidated operating margin was 12.2% in Q3 versus 18.7% a year ago, and 12.3% for nine months versus 15.9%; lower gains on lease portfolio sales weighed on comparisons. Higher interest costs reduced Q3 continuing income despite higher operating profit. Nine-month attributable net income also benefited from a low 2.8% continuing-operations effective tax rate, including tax benefits from AOCI-related items.
- Leasing: Q3 leasing and management operating profit increased 16.2% to $85.5; nine-month profit increased 11.8% to $246.2. Q3 total segment operating profit fell 17.9% to $88.6, mainly because lease portfolio sales gains fell to $3.1 from $34.3. Nine-month gains were $46.4 versus $73.0.
- Rail Products: Segment revenue increased 14.2% in Q3 and 43.0% for nine months. Operating profit rose 50.8% to $39.2 in Q3 and 117.8% to $88.2 for nine months, with higher deliveries partly offset by input costs, foreign exchange, labor and operating inefficiencies.
- Margins and fleet: Rail Products operating margin was 5.7% in Q3 versus 4.4%, and 4.3% for nine months versus 2.9%. Company-owned fleet utilization was 98.1%, compared with 97.9% a year earlier.
Cash flow, balance sheet and liquidity
- Nine-month cash from continuing operations was $215.8, compared with a $52.6 use in 2022. Investing used $316.3; financing provided $81.0. Cash, cash equivalents and restricted cash totaled $266.7 at period end, including $114.0 of unrestricted cash.
- Capital expenditures for leasing were $483.3; lease portfolio sale proceeds were $245.8. The company reported $49.5 of Adjusted Free Cash Flow After Investments and Dividends, a non-GAAP measure, compared with $0.1 in 2022.
- Total debt was $5,782.4, comprising $794.2 recourse and $4,988.2 non-recourse debt. Non-recourse debt is primarily secured by railcars and related assets. Net interest expense rose amid higher rates and average debt.
- Reported available liquidity was $780.0: $114.0 cash, $561.2 available under the $600.0 revolving facility, and $104.8 available under the TILC warehouse facility, subject to eligible unpledged equipment. The company reported compliance with debt covenants; actual leverage was 2.35 against a maximum of 4.00, and interest coverage was 8.53 against a minimum of 2.25.
- Stockholders’ equity was $1,253.4, versus $1,269.6 at year-end 2022. Dividends paid during the first nine months totaled $64.7; no shares were repurchased under the $250.0 million authorization.
Material changes, outlook and management commentary
- The railcar backlog was $3.6 billion at September 30, down 12.0% year over year. Trinity received 10,660 railcar orders and delivered 13,355 in the first nine months; the prior-year order count included a 15,000-car GATX agreement. Management expected to deliver about 17.2% of backlog value in the remainder of 2023 and 39.6% in 2024.
- For full-year 2023, management projected net investment in the lease fleet of $250–$350 and manufacturing and other capital expenditures of $40–$50. The filing provides no full-year earnings or revenue guidance.
- Management cited elevated near-term fleet maintenance and compliance costs, labor constraints, supply chain and transportation disruptions, and peso strength as pressures. U.S.-Mexico border congestion disrupted Q3 deliveries and continued to pose supply-chain risk. Steel, component, and labor costs and interest rates were also identified as headwinds.
- In June, Trinity issued $400.0 of 7.75% senior notes due 2028; proceeds principally repaid revolving borrowings. Its leasing subsidiary also entered a $340.0 variable-rate term loan due 2028. The 2024 senior notes remain outstanding.
- Trinity acquired RSI Logistics for $72.1 in March 2023. Its preliminary purchase price allocation included $26.8 of goodwill at quarter-end. Holden America contingent consideration was valued at $18.0 at September 30.
Risks, contingencies and unusual items
- East Palestine derailment litigation: TILC, which owned one tank car leased to a third party, faces third-party claims and direct claims. Trinity disputes the claims; it said loss was not considered probable and a loss range could not be determined, so no accrual was recorded.
- Highway products matters: A Virginia state qui tam case was set for trial in March 2024; a Tennessee appeal application remained pending and a New Jersey appeal was also pending. Trinity said loss was not probable, but could not estimate a range; potential financial effects could be material. The Missouri class-action settlement liability was $7.7 at September 30.
- Other matters had a stated reasonably possible loss range of $22.5–$33.7, including approximately $14.0 of indemnity and third-party recourse; accrued liabilities included $22.9 for the described matters. The company also recorded Q3 insurance-recovery gains of $3.7 related to the 2021 Georgia tornado.
- Discontinued operations, largely retained highway-business legal expenses, reduced attributable earnings by $2.7 in Q3 and $8.1 for nine months.
Key facts for investors to verify
- Whether railcar deliveries, orders and the $3.6 billion backlog convert to revenue as expected, particularly given border congestion and supply-chain constraints.
- How much recurring leasing profit can offset lower and variable lease portfolio sale gains, while maintenance and compliance costs remain elevated.
- Debt refinancing and interest-cost exposure, including the 2024 notes, variable-rate borrowings, covenant headroom and the availability of equipment eligible for warehouse financing.
- Developments and potential financial exposure in East Palestine and retained highway-products litigation, for which some loss ranges are not estimable.
- Progress toward the projected 2023 capital investment ranges and the sustainability of operating cash flow and non-GAAP Adjusted Free Cash Flow.