Trinity Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Trinity provides railcar leasing, manufacturing, maintenance and modification services, as well as highway products. Amounts below are in millions except per-share data and where noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $503.5 | $459.4 | $1,273.8 | $1,583.8 |
| Operating profit (loss) | $92.2 | $72.9 | $219.8 | $(161.4) |
| Net income (loss) attributable to Trinity | $32.0 | $25.1 | $48.0 | $(20.1) |
| Diluted earnings (loss) per share attributable to Trinity | $0.33 | $0.21 | $0.45 | $(0.17) |
| Net cash from operating activities, continuing operations | Not presented quarterly | Not presented quarterly | $428.0 | $456.8 |
Q3 operating margin was approximately 18.3%, compared with 15.9% a year earlier. For the nine months, operating margin was approximately 17.3%; the prior-year period had an operating loss, including a $369.4 million impairment charge. Q3 revenue increased 9.6%, while nine-month revenue declined 19.6%.
At September 30, cash and cash equivalents were $221.8, restricted cash $123.3, and total debt $5,176.5, comprising $398.5 of recourse debt and $4,778.0 of non-recourse debt. Total available liquidity was reported at $1.1 billion, including $421.7 available under the revolving facility and $485.6 under the TILC warehouse facility. Trinity was compliant with its debt covenants. Nine-month dividends paid were $68.5; share repurchases totaled approximately $406.5.
Material changes and business developments
- Leasing Group Q3 operating profit rose 21.9% to $109.3, mainly on higher lease-portfolio sale gains. Regular leasing and management profit declined 12.0% to $76.4, reflecting lower lease rates, higher depreciation and fleet costs. Fleet utilization was 95.0%, versus 94.8% a year earlier.
- Rail Products Group revenue fell 10.8% in Q3 and 33.4% for the nine months; it recorded an operating loss of $3.1 in Q3 and $8.7 for the nine months. Higher input costs, supply-chain disruptions and maintenance labor shortages weighed on results. Nine-month orders rose to 8,510 railcars from 4,810, while deliveries declined to 6,070 from 9,295. Backlog was $1.23 billion at quarter-end.
- All Other revenue, primarily highway products, increased 33.7% in Q3 and 17.8% for the nine months, supported by higher demand and pricing. Nine-month operating profit was $42.8, up from $23.9.
- Trinity’s prospective accounting presentation change, begun in Q4 2020, reports all lease-fleet railcar sales as net disposition gains or losses rather than gross revenue and costs for certain newer cars. This affects revenue comparability, but the company says it did not affect operating profit, net income, EPS or the balance sheet.
- In August, Trinity sold an initial portfolio of 3,582 railcars to Signal Rail, a joint venture 90% owned by Wafra funds and 10% by Trinity’s leasing subsidiary. The sale generated a $32.9 gain and approximately $318.7 cash proceeds; Trinity expects ongoing servicing fees.
Outlook, risks and unusual items
- Management did not provide earnings guidance in the supplied filing text. It said railcar lease rates and utilization remained under pressure and expected near-term pressure to continue, while railcar orders and loading activity showed signs of improvement. COVID-19 effects, cyclical demand and economic recovery remained uncertain.
- For full-year 2021, Trinity anticipated a net lease-fleet investment of $40–$70 and manufacturing and other capital expenditures of $30–$40.
- Management cited significantly higher steel prices and labor costs, supply-chain disruption, labor shortages and operating inefficiencies as potential headwinds. Other disclosed risks include customer credit and demand, interest rates, LIBOR transition, cybersecurity, and litigation and regulatory matters.
- Nine-month operating cash flow was $428.0, down from $456.8. The company reported non-GAAP Free Cash Flow After Investments and Dividends of $515.5, compared with $48.5 a year earlier; this measure includes lease-sale proceeds and should not be treated as a GAAP cash-flow measure.
- In June, leasing subsidiaries refinanced debt, contributing to an $11.7 nine-month loss on extinguishment. The transactions lowered stated rates on certain secured notes; those notes are non-recourse, and their stated final maturities extend to 2051, subject to anticipated repayment assumptions.
- Highway-products lawsuits include pending state qui tam matters and a Missouri class action. The company said losses were not considered probable for the state, county and municipal actions, recorded no accrual for those actions, and could not estimate a loss range; potential financial impacts could be material. Other matters had a stated reasonably possible loss range of $11.2–$18.4, including approximately $6.4 of indemnity and recourse rights.
- A tornado damaged a Georgia rail-maintenance facility in March. Trinity reported $14.6 in insurance advances received through September 30, a $4.7 gain on recoveries above the net book value of destroyed assets, and possible additional property-damage and business-interruption proceeds not yet recognized.
Investor verification points
- Assess underlying leasing profitability separately from gains on portfolio sales; Q3 included a $32.9 sale gain, and nine-month lease-sale proceeds were $404.5.
- Review Rail Products margins, backlog conversion, delivery timing and the effects of steel, supply-chain and labor costs.
- Reconcile the $1.1 billion liquidity figure to availability conditions, restricted cash, non-recourse debt and covenant requirements.
- Check the assumptions behind 2021 capital-spending expectations and management’s stated near-term market outlook.
- Monitor the highway-products litigation, insurance recoveries and any changes to estimates or accruals.
- Consider the scale and funding of shareholder returns: nine-month repurchases were approximately $406.5, and a new authorization permits up to $250.0 through December 2022.