Trinity Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Trinity operates railcar leasing and management, and rail products manufacturing and services. Highway Products is reported as a discontinued operation.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $641.7 million | $472.7 million |
| Operating profit | $69.0 million | $54.8 million |
| Operating margin | 10.8% | 11.6% |
| Continuing-operations income | $16.8 million | $9.9 million |
| Net income (loss) attributable to Trinity | $4.4 million | ($0.7) million |
| Diluted EPS attributable to Trinity | $0.05 | ($0.01) |
| Net cash from continuing operating activities | $102.5 million | $28.5 million |
| Adjusted Free Cash Flow after investments and dividends (non-GAAP) | $36.2 million | $47.8 million |
Revenue increased 35.8%, mainly from higher railcar deliveries and improved pricing in Rail Products, and higher lease rates in Leasing. Rail Products Group revenue rose 63.1%; its operating profit was $25.3 million versus $0.8 million, with a 4.0% margin versus 0.2%. Leasing Group revenue increased 11.1%; operating profit rose 7.1% to $85.5 million, while total segment margin declined to 42.0% from 43.6%. Higher labor costs, inefficiencies, supply-chain disruption, maintenance costs and depreciation weighed on results. Consolidated interest expense rose to $62.1 million from $43.5 million, primarily due to higher variable rates and average debt.
The income-tax benefit from continuing operations was $11.5 million, producing a reported 217.0% effective tax benefit rate. A major contributor was the release of residual tax effects previously recorded in accumulated other comprehensive income; the tax benefit is not indicative of an ordinary operating tax rate. Discontinued operations generated a $3.1 million net loss, primarily residual Highway Products legal expenses, compared with a $6.9 million loss and a $1.1 million sale loss in Q1 2022.
Balance sheet, debt and liquidity
At March 31, 2023, total assets were $8.84 billion and total stockholders’ equity was $1.25 billion. Cash and cash equivalents were $81.9 million; total debt was $5.71 billion, comprising $704.3 million recourse debt and $5.00 billion non-recourse leasing debt. Debt increased $100.0 million from December 31, 2022. The non-recourse debt is generally secured by rail equipment and subsidiary assets; debt of partially owned leasing subsidiaries is non-recourse to Trinity.
Reported committed liquidity was $451.5 million: $81.9 million unrestricted cash, $278.2 million available under the corporate revolving credit facility, and $91.4 million available under the TILC warehouse facility, subject to eligible unpledged equipment. Cash, cash equivalents and restricted cash totaled $263.0 million at quarter-end, down $31.3 million during the quarter. Investing used $203.1 million, including $191.5 million of leasing capital expenditures and $66.2 million net cash for the RSI acquisition; financing provided $72.4 million. The company paid $21.1 million in common dividends.
In March, Trinity expanded its revolving credit facility from $450 million to $600 million and amended covenant and restricted-payment terms. It had $305.0 million drawn and $16.8 million of letters of credit outstanding. Trinity reported compliance with its financial covenants. Its $400 million of 4.55% senior notes mature in 2024; management said it was exploring refinancing alternatives during 2023.
Changes, outlook and management commentary
The railcar fleet was 98.2% utilized, compared with 96.5% a year earlier. The new railcar backlog was $3.71 billion, up 95.5% year over year, including $3.26 billion for external customers and $448.8 million for Leasing. The backlog included 30,915 new railcars; the company received 2,690 orders and delivered 4,045 in the quarter. Management expected approximately 42.3% of backlog value to be delivered in 2023 and 22.5% in 2024, with the remainder through 2028. Sustainable conversion backlog was $173.7 million, representing 2,085 railcars.
For full-year 2023, management projected a $250 million–$350 million net investment in the lease fleet and $40 million–$50 million of manufacturing and other capital expenditures. The filing does not provide a clear full-year earnings or revenue guidance figure. Management cited improving lease rates and utilization, while warning of cyclical demand, elevated maintenance activity, labor constraints and costs, supply-chain and transportation disruptions, steel-price volatility, inflation and higher interest rates. It noted that Q1 results may not indicate full-year results due to seasonal and other factors.
Trinity acquired RSI Logistics on March 8, 2023, for $72.1 million; the preliminary allocation included $26.3 million of goodwill and $37.4 million of identifiable intangible assets. The purchase-price allocation remains subject to adjustment. The company recorded a $1.2 million gain from tornado-related insurance recoveries in Q1 2023.
Risks, contingencies and other notable items
Trinity indemnified the buyer of its former Highway Products business for specified ET-Plus-related liabilities. A Missouri class-action settlement liability of $7.8 million remained at March 31, 2023. Virginia, Tennessee and New Jersey state qui tam actions remained pending; Trinity said it did not consider a loss probable and could not estimate a possible loss range. The Virginia case was set for trial in March 2024. The filing disclosed a $10.0 million–$20.9 million range of reasonably possible losses for other matters, including highway litigation, and $10.5 million of total accruals for those matters.
The company identified continued exposure to market cyclicality, customer creditworthiness, operating and delivery constraints, raw-material and labor costs, interest rates, cybersecurity, litigation, environmental matters and acquisition integration. It reported no material change in risk factors from its 2022 Form 10-K and no material change in market-risk disclosures.
Important facts for investors to verify
- Progress and terms of refinancing the $400 million senior notes due in 2024, and the effect of interest rates on debt service.
- Whether higher railcar deliveries and the substantial backlog convert to revenue and improved manufacturing margins amid labor and supply-chain constraints.
- Cash generation and funding needs against planned fleet investment, dividends and acquisition spending.
- The sustainability of leasing utilization, lease rates and portfolio-sale gains, alongside rising maintenance costs.
- Developments in retained ET-Plus litigation and settlement costs, including the uncertainty of state actions.
- The impact of the unusual tax benefit on comparisons with future periods and the final purchase-price allocation for RSI.