Trinity Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Trinity operates railcar leasing and management, railcar manufacturing and maintenance, and highway products businesses, primarily in North America. Amounts are in U.S. dollars.
Financial results and key metrics
- Revenue: $615.2 million, up 1.7% from $604.8 million. Leasing revenue rose, while Rail Products revenue declined.
- Operating profit: $73.0 million, down 20.5% from $91.8 million. Operating margin was approximately 11.9%, versus 15.2% a year earlier.
- Net income attributable to Trinity: $161.7 million, or diluted EPS of $1.33, compared with $30.6 million and $0.23. The increase was principally driven by a $147.6 million income tax benefit, including a $154.7 million CARES Act-related benefit; pretax continuing income fell to $14.9 million from $40.1 million.
- Cash flow: Operating cash flow from continuing operations was $173.8 million, compared with cash used of $124.8 million. The filing attributes the change primarily to the CARES Act tax benefit and working-capital movements; the income-tax receivable increased $374.4 million. Management’s non-GAAP Free Cash Flow before leasing capital expenditures was $205.6 million, versus negative $124.2 million.
- Cash and liquidity: Cash and cash equivalents were $213.2 million at March 31, up from $166.2 million at year-end; restricted cash was an additional $96.3 million. Committed liquidity was $759.7 million, including $284.5 million available on the revolver and $262.0 million on the TILC warehouse facility.
- Debt: Total debt was $4.87 billion, including $527.9 million recourse and $4.34 billion non-recourse leasing debt. The revolver had $130.0 million outstanding and $284.5 million available. Trinity reported compliance with its financial covenants.
- Segments: Leasing Group operating profit increased to $92.9 million from $85.8 million; Rail Products fell to $25.1 million from $47.1 million; All Other was $9.3 million versus $10.1 million.
Changes versus the prior-year quarter
- Rail Products Group revenue decreased 18.9%, and operating profit fell 46.7%, reflecting fewer deliveries and production inefficiencies at lower volumes.
- Leasing Group revenue rose 17.9%, partly on higher railcar sales. Fleet utilization declined to 95.4% from 98.4%; the company-owned fleet totaled 103,815 railcars.
- Railcar backlog fell 52.1% to $1.56 billion from $3.25 billion. Trinity received orders for 1,970 railcars and delivered 3,705. A change in customers’ financial condition led to removal of 540 railcars valued at $81 million from backlog.
- Interest expense, net, increased to $58.9 million from $51.4 million, reflecting higher Leasing Group debt and a $4.7 million early-redemption premium.
- Share repurchases were $35.4 million and dividends paid were $22.7 million. The board amended the repurchase authorization after quarter-end to remove the share limit.
Outlook, risks and unusual items
- COVID-19: Operations continued through quarter-end under enhanced safety measures, and management reported no material Q1 impact. It nevertheless expects near-term results to decline and warns that the pandemic could affect demand, customer payments, supply chains, orders, lease rates and utilization, liquidity, capital spending, and dividends. The filing says the extent of future effects cannot be reliably estimated.
- Capital plans: Management projected 2020 net investment in the lease fleet of $350–$500 million and manufacturing and corporate capital expenditures of $90–$110 million. It expected approximately $303 million of CARES Act-related tax refunds in 2020.
- Cost reductions and restructuring: Q1 restructuring charges were $5.5 million, including a $5.2 million non-cash headquarters impairment and severance, partly offset by a $3.8 million disposition gain. Headcount reductions are expected to generate $9–$10 million in annualized savings; further streamlining may occur.
- Accounting estimate: Revised railcar useful-life and salvage-value assumptions reduced Q1 depreciation by about $7.7 million and increased net income by about $5.9 million, or $0.05 per share.
- Pension plan: Settlement was expected in late 2020 or early 2021, subject to approvals, with estimated pretax settlement charges of $155–$185 million and a potential cash contribution not expected to exceed $15 million.
- Legal and other contingencies: State, county, and municipal ET-Plus-related actions remain pending; Trinity reported no probable loss accrual for those actions, but stated their financial impact could be material and could not be estimated. Other matters had a reasonably possible loss range of $19.3–$32.5 million, including approximately $16.5 million of indemnity and third-party recourse; recorded accruals totaled $21.0 million.
- Other financing risk: Certain debt, derivative, warehouse, and revolver contracts reference LIBOR beyond 2021; replacement-rate changes could increase borrowing costs.
Most important facts for investors to verify
- Whether the anticipated CARES Act tax refunds are received, and how much of reported earnings and operating cash flow reflects the tax benefit rather than ongoing operations.
- Railcar backlog conversion, order trends, customer credit quality, and the impact of the 540-car backlog removal.
- COVID-19 effects on fleet utilization, lease rates, manufacturing volumes, customer payment performance, and liquidity.
- Debt maturities, non-recourse debt structure, revolver availability, covenant headroom, and LIBOR transition terms.
- Timing and final cost of the pension settlement, plus developments in the pending ET-Plus litigation and other contingencies.