Trinity Industries, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017. Trinity operates railcar manufacturing and leasing businesses, construction products, inland barges, and energy equipment. Management reported weak demand and railcar and barge oversupply; results are also affected by industry cyclicality and seasonal construction activity.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $905.5 million | $1,184.9 million | $1,782.8 million | $2,372.8 million |
| Operating profit | $135.2 million | $191.6 million | $251.8 million | $395.0 million |
| Net income attributable to Trinity | $51.1 million | $94.6 million | $97.1 million | $191.8 million |
| Diluted EPS | $0.33 | $0.62 | $0.63 | $1.25 |
| Operating margin | 14.9% | 16.2% | 14.1% | 16.6% |
- Revenue fell 23.6% in Q2 and 24.9% year to date; operating profit declined 29.4% and 36.3%, respectively. Management attributed the declines mainly to lower Rail and Inland Barge volumes.
- Six-month operating cash flow was $336.1 million, down from $486.4 million. Investing used $168.9 million; financing provided $78.1 million. Cash increased $245.3 million to $808.7 million.
- At June 30, cash and cash equivalents were $808.7 million and short-term marketable securities were $179.6 million. Unrestricted cash, equivalents, and securities totaled $988.3 million. The $600 million revolving facility had $507.4 million available, with no borrowings; the company was in compliance with its covenants.
- Total debt was $3.270 billion, up from $3.057 billion at year-end: $859.0 million recourse and $2.411 billion non-recourse. Much of the non-recourse debt is secured by railcars and lease cash flows; partially owned subsidiary debt is non-recourse to Trinity.
- Q2 segment operating profit was $37.0 million for Rail, $22.3 million for Construction Products, $0.5 million for Inland Barge, $24.3 million for Energy Equipment, and $110.8 million for Leasing. Leasing’s six-month operating profit rose 2.0%, despite lower railcar sale volume, helped by lower maintenance and compliance expense.
Material changes and management commentary
- Rail Group revenue fell 32.8% in Q2 and 38.7% for the first half; operating profit fell 58.3% and 64.3%. Rail backlog was $2.715 billion, down from $4.291 billion a year earlier, and average backlog selling price was 7.8% lower.
- Inland Barge revenue declined 71.7% in Q2 and 58.0% year to date; backlog decreased to $90.7 million from $251.0 million.
- Construction Products revenue declined, but operating profit was broadly stable. Energy Equipment revenue was nearly flat in Q2; higher wind tower and utility structure volumes were offset by declines in other product lines. Management cited increased bad-debt expense related to one customer.
- Leasing and management revenue increased, but reduced sales of railcars owned one year or less drove down total Leasing Group revenue. Fleet utilization was 97.5%, versus 96.4% a year earlier.
- Management said it continues to align manufacturing capacity with demand. Headcount was approximately 26% lower than a year earlier and 18% lower than year-end 2016. Selling, engineering, and administrative expense increased, mainly due to litigation, insurance, and bad-debt costs.
- The company increased its quarterly dividend 18%, from $0.11 to $0.13 per share. It repurchased 1.94 million shares for approximately $52.4 million during the first half; $163.0 million remained authorized at June 30.
Outlook, risks, contingencies, and unusual items
- For 2017, management projected manufacturing and corporate capital expenditures of $90–$110 million and a net investment in the wholly owned lease fleet of $315–$365 million. No earnings or revenue guidance is stated in the filing.
- The company issued $302.4 million of non-recourse promissory notes through a leasing subsidiary in May; $301.1 million was outstanding at June 30. The notes mature in 2024 and had an all-in interest rate of 2.91% at quarter-end. A $42 million acquisition of a trench-shoring business closed in July, after quarter-end.
- The ET-Plus False Claims Act case had a $682.4 million judgment, including trebled damages, penalties, and costs. Trinity appealed; the Fifth Circuit ruling was pending. The judgment was stayed against a $686 million unsecured supersedeas bond, with a $3.7 million annual premium. Management said a loss was not probable and recorded no accrual. Related state, local, and class-action claims also remain; some potential losses could be material, and the company said it could not estimate a loss range for certain actions.
- Accruals for other matters totaled $26.0 million at June 30, including environmental and workplace matters. The company disclosed a $4.4–$21.6 million range of reasonably possible losses for specified matters and reserved $3.7 million for probable environmental and workplace liabilities.
- Adoption of the new revenue standard was planned for January 1, 2018. Trinity anticipated that revenue for wind towers and utility structures would shift to recognition over time as products are manufactured; the impact was not reasonably estimable. Adoption of the new lease standard was planned for 2019, with effects still under assessment.
- The effective tax rate was 40.9% in Q2 and 35.5% for the first half. The first-half rate included a $5.8 million tax benefit from closure of the IRS audit of 2006–2009 tax years, partly offset by equity-compensation tax effects.
Important facts for investors to verify
- Track railcar and barge demand, orders, deliveries, pricing, and backlog conversion against continued market oversupply.
- Monitor progress and costs in the ET-Plus appeal, related litigation, and the supersedeas bond; confirm whether subsequent rulings change the loss assessment or accrual.
- Assess cash generation and capital allocation against planned lease-fleet investment, rising total debt, dividends, and share repurchases.
- Review collection risk and credit exposure, including the Energy Equipment customer-related bad-debt expense and the Rail Group customer representing 13% of consolidated receivables.
- Follow implementation of the revenue-recognition standard and the resulting timing and financial-statement effects for wind towers and utility structures.