Trinity: “Our 1Q Results Reflect Solid Progress”

Written by Andrew Corselli
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“I am pleased Trinity’s rail platform continues to display its resiliency with strong cash flow generation stemming from the platform synergies,” said Jean Savage, Trinity Industries CEO and President.

Trinity Industries announced first-quarter 2020 total company revenues of $615.2 million; quarterly earnings from continuing operations per common diluted share (EPS) of $1.33, an increase of $1.09 year-over-year; and quarterly adjusted EPS of $0.11 and excludes $0.04 per share related to restructuring activities, $0.03 per share related to the early redemption of high coupon debt, and $1.29 per share related to the effects of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act).

Other 1Q20 financial and operational highlights include:

  • Cash flow from operations and free cash flow before leasing investment of $174 million and $206 million, respectively.
  • Quarterly revenues from leasing and management services of $192 million with a 43% operating profit margin.
  • Growth of the wholly-owned and partially-owned lease fleet to 103,815 units, with lease fleet utilization of 95.4% at quarter-end.
  • Rail Products Group quarterly revenues of $509.4 million and a 4.9% operating profit margin.
  • Rail Products Group quarterly railcar orders and deliveries of 1,970 and 3,705, respectively, resulting in total railcar backlog of $1.6 billion at quarter-end.
  • Repurchases of approximately 1.9 million shares at a cost of $35.4 million.
  • Total committed liquidity of $760 million. Potential additional liquidity of $200 million available under corporate revolver, subject to certain conditions.

Liquidity Update

“As of March 31, 2020, we had total committed liquidity of $759.7 million, which includes $213.2 million of unrestricted cash and cash equivalents, $284.5 million available under our revolving credit facility, and $262 million unused and available under the TILC warehouse facility,” Trinity noted. “Our revolving credit facility also contains a $200 million expansion feature that can be accessed subject to certain conditions. Additionally, as a result of certain provisions of the CARES Act, Trinity anticipates receiving tax refunds in 2020 totaling approximately $303 million, further bolstering the Company’s strong liquidity position.”

COVID-19 Impact

“Because Trinity was able to respond to the pandemic without significant interruptions to the Company’s daily operations, the pandemic did not materially impact our financial results for the first quarter of 2020,” Trinity added. “To date, our Railcar Leasing and Management Services Group has not experienced any significant increase in lease payment delinquencies, and has granted rent payment extensions to a relatively small number of railcar lessees upon a credit review. We expect there to be adjustments to our 2020 production plans as customers may need to defer new railcar equipment investments based on specific business needs.

“The Company expects that the economic impacts of the COVID-19 pandemic will negatively impact our financial results in the near term. Given the uncertainty in the market about the ultimate impact of COVID-19 on the North American economy, the Company cannot reasonably estimate the likelihood of the financial impact on performance. Trinity is closely monitoring business conditions and will make appropriate adjustments to our operations and related financial scenarios as necessary.”

Jean Savage, Trinity Industries CEO and President

“Coming into 2020, Trinity was rapidly and effectively executing on a number of optimization efforts to align with the Company’s go-forward business strategy as well as responding to the decline in railcar demand from the slowing industrial economy in the preceding year,” she said. “Our first-quarter results reflect solid progress on a number of actions taken to improve the performance of the business. While we have not lost sight of our longer-term goals, the disruption caused by the coronavirus pandemic is unprecedented, and our first priority is the health and safety of our employees and the residents of the communities in which we live and work. The United States government cited the rail and highway industries as critical infrastructure to our country’s response efforts to this pandemic. I applaud our dedicated employees for their service and commitment to business continuity and keeping critical supply chains operational for essential goods and services to move across North America.

“We expect COVID-19 to have a negative impact on demand for our products and services, clouding our forecasting abilities and limiting visibility into our financial performance for 2020. Trinity’s leadership team has stress-tested our business model in several scenarios, and we continue to expect positive cash flow generation from our platform of businesses. Based on our current knowledge and analysis of market conditions, we believe the resiliency of Trinity’s rail platform, solid cash flow generation, and strong liquidity and balance sheet position the Company to withstand the volatile disruption from the global pandemic and take advantage of potential opportunities that can lead to long-term value creation.”

Cowen Insight

“Amid the uncertainty of a volatile market, Trinity’s leasing-manufacturing business model positions it well, in our opinion,” said Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “We believe the company had already become less focused on preserving its manufacturing market share, so the pandemic-related decline in orders should affect it less than others. We are fine-tuning our estimates and raising our PT to $24 from $21.

“We are lowering our 2020 EPS estimate slightly to $0.40, from $0.45, while raising our 2021 estimate to $1.15, from $1.10. We believe the weaker this year gets, the stronger the 2021 demand rebound will be. This is as replacement of aging equipment gets deferred, and the industry produces well below the normal annual replacement demand of 38-50K this year. Our price target rises from $21 to $24, based on our SOTP valuation and our new 2021 estimates.

“We are constructive on Trinity as we believe that the ongoing transition into being primarily a lessor will enable the company to also become a more disciplined manufacturer. We think the economic challenges presented by the coronavirus pandemic could bring to the front burner any cost cutting and permanent capacity reduction plans in the manufacturing segment.

“We believe that in the face of increased risk of customer defaults or cancelations industry wide, Trinity’s key involvement in both manufacturing and leasing pave the way for a wider set of potentially favorable, win-win resolutions, which could drive a solid earnings rebound in 2021. It appears that the leasing business has thus far been fairly resilient. The company has not experienced any significant increase in lease payment delinquencies, and has granted rent payment extensions to a relatively small number of railcar lessees upon a credit review.

“The company canceled 540 energy-related railcars from its manufacturing backlog, something that effectively eliminates its exposure to crude oil and frac sand in its manufacturing segment. Trinity has some energy-related units in its leasing segment, but with the aforementioned removal of equipment from the manufacturing backlog, the company’s overall percentage exposure to energy is limited (in the mid-to-high single digits, we believe).

“At the end of 1Q20, Trinity had total committed liquidity of $759.7 million. The company’s revolving credit facility also contains a $200 million expansion feature that can be accessed subject to certain conditions. Additionally, an anticipated $303 million tax refund further boosts liquidity.”

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