Trinity Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,110.3 | $907.3 | $3,109.3 | $2,799.0 |
| Operating profit | $205.6 | $140.7 | $548.5 | $415.9 |
| Net income attributable to Trinity | $99.6 | $63.2 | $262.7 | $183.9 |
| Diluted EPS | $1.26 | $0.80 | $3.31 | $2.29 |
| Operating margin | 18.5% | 15.5% | 17.6% | 14.9% |
For the first nine months, continuing-operations income attributable to Trinity was $256.8 million, or $3.24 per diluted share; discontinued operations contributed $5.9 million net, including a $7.1 million after-tax sale gain. The company declared dividends of $0.15 per share in Q3 and $0.39 per share year to date.
- Cash flow: Nine-month operating cash flow was $374.7 million, versus $252.1 million in 2012. Investing used $628.5 million, chiefly reflecting $455.5 million in lease-fleet capital expenditures and $91.2 million in manufacturing and other capital expenditures. Financing provided $83.4 million. Cash declined $170.4 million to $402.6 million.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $402.6 million, short-term marketable securities $96.0 million, and restricted cash $249.3 million. Total debt was $3,021.1 million, comprising $416.2 million recourse and $2,604.9 million non-recourse debt. The company reported $352.4 million available under its $425 million revolving facility and $323.0 million under its $475 million TILC warehouse facility; no revolver borrowings were outstanding. It was in compliance with financial covenants.
- Capital and investment: Nine-month share repurchases cost approximately $73.8 million. Management projected 2013 manufacturing/corporate capital expenditures of $125–$145 million and net lease-fleet investment of $540–$555 million after railcar-sale proceeds.
Changes versus the prior comparable period
- Q3 revenue increased 22% and operating profit 46%; nine-month revenue increased 11% and operating profit 32%. Management attributed the gains mainly to higher railcar shipment volumes, pricing and favorable product mix, with additional contribution from aggregates acquisitions and improved Energy Equipment efficiencies.
- The Rail Group was the main growth driver: Q3 segment revenue was $718.5 million versus $457.9 million, and operating profit $121.5 million versus $35.2 million. Nine-month rail backlog rose to $5.09 billion from $3.34 billion a year earlier; 25,115 railcars were ordered in the first nine months.
- Inland Barge revenue declined 15% year to date and operating profit declined 26%, reflecting lower hopper-barge deliveries, partly offset by tank barges. Leasing Group revenue declined 8% year to date and operating profit 7%, mainly due to lower railcar-sale contributions, partly offset by higher lease rates and fleet additions.
- Energy Equipment year-to-date revenue increased 22% and operating profit rose to $44.2 million from $9.7 million, as manufacturing challenges from 2012 eased. Construction Products revenue increased 9% year to date, with aggregates acquisition volumes partly offset by weaker highway-products demand and pricing.
- Cash from operations improved, while investing outflow increased substantially because of expanded lease-fleet investment. Total debt was $34 million below December 31, 2012. Selling, engineering and administrative expenses rose as a share of revenue year to date, to 6.8% from 5.7%, due mainly to compensation, consulting and legal costs.
Outlook, commentary and risks
- Management described demand as mixed: rail demand tied to oil, gas and chemicals remained very favorable, while coal and grain rail markets were less favorable and barge demand was weak. Commercial construction weakness and state budget constraints weighed on Construction Products. Wind-tower orders improved following renewal of the federal production tax credit.
- The filing provides no specific earnings or revenue guidance. Management said it expects to fund operations and growth with cash, operating cash flow and, depending on conditions, debt or equity, and believes capital resources are adequate. Results are subject to seasonality and cyclical industry conditions and nine-month results may not indicate full-year results.
- Litigation: A False Claims Act qui tam complaint alleges false claims concerning the ET-Plus highway product and seeks recall/replacement costs, treble damages, costs and interest. Trinity disputes the allegations; management said a loss was not probable and could not estimate a loss range, so no accrual was recorded. Separate litigation concerns a wind-tower customer’s alleged breach of a supply contract; the related $412.5 million of prior-year backlog was removed because Trinity expects the purchases will not occur.
- Other claims, including environmental and workplace matters, had a reasonably possible loss range of $8.0–$33.3 million and recorded accruals of $19.7 million. Environmental and workplace liabilities included a $10.0 million reserve. Tank-car recertification was more than 75% complete; additional compliance costs were not expected to be significant.
- Tax matters include $53.8 million of unrecognized tax benefits at September 30, 2013, ongoing transfer-pricing disputes and a $5.1 million Q3 charge for state-tax filing responsibilities. Management reversed a valuation allowance for foreign tax credits it expected to use. No material change in previously disclosed risk factors or market risks was reported.
Key facts for investors to verify
- Whether rail demand, pricing and the $5.09 billion backlog convert into deliveries and margins as expected, including the portion allocated to the Leasing Group.
- Whether forecast lease-fleet investment and manufacturing capital spending are funded while preserving cash and liquidity; assess the recourse versus non-recourse debt and debt maturities.
- Progress and potential outcomes of the ET-Plus False Claims Act matter and the wind-tower customer litigation, including any changes to loss assessments or backlog.
- Whether weaker barge, coal/grain rail and construction markets, higher operating expenses, customer concentration, and tax uncertainties affect subsequent results.