Trinity Industries, Inc. — Q1 2013 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2013, compared with Q1 2012. Trinity manufactures railcars, barges, highway and infrastructure products, and energy equipment, and operates a railcar leasing and management business. Results may be seasonal and cyclical; Q1 is historically the weakest quarter for Construction Products and Energy Equipment.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $932.9 million | $896.2 million |
| Operating profit | $159.5 million | $122.7 million |
| Operating margin | 17.1% | 13.7% |
| Income from continuing operations | $72.2 million | $52.4 million |
| Net income attributable to Trinity | $79.1 million | $52.9 million |
| Diluted EPS | $0.99, including $0.08 from discontinued operations | $0.66 |
| Operating cash flow | $101.8 million | $71.0 million |
- Revenue increased 4.1% and operating profit rose 30%, primarily on higher Rail and Energy Equipment shipments. SG&A as a share of revenue increased to 7.4% from 5.7%, reflecting compensation, consulting costs, and legal reserves.
- Rail revenue rose 33.9% and operating profit to $102.9 million from $40.1 million; rail backlog was $5.1 billion versus $2.6 billion a year earlier. Q1 railcar orders totaled 14,505.
- Energy Equipment revenue increased 23.8%; the segment moved to $14.9 million operating profit from a $3.8 million loss. Construction Products revenue fell 17.6% and Inland Barge revenue fell 13.0%. Leasing revenue declined 5.6% and operating profit fell 7.4%, as higher leasing income was offset by fewer railcar sales and higher maintenance costs.
- Investing cash outflow was $231.6 million, including $166.8 million of net leasing capital expenditures; financing cash outflow was $82.7 million. Cash declined $212.5 million to $360.5 million. The quarter-end balance also included $59.9 million of short-term marketable securities and $215.3 million of restricted cash.
- Total debt was $2.975 billion at March 31, down from $3.055 billion at year-end. It comprised $412.0 million recourse debt and $2.563 billion non-recourse debt. The company repaid $83.5 million of debt, including its leasing term loan.
- Unrestricted cash and short-term securities totaled $420.4 million. The $425 million revolving facility had $354.9 million available after letters of credit; the $475 million non-recourse leasing warehouse facility had $307.1 million available and matured in August 2013. Trinity reported compliance with revolving-credit covenants.
Changes, outlook, and material items
- Management described demand as mixed: railcars and barges serving oil, gas, and chemicals remained favorable, while coal and grain demand was weaker. Wind-tower orders improved following renewal of the federal production tax credit; commercial construction weakness and state budget constraints weighed on Construction Products.
- Management projected 2013 manufacturing and corporate capital expenditures of $160–$190 million and net leasing-fleet investment of $530–$580 million after railcar-sale proceeds. The filing provides no company-wide earnings or revenue guidance.
- Structural wind-tower backlog was $670.9 million, down from $884.6 million; $412.5 million was subject to litigation over a customer’s alleged breach of a long-term supply contract.
- Trinity sold its remaining ready-mix concrete operations in a transaction involving aggregates operations. The sale generated a $7.0 million after-tax gain; discontinued operations also recorded a $0.4 million loss. The company reported $79.1 million net income attributable to Trinity, versus $72.5 million from continuing operations.
- In April 2013, Trinity completed an approximately $23.1 million acquisition in Mexico, plus assumed liabilities. In March, it acquired an additional 16% interest in TRIP Holdings, bringing its ownership to 73%; the $31.7 million purchase was cash-settled in April.
- Legal and regulatory exposures include a False Claims Act complaint alleging false claims related to the ET-Plus guardrail system. The company intends to defend the case, said a loss was not probable, and recorded no accrual; it could not estimate a loss range. Separately, estimated reasonably possible losses for other claims were $3.9–$32.8 million, with $18.3 million accrued. The company also reported $6.8 million reserved for probable environmental and workplace liabilities.
- Other risks include customer and contract performance, cyclical demand, steel and other input costs, weather, interest rates, and legal, environmental, and tax matters. A customer accounted for 14% of consolidated net receivables, all within terms. The company stated that market risks and risk factors had not materially changed from its 2012 Form 10-K.
Investor verification priorities
- Track execution and pricing of the $5.1 billion rail backlog, including the portion designated for leasing and whether orders convert to shipments and cash.
- Monitor the $412.5 million wind-tower backlog exposed to customer litigation and the separate ET-Plus False Claims Act case, including any change in loss assessment or accruals.
- Assess whether leasing-fleet investment and cash generation remain aligned, and verify refinancing or repayment plans for the warehouse facility maturing in August 2013.
- Separate continuing-operations performance from the ready-mix disposal gain when evaluating earnings; note that management cautioned Q1 results may not indicate full-year results.
- Review customer concentration, segment demand trends, rising SG&A and leasing maintenance costs, and the company’s stated capital-expenditure plans against subsequent filings.