TRINITY INDUSTRIES INC annual report, FY2012

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Business context and reporting period

Trinity Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The diversified manufacturer and railcar lessor operates in Rail, Railcar Leasing and Management Services, Construction Products, Energy Equipment, and Inland Barge businesses. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Financial amounts below are in U.S. dollars.

Financial performance and position

  • Revenue: FY 2012 revenue was $3.812 billion, up 29.7% from $2.938 billion in 2011. Manufacturing revenue increased to $3.168 billion from $2.387 billion; leasing revenue rose to $644.4 million from $551.4 million.
  • Profit and margins: Operating profit was $574.8 million, up 34.7% from $426.8 million; operating margin was approximately 15.1%, versus 14.5%. Net income attributable to Trinity was $255.2 million, compared with $142.2 million. Diluted EPS was $3.19 versus $1.77. Income from continuing operations attributable to Trinity was $253.4 million, or $3.17 diluted EPS. The effective tax rate was 34.7%, down from 38.6%.
  • Fourth quarter: Revenue was $1.013 billion, operating profit $158.9 million, net income attributable to Trinity $71.3 million, and diluted EPS $0.90. For Q4 2011, the corresponding figures were $914.3 million, $139.5 million, $56.1 million, and $0.70.
  • Segments: Rail revenue was $2.013 billion and operating profit $199.0 million, versus $1.275 billion and $77.3 million in 2011. Leasing revenue was $647.1 million and operating profit $300.9 million, versus $552.0 million and $254.5 million. Inland Barge revenue and operating profit were $675.2 million and $124.7 million; Construction Products reported $483.7 million and $44.8 million; Energy Equipment reported $558.6 million and $18.2 million.
  • Cash flow and investment: Operating cash flow was $527.4 million, compared with $110.9 million in 2011. Investing activities used $311.4 million and financing activities provided $5.9 million. Capital expenditures were $469.2 million, including $352.6 million for lease-fleet additions. Cash and cash equivalents ended the year at $573.0 million.
  • Debt and liquidity: Total debt was $3.055 billion, versus $2.972 billion; $458.1 million was recourse and $2.597 billion non-recourse. Total debt to total capital was 58.8%, down from 60.4%. The company reported $356.4 million available on its $425 million revolving facility and $301.4 million available under the TILC warehouse facility. Restricted cash was $223.2 million. The TILC facility had $173.6 million outstanding and was extended in February 2013 to August 2013.
  • Other balance-sheet measures: Total assets were $6.670 billion and stockholders’ equity $2.138 billion. The defined-benefit pension deficit widened to $102.4 million from $74.2 million, principally reflecting a lower discount-rate assumption.

Material changes versus the prior comparable period

  • Revenue, operating profit, and diluted EPS increased substantially, primarily from higher railcar and barge shipments, increased lease-fleet sales and additions, and higher leasing rates. Railcar orders totaled 22,350; shipments were 19,360.
  • Railcar backlog rose to $3.702 billion from $2.595 billion, including $2.868 billion from external customers and $834.7 million allocated to the Leasing Group. Barge backlog increased to $564.1 million from $494.6 million. Structural wind-tower backlog declined to $680.3 million from $934.3 million.
  • Rail operating margin improved to 9.9% from 6.1%; Inland Barge margin eased to 18.5% from 19.4%. Construction Products margin fell to 9.3% from 12.1%, reflecting highway-product price competition and higher costs. Energy Equipment margin improved to 3.3% from 1.9% but remained modest.
  • Operating cash flow rose markedly, helped by stronger profits, a smaller inventory increase than in 2011, and a $125.5 million increase in accrued liabilities, primarily customer advances. Raw-material inventory nevertheless increased $85.8 million during 2012.
  • Quarterly dividends declared increased to $0.42 per share for 2012 from $0.35 in 2011. The company repurchased 1.834 million shares for $45.2 million under its prior program and authorized a new $200 million program effective October 1, 2012; no purchases were made under the new program in Q4.

Outlook, risks, contingencies and unusual items

  • Management projected 2013 capital expenditures of approximately $510 million to $595 million, including manufacturing expenditures of $160 million to $195 million and net lease-fleet investment of $350 million to $400 million. Approximately 60% of year-end rail backlog, 83% of barge backlog, and 64% of non-litigated wind-tower backlog was expected to deliver in 2013. These are expectations, not guaranteed results.
  • Management described railcar demand as favorable in 2012, especially from oil, gas, and chemical customers, but noted that demand had moderated from early 2011. The businesses are cyclical; construction and energy-equipment activity also faces seasonal and market pressures. Backlog can be cancelled, deferred, or affected by contract breaches.
  • Approximately $412.5 million of structural wind-tower backlog was subject to litigation over a customer’s alleged breach of a long-term supply contract. The outcome and recoverability of those orders are uncertain.
  • A False Claims Act qui tam complaint concerning the ET-Plus highway guardrail product was disclosed after year-end. The government declined intervention; Trinity said it had not been served, intended to defend the allegations, did not believe a loss was probable, and recorded no accrual or estimated loss range. The filing also reports other claims and lawsuits, with a stated aggregate loss range of $4.0 million to $29.4 million and accruals of $16.1 million, including environmental and workplace matters.
  • In December 2012, Trinity agreed to sell its remaining ready-mix concrete operations, reported as discontinued operations. Closing was expected in 2013. Those operations recorded 2012 revenue of $121.4 million and net income of $1.8 million.
  • Other notable exposures include steel and component-supply volatility, lease-fleet utilization and remarketing risk, customer credit and concentration (one Energy Equipment customer represented 21% of net receivables), environmental and product-liability claims, and foreign-operation risks. A one-percentage-point rise in interest rates was estimated to increase 2013 interest expense by $2.5 million after hedges.
  • The 2012 financial statements received an unqualified audit opinion, and the auditor and management reported effective internal control over financial reporting as of December 31, 2012.

Important facts for investors to verify

  1. Track the wind-tower contract litigation and whether the $412.5 million of associated backlog converts to orders, revenue, or recovery.
  2. Confirm completion and final proceeds from the ready-mix divestiture, and distinguish continuing from discontinued results.
  3. Assess whether 2013 capital spending and lease-fleet growth are supported by customer demand, lease commitments, utilization, and financing access.
  4. Monitor the TILC warehouse facility’s August 2013 maturity, refinancing or renewal, and the 2014 maturity of TRIP Holdings’ $170 million senior secured notes.
  5. Evaluate whether the improvement in operating cash flow is sustainable, including the effects of customer advances, inventory, and working capital.
  6. Follow the ET-Plus False Claims Act matter, other litigation and environmental reserves, pension funding, and the significant customer receivable concentration.