Trinity Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Amounts are in millions of dollars except per-share data, percentages, and where noted. The unaudited interim results may not be indicative of full-year performance.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $925.3 | $634.2 |
| Operating profit | $122.4 | $85.5 |
| Income before taxes | $77.9 | $41.8 |
| Net income attributable to Trinity | $52.9 | $24.2 |
| Diluted EPS | $0.66 | $0.30 |
| Operating cash flow | $71.0 | $(5.6) |
| Capital expenditures | $116.4 | $89.5 |
| Cash and cash equivalents at March 31 | $304.8 | $351.1 at Dec. 31, 2011 |
| Total debt at March 31 | $2,927.5 | $2,974.9 at Dec. 31, 2011 |
Revenue increased 45.9% year over year and operating profit rose about 43%. Consolidated operating margin was approximately 13.2%, compared with 13.5% in Q1 2011. The effective tax rate was 32.9%, versus 38.8%; a $3.5 tax benefit from settling the 2004–2005 IRS audit contributed to the change. Interest expense rose $3.4 to $47.9, primarily due to TRIP Holdings’ 2011 refinancing.
Revenue comprised $783.2 from manufacturing and $142.1 from leasing. Segment operating results were: Rail $40.1 (8.6% margin), Construction Products $10.8 (7.0%), Inland Barge $30.0 (17.7%), Energy Equipment loss of $3.8 (negative 3.0%), and Leasing $66.5 (46.7%).
Material changes and management commentary
- Rail Group revenue rose 112.5% to $467.1, with shipments increasing to approximately 5,010 railcars from 2,240; operating profit rose to $40.1 from $9.3. Rail backlog was $2,561.9, including $2,008.2 for external customers.
- Leasing revenue rose 18.8% to $142.3 and operating profit rose to $66.5 from $54.7. Management cited fleet additions, higher rental rates, sales from the lease fleet, lower maintenance costs, and utilization of 99.5%.
- Inland Barge revenue rose 22.8% to $169.4 and operating profit increased to $30.0 from $21.7; Q1 2012 profit included a $3.4 gain on barge sales.
- Construction Products revenue increased 16.0% to $155.0 and operating profit rose to $10.8. Higher highway-products volumes were partly offset by lower concrete and aggregates revenue following a divestiture.
- Energy Equipment revenue increased 5.3% to $125.0, but the segment moved from $10.5 operating profit to a $3.8 loss. Management attributed the decline to wind-tower pricing pressure and product-mix transition costs. Wind-tower backlog was $884.6, down from $974.0.
- Total reported backlog was higher year over year: Rail Group $2,561.9 versus $1,806.6; Inland Barge $512.1 versus $460.5; and structural wind towers $884.6 versus $974.0.
Operating cash flow improved from a use of cash to $71.0 provided, while investing activities used $77.0 and financing activities used $40.3. Cash fell $46.3 during the quarter. Management attributed the operating-cash improvement mainly to stronger profits and more favorable receivables and inventory movements than in the prior-year quarter.
Liquidity, debt, outlook, and risks
- At March 31, unrestricted cash was $304.8. The $425.0 revolving facility had no borrowings, $72.6 of letters of credit, and $352.4 available; the company reported compliance with its financial covenants. The non-recourse TILC warehouse facility had $282.7 outstanding and $192.3 available.
- Debt consisted of $461.2 recourse and $2,466.3 non-recourse debt. The $450.0 convertible notes had a conversion price of $51.36; no shares would have been issued on conversion at the quarter-end share price. The filing reports substantial scheduled principal payments, including $450.3 of manufacturing/corporate recourse principal after 2016.
- Management projected 2012 capital expenditures of approximately $400–$475, including $300–$350 of net lease-fleet additions. It said railcar demand and order levels remained favorable, though moderating from the first half of 2011. No full-year earnings or revenue guidance is provided in the text.
- Approximately $412.5 of wind-tower backlog is subject to litigation over a customer’s alleged breach of a long-term supply contract. Discovery was underway. The company also disclosed other business claims, with estimated loss range of $4.3–$20.5 and $9.3 accrued; environmental and workplace reserves were $6.8. Management said additional liability was not expected to be material, while noting estimates and outcomes remain uncertain.
- The voluntary FRA recertification of 948 tank cars used for poison inhalation hazard materials was underway; additional compliance costs were not expected to be significant.
- Other risks cited include cyclical demand, construction-market weakness, weather and operational disruptions, raw-material costs and availability, competition, customer credit and contract performance, interest rates, litigation, and environmental and regulatory matters. Management said there had been no material change in previously disclosed risk factors or market risks.
Accounting presentation changed for railcars sold from the lease fleet: sales of cars owned for one year or less are reported gross in leasing revenue and cost of revenue; older-car disposals are reported as net gains or losses. Prior-year revenue was reduced by $10.0 to conform. Adoption of the comprehensive-income presentation standard changed reporting format only.
Most important facts for investors to verify
- Whether railcar orders, shipments, backlog conversion, and high fleet utilization persisted beyond Q1, and how customer commitments affect the portion of rail backlog allocated to leasing.
- Whether the wind-tower contract dispute is resolved and what portion of the $412.5 backlog subject to litigation is ultimately deliverable or collectible.
- Whether Energy Equipment margins recover from pricing pressure and transition costs, and whether the projected capital-spending range is maintained.
- Liquidity and debt-service assumptions, including the non-recourse nature and collateral of leasing debt, warehouse-facility renewal needs, and scheduled principal payments.
- Developments in IRS examinations and uncertain tax positions, along with any changes in the disclosed litigation, environmental, warranty, or workplace exposures.