Trinity Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Trinity manufactures railcars, barges, construction and energy equipment, and operates a railcar leasing and management business. Amounts are in millions except per-share data and percentages.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $1,028.4 | $708.3 | $1,953.7 | $1,342.5 |
| Operating profit | $154.9 | $95.4 | $277.3 | $180.9 |
| Operating margin | 15.1% | 13.5% | 14.2% | 13.5% |
| Net income attributable to Trinity | $67.8 | $30.0 | $120.7 | $54.2 |
| Diluted EPS | $0.84 | $0.37 | $1.50 | $0.67 |
| Interest expense | $47.9 | $43.8 | $95.8 | $88.3 |
| Effective tax rate | 37.1% | 39.9% | 35.3% | 39.4% |
- Revenue rose 45% in Q2 and 46% in the first half; attributable net income rose 126% and 123%, respectively. Manufacturing revenue was $836.1 in Q2 and $1,619.3 for the first half; leasing revenue was $192.3 and $334.4, respectively.
- Rail and Inland Barge benefited from higher shipments; Leasing benefited from fleet sales, fleet additions and higher rental rates. The Rail Group’s first-half revenue rose 96.6% and operating profit was $93.1, versus $24.7. Inland Barge first-half operating profit was $66.6, versus $40.8.
- Leasing Group first-half operating profit increased to $142.9 from $114.4. Construction Products’ first-half operating profit rose to $26.0 from $24.4, though its Q2 profit and margin declined. Energy Equipment’s first-half operating profit fell to $0.2 from $11.7, reflecting wind-tower mix changes and pricing pressure.
- Six-month cash from operations was $198.5, compared with $8.8. Investing used $154.7 and financing used $100.8; cash declined $57.0 to $294.1. Capital expenditures were $209.3, including $172.5 for leasing, implying approximately $10.8 of negative operating-cash-flow less total-capex cash flow.
- At June 30, cash was $294.1; restricted cash was $218.9. Total debt was $2,910.5, down from $2,974.9 at year-end: $461.5 recourse and $2,449.0 non-recourse. Non-recourse leasing and TRIP debt is secured by related assets and is generally not an obligation of Trinity.
- The $425.0 revolving facility had no borrowings and $354.1 available after letters of credit. The $475.0 TILC warehouse facility had $291.4 outstanding and $183.6 available, and matures in February 2013. Trinity reported covenant compliance.
Material changes and operating context
- Railcar demand and orders remained favorable, although management said demand had moderated from the accelerated pace of early 2011. First-half rail manufacturing orders totaled 11,865 cars; Rail Group backlog was $3,159.6, up from $2,245.4 a year earlier, including $794.7 designated for Leasing.
- Inland Barge backlog was $541.5, versus $494.2. Structural wind-tower backlog was $817.4, down from $916.5; $412.5 was subject to customer-contract litigation.
- Management cited continuing weakness in residential and commercial construction and slow wind-tower demand. Competitive pricing pressured Construction Products and Energy Equipment; changes in Energy Equipment product mix added costs. Results are also subject to seasonality and cyclicality.
- Interest expense increased $7.5 for the first half, primarily due to TRIP Holdings’ 2011 refinancing. Railcar-fleet sales accounting was changed to recognize sales of cars held one year or less gross in revenue and cost; prior-year revenue was reclassified, with no effect on operating profit or net income.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management projected 2012 capital expenditures of approximately $390–$440, including $260–$290 of net lease-fleet additions, and said it expected adequate capital resources from cash, operating cash flow and financing sources.
- Management warned that interim results may not indicate full-year results. Key risks include cyclical demand, customer order timing and credit, pricing and product mix, raw-material costs, interest rates, weather or other operational disruptions, and litigation, regulatory and environmental matters. The filing reported no material change in previously disclosed risk factors.
- A $3.5 tax benefit arose from settlement of the IRS audit for 2004–2005. The 2006–2008 IRS audit remained unresolved on a transfer-pricing issue under appeal and seeking U.S.-Mexico Competent Authority review. Unrecognized tax benefits were $50.0 at June 30.
- For ordinary claims and lawsuits, the estimated loss range was $4.1–$20.6, with $10.4 accrued, including environmental and workplace matters. Environmental and workplace reserves were $7.6. The company said additional liability was not expected to be material, while noting estimates are uncertain.
- The wind-tower customer litigation concerns breach of a long-term supply contract and affects $412.5 of reported backlog. The company also described voluntary FRA recertification of 948 PIH tank cars; additional compliance costs were not expected to be significant.
- First-half barge operating profit included a $3.4 gain on barge sales. The company repurchased 1,692,229 shares for approximately $41.2 under its $200 share-repurchase authorization; $158.8 remained available at quarter-end.
Most important facts for investors to verify
- Whether the railcar order and backlog levels convert to deliveries and profits, particularly the portion designated for Leasing.
- The status, recoverability and potential financial effect of the wind-tower contract litigation and the $412.5 of related backlog.
- Refinancing or repayment plans for the TILC warehouse facility maturing in February 2013 and the company’s future debt and interest costs.
- Whether projected 2012 capital expenditures and lease-fleet additions can be funded while maintaining cash generation and liquidity.
- Whether competitive pricing, product-mix issues, construction-market weakness and tax-audit matters materially affect subsequent results.