Trinity Industries, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Trinity manufactures railcars and other transportation, construction, barge, and energy products, and operates a railcar leasing business.
Comparability note: 2010 results include TRIP Rail Holdings (TRIP) following adoption of a consolidation accounting standard effective January 1, 2010; 2009 periods were not restated. Trinity raised its TRIP ownership to 57.14% in September 2010. Accordingly, year-over-year comparisons, especially for leasing, are not fully like-for-like.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $540.0 | $557.4 | $1,537.1 | $2,067.0 |
| Operating profit (loss) | $92.0 | $64.6 | $222.9 | ($89.8) |
| Net income (loss) attributable to Trinity | $29.7 | $23.2 | $50.1 | ($152.3) |
| Diluted earnings (loss) per share | $0.37 | $0.29 | $0.63 | ($2.00) |
| Operating margin | 17.0% | 11.6% | 14.5% | (4.3%) |
- Revenue and profit: Q3 revenue declined 3.1%; nine-month revenue declined 25.6%. Nine-month operating profit turned positive from a loss, largely because 2009 included a $325.0 goodwill impairment charge. Q3 operating profit included a $10.2 gain on flood-damaged property and benefits from TRIP consolidation and the Quixote acquisition.
- Cash flow: Nine-month operating cash flow was $47.2, down from $530.0. Investing activities used $332.7 and financing activities used $175.1; cash and cash equivalents fell to $151.2 from $611.8 at year-end 2009. Operating cash flow was pressured by lower operating profits and higher receivables and inventories.
- Liquidity: September 30 cash was $151.2 and short-term marketable securities were $220.0. A further $193.0 of restricted cash was not freely available. The $425.0 revolving facility had no borrowings and $343.9 available after letters of credit; the $475.0 TILC warehouse facility had $137.2 outstanding and $337.8 available.
- Debt and balance sheet: Total debt was $2,821.6 versus $1,845.1 at December 31, 2009, primarily reflecting consolidation of TRIP’s $1,017.4 warehouse loan. Much of leasing debt is non-recourse and secured by railcars and related lease cash flows. Total assets were $5,674.4 and stockholders’ equity, including noncontrolling interest, was $1,802.3.
- Margins and dividends: Q3 declared dividends of $0.08 per share; the nine-month declared dividend was $0.24 per share, unchanged from 2009.
Material changes and business developments
- Segment trends were mixed. Q3 operating profit improved in Construction Products ($20.3 versus $13.1) and Leasing ($52.9 versus $30.3), while Inland Barge declined to $22.4 from $26.7 and Energy Equipment to $6.0 from $16.2. Rail Group posted $3.3 versus a $12.0 loss.
- Rail Group shipments fell 30% in Q3 to approximately 1,140 cars; nine-month shipments fell 67% to approximately 2,525. Backlog rose to approximately 4,860 cars, valued at $388.4, from $263.8 a year earlier.
- Inland Barge backlog was approximately $515.6 versus $347.7. Structural wind-tower backlog was approximately $1.0 billion versus $1.1 billion.
- Trinity acquired Quixote in February for a total cost of $58.1, including assumed debt that was retired, and acquired an energy equipment business in Q2. In August it sold asphalt operations and a ready-mix plant for $30.8, recording a $3.8 gain after writing off $16.5 of goodwill.
- The May Tennessee barge-facility flood disrupted production. Trinity had received $20.0 in insurance payments by quarter-end and recorded the $10.2 property-disposition gain; production capacity returned to pre-flood levels on October 1.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said the downturn continued to weigh on rail, barge, wind-tower, and construction markets, and described competitive conditions and reduced demand. The company had adjusted capacity and staffing to market conditions and believed it had adequate capital access to fund operations and growth.
- The TRIP consolidation adoption produced a $105.4 after-tax charge to retained earnings and $129.9 of noncontrolling interest as of January 1, 2010. TRIP assets are available only to satisfy TRIP liabilities; TRIP liabilities have recourse only to TRIP assets.
- TRIP’s warehouse loan requires excess cash flow to reduce principal through June 2011; scheduled installments begin in June 2011 and continue through March 2012. TRIP was evaluating financing alternatives. The TILC warehouse facility matures in February 2011; management planned to renew it on customary terms.
- After quarter-end, a wholly owned subsidiary issued $369.2 of secured railcar notes at 5.194%. Trinity also announced redemption of its 6.5% senior notes due 2014 at 102.167% on November 26, 2010, with part of the new financing proceeds intended for the redemption.
- Tax settlements and reserve releases affected the period: the nine-month effective tax rate was 34.1%, versus 12.2% in 2009, when the nondeductible goodwill impairment materially affected the rate. Unrecognized tax benefits were $34.8 at September 30; tax examinations and appeals remained ongoing.
- Management said litigation and claims were not expected to materially affect overall financial condition; environmental and workplace liabilities reserved were $7.3, though future estimates are inherently uncertain. Disclosed business risks include cyclicality and demand, customer credit and order timing, raw-material costs, competition, interest rates, weather and production disruption, litigation, and regulatory and environmental matters.
Investor verification priorities
- Assess the effect of TRIP consolidation on reported growth, leverage, cash flows, noncontrolling interests, and comparisons with 2009.
- Verify the sources and sustainability of reported operating profit, including the $10.2 flood-related gain and acquisition/divestiture effects.
- Track railcar and barge orders, shipment levels, backlog conversion, and demand and margins in wind towers and construction products.
- Review liquidity and refinancing execution, particularly the TRIP warehouse installments beginning in 2011, TILC facility renewal, and the post-quarter rail-note issuance and senior-note redemption.
- Monitor operating cash generation and working-capital changes, especially receivables and raw-material inventory growth, along with tax examination outcomes and environmental contingencies.