Trinity Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited. Unless noted otherwise, amounts are in millions of dollars; prior periods were adjusted to exclude the divested ready-mix operations.
Business context and results
Trinity operates in rail manufacturing and leasing, construction products, inland barges, and energy equipment. Q2 growth was led by Rail, while barge and lease-fleet sales revenues declined. Management describes demand as mixed: rail and barge demand tied to oil, gas, and chemicals was favorable, while coal, grain, and commercial construction conditions were less favorable.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,066.1 | $995.5 | $1,999.0 | $1,891.7 |
| Operating profit | $183.4 | $152.5 | $342.9 | $275.2 |
| Operating margin | 17.2% | 15.3% | 17.2% | 14.5% |
| Continuing-operations net income | $89.2 | $66.1 | $161.4 | $118.5 |
| Net income attributable to Trinity | $84.0 | $67.8 | $163.1 | $120.7 |
| Diluted EPS, continuing operations | $1.07 | $0.82 | $1.98 | $1.49 |
| Interest expense | $46.5 | $47.9 | $95.7 | $95.8 |
Cash flow, debt, and liquidity
- First-half operating cash flow was $273.6, up from $198.5. Investing used $424.9, mainly reflecting $365.9 of capital expenditures, including $308.5 for lease-fleet additions. Financing used $33.7; cash declined $185.0 to $388.0.
- At June 30, cash and short-term marketable securities totaled $447.9. The $425.0 revolving facility had no borrowings; $355.1 remained available after letters of credit. The non-recourse TILC warehouse facility had $307.6 available.
- Total debt was $2,884.2, down from $3,055.0 at year-end: $413.7 recourse and $2,470.5 non-recourse. The company reported compliance with revolving-credit covenants. The $48.6 term loan and TRIP Holdings senior secured notes were repaid during the period.
- Inventory was $738.9 versus $667.7 at year-end, driven largely by work-in-process growth. Customer advances were $142.7. Two customers accounted for 13% and 11% of net receivables.
Material changes and segment trends
- Rail Group revenue rose 31.5% for the first half to $1,293.5; operating profit increased to $210.8 from $93.1, reflecting higher shipments, prices, and favorable product mix. Rail backlog reached $5,054.5, versus $3,159.6 a year earlier; first-half orders totaled 19,505 cars.
- Energy Equipment first-half revenue increased 20.1% to $307.2 and operating profit rose to $29.2 from $0.2, aided by demand for containers and improved manufacturing efficiencies. Structural wind-tower backlog fell to $642.9 from $817.4.
- Inland Barge first-half revenue declined 13.4% to $297.4 and operating profit fell 32.1% to $45.2, due to lower volumes, mix, and pricing.
- Leasing Group first-half revenue declined 9.7% to $304.0 as lower railcar sales more than offset higher leasing and management revenue. Operating profit was $137.3 versus $142.9. Fleet utilization was 98.7%, compared with 99.1%.
- Construction Products first-half revenue was up 3.4% to $258.3 and operating profit rose to $26.7 from $23.9. Acquisition-related aggregates growth was partly offset by weaker highway-products demand and unfavorable weather.
Outlook, risks, and unusual items
- Management projected 2013 manufacturing and corporate capital expenditures of $140–$170 and net lease-fleet investment of $585–$615 after railcar-sale proceeds. It stated that available cash and committed facilities should fund operating needs and growth; the filing provides no explicit earnings or EPS guidance.
- Approximately $412.5 of structural wind-tower backlog is subject to litigation over a customer’s alleged breach of a long-term supply contract.
- A False Claims Act relator alleges false claims related to the ET-Plus highway guardrail end terminal and seeks recall/replacement costs, treble damages, and other relief. The government declined to intervene. Trinity intends to defend; management said a loss was not probable and could not be estimated, so no accrual was recorded.
- Other claims had a reasonably possible loss range of $6.0–$31.4, with $18.9 accrued; the environmental and workplace reserve was $9.2. Trinity said additional liability was not expected to be material, while acknowledging estimation uncertainty.
- Railcar and barge markets are cyclical; results are also exposed to product mix, steel and input costs, customer credit and contract performance, interest rates, weather, and litigation. Management noted higher selling, engineering, and administrative expense, including compensation, consulting, and legal reserves.
- Ready-mix operations were sold in March and reported as discontinued operations. First-half results included a $7.1 after-tax gain on sale. Trinity repurchased 1.29 million shares for approximately $49.9 under its $200 million buyback authorization.
Important facts for investors to verify
- Whether Rail backlog converts to deliveries and margins as scheduled, and how much backlog is directed to Trinity’s leasing business.
- Progress and potential financial impact of the ET-Plus False Claims Act case and the structural wind-tower contract litigation.
- Whether projected 2013 lease-fleet investment and manufacturing/corporate capital spending remain consistent with cash generation and liquidity.
- Leasing profitability, fleet utilization, maintenance costs, and financing availability as fleet investment expands.
- Customer concentration, inventory growth, and the impact of weaker barge, coal/grain, and construction markets.