TRINITY INDUSTRIES INC quarterly report, Q2 FY2011

Trinity Industries, Inc. — Q2 2011 Form 10-Q

Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Trinity operates in rail manufacturing, construction products, inland barges, energy equipment, and railcar leasing and management. Management cautions that interim results may not indicate full-year results.

Financial performance

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Revenue	$710.5 million	$543.1 million	$1,354.7 million	$997.1 million
Operating profit	$95.4 million	$78.9 million	$180.9 million	$130.9 million
Net income attributable to Trinity	$30.0 million	$18.4 million	$54.2 million	$20.4 million
Diluted EPS	$0.37	$0.23	$0.67	$0.26
Interest expense	$43.8 million	$45.3 million	$88.3 million	$91.0 million

Revenue increased 30.8% in Q2 and 35.9% for the half year; operating profit increased 20.9% and 38.2%, respectively. Net income attributable to Trinity rose 63.0% and 165.7%.
Calculated operating margin was approximately 13.4% in Q2 2011 versus 14.5% in Q2 2010, and 13.4% for the first half versus 13.1%. The filing does not present consolidated margin figures directly.
Q2 segment operating profit: Rail $15.4 million (versus a $2.7 million loss); Construction Products $16.1 million; Inland Barge $19.1 million; Energy Equipment $1.2 million; Leasing $59.7 million. Energy Equipment profit fell sharply despite slightly higher revenue.
Cash and cash equivalents were $257.1 million at June 30, down from $354.0 million at year-end; short-term marketable securities were $42.0 million, versus $158.0 million. Restricted cash was $205.3 million.
Six-month operating cash flow was a $6.2 million use, versus $5.8 million provided in 2010. Investing activities used $55.3 million; financing activities used $35.4 million. Capital expenditures were $180.1 million, including $155.5 million for leasing.
Total debt was $2,886.6 million, comprising $455.3 million recourse debt and $2,431.3 million non-recourse debt. The $425 million revolving facility had no borrowings; $341.4 million remained available after letters of credit. The $475 million TILC warehouse facility had $130 million outstanding and $345 million available. Trinity reported compliance with its revolving-credit covenants.

Changes, outlook, and management commentary

Rail recovery was the principal growth driver: Q2 Rail Group revenue increased 148.6%, shipments rose to approximately 3,115 cars from 890, and the group returned to operating profit. Six-month railcar orders were approximately 26,630, including a five-year GATX agreement for 12,500 cars. Rail backlog was $2.245 billion, versus $300.9 million a year earlier; about 30% was scheduled for delivery in 2011, with the balance expected during 2012–2015.
Leasing revenue and operating profit increased 9.0% and 21.3% in Q2; fleet utilization was 99.3% for wholly owned subsidiaries and 99.9% for TRIP Holdings. Inland Barge revenue and profit grew with higher tank-barge volumes, while Construction Products revenue declined 12.6% in Q2, mainly reflecting divestitures and lower concrete and aggregates activity.
Structural wind tower backlog was approximately $916.5 million, down from $1.1 billion a year earlier; about 15% was scheduled for 2011 delivery. Management cited continuing slow wind-tower orders and weak residential and commercial construction markets, while noting improved rail demand and production staffing at certain facilities.
On July 6, 2011, TRIP entities refinanced the $963.3 million warehouse loan with $175 million of senior secured notes and $857 million of secured railcar equipment notes. The new debt is non-recourse to Trinity; Trinity itself purchased $112 million of the 8% TRIP senior notes. This post-quarter refinancing is not reflected in June 30 debt balances.
Management gave no specific full-year earnings or revenue guidance in the supplied filing text. It said operating requirements are expected to be funded through operating cash flow and, depending on market conditions, debt and equity; it believed adequate capital resources were available.

Risks, contingencies, and unusual items

A Federal Railroad Administration directive addressed a specific tank-car design used for poison inhalation hazard materials. Five cars had potential leaks around manway nozzles; 162 cars were removed from service for testing. The potential compliance costs could not be reasonably estimated.
Missouri barge facilities incurred approximately $8.4 million of second-quarter flood damage and lost-productivity costs, net of estimated insurance recoveries. Q2 operating profit included $4.0 million of insurance proceeds relating to a 2010 Tennessee flood.
Unrecognized tax benefits were $52.3 million at June 30, up from $36.8 million at year-end, primarily reflecting prior-year federal tax positions proposed by the IRS. IRS examinations and appeals remain ongoing. Environmental and workplace liabilities reserved were $8.0 million; management stated estimates are inherently imprecise.
Management identifies demand cyclicality, weather and natural disasters, raw-material availability and cost, customer credit and order timing, interest rates, financing access, litigation, and regulatory and environmental matters among factors that could affect results.
TRIP-related hedge termination following the refinancing is expected to result in $6.3 million of additional interest expense over the 12 months following June 30, 2011. The filing also describes contingent agreements that could require Trinity to acquire an investor’s additional TRIP Holdings interest under limited circumstances.

Important facts for investors to verify

Whether the substantial rail backlog converts to deliveries on schedule and at anticipated margins, including the GATX agreement and the 2011–2015 delivery profile.
The tank-car testing results, scope of any required remediation, and eventual cost or operational impact of the FRA directive.
Post-refinancing TRIP debt terms, including the high-cost 8% senior notes and redemption yields, Trinity’s $112 million investment, and the effect of the transaction on leasing cash flows and interest expense.
Working-capital trends: receivables and inventories rose materially during the first half, contributing to negative operating cash flow.
Whether Energy Equipment profitability recovers and whether barge operations absorb further flood-related disruption; confirm the status of tax examinations and contingencies.
The filing states no shares were repurchased under the $200 million repurchase program. The quarterly share-purchase table nevertheless reports 208,516 shares acquired, identified as employee tax withholding, option-related surrenders, and plan-trust purchases—not program repurchases.