Trinity Industries, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2012; the filing compares the three- and nine-month periods with 2011. Trinity operates rail, construction products, inland barge, energy equipment, and railcar leasing and management businesses. Results are unaudited. Management cautions that nine-month results may not indicate full-year performance because of seasonal and other factors.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $937.5 million | $791.1 million | $2,891.2 million | $2,133.6 million |
| Operating profit | $141.9 million | $105.4 million | $419.2 million | $286.3 million |
| Net income attributable to Trinity | $63.2 million | $31.9 million | $183.9 million | $86.1 million |
| Diluted EPS | $0.80 | $0.40 | $2.29 | $1.07 |
| Interest expense | $47.8 million | $47.9 million | $143.6 million | $136.2 million |
Revenue increased 18.5% in Q3 and 35.5% year to date; operating profit rose approximately 35% and 46%, respectively. Operating margin was about 15.1% in Q3 versus 13.3% a year earlier, and 14.5% for nine months versus 13.4%. Growth in rail, barge, and leasing, including railcar fleet-sale gains, contributed to earnings growth.
- Cash flow: Nine-month operating cash flow was $252.1 million, versus $56.1 million in 2011. Investing used $217.6 million and financing used $73.4 million. Cash declined $38.9 million to $312.2 million.
- Liquidity and debt: Total debt was $2,978.1 million at September 30, 2012, including $462.3 million recourse and $2,515.8 million non-recourse debt. The $425 million revolving facility had no borrowings, $68.9 million of letters of credit, and $356.1 million available. The separate TILC warehouse facility had $89.3 million available and matures in February 2013.
- Investment and distributions: Nine-month capital expenditures were $333.7 million, including $266.3 million for the lease fleet. Trinity repurchased $45.2 million of shares and paid $23.1 million in dividends in the first nine months. A new $200 million repurchase authorization became effective October 1, 2012.
Material changes and segment developments
- Rail: Nine-month segment revenue increased 75.5% and operating profit rose to $128.3 million from $42.9 million, driven by higher railcar shipment volumes and prices. Backlog was $3.342 billion, up from $2.371 billion; 16,730 railcar orders were received in the first nine months. Q3 and year-to-date results included $6.0 million in capacity-repositioning costs.
- Leasing: Nine-month segment revenue increased 25.5% to $496.4 million and operating profit rose to $228.0 million from $178.6 million. Management cited fleet additions, higher rental rates, railcar sales, and lower maintenance costs. Fleet utilization was 99.0%, versus 99.6% a year earlier.
- Inland Barge: Nine-month revenue rose 27.8% and operating profit increased to $93.5 million from $66.8 million, supported by higher volumes and recovery from prior-year flooding. Results included a $3.4 million net gain on barge sales.
- Construction Products: Nine-month revenue rose 4.1%, but operating profit fell to $38.7 million from $42.2 million. Competitive pricing pressure and higher operating expenses weighed on results; Q3 revenue and profit also declined.
- Energy Equipment: Nine-month revenue rose 12.5%, while operating profit was essentially unchanged at $9.7 million. Structural wind tower backlog declined to $754.3 million from $929.5 million.
Comparative leasing revenue reflects a presentation policy adopted at the end of 2011: sales of lease-fleet railcars held one year or less are reported gross in revenue and cost of revenue; older-car sales are recognized as gains or losses. The change did not affect operating profit or net income.
Outlook, risks, contingencies, and unusual items
- Management described rail demand and orders as favorable, particularly in oil, gas, and chemicals, though demand had moderated from the accelerated pace of early 2011. Industries including rail, barges, wind towers, and construction are cyclical; construction products are also seasonal.
- Management projected 2012 manufacturing capital expenditures of $120 million to $140 million and fourth-quarter net lease-fleet investment of $60 million to $70 million. It stated that cash, operating cash flow, and available credit were expected to provide adequate capital resources. No EPS or revenue guidance was provided.
- Approximately $412.5 million of wind-tower backlog is subject to litigation over a customer’s alleged breach of a long-term supply contract. Discovery was continuing. The filing does not quantify a likely recovery or outcome.
- Other claims include product warranty, personal injury, environmental, workplace, and regulatory matters. The estimated loss range was $4.0 million to $19.8 million, with $10.1 million accrued; environmental and workplace reserves included $7.4 million. Management said additional liability was not expected to be material but noted that future outcomes are inherently uncertain.
- Tax items included a $3.5 million benefit from settlement of the 2004–2005 IRS audit and reserve releases. A transfer-pricing issue remained under appeal and subject to U.S.-Mexico Competent Authority review; the IRS also planned examinations of 2009 and 2010 tax years, with 2011 expected to be included.
- Other items to note: railcar lease-fleet sales generated $22.3 million of nine-month net gains; the 2012 effective tax rate was 34.9% versus 39.6% in 2011; and a single Energy Equipment customer accounted for about 22% of consolidated receivables.
Key facts for investors to verify
- Whether elevated railcar demand and the $3.342 billion rail backlog convert to shipments and margins, and how capacity-repositioning costs evolve.
- Whether lease-fleet sale gains and high utilization persist, and the financing/refinancing plan for the TILC warehouse facility due in February 2013.
- The status and collectability of the $412.5 million wind-tower backlog under litigation, and any change in related reserves or customer exposure.
- Working-capital trends, particularly inventory growth, and whether operating cash flow remains strong while fleet and manufacturing investment continue.
- Developments in tax audits, transfer-pricing review, and the range and accruals for environmental, workplace, and other claims.