Business Context and Reporting Period
Trinity Industries, Inc. (NYSE: TRN) filed this Form 10-K for the fiscal year ended December 31, 2011. The company operates in rail manufacturing and leasing, construction products, inland barges, and energy equipment. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key Financial Results
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $3,075.1 | $2,155.5 |
| Operating profit | $425.3 | $303.8 |
| Operating margin | 13.8% | 14.1% |
| Net income attributable to Trinity | $142.2 | $67.4 |
| Diluted EPS | $1.77 | $0.85 |
| Cash from operations | $104.3 | $170.5 |
| Capital expenditures | $340.0 | $254.8 |
| Total debt | $2,974.9 | $2,907.7 |
| Cash and cash equivalents | $351.1 | $354.0 |
Revenue rose 42.7%, primarily on increased railcar and barge shipments and higher leasing revenue, rental rates, and railcar sales. Operating profit increased 40.0%, though consolidated operating margin edged down. Interest expense was $185.3 million versus $182.1 million; the effective tax rate was 38.7% versus 35.1%.
Operating cash flow declined as receivables and inventory grew with increased production. Receivables rose $146.3 million and inventory rose $218.6 million year over year. At year-end, $240.3 million of cash was restricted. The company reported $350.9 million available on its revolving credit facility and $166.5 million available under its railcar warehouse facility. Debt-to-total-capital was 60.4%, down from 61.2%.
Fourth-Quarter Snapshot
For Q4 2011, revenue was $941.5 million, operating profit $139.0 million, net income attributable to Trinity $56.1 million, and diluted EPS $0.70. Q4 included a $17.0 million gain on disposition of flood-damaged property.
Segments and Changes Versus 2010
- Rail: Revenue was $1,274.7 million, up 144.1%; operating profit was $77.3 million versus $1.5 million. Shipments increased to approximately 14,065 railcars. Backlog expanded to $2.595 billion, or about 29,000 railcars, from $457.6 million.
- Leasing: Revenue rose 18.8% to $552.0 million and operating profit increased to $254.5 million from $207.0 million. The combined lease fleet was 68,945 cars and 99.5% utilized.
- Inland Barge: Revenue increased 29.9% to $548.5 million and operating profit rose to $106.4 million. Backlog was $494.6 million, compared with $508.0 million.
- Construction Products: Revenue increased 2.0% to $590.1 million and operating profit rose to $53.4 million. Higher highway-products sales offset lower concrete and aggregates revenue.
- Energy Equipment: Revenue increased 12.7% to $472.8 million, but operating profit fell to $8.9 million from $35.1 million; competitive pricing and product-mix transition weighed on results. Wind-tower backlog was $934.3 million, down from $1.0 billion.
Comparability is affected by consolidation of majority-owned TRIP Holdings beginning in 2010; prior periods were not restated. Trinity also adopted a railcar-sale revenue presentation policy effective December 31, 2011 and reclassified prior-period figures. The filing reports that the policy change reduced previously reported revenue by $33.6 million for 2010 and $154.3 million for 2009.
Outlook, Risks, Contingencies, and Unusual Items
- Management projected 2012 capital expenditures of approximately $400 million to $475 million, including $300 million to $350 million for net lease-fleet additions. No specific earnings or revenue guidance is provided.
- Rail demand strengthened in 2011; approximately 55% of rail backlog was expected to deliver in 2012. The GATX agreement covers 12,500 railcars over five years. Backlog is not assured revenue and can be affected by cancellations, deferrals, customer credit, and supply constraints.
- Approximately $412.5 million of wind-tower backlog is subject to litigation over a customer’s alleged breach of multi-year purchase commitments. The company filed suit in January 2012; outcome and recovery are uncertain.
- Missouri and Tennessee barge-facility floods caused production interruptions. The Missouri facility returned to pre-flood production capacity in Q4 2011. The company recorded a $17.0 million Missouri flood-related gain and incurred $8.6 million in net flood-related costs; 2011 also included $6.5 million of Tennessee flood insurance proceeds and a $0.6 million gain.
- An FRA directive requires recertification of 948 tank cars used in poison-inhalation-hazard service by September 2014. Management did not expect the additional compliance costs to be significant.
- Key risks include cyclical end markets, steel and component costs and availability, competition, railcar lease renewal and residual-value exposure, refinancing, interest rates, environmental and product liability, and operations in Mexico. The $475 million TILC warehouse facility matures in February 2013; the filing warns that failure to refinance could put pledged railcars at risk.
- TRIP Holdings’ July 2011 refinancing replaced its warehouse loan with secured notes, including $175 million of senior secured notes bearing 8.00% interest and equipment notes. These obligations are generally non-recourse to Trinity, subject to the disclosed structure; Trinity purchased $112 million of the senior notes.
Most Important Facts for Investors to Verify
- Whether the substantial rail backlog converts to deliveries and cash generation on the expected schedule, and whether customer commitments remain firm.
- The status and potential financial recovery from the wind-tower contract litigation involving $412.5 million of backlog.
- Working-capital trends, especially receivables and inventory growth, and the resulting cash conversion as production ramps.
- Debt maturities, refinancing terms, covenant headroom, and the amount of debt and assets that are non-recourse or pledged as collateral.
- Underlying segment profitability excluding flood gains, lease-fleet sale gains, and other unusual items; note that the filing reports no clear standalone adjusted earnings measure.
- Progress and cost of tank-car recertification, flood-related insurance matters, and any developments in environmental, product, or other litigation.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed disclosure controls as effective.