Trinity Industries, Inc. — Q3 2011 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2011. Trinity manufactures railcars, construction products, barges, and energy equipment, and provides railcar leasing and management services. Results are unaudited; management cautions that nine-month performance may not indicate full-year results because of seasonal and other factors.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $796.8 million | $540.0 million | $2,151.5 million | $1,537.1 million |
| Operating profit | $105.4 million | $91.9 million | $286.3 million | $222.8 million |
| Net income attributable to Trinity | $31.9 million | $29.7 million | $86.1 million | $50.1 million |
| Diluted EPS | $0.40 | $0.37 | $1.07 | $0.63 |
| Operating margin | 13.2% | 17.0% | 13.3% | 14.5% |
- Q3 revenue rose 47.6% and nine-month revenue rose 40.0% year over year. Growth was led by rail and inland barge shipments and higher leasing revenue.
- Q3 operating profit increased 14.7%; nine-month operating profit increased 28.5%. Operating margin narrowed, reflecting segment mix and weaker results in some businesses.
- Q3 interest expense was $47.9 million versus $45.3 million; nine-month interest expense was $136.2 million versus $136.3 million. Effective tax rates were 40.0% and 39.6% in 2011, compared with 32.5% and 34.1% in 2010, respectively.
- Operating cash flow was $20.7 million for the first nine months, down from $47.2 million, mainly because of increased receivables and inventories.
- Capital expenditures were $288.1 million, including $236.0 million for leasing-fleet additions. Investing cash outflow was $117.7 million; financing provided $15.8 million. Cash and equivalents ended at $272.8 million, down from $354.0 million at year-end 2010.
- Total debt was $2,971.9 million, versus $2,907.7 million at December 31, 2010: $456.3 million recourse and $2,515.6 million non-recourse. Restricted cash was $229.4 million. The company reported $342.4 million available on its revolving facility and $194.3 million on its TILC warehouse facility.
Material changes and segment performance
- Rail: Q3 revenue rose 145% to $320.9 million and operating profit increased to $18.2 million from $3.3 million. Nine-month shipments reached approximately 8,960 railcars, versus 2,525 a year earlier. Backlog was $2.37 billion, compared with $388.4 million, including a five-year GATX supply agreement for 12,500 cars.
- Inland Barge: Q3 revenue increased 44.8% to $143.2 million; operating profit was $26.0 million versus $22.4 million. The segment reported $8.4 million in second-quarter 2011 flood-related costs, net of estimated insurance recoveries.
- Leasing: Q3 revenue grew 25.4% to $153.1 million and operating profit rose to $64.2 million from $52.9 million. Fleet utilization was 99.4% for wholly owned subsidiaries and 99.9% for TRIP Holdings.
- Construction Products: Q3 revenue increased 2.7% to $164.8 million, but operating profit fell to $17.8 million from $20.3 million. Highway products growth was offset by weaker concrete and aggregates activity and divestitures.
- Energy Equipment: Q3 revenue rose 4.7% to $111.6 million, but the segment recorded a $1.9 million operating loss, compared with $6.0 million profit. Management cited competitive pricing and new-product manufacturing inefficiencies; wind-tower backlog was approximately $0.9 billion, down from $1.0 billion.
Outlook, risks, and unusual items
- Management reported improved 2011 railcar orders, supported by commodity transportation demand, replacement needs, and tax incentives for deliveries in 2011 and 2012. No specific earnings or revenue guidance was provided.
- On October 20, 2011, after quarter-end, Trinity amended and extended its $425 million revolving credit facility to October 20, 2016. Pricing increased; the revised covenants no longer include a minimum net-worth requirement. Trinity said it was compliant with covenants at September 30.
- In July, TRIP entities issued $1.032 billion of debt to refinance the TRIP warehouse loan. The $175 million TRIP Holdings notes bear 8% interest and mature in 2014; Trinity purchased $112 million. Separate asset-backed railcar notes mature in 2041 and are non-recourse to Trinity.
- A railworthiness directive concerns 948 tank cars used for poison inhalation hazard materials. Following reported potential leaks, cars were removed from service; the FRA approved voluntary recertification of all 948 cars, scheduled through September 2014. Related maintenance costs are expensed as incurred.
- Flood events affected barge operations. Q3 2011 operating profit included $2.5 million of insurance proceeds and a $0.6 million gain related to the 2010 Tennessee flood; the 2011 Missouri flood caused $8.4 million of net costs in the first nine months.
- Other, net expense included $2.4 million for TRIP equity repurchase agreements and higher foreign-currency losses. IRS examinations for 2004–2005 were under administrative appeal, with an effective settlement expected in Q1 or Q2 2012; the 2006–2008 examination remained ongoing. Unrecognized tax benefits were $50.7 million.
- Environmental and workplace matters carried a $7.7 million reserve. Management did not expect current litigation and claims, in aggregate, to materially affect overall financial condition, while noting that individual resolutions could affect period results.
- Key disclosed risks include cyclical demand, weather and natural disasters, customer credit and order timing, raw-material availability and cost, pricing and competition, interest rates, funding access, taxes, litigation, and environmental and regulatory matters.
Investor verification priorities
- Confirm that the exceptional rail backlog converts into deliveries and cash generation, and assess dependence on large customer agreements.
- Track working-capital absorption, especially the sharp inventory and receivables increases, against operating cash flow.
- Review total leverage, refinancing terms and costs, covenant headroom, and the distinction between recourse and asset-secured non-recourse debt.
- Monitor tank-car recertification scope, costs, service disruption, and any further regulatory developments.
- Assess whether Energy Equipment profitability recovers and whether flood-related costs and insurance proceeds recur.
- Follow tax audit outcomes and potential exposures, including the status and resolution of the open IRS examination cycles.