Trinity Industries, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts are in millions of dollars unless stated otherwise.
Business context and comparability
Trinity operates railcar manufacturing and leasing, construction products, inland barges, and energy equipment businesses. Effective January 1, 2010, a new consolidation accounting standard required Trinity to include TRIP Rail Holdings LLC (TRIP) in its consolidated results. Prior periods were not restated, so year-over-year comparisons are not fully comparable. The transition also reduced opening retained earnings by $105.4 million, net of tax, and recognized $129.9 million of noncontrolling interest.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $543.1 | $716.1 | $997.1 | $1,509.6 |
| Operating profit (loss) | $78.9 | $(240.3) | $130.9 | $(154.4) |
| Net income (loss) attributable to Trinity | $18.4 | $(209.4) | $20.4 | $(175.5) |
| Diluted earnings (loss) per share | $0.23 | $(2.75) | $0.26 | $(2.30) |
| Interest expense | $45.3 | $28.8 | $91.0 | $57.8 |
Q2 operating margin was approximately 14.5%; six-month margin was approximately 13.1%. These figures include TRIP in 2010 but not in the comparable 2009 periods. The prior-year operating loss included a $325.0 million Rail Group goodwill impairment; excluding that charge, management said operating profit declined in 2010 because of lower revenues and competitive markets.
Six-month operating cash flow was a use of $1.9 million, versus $347.0 million provided in 2009. Investing activities used $303.7 million, including $155.0 million invested in short-term securities, $118.3 million of capital expenditures, and $46.9 million for acquisitions. Financing activities used $95.9 million. Cash and cash equivalents fell to $210.3 million from $611.8 million at year-end; short-term marketable securities were $225.0 million and restricted cash was $189.4 million.
Total debt was $2,852.0 million at June 30, up from $1,845.1 million at year-end, primarily reflecting TRIP consolidation. Debt included $648.4 million of recourse debt and $2,203.6 million of non-recourse debt. Trinity had no borrowings on its $425 million revolving credit facility and reported $339.3 million available after letters of credit; its leasing warehouse facility had $337.7 million available and $137.3 million outstanding. TRIP debt is secured by TRIP assets and has recourse only to those assets.
Material changes and business trends
- Consolidated revenue declined 24.2% in Q2 and 33.9% for the first half. Management attributed the declines mainly to the economic downturn and particularly weak new railcar demand.
- Rail Group revenue fell 62.8% in Q2; shipments declined 71% to about 890 railcars. The group recorded a $2.7 million operating loss. Backlog was about 3,990 railcars, valued at $300.9 million, versus $325.9 million a year earlier.
- Construction Products revenue increased 11.5% in Q2, supported by Quixote and higher highway-products volumes; operating profit was $17.7 million. Inland Barge revenue and operating profit fell 27.2% and 60.4%, respectively. Energy Equipment revenue declined 14.2%, mainly due to lower wind-tower shipments.
- Leasing Group operating profit rose to $49.2 million in Q2, including $17.5 million from TRIP. Fleet utilization was 98.7% at wholly owned subsidiaries and 99.5% at TRIP. The group reported $1,359.9 million of future minimum rental revenues on leases.
- Interest expense increased, reflecting TRIP’s inclusion and higher debt levels. Six-month operating cash flow was also affected by higher receivables and inventories and lower operating profits compared with the prior period.
Outlook, risks, and unusual items
The filing provides no numerical earnings or revenue guidance. Management expected weakness in transportation markets to continue through the remainder of 2010, including lower railcar and barge demand. It said it was aligning capacity with demand through reduced production footprint and staffing, while some facilities remained available for restart. Management believed available capital resources were adequate to fund operations, citing cash, credit facilities, and access to capital markets.
- TRIP consolidation increased reported assets, debt, leasing revenue, and interest expense; the 2010 and 2009 periods therefore have different scopes.
- Q2 barge operations incurred about $3.4 million of costs, net of insurance advances, related to flood damage and lost productivity.
- Trinity acquired Quixote in February 2010 and recorded $4.6 million in transaction-related expenses; a separate $7.4 million second-quarter acquisition in Energy Equipment added $6.6 million of goodwill.
- Unrecognized tax benefits were $40.9 million at June 30, including interest and penalties that could affect the effective tax rate. IRS examinations and other tax reviews remain ongoing.
- Environmental and workplace liabilities included a $7.0 million reserve; management cautioned that future outcomes and costs are uncertain. Other litigation was not expected by management to materially affect overall financial condition, though individual resolutions could affect period results.
- TRIP’s warehouse loan had a $1,033.9 million balance; scheduled principal payments include $745.5 million in 2011 and $271.0 million in 2012. Extension terms were not in place at quarter-end, and excess cash flow was required to reduce principal before distributions during the specified period.
Important facts for investors to verify
- Assess year-over-year performance on a comparable basis, particularly the effect of consolidating TRIP and the prior-year $325 million impairment.
- Review Rail Group order trends, shipments, backlog conversion, and the outlook for transportation demand.
- Confirm liquidity availability and the maturity, extension, and repayment terms of TRIP and other leasing debt.
- Track operating cash flow, working-capital movements, and the use of cash for fleet investment and acquisitions.
- Monitor tax examinations, environmental matters, and the financial effects of the Tennessee flood disruption.