Trinity Industries, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are summarized separately below. Amounts are in U.S. dollars.
Business context and reporting period
Trinity is a diversified industrial company serving transportation, construction, and energy markets. Its principal businesses are railcar manufacturing and parts, railcar leasing and management, construction products, inland barges, and energy equipment, including wind towers. Demand in several businesses is cyclical; construction and some energy products are also seasonal.
FY2010 financial statements include TRIP Holdings, a railcar leasing business, following adoption of a new consolidation standard. Prior periods were not restated, limiting direct comparability. Trinity increased its ownership in TRIP Holdings to 57.1% in September 2010.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $2,189.1 million | $2,575.2 million |
| Operating profit (loss) | $304.0 million | $(30.7) million |
| Income (loss) from continuing operations | $75.6 million | $(137.5) million |
| Net income (loss) attributable to Trinity | $67.4 million | $(137.7) million |
| Diluted EPS | $0.85 | $(1.81) |
| Cash from continuing operating activities | $163.6 million | $686.2 million |
| Capital expenditures | $257.6 million | $429.2 million |
| Total debt | $2,907.7 million | $1,845.1 million |
- Revenue declined 15.0%. Operating profit recovered chiefly because 2009 included a $325.0 million Rail Group goodwill impairment charge and 2010 included TRIP Holdings’ results; lower product shipments partly offset the improvement. FY2010 operating margin was approximately 13.9%, compared with a negative margin in 2009.
- Net cash from operations fell by $522.6 million. Working-capital movements included higher receivables and raw-material inventory; cash flow also benefited from $26.9 million of tax refunds received.
- Cash and cash equivalents were $354.0 million and short-term marketable securities were $158.0 million at year-end. The company had $345.1 million available under its revolving credit facility and $394.8 million under its TILC warehouse facility.
- Of total debt, $450.3 million was recourse and $2,457.4 million non-recourse. Debt-to-total-capital was 61.2%, versus 50.5% in 2009. The balance-sheet increase primarily reflects consolidation of TRIP Holdings and its debt.
- Interest expense was $182.1 million, compared with $123.2 million in 2009. Selling, engineering, and administrative costs were $186.1 million, approximately 8.5% of revenue. The annual dividend remained $0.32 per share.
- Fourth-quarter snapshot: Revenue was $652.0 million, operating profit $81.1 million, income from continuing operations $18.6 million, and Trinity-attributable EPS $0.22. In Q4 2009, revenue was $508.2 million, operating profit $59.1 million, continuing income $14.7 million, and EPS $0.19.
Material changes versus the prior comparable period
- Rail Group revenue fell 41.7% to $522.1 million; shipments dropped 47.8% to about 4,750 railcars. Operating profit was $1.5 million, versus a $355.9 million loss in 2009, which included the goodwill impairment.
- Construction Products revenue rose 7.5% to $578.8 million and operating profit increased to $47.4 million, aided by the Quixote acquisition, stronger highway-products activity, cost reductions, and divestiture gains.
- Inland Barge revenue declined 19.9% to $422.3 million and operating profit declined to $69.0 million. Structural wind-tower weakness contributed to Energy Equipment revenue declining 17.7% to $419.6 million and operating profit falling to $35.1 million.
- Leasing Group revenue declined 5.0% to $498.1 million, while operating profit rose to $207.0 million, including TRIP Holdings for the first time. Wholly owned fleet utilization was 99.3%; TRIP Holdings utilization was 99.9%.
- Rail backlog increased to $457.6 million from $195.4 million; barge backlog rose to $508.0 million from $318.8 million. Wind-tower backlog decreased to $1.0 billion from $1.1 billion.
Outlook, commentary, risks, and unusual items
- Management said transportation markets began improving in 2010 after weakness in 2009, while wind-tower orders and deliveries remained slow and construction markets remained weak. The filing provides no formal company earnings or revenue guidance.
- Rail backlog was approximately 5,960 cars; about 85% was expected to be delivered in 2011. Most barge backlog was also expected to be delivered in 2011. About 25% of wind-tower backlog was expected in 2011, with the balance scheduled across 2012–2013. Third-party research cited estimated industry railcar deliveries of 28,000 in 2011 and rising thereafter.
- Key financing risk: TRIP Leasing had $1.0 billion outstanding under its non-recourse warehouse loan. Lenders could require repayment in four quarterly installments beginning June 2011 and ending March 2012; Trinity said TRIP Leasing was not expected to meet those payments from anticipated cash and operating flows alone and was evaluating financing alternatives. Failure to agree on a solution could impair Trinity’s investment in TRIP Holdings.
- In October, a Trinity leasing subsidiary issued $369.2 million of non-recourse secured railcar notes at 5.19%. In November, Trinity redeemed $201.5 million of 6.5% senior notes due 2014 and recorded approximately $5.9 million in related expenses. The TILC warehouse facility was renewed for two years in February 2011.
- The May 2010 Tennessee barge-facility flood caused temporary production disruption. Insurance payments totaled $20 million by year-end; Trinity recorded a $9.7 million gain on damaged property and incurred approximately $4.6 million of flood-related costs net of insurance advances. Production capacity was restored to pre-flood levels by October.
- Quixote was acquired in February 2010 for a stated total cost of $58.1 million. Steel prices ended 2010 significantly above 2009 levels; management said purchasing practices, supplier commitments, and customer price-escalation provisions mitigated much of the effect.
- Other risks include cyclical demand and potential backlog cancellations, railcar lease refinancing and remarketing, steel and specialty-component supply, environmental and product-liability exposure, interest-rate changes, and foreign operations. Environmental reserves were $10.9 million. Management reported substantial compliance with applicable requirements.
- The 2010 annual goodwill impairment test found no additional charge necessary. The 2009 Rail Group impairment was $325.0 million. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- TRIP Leasing’s repayment timetable, lender actions, and status of refinancing or other financing alternatives for its $1.0 billion warehouse loan.
- How much of the reported earnings recovery reflects underlying operating improvement versus the 2009 impairment comparison and first-time TRIP Holdings consolidation.
- Whether operating cash flow can recover relative to earnings and fund capital spending, pension contributions, dividends, and debt obligations.
- Realization and delivery timing of rail, barge, and wind-tower backlogs, including customer commitments and potential cancellations.
- Effects of higher steel and component costs, railcar demand and utilization, and continued weakness in wind towers and construction markets.