Trinity Industries - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (214) 631-4420

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ                     Accelerated filer o           Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso    No þ.

     At April 28, 2006 there were 52,653,351 shares of the Registrant’s common stock outstanding.

 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

Interest paid for the three months ended March 31, 2006 and 2005, net of $0.3 million in capitalized interest for 2006, was $18.3 million and $17.3 million, respectively. Taxes paid, net of refunds received, were $18.3 million and $0.9 million for the three months ended March 31, 2006 and 2005, respectively.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

     The foregoing consolidated financial statements are unaudited and have been prepared from the books and records of Trinity Industries, Inc. and subsidiaries (“Trinity” or the “Company”). In the opinion of management, all adjustments, consisting only of normal and recurring adjustments necessary for a fair presentation of the financial position of the Company as of March 31, 2006 and the results of operations for the three month periods ended March 31, 2006 and 2005, and cash flows for the three month periods ended March 31, 2006 and 2005, have been made in conformity with generally accepted accounting principles. Because of seasonal and other factors, the results of operations for the three month period ended March 31, 2006 may not be indicative of expected results of operations for the year ending December 31, 2006. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of the Company included in its Form 10-K for the year ended December 31, 2005.

     Based on a study performed by the Company in the fourth quarter of 2005, the estimated useful lives of certain railcars in our lease fleet were extended to 35 years. The impact of this change on net income for three month period ended March 31, 2006 was approximately $1.2 million, or $0.01 per diluted share.

     On January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123R “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25). In January 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental implementation guidance for SFAS No. 123R. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements.

     The Company uses the Black-Scholes-Merton (“BSM”) option pricing model to determine the fair value of stock options granted to employees, consistent with that used for pro forma disclosures under SFAS No. 123. The Company has elected the modified prospective transition method as permitted by SFAS No. 123R and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, and restricted stock units that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based compensation expense for awards granted prior to January 1, 2006 is based on the grant date fair-value as determined under the pro forma provisions of SFAS No. 123.

     As a result of the adoption of SFAS No. 123R, the Company recorded an incremental $0.5 million of stock-based compensation expense during the first quarter of 2006. The income tax benefit related to stock-based compensation expense was $5.7 million for the quarter ended March 31, 2006. In accordance with SFAS No. 123R, beginning in the first quarter of 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows. No stock-based compensation costs were capitalized as part of the cost of an asset as of March 31, 2006. As of March 31, 2006, $29.5 million of total unrecognized compensation cost related to stock options, restricted stock, and restricted stock units are expected to be recognized rateably over a weighted-average period of 4.2 years. See Note 10 for additional information on stock based compensation.

     Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The Company applied the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” as if the fair-value-based method had been applied in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

     The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the three-month period ended March 31, 2005, (in millions, except per share amounts):

     The Company reports operating results in the following business segments: (1) the Rail Group, which manufactures and sells railcars and component parts; (2) the Construction Products Group, which manufactures and sells highway products, concrete and aggregates, girders and beams used in the construction of highway and railway bridges, and weld fittings used in pressure piping systems; (3) the Inland Barge Group, which manufactures and sells barges and related products for inland waterway services; (4) the Energy Equipment Group, which manufactures and sells products for energy related businesses, including tank heads, pressure and non-pressure containers for the storage and transportation of liquefied gases and other liquid and dry products, and structural wind towers; and (5) the Railcar Leasing and Management Services Group, which provides fleet management, maintenance, and equipment under lease to customers. Finally, All Other includes the Company’s captive insurance and transportation companies, and other peripheral businesses.

     Sales and related profits from the Rail Group to Railcar Leasing and Management Services Group are recorded in the Rail Group and eliminated in consolidation. Sales of railcars from the lease fleet are included in the Railcar Leasing and Management Services Group. Sales between groups are recorded at prices reflective of current market prices charged to external customers.

     In anticipation of a future debt issuance, the Company entered into interest rate swap transactions during 2005 and 2006. These instruments, with a notional amount of $200 million, fixed the interest rate on a portion of a future debt issuance associated with a railcar leasing transaction in 2006 and settled at maturity in the first quarter of 2006. The weighted average fixed interest rate under these instruments was 4.87%. These interest rate swaps are being accounted for as cash flow hedges with changes in the fair value of the instruments of $4.5 million recorded in other comprehensive income. The future debt issuance is anticipated to close in the second quarter of 2006.

     As of March 31, 2006, the Company had $115.0 million of interest rate swaps outstanding to fix the LIBOR component of outstanding debt. No portion of these swaps was treated as ineffective during the quarter ending March 31, 2006. The amount recorded on the consolidated balance sheet for these instruments was a net asset of $1.1 million as of March 31, 2006 with a $1.0 million balance in accumulated other comprehensive income. The effect on the consolidated statement of operations for the three month period ended March 31, 2006 was income of $0.3 million.

     The Company continues to maintain a program to mitigate the impact of fluctuations in the price of natural gas and diesel fuel purchases. The intent of the program is to protect the Company’s operating profit and overall profitability from adverse price changes by entering into hedge instruments. The amount recorded on the consolidated balance sheet for these instruments was a net liability of $0.6 million as of March 31, 2006 with a $0.1 million balance in accumulated other comprehensive income. Since the majority of these instruments do not qualify for hedge accounting treatment, any change in their valuation will be recorded directly to the consolidated statement of operations. The effect on the consolidated statement of operations for the three month period ended March 31, 2006 was an expense of $1.3 million. The amounts related to these instruments recorded in the consolidated statement of operations for the three months ended March 31, 2005 as well consolidated balance sheet for the year ended December 31, 2005 were not significant.

     The following table summarizes the components of property, plant, and equipment as of March 31, 2006 and December 31, 2005.

     The Company provides for the estimated cost of product warranties at the time revenue is recognized related to products covered and assesses the adequacy of the resulting reserves on a quarterly basis. The changes in the accruals for warranties for the three months ended March 31, 2006 and 2005 are as follows:

     The following table summarizes the components of debt as of March 31, 2006 and December 31, 2005.

     At March 31, 2006 there were no borrowings under the Company’s $350 million secured revolving credit facility. Due to outstanding letters of credit, $233.3 million was available under this facility as of March 31, 2006.

     In March 2006, Trinity Industries Leasing Company (“TILC”) increased its non-recourse warehouse facility by $125 million to $500 million. This facility, established to finance railcars owned by TILC, had $347.5 million outstanding as of March 31, 2006. Advances under the facility bear interest at a defined index rate plus a margin, for an all in rate of 5.50% as of March 31, 2006. At March 31, 2006, $152.5 million was available under this facility.

     Terms and conditions of other debt are described in the Company’s Annual Report on Form 10-K.

     The remaining principal payments under existing debt agreements as of March 31, 2006, are as follows:

     The Railcar Leasing and Management Services Group (Leasing Group) provides fleet management, maintenance, and leasing services. Selected combined financial information for the Leasing Group is as follows:

     Interest expense, which is not a component of operating profit, was $6.6 million and $4.3 million for the three months ended March 31, 2006 and 2005, respectively.

     Equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured by Trinity and enters into lease contracts with third parties with terms generally ranging between one and twenty years. The Leasing Group primarily enters into operating leases. Future minimum rental revenues on leases in each year are (in millions): the remaining nine months of 2006 — $119.5; 2007 — $146.7; 2008 — $128.4; 2009 — $112.9; 2010 — $94.2 and $407.9 thereafter.

     The Leasing Group’s debt consists of both recourse and non-recourse debt. See Note 6 for maturities of the debt. Leasing Group equipment with a net book value of $752.0 million is pledged as collateral for Leasing Group debt.

     Other, net consists of other (income) expense of the following items:

     The following table summarizes the components of net periodic pension cost for the Company:

     The Company contributed $1.5 million and $1.1 million, respectively, to the Company’s defined benefit pension plans for the three month periods ended March 31, 2006 and 2005. Total contributions to the Company’s pension plans in 2006 are expected to be approximately $17.9 million.

     SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the BSM option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur, and other relevant factors including implied volatility in market traded options on the Company’s common stock. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.

     There were no options granted during the three month period ended March 31, 2006. The assumptions used for the three month period ended March 31, 2005 and the resulting estimates of weighted-average fair value per share of options granted during that period are as follows:

     A summary of stock option activity as of March 31, 2006 and changes during the three months ended March 31, 2006 is presented below:

     The total intrinsic value of options exercised during the three months ended March 31, 2006 was $19.5 million.

     Basic net income applicable to common shareholders per common share is computed by dividing net income less dividend requirements on the Series B preferred stock by the weighted average number of common shares outstanding for the period. Except when the effect would be anti-dilutive, the calculation of diluted net income applicable to common shareholders includes the impact of shares that could be issued under outstanding stock options as well as common shares that would be issued at the conversion of the Series B preferred stock. In addition, the Series B preferred stock dividends are added back to income assuming the Series B preferred stock are converted into common stock. The number of anti-dilutive stock options for the three months ended March 31, 2005 was equivalent to 1.3 million shares. There were no anti-dilutive stock options for the three months ended March 31, 2006. The Series B preferred stock was anti-dilutive for the three months ended March 31, 2005 and converted into common stock in February 2006.

     The computation of basic and diluted net income (loss) applicable to common shareholders follows:

     Barge Litigation

     The Company and its wholly owned subsidiary, Trinity Marine Products, Inc. (“TMP”), and certain material suppliers and others, are co-defendants in a lawsuit filed by Waxler Transportation. The plaintiff has petitioned the court for certification of a class which, if certified by the court, could significantly increase the total number of barges at issue. The current class representative owns four tank barges on which allegedly defective coatings were applied. These four barges were sold at an approximate average price of $1.4 million. Legal counsel for the Company and TMP has advised that factual disputes exist regarding the legal merits of class certification. Discovery is underway in Waxler but no date has been set for a class certification hearing or trial. Independent experts investigating the claims for the Company have opined that the plaintiffs’ assertion the coating applied to the barges is a food source for microbiologically influenced corrosion is without merit. The Company and TMP are defending the Waxler case vigorously.

     In a separate action, the Company and TMP filed for declaratory judgment to determine the Company’s and TMP’s obligation for coatings applied to 23 tank barges and TMP’s rights and remedies under an insurance policy applicable to the barges in which TMP was named as an additional insured. This action is pending.

     Other Litigation

     A subsidiary of the Company, Transit Mix Concrete and Materials Company, Inc. (“Transit Mix”), is named as a defendant in a case involving the death of an employee of an independent contractor who was working at a Transit Mix facility. Following a jury verdict in favor of the plaintiff, the presiding judge entered a final judgment that, together with fees, costs, and judgment interest, now totals $43.4 million. This case has been appealed by Transit Mix and its insurers. Management believes liability in this case, if any, exceeding $3.0 million, will be covered by insurance.

     On March 31, 2006, following the issuance of a “Presentment” by an investigating Grand Jury in Harrisburg, Pennsylvania, the Company was charged in an eleven count Complaint with eight misdemeanors and three felony violations under Pennsylvania’s Solid Waste Management Act, 35 P.S. Secs. 6018.401(a) and 6018.610 (1), (2). (4), (6), and (9). The allegations relate to the Company’s former operations in Greenville, Pennsylvania and primarily stem from the movement of soil on the property in 1994 as part of an improvement project. The Company discontinued its Greenville operations in 2000. A Trinity employee was also named in a separate presentment alleging similar charges. No specific monetary claims have been made and management believes the Company has defenses to the charges alleged in the Complaint.

     The Company is also involved in other claims and lawsuits incidental to its business. Based on information currently available, it is management’s opinion that the ultimate outcome of all current litigation and other claims, including settlements, in the aggregate will not have a material adverse effect on the Company’s overall financial condition for purposes of financial reporting. However, resolution of certain claims or lawsuits by settlement or otherwise could have a significant impact on the operating results of the reporting period in which such resolution occurs.

     The Company is subject to federal, state, local, and foreign laws and regulations relating to the environment and to the workplace. The Company believes that it is currently in substantial compliance with such laws and regulations.

     The Company is involved in various proceedings relating to environmental matters. The Company has reserved $11.3 million to cover probable and estimable liabilities of the Company with respect to investigation, assessment, and remedial response to such matters, taking into account currently available information and the Company’s contractual rights to indemnification and other recourse to third parties. However, estimates of future remedial response costs are necessarily imprecise. Accordingly, there can be no assurance that the Company will not become involved in future environmental litigation or other proceedings or, if the Company were found to be responsible or liable in any such litigation or proceeding, that such costs would not be material to the Company.

     On March 10, 2004, $300 million of Senior Notes due 2014 were issued by Trinity Industries, Inc. (Parent) which includes the corporate operations and certain operations of the Construction Products Group and the Industrial Products Group. The Senior Notes are fully and unconditionally and jointly and severally guaranteed by certain of Trinity’s wholly owned subsidiaries: Transit Mix Concrete & Material Company, Trinity Industries Leasing Company, Trinity Marine Products, Inc., Trinity Rail Group, LLC, Trinity Freight Car North America (formerly known as Thrall Trinity Freight Car, Inc.), Trinity Tank Car, Inc., and Trinity Parts and Components Inc. (formerly known as Trinity Rail Components and Repair, Inc.). No other subsidiaries guarantee the Senior Notes. As of March 31, 2006, assets held by the non-guarantor subsidiaries include $83.8 million of restricted assets that are not available for distribution to the Parent, $463.0 million of assets securing certain debt held by the non-guarantor subsidiaries, and $297.2 million of assets located in foreign locations.