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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________.
COMMISSION FILE NUMBER 1-6903
TRINITY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-0225040
(State of Incorporation) (I.R.S. Employer Identification No.)
2525 STEMMONS FREEWAY
DALLAS, TEXAS 75207-2401
(Address of principal executive offices) (Zip Code)
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 [X] NO [ ].
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [X] NO [ ]
AT OCTOBER 31, 2003 THERE WERE 46,348,566 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
TRINITY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
CAPTION PAGE
-------------------------------------------------------------- ----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements.......................................... 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 22
Item 4 Controls and Procedures....................................... 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................. 23
Item 6 Exhibits and Reports on Form 8-K.............................. 24
SIGNATURES...................................................................... 25
CERTIFICATIONS.................................................................. 27
2
ITEM 1. FINANCIAL STATEMENTS
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
---------- ----------
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ 363.4 $ 387.6
Operating costs:
Cost of revenues.................................. 311.5 334.8
Selling, engineering and administrative
expenses........................................ 41.8 39.1
-------- --------
353.3 373.9
-------- --------
Operating profit.................................... 10.1 13.7
Other (income) expense:
Interest income................................... (0.1) (0.3)
Interest expense.................................. 8.4 9.1
Other, net........................................ (0.2) (3.4)
-------- --------
8.1 5.4
-------- --------
Income before income taxes.......................... 2.0 8.3
Provision (benefit) for income taxes:
Current........................................... (18.5) (1.5)
Deferred.......................................... 18.7 3.6
-------- --------
0.2 2.1
-------- --------
Net income.......................................... 1.8 6.2
Dividends on Series B preferred stock............... (0.8) --
-------- --------
Net income applicable to common shareholders........ $ 1.0 $ 6.2
======== ========
Net income per common share:
Basic............................................. $ 0.02 $ 0.14
======== ========
Diluted........................................... $ 0.02 $ 0.14
======== ========
Weighted average number of shares outstanding:
Basic............................................. 45.6 45.5
Diluted........................................... 46.2 45.6
See accompanying notes to consolidated financial statements.
3
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $1,018.3 $1,137.9
Operating costs:
Cost of revenues.................................. 892.1 1,004.9
Selling, engineering and administrative
expenses........................................ 117.1 120.3
-------- --------
1,009.2 1,125.2
-------- --------
Operating profit.................................... 9.1 12.7
Other (income) expense:
Interest income................................... (0.4) (0.9)
Interest expense.................................. 26.3 26.4
Other, net........................................ (3.6) (2.0)
-------- --------
22.3 23.5
-------- --------
Loss before income taxes............................ (13.2) (10.8)
Provision (benefit) for income taxes:
Current........................................... (30.6) (42.8)
Deferred.......................................... 26.6 40.1
-------- --------
(4.0) (2.7)
-------- --------
Net loss............................................ (9.2) (8.1)
Dividends on Series B preferred stock............... (0.8) --
-------- --------
Net loss applicable to common shareholders.......... $ (10.0) $ (8.1)
======== ========
Net loss per common share:
Basic............................................. $ (0.22) $ (0.18)
======== ========
Diluted........................................... $ (0.22) $ (0.18)
======== ========
Weighted average number of shares outstanding:
Basic............................................. 45.6 44.5
Diluted........................................... 45.6 44.5
See accompanying notes to consolidated financial statements.
4
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
(IN MILLIONS)
ASSETS
Cash and cash equivalents........................... $ 13.6 $ 19.1
Receivables, net of allowance....................... 211.3 168.2
Income tax receivable............................... 26.3 50.0
Inventories:
Raw materials and supplies...................... 132.7 115.9
Work in process................................. 54.5 42.3
Finished goods.................................. 38.4 55.1
---------- ---------
225.6 213.3
Property, plant and equipment, at cost.............. 1,756.7 1,551.8
Less accumulated depreciation....................... (685.3) (604.4)
---------- ---------
1,071.4 947.4
Goodwill............................................ 412.9 411.3
Other assets........................................ 123.9 133.6
---------- ---------
$ 2,085.0 $ 1,942.9
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............ $ 414.6 $ 396.0
Debt................................................ 537.7 488.9
Other liabilities................................... 82.6 56.4
---------- ---------
1,034.9 941.3
Series B redeemable convertible preferred
stock, no par value, $0.1 liquidation value........ 57.7 --
Stockholders' equity:
Preferred stock - 1.5 shares authorized and
unissued........................................ -- --
Common stock -- shares issued and outstanding at
September 30, 2003 - 50.9; at December 31, 2002
- 50.9.......................................... 50.9 50.9
Capital in excess of par value.................... 436.4 442.1
Retained earnings................................. 654.2 672.6
Accumulated other comprehensive loss.............. (33.7) (34.9)
Treasury stock (4.6 shares at September 30, 2003
and 5.0 shares at December 31, 2002)............. (115.4) (129.1)
---------- ---------
992.4 1,001.6
---------- ---------
$ 2,085.0 $ 1,942.9
========== =========
See accompanying notes to consolidated financial statements.
5
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- ---------
(UNAUDITED)
(IN MILLIONS)
Operating activities:
Net loss.................................................................... $ (9.2) $ (8.1)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................................... 64.7 67.8
Deferred income taxes................................................... 26.6 40.1
Gain on sale of property, plant, equipment and
other assets........................................................ (6.0) (4.7)
Other.................................................................. 5.2 2.9
Changes in assets and liabilities:
(Increase) decrease in receivables.............................. (43.1) 2.1
Decrease in tax receivable...................................... 23.7 1.7
(Increase) decrease in inventories.............................. (12.3) 31.5
Decrease (increase) in other assets............................. 9.4 (33.5)
Increase (decrease) in accounts payable and accrued liabilities. 21.2 (47.7)
(Decrease) increase in other liabilities........................ (12.1) 6.0
-------- ---------
Total adjustments.............................................. 77.3 66.2
-------- ---------
Net cash provided by operating activities................................... 68.1 58.1
-------- ---------
Investing activities:
Proceeds from sale of property, plant, equipment and other assets........... 33.6 13.9
Capital expenditures - lease subsidiary..................................... (188.5) (97.7)
Capital expenditures - other................................................ (16.7) (25.5)
Payment for purchase of acquisitions, net of cash acquired.................. -- (1.4)
-------- ---------
Net cash required by investing activities................................... (171.6) (110.7)
-------- ---------
Financing activities:
Issuance of common stock.................................................... -- 31.2
Issuance of redeemable preferred stock....................................... 57.6 --
Payments to retire debt..................................................... (145.6) (370.2)
Proceeds from issuance of debt.............................................. 194.4 397.9
Dividends paid.............................................................. (8.4) (13.6)
-------- ---------
Net cash provided by financing activities................................... 98.0 45.3
-------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (5.5) (7.3)
Cash and cash equivalents at beginning of period.............................. 19.1 22.2
-------- ---------
Cash and cash equivalents at end of period.................................... $ 13.6 $ 14.9
======== =========
Interest paid for the nine months ended September 30, 2003 and 2002 was
$26.3 and $21.8, respectively. Taxes received, net of payments made, for the
nine months ended September 30, 2003 and 2002 were $43.5 and $6.8, respectively.
See accompanying notes to consolidated financial statements.
6
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON COMMON CAPITAL ACCUMULATED
SHARES STOCK IN EXCESS OTHER TREASURY TOTAL
(100,000,000 $1.00 PAR OF PAR RETAINED COMPREHENSIVE TREASURY STOCK AT STOCKHOLDERS'
AUTHORIZED) VALUE VALUE EARNINGS LOSS SHARES COST EQUITY
---------- ----- ------ -------- ---- ------ ---- ------
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
Balance at December 31,
2002........................ 50,940,351 $ 50.9 $442.1 $ 672.6 $ (34.9) (5,040,709) $(129.1) $ 1,001.6
Net loss.................... -- -- -- (9.2) -- -- -- (9.2)
Currency translation
adjustments............... -- -- -- -- 1.1 -- -- 1.1
Unrealized gain on
derivative financial
instruments............... -- -- -- -- .1 -- -- 0.1
---------
Comprehensive net loss...... (8.0)
Cash dividends ($0.18
per common share)......... -- -- -- (8.4) -- -- -- (8.4)
Dividend on Series B
preferred stock......... -- -- -- (0.8) -- -- -- (0.8)
Other....................... -- -- (5.7) -- -- 447,160 13.7 8.0
---------- ------ ------ ------- -------- ---------- ------- ---------
Balance at September 30, 2003. 50,940,351 $ 50.9 $436.4 $ 654.2 $ (33.7) (4,593,549) $(115.4) $ 992.4
========== ====== ======= ======= ======== ========== ======= =========
See accompanying notes to consolidated financial statements.
7
TRINITY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 1. BASIS OF PRESENTATION
The foregoing consolidated financial statements are unaudited and have
been prepared from the books and records of Trinity Industries, Inc. ("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 September 30, 2003 and the results
of operations for the three-month and nine-month periods ended September 30,
2003 and 2002, and cash-flows for the nine month periods ended September 30,
2003 and 2002, in conformity with generally accepted accounting principles, have
been made. Because of seasonal and other factors, the results of operations for
the three-month and nine-month periods ended September 30, 2003 may not be
indicative of expected results of operations for the year ending December 31,
2003. 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, 2002.
NOTE 2. UNUSUAL CHARGES
Restructuring reserve activity for the nine months ended September 30,
2003 was:
RESERVES RESERVES
DECEMBER 31, RECLASSIFI- SEPTEMBER 30,
2002 PAYMENTS CATIONS 2003
------------ -------- ----------- -------------
Property, plant & equipment
-- shut down costs ..................... $ 4.6 $ 0.3 $ (4.3) $ --
Environmental liabilities................. 10.6 0.5 (10.1) --
Severance costs........................... 0.6 0.4 (0.2) --
Adverse jury verdict...................... 14.8 0.1 (14.7) --
Other..................................... 0.4 -- (0.4) --
------- ------ ------- ------
$ 31.0 $ 1.3 $ (29.7) $ --
======= ====== ======= ======
The lawsuit representing the adverse jury verdict was resolved during the
three-month period ended June 30, 2003. This amount was paid in July 2003 and
the balance of the restructuring reserve was reclassified to the Company's
litigation reserves. The restructuring reserves related to environmental
liabilities were reclassified to the Company's environmental reserves. Amounts
for shut down costs, severance costs, and other have been reclassified to other
accrued liabilities. None of the reclassifications impacted operating profit.
NOTE 3. SEGMENT INFORMATION
The Company reports operating results in the following business
segments: (1) the Trinity Rail Group, which manufactures and sells railcars and
component parts and provides railcar repair services; (2) the Constructions
Products Group, which manufactures and sells highway guardrail and safety
products, concrete and aggregate, 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 Industrial Products Group, which
manufactures and sells container heads and pressure and non-pressure containers
for the storage and transportation of liquefied gases and other liquid and dry
products; and (5) the Trinity Railcar Leasing and Management Services Group,
which provides services such as fleet management and leasing. Finally, All Other
includes the Company's captive insurance and transportation companies,
structural towers, and other peripheral businesses.
Sales and related profits from Trinity Rail Group to Trinity Railcar
Leasing and Management Services Group are recorded in Trinity Rail Group and
eliminated in consolidation. Sales of railcars from the lease fleet are included
in the Trinity Railcar Leasing and Management Services Group segment. Sales
among groups are recorded at prices comparable to those charged to external
customers.
8
THREE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES OPERATING
--------------------------------------- PROFIT
OUTSIDE INTERSEGMENT TOTAL (LOSS)
--------- ------------ --------- --------
Trinity Rail Group......................... $ 126.4 $ 63.8 $ 190.2 $ 2.9
Construction Products Group................ 133.3 0.4 133.7 11.4
Inland Barge Group......................... 42.5 -- 42.5 0.3
Industrial Products Group.................. 30.1 1.4 31.5 2.7
Trinity Railcar Leasing and
Management Services Group................ 29.9 -- 29.9 9.3
All Other.................................. 1.2 6.7 7.9 (2.0)
Eliminations & Corporate
Items.................................... -- (72.3) (72.3) (14.5)
--------- -------- --------- --------
Consolidated Total......................... $ 363.4 $ -- $ 363.4 $ 10.1
========= ======== ========= ========
THREE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES OPERATING
--------------------------------------- PROFIT
OUTSIDE INTERSEGMENT TOTAL (LOSS)
--------- ------------ --------- ---------
Trinity Rail Group......................... $ 123.2 $ 34.7 $ 157.9 $ (6.1)
Construction Products Group................ 141.4 0.1 141.5 17.2
Inland Barge Group......................... 47.7 -- 47.7 1.3
Industrial Products Group.................. 40.0 1.0 41.0 3.0
Trinity Railcar Leasing and Management
Services Group........................... 28.1 -- 28.1 7.2
All Other.................................. 7.2 7.3 14.5 (1.1)
Eliminations & Corporate Items............. -- (43.1) (43.1) (7.8)
-------- -------- -------- --------
Consolidated Total......................... $ 387.6 $ -- $ 387.6 $ 13.7
======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES OPERATING
--------------------------------------- PROFIT
OUTSIDE INTERSEGMENT TOTAL (LOSS)
--------- ------------ --------- ---------
Trinity Rail Group......................... $ 317.2 $ 176.8 $ 494.0 $ (13.5)
Construction Products Group................ 368.9 0.6 369.5 29.8
Inland Barge Group......................... 129.8 -- 129.8 0.5
Industrial Products Group.................. 85.5 3.0 88.5 4.3
Trinity Railcar Leasing and
Management Services Group................ 112.7 -- 112.7 30.5
All Other.................................. 4.2 18.7 22.9 (5.0)
Eliminations & Corporate
Items.................................... -- (199.1) (199.1) (37.5)
--------- -------- --------- --------
Consolidated Total......................... $ 1,018.3 $ -- $ 1,018.3 $ 9.1
========= ======== ========= ========
9
NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES OPERATING
-------------------------------------- PROFIT
OUTSIDE INTERSEGMENT TOTAL (LOSS)
-------- ------------ --------- ---------
Trinity Rail Group......................... $ 374.9 $ 93.5 $ 468.4 $ (31.1)
Construction Products Group................ 400.0 0.8 400.8 41.9
Inland Barge Group......................... 166.8 -- 166.8 4.3
Industrial Products Group.................. 103.1 2.1 105.2 2.3
Trinity Railcar Leasing and Management
Services Group........................... 81.7 -- 81.7 21.4
All Other.................................. 11.4 20.5 31.9 (4.9)
Eliminations & Corporate Items............. -- (116.9) (116.9) (21.2)
-------- -------- --------- --------
Consolidated Total......................... $1,137.9 $ -- $ 1,137.9 $ 12.7
======== ======== ========= ========
NOTE 4. STOCK BASED COMPENSATION
The Company has elected to apply the accounting provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and its interpretations and, accordingly, no
compensation expense has been recorded for the stock options. The effect of
computing compensation expense in accordance with Statement of Accounting
Standards No. 123, "Accounting for Stock Based Compensation," and the weighted
average fair value of options granted during the three and nine months ended
September 30, 2003 and 2002 using the Black-Scholes option pricing method are
shown in the accompanying table.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Pro forma
Net income (loss) applicable to common
shareholders, as reported.............. $ 1.0 $ 6.2 $ (10.0) $ (8.1)
Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related income
tax effects......................... (0.9) (1.3) (2.9) (3.6)
------- ------- -------- --------
Pro forma net income (loss) applicable
to common shareholders ................ $ 0.1 $ 4.9 $ (12.9) $ (11.7)
======= ======= ======== ========
Pro forma diluted share ............... $ 0.00 $ 0.11 $ (0.28) $ (0.26)
======= ======= ======== ========
Net income (loss) applicable to common
shareholders per diluted share - as
reported............................... $ 0.02 $ 0.14 $ (0.22) $ (0.18)
======= ======= ======== ========
10
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Manufacturing/Corporate:
Property, plant and equipment....... $ 944.7 $ 901.8
Accumulated depreciation............ (560.7) (493.6)
---------- ----------
384.0 408.2
---------- ----------
Leasing:
Equipment on lease.................. 812.0 650.0
Accumulated depreciation............ (124.6) (110.8)
---------- ----------
687.4 539.2
---------- ----------
$ 1,071.4 $ 947.4
========== ==========
NOTE 6. WARRANTIES
The Company provides for the estimated cost of product warranties at
the time revenue is recognized and assesses the adequacy of the resulting
reserves on a quarterly basis. The change in the accruals for warranties for the
three months and the nine months ended September 30, 2003 and 2002 was as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Beginning balance............. $ 21.5 $ 15.8 $ 20.8 $ 18.1
Additions..................... 2.6 8.2 9.6 16.6
Reductions.................... (3.4) (3.6) (9.7) (14.3)
-------- -------- -------- --------
Ending balance................ $ 20.7 $ 20.4 $ 20.7 $ 20.4
======== ======== ======== ========
NOTE 7. DEBT
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Corporate/Manufacturing:
Revolving commitment................... $ 20.0 $ 48.0
Term commitment........................ 123.1 149.3
Other.................................. 5.2 6.4
-------- --------
148.3 203.7
-------- --------
Leasing:
Equipment trust certificates........... 170.0 171.4
Warehouse facility..................... 219.4 113.8
-------- --------
389.4 285.2
-------- --------
$ 537.7 $ 488.9
======== ========
In June 2002, the Company completed a secured credit agreement for $425
million. The agreement includes a $275 million 3-year revolving commitment and a
$150 million 5-year term commitment. The agreement calls for quarterly payments
of principal on the term debt in the amount of $375 thousand beginning September
30, 2002 through June 30, 2006 and quarterly payments of $36.0 million beginning
on September 30, 2006 through the maturity date. Amounts borrowed under the
revolving commitment bear interest at LIBOR plus 2.25% or Prime rate plus 0.25%
(4.25% at September 30, 2003). Amounts borrowed under the term commitment bear
interest at LIBOR plus 3.25% (4.45% at September 30, 2003). The Company's
accounts receivable and inventory and a portion of its property, plant and
equipment secure the agreement. During September 2003, the Company modified the
terms of the debt covenants under the agreement to separate the Company's
leasing and manufacturing operations for debt compliance purposes and paid off
$25.0 million of the 5-year term commitment. The agreement limits the amount of
capital expenditures related to the Company's leasing business, requires
maintenance of ratios related to interest coverage for both the leasing and
manufacturing operations, leverage, asset coverage and minimum net worth, and
restricts the amount of dividend payments. At September 30, 2003,
11
$143.1 million was borrowed under this agreement. At September 30, 2003, the
most restrictive of the debt covenants based on trailing twelve month
calculations as defined by the debt agreements allows for approximately $65.4
million additional principal and approximately $6.8 million and $9.0 million
additional annual interest expense for leasing and manufacturing operations,
respectively.
In June 2002 Trinity Industries Leasing Company ("TILC") through a
newly formed, wholly owned and consolidated business trust entered into a $200
million non-recourse warehouse facility to finance or refinance railcars
acquired or owned by TILC. Specific railcars and the underlying leases secure
the facility. Advances under the facility may not exceed 75% of the fair market
value of the eligible railcars securing the facility as defined by the
agreement. Advances under the facility bear interest at LIBOR plus 1.375%
(2.495% at September 30, 2003). In August 2003, TILC expanded this facility to
$300 million and extended the term through August 2004. At September 30, 2003,
$80.6 million was available under this facility. The Company is currently in
discussions with long-term lenders to provide permanent financing for the amount
currently outstanding under the facility, which is expected to be completed
during the fourth quarter of 2003.
Terms and conditions of other debt are described in the Annual Report.
The remaining principal payments under the debt agreements as of
September 30, 2003 are as follows: the remaining three months of 2003 - $2.5;
2004 - $6.7; 2005 - $203.8; 2006 - $154.2; 2007 - $90.6; and $79.9 thereafter.
NOTE 8. SALE/LEASEBACK FINANCING
During the nine months ended December 31, 2001, the Company completed a
lease arrangement for $199.0 million in railcars. Trinity sold the railcars to
an independent trust. The trust financed the purchase of the railcars with
$151.3 million in debt and $47.7 million in equity provided by large independent
financial institutions. The equity investor in the trust has the risk of
ownership of the assets in the trust except for the collateral pledged to
support the operating lease. Trinity has made no guarantees with respect to
amounts at risk. An independent trustee for the trust has the authority for the
appointment of the railcar fleet manager.
Trinity, through a newly formed, wholly owned qualified subsidiary,
leased railcars from the trust and subleased the railcars to independent third
party customers. This subsidiary had a net worth as of September 30, 2003 of $
47.3 including cash of $22.8 million, of which $6.5 million was collateral for
the equity investor, and company-owned railcars of $23.1 million. The cash
(other than the $6.5 million) and railcars are pledged to secure the lease
obligation to the trust and are included in the consolidated financial
statements of the Company. Trinity does not guarantee the performance of the
subsidiary's lease obligation.
Under the terms of the operating lease agreement, Trinity has the
option to purchase the railcars from the trust in 2017 at a predetermined, fixed
price. Trinity also has an option to purchase the railcars at the end of the
lease agreement in 2023 at the then fair market value of the railcars as
determined by a third party, independent appraisal. At the expiration of the
operating lease agreement, Trinity has no further obligation thereunder.
Trinity, under the terms of a servicing and remarketing agreement, will
endeavor, consistent with customary commercial practice as would be used by a
prudent person, to maintain railcars under lease for the benefit of the trust.
Trinity also receives management fees under the terms of the agreement. Certain
ratios must be maintained by the subsidiary in order for excess cash flow, as
defined, from the lease to third parties, to be available to Trinity.
The sale of the railcars by Trinity to the trust was accounted for as a
sale/leaseback transaction. No revenue or profit was recorded at the time of the
transaction and all profit was deferred and is being amortized over the term of
the operating lease. Neither the assets, the liabilities, nor equity of the
trust are reflected on the balance sheet of Trinity.
NOTE 9. DEPOSIT AGREEMENT
The Company has a deposit agreement with Altos Hornos de Mexico, SA de
C.V. ("AHMSA") that provides for funds to be deposited with AHMSA that are then
used along with other funds from the Company to purchase steel from AHMSA. As of
September 30, 2003, total funds on deposit including interest due amounted to
approximately $25.0 million. Since May 1999 AHMSA has been operating under a
judicial declaration of suspension of payments, which under applicable Mexican
law, allows companies in Mexico to (1) seek a debt restructuring agreement with
their creditors in an orderly fashion; (2) continue their operations; and (3)
avoid declaration of bankruptcy and liquidation of assets. The Company's
understanding of Mexican law is that all funds on deposit are required to be
returned to the Company regardless of whether the supplier is able to operate
under the declaration of suspension of payments. Trinity reduced $3.5 of this
deposit through inventory purchases in the quarter ended September 30, 2003. The
timing of future reductions of the deposit balance will depend on the rate of
future steel purchases.
12
NOTE 10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 2003 the Company issued 600 shares of Series B Redeemable
Convertible Preferred Stock (Series B preferred stock). Each share of Series B
preferred stock has an initial liquidation value of $100,000 per share. The
liquidation value, plus accrued but unpaid dividends, is payable on June 25,
2008, the mandatory redemption date, at the option of the Company in cash or in
shares of common stock valued at 90% of the then current market price of the
Company's common stock. Each share of Series B preferred stock may be converted
at any time at the option of the holder into shares of the Company's common
stock, based on the initial conversion price of $22.46 per share, which is
equivalent to 4,452 shares of common stock for each $100,000 initial liquidation
preference. Holders of the Series B preferred stock are entitled to receive
dividends payable semi-annually, on July 1 and January 1 of each year, beginning
January 1, 2004 at an annual rate of 4.5% of the liquidation preference. The
Company may, at its option, pay dividends either in cash or in shares of the
Company's common stock at the then current market price. The holders of shares
of Series B preferred stock are entitled to vote with the holders of the common
stock on an as-if converted basis on all matters brought before the
stockholders. The Series B preferred stock has been classified outside the
Stockholders' Equity section because there is not absolute assurance that the
number of authorized and unissued common shares would be adequate to redeem the
Series B preferred stock. At September 30, 2003, the number of shares authorized
and unissued would be adequate to redeem the Series B preferred stock as long as
the market value of the Company's common stock was at least $1.37 per share.
NOTE 11. OTHER, NET
Other (income) expense consists of the following items:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Gain on sale of property, plant
and equipment .............. $ (1.6) $ (4.3) $ (6.0) $ (4.7)
Foreign exchange
transactions ................ 0.8 0.4 0.8 1.4
Loss on equity investments .... 0.6 0.5 1.6 1.5
Other ......................... -- -- -- (0.2)
------ ------ ------ ------
Other, net .................. $ (0.2) $ (3.4) $ (3.6) $ (2.0)
====== ====== ====== ======
NOTE 12. CONTINGENCIES
The Company and its wholly owned subsidiary, Trinity Marine Products,
Inc. ("TMP"), and certain material suppliers and others, have been named as
co-defendants in six separate lawsuits filed by multiple plaintiffs on various
dates. In October 2003 one of these six cases was dismissed as a result of a
settlement between the Company and TMP and ACF Barge Acceptance I, LLC ("ACF").
The settlement involved the purchase of eleven barges which are leased to a
barge operator under long-term lease agreements. The Company's Leasing
Subsidiary purchased the barges for $19.1 million and succeeded ACF as lessor.
The estimated fair value of the operating leases and residual value of the
barges approximated the purchase price. In one of the remaining five cases the
plaintiff has petitioned the court for certification of a class, which, if
certified by the court, could potentially increase the total number of barges
involved in the five cases. Absent certification of a class in that case, the
remaining five separate suits involve 37 tank barges sold at an average prices
of approximately $1.4 million, and 140 hopper barges sold at an average price of
approximately $280,000. Each of the five remaining cases set forth allegations
pertaining to damages arising from alleged defects in coating materials supplied
by a co-defendant and coatings application workmanship by TMP. The plaintiffs
seek both compensatory and punitive damages and/or recision of the barge
purchase contracts. Independent experts investigating the claims on behalf of
the Company and TMP have expressed the opinion that technical arguments
presented by the plaintiffs in this litigation are without merit. As of
September 30, 2003, two of the plaintiffs owe TMP approximately $11.4 million,
of which $7.9 million is past due, related to contracts for barges not involved
in the litigation. TMP has filed suit for collection of the past due amount.
A subsidiary of the Company, Transit Mix Concrete and Materials
Company, Inc. ("Transit Mix"), was named as a defendant in a case involving the
death of an employee of an independent contractor who died following an accident
that occurred while the decedent was working at a Company owned facility.
Following a jury verdict in the favor of the plaintiff, the presiding judge
entered a final judgment in the amount of $33.9 million (inclusive of fees,
costs, and judgment interest). This case has been appealed by Transit Mix
13
and its insurers. Management believes liability in this case, if any, exceeding
$3.0 million, will be covered by insurance.
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 provided reserves amounting to $19.3
million to cover probable and estimable liabilities of the Company with respect
to such investigations and cleanup activities, taking into account currently
available information and the Company's contractual rights of indemnification.
However, estimates of future response costs are necessarily imprecise.
Accordingly, there can be no assurance that the Company will not become involved
in future litigation or other proceedings or, if the Company were found to be
responsible or liable in any litigation or proceeding, that such costs would not
be material to the Company.
NOTE 13. NET INCOME (LOSS) PER SHARE
Diluted net income per common share is based on the weighted average
shares outstanding plus the dilutive impact of stock options and Series B
preferred stock. Basic net income per common share is based on the weighted
average number of common shares outstanding for the period. The numerator for
basic net income (loss) per common share is net income (loss) adjusted for
dividends on the Series B preferred stock in 2003 and net income (loss) in 2002.
The numerator for diluted net income (loss) per common share is net income
(loss), adjusted for dividends on the Series B preferred stock in 2003. The
difference between the denominator in the basic calculation and the denominator
in the diluted calculation for the three months ended September 30, 2003 and
September 30, 2002 was attributable to the effect of employee stock options.
Employee stock options were antidilutive for all other periods presented. The
Series B preferred stock was antidilutive for all periods presented and
therefore not considered in the diluted net income (loss) per common share
calculation.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
During January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities" (FIN 46). The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003 and apply to existing variable interest entities in the
first fiscal year or interim periods beginning after June 15, 2003. In October
2003, the FASB agreed to a broad-based deferral of the effective date for public
companies until the end of the periods ending after December 15, 2003. Until
now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. A company that consolidates a variable interest entity
is called the primary beneficiary of that entity. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company is
not the primary beneficiary for any variable interest entities.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). SFAS 150 establishes standards for how a company classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that a company
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first period beginning after June 15, 2003. The provisions of
this statement did not have an impact on the Company's statement of financial
position.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and related notes thereto appearing
elsewhere in this document.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2002 -- RESULTS OF OPERATIONS
Revenues were $363.4 million for the three months ended September 30,
2003 compared to $387.6 million for the three months ended September 30, 2002.
The decrease in revenues was primarily due to lower demand for Highway Safety
and Fittings products, reduced production in the Structural Bridge Group, and
reduced Hopper Barge volume, offset by increased railcar sales to third parties
and leasing revenues due to the growth of the lease fleet.
The following table reconciles the revenue amounts discussed under each
segment with the consolidated total revenues shown in the Selected Financial
Data (in millions).
THREE MONTHS ENDED SEPTEMBER 30, 2003 THREE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------- -------------------------------------
REVENUES REVENUES
------------------------------------- -------------------------------------
OUTSIDE INTERSEGMENT TOTAL OUTSIDE INTERSEGMENT TOTAL
------- ------------ ------- -------- ------------ -------
Trinity Rail Group .............. $ 126.4 $ 63.8 $ 190.2 $ 123.2 $ 34.7 $ 157.9
Construction Products Group ..... 133.3 0.4 133.7 141.4 0.1 141.5
Inland Barge Group .............. 42.5 -- 42.5 47.7 -- 47.7
Industrial Products Group ....... 30.1 1.4 31.5 40.0 1.0 41.0
Trinity Railcar Leasing and
Management Services Group ..... 29.9 -- 29.9 28.1 -- 28.1
All Other ....................... 1.2 6.7 7.9 7.2 7.3 14.5
Eliminations & Corporate Items... -- (72.3) (72.3) -- (43.1) (43.1)
------- ------- ------- ------- ------- -------
Consolidated Total .............. $ 363.4 $ -- $ 363.4 $ 387.6 $ -- $ 387.6
======= ======= ======= ======= ======= =======
Operating profit decreased $3.6 million to $10.1 million for the three
months ended September 30, 2003 compared to $13.7 million for the same period in
2002. The decline in operating profit was due to reduced volumes and competitive
pricing pressures offset by improved efficiencies from an increase in railcar
sales and lease operations. During the year ended December 31, 2002, the Company
signed a managed services contract to implement a new financial system and to
outsource certain accounting and processing activities. While expected to
produce overall savings in future years, this project is expected to result in
incremental selling, engineering, and administrative costs in 2003 of
approximately $9.6 million or $0.15 cents per share. During the quarter ended
September 30, 2003 these incremental costs were approximately $2.8 million or
$0.04 per share.
Interest expense decreased $0.7 million to $8.4 million for the three
months ended September 30, 2003 compared to $9.1 million for the same period in
2002, a decrease of 7.7%. The decrease was primarily attributable to replacing
higher cost term commitment debt with lower cost warehouse debt offset by higher
average debt levels.
Other, net was $0.2 million of income for the three months ended
September 30, 2003 compared to income of $3.4 million for the comparable period
in 2002. The decrease was primarily due to a smaller amount of gains on sale of
property, plant, and equipment and an increase in foreign currency losses in
2003.
The current year effective tax rate of 30.2% was less than the
statutory rate of 35% due to the absence of tax benefits on certain foreign
losses.
Net income for the three months ended September 30, 2003 was $1.8
million compared to net income of $6.2 million for the same period in 2002. Net
income applicable to common shares for the three months ended September 30, 2003
was $1.0 million or $0.02 per diluted share compared to $6.2 million or $0.14
per diluted share, for the same period in 2002. The difference between net
income and net income applicable to common shares for the three months ended
September 30, 2003 is the $0.8 million in accrued dividends and accreted
offering costs on the Series B preferred stock.
15
TRINITY RAIL GROUP
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- --------
(IN MILLIONS)
Revenues............................................ $ 190.2 $ 157.9
Operating profit (loss)............................. $ 2.9 $ (6.1)
Operating profit (loss) margin...................... 1.5% (3.9)%
Revenues for the North American operations were $156.6 million for the
three months ended September 30, 2003, a 40.7% increase over the same period
last year. Railcars shipped in North America increased 88.7% to approximately
2,200 cars during the three months ended September 30, 2003 compared to the same
period in 2002. The increase in revenues was due to an increase in cars sold as
well as an increase in the components business, offset by a change in product
mix for the railcars.
Revenues for the European operations were $33.6 million for the three
months ended September 30, 2003, a 27.9% decrease from the same period last
year. Railcars shipped in Europe decreased 8.5% to approximately 510 cars during
the three months ended September 30, 2003 compared to the same period in 2002.
The decrease in revenues is primarily related to the closure of plants during
2002.
The operating profit for the Trinity Rail Group increased $9.0 million
to $2.9 million for the three months ended September 30, 2003 compared the same
period last year. The operating margin improved primarily due to improved
efficiencies from increased volumes in North America.
In the three months ended September 30, 2003 railcar sales to Trinity
Industries Leasing Company included in the Rail Group results were $63.6 million
compared to $31.0 million in the comparable period in 2002 with profit of $4.9
million compared to $2.5 million for the same period in 2002. Sales to Trinity
Industries Leasing Company and related profits are eliminated in consolidation.
CONSTRUCTION PRODUCTS GROUP
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------- -------
(IN MILLIONS)
Revenues............................................. $ 133.7 $ 141.5
Operating profit..................................... $ 11.4 $ 17.2
Operating profit margin.............................. 8.5% 12.2%
Revenues declined 5.5% for the three months ended September 30, 2003
compared to the same period in 2002. The decrease in revenues was primarily
attributable to a lower demand in Highway Safety and Fittings products along
with reduced production in the Structural Bridge group, partially offset by
improvements in the Concrete and Aggregates group due to strong demand and good
weather. Operating profit margin decreased as a result of reduced volume and
competitive pricing pressures.
16
INLAND BARGE GROUP
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------- -------
(IN MILLIONS)
Revenues............................................. $ 42.5 $ 47.7
Operating profit..................................... $ 0.3 $ 1.3
Operating profit margin.............................. 0.7% 2.7%
Revenues decreased 10.9% for the three months ended September 30, 2003
compared to the same period in 2002. This was primarily due to a decrease in
hopper barge volume. Operating profit for the current quarter was $0.3 million,
a decrease of $1.0 million compared to the prior year's quarter. This was
primarily due to the reduction in hopper barge volume and increased barge
litigation costs. Barge litigation costs were $1.1 and $0.7 million for the
three months ended September 30, 2003 and 2002, respectively.
INDUSTRIAL PRODUCTS GROUP
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------- -------
(IN MILLIONS)
Revenues............................................. $ 31.5 $ 41.0
Operating profit..................................... $ 2.7 $ 3.0
Operating profit margin.............................. 8.6% 7.3%
Revenues declined 23.2% for the three months ended September 30, 2003
compared to the same period in 2002. The decline in revenues was primarily due
to a decline in LPG related sales in Mexico and the sale of a specialty heads
product line in the United States during 2002. Additionally, operating profit
was adversely impacted by a decline in LPG related sales in Mexico.
TRINITY RAILCAR LEASING AND MANAGEMENT SERVICES GROUP
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------- -------
(IN MILLIONS)
Revenues....................................... $ 29.9 $ 28.1
Operating profit............................... $ 9.3 $ 7.2
Operating profit margin........................ 31.1% 25.6%
Fleet utilization ............................. 96.8% 95.2%
Revenues increased $1.8 million to $29.9 million in the current
quarter. This increase was primarily due to an increase in rental revenues from
additions to the lease fleet. Revenues from the sale of railcars from the lease
fleet were $0.5 million in the three months ended September 30, 2003 and $0.4
million in the same period in 2002. Operating profit increased $2.1 million to
$9.3 million in the current quarter. This increase is primarily due to an
increase in the size of the rental fleet, improved utilization, as well as a
decrease in lost revenues due to maintenance related downtime. Operating profit
on the sale of railcars from the lease fleet, including recognition of deferred
manufacturing profit, was $0.2 million for the three months ended September 30,
2003 and $0.1 million for the same period in 2002.
ALL OTHER
Revenues in All Other decreased primarily due to a decline in the
structural tower business. Operating loss was $2.0 million for the three months
ended September 30, 2003 and $1.1 million in the same period in 2002. The
increase in the operating loss is primarily due to costs associated with
non-operating plants.
17
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002 - RESULTS OF OPERATIONS
Revenues decreased $119.6 million to $1,018.3 million for the nine
months ended September 30, 2003 compared to $1,137.9 million for the nine months
ended September 30, 2002. The decrease in revenues was due to a reduction in
demand for hopper barges, Highway Safety products and certain LPG markets in
Mexico as well as a reduction in rail car sales to third parties, offset by an
increase in railcar sales from the lease fleet and increased leasing revenues
due to growth in the lease fleet.
The following table reconciles the revenue amounts discussed under each
segment with the consolidated total revenues shown in the Selected Financial
Data (in millions).
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------ ------------------------------------
REVENUES REVENUES
------------------------------------ ------------------------------------
OUTSIDE INTERSEGMENT TOTAL OUTSIDE INTERSEGMENT TOTAL
--------- ------------ --------- --------- ------------ ---------
Trinity Rail Group............... $ 317.2 $ 176.8 $ 494.0 $ 374.9 $ 93.5 $ 468.4
Construction Products Group...... 368.9 0.6 369.5 400.0 0.8 400.8
Inland Barge Group............... 129.8 -- 129.8 166.8 -- 166.8
Industrial Products Group........ 85.5 3.0 88.5 103.1 2.1 105.2
Trinity Railcar Leasing and
Management Services Group........ 112.7 -- 112.7 81.7 -- 81.7
All Other........................ 4.2 18.7 22.9 11.4 20.5 31.9
Eliminations & Corporate Items... -- (199.1) (199.1) -- (116.9) (116.9)
--------- -------- --------- --------- -------- ---------
Consolidated Total............... $ 1,018.3 $ -- $ 1,018.3 $ 1,137.9 $ -- $ 1,137.9
========= ======== ========= ========= ======== =========
Operating profit was $9.1 million for the nine months ended September
30, 2003 and $12.7 million for the same period in 2002. For the nine months
ended September 30, 2003 compared to the same period in 2002, operating profit
was impacted by the decrease in revenues as described above for the period,
competitive pricing pressures, the implementation of a new financial system, and
the impact of under-absorbed overhead costs. During the year ended December 31,
2002, the Company signed a managed services contract to implement a new
financial system and to outsource certain accounting and processing activities.
During the nine month period ended September 30, 2003 these incremental costs
were approximately $8.0 million or $0.12 per share.
Interest expense decreased $0.1 million to $26.3 million for the nine
months ended September 30, 2003 compared to $26.4 million for the same period in
2002. This decrease was due to higher average debt levels and higher interest
rates during the nine-month period, offset by the charge of $1.3 million to
write off debt issuance costs in the prior year.
Other, net was income of $3.6 million for the nine months ended
September 30, 2003 compared to income of $2.0 million for the comparable period
in 2002. The income in 2003 was primarily due to a larger amount of gains on
sale of property, plant, and equipment and smaller foreign currency losses in
2003.
The current year effective tax rate of 30.2% was less than the
statutory rate of 35% due to the absence of tax benefits on certain foreign
losses.
Net loss for the nine months ended September 30, 2003 was $9.2 million
compared to a net loss of $8.1 million for the same period in 2002. Net loss
applicable to common shares for the nine months ended September 30, 2003 was
$10.0 million or $0.22 per diluted share compared to $8.1 million or $0.18 per
diluted share, for the same period in 2002. The difference between net loss and
net loss applicable to common shares for the nine months ended September 30,
2003 is the $0.8 million in accrued dividends and accreted offering costs on the
Series B preferred stock.
18
TRINITY RAIL GROUP
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------ -------
(IN MILLIONS)
Revenues............................................ $ 494.0 $ 468.4
Operating loss...................................... $ (13.5) $ (31.1)
Operating loss margin............................... (2.7)% (6.6)%
Revenues for the North American operations were $389.7 million for the
nine months ended September 30, 2003, a 12.6% increase over the same period last
year. Railcars shipped in North America increased 60.4% to approximately 5,400
cars during the nine months ended September 30, 2003 compared to the same period
in 2002. The increase in revenues was due to an increase in cars sold as well as
an increase in the components business, offset by a change in product mix and
fewer high-revenue specialty cars in early 2003.
Revenues for the European operations were $104.3 million for the nine
months ended September 30, 2003, a 14.8% decrease from the same period last
year. Railcars shipped in Europe remained constant at approximately 1,600 cars
during the nine months ended September 30, 2003 and 2002. The decrease in
revenues is primarily related to the closure of plants during 2002.
The operating loss for the Trinity Rail Group decreased $17.6 million
to a loss of $13.5 million for the nine months ended September 30, 2003 compared
to the same period last year. The operating margins for all of Trinity Rail
Group improved primarily due to improved efficiencies from increased volumes in
North America.
As of September 30, 2003, overall backlog increased 95% to
approximately 13,500 cars from the same period last year. The North American
backlog increased 139% to approximately 11,500 cars and European backlog
decreased 5% to approximately 2,000 cars from the same period in 2002.
In the nine months ended September 30, 2003 railcar sales to Trinity
Industries Leasing Company included in the Rail Group results were $173.8
million compared to $88.4 million in the comparable period in 2002 with profit
of $12.5 million compared to $4.8 million for the same period in 2002. Sales to
Trinity Industries Leasing Company and related profits are eliminated in
consolidation.
CONSTRUCTION PRODUCTS GROUP
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------ -------
(IN MILLIONS)
Revenues............................................. $ 369.5 $ 400.8
Operating profit..................................... $ 29.8 $ 41.9
Operating profit margin.............................. 8.1% 10.5%
Revenues declined 7.8% for the nine months ended September 30, 2003
compared to the same period in 2002. The decrease in revenues was primarily
attributable to exiting certain non-core product lines since the first quarter
of 2002, lower demand in Highway Safety products, reduced production in the
Structural Bridge group, and reduced volume and competitive pricing pressures in
the fittings business, partially offset by an increase in production in the
Concrete and Aggregate group due to good weather and strong demand. Operating
profit margin decreased as a result of reduced volume and competitive pricing
pressures.
19
INLAND BARGE GROUP
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------ -------
(IN MILLIONS)
Revenues.............................................. $ 129.8 $ 166.8
Operating profit...................................... $ 0.5 $ 4.3
Operating profit margin............................... 0.4% 2.6%
Revenues decreased 22.2% for the nine months ended September 30, 2003
compared to the same period in 2002. This was primarily due to a decrease in
hopper barge volume as a result of the downturn in the hopper barge market.
Operating profit decreased $3.8 million to $0.5 million for the current
nine-month period. This change was primarily due to the decline in the hopper
barge volumes and increased barge litigation costs. Barge litigation costs were
$2.5 and $1.9 million for the nine months ended September 30, 2003 and 2002,
respectively.
INDUSTRIAL PRODUCTS GROUP
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------ -------
(IN MILLIONS)
Revenues............................................. $ 88.5 $ 105.2
Operating profit..................................... $ 4.3 $ 2.3
Operating profit margin.............................. 4.9% 2.2%
Revenues declined 15.9% for the nine months ended September 30, 2003
compared to the same period in 2002. The decline in revenues was primarily due
to the sale of a specialty heads product line in the United States during 2002
and a decline in LPG related sales. Overall, the increase in operating profit
was primarily due to the establishment of a $2.2 million allowance for bad debt
in the prior year as well as an improvement in margins in the US LPG business,
partially offset by a decline in LPG related sales in Mexico.
TRINITY RAILCAR LEASING AND MANAGEMENT SERVICES GROUP
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2003 2002
------ -------
(IN MILLIONS)
Revenues............................................. $ 112.7 $ 81.7
Operating profit..................................... $ 30.5 $ 21.4
Operating profit margin.............................. 27.1% 26.2%
Fleet utilization ................................... 96.8% 95.2%
Revenues increased $31.0 million to $112.7 million for the nine-month
period ended September 30, 2003. This increase was primarily due to railcar
sales and an increase in rental revenues due to growth in the lease fleet.
Included in the results of this group are revenues from the sale of railcars
from the lease fleet of $26.7 million in the nine months ended September 30,
2003 and $1.7 million in the same period in 2002. Operating profit increased
$9.1 million to $30.5 million in the current nine-month period. This increase is
primarily due to an increase in the size of the rental fleet, improved
utilization, as well as a decrease in lost revenues due to maintenance related
downtime. Operating profits on the sale of railcars from the lease fleet,
including recognition of deferred manufacturing profit, were $3.4 million for
the nine months ended September 30, 2003 and $0.3 million for the same period in
2002.
ALL OTHER
Revenues in All Other decreased primarily due to a decline in the
structural tower business. Operating loss remained constant at $5.0 million for
the nine months ended September 30, 2003 and 2002. The decrease in the operating
loss was primarily due to the sale of inventory in the structural tower business
offset by costs associated with the non-operating plants.
20
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
September 30, 2003 increased to $68.1 million compared to $58.1 million for the
same period in 2002. This was due to the collection of a $48.5 million tax
refund, an increase in accounts payable and accrued liabilities of $21.2 million
offset by an increase in inventory and accounts receivable of $55.4 million, a
decrease in other liabilities of $12.1 million and a net loss in the current
period. Capital expenditures for the nine months ended September 30, 2003 were
$205.2 million, of which $188.5 million were for additions to the lease
subsidiary. This compares to $123.2 million of capital expenditures for the same
period last year, of which $97.7 million was for additions to the lease
subsidiary. Proceeds from the sale of property, plant and equipment were $33.6
million for the nine months ended September 30, 2003 composed primarily of the
sale of railcars from the lease fleet and other assets, compared to $13.9
million for the same period in 2002.
In June 2002 TILC, through a newly formed, wholly owned business trust,
entered into a $200 million non-recourse warehouse facility to finance railcars
owned by TILC. Specific railcars and the underlying leases secure the facility.
Advances under the facility may not exceed 75% of the fair market value of the
eligible railcars securing the facility as defined by the agreement. Advances
under the facility bear interest at LIBOR plus 1.375% (2.495% at September 30,
2003). In August 2003, TILC expanded this facility to $300 million and extended
the term through August 2004. At September 30, 2003, $80.6 million was available
under this facility. The Company is currently in discussions with long-term
lenders to provide permanent financing for the amount currently outstanding
under the facility, which is expected to be completed during the fourth quarter
of 2003.
In June 2002, the Company completed a secured credit agreement for $425
million. The agreement includes a $275 million 3-year revolving commitment and a
$150 million 5-year term commitment. The agreement calls for quarterly payments
of principal on the term debt in the amount of $375 thousand beginning September
30, 2002 through June 30, 2006 and quarterly payments of $36.0 million beginning
on September 30, 2006 through the maturity date. Amounts borrowed under the
revolving commitment bear interest at LIBOR plus 2.25% or Prime rate plus 0.25%
(4.25% at September 30, 2003). Amounts borrowed under the term commitment bear
interest at LIBOR plus 3.25% (4.45% at September 30, 2003). The Company's
accounts receivable and inventory and a portion of its property, plant and
equipment secure the entire agreement. During September 2003, the Company
modified the terms of these debt covenants to separate the Company's leasing and
manufacturing operations and paid off $25.0 million of the 5-year term
commitment. The agreement limits the amount of capital expenditures related to
the Company's leasing business, requires maintenance of ratios related to
interest coverage for both the leasing and manufacturing operations, leverage,
asset coverage and minimum net worth, and restricts the amount of dividend
payments. At September 30, 2003, $143.1 million was borrowed under this
agreement. At September 30, 2003, the most restrictive of the debt covenants
based on trailing twelve month calculations as defined by the debt agreements
allow approximately $65.4 million additional principal and approximately $6.8
million and $9.0 million additional annual interest expense for leasing and
manufacturing operations, respectively.
In June 2003 the Company issued 600 shares of Series B Redeemable
Convertible Preferred Stock. Each share of Series B preferred stock has an
initial liquidation value of $100,000 per share. The liquidation value, plus
accrued but unpaid dividends, is payable on June 25, 2008, the mandatory
redemption date, at our option in cash or in shares of common stock valued at
90% of the then current market price of our common stock. Each share of Series B
preferred stock may be converted at any time at the option of the holder into
shares of our common stock, based on the initial conversion price of $22.46 per
share, which is equivalent to 4,452 shares of common stock for each $100,000
initial liquidation preference. Holders of the Series B preferred stock are
entitled to receive dividends payable semi-annually, on July 1 and January 1 of
each year, beginning January 1, 2004 at an annual rate of 4.5% of the
liquidation preference. The Company may, at our option, pay dividends either in
cash or in shares of our common stock at the then current market price. The
holders of shares of Series B preferred stock are entitled to vote with the
holders of the common stock on an as-if converted basis on all matters brought
before the stockholders.
The Company expects to finance future operating requirements with cash
flows from operations and, depending on market conditions, debt and/or privately
or publicly placed equity.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
As of September 30, 2003 other commercial commitments related to
letters of credit have decreased to $99.8 million from $110.2 million as of
December 31, 2002. Other commercial commitments that relate to operating leases
under sales/leaseback transactions were basically unchanged.
21
RECENT PRONOUNCEMENTS
During January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities (FIN 46). The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003 and apply to existing variable interest entities in the
first fiscal year or interim periods beginning after June 15, 2003. In October
2003, the FASB agreed to a broad-based deferral of the effective date for public
companies until the end of periods ending after December 15, 2003. Until now,
one company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
no variable interest entities in which it is the primary beneficiary.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). SFAS 150 establishes standards for how a company classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that a company
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first period beginning after June 15, 2003. The provisions of
this statement did not have an impact on the Company's statement of financial
position.
FORWARD-LOOKING STATEMENTS. This quarterly report on Form 10-Q contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Any statements contained herein that are not
historical facts are forward-looking statements and involve risks and
uncertainties. These forward-looking statements include expectations, beliefs,
plans, objectives, future financial performance, estimates, projections, goals
and forecasts. Potential factors, which could cause our actual results of
operations to differ materially from those in the forward-looking statements,
include among others:
- - market conditions and demand for our products;
- - the cyclical nature of both the railcar and barge industries;
- - variations in weather in areas where construction products are sold and
used;
- - the timing of introduction of new products;
- - the timing of customer orders;
- - price changes;
- - changes in mix of products sold;
- - the extent of utilization of manufacturing capacity;
- - availability and costs of component parts, supplies, and raw materials;
- - competition and other competitive factors;
- - changing technologies;
- - steel prices;
- - interest rates and capital costs;
- - long-term funding of our leasing warehouse facility;
- - taxes;
- - the stability of the governments and political and business conditions in
certain foreign countries, particularly Mexico and Romania;
- - changes in import and export quotas and regulations;
- - business conditions in emerging economies;
- - results of litigation; and
- - legal, regulatory, and environmental issues.
Any forward-looking statement speaks only as of the date on which such
statement is made. Trinity undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our market risks since December
31, 2002.
22
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the SEC, and to process, summarize, and disclose this information
within the time periods specified in the rules of the SEC. The Company's Chief
Executive and Chief Financial Officers are responsible for establishing and
maintaining these procedures and, as required by the rules of the SEC, evaluate
their effectiveness. Based on their evaluation of the Company's disclosure
controls and procedures which took place as of the end of the period covered by
this report, the Chief Executive and Chief Financial Officers believe that these
procedures are effective to ensure that the Company is able to collect, process,
and disclose the information it is required to disclose in the reports it files
with the SEC within the required time periods.
INTERNAL CONTROLS
The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company and its wholly owned subsidiary, Trinity Marine Products,
Inc. ("TMP"), and certain material suppliers and others, have been named as
co-defendants in six separate lawsuits filed by Florida Marine Transporters,
Inc. ("FMT") on May 15, 2002, J. Russell Flowers, Inc. ("Flowers") on October 7,
2002, ACF Barge Acceptance I, LLC ("ACF") on December 4, 2002, Marquette
Transportation Company and Iowa Fleeting Services, Inc. ("Marquette") on March
7, 2003, Waxler Transportation Company, Inc. ("Waxler") on April 7, 2003 and
LeBeouf Bros. Towing ("LeBeouf") on July 3, 2003. The FMT, Marquette, Waxler,
and LeBeouf cases are pending in the 25th Judicial District Court in Plaquemines
Parish, Louisiana, and the Flowers case is pending in the U.S. District Court,
Northern District of Mississippi in Greenville, Mississippi. On October 8, 2003,
one of the six cases was dismissed as a result of a settlement between the
Company and TMP and ACF. The settlement involved the purchase of eleven barges
which are leased to a barge operator under long-term lease agreements. The
Company's Leasing subsidiary purchased the barges for $ 19.1 million and
succeeded ACF as lessor. The estimated fair value of the operating leases and
residual value of the barges approximated the purchase price. In the Waxler
case, the plaintiff has petitioned the court for certification of a class, which
could potentially increase the total number of barges involved in the
litigation. Absent certification of a class in the Waxler case, these remaining
five separate suits involve 37 tank barges sold at an approximate average price
of $1.4 million, and 140 hopper barges sold at an approximate average price of
$280,000. Each of the cases set forth allegations pertaining to damages arising
from alleged defects in coating materials supplied by a co-defendant and
coatings application workmanship by TMP. The plaintiffs seek both compensatory
and punitive damages and/or recision of the barge purchase contracts.
Independent experts investigating the claims on behalf of the Company and TMP
have expressed the opinion that technical arguments presented by the plaintiffs
in the litigation are without merit. As of September 30, 2003, two of the five
plaintiffs owe TMP approximately $11.4 million, of which $7.9 million is past
due, related to contracts for barges not involved in the litigation. TMP has
filed suit for collection of the past due amounts.
A subsidiary of the Company, Transit Mix Concrete and Materials
Company, Inc. ("Transit Mix"), was named as a defendant in a case involving the
death of an employee of an independent contractor who died following an accident
that occurred while the decedent was working at a Company owned facility.
Following a jury verdict in the favor of the plaintiff, the presiding judge
entered a final judgment in the amount of $33.9 million (inclusive of fees,
costs, and judgment interest). 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.
As previously reported, a wholly owned subsidiary of the Company,
Trinity Marine Baton Rouge, Inc. ("TMBR") was named in a two-count felony
indictment charging TMBR with transporting hazardous waste without a proper
manifest to a non-permitted facility
23
in violation of the Resource Conservation and Recovery Act. Following four (4)
years of investigation, on September 17, 2003 the United States government
voluntarily dismissed all charges against TMBR and no further enforcement will
take place in this matter.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
10.17.1 First Amendment to the Credit Agreement dated as
of October 16, 2002, amending the Credit
Agreement dated June 4, 2002, among Trinity
Industries, Inc., as Borrower, JPMorgan Chase
Bank, individually as a Lender and Issuing Bank
and Administrative Agent, and Dresdner Bank AG
New York and Grand Cayman Branches and The Royal
Bank of Scotland plc., each individually as a
Lender and collectively as Syndication Agents,
and certain other Lenders party thereto from
time to time.
10.17.2 Second Amendment to the Credit Agreement dated
as of September 26, 2003, amending the Credit
Agreement dated June 4, 2002, among Trinity
Industries, Inc., as Borrower, JPMorgan Chase
Bank, individually as a Lender and Issuing Bank
and Administrative Agent, and Dresdner Bank AG
New York and Grand Cayman Branches and The Royal
Bank of Scotland plc., each individually as a
Lender and collectively as Syndication Agents,
and certain other Lenders party thereto from
time to time.
10.18.1 Amendment No. 1 to the Warehouse Loan Agreement
dated as of June 27, 2003, amending the
Warehouse Loan Agreement dated as of June 27,
2002.
10.18.2 Amendment No. 2 to the Warehouse Loan Agreement
dated as of July 29, 2003, amending the
Warehouse Loan Agreement dated as of June 27,
2002.
10.18.3 Amendment No. 3 to the Warehouse Loan Agreement
dated as of August 29, 2003, amending the
Warehouse Loan Agreement dated as of June 27,
2002.
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification by Chief Executive Officer
pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by Chief Financial Officer
pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K during the quarter ended September 30, 2003
(1) A Current Report on Form 8-K was filed on August 11, 2003, under Item
9, reporting operating results for the second quarter of 2003, and
attaching a news release dated August 6, 2003 and script of conference
call of August 7, 2003.
(2) A Current Report on Form 8-K was filed on October 9, 2003, under Item
5, announcing litigation settlement with ACF Barge Acceptance I LLC,
and attaching a news release dated October 8, 2003.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRINITY INDUSTRIES, INC. By /s/ JIM S. IVY
Registrant
Jim S. Ivy
Senior Vice President and
Chief Financial Officer
November 6, 2003
25
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
10.17.1 First Amendment to the Credit Agreement dated as of
October 16, 2002, amending the Credit Agreement dated
June 4, 2002.
10.17.2 Second Amendment to the Credit Agreement dated as of
September 26, 2003, amending the Credit Agreement dated
June 4, 2002.
10.18.1 Amendment No. 1 to the Warehouse Loan Agreement dated as
of June 27, 2003, amending the Warehouse Loan Agreement
dated as of June 27, 2002.
10.18.2 Amendment No. 2 to the Warehouse Loan Agreement dated as
of July 29, 2003, amending the Warehouse Loan Agreement
dated as of June 27, 2002.
10.18.3 Amendment No. 3 to the Warehouse Loan Agreement dated as
of August 29, 2003, amending the Warehouse Loan Agreement
dated as of June 27, 2002.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C., Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification pursuant to 18 U.S.C., Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.