Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide management's perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and Item 8, Financial Statements and Supplementary Data, of our 2022 Annual Report on Form 10-K.
This MD&A includes financial measures compiled in accordance with generally accepted accounting principles ("GAAP") and certain non-GAAP measures. Please refer to the Non-GAAP Financial Measures section herein for information on the non-GAAP measures included in the MD&A, reconciliations to the most directly comparable GAAP financial measure, and the reasons why management believes each measure is useful to management and investors.
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Forward-Looking Statements
This quarterly report on Form 10-Q (or statements otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings or otherwise) 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 performances, estimates, projections, goals, and forecasts. Trinity uses the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify these forward-looking statements. 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 customer demand for our business products and services;
• the cyclical nature of the industries in which we compete;
• variations in weather in areas where our products are manufactured, delivered, or used;
• naturally-occurring events, pandemics, and/or disasters causing disruption to our manufacturing, product deliveries, and production capacity, thereby giving rise to an increase in expenses, loss of revenue, and property losses;
• the impact of the coronavirus pandemic (“COVID-19”) and the response thereto, on, among other things, demand for our products and services, our customers' ability to pay, disruptions to our supply chain, our liquidity and financial position, results of operations, stock price, payment of dividends, our ability to generate new railcar orders, our ability to originate and/or renew leases at favorable rates, our ability to convert backlog to revenue, and the operational status of our facilities;
• disruptions in the transportation network used to deliver our products, which may impact our ability to timely deliver railcars to our customers;
• shortages of labor;
• impacts from asset impairments and related charges;
• the timing of introduction of new products;
• the inability to effectively integrate acquired businesses;
• the timing and delivery of customer orders, lease portfolio sales, or a breach of customer contracts;
• the creditworthiness of customers and their access to capital;
• product price changes;
• changes in mix of products sold;
• the costs incurred to align manufacturing capacity with demand and the extent of its utilization;
• the operating leverage and efficiencies that can be achieved by our manufacturing businesses;
• availability and costs of steel, component parts, supplies, and other raw materials;
• competition and other competitive factors;
• changing technologies;
• material failure, interruption of service, compromised data security, phishing emails, or cybersecurity breaches in our information technology (or that of the third-party vendors who provide information technology or other services);
• surcharges and other fees added to fixed pricing agreements for steel, component parts, supplies, and other raw materials;
• inflation, interest rates, and capital costs;
• counter-party risks for financial instruments;
• long-term funding of our operations;
• taxes;
• the stability of the governments and political and business conditions in certain foreign countries, particularly Mexico;
• geopolitical events, including armed conflicts, and their impact on supply chains, pricing, and the global economy;
• changes in import and export quotas and regulations;
• business conditions in emerging economies;
• costs and results of litigation, including trial and appellate costs;
• changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies;
• changes in laws and regulations that may have an adverse effect on demand for our products and services, our results of operations, financial condition or cash flows;
• legal, regulatory, and environmental issues, including compliance of our products with mandated specifications, standards, or testing criteria and obligations to remove and replace our products following installation or to recall our products and install different products;
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• actions by U.S. and/or foreign governments (particularly Mexico and Canada) relative to federal government budgeting, taxation policies, government expenditures, borrowing/debt ceiling limits, tariffs, and trade policies;
• the use of social or digital media to disseminate false, misleading and/or unreliable or inaccurate information; and
• the inability to sufficiently protect our intellectual property rights.
Any forward-looking statement speaks only as of the date on which such statement is made. Except as required by federal securities laws, Trinity undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. For a discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our 2022 Annual Report on Form 10-K, this Form 10-Q and future Forms 10-Q and Current Reports on Forms 8-K.
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Company Overview
Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,” “Company,” “we,” “our,” or "us") own businesses that are leading providers of railcar products and services in North America. We market our railcar products and services under the trade name TrinityRail ® . The TrinityRail platform provides railcar leasing and management services; railcar manufacturing, maintenance and modifications; and other railcar logistics products and services.
In the fourth quarter of 2021, we completed the sale of Trinity Highway Products, LLC (“THP”) to Rush Hour Intermediate II, LLC ("Rush Hour"), an entity owned by an affiliated investment fund of Monomoy Capital Partners. Upon completion of the sale, the accounting requirements for reporting THP as a discontinued operation were met. In connection with the sale of THP, we agreed to indemnify Rush Hour for certain liabilities related to the ET-Plus® System, a highway guardrail end-terminal system (the “ET Plus”). Consequently, expenses incurred during the three months ended March 31, 2023 and 2022, and that may be incurred in the future related to these retained obligations, will be reported in discontinued operations. See Note 2 of the Consolidated Financial Statements for further information related to the sale of THP and Note 14 of the Consolidated Financial Statements for information regarding the retained liabilities.
We report our operating results in two reportable segments: (1) the Railcar Leasing and Management Services Group (the "Leasing Group"), which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services, as well as other railcar logistics products and services; and (2) the Rail Products Group, which manufactures and sells railcars and related parts and components, and provides railcar maintenance and modification services.
Executive Summary
Recent Market Developments
Cyclical, Seasonal and Other Trends Impacting Our Business
Although lease rates and lease fleet utilization continue to improve, the industries in which our customers operate are cyclical in nature. Weaknesses in certain sectors of the North American and global economy may make it more difficult to sell or lease certain types of railcars. Additionally, changes in certain commodity prices, or changes in demand for certain commodities, could impact customer demand for various types of railcars. Further, disruptions in the global supply chain have impacted demand for, and the costs of, certain of our products and services.
We continuously assess demand for our products and services and take steps to rationalize and diversify our leased railcar portfolio and align our operating capacity appropriately. We evaluate the creditworthiness of our customers and monitor performance of relevant market sectors; however, weaknesses in any of these market sectors could affect the financial viability of our underlying Leasing Group customers, which could negatively impact our recurring leasing revenues and operating profits. We continue to believe that our rail platform is able to respond to cyclical changes in demand and perform throughout the railcar cycle.
Steel prices, which are subject to volatility, were elevated over much of the last two years and are a major component of our cost of revenues. We typically use contract-specific purchasing practices, existing supplier commitments, contractual price escalation provisions, and other arrangements with our customers to reduce the impact of plate and coil steel price volatility on our operating profit. Additionally, the cost and volume of lease fleet maintenance and compliance events increased in 2022, and we expect elevated levels of these activities to continue in the near term. Further, although we remain committed to attracting and retaining a highly skilled and diverse workforce, challenging labor market conditions and increases in labor costs have negatively impacted our operations. We continue to monitor the impact of potential margin and operating profit headwinds resulting from these factors.
As a result of disruptions in the global supply chain, we have continued to experience shortages of materials used to manufacture or repair certain railcar types, as well as disruptions in the transportation network used to deliver our products, which have impacted our ability to timely deliver these railcars to our customers. While we believe these challenges will be resolved over time, they may persist over the foreseeable future, which could continue to impact our operations. We will continue to monitor the situation and take appropriate steps within our control to mitigate the potential impacts on our production schedules and delivery timelines.
Due to their transactional nature, lease portfolio sales are the primary driver of fluctuations in results in the Leasing Group.
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Financial and Operational Highlights
• Our revenues for the three months ended March 31, 2023 were $641.7 million, representing an increase of 35.8%, compared to the three months ended March 31, 2022. Our operating profit for the three months ended March 31, 2023 was $69.0 million compared to $54.8 million for the three months ended March 31, 2022.
• The Leasing Group's lease fleet of 108,865 company-owned railcars was 98.2% utilized as of March 31, 2023, compared to a lease fleet utilization of 96.5% on 107,090 company-owned railcars as of March 31, 2022. Our company-owned lease fleet includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements.
• For the three months ended March 31, 2023, we made a net investment in our lease fleet of approximately $134.8 million, which primarily includes new railcar additions, sustainable railcar conversions, railcar modifications, and other betterments, net of deferred profit, and secondary market purchases; and is net of proceeds from lease portfolio sales.
• The total value of the new railcar backlog at March 31, 2023 was $3.7 billion, compared to $1.9 billion at March 31, 2022. The Rail Products Group received orders for 2,690 railcars and delivered 4,045 railcars in the three months ended March 31, 2023, in comparison to orders for 5,055 railcars and deliveries of 2,470 railcars in the three months ended March 31, 2022.
• During the three months ended March 31, 2023, sustainable railcar conversion revenues totaled $53.9 million, representing 590 railcars.
• For the three months ended March 31, 2023, we generated operating cash flows from continuing operations and Adjusted Free Cash Flow After Investments and Dividends ("Adjusted Free Cash Flow") of $102.5 million and $36.2 million (1) , respectively, in comparison to $28.5 million and $47.8 million (1) , respectively, for the three months ended March 31, 2022.
(1) Non-GAAP financial measure. See the Non-GAAP Financial Measures section within this Form 10-Q for a reconciliation to the most directly comparable GAAP measure and why management believes this measure is useful to management and investors.
See "Consolidated Results of Operations" and "Segment Discussion" below for additional information regarding our operating results.
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Returns of Capital to Shareholders
Returns of capital to shareholders in the form of dividends and share repurchases are summarized below:
(1) Dividend yield is calculated as dividends paid for the four previous quarters divided by the closing stock price on the last trading day of each respective quarter.
(2) In the second quarter of 2022, we completed the final settlement of an accelerated share repurchase agreement ("ASR").
(3) In the fourth quarter of 2022, our Board of Directors terminated the existing share repurchase program and authorized a new $250.0 million share repurchase program.
Litigation Updates
See Note 14 of the Consolidated Financial Statements for an update on the status of certain litigation retained in connection with the sale of THP.
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Consolidated Results of Operations
The following table summarizes our consolidated results of operations for the three months ended March 31, 2023 and 2022:
Three Months Ended
March 31,
2023 2022
(in millions)
Revenues $ 641.7 $ 472.7
Cost of revenues 538.5 398.5
Selling, engineering, and administrative expenses 49.9 44.7
Gains on dispositions of property 15.3 25.3
Restructuring activities, net (0.4) —
Total operating profit 69.0 54.8
Interest expense, net 62.1 43.5
Other, net 1.6 (1.6)
Income from continuing operations before income taxes 5.3 12.9
Provision (benefit) for income taxes (11.5) 3.0
Income from continuing operations $ 16.8 $ 9.9
Revenues
The tables below present revenues by segment for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31, 2023
Revenues Percent
External Intersegment Total Change
(in millions)
Railcar Leasing and Management Services Group $ 203.3 $ 0.2 $ 203.5 11.1 %
Rail Products Group 438.4 199.4 637.8 63.1 %
Segment Totals 641.7 199.6 841.3 46.5 %
Eliminations – Lease Subsidiary — (199.4) (199.4)
Eliminations – Other — (0.2) (0.2)
Consolidated Total $ 641.7 $ — $ 641.7 35.8 %
Three Months Ended March 31, 2022
Revenues
External Intersegment Total
(in millions)
Railcar Leasing and Management Services Group $ 182.9 $ 0.2 $ 183.1
Rail Products Group 289.8 101.3 391.1
Segment Totals 472.7 101.5 574.2
Eliminations – Lease Subsidiary — (101.3) (101.3)
Eliminations – Other — (0.2) (0.2)
Consolidated Total $ 472.7 $ — $ 472.7
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Operating Costs
Operating costs are comprised of cost of revenues; selling, engineering, and administrative costs; gains or losses on property disposals; and restructuring activities. Operating costs by segment for the three months ended March 31, 2023 and 2022 were as follows:
Three Months Ended
March 31,
2023 2022
(in millions)
Railcar Leasing and Management Services Group (1)
$ 118.0 $ 103.3
Rail Products Group 612.5 390.3
Segment Totals 730.5 493.6
Corporate and other 26.0 15.7
Restructuring activities, net (0.4) —
Eliminations – Lease Subsidiary (182.6) (92.5)
Eliminations – Other (0.8) 1.1
Consolidated Total $ 572.7 $ 417.9
(1) Includes gains on lease portfolio sales of $13.5 million and $11.8 million for the three months ended March 31, 2023 and 2022, respectively.
Operating Profit
Operating profit by segment for the three months ended March 31, 2023 and 2022 was as follows:
Three Months Ended
March 31,
2023 2022
(in millions)
Railcar Leasing and Management Services Group $ 85.5 $ 79.8
Rail Products Group 25.3 0.8
Segment Totals 110.8 80.6
Corporate and other (26.0) (15.7)
Restructuring activities, net 0.4 —
Eliminations – Lease Subsidiary (16.8) (8.8)
Eliminations – Other 0.6 (1.3)
Consolidated Total $ 69.0 $ 54.8
Discussion of Consolidated Results
Revenues – Our revenues for the three months ended March 31, 2023 were $641.7 million, representing an increase of $169.0 million, or 35.8%, over the prior year period. The increase in revenues was primarily due to a higher volume of, and improved pricing on, external deliveries in the Rail Products Group and improved lease rates in the Leasing Group.
Cost of revenues – Our cost of revenues for the three months ended March 31, 2023 was $538.5 million, representing an increase of $140.0 million, or 35.1%, over the prior year period. The increase in cost of revenues was primarily due to a higher volume of external deliveries, higher labor costs and operational inefficiencies in the Rail Products Group.
Selling, engineering, and administrative expenses – Selling, engineering, and administrative expenses for the three months ended March 31, 2023 were $49.9 million, representing an increase of $5.2 million or 11.6% when compared to the prior year period, primarily as a result of higher employee-related costs.
Gains on dispositions of property – Gains on dispositions of property decreased by $10.0 million for the three months ended March 31, 2023 when compared to the prior year period primarily due to higher gains associated with the disposition of certain non operating facilities and insurance recoveries in the prior year period, partially offset by higher profits on lease portfolio sales in the current year period. Results for the three months ended March 31, 2023 and 2022 included gains of $1.2 million and $6.4 million, respectively, related to insurance recoveries in excess of net book value for assets damaged by a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021. See Note 14 of the Consolidated Financial Statements for more information.
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Operating profit – Operating profit for the three months ended March 31, 2023 totaled $69.0 million, representing an increase of $14.2 million, or 25.9%, from the prior year period primarily due to a higher volume of, and improved pricing on, external deliveries in the Rail Products Group and improved lease rates in the Leasing Group, partially offset by higher employee-related and other operating costs across the enterprise. Operating profit was favorably impacted in the current and prior year periods by insurance recoveries related to a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021.
For further information regarding the operating results of individual segments, see "Segment Discussion" below.
Interest expense, net – Interest expense, net for the three months ended March 31, 2023 totaled $62.1 million, compared to $43.5 million for the three months ended March 31, 2022, primarily driven by higher variable interest rates associated with TILC's warehouse loan facility and the revolving credit facility and higher overall average debt in 2023.
Income taxes – The effective tax rate from continuing operations for the three months ended March 31, 2023 was a benefit of 217.0%, which differs from the U.S. statutory rate of 21.0% primarily due to the release of residual taxes out of accumulated other comprehensive income, the re-measurement of our net deferred tax liabilities due to the acquisition of RSI Logistics ("RSI"), changes in our valuation allowances, state income taxes, and foreign income taxes. See Note 9 of the Consolidated Financial Statements for additional information.
The effective tax rate from continuing operations for the three months ended March 31, 2022 was an expense of 23.3%, which differs from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, and non-deductible executive compensation, net of the benefits of excess deductions on equity compensation.
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Segment Discussion
Railcar Leasing and Management Services Group
Three Months Ended March 31,
2023 2022 Percent
($ in millions) Change
Revenues:
Leasing and management $ 203.5 $ 183.1 11.1 %
Operating profit (1) :
Leasing and management $ 72.0 $ 68.0 5.9 %
Lease portfolio sales (2)
13.5 11.8 *
Total operating profit $ 85.5 $ 79.8 7.1 %
Total operating profit margin 42.0 % 43.6 %
Leasing and management operating profit margin
35.4 % 37.1 %
Selected expense information:
Depreciation (3)
$ 62.4 $ 57.2 9.1 %
Maintenance and compliance $ 35.8 $ 29.2 22.6 %
Rent and ad valorem taxes $ 4.3 $ 5.0 (14.0) %
Selling, engineering, and administrative expenses
$ 15.7 $ 12.8 22.7 %
Interest $ 54.8 $ 38.7 41.6 %
* Not meaningful
(1) Operating profit includes: depreciation; fleet operating costs, which include maintenance, compliance, freight, and storage; rent and ad valorem taxes; and selling, engineering, and administrative expenses. Amortization of deferred profit on railcars sold from the Rail Products Group to the Leasing Group is included in the operating profits of the Leasing Group, resulting in the recognition of depreciation expense based on our original manufacturing cost of the railcars. Interest expense is not a component of operating profit and includes the effect of hedges.
(2) Includes $1.3 million selling profit associated with sales-type leases for the three months ended March 31, 2022.
(3) Depreciation expense includes $4.7 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program.
Information related to lease portfolio sales is as follows:
Three Months Ended
March 31,
2023 2022
($ in millions)
Lease portfolio sales $ 56.7 $ 71.1
Operating profit on lease portfolio sales (1)
$ 13.5 $ 10.5
Operating profit margin on lease portfolio sales 23.8 % 14.8 %
(1) Excludes $1.3 million selling profit associated with sales-type leases for the three months ended March 31, 2022.
Total revenues for the Railcar Leasing and Management Services Group increased by 11.1% for the three months ended March 31, 2023 compared to the prior year period. Leasing and management revenues for the three months ended March 31, 2023 were favorably impacted primarily by improved lease rates and higher utilization, which resulted in higher revenues when compared to the three months ended March 31, 2022. Revenues for the Leasing Group were also favorably impacted for the three months ended March 31, 2023 by the acquisition of RSI.
Leasing and management operating profit for the three months ended March 31, 2023 increased by 5.9% compared to the prior year period primarily due to improved lease rates and higher utilization, partially offset by higher maintenance costs and increased depreciation. Leasing Group operating profit increased by 7.1% for the three months ended March 31, 2023 compared to the prior year period and was favorably impacted by higher profit from lease portfolio sales.
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The Leasing Group generally uses its non-recourse warehouse loan facility or cash to provide initial funding for a portion of the purchase price of the railcars. After initial funding, the Leasing Group may obtain long-term financing for the railcars in the lease fleet through non-recourse asset-backed securities; long-term non-recourse operating leases pursuant to sale-leaseback transactions; long-term recourse debt such as equipment trust certificates; long-term non-recourse promissory notes; or third-party equity.
Information regarding the Leasing Group’s lease fleet is as follows:
March 31, 2023 March 31, 2022
Number of railcars:
Wholly-owned (1)
85,185 82,760
Partially-owned 23,680 24,330
108,865 107,090
Investor-owned 33,420 29,740
142,285 136,830
Company-owned railcars (2) :
Average age in years 12.5 11.4
Average remaining lease term in years 3.0 2.9
Fleet utilization 98.2 % 96.5 %
(1) Includes 2,470 railcars and 2,575 railcars under leased-in arrangements as of March 31, 2023 and 2022, respectively.
(2) Includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements.
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Rail Products Group
Three Months Ended March 31,
2023 2022 Percent
($ in millions) Change
Revenues:
Rail products (1)
$ 558.4 $ 338.4 65.0 %
Maintenance services 55.3 43.0 28.6 %
Other 24.1 9.7 148.5 %
Total revenues $ 637.8 $ 391.1 63.1 %
Operating costs:
Cost of revenues 605.4 387.0 56.4 %
Selling, engineering, and administrative expenses
8.2 9.7 (15.5) %
Gains on dispositions of property (1.1) (6.4) *
Operating profit $ 25.3 $ 0.8 *
Operating profit margin 4.0 % 0.2 %
* Not meaningful
(1) Includes sustainable railcar conversion revenues of $53.9 million, representing 590 railcars, for the three months ended March 31, 2023. Includes sustainable railcar conversion revenues of $49.8 million, representing 445 railcars for the three months ended March 31, 2022.
Revenues for the Rail Products Group increased for the three months ended March 31, 2023 by 63.1% when compared to the prior year period. Revenues in our rail products business increased as a result of higher deliveries and favorable pricing, partially offset by the mix of railcars sold. Revenues in our maintenance services business increased as a result of higher volumes, favorable pricing, and the mix of repairs. Revenues in other were driven by the growth of our parts business, including the impact of acquisitions.
Cost of revenues for the Rail Products Group increased for the three months ended March 31, 2023 by 56.4% when compared to the prior year period. In our rail products business, the increase in cost of revenues was driven by higher deliveries, labor inefficiencies associated with onboarding of new employees, higher labor costs related to hiring and retention activities, and operational inefficiencies associated with supply chain disruptions. In our maintenance services business, cost of revenues increased as a result of a higher volume of general repairs and the mix of repairs and continues to be impacted by labor shortages leading to operating inefficiencies.
Operating profit for the three months ended March 31, 2023 was favorably impacted by higher deliveries and improved pricing, partially offset by labor inefficiencies, higher labor costs, and the mix of railcars sold. Additionally, during the three months ended March 31, 2023 and 2022, operating profit was favorably impacted by gains of $1.2 million and $6.4 million, respectively, related to insurance recoveries in excess of net book value for assets damaged by a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021.
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Information related to our Rail Products Group backlog of new railcars is as follows. In addition to the amounts below, as of March 31, 2023, our backlog related to sustainable railcar conversions totaled $173.7 million, representing 2,085 railcars.
March 31,
2023 2022 Percent
(in millions) Change
External customers $ 3,257.1 $ 1,209.3
Leasing Group 448.8 686.1
Total $ 3,705.9 $ 1,895.4 95.5 %
Three Months Ended
March 31,
2023 2022 Percent
Change
Beginning balance 32,270 13,980
Orders received 2,690 5,055 (46.8) %
Deliveries (4,045) (2,470) 63.8 %
Other adjustments (1)
— (300)
Ending balance 30,915 16,265 90.1 %
Average selling price in ending backlog $ 119,874 $ 116,532 2.9 %
(1) The adjustment for the three months ended March 31, 2022 includes 300 railcars valued at $34.6 million that were removed from the new railcar backlog and shifted to the sustainable railcar conversion backlog.
Total backlog dollars increased by 95.5% when compared to the prior year period due to an increase in the volume and average selling price of orders received primarily driven by a new long-term railcar supply agreement with GATX Corporation executed in the third quarter of 2022. We expect to deliver approximately 42.3% of our railcar backlog value during 2023 and 22.5% during 2024, with the remainder to be delivered through 2028. The orders in our backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may elect to change their procurement decision.
Transactions between the Rail Products Group and the Leasing Group are as follows:
Three Months Ended March 31,
2023 2022
($ in millions)
Revenues:
New railcars $ 134.3 $ 58.0
Sustainable railcar conversions $ 39.0 $ 22.0
Other maintenance services $ 26.1 $ 21.3
Deferred profit $ 16.8 $ 8.8
Number of new railcars (in units) 1,020 455
Number of sustainable railcar conversions (in units) 390 195
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Corporate and other
Three Months Ended March 31,
2023 2022 Percent
(in millions) Change
Operating costs:
Selling, engineering, and administrative expenses
$ 26.0 $ 22.2 17.1 %
Gains on dispositions of property — (6.5) *
Operating loss $ (26.0) $ (15.7) 65.6 %
* Not meaningful
Selling, engineering, and administrative expenses for the three months ended March 31, 2023 increased 17.1% compared to the prior year period, primarily from higher employee-related costs. Total operating costs during the three months ended March 31, 2022 were favorably impacted by gains associated with the disposition of non-operating facilities. As we continue to streamline our operational footprint, we may have additional gains or losses on the disposition of other non-operating facilities.
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Liquidity and Capital Resources
Overview
We expect to finance future operating requirements with cash, cash equivalents, and short-term marketable securities; cash flows from operations; and short-term debt, long-term debt, and equity. Debt instruments that we have utilized include the TILC warehouse loan facility, senior notes, convertible subordinated notes, asset-backed securities, non-recourse promissory notes, sale-leaseback transactions, and our revolving credit facility.
As of March 31, 2023, we have total committed liquidity of $451.5 million. Our total available liquidity includes: $81.9 million of unrestricted cash and cash equivalents; $278.2 million unused and available under our revolving credit facility; and $91.4 million unused and available under the TILC warehouse loan facility based on the amount of warehouse-eligible, unpledged equipment. We believe we have access to adequate capital resources to fund operating requirements and are an active participant in the capital markets.
The Company’s $400.0 million aggregate principal amount of 4.55% senior notes are due in 2024 (“Senior Notes”). We are exploring various alternatives to refinance the Senior Notes during 2023, including by issuing or incurring new debt. Any issuance or incurrence of new debt will depend on prevailing market conditions and other factors, and may have a material impact on our financial results.
Liquidity Highlights
Revolving Credit Facility – In March 2023, we amended our revolving credit facility to increase the total facility commitment from $450.0 million to $600.0 million, increase the maximum leverage ratio to provide additional flexibility, modify the limitations on restricted payments, and allow up to $100.0 million of annual dividends on the Company's common stock. See Note 8 of the Consolidated Financial Statements for additional information regarding this amendment.
Dividend Payments – We paid $21.1 million in dividends to our common stockholders during the three months ended March 31, 2023.
Share Repurchase Authorization – In December 2022, our Board of Directors authorized a new share repurchase program effective December 9, 2022 with no expiration. The new share repurchase program authorizes the Company to repurchase up to $250.0 million of its common stock. There were no shares repurchased during the three months ended March 31, 2023.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022:
Three Months Ended
March 31,
2023 2022
(in millions)
Net cash flows from continuing operations:
Operating activities $ 102.5 $ 28.5
Investing activities (203.1) (0.2)
Financing activities 72.4 28.7
Net cash flows from discontinued operations (3.1) (8.0)
Net increase (decrease) in cash, cash equivalents, and restricted cash $ (31.3) $ 49.0
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Operating Activities . Net cash provided by operating activities from continuing operations for the three months ended March 31, 2023 was $102.5 million compared to net cash provided by operating activities from continuing operations of $28.5 million for the three months ended March 31, 2022. The changes in our operating assets and liabilities are as follows:
Three Months Ended
March 31,
2023 2022
(in millions)
(Increase) decrease in receivables, inventories, and other assets $ 6.8 $ (42.1)
Increase (decrease) in accounts payable, accrued liabilities, and other liabilities 26.1 9.0
Changes in operating assets and liabilities $ 32.9 $ (33.1)
The changes in our operating assets and liabilities resulted in a net source of $32.9 million for the three months ended March 31, 2023, as compared to a net use of $33.1 million for the three months ended March 31, 2022. Operating assets in the prior year period were impacted by higher inventory balances in anticipation of higher volumes of railcar deliveries in future periods, as well as continued supply chain challenges.
Investing Activities. Net cash used in investing activities from continuing operations for the three months ended March 31, 2023 was $203.1 million compared to $0.2 million of net cash used in investing activities from continuing operations for the three months ended March 31, 2022. Significant investing activities are as follows:
• We made a net investment in our lease fleet of $134.8 million during the three months ended March 31, 2023, compared to $13.5 million in the prior year period. Our investment in the lease fleet primarily includes new railcar additions, sustainable railcar conversions, railcar modifications, and other betterments, net of deferred profit, and secondary market purchases; and is net of proceeds from lease portfolio sales.
• During the three months ended March 31, 2023, we acquired a company that is a provider of proprietary software and logistics and terminal management solutions for net cash of $66.2 million. We had no acquisitions during the three months ended March 31, 2022.
Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2023 was $72.4 million compared to $28.7 million of net cash provided by financing activities for the three months ended March 31, 2022. Significant financing activities are as follows:
• During the three months ended March 31, 2023, we had total borrowings of $246.3 million and total repayments of $149.6 million, for net proceeds of $96.7 million, primarily from debt proceeds to support our investment in the lease fleet and for general corporate purposes. During the three months ended March 31, 2022, we had total borrowings of $127.2 million and total repayments of $73.0 million, for net proceeds of $54.2 million, primarily from debt proceeds to support our investment in the lease fleet.
• We paid $21.1 million and $19.1 million in dividends to our common stockholders during the three months ended March 31, 2023 and 2022, respectively.
Current Debt Obligations
The revolving credit facility contains several financial covenants that require the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. In March 2023, we amended our revolving credit facility to increase the maximum leverage ratio to provide additional flexibility and to amend certain other terms. A summary of our financial covenants is detailed below:
Ratio Covenant Actual at
March 31, 2023
Maximum leverage (1)
No greater than 4.25 to 1.00 2.76
Minimum interest coverage (2)
No less than 2.25 to 1.00 7.66
(1) Defined as the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") for the Borrower and its restricted subsidiaries for the period of four consecutive quarters ending with March 31, 2023.
(2) Defined as the ratio of the difference of (A) consolidated EBITDA less (B) consolidated capital expenditures – manufacturing and other to consolidated interest expense to the extent paid in cash, in each case for the Borrower and its restricted subsidiaries for the period of four consecutive quarters ending with March 31, 2023.
As of March 31, 2023, we were in compliance with all such financial covenants. Please refer to Note 8 of the Consolidated Financial Statements for a description of our current debt obligations.
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Supplemental Guarantor Financial Information
Our Senior Notes are fully and unconditionally and jointly and severally guaranteed by certain of Trinity’s 100%-owned subsidiaries: Trinity Industries Leasing Company; Trinity North American Freight Car, Inc.; Trinity Rail Group, LLC; Trinity Tank Car, Inc.; and TrinityRail Maintenance Services, Inc. (collectively, the "Guarantor Subsidiaries”).
The Senior Notes indenture agreement includes customary provisions for the release of the guarantees by the Guarantor Subsidiaries upon the occurrence of certain allowed events including the release of one or more of the Guarantor Subsidiaries as guarantor under our revolving credit facility. See Note 8 of our 2022 Annual Report on Form 10-K. The Senior Notes are not guaranteed by any of our remaining 100%-owned subsidiaries or partially-owned subsidiaries (“Non-Guarantor Subsidiaries”).
As of March 31, 2023, assets held by the Non-Guarantor Subsidiaries included $173.1 million of restricted cash that was not available for distribution to Trinity Industries, Inc. (“Parent”), $7,255.5 million of equipment securing certain non-recourse debt, and $545.7 million of assets located in foreign locations. As of December 31, 2022, assets held by the Non-Guarantor Subsidiaries included $209.8 million of restricted cash that was not available for distribution to the Parent, $7,153.3 million of equipment securing certain non-recourse debt, and $571.7 million of assets located in foreign locations.
The following tables include the summarized financial information for Parent and Guarantor Subsidiaries (together, the obligor group) on a combined basis after elimination of intercompany transactions within the obligor group (in millions). Investments in and equity in the earnings of the Non-Guarantor Subsidiaries (the non-obligor group) have been excluded.
Three Months Ended March 31, 2023
Summarized Statement of Operations:
Revenues (1)
$ 428.4
Cost of revenues (2)
$ 394.9
Income (loss) from continuing operations $ (8.1)
Net income (loss) (3)
$ (11.2)
March 31, 2023 December 31, 2022
Summarized Balance Sheets:
Assets:
Receivables, net of allowance (4)
$ 304.3 $ 317.3
Inventories $ 573.6 $ 577.0
Property, plant, and equipment, net $ 442.6 $ 471.8
Goodwill and other assets $ 387.5 $ 399.7
Liabilities:
Accounts payable and accrued liabilities (5)
$ 381.5 $ 371.4
Debt $ 704.3 $ 624.1
Deferred income taxes $ 962.7 $ 949.8
Other liabilities $ 152.0 $ 156.6
Noncontrolling interest $ 256.2 $ 257.2
(1) There were no net sales from the obligor group to Non-Guarantor Subsidiaries during the three months ended March 31, 2023.
(2) Cost of revenues includes $94.3 million of purchases from Non-Guarantor Subsidiaries during the three months ended March 31, 2023.
(3) Net income (loss) includes $3.1 million of net loss related to discontinued operations.
(4) Receivables, net of allowance includes $87.4 million and $87.9 million of receivables from Non-Guarantor Subsidiaries as of March 31, 2023 and December 31, 2022, respectively.
(5) Accounts payable includes $52.6 million and $57.8 million of payables to Non-Guarantor Subsidiaries as of March 31, 2023 and December 31, 2022, respectively.
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Capital Expenditures
For the full year 2023, we anticipate a net investment in our lease fleet of between $250 million and $350 million. Capital expenditures related to manufacturing and other activities, including expansion of our fleet maintenance capabilities and systems upgrades, are projected to range between $40 million and $50 million for the full year 2023.
Equity Investment
See Note 5 of the Consolidated Financial Statements for information about our investment in partially-owned leasing subsidiaries.
Off Balance Sheet Arrangements
As of March 31, 2023, we had letters of credit issued under our revolving credit facility in an aggregate amount of $16.8 million, the majority of which are expected to expire in October 2023. Our letters of credit obligations support performance bonds related to certain railcar orders. See Note 8 of the Consolidated Financial Statements for further information about our corporate revolving credit facility.
Derivative Instruments
We use derivative instruments to mitigate interest rate risk, including risks associated with the impact of changes in interest rates in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also may use derivative instruments from time to time to mitigate the impact of changes in foreign currency exchange rates. Derivative instruments are accounted for in accordance with applicable accounting standards. See Note 3 of the Consolidated Financial Statements for discussion of how we utilize our derivative instruments.
LIBOR Transition
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), previously announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after June 2023. In the U.S., the Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to LIBOR. In February 2023, we amended the promissory notes and derivative instruments for Trinity Rail Leasing 2017 LLC to transition the facility benchmark rate from LIBOR to SOFR plus a benchmark adjustment. Following the completion of these amendments, we have no remaining LIBOR-based contracts.
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Non-GAAP Financial Measures
We have included financial measures compiled in accordance with GAAP and certain non-GAAP measures in this Quarterly Report on Form 10-Q to provide management and investors with additional information regarding our financial results. Non-GAAP measures should not be considered in isolation or as a substitute for our reporting results prepared in accordance with GAAP and, as calculated, may not be comparable to other similarly titled measures for other companies. For each non-GAAP financial measure, we provide a reconciliation to the most comparable GAAP measure.
Adjusted Free Cash Flow
Adjusted Free Cash Flow After Investments and Dividends ("Adjusted Free Cash Flow") is a non-GAAP financial measure. We believe Adjusted Free Cash Flow is useful to both management and investors as it provides a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. Adjusted Free Cash Flow is reconciled to net cash provided by operating activities from continuing operations, the most directly comparable GAAP financial measure, in the following table.
Adjusted Free Cash Flow is defined as net cash provided by operating activities from continuing operations as computed in accordance with GAAP, plus cash proceeds from lease portfolio sales, less capital expenditures for manufacturing, dividends paid, and Equity CapEx for leased railcars. Equity CapEx for leased railcars is defined as leasing capital expenditures, adjusted to exclude net proceeds from (repayments of) recourse and non-recourse debt.
Three Months Ended
March 31,
2023 2022
(in millions)
Net cash provided by operating activities – continuing operations $ 102.5 $ 28.5
Proceeds from lease portfolio sales 56.7 71.1
Capital expenditures – manufacturing and other (7.1) (2.3)
Dividends paid to common stockholders (21.1) (19.1)
Equity CapEx for leased railcars (94.8) (30.4)
Adjusted Free Cash Flow After Investments and Dividends
$ 36.2 $ 47.8
Capital expenditures – leasing $ 191.5 $ 84.6
Less:
Payments to retire debt (149.6) (73.0)
Proceeds from issuance of debt 246.3 127.2
Net proceeds from (repayments of) debt 96.7 54.2
Equity CapEx for leased railcars $ 94.8 $ 30.4
Contractual Obligations and Commercial Commitments
Except as described below, as of March 31, 2023, there have been no material changes to our contractual obligations from December 31, 2022:
• In March 2023, we amended our revolving credit facility to increase the total facility commitment from $450.0 million to $600.0 million and to amend certain other terms.
See Note 8 of the Consolidated Financial Statements for additional information regarding this amendment.
Recent Accounting Pronouncements
See Note 1 of the Consolidated Financial Statements for information about recent accounting pronouncements.
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