What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 189 added, 122 removed, 358 unchanged (46% of the section changed)

35 unchanged sentences

• the stability of the governments and political and business conditions in certain foreign countries, particularly Mexico;

• fluctuations in foreign currency exchange rates, particularly the Mexican peso;

• geopolitical events, including armed conflicts, and their impact on supply chains, pricing, and the global economy;

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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.

and its consolidated subsidiaries (“Trinity,” “Company,” “we,” “our,” or "us") own businesses that are leading providers of rail transportation products and services in North America.

We market our railcar products and services under the trade name TrinityRail ® .

2 unchanged sentences

and other railcar logistics products and services.

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.

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.

1 unchanged sentence

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.

Consequently, expenses incurred during the three and six months ended June 30, 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:

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

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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 are exposed to the impact of foreign currency fluctuations in our Mexico operations resulting from certain expenditures that are denominated in the Mexican peso.

We have entered into hedging transactions to mitigate the foreign currency impact of a portion of our peso-denominated expenditures;

however, in recent months, the magnitude of the peso's strengthening relative to the United States dollar has unfavorably impacted the operating results in our Rail Products Group.

Additionally, 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.

Further, 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.

Finally, 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.

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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 revenues for the six months ended June 30, 2023 were $1,364.1 million, representing an increase of 53.4%, compared to the six months ended June 30, 2022.

Our operating profit for the six months ended June 30, 2023 was $168.1 million compared to $127.8 million for the six months ended June 30, 2022.

• The Leasing Group's lease fleet of 109,060 company-owned railcars was 97.9% utilized as of June 30, 2023, compared to a lease fleet utilization of 97.2% on 110,560 company-owned railcars as of June 30, 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;

• For the six months ended June 30, 2023, we made a net investment in our lease fleet of approximately $214.0 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.

• The total value of the new railcar backlog at June 30, 2023 was $3.6 billion, compared to $2.2 billion at June 30, 2022.

The Rail Products Group received orders for 7,460 railcars and delivered 9,030 railcars in the six months ended June 30, 2023, in comparison to orders for 9,390 railcars and deliveries of 4,980 railcars in the six months ended June 30, 2022.

• During the six months ended June 30, 2023, sustainable railcar conversion revenues totaled $60.3 million, representing 635 railcars.

• For the six months ended June 30, 2023, we generated operating cash flows from continuing operations and Adjusted Free Cash Flow After Investments and Dividends ("Adjusted Free Cash Flow") of $140.3 million and $80.8 million (1) , respectively.

For the six months ended June 30, 2022, operating cash flows from continuing operations was a net use of $61.3 million and Adjusted Free Cash Flow was $42.5 million (1) .

(1) Non-GAAP financial measure.

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(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.

Capital Structure Updates

TRL-2023 Term Loan – In June 2023, Trinity Rail Leasing 2023 LLC (“TRL-2023”), a limited purpose, indirect wholly-owned subsidiary of the Company owned through Trinity Industries Leasing Company ("TILC"), entered into a $340.0 million term loan agreement ("TRL-2023 term loan").

The TRL-2023 term loan bears interest at a variable rate of daily simple Secured Overnight Financing Rate ("SOFR") plus (1) a benchmark adjustment of 10 basis points and (2) a facility margin of 1.80%.

The TRL-2023 term loan has a stated maturity date of June 2028.

Net proceeds received from the transaction were used to repay borrowings under TILC's warehouse loan facility and for general corporate purposes.

Senior Notes Due 2028 – In June 2023, we issued $400.0 million aggregate principal amount of 7.75% senior notes due July 2028 ("Senior Notes due 2028").

Interest on the Senior Notes due 2028 is payable semiannually commencing January 15, 2024.

Net proceeds received from the issuance were used to repay outstanding borrowings under our revolving credit facility and to pay related fees, costs, premiums, and expenses in connection with the issuance.

We intend to use the remainder of the net proceeds for general corporate purposes, which may include repayment of other debt, including our 4.55% senior notes due 2024 ("Senior Notes due 2024").

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.

See Note 14 of the Consolidated Financial Statements for an update on the status of certain litigation.

Consolidated Results of Operations

The following table summarizes our consolidated results of operations for the three months ended March 31, 2023 and 2022:

The following table summarizes our consolidated results of operations for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in millions)

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Interest expense, net 66.9 49.7 129.0 93.2

Loss on extinguishment of debt — 1.5 — 1.5

Other, net 1.3 (0.5) 2.9 (2.1)

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Income from continuing operations $ 23.5 $ 16.5 $ 40.3 $ 26.4

The tables below present revenues by segment for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, 2023

The tables below present revenues by segment for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, 2023

Revenues Percent

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Consolidated Total $ 722.4 $ — $ 722.4 73.3 %

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

External Intersegment Total

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Consolidated Total $ 416.8 $ — $ 416.8

Six Months Ended June 30, 2023

Revenues Percent

External Intersegment Total Change

(in millions)

Railcar Leasing and Management Services Group $ 426.3 $ 0.4 $ 426.7 12.8 %

Rail Products Group 937.8 409.0 1,346.8 63.9 %

Segment Totals 1,364.1 409.4 1,773.5 47.8 %

Eliminations – Lease Subsidiary — (409.0) (409.0)

Eliminations – Other — (0.4) (0.4)

Consolidated Total $ 1,364.1 $ — $ 1,364.1 53.4 %

Six Months Ended June 30, 2022

External Intersegment Total

(in millions)

Railcar Leasing and Management Services Group $ 378.0 $ 0.4 $ 378.4

Rail Products Group 511.5 310.2 821.7

Segment Totals 889.5 310.6 1,200.1

Eliminations – Lease Subsidiary — (310.2) (310.2)

Eliminations – Other — (0.4) (0.4)

Consolidated Total $ 889.5 $ — $ 889.5

Operating Costs

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and restructuring activities.

Operating costs by segment for the three months ended March 31, 2023 and 2022 were as follows:

Operating costs by segment for the three and six months ended June 30, 2023 and 2022 were as follows:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in millions)

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Consolidated Total $ 623.3 $ 343.8 $ 1,196.0 $ 761.7

(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.

(1) Includes gains on lease portfolio sales of $29.8 million and $26.9 million for the three months ended June 30, 2023 and 2022, respectively.

Includes gains on lease portfolio sales of $43.3 million and $38.7 million for the six months ended June 30, 2023 and 2022, respectively.

Operating Profit

Operating profit by segment for the three months ended March 31, 2023 and 2022 was as follows:

Operating profit by segment for the three and six months ended June 30, 2023 and 2022 was as follows:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in millions)

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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.

Revenues – Our revenues for the three months ended June 30, 2023 were $722.4 million, representing an increase of $305.6 million, or 73.3%, over the prior year period.

Our revenues for the six months ended June 30, 2023 were $1,364.1 million, representing an increase of $474.6 million, or 53.4%, over the prior year period.

The increases in revenues were primarily due to a higher volume of external deliveries in the Rail Products Group and improved lease rates, higher utilization, and the impact of the acquisition of RSI Logistics ("RSI") in the Leasing Group.

Cost of revenues – Our cost of revenues for the three months ended June 30, 2023 was $601.2 million, representing an increase of $275.6 million, or 84.6%, over the prior year period.

Our cost of revenues for the six months ended June 30, 2023 was $1,139.7 million, representing an increase of $415.6 million, or 57.4%, over the prior year period.

The increases in cost of revenues were primarily due to a higher volume of external deliveries, the impact of foreign currency fluctuations, and operational and labor-related inefficiencies in the Rail Products Group.

Selling, engineering, and administrative expenses – Selling, engineering, and administrative expenses for the three months ended June 30, 2023 were $54.3 million, representing an increase of $9.3 million, or 20.7%, when compared to the prior year period.

Selling, engineering, and administrative expenses for the six months ended June 30, 2023 were $104.2 million, representing an increase of $14.5 million, or 16.2%, when compared to the prior year period.

These increases were primarily due to higher employee-related costs.

Gains on dispositions of property – Gains on dispositions of property increased by $2.6 million for the three months ended June 30, 2023 when compared to the prior year period primarily due to higher profits on lease portfolio sales.

Gains on dispositions of property decreased by $7.4 million for the six months ended June 30, 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 six months ended June 30, 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.

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.

Operating profit – Operating profit for the three months ended June 30, 2023 totaled $99.1 million, representing an increase of $26.1 million, or 35.8%, from the prior year period.

Operating profit for the six months ended June 30, 2023 totaled $168.1 million, representing an increase of $40.3 million, or 31.5%, from the prior year period.

These increases were primarily due to a higher volume of external deliveries in the Rail Products Group and improved lease rates and higher utilization in the Leasing Group, partially offset by higher employee-related and other operating costs across the enterprise.

Operating profit for the six months ended June 30, 2023 and 2022 was favorably impacted 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.

Interest expense, net – Interest expense, net for the three months ended June 30, 2023 totaled $66.9 million, compared to $49.7 million for the three months ended June 30, 2022.

Interest expense, net for the six months ended June 30, 2023 totaled $129.0 million, compared to $93.2 million for the six months ended June 30, 2022.

These increases were 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 June 30, 2023 was an expense of 23.9%, which differs from the U.S.

statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, non-deductible executive compensation, excess tax benefits associated with equity-based compensation, and taxes not recorded on our non-controlling interests in partially-owned subsidiaries.

The effective tax rate from continuing operations for the six months ended June 30, 2023 was a benefit of 11.3%, which differs from the U.S.

statutory rate of 21.0% primarily due to the release of residual taxes out of AOCI, the re-measurement of our net deferred tax liabilities due to the acquisition of 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.

The effective tax rates from continuing operations for the three and six months ended June 30, 2022 were expenses of 26.0% and 25.0%, respectively, which differ from the U.S.

Segment Discussion

Railcar Leasing and Management Services Group

Three Months Ended March 31,

2023 2022 Percent

($ in millions) Change

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 Percent 2023 2022 Percent

($ in millions) Change ($ in millions) Change

Leasing and management $ 223.2 $ 195.3 14.3 % $ 426.7 $ 378.4 12.8 %

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Lease portfolio sales (2)

29.8 26.9 * 43.3 38.7 *

Total operating profit $ 118.5 $ 105.5 12.3 % $ 204.0 $ 185.3 10.1 %

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Selected expense information:

Depreciation (3)

Depreciation and amortization (3)

$ 61.1 $ 59.4 2.9 % $ 123.5 $ 116.6 5.9 %

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$ 14.0 $ 12.6 11.1 % $ 29.7 $ 25.4 16.9 %

Interest $ 54.8 $ 38.7 41.6 %

$ 57.0 $ 46.0 23.9 % $ 111.8 $ 84.7 32.0 %

* Not meaningful

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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.

(2) Includes $1.3 million selling profit associated with sales-type leases for the six months ended June 30, 2022.

(3) Depreciation expense includes $0.8 million and $5.5 million for the three and six months ended June 30, 2023, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program.

For the three and six months ended June 30, 2022, depreciation expense includes $3.9 million and $6.1 million, respectively, related to our sustainable railcar conversion program.

(4) Interest expense for the three and six months ended June 30, 2022 includes $1.5 million of loss on extinguishment of debt associated with the repayment of TRIP Railcar Co.

LLC's outstanding term loan agreement.

Information related to lease portfolio sales is as follows:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in millions)

3 unchanged sentences

Operating profit margin on lease portfolio sales 23.1 % 18.7 % 23.3 % 17.4 %

(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.

(1) Excludes $1.3 million selling profit associated with sales-type leases for the six months ended June 30, 2022.

Total revenues for the Railcar Leasing and Management Services Group increased by 14.3% and 12.8% for the three and six months ended June 30, 2023, respectively, compared to the prior year periods.

Leasing and management revenues for the three and six months ended June 30, 2023 were favorably impacted primarily by improved lease rates and higher utilization, which resulted in higher revenues when compared to the three and six months ended June 30, 2022.

Revenues for the Leasing Group were also favorably impacted for the three and six months ended June 30, 2023 by the acquisition of RSI.

Leasing and management operating profit for the three and six months ended June 30, 2023 increased by 12.8% and 9.6%, respectively, compared to the prior year periods primarily due to improved lease rates and higher utilization, partially offset by higher maintenance costs and increased depreciation and selling, engineering, and administrative expenses.

Leasing Group operating profit increased by 12.3% and 10.1% for the three and six months ended June 30, 2023, respectively, compared to the prior year periods and was favorably impacted by higher profit from lease portfolio sales.

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.

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Information regarding the Leasing Group’s lease fleet is as follows:

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Number of railcars:

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Fleet utilization 97.9 % 97.2 %

(1) Includes 2,470 railcars and 2,575 railcars under leased-in arrangements as of March 31, 2023 and 2022, respectively.

(1) Includes 2,490 railcars and 2,845 railcars under leased-in arrangements as of June 30, 2023 and 2022, respectively.

(2) Includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements.

Rail Products Group

Three Months Ended March 31,

2023 2022 Percent

($ in millions) Change

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 Percent 2023 2022 Percent

($ in millions) Change ($ in millions) Change

Rail products (1)

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8.7 7.0 24.3 % 16.9 16.7 1.2 %

Gains on dispositions of property (1.1) (6.4) *

(Gains) losses on dispositions of property 0.2 0.1 * (0.9) (6.3) *

Operating profit $ 23.7 $ 13.7 * $ 49.0 $ 14.5 *

1 unchanged sentence

* 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.

(1) Includes sustainable railcar conversion revenues of $6.4 million, representing 45 railcars, for the three months ended June 30, 2023 and sustainable railcar conversion revenues of $60.3 million, representing 635 railcars, for the six months ended June 30, 2023.

Includes sustainable railcar conversion revenues of $39.2 million, representing 485 railcars, for the three months ended June 30, 2022 and sustainable railcar conversion revenues of $89.0 million, representing 930 railcars, for the six months ended June 30, 2022.

Revenues for the Rail Products Group increased for the three and six months ended June 30, 2023 by 64.7% and 63.9%, respectively, when compared to the prior year periods.

Revenues in our rail products business increased as a result of higher deliveries, partially offset by the mix of railcars sold.

Revenues in our maintenance services business increased as a result of higher volumes and favorable pricing, partially offset by the mix of repairs.

Revenues in other were driven by the growth of our parts business as a result of the acquisition of Holden America.

Cost of revenues for the Rail Products Group increased for the three and six months ended June 30, 2023 by 65.1% and 60.9%, respectively, when compared to the prior year periods.

In our rail products business, the increase in cost of revenues was driven by higher deliveries, the impact of foreign currency fluctuations, operational inefficiencies associated with production line changeovers and supply chain disruptions, and labor inefficiencies associated with onboarding of new employees.

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.

Operating profit for the three and six months ended June 30, 2023 was favorably impacted by higher deliveries, partially offset by the mix of railcars sold, the impact of foreign currency fluctuations, and operational and labor inefficiencies.

Additionally, during the six months ended June 30, 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.

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.

In addition to the amounts below, as of June 30, 2023, our backlog related to sustainable railcar conversions totaled $179.9 million, representing 2,160 railcars.

2023 2022 Percent

3 unchanged sentences

Total $ 3,605.4 $ 2,194.7 64.3 %

Three Months Ended

Three Months Ended June 30, Six Months Ended

2023 2022 2023 2022 Percent

(in units, $ in whole dollars) Change

Beginning balance 30,915 16,265 32,270 13,980

2 unchanged sentences

Other adjustments (1)

(160) — (160) (300)

Ending balance 30,540 18,090 30,540 18,090 68.8 %

Average selling price in ending backlog $ 118,055 $ 121,321 (2.7) %

(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.

(1) The adjustment for the three and six months ended June 30, 2023 includes 160 railcars valued at $19.2 million that were placed with a different customer and are also included in orders received in the table above, resulting in no net effect on ending backlog.

The adjustment for the six months ended June 30, 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 64.3% 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.

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Transactions between the Rail Products Group and the Leasing Group are as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended

2023 2022 2023 2022

($ in millions)

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Corporate and other

Three Months Ended March 31,

2023 2022 Percent

(in millions) Change

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 Percent 2023 2022 Percent

(in millions) Change (in millions) Change

Operating costs:

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* 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.

Selling, engineering, and administrative expenses for the three and six months ended June 30, 2023 increased 24.4% and 21.0%, respectively, compared to the prior year periods primarily from higher employee-related costs, as well as the change in estimated fair value of additional contingent consideration associated with an acquisition.

Total operating costs during the six months ended June 30, 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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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.

As of June 30, 2023, we have total committed liquidity of $698.5 million.

Our total available liquidity includes:

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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

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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.

TRL-2023 Term Loan – In June 2023, TRL-2023 entered into a $340.0 million term loan agreement.

The TRL-2023 term loan bears interest at a variable rate of daily simple SOFR plus (1) a benchmark adjustment of 10 basis points and (2) a facility margin of 1.80%.

The TRL-2023 term loan has a stated maturity date of June 2028.

Net proceeds received from the transaction were used to repay borrowings under TILC's warehouse loan facility and for general corporate purposes.

Senior Notes Due 2028 – In June 2023, we issued $400.0 million aggregate principal amount of 7.75% senior notes due July 2028.

Interest on the Senior Notes due 2028 is payable semiannually commencing January 15, 2024.

We intend to use the remainder of the net proceeds for general corporate purposes, which may include repayment of other debt, including our Senior Notes due 2024.

Dividend Payments – We paid $43.3 million in dividends to our common stockholders during the six months ended June 30, 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.

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

There were no shares repurchased during the three and six months ended June 30, 2023.

The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022:

Six Months Ended

(in millions)

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Net cash flows from discontinued operations (5.4) (14.7)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ (31.3) $ 49.0

Net increase in cash, cash equivalents, and restricted cash $ 2.3 $ 4.1

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.

Net cash provided by operating activities from continuing operations for the six months ended June 30, 2023 was $140.3 million compared to net cash used in operating activities from continuing operations of $61.3 million for the six months ended June 30, 2022.

The changes in our operating assets and liabilities are as follows:

Three Months Ended

Six Months Ended

(in millions)

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Changes in operating assets and liabilities $ (6.2) $ (193.4)

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.

The changes in our operating assets and liabilities resulted in a net use of $6.2 million for the six months ended June 30, 2023, as compared to a net use of $193.4 million for the six months ended June 30, 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.

Net cash used in investing activities from continuing operations for the six months ended June 30, 2023 was $292.1 million compared to $198.5 million of net cash used in investing activities from continuing operations for the six months ended June 30, 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.

• We made a net investment in our lease fleet of $214.0 million during the six months ended June 30, 2023, compared to $198.9 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.

• During the six months ended June 30, 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.

During the six months ended June 30, 2022, we acquired a company that owns and operates an end-to-end rail logistics software platform providing a real-time data universe to freight rail shippers and operators for net cash of $9.4 million.

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.

Net cash provided by financing activities during the six months ended June 30, 2023 was $159.5 million compared to $278.6 million of net cash provided by financing activities for the six months ended June 30, 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.

• During the six months ended June 30, 2023, we had total borrowings of $1,253.9 million and total repayments of $1,035.3 million, for net proceeds of $218.6 million, primarily from debt proceeds for general corporate purposes and to support our investment in the lease fleet.

During the six months ended June 30, 2022, we had total borrowings of $1,194.1 million and total repayments of $833.3 million, for net proceeds of $360.8 million, primarily from debt proceeds to support our investment in the lease fleet.

• We paid $43.3 million and $39.3 million in dividends to our common stockholders during the six months ended June 30, 2023 and 2022, respectively.

• We repurchased common stock totaling $22.4 million during the six months ended June 30, 2022.

The prior year period excludes $25.0 million representing the final settlement of the ASR, which was funded in December 2021 but a portion of which remained outstanding.

There were no shares repurchased during the six months ended June 30, 2023.

Current Debt Obligations

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Ratio Covenant Actual at

March 31, 2023

June 30, 2023

Maximum leverage (1)

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No less than 2.25 to 1.00 7.79

(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.

As of June 30, 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.

Supplemental Guarantor Financial Information

Our Senior Notes are fully and unconditionally and jointly and severally guaranteed by certain of Trinity’s 100%-owned subsidiaries:

Our Senior Notes due 2024 are fully and unconditionally and jointly and severally guaranteed by certain of Trinity’s 100%-owned subsidiaries:

Trinity Industries Leasing Company;

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(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.

The Senior Notes due 2024 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.

The Senior Notes due 2024 are not guaranteed by any of our remaining 100%-owned subsidiaries or partially-owned subsidiaries (“Non-Guarantor Subsidiaries”).

As of June 30, 2023, assets held by the Non-Guarantor Subsidiaries included $198.1 million of restricted cash that was not available for distribution to Trinity Industries, Inc.

(“Parent”), $7,262.8 million of equipment securing certain non-recourse debt, and $519.1 million of assets located in foreign locations.

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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

Six Months Ended June 30, 2023

Summarized Statement of Operations:

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Net income (loss) (3)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Summarized Balance Sheets:

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Noncontrolling interest $ 254.4 $ 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.

(1) There were no net sales from the obligor group to Non-Guarantor Subsidiaries during the six months ended June 30, 2023.

(2) Cost of revenues includes $200.1 million of purchases from Non-Guarantor Subsidiaries during the six months ended June 30, 2023.

(3) Net income (loss) includes $5.4 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.

(4) Receivables, net of allowance includes $93.4 million and $87.9 million of receivables from Non-Guarantor Subsidiaries as of June 30, 2023 and December 31, 2022, respectively.

(5) Accounts payable includes $45.1 million and $57.8 million of payables to Non-Guarantor Subsidiaries as of June 30, 2023 and December 31, 2022, respectively.

Capital Expenditures

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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.

As of June 30, 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.

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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.

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.

Non-GAAP measures should not be considered in isolation or as a substitute for our reported 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.

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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.

Adjusted Free Cash Flow is reconciled to net cash provided by (used in) 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 (used in) 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

Six Months Ended

(in millions)

Net cash provided by operating activities – continuing operations $ 102.5 $ 28.5

Net cash provided by (used in) operating activities – continuing operations $ 140.3 $ (61.3)

Proceeds from lease portfolio sales 185.7 215.2

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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:

Except as described below, as of June 30, 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.

• In June 2023, TRL-2023 entered into a $340.0 million term loan agreement with a stated maturity date of June 2028.

• In June 2023, we issued $400.0 million aggregate principal amount of 7.75% senior notes due July 2028.

See Note 8 of the Consolidated Financial Statements for additional information regarding this amendment.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis