TRINITY INDUSTRIES INC 10-Q

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. 34 Table of Contents 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; • 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; • 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; 35 Table of Contents • 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; • 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. 36 Table of Contents Company Overview Trinity Industries, Inc. 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 ® . The TrinityRail platform provides railcar leasing and management services; railcar manufacturing, maintenance and modifications; 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. 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 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. 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. 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. 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. 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. 37 Table of Contents Due to their transactional nature, lease portfolio sales are the primary driver of fluctuations in results in the Leasing Group. Financial and Operational Highlights • 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 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 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. 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. 38 Table of Contents 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. 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. 39 Table of Contents Consolidated Results of Operations 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 June 30, 2023 2022 2023 2022 (in millions) Revenues $ 722.4 $ 416.8 $ 1,364.1 $ 889.5 Cost of revenues 601.2 325.6 1,139.7 724.1 Selling, engineering, and administrative expenses 54.3 45.0 104.2 89.7 Gains on dispositions of property 30.4 27.8 45.7 53.1 Restructuring activities, net (1.8) 1.0 (2.2) 1.0 Total operating profit 99.1 73.0 168.1 127.8 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) Income from continuing operations before income taxes 30.9 22.3 36.2 35.2 Provision (benefit) for income taxes 7.4 5.8 (4.1) 8.8 Income from continuing operations $ 23.5 $ 16.5 $ 40.3 $ 26.4 40 Table of Contents Revenues 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 External Intersegment Total Change (in millions) Railcar Leasing and Management Services Group $ 223.0 $ 0.2 $ 223.2 14.3 % Rail Products Group 499.4 209.6 709.0 64.7 % Segment Totals 722.4 209.8 932.2 48.9 % Eliminations – Lease Subsidiary — (209.6) (209.6) Eliminations – Other — (0.2) (0.2) Consolidated Total $ 722.4 $ — $ 722.4 73.3 % Three Months Ended June 30, 2022 Revenues External Intersegment Total (in millions) Railcar Leasing and Management Services Group $ 195.1 $ 0.2 $ 195.3 Rail Products Group 221.7 208.9 430.6 Segment Totals 416.8 209.1 625.9 Eliminations – Lease Subsidiary — (208.9) (208.9) Eliminations – Other — (0.2) (0.2) 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 Revenues 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 41 Table of Contents 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 and six months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in millions) Railcar Leasing and Management Services Group (1) $ 104.7 $ 89.8 $ 222.7 $ 193.1 Rail Products Group 685.3 416.9 1,297.8 807.2 Segment Totals 790.0 506.7 1,520.5 1,000.3 Corporate and other 31.6 25.1 57.6 40.8 Restructuring activities, net (1.8) 1.0 (2.2) 1.0 Eliminations – Lease Subsidiary (196.5) (188.6) (379.1) (281.1) Eliminations – Other — (0.4) (0.8) 0.7 Consolidated Total $ 623.3 $ 343.8 $ 1,196.0 $ 761.7 (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 and six months ended June 30, 2023 and 2022 was as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in millions) Railcar Leasing and Management Services Group $ 118.5 $ 105.5 $ 204.0 $ 185.3 Rail Products Group 23.7 13.7 49.0 14.5 Segment Totals 142.2 119.2 253.0 199.8 Corporate and other (31.6) (25.1) (57.6) (40.8) Restructuring activities, net 1.8 (1.0) 2.2 (1.0) Eliminations – Lease Subsidiary (13.1) (20.3) (29.9) (29.1) Eliminations – Other (0.2) 0.2 0.4 (1.1) Consolidated Total $ 99.1 $ 73.0 $ 168.1 $ 127.8 Discussion of Consolidated Results 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. 42 Table of Contents 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 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 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 $93.2 million for the six months ended June 30, 2022. These increases were primarily driven by higher variable interest rates associated with TILC's warehouse loan facility and the revolving credit facility and higher overall average debt in 2023. Income taxes – The effective tax rate from continuing operations for the three months ended June 30, 2023 was an expense of 23.9%, which differs from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, non-deductible executive compensation, excess tax benefits associated with equity-based compensation, and taxes not recorded on our non-controlling interests in partially-owned subsidiaries. The effective tax rate from continuing operations for the six months ended June 30, 2023 was a benefit of 11.3%, which differs from the U.S. statutory rate of 21.0% primarily due to the release of residual taxes out of AOCI, the re-measurement of our net deferred tax liabilities due to the acquisition of RSI, changes in our valuation allowances, state income taxes, and foreign income taxes. See Note 9 of the Consolidated Financial Statements for additional information. The effective tax rates from continuing operations for the three and six months ended June 30, 2022 were expenses of 26.0% and 25.0%, respectively, which differ from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, non-deductible executive compensation, excess tax benefits associated with equity-based compensation, and taxes not recorded on our non-controlling interests in partially-owned subsidiaries. 43 Table of Contents Segment Discussion Railcar Leasing and Management Services Group Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Percent 2023 2022 Percent ($ in millions) Change ($ in millions) Change Revenues: Leasing and management $ 223.2 $ 195.3 14.3 % $ 426.7 $ 378.4 12.8 % Operating profit (1) : Leasing and management $ 88.7 $ 78.6 12.8 % $ 160.7 $ 146.6 9.6 % 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 % Total operating profit margin 53.1 % 54.0 % 47.8 % 49.0 % Leasing and management operating profit margin 39.7 % 40.2 % 37.7 % 38.7 % Selected expense information: Depreciation and amortization (3) $ 61.1 $ 59.4 2.9 % $ 123.5 $ 116.6 5.9 % Maintenance and compliance $ 35.0 $ 27.3 28.2 % $ 70.8 $ 56.5 25.3 % Rent and ad valorem taxes $ 4.2 $ 5.3 (20.8) % $ 8.5 $ 10.3 (17.5) % Selling, engineering, and administrative expenses $ 14.0 $ 12.6 11.1 % $ 29.7 $ 25.4 16.9 % Interest (4) $ 57.0 $ 46.0 23.9 % $ 111.8 $ 84.7 32.0 % * 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 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 $1.5 million of loss on extinguishment of debt associated with the repayment of TRIP Railcar Co. LLC's outstanding term loan agreement. Information related to lease portfolio sales is as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in millions) Lease portfolio sales $ 129.0 $ 144.1 $ 185.7 $ 215.2 Operating profit on lease portfolio sales (1) $ 29.8 $ 26.9 $ 43.3 $ 37.4 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 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. 44 Table of Contents 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. 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: June 30, 2023 June 30, 2022 Number of railcars: Wholly-owned (1) 85,390 86,630 Partially-owned 23,670 23,930 109,060 110,560 Investor-owned 33,205 30,115 142,265 140,675 Company-owned railcars (2) : Average age in years 12.6 11.9 Average remaining lease term in years 3.1 2.9 Fleet utilization 97.9 % 97.2 % (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. 45 Table of Contents Rail Products Group Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Percent 2023 2022 Percent ($ in millions) Change ($ in millions) Change Revenues: Rail products (1) $ 626.0 $ 359.0 74.4 % $ 1,184.4 $ 697.4 69.8 % Maintenance services 59.5 57.0 4.4 % 114.8 100.0 14.8 % Other 23.5 14.6 61.0 % 47.6 24.3 95.9 % Total revenues $ 709.0 $ 430.6 64.7 % $ 1,346.8 $ 821.7 63.9 % Operating costs: Cost of revenues 676.4 409.8 65.1 % 1,281.8 796.8 60.9 % Selling, engineering, and administrative expenses 8.7 7.0 24.3 % 16.9 16.7 1.2 % (Gains) losses on dispositions of property 0.2 0.1 * (0.9) (6.3) * Operating profit $ 23.7 $ 13.7 * $ 49.0 $ 14.5 * Operating profit margin 3.3 % 3.2 % 3.6 % 1.8 % * Not meaningful (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 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. 46 Table of Contents Information related to our Rail Products Group backlog of new railcars is as follows. 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. June 30, 2023 2022 Percent (in millions) Change External customers $ 3,221.5 $ 1,432.1 Leasing Group 383.9 762.6 Total $ 3,605.4 $ 2,194.7 64.3 % Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Percent (in units, $ in whole dollars) Change Beginning balance 30,915 16,265 32,270 13,980 Orders received 4,770 4,335 7,460 9,390 (20.6) % Deliveries (4,985) (2,510) (9,030) (4,980) 81.3 % 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 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 $34.6 million that were removed from the new railcar backlog and shifted to the sustainable railcar conversion backlog. Total backlog dollars increased by 64.3% when compared to the prior year period due to an increase in the volume and average selling price of orders received primarily driven by a new long-term railcar supply agreement with GATX Corporation executed in the third quarter of 2022. We expect to deliver approximately 28.6% of our railcar backlog value during 2023 and 33.1% during 2024, with the remainder to be delivered through 2028. The orders in our backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may elect to change their procurement decision. Transactions between the Rail Products Group and the Leasing Group are as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in millions) Revenues: New railcars $ 190.4 $ 136.7 $ 324.7 $ 194.7 Sustainable railcar conversions $ 4.1 $ 38.3 $ 43.1 $ 60.3 Other maintenance services $ 15.1 $ 33.9 $ 41.2 $ 55.2 Deferred profit $ 13.1 $ 20.3 $ 29.9 $ 29.1 Number of new railcars (in units) 1,475 1,015 2,495 1,470 Number of sustainable railcar conversions (in units) 35 365 425 560 47 Table of Contents Corporate and other Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Percent 2023 2022 Percent (in millions) Change (in millions) Change Operating costs: Selling, engineering, and administrative expenses $ 31.6 $ 25.4 24.4 % $ 57.6 $ 47.6 21.0 % Gains on dispositions of property — (0.3) * — (6.8) * Operating loss $ (31.6) $ (25.1) 25.9 % $ (57.6) $ (40.8) 41.2 % * Not meaningful 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. 48 Table of Contents 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 June 30, 2023, we have total committed liquidity of $698.5 million. Our total available liquidity includes: $91.7 million of unrestricted cash and cash equivalents; $476.9 million unused and available under our revolving credit facility; and $129.9 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. 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. 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. 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 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 and six months ended June 30, 2023. Cash Flows 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 June 30, 2023 2022 (in millions) Net cash flows from continuing operations: Operating activities $ 140.3 $ (61.3) Investing activities (292.1) (198.5) Financing activities 159.5 278.6 Net cash flows from discontinued operations (5.4) (14.7) Net increase in cash, cash equivalents, and restricted cash $ 2.3 $ 4.1 49 Table of Contents Operating Activities . 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: Six Months Ended June 30, 2023 2022 (in millions) (Increase) decrease in receivables, inventories, and other assets $ (73.7) $ (248.6) Increase (decrease) in accounts payable, accrued liabilities, and other liabilities 67.5 55.2 Changes in operating assets and liabilities $ (6.2) $ (193.4) 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 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 $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 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 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 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. 50 Table of Contents 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 June 30, 2023 Maximum leverage (1) No greater than 4.25 to 1.00 2.66 Minimum interest coverage (2) 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 June 30, 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 June 30, 2023. 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. 51 Table of Contents Supplemental Guarantor Financial Information 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; 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 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 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. 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. Six Months Ended June 30, 2023 Summarized Statement of Operations: Revenues (1) $ 918.5 Cost of revenues (2) $ 840.7 Income (loss) from continuing operations $ (20.1) Net income (loss) (3) $ (25.5) June 30, 2023 December 31, 2022 Summarized Balance Sheets: Assets: Receivables, net of allowance (4) $ 383.5 $ 317.3 Inventories $ 568.9 $ 577.0 Property, plant, and equipment, net $ 440.0 $ 471.8 Goodwill and other assets $ 402.3 $ 399.7 Liabilities: Accounts payable and accrued liabilities (5) $ 417.8 $ 371.4 Debt $ 793.9 $ 624.1 Deferred income taxes $ 968.2 $ 949.8 Other liabilities $ 150.6 $ 156.6 Noncontrolling interest $ 254.4 $ 257.2 (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 $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. 52 Table of Contents 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 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. 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. 53 Table of Contents 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 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. 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 (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. Six Months Ended June 30, 2023 2022 (in millions) Net cash provided by (used in) operating activities – continuing operations $ 140.3 $ (61.3) Proceeds from lease portfolio sales 185.7 215.2 Capital expenditures – manufacturing and other (20.8) (18.8) Dividends paid to common stockholders (43.3) (39.3) Equity CapEx for leased railcars (181.1) (53.3) Adjusted Free Cash Flow After Investments and Dividends $ 80.8 $ 42.5 Capital expenditures – leasing $ 399.7 $ 414.1 Less: Payments to retire debt (1,035.3) (833.3) Proceeds from issuance of debt 1,253.9 1,194.1 Net proceeds from (repayments of) debt 218.6 360.8 Equity CapEx for leased railcars $ 181.1 $ 53.3 Contractual Obligations and Commercial Commitments 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. Recent Accounting Pronouncements See Note 1 of the Consolidated Financial Statements for information about recent accounting pronouncements. 54 Table of Contents