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 2023 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. 35 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 that 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; • disruptions in the transportation network used to transport parts and components to our production facilities and to deliver products to our customers, particularly with respect to the delivery of finished railcars from Mexico to the U.S., which may impact our ability to manufacture and 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; • 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; 36 Table of Contents • 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 2023 Annual Report on Form 10-K, this Form 10-Q and future Forms 10-Q and Current Reports on Forms 8-K. 37 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 railcar products and services in North America. We market our railcar products and services under the trade name TrinityRail ® . The TrinityRail platform provides railcar leasing and management services; railcar manufacturing; railcar maintenance and modifications; and other railcar logistics products and services. We report our operating results in two reportable segments: (1) the Railcar Leasing and Services Group (the "Leasing Group"), which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services; railcar maintenance and modification services; and other railcar logistics products and services; and (2) the Rail Products Group, which manufactures and sells railcars and related parts and components. Effective January 1, 2024, the Company modified its organizational structure to better leverage our maintenance services capabilities to support lease fleet optimization and to grow our services and parts businesses. The new structure resulted in a change to our reportable segments beginning in 2024. In connection with this organizational update, we aligned the maintenance services business, which was previously reported in the Rail Products Group, to now be presented within our leasing business. This change aligns with the way in which our CODM assesses performance and allocates resources. Consequently, beginning January 1, 2024, we report our operating results in two reportable segments: (1) the Railcar Leasing and Services Group, formerly the Railcar Leasing and Management Services Group, and (2) the Rail Products Group. These changes had no impact to our previously reported consolidated results of operations, financial position, or cash flows. All prior period segment results set forth herein have been recast to reflect these changes and present results on a comparable basis. Executive Summary Cyclical, Seasonal and Other Trends Impacting Our Business General/Business Trends The industries in which our customers operate are cyclical in nature. Although lease rates and lease fleet utilization remain strong, 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 customers, which could negatively impact our revenues, credit loss expense, 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. Due to their transactional nature, lease portfolio sales are the primary driver of fluctuations in results in the Leasing Group. U.S.-Mexico Border Disruption In late 2023, the U.S. Customs and Border Protection Agency suspended cross-border rail traffic in Eagle Pass, Texas, the primary border crossing used for railcar deliveries from our manufacturing facilities in Mexico, which negatively impacted our railcar deliveries in the second half of 2023. We have not experienced a border closure at Eagle Pass thus far in 2024, and all railcar shipments that were delayed at the end of 2023 were delivered during the first half of 2024; however, there remains a risk of instability at the border, and there can be no assurance that similar border closings or congestion will not occur in the future. We actively monitor rail and truck traffic at the U.S.-Mexico border and remain in close contact with all stakeholders, including the relevant government agencies, and continue to evaluate available alternatives for rail and truck transportation between Mexico and the United States. Any future rail and truck congestion at the border could negatively impact our deliveries and supply chain. Supply Chain Disruptions As a result of disruptions in the global supply chain, we have, from time to time, experienced shortages of materials used to manufacture or repair certain railcar types, as well as disruptions in the transportation network. Such challenges could negatively impact our operations or our ability to timely deliver railcars to our customers. We actively monitor our supply chain and take appropriate steps within our control to mitigate the potential impacts on our production schedules and delivery timelines. 38 Table of Contents Foreign Currency Fluctuations 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. The strengthening of the Mexican peso relative to the U.S. dollar unfavorably impacted the operating results in our Rail Products Group in 2023. We maintain a hedging program and have taken other actions to mitigate the foreign currency impact of a portion of our peso-denominated expenditures. We regularly evaluate and update our strategies to mitigate the negative effects on margins and operating profits that may arise due to foreign currency fluctuations. Input and Labor Costs We periodically experience increases in the costs of steel, components, and certain other inputs that represent a substantial portion 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 the volatility of certain input costs on our operating profit. Further, the cost and volume of lease fleet maintenance and compliance events have increased, and we expect elevated levels of these activities to continue in the near term. Finally, increases in labor costs have negatively impacted our operations. We continually assess the impact of input and labor costs on our operational efficiency, margins, and overall profitability. 39 Table of Contents Financial and Operational Highlights • Our revenues for the six months ended June 30, 2024 were $1,651.0 million, representing an increase of 21.0%, compared to the six months ended June 30, 2023. Our operating profit for the six months ended June 30, 2024 was $257.1 million compared to $168.1 million for the six months ended June 30, 2023. • The Leasing Group's lease fleet of 109,365 company-owned railcars was 96.9% utilized as of June 30, 2024, compared to a lease fleet utilization of 97.9% on 109,060 company-owned railcars as of June 30, 2023. 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, 2024, we made a net fleet investment of approximately $46.0 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, 2024 was $2.7 billion, compared to $3.6 billion at June 30, 2023. The Rail Products Group received orders for 4,375 railcars and delivered 9,450 railcars in the six months ended June 30, 2024, in comparison to orders for 7,460 railcars and deliveries of 9,030 railcars in the six months ended June 30, 2023. See "Consolidated Results of Operations" and "Segment Discussion" below for additional information regarding our operating results. (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) 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. Dollar amounts are presented for the six months ended June 30, 2024 and 2023. 40 Table of Contents Capital Structure Updates TILC Warehouse Loan Facility – In March 2024, we entered into a new Trinity Industries Leasing Company ("TILC") warehouse loan facility with a total commitment amount of $800.0 million, a revolving termination date of March 15, 2027, and a maturity date of March 15, 2028. This warehouse loan facility replaced the prior $1.0 billion warehouse loan facility. TRL-2024 Secured Railcar Equipment Notes – In May 2024, Trinity Rail Leasing 2021 LLC, a Delaware limited liability company ("TRL-2021") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued $432.4 million of its Series 2024-1 Class A Green Secured Railcar Equipment Notes. These notes bear interest at a fixed rate of 5.78%, are payable monthly, and have a stated final maturity date of 2054. Net proceeds received from the transaction were used to repay borrowings under TILC's warehouse loan facility; to redeem the outstanding debt of Trinity Rail Leasing VII LLC's Series 2009-1 Secured Railcar Equipment Notes (the "TRL VII Notes"), of which $94.1 million was outstanding at the redemption date; and for general corporate purposes. The all-in interest rate for the TRL VII Notes was 6.66% per annum. Senior Notes due 2028 – In June 2024, we issued an additional $200.0 million aggregate principal amount of 7.75% senior notes due July 2028 (the "Additional Senior Notes"), which increased the aggregate principal amount from $400.0 million to $600.0 million. Interest on the Additional Senior Notes is payable semiannually commencing July 15, 2024. Net proceeds received from the issuance, together with cash on hand, were used to repay $400.0 million of our 4.55% senior notes due 2024 ("Senior Notes due 2024"), and to pay related fees, costs, premiums, and expenses in connection with the issuance. See Note 8 of the Consolidated Financial Statements for additional information regarding these debt transactions. Litigation Updates See Note 14 of the Consolidated Financial Statements for an update on the status of certain litigation. 41 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, 2024 and 2023: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in millions) Revenues $ 841.4 $ 722.4 $ 1,651.0 $ 1,364.1 Cost of revenues 662.4 601.2 1,307.3 1,139.7 Selling, engineering, and administrative expenses 61.3 54.3 113.6 104.2 Gains on dispositions of property 24.2 30.4 27.0 45.7 Restructuring activities, net — (1.8) — (2.2) Total operating profit 141.9 99.1 257.1 168.1 Interest expense, net 70.1 66.9 139.2 129.0 Other, net (3.4) 1.3 — 2.9 Income from continuing operations before income taxes 75.2 30.9 117.9 36.2 Provision (benefit) for income taxes 17.1 7.4 28.1 (4.1) Income from continuing operations $ 58.1 $ 23.5 $ 89.8 $ 40.3 42 Table of Contents Revenues The tables below present revenues by segment for the three and six months ended June 30, 2024 and 2023: Three Months Ended June 30, 2024 Revenues Percent External Intersegment Total Change (in millions) Railcar Leasing and Services Group $ 280.5 $ 0.9 $ 281.4 4.9 % Rail Products Group 560.9 73.3 634.2 (3.2) % Segment Totals 841.4 74.2 915.6 (0.9) % Eliminations — (74.2) (74.2) Consolidated Total $ 841.4 $ — $ 841.4 16.5 % Three Months Ended June 30, 2023 Revenues External Intersegment Total (in millions) Railcar Leasing and Services Group $ 267.8 $ 0.5 $ 268.3 Rail Products Group 454.6 200.8 655.4 Segment Totals 722.4 201.3 923.7 Eliminations — (201.3) (201.3) Consolidated Total $ 722.4 $ — $ 722.4 Six Months Ended June 30, 2024 Revenues Percent External Intersegment Total Change (in millions) Railcar Leasing and Services Group $ 564.8 $ 1.8 $ 566.6 13.0 % Rail Products Group 1,086.2 215.4 1,301.6 4.7 % Segment Totals 1,651.0 217.2 1,868.2 7.1 % Eliminations — (217.2) (217.2) Consolidated Total $ 1,651.0 $ — $ 1,651.0 21.0 % Six Months Ended June 30, 2023 Revenues External Intersegment Total (in millions) Railcar Leasing and Services Group $ 500.5 $ 0.7 $ 501.2 Rail Products Group 863.6 379.4 1,243.0 Segment Totals 1,364.1 380.1 1,744.2 Eliminations — (380.1) (380.1) Consolidated Total $ 1,364.1 $ — $ 1,364.1 43 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, 2024 and 2023 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in millions) Railcar Leasing and Services Group (1) $ 153.4 $ 152.2 $ 338.3 $ 300.5 Rail Products Group 583.8 631.1 1,207.4 1,194.6 Segment Totals 737.2 783.3 1,545.7 1,495.1 Corporate and other 33.3 31.6 59.8 57.6 Restructuring activities, net — (1.8) — (2.2) Eliminations (71.0) (189.8) (211.6) (354.5) Consolidated Total $ 699.5 $ 623.3 $ 1,393.9 $ 1,196.0 (1) Includes gains on lease portfolio sales of $22.7 million and $29.8 million for the three months ended June 30, 2024 and 2023, respectively. Includes gains on lease portfolio sales of $24.8 million and $43.3 million for the six months ended June 30, 2024 and 2023, respectively. Operating Profit Operating profit by segment for the three and six months ended June 30, 2024 and 2023 was as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in millions) Railcar Leasing and Services Group $ 128.0 $ 116.1 $ 228.3 $ 200.7 Rail Products Group 50.4 24.3 94.2 48.4 Segment Totals 178.4 140.4 322.5 249.1 Corporate and other (33.3) (31.6) (59.8) (57.6) Restructuring activities, net — 1.8 — 2.2 Eliminations (3.2) (11.5) (5.6) (25.6) Consolidated Total $ 141.9 $ 99.1 $ 257.1 $ 168.1 Discussion of Consolidated Results Revenues – Our revenues for the three months ended June 30, 2024 were $841.4 million, representing an increase of $119.0 million, or 16.5%, over the prior year period. Our revenues for the six months ended June 30, 2024 were $1,651.0 million, representing an increase of $286.9 million, or 21.0%, over the prior year period. These increases in revenues were primarily due to higher external deliveries in the Rail Products Group and improved lease rates and net additions to the lease fleet in the Leasing Group. For the six months ended June 30, 2024, revenues were favorably impacted by a higher volume of external repairs in the Leasing Group. Cost of revenues – Our cost of revenues for the three months ended June 30, 2024 was $662.4 million, representing an increase of $61.2 million, or 10.2%, over the prior year period primarily due to higher external deliveries in the Rail Products Group. Our cost of revenues for the six months ended June 30, 2024 was $1,307.3 million, representing an increase of $167.6 million, or 14.7%, over the prior year period primarily due to higher external deliveries and the impact of foreign currency fluctuations in the Rail Products Group. Selling, engineering, and administrative expenses – Selling, engineering, and administrative expenses for the three months ended June 30, 2024 were $61.3 million, representing an increase of $7.0 million, or 12.9%, when compared to the prior year period. Selling, engineering, and administrative expenses for the six months ended June 30, 2024 were $113.6 million, representing an increase of $9.4 million, or 9.0%, when compared to the prior year period. These increases were primarily due to higher employee-related costs, including increased incentive-based compensation, and continued investments in technology. Selling, engineering, and administrative expenses in the prior year periods include additional contingent consideration associated with an acquisition. 44 Table of Contents Gains on dispositions of property – Gains on dispositions of property decreased by $6.2 million and $18.7 million for the three and six months ended June 30, 2024, respectively, when compared to the prior year periods. These decreases were primarily due to lower lease portfolio sales in the current year periods. Additionally, we recorded gains of $1.2 million during the six months ended June 30, 2023 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. Operating profit – Operating profit for the three months ended June 30, 2024 totaled $141.9 million, representing an increase of $42.8 million, or 43.2%, from the prior year period. Operating profit for the six months ended June 30, 2024 totaled $257.1 million, representing an increase of $89.0 million, or 52.9%, from the prior year period. These increases were primarily due to higher external deliveries and improved efficiencies in the Rail Products Group and improved lease rates in the Leasing Group, partially offset by lower lease portfolio sales in the current year periods. Operating profit for the six months ended June 30, 2024 was favorably impacted by a higher volume of external repairs in our maintenance services business. 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, 2024 totaled $70.1 million, compared to $66.9 million for the three months ended June 30, 2023. Interest expense, net for the six months ended June 30, 2024 totaled $139.2 million, compared to $129.0 million for the six months ended June 30, 2023. These increases were primarily driven by higher interest rates and higher average debt in 2024, as well as a $1.5 million loss on extinguishment of debt for the three and six months ended June 30, 2024. Other, net – Other, net for the three months ended June 30, 2024 resulted in income of $3.4 million, compared to expense of $1.3 million for the three months ended June 30, 2023. There was no other, net (income) expense for the six months ended June 30, 2024, compared to expense of $2.9 million for the six months ended June 30, 2023. The changes in other, net (income) expense are primarily due the remeasurement impact of foreign currency fluctuations related to the Mexican peso. Additionally, other, net for the six months ended June 30, 2024 includes a fee of $3.1 million related to the execution of back-to-back interest rate caps associated with the new TILC warehouse loan facility. Income taxes – The effective tax rates from continuing operations for the three and six months ended June 30, 2024 were expenses of 22.7% and 23.8%, respectively, which differ from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, and non-deductible executive compensation, partially offset by the benefit of noncontrolling interest, for which we do not provide income taxes, excess tax benefits associated with equity-based compensation, and changes in state tax laws enacted in the second quarter. The effective tax rate from continuing operations for the three months ended June 30, 2023 was an expense of 23.9%, which differs from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, non-deductible executive compensation, excess tax benefits associated with equity-based compensation, and taxes not recorded on our non-controlling interests in partially-owned subsidiaries. The effective tax rate from continuing operations for the six months ended June 30, 2023 was a benefit of 11.3%, which differs from the U.S. statutory rate of 21.0% primarily due to the release of residual taxes out of accumulated other comprehensive income; the re-measurement of our net deferred tax liabilities due to the acquisition of a subsidiary; changes in our valuation allowances; state income taxes, and foreign income taxes. See Note 9 of the Consolidated Financial Statements for additional information. 45 Table of Contents Segment Discussion Railcar Leasing and Services Group Three Months Ended June 30, Six Months Ended June 30, 2024 2023 Percent 2024 2023 Percent ($ in millions) Change ($ in millions) Change Revenues: Leasing and management $ 221.9 $ 203.8 8.9 % $ 430.9 $ 398.5 8.1 % Maintenance services (1) 49.0 45.1 8.6 % 114.2 74.5 53.3 % Digital and logistics services 10.5 19.4 (45.9) % 21.5 28.2 (23.8) % Total revenues $ 281.4 $ 268.3 4.9 % $ 566.6 $ 501.2 13.0 % Cost of revenues (2) $ 157.4 $ 167.6 (6.1) % 327.0 314.4 4.0 % Selling, engineering, and administrative expenses 20.0 15.2 31.6 % 38.1 32.1 18.7 % Gains on dispositions of property: Lease portfolio sales 22.7 29.8 * 24.8 43.3 * Other 1.3 0.8 * 2.0 2.7 * Total operating profit $ 128.0 $ 116.1 10.2 % $ 228.3 $ 200.7 13.8 % Total operating profit margin 45.5 % 43.3 % 40.3 % 40.0 % Total operating profit margin, excluding lease portfolio sales 37.4 % 32.2 % 35.9 % 31.4 % Selected expense information for Company-owned railcars (3) : Depreciation and amortization expense (4) $ 60.1 $ 59.2 1.5 % $ 120.0 $ 120.8 (0.7) % Maintenance and compliance expense (5) $ 35.0 $ 32.8 6.7 % $ 65.4 $ 67.6 (3.3) % Other fleet operating costs (6) $ 8.1 $ 8.2 (1.2) % $ 15.8 $ 17.4 (9.2) % Interest expense (7) $ 60.4 $ 57.0 6.0 % $ 117.8 $ 111.8 5.4 % * Not meaningful (1) Revenues related to services performed by the maintenance services business to support the railcars in our lease fleet are eliminated within the Railcar Leasing & Services Group and are excluded from the totals reported on this line. (2) Includes depreciation and amortization expense, maintenance and compliance expense, and other fleet operating costs related to our lease fleet, as well as operating costs for our maintenance services and digital and logistics services businesses. (3) Includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements. (4) Depreciation and amortization expense includes $0.8 million and $5.5 million for the three and six months ended June 30, 2023, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program. Additionally, amortization of deferred profit on railcars sold from the Rail Products Group to the Leasing Group is included in depreciation and amortization expense, resulting in the recognition of depreciation expense based on our original manufacturing cost of the railcars. (5) Maintenance and compliance expense is reported at cost with respect to the services performed by our maintenance services business to support the railcars in our lease fleet. (6) Other fleet operating costs include freight, storage, rent, and ad valorem taxes. (7) Interest expense is not a component of operating profit and includes the effect of hedges. Information related to lease portfolio sales is as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 ($ in millions) Lease portfolio sales $ 162.5 $ 129.0 $ 186.7 $ 185.7 Operating profit on lease portfolio sales $ 22.7 $ 29.8 $ 24.8 $ 43.3 Operating profit margin on lease portfolio sales 14.0 % 23.1 % 13.3 % 23.3 % 46 Table of Contents Total revenues for the Railcar Leasing and Services Group increased by 4.9% and 13.0% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods. Leasing and management revenues for the three and six months ended June 30, 2024 were favorably impacted primarily by improved lease rates and net additions to the lease fleet, which resulted in higher revenues when compared to the three and six months ended June 30, 2023. Digital and logistics services revenues for the three and six months ended June 30, 2024 decreased when compared to the prior year periods primarily due to a change in revenue recognition from gross basis to net basis based on our conclusion that we are acting as an agent for certain services provided to a small number of customers. Our maintenance services business is primarily dedicated to servicing our lease fleet pursuant to the provisions of our lease contracts. This may include services that are not included in the full-service lease agreement, such as repairs of railcar damage or other customer-specific requirements. We also perform maintenance and repair activities on railcars owned by third parties, including our investor-owned fleet. Revenues in our maintenance services business increased for the three months ended June 30, 2024 as a result of the mix of external repairs. Revenues in our maintenance services business increased for the six months ended June 30, 2024 as a result of a higher volume of repairs completed for third parties, including our investor-owned fleet, as well as favorable pricing. Cost of revenues for the Railcar Leasing and Services Group decreased by 6.1% and increased by 4.0% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods. In our maintenance services business, cost of revenues decreased for the three months ended June 30, 2024 as a result of the mix of external repairs, as well as a government incentive related to our investment at a rail maintenance facility. In our maintenance services business, cost of revenues increased for the six months ended June 30, 2024 as a result of the volume of external repairs. Cost of revenues for the three and six months ended June 30, 2024 was also impacted by the gross basis to net basis change described above. Leasing Group operating profit increased by 10.2% and 13.8% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods primarily due to improved lease rates and net additions to the lease fleet, partially offset by lower lease portfolio sales in the current year periods. For the six months ended June 30, 2024, operating profit was further increased by a higher volume of external repairs in the maintenance services business. Additionally, operating profit was favorably impacted by gains of $1.2 million during the six months ended June 30, 2023 related to insurance recoveries in excess of net book value for assets damaged by a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021. The Leasing Group generally uses its non-recourse warehouse loan facility or cash to provide initial funding for a portion of the purchase price of the railcars. After initial funding, the Leasing Group may obtain long-term financing for the railcars in the lease fleet through non-recourse asset-backed securities; long-term recourse debt; long-term non-recourse promissory notes; or third-party equity. Information regarding the Leasing Group’s lease fleet is as follows: June 30, 2024 June 30, 2023 Number of railcars: Wholly-owned (1) 85,825 85,390 Partially-owned 23,540 23,670 109,365 109,060 Investor-owned 34,305 33,205 143,670 142,265 Company-owned railcars (2) : Average age in years 13.5 12.6 Average remaining lease term in years 2.8 3.1 Fleet utilization 96.9 % 97.9 % (1) Includes 2,490 railcars under leased-in arrangements as of both June 30, 2024 and 2023. (2) Includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements. 47 Table of Contents Rail Products Group Three Months Ended June 30, Six Months Ended June 30, 2024 2023 Percent 2024 2023 Percent ($ in millions) Change ($ in millions) Change Revenues: Rail products (1) $ 605.6 $ 626.0 (3.3) % $ 1,244.8 $ 1,184.4 5.1 % Parts & components 28.6 29.4 (2.7) % 56.8 58.6 (3.1) % Total revenues $ 634.2 $ 655.4 (3.2) % $ 1,301.6 $ 1,243.0 4.7 % Operating costs: Cost of revenues 576.0 623.4 (7.6) % 1,191.9 1,179.8 1.0 % Selling, engineering, and administrative expenses 7.8 7.5 4.0 % 15.5 14.5 6.9 % Losses on dispositions of property — (0.2) * — (0.3) * Operating profit $ 50.4 $ 24.3 107.4 % $ 94.2 $ 48.4 94.6 % Operating profit margin 7.9 % 3.7 % 7.2 % 3.9 % * Not meaningful (1) Includes sustainable railcar conversion revenues of $14.4 million, representing 195 railcars, for the three months ended June 30, 2024 and sustainable railcar conversion revenues of $64.6 million, representing 870 railcars, for the six months ended June 30, 2024. 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. Revenues for the Rail Products Group decreased for the three months ended June 30, 2024 by 3.2% when compared to the prior year period primarily as a result of lower deliveries and the mix of railcars sold. Revenues for the Rail Products Group increased for the six months ended June 30, 2024 by 4.7% when compared to the prior year period primarily as a result of higher deliveries. Cost of revenues for the Rail Products Group decreased for the three months ended June 30, 2024 by 7.6% when compared to the prior year period primarily due to improved labor efficiencies, operational efficiencies associated with reduced production line changeovers and fewer supply chain disruptions, as well as lower deliveries when compared to the prior year period. Cost of revenues for the Rail Products Group for the six months ended June 30, 2024 was relatively flat when compared to the prior year period primarily driven by higher deliveries and the impact of foreign currency fluctuations, partially offset by improved labor efficiencies and operational efficiencies associated with reduced production line changeovers and fewer supply chain disruptions when compared to the prior year period. Operating profit for the Rail Products Group increased for the three months ended June 30, 2024 by 107.4% when compared to the prior year period primarily due to improved labor and operational efficiencies, partially offset by lower deliveries. Operating profit for the Rail Products Group increased for the six months ended June 30, 2024 by 94.6% when compared to the prior year period primarily due to improved labor and operational efficiencies and higher deliveries. Information related to our Rail Products Group backlog of new railcars is set forth below. In addition to the amounts below, as of June 30, 2024, our backlog related to sustainable railcar conversions totaled $19.6 million, representing 250 railcars. June 30, 2024 2023 Percent (in millions) Change External customers $ 2,281.1 $ 3,221.5 Leasing Group 402.1 383.9 Total $ 2,683.2 $ 3,605.4 (25.6) % 48 Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Percent (in units, $ in whole dollars) Change Beginning balance 23,075 30,915 25,890 32,270 Orders received 2,495 4,770 4,375 7,460 (41.4) % Deliveries (4,755) (4,985) (9,450) (9,030) 4.7 % Other adjustments (1) — (160) — (160) Ending balance 20,815 30,540 20,815 30,540 (31.8) % Average selling price in ending backlog $ 128,907 $ 118,055 9.2 % (1) The adjustment for the three and six months ended June 30, 2023 includes 160 railcars valued at $19.2 million that were placed with a different customer and are also included in orders received in the table above, resulting in no net effect on ending backlog. Total backlog dollars decreased by 25.6% when compared to the prior year period. We expect to deliver approximately 36.0% of our railcar backlog value during the remaining six months of 2024 and 27.9% during 2025, with the remainder to be delivered through 2028. The orders in our backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may elect to change their procurement decision. Transactions between the Rail Products Group and the Leasing Group are as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 ($ in millions) Revenues: New railcars $ 64.5 $ 190.4 $ 199.7 $ 324.7 Sustainable railcar conversions $ — $ 4.1 $ 0.4 $ 43.1 Parts & components $ 8.8 $ 6.3 $ 15.3 $ 11.6 Deferred profit $ 3.5 $ 11.2 $ 5.6 $ 25.9 Number of new railcars (in units) 505 1,475 1,600 2,495 Number of sustainable railcar conversions (in units) — 35 5 425 Corporate and other Three Months Ended June 30, Six Months Ended June 30, 2024 2023 Percent 2024 2023 Percent (in millions) Change (in millions) Change Operating costs: Selling, engineering, and administrative expenses $ 33.5 $ 31.6 6.0 % $ 60.0 $ 57.6 4.2 % Gains on dispositions of property (0.2) — * (0.2) — * Operating loss $ (33.3) $ (31.6) 5.4 % $ (59.8) $ (57.6) 3.8 % *Not meaningful Selling, engineering, and administrative expenses for the three and six months ended June 30, 2024 were relatively flat when compared to the prior year periods. Total operating costs during the three and six months ended June 30, 2024 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. 49 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, and our revolving credit facility. As of June 30, 2024, we have total committed liquidity of $985.2 million. Our total available liquidity includes: $257.1 million of unrestricted cash and cash equivalents; $594.8 million unused and available under our revolving credit facility; and $133.3 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 TILC Warehouse Loan Facility – In March 2024, we entered into a new TILC warehouse loan facility with a total commitment amount of $800.0 million, a revolving termination date of March 15, 2027, and a maturity date of March 15, 2028. This warehouse loan facility replaced the prior $1.0 billion warehouse loan facility. TRL-2024 Secured Railcar Equipment Notes – In May 2024, TRL-2021 issued $432.4 million of its Series 2024-1 Class A Green Secured Railcar Equipment Notes. These notes bear interest at a fixed rate of 5.78% and have a stated final maturity date of 2054. Net proceeds received from the transaction were used to repay borrowings under TILC's warehouse loan facility, to redeem the outstanding debt of the TRL VII Notes, and for general corporate purposes. Redemption of TRL-VII Secured Railcar Equipment Notes – In May 2024, we redeemed in full the TRL VII Notes, of which $94.1 million was outstanding at the redemption date. The all-in interest rate for the TRL VII Notes was 6.66% per annum. Senior Notes due 2028 – In June 2024, we issued an additional $200.0 million aggregate principal amount of 7.75% senior notes due July 2028, which increased the aggregate principal amount from $400.0 million to $600.0 million. Interest on the Additional Senior Notes is payable semiannually commencing July 15, 2024. Net proceeds received from the issuance, together with cash on hand, were used to repay our Senior Notes due 2024, and to pay related fees, costs, premiums, and expenses in connection with the issuance. Redemption of Senior Notes due 2024 – In June 2024, we redeemed in full $400.0 million aggregate principal amount of our 4.55% senior notes due 2024. See Note 8 of the Consolidated Financial Statements for additional information regarding these debt transactions. Dividend Payments – We paid $47.2 million in dividends to our common stockholders during the six months ended June 30, 2024. Share Repurchase Authorization – In December 2022, our Board of Directors authorized a share repurchase program effective December 9, 2022 with no expiration. The share repurchase program authorizes the Company to repurchase up to $250.0 million of its common stock. During the three and six months ended June 30, 2024, share repurchases totaled 33,900 shares, at a cost of approximately $0.9 million, resulting in a remaining authorization to repurchase up to $249.1 million of its common stock under the share repurchase program as of June 30, 2024. 50 Table of Contents Cash Flows The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 (in millions) Net cash flows from continuing operations: Operating activities $ 299.7 $ 140.3 Investing activities (55.9) (292.1) Financing activities (108.7) 159.5 Net cash flows from discontinued operations (6.0) (5.4) Net increase in cash, cash equivalents, and restricted cash $ 129.1 $ 2.3 Operating Activities . Net cash provided by operating activities from continuing operations for the six months ended June 30, 2024 was $299.7 million compared to net cash provided by operating activities from continuing operations of $140.3 million for the six months ended June 30, 2023. The changes in our operating assets and liabilities are as follows: Six Months Ended June 30, 2024 2023 (in millions) (Increase) decrease in receivables, inventories, and other assets $ 37.1 $ (73.7) Increase (decrease) in accounts payable, accrued liabilities, and other liabilities 32.4 67.5 Changes in operating assets and liabilities $ 69.5 $ (6.2) The changes in our operating assets and liabilities resulted in a net source of $69.5 million for the six months ended June 30, 2024, as compared to a net use of $6.2 million for the six months ended June 30, 2023. The change in operating assets for the current year period was impacted primarily by lower inventory balances associated with railcar deliveries. Investing Activities. Net cash used in investing activities from continuing operations for the six months ended June 30, 2024 was $55.9 million compared to $292.1 million of net cash used in investing activities from continuing operations for the six months ended June 30, 2023. Significant investing activities are as follows: • We made a net fleet investment of $46.0 million during the six months ended June 30, 2024, compared to $214.0 million in the prior year period primarily due to the timing of lease portfolio sales relative to fleet additions. 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. We had no acquisitions during the six months ended June 30, 2024. Financing Activities. Net cash used in financing activities during the six months ended June 30, 2024 was $108.7 million compared to $159.5 million of net cash provided by financing activities for the six months ended June 30, 2023. Significant financing activities are as follows: • During the six months ended June 30, 2024, we had total repayments of $1,759.9 million and total borrowings of $1,722.2 million, for net repayments of $37.7 million, primarily from the redemption of the Senior Notes due 2024 and the TRL VII Notes, partially offset by debt proceeds to support our investment in the lease fleet and for general corporate purposes. 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. • We paid $47.2 million and $43.3 million in dividends to our common stockholders during the six months ended June 30, 2024 and 2023, respectively. 51 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. A summary of our financial covenants is detailed below: Ratio Covenant Actual at June 30, 2024 Maximum leverage (1) No greater than 3.75 to 1.00 1.13 Minimum interest coverage (2) No less than 2.25 to 1.00 13.22 (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, 2024. (2) Defined as the ratio of the difference of (A) consolidated EBITDA less (B) consolidated capital expenditures – operating and administrative 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, 2024. As of June 30, 2024, 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. Capital Expenditures For the full year 2024, we anticipate a net fleet investment of between $300 million and $400 million. Capital expenditures related to operating and administrative activities, including supporting automation, technology, and modernization of our facilities and processes, are projected to range between $50 million and $60 million for the full year 2024. Equity Investment See Note 5 of the Consolidated Financial Statements for information about our investments in partially-owned subsidiaries. Off Balance Sheet Arrangements As of June 30, 2024, we had outstanding letters of credit issued under our revolving credit facility in an aggregate amount of $5.2 million, the majority of which are expected to expire in November 2024. 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. Additionally, we had a letter of credit issued outside our revolving credit facility for $8.5 million. This letter of credit obligation replaces a required cash liquidity reserve to support the TILC warehouse loan facility and renews by its terms each year. 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. 52 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. Cash Flow from Operations with Net Gains on Lease Portfolio Sales Cash flow from operations with net gains on lease portfolio sales is a non-GAAP financial measure. We believe this measure is useful to both management and investors as it provides a relevant measure of liquidity and a useful basis for assessing the breadth of the cash flow generation capabilities across our operating platform, as well as our ability to fund our operations and repay our debt. This measure is defined as net cash provided by operating activities from continuing operations as computed in accordance with GAAP, plus net gains on lease portfolio sales and is reconciled to net cash provided by operating activities from continuing operations, the most directly comparable GAAP financial measure, in the following table. 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. Six Months Ended June 30, 2024 2023 (in millions) Net cash provided by operating activities – continuing operations $ 299.7 $ 140.3 Net gains on lease portfolio sales 24.8 43.3 Cash flow from operations with net gains on lease portfolio sales $ 324.5 $ 183.6 Contractual Obligations and Commercial Commitments Except as described below, as of June 30, 2024, there have been no material changes to our contractual obligations from December 31, 2023: • In March 2024, we entered into a new TILC warehouse loan facility with a total commitment amount of $800.0 million, a revolving termination date of March 15, 2027, and a maturity date of March 15, 2028. This warehouse loan facility replaced the prior $1.0 billion warehouse loan facility. • In May 2024, TRL-2021 issued $432.4 million of its Series 2024-1 Class A Green Secured Railcar Equipment Notes. These notes have a stated final maturity date of 2054. • In May 2024, we redeemed in full the TRL VII Notes, of which $99.7 million was outstanding as of December 31, 2023. • In June 2024, we issued an additional $200.0 million aggregate principal amount of 7.75% senior notes due 2028, which increased the aggregate principal amount from $400.0 million to $600.0 million. • In June 2024, we redeemed in full $400.0 million aggregate principal amount of 4.55% senior notes due 2024. See Note 8 of the Consolidated Financial Statements for additional information regarding these debt transactions. Recent Accounting Pronouncements See Note 1 of the Consolidated Financial Statements for information about recent accounting pronouncements.