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Stockholders Equity (Policies)
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Recognition and Remaining performance obligation
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Accounting (Details)
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Accounting (Details)
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Receivables (Details)
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FX Hedge (Details)
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(Exact
name of registrant as specified in its charter)
iDelaware
i75-0225040
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i14221 N. Dallas Parkway, Suite 1100
iDallas,
iTexas
i75254-2957
(Address
of principal executive offices)
(Zip Code)
(i214) i631-4420
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange
on which registered
iCommon Stock
iTRN
iNew
York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. iYesþ No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to besubmitted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit suchfiles). iYesþ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See thedefinitions of “large accelerated filer,”“accelerated filer,”“smaller reportingcompany,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Smaller reporting company i☐Emerging growth companyi☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No
þ
At April 25, 2023, the number of shares of common stock, $0.01 par value, outstanding was i81,148,848.
Note
1. Summary of Significant Accounting Policies
i
Basis of Presentation
The foregoing Consolidated Financial Statements are unaudited and have been prepared from the books and records of Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,”“Company,”“we,”“our,” or "us") including the accounts of our wholly-owned subsidiaries and partially-owned
subsidiaries, TRIP Rail Holdings LLC (“TRIP Holdings”) and RIV 2013 Rail Holdings LLC ("RIV 2013"), in which we have a controlling interest. In our opinion, all normal and recurring adjustments necessary for a fair presentation of our financial position as of March 31, 2023, and the results of operations and cash flows for the three months ended March 31, 2023 and 2022, have been made in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the 2023 presentation.
Due to seasonal and other factors, the results of operations for the
three months ended March 31, 2023 may not be indicative of expected results of operations for the year ending December 31, 2023. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with our audited Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2022.
i
Revenue
Recognition
Revenue is measured based on the allocation of the transaction price in a contract to satisfied performance obligations. The transaction price does not include any amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. Payments for our products and services are generally due within normal commercial terms. The following is a description of principal activities from which we generate our revenue, separated by reportable segments. See Note 4 for a further discussion regarding our reportable segments.
Railcar Leasing and Management Services Group
In our Railcar Leasing and Management Services Group ("Leasing Group"),
revenue from rentals and operating leases, including contracts that contain non-level fixed lease payments, is recognized monthly on a straight-line basis. Leases not classified as operating leases are generally considered sales-type leases as a result of an option to purchase.
We review our operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the lessee’s payment history, the financial condition of the lessee, and business and economic conditions in the industry in which the lessee operates. In the event that the collectibility of a receivable with respect to any lessee is no longer probable, we derecognize the revenue and related receivable and recognize future revenue only when the lessee makes a rental payment. Contingent rents are recognized when the contingency
is resolved.
Selling profit or loss associated with sales-type leases is recognized upon lease commencement, and a net investment in the sales-type lease is recorded in the Consolidated Balance Sheets. Interest income related to sales-type leases is recognized over the lease term using the effective interest method. See "Lease Accounting" below for additional information regarding sales-type leases as of March 31, 2023 and 2022.
We report all sales of railcars from the lease fleet and selling profit or loss associated with sales-type leases as a net gain or loss from the disposal of a long-term asset in accordance with ASC 610-20, Gains and losses from the derecognition of non-financial assets. These sales are presented in the
Lease portfolio sales line in our Consolidated Statements of Operations.
We account for shipping and handling costs as activities to fulfill the promise to transfer the good; as such, these fees are recorded in revenue. The fees and costs of shipping and handling activities are accrued when the related performance obligation has been satisfied.
Our railcar manufacturing business recognizes revenue related to new railcars when the customer has submitted its certificate of acceptance and legal title of the railcar has passed to the
customer. Certain contracts for the sales of railcars include price adjustments based on changes to input costs; this amount represents variable consideration for which we are unable to estimate the final consideration until the railcar is delivered.
Revenue is recognized over time as repair and maintenance projects and sustainable railcar conversions are completed, using an input approach based on the costs incurred relative to the total estimated costs of performing the project. We recorded contract assets of $i4.4 million
and $i2.9 million as of March 31, 2023 and December 31, 2022, respectively, related to unbilled revenues recognized on repair and maintenance services and sustainable railcar conversions that have been performed, but for which the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within the Receivables, net
of allowance line in our Consolidated Balance Sheets.
i
Unsatisfied Performance Obligations
The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially satisfied as of March 31, 2023 and the percentage of the outstanding performance obligations as of March 31,
2023 expected to be delivered during the remainder of 2023:
The
remainder of the unsatisfied performance obligations for the Rail Products Group is expected to be delivered through 2028. The orders in the Rail Products Group's 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.
Unsatisfied performance obligations for the Railcar Leasing and Management Services Group are related to servicing, maintenance, and management agreements and are expected to be performed through 2029.
Lease Accounting
i
Lessee
We
are the lessee of operating leases predominantly for office buildings and railcars, as well as manufacturing equipment and office equipment. Our operating leases have remaining lease terms ranging from ione year to ifourteen years, some of which include options to extend for up
to ifive years, and some of which include options to terminate within ione year. As of March 31, 2023, we had ino
material finance leases in which we were the lessee. Certain of our operating leases include lease incentives, which reduce the right-of-use asset and are recognized on a straight-line basis over the lease term.
The
following table summarizes the impact of our operating leases on our Consolidated Financial Statements (in millions, except lease term and discount rate):
(1)Included in other assets in our Consolidated Balance Sheets.
(2)Included in other liabilities in our Consolidated Balance Sheets.
/i
Future contractual minimum operating lease liabilities will mature as follows (in millions):
Leasing
Group
Non-Leasing Group
Total
Remaining nine months of 2023
$
i8.1
$
i6.9
$
i15.0
2024
i7.0
i8.1
i15.1
2025
i6.1
i7.3
i13.4
2026
i5.8
i6.9
i12.7
2027
i5.3
i6.9
i12.2
Thereafter
i3.7
i56.5
i60.2
Total
operating lease payments
$
i36.0
$
i92.6
$
i128.6
Less:
Present value adjustment
(i17.1)
Total operating lease liabilities
$
i111.5
/i
Lessor
Our Leasing Group enters into railcar operating leases with third parties with terms generally ranging between ione year and iten years. The majority of our fleet operates on leases that earn fixed monthly lease payments. Generally,
lease payments are due at the beginning of the applicable month. A portion of our fleet operates on per diem leases that earn usage-based variable lease payments. Some of our leases include options to extend the leases for up to ifive years, and a small percentage of our leases include early termination options with certain notice requirements and early termination penalties. As of March 31, 2023, non-Leasing Group operating leases were not significant, and we had ino
direct finance leases.
We manage risks associated with residual values of leased railcars by investing across a diverse portfolio of railcar types, staggering lease maturities within any given railcar type, avoiding concentration of railcar type and industry, and actively participating in secondary markets. Additionally, our lease agreements contain normal wear and tear return condition provisions and high mileage thresholds designed to protect the value of our residual assets. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
Profit
recognized at sales-type lease commencement (1)
$
i—
$
i1.3
(1)Included in gains on dispositions of property – lease portfolio sales on our Consolidated Statements of Operations.
/i
Future contractual minimum revenues for operating leases will mature as follows (in millions)(1):
Remaining
nine months of 2023
$
i480.8
2024
i533.8
2025
i424.1
2026
i312.9
2027
i219.5
Thereafter
i318.5
Total
$
i2,289.6
(1)Total contractual minimum rental revenues on operating leases relates to our wholly-owned and partially-owned subsidiaries and sub-lease rental revenues associated with the Leasing Group's operating lease obligations.
Future contractual minimum lease receivables for sales-type leases will mature as follows (in millions)(1):
Remaining nine months of 2023
$
i0.8
2024
i1.1
2025
i1.1
2026
i1.1
2027
i1.1
Thereafter
i10.1
Total
i15.3
Less:
Unearned interest income
(i4.8)
Net investment in sales-type leases (1)
$
i10.5
(1)Included in other assets in our Consolidated Balance Sheets.
/i
Financial Instruments
We consider all highly liquid debt instruments to be either cash and cash equivalents if purchased with a maturity of three months or less, or short-term marketable securities if purchased with a maturity of more than three months and
less than one year.
Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments, including restricted cash and receivables. We place our cash investments in bank deposits, investment grade short-term debt instruments, highly-rated money market funds, and highly-rated commercial paper. We limit the amount of credit exposure to any one commercial issuer. The carrying values of cash, receivables, and accounts payable are considered to be representative of their respective fair values.
Concentrations of credit risk with respect to receivables are limited due to control procedures that monitor the credit worthiness of customers, the large number of customers in our customer base, and their dispersion across different end markets and geographic areas. Receivables are generally evaluated at a portfolio level based on these
characteristics. As receivables are generally unsecured, we maintain an allowance for credit losses using a forward-looking approach based on historical losses and consideration of current and expected future economic conditions. Historically, we have observed that the likelihood of loss increases when receivables have aged beyond 180 days. When a receivable is deemed uncollectible, the write-off is recorded as a reduction to allowance for credit losses. During the three months ended March 31, 2023, we recognized approximately $i0.5 million
of credit loss expense and approximately $i0.5 million of recoveries and other adjustments, and wrote off $i0.2 million
related to our trade receivables that are in the scope of ASC 326, Financial Instruments – Credit Losses, bringing the allowance for credit losses balance from $i10.6 million at December 31, 2022 to $i10.4 million
at March 31, 2023. This balance excludes the general reserve for operating lease receivables that is permitted under ASC 450, Contingencies.
We
provide various express, limited product warranties that generally range from ione year to ifive years depending on the product. The warranty costs are estimated using a two-step approach. First, an engineering estimate is made for the cost of all claims that have been asserted by customers. Second, based on historical claims experience,
a cost is accrued for all products still within a warranty period for which no claims have been filed. We provide for the estimated cost of product warranties at the time revenue is recognized related to products covered by warranties and assess the adequacy of the resulting reserves on a quarterly basis. iThe changes in the accruals for warranties for the three months ended March 31, 2023 and 2022 are as follows:
ASU 2022-04 – In September 2022, the FASB issued ASU No. 2022-04, Disclosure of Supplier Finance Program Obligations, which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose information about the key terms of these programs, outstanding amounts as of the end of the reporting period, a description of where in the financial statements outstanding amounts are presented, and a rollforward of these obligations. ASU 2022-04 is effective for public companies during interim and annual reporting periods beginning after December 15, 2022 and is to be adopted on a retrospective basis, except for the disclosure of rollforward information, which is effective for public
companies during interim and annual reporting periods beginning after December 15, 2023 and is to be adopted on a prospective basis.
We adopted ASU 2022-04 effective January 1, 2023. The adoption did not have a significant impact on our Consolidated Financial Statements. In cooperation with a participating financial institution, we facilitate a voluntary supply chain finance ("SCF") program for several of our suppliers. We negotiate payment terms with suppliers that are in line with average industry terms. We have not pledged any assets as security or provided other forms of guarantees to the financial institution. Under the SCF program, participating suppliers may choose to sell, at a discounted price, receivables due from us to the financial institution, at the sole discretion of both the suppliers and the financial
institution, prior to the invoices’ scheduled due dates. The payment terms that we negotiate with all suppliers are consistent regardless of whether the supplier chooses to participate in the SCF program for a particular invoice. The SCF program is administered by a third-party financial institution, and our responsibility is limited to making payments based on the terms originally negotiated with participating suppliers, regardless of whether such suppliers sell receivables to the financial institution.
Amounts due to our participating suppliers in the SCF program totaled $i17.3 million
and $i22.8 million as of March 31, 2023 and December 31, 2022, respectively, and are included in accounts payable in our Consolidated Balance Sheets. Payments made under the SCF program are reflected in net cash provided by operating activities in our Consolidated Statements of Cash Flows.
On March 8, 2023, we acquired RSI Logistics ("RSI"), a data-centric provider of proprietary software and logistics and terminal management solutions to the North American rail industry, for an aggregate purchase price of $i72.1 million.
This transaction was recorded as a business combination within the Leasing Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The fair values of the assets acquired and liabilities assumed are considered preliminary and are subject to adjustment as additional information is obtained and reviewed. The final allocation of the purchase price may differ from the preliminary allocation based on completion of the valuation. We expect to finalize the purchase price allocation within the measurement period, which will not exceed one year from the acquisition date.
Based on our preliminary purchase price allocation, we recorded identifiable intangible assets of $i37.4 million,
goodwill of $i26.3 million, and certain other assets, net of liabilities, totaling $i8.4 million.
The identifiable intangible assets, with the exception of the trade name, which will be considered an indefinite-lived intangible asset, will be amortized over their estimated useful lives, ranging from 5 years to 15 years. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of intangible assets, goodwill and certain other immaterial assets and liabilities.
Acquisition of Holden America
/
On December 30, 2022, we acquired Holden America, a manufacturer of market-leading multi-level vehicle securement and protection systems, gravity-outlet gates, and gate accessories for freight rail in North America. This transaction was recorded as a business
combination within the Rail Products Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. Based on our preliminary purchase price allocation recorded during the year ended December 31, 2022, we recorded identifiable intangible assets of $i45.9 million, goodwill of $i36.4 million,
and certain other immaterial assets. The fair values of the assets acquired and liabilities assumed are considered preliminary and are subject to adjustment as additional information is obtained and reviewed. The final allocation of the purchase price may differ from the preliminary allocation based on completion of the valuation. We did not make any adjustments during the three months ended March 31, 2023. We expect to finalize the purchase price allocation within the measurement period, which will not exceed one year from the acquisition date.
i
Sale
of Highway Products Business
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, the Company agreed to indemnify Rush Hour for certain liabilities related to the highway products business, including certain liabilities resulting from or arising out of the ET-Plus® System, a highway guardrail end-terminal system (the “ET Plus”). Consequently, results from discontinued operations below include certain legal expenses that are directly attributable to the highway products business. Similar expenses related to these retained
obligations that may be incurred in the future will likewise be reported in discontinued operations. See Note 14 for further information regarding obligations retained in connection with the THP sale.
i
The following is a summary of residual THP expenses included in loss from discontinued operations for the three months ended March 31, 2023 and 2022:
Note 3. Derivative Instruments and Fair Value Measurements
i
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 use derivative instruments
to mitigate the impact of changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for by recording the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss ("AOCI") as a separate component of stockholders' equity. These accumulated gains or losses are reclassified into earnings in the periods during which the hedged transactions affect earnings. Derivative instruments that are not designated as hedges are accounted for by recording the realized and unrealized gains or losses on the derivative instrument in other, net (income) expense in our Consolidated Statements of Operations. We continuously monitor our derivative positions and the credit ratings of our counterparties and do not anticipate losses due to non-performance. SeeNote 8for
a description of our debt instruments.
Our exposure related to foreign currency transactions is currently hedged for up to a
maximum of twelve months. Information related to our foreign currency hedge is as follows:
(1)Derivatives not designated as hedging instruments are comprised of back-to-back interest rate caps entered into with the same counterparty that offset and do not have a net effect on Trinity's consolidated earnings. These derivative contracts were entered into in connection with our risk management objectives.
/i
Fair
Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to establish a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are listed below.
Level 1 – This level is defined as quoted prices in active markets for identical assets or liabilities. Our cash equivalents and restricted cash are instruments of the U.S. Treasury or highly-rated money market mutual funds. iThe
assets measured as Level 1 in the fair value hierarchy are summarized below:
Level 2 – This level is defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Interest rate swaps and interest rate caps are valued at exit prices obtained from each counterparty. Foreign currency hedges are valued at exit prices obtained from each counterparty, which are based on currency spot and forward rates and forward points. The assets and liabilities measured on a recurring basis as Level 2 in the fair value hierarchy are summarized below:
Derivatives
not designated as hedging instruments (1)
i18.4
i21.6
Total
assets
$
i36.3
$
i43.3
Liabilities:
Derivatives
not designated as hedging instruments (2)
$
i18.4
$
i21.6
Total
liabilities
$
i18.4
$
i21.6
(1)Included in other assets in our Consolidated Balance Sheets.
(2)Included in accrued liabilities in our Consolidated Balance Sheets.
/
Level 3 – This level is defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of March 31, 2023 and December 31, 2022, we have iiiino///
assets or liabilities measured on a recurring basis as Level 3 in the fair value hierarchy.
See Note 2 for more information regarding non-recurring fair value measurements involving Level 3 inputs resulting from acquisition activity. See Note 8 for the estimated fair values of our debt instruments. The fair values of all other financial instruments are estimated to approximate carrying value.
Note 4. iSegment
Information
We report our operating results in itwo reportable segments: (1) the Railcar Leasing and Management Services 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.
Gains and losses from the sale of property, plant, and equipment are included in the operating profit of each respective segment. Our Chief Operating Decision Maker ("CODM") regularly reviews the operating results of our reportable segments in order to assess performance and allocate resources`. Our CODM does not consider restructuring activities when evaluating segment operating results; therefore, restructuring activities are not allocated to segment profit or loss.
Sales and related net profits ("deferred profit") from the Rail Products Group to the Leasing Group are recorded in the Rail Products Group and eliminated in consolidation and are reflected in "Eliminations – Lease Subsidiary" in the tables below. Sales between these groups are recorded at prices comparable to those charged to external customers, taking into consideration quantity, features, and production demand. Amortization of deferred
profit on railcars sold to the Leasing Group is included in the operating profit of the Leasing Group, resulting in the recognition of depreciation expense based on our original manufacturing cost of the railcars. Lease portfolio sales are included in the Leasing Group, with related gains and losses computed based on the net book value of the original manufacturing cost of the railcars.
Through our wholly-owned subsidiary, Trinity Industries Leasing Company ("TILC"), we formed itwosubsidiaries, TRIP Holdings and RIV 2013, for the purpose of providing railcar leasing services in North America for institutional investors. Each of TRIP Holdings and RIV 2013 are direct, partially-owned subsidiaries of TILC in which we have a controlling interest. Each is governed by a iseven-member board of representatives, itwo
of whom are designated by TILC. TILC is the agent of each of TRIP Holdings and RIV 2013 and, as such, has been delegated the authority, power, and discretion to take certain actions on behalf of the respective companies.
At March 31, 2023, the carrying value of our investment in TRIP Holdings and RIV 2013 totaled $i135.3 million. Our weighted average ownership interest in TRIP Holdings and RIV 2013 is i38%
while the remaining i62% weighted average interest is owned by third-party, investor-owned funds. The investment in our partially-owned leasing subsidiaries is eliminated in consolidation.
Each of TRIP Holdings and RIV 2013 has wholly-owned subsidiaries that are the owners of railcars acquired from our Rail Products and Leasing
Groups. TRIP Holdings has wholly-owned subsidiaries known as Triumph Rail LLC ("Triumph Rail") and Tribute Rail LLC ("Tribute Rail"). RIV 2013 has a wholly-owned subsidiary known as TRP 2021 LLC ("TRP-2021"). TILC is the contractual servicer for Triumph Rail, Tribute Rail, and TRP-2021, with the authority to manage and service each entity's owned railcars. Our controlling interest in each of TRIP Holdings and RIV 2013 results from our combined role as both equity member and agent/servicer. The noncontrolling interest included in the accompanying Consolidated Balance Sheets represents the non-Trinity equity interest in these partially-owned subsidiaries.
Trinity has ino
obligation to guarantee performance under any of our partially-owned subsidiaries' (or their respective subsidiaries') debt agreements, guarantee any railcar residual values, shield any parties from losses or guarantee minimum yields.
The assets of each of Triumph Rail, Tribute Rail, and TRP-2021 may only be used to satisfy the particular subsidiary's liabilities, and the creditors of each of Triumph Rail, Tribute Rail, and TRP-2021 have recourse only to the particular subsidiary's assets. Each of TILC and the third-party equity investors receive distributions from TRIP Holdings and RIV 2013, when available, in proportion to its respective equity interests, and has an interest in the net assets of the partially-owned subsidiaries
upon a liquidation event in the same proportion. TILC is paid fees for the services it provides to Triumph Rail, Tribute Rail, and TRP-2021 and has the potential to earn certain incentive fees. There are ino remaining equity commitments with respect to TRIP Holdings or RIV 2013.
See Note 8 for additional information regarding the debt of TRIP Holdings and RIV 2013 and their respective subsidiaries.
Investment in Unconsolidated
Affiliate
In August 2021, the Company and Wafra, Inc. (“Wafra”), a global alternative investment manager, announced a new railcar investment vehicle (“RIV”) program between Trinity and certain funds managed by Wafra (“Wafra Funds”). As part of this program, a joint venture was formed, Signal Rail Holdings LLC (“Signal Rail”), which is currently owned i87.1% by Wafra Funds and i12.9%
by TILC. Signal Rail or its subsidiaries are expected to invest in diversified portfolios of leased railcars originated by TILC targeting up to $i1 billion in total acquisitions over an expected three-year investment period. TILC will service all railcars owned by Signal Rail. To date, TILC has sold 6,460 railcars to Signal Rail for an aggregate sales price of $i598.6 million.
Upon
consideration under the variable interest entity (“VIE”) model of ASC 810, Consolidations, Trinity has concluded that Signal Rail meets the definition of a VIE. TILC has variable interests in Signal Rail arising from its i12.9% equity ownership position and its role as a service provider. We determined that Trinity is not the primary beneficiary and therefore does not consolidate this entity as we do not have the power to direct the activities of the entity that most significantly impact its economic performance. We will absorb
portions of Signal Rail’s expected losses and/or receive portions of expected residual returns commensurate with our i12.9% equity interest in Signal Rail.
Our investment in Signal Rail is being accounted for under the equity method of accounting. At March 31, 2023, the carrying value of TILC’s equity investment in Signal Rail was $i21.2
million, which is included in other assets in our Consolidated Balance Sheets. The carrying value of this investment, together with any potential future investments described above, collectively represent our maximum exposure in Signal Rail.
Note 6. iRailcar
Leasing and Management Services Group
The Railcar Leasing and Management Services Group owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, and administrative services. iSelected consolidated financial information for the Leasing Group is as follows:
(1)
Net deferred profit on railcars sold to the Leasing Group consists of intersegment profit that is eliminated in consolidation. Net deferred profit and the related deferred tax impact are included as adjustments to the property, plant, and equipment, net and deferred income taxes line items, respectively, in the Eliminations – Lease Subsidiary column above to reflect the net book value of the railcars purchased by the Leasing Group from the Rail Products Group based on manufacturing cost. See Note 5 and Note 8 for a further discussion regarding our investment in our partially-owned leasing subsidiaries and the related indebtedness.
(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 profit 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 $i1.3
million selling profit associated with sales-type leases for the three months ended March 31, 2022.
(3) Depreciation expense includes $i4.7 million and $i2.2 million
for the three months ended March 31, 2023 and 2022, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program.
/i
Information related to lease portfolio sales is as follows:
Railcar Leasing Equipment Portfolio. The Leasing Group's equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured predominantly by the Rail Products Group and enters into lease contracts with third parties with terms generally ranging between ione year and iten
years. The Leasing Group primarily enters into operating leases. iFuture contractual minimum rental revenues on operating leases related to our wholly-owned and partially-owned subsidiaries are as follows:
Remaining
nine months of 2023
2024
2025
2026
2027
Thereafter
Total
(in millions)
Future contractual minimum rental revenues
$
i473.6
$
i528.7
$
i420.5
$
i310.9
$
i219.0
$
i318.4
$
i2,271.1
Debt.
Wholly-owned subsidiaries. The Leasing Group’s debt at March 31, 2023 consisted primarily of non-recourse debt. As of March 31, 2023, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $i5,567.2
million, which is pledged solely as collateral for Leasing Group debt held by those subsidiaries. The net book value of unpledged equipment at March 31, 2023 was $i307.3 million. See Note 8 for more information regarding the Leasing Group’s debt.
Partially-owned subsidiaries.
Debt owed by TRIP Holdings and RIV 2013 and their respective subsidiaries is nonrecourse to Trinity and TILC. Creditors of each of TRIP Holdings and RIV 2013 and their respective subsidiaries have recourse only to the particular subsidiary's assets. As of March 31, 2023, TRIP Holdings held equipment with a net book value of $i1,054.8 million,
which is pledged solely as collateral for the TRIP Holdings' debt held by its subsidiaries. As of March 31, 2023, TRP-2021 equipment with a net book value of $i455.1 million is pledged solely as collateral for the TRP-2021 debt. See Note 5 for a description of TRIP Holdings and RIV 2013 and their respective subsidiaries.
Operating
Lease Obligations.iFuture amounts due as well as future contractual minimum rental revenues related to the Leasing Group's railcar operating lease obligations are as follows:
Remaining
nine months of 2023
2024
2025
2026
2027
Thereafter
Total
(in millions)
Future operating lease obligations
$
i8.0
$
i6.9
$
i6.1
$
i5.8
$
i5.3
$
i3.7
$
i35.8
Future
contractual minimum rental revenues
$
i7.2
$
i5.1
$
i3.6
$
i2.0
$
i0.5
$
i0.1
$
i18.5
Operating
lease obligations totaling $i1.2 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries. The Leasing Group also has future amounts due for operating lease obligations related to office space of approximately $i0.2
million, which is excluded from the table above.
Secured railcar equipment notes, net of unamortized discount of $i0.3 and $i0.3
i1,185.6
i1,192.6
Less:
unamortized debt issuance costs
(i9.2)
(i9.8)
i1,176.4
i1,182.8
Total
non–recourse debt
i5,003.3
i4,983.5
Total
debt
$
i5,707.6
$
i5,607.6
/
Estimated
Fair Value of Debt – The estimated fair value of our i4.55% senior notes due 2024 ("Senior Notes") is based on a quoted market price in a market with little activity (Level 2 input). The estimated fair values of our secured railcar equipment notes are based on our estimate of their fair value using unobservable input values provided by a third party (Level 3 inputs). The respective carrying values of our revolving credit facility, 2017 promissory notes and TILC warehouse facility approximate fair value because the interest rate adjusts to the market
interest rate. The estimated fair values of our debt are as follows:
Revolving
Credit Facility – We have a $i600.0 million unsecured corporate revolving credit facility. In March 2023, we amended our revolving credit facility to increase the total facility commitment from $i450.0 million
to $i600.0 million, increase the maximum leverage ratio to provide additional flexibility, modify the limitations on restricted payments, and allow up to $i100.0 million
of annual dividends on the Company's common stock. We incurred $i0.5 million in costs related to the amendment, which will be amortized to interest expense through the maturity date. The maturity date for the revolving credit facility is the earlier of (i) July 25, 2027 or (ii) July 2, 2024 if our Senior Notes have not been repaid in full by that date.
During the three months ended March 31, 2023, we had total borrowings of $i155.0 million and total repayments of $i75.0
million under the revolving credit facility. Additionally, we had outstanding letters of credit issued in an aggregate amount of $i16.8 million, leaving $i278.2
million available for borrowing as of March 31, 2023. The majority of our outstanding letters of credit as of March 31, 2023 are scheduled to expire in October 2023. Our letters of credit obligations support performance bonds related to certain railcar orders. The revolving credit facility bears interest at a variable rate of the Secured Overnight Financing Rate ("SOFR") plus (1) a benchmark adjustment of 10 basis points and (2) a facility margin of i1.75%, for
an all-in interest rate of i6.69% as of March 31, 2023. A commitment fee accrues on the average daily unused portion of the revolving credit facility at the rate of i0.175%
to i0.40% (i0.25% as of March 31, 2023).
The revolving credit facility
requires the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. As of March 31, 2023, we were in compliance with all such financial covenants.
TILC Warehouse Loan Facility – TILC has a $i1.0 billion warehouse loan facility, which was established to finance railcars owned by TILC. During the three months ended March
31, 2023, we had total borrowings of $i91.8 million and total repayments of $i17.4 million under the TILC warehouse loan facility. Of the remaining unused facility
amount of $i203.8 million, $i91.4 million was available as of March
31, 2023 based on the amount of warehouse-eligible, unpledged equipment. Advances under the facility bear interest at one-month term SOFR plus (1) a benchmark adjustment of 11 basis points and (2) a facility margin of 185 basis points, for an all-in interest rate of i6.63% at March 31, 2023.
TRL-2017 SOFR Transition –In February 2023, we amended the Amended and Restated Loan Agreement and the Trinity
Rail Leasing 2017, LLC ("TRL-2017") interest rate swap agreements to transition the benchmark rate from LIBOR to SOFR plus a benchmark adjustment. The Company has elected to apply the optional accounting expedient under ASC 848, Reference Rate Reform, for hedging relationships affected by reference rate reform.
Terms and conditions of our other long-term debt, including recourse and non-recourse provisions and scheduled maturities, are described in Note 8 of our 2022 Annual Report on Form 10-K.
Note 9. iIncome
Taxes
During the three months ended March 31, 2023, one of our partially-owned subsidiaries released residual tax effects that had previously been recorded in AOCI. This deferred tax benefit was originally recorded before the partially-owned subsidiary was treated as a flow-through entity, remaining in AOCI until the underlying book to tax difference no longer existed, which occurred during the three months ended March 31, 2023. As a result, we recorded an $i11.9 million
income tax benefit in our Consolidated Statements of Operations during the three months ended March 31, 2023.
Pursuant to the acquisition of RSI during the three months ended March 31, 2023, we re-measured our existing deferred tax assets and liabilities, taking into account the expected change to state tax apportionment. This resulted in an increase to our net deferred tax liability of $i3.2 million
in the quarter, which was recorded through deferred income tax expense.
The tax provision also reflects a $i4.0 million tax benefit related to an adjustment to valuation allowances, primarily for deferred tax assets in Mexico, state tax loss carryforwards, and federal tax credits.
The effective tax rate from continuing operations for the three months ended March 31, 2023 was a
benefit of i217.0% which differs from the U.S. statutory rate of ii21.0/%
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.
The effective tax rate from continuing operations for the three months ended March 31, 2022 was an expense of i23.3%, which differs from the U.S. statutory rate of ii21.0/%
primarily due to state income taxes, foreign income taxes, and non-deductible executive compensation, net of the benefits of excess deductions on equity compensation.
The total income tax receivable position as of March 31, 2023 was $i10.1 million.
Our tax years through 2020 are effectively settled except with respect to carryback claims related to the 2013 through 2015 tax years, which are currently in review by the Joint Committee on Taxation. We do
not expect any significant changes to the carryback claims. We have received a partial acceptance letter for our 2021 federal tax refund and have one open issue. We have state tax returns that are under audit in the normal course of business, and our Mexican subsidiaries' tax returns statutes of limitations remain open for auditing 2017 forward. We believe we are appropriately reserved for any potential matters.
Our defined contribution expense for the three months ended March 31, 2023 and 2022 was $i2.4 million and $i2.1
million, respectively.
The net periodic benefit cost related to our Supplemental Executive Retirement Plan was $ii0.2/
million for each of the three months ended March 31, 2023 and 2022. The non-service cost components of net periodic benefit cost are included in other, net (income) expense in our Consolidated Statements of Operations.
Pension Plan Termination
In September 2019, our Board of Directors approved the termination of the Trinity Industries, Inc. Consolidated Pension Plan (the "Pension Plan"), effective December 31, 2019. The Pension Plan was settled in the fourth quarter of 2020, which resulted in the Company no longer having any remaining funded pension plan obligations. During the three months ended March
31, 2023, we reverted the remaining surplus pension assets of $i0.4 million to the Company and incurred an excise tax of approximately $i0.1 million.
Following the completion of this transaction, there are no longer any pension assets reported in our Consolidated Balance Sheet.
Note 11. iAccumulated Other Comprehensive Income
i
Changes
in AOCI for the three months ended March 31, 2023 are as follows:
Unrealized gains/(losses) on derivative financial instruments
Net actuarial gains/(losses) of defined benefit plans
In
May 2013, one of our partially-owned leasing subsidiaries, TRIP Holdings, was converted to a partnership for income tax purposes. At the time of the conversion, TRIP Holdings had deferred tax assets associated with certain terminated interest rate hedges that were initially recognized as a component of AOCI. As TRIP Holdings was no longer a taxable entity following the conversion, these deferred tax assets were removed during the year ended December 31, 2013, with a corresponding charge to income tax expense in the Consolidated Statements of Operations, leaving residual tax effects in AOCI. These residual tax effects are released when the item giving rise to the tax effect is disposed of, liquidated, or terminated. Pursuant to our election of the portfolio approach, we released the residual tax effects when all of the interest rate
swap balances were fully amortized, which occurred during the three months ended March 31, 2023. Consequently, during the three months ended March 31, 2023, we recorded an income tax benefit of $i13.2 million to TRIP Holdings, reflecting the reclassification of the residual tax effects previously recorded in AOCI. The controlling interest portion of this income tax benefit was $i4.4 million.
See Note 3 for additional information on the reclassification of amounts in AOCI into earnings. Reclassifications of unrealized before-tax gains and losses on derivative financial instruments are included in interest expense, net for our interest rate hedges and in cost of revenues for our foreign currency hedges in our Consolidated Statements of Operations. Reclassifications of before-tax net actuarial gains/(losses) of defined benefit plans are included in other, net (income) expense in our Consolidated Statements of Operations.
Note
12. iCommon Stock and Stock-Based Compensation
i
Stockholders' Equity
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 $i250.0 million of its common stock. There were iino/
shares repurchased during the three months ended March 31, 2023 or 2022.
/i
Stock-Based Compensation
Stock-based compensation expense totaled approximately $i6.2
million and $i5.1 million for the three months ended March 31, 2023 and 2022, respectively. The Company's annual grant of share-based awards generally occurs in the second quarter under our 2004 Fourth Amended and Restated Stock Option and Incentive Plan (the "Plan”). Our stock options have contractual terms of iten
years and become exercisable over a three-year period. Expense related to stock options is recognized on a straight-line basis over the vesting period. Expense related to restricted stock units ("RSUs") issued to eligible employees under the Plan is recognized over the vesting period, generally between ithree years and ifour
years. Beginning in 2020, certain RSU grants provide for full vesting when the award recipients retire having reached 60 years of age and having provided at least ten years of service to the Company, provided that the awards remain outstanding for a period of six months from the date of grant. The expense for these awards is recognized over the applicable service period for each of the eligible award recipients. Expense related to RSUs and restricted stock awards ("RSAs") granted to non-employee directors under the Plan is recognized on a straight-line basis over the vesting period, generally ione
year. Expense related to performance units is recognized on a straight-line basis from their award date to the end of the performance period, generally ithree years.
i
The
following table summarizes stock-based compensation awards granted during the three months ended March 31, 2023:
Basic net income (loss) attributable to Trinity Industries, Inc. per common share ("EPS") is computed by dividing net income (loss) attributable to Trinity by the weighted average number of basic common shares outstanding for the period. Except when the effect would be antidilutive, the calculation of diluted EPS includes the net impact of potentially dilutive common shares. The
Company has certain unvested RSAs that participate in dividends on a nonforfeitable basis and are therefore considered to be participating securities. Consequently, diluted net income (loss) attributable to Trinity Industries, Inc. per common share is calculated under both the two-class method and the treasury stock method, and the more dilutive of the two calculations is presented.
i
The following table sets forth the computation of basic and diluted net income (loss) attributable to Trinity Industries, Inc.
We previously reported the filing of a False Claims Act (“FCA”) complaint in the United States District Court for the Eastern District of Texas, Marshall Division (“District Court”) styled Joshua Harman, on behalf of the United States of America, Plaintiff/Relator v. Trinity Industries, Inc., Defendant,
Case No. 2:12-cv-00089-JRG (E.D. Tex.). In this case, in which the U.S. Government declined to intervene, the relator, Mr. Joshua Harman, alleged the Company violated the FCA pertaining to sales of the ET Plus. On October 20, 2014, a trial in this case concluded with a jury verdict stating that the Company and THP “knowingly made, used or caused to be made or used, a false record or statement material to a false or fraudulent claim," and the District Court entered judgment on the verdict in the total amount of $i682.4
million. On September 29, 2017, the United States Court of Appeals for the Fifth Circuit ("Fifth Circuit") reversed the District Court’s $i682.4 million judgment and rendered judgment as a matter of law in favor of the Company and THP. On January 7, 2019, the United States Supreme Court denied Mr. Harman's petition for certiorari seeking review of the Fifth Circuit's
decision. The denial of Mr. Harman's petition ended this action.
Pursuant to the purchase and sale agreement related to the sale of THP, the Company agreed to indemnify Rush Hour for certain liabilities related to the highway products business, including those liabilities resulting from or arising out of (a) the proceedings set forth under “State actions” and "Missouri class action" below and (b) any other proceedings to the extent resulting from or arising out of ET Plus systems or specified ET Plus component parts that are both (i) manufactured prior to December 31, 2021, and (ii) sold in the United States on or prior to April 30, 2022, or related warranty obligations with respect thereto.
State
actions
Mr. Harman also has a separate state qui tam action currently pending pursuant to the Virginia Fraud Against Taxpayers Act ("VFATA") (Commonwealth of Virginia ex rel. Joshua M. Harman v. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No. CL13-698, in the Circuit Court, Richmond, Virginia). In this matter, Mr. Harman alleged the Company violated the VFATA pertaining to sales of the ET Plus, and he is seeking damages, civil penalties, attorneys’ fees, costs, and interest. The Commonwealth of Virginia Attorney General has intervened in the Virginia matter. The trial court has set the case for trial on March 18, 2024. The Company believes
that the claims in this matter are without merit and intends to vigorously defend against all allegations.
In a similar Tennessee state qui tam action filed by Mr. Harman (State of Tennessee ex rel. Joshua M. Harman v. Trinity Industries, Inc., and Trinity Highway Products, LLC, Case No. 14C2652, in the Circuit Court for Davidson County, Tennessee), Mr. Harman alleged the Company violated the Tennessee False Claim Act pertaining to sales of the ET Plus, and he is seeking damages, civil penalties, attorneys’ fees, costs, and interest. The State of Tennessee Attorney General filed a Notice of Election to Decline Intervention in this matter. On January 10, 2022, the trial court granted Trinity’s Motion to Dismiss Harman’s Second Amended Complaint and
entered an order dismissing Mr. Harman’s complaint with prejudice. On February 7, 2022, Mr. Harman filed a Notice of Appeal of the trial court's order dismissing the case. Mr. Harman's appeal remains pending. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations.
In a similar New Jersey state qui tam action (State of New Jersey ex rel. Joshua M. Harman v. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No.L-1344-14, in the Superior Court of New Jersey Law Division: Mercer County) that was previously dismissed by the trial court, Mr. Harman sought leave to file an amended complaint pursuant to the New Jersey False Claims Act. On February
16, 2022, the trial court denied Mr. Harman’s motion. On March 9, 2022, Mr. Harman filed a motion for reconsideration of the trial court’s order denying leave to file an amended complaint. On June 27, 2022, the trial court denied Mr. Harman’s motion for reconsideration seeking leave to file an amended complaint with prejudice. On August 9, 2022, Mr. Harman filed a Notice of Appeal of the trial court's order denying Mr. Harman's motion for reconsideration. Mr. Harman's appeal remains pending. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations.
Based on information currently available to the
Company and previously disclosed, we currently do not believe that a loss is probable in the Virginia, Tennessee, and New Jersey state qui tam actions described under "State actions," therefore ino accrual has been included in the accompanying Consolidated Financial Statements. Because of the complexity of these actions, as well as the current status of certain of these actions, we are not able to estimate a range of possible losses with respect to any one or more of these actions. While the financial impacts of these state actions are currently
unknown, they could be material.
On November 5, 2015, a lawsuit was filed against the Company titled Jackson County, Missouri, individually and on behalf of a class of others similarly situated vs. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No. 1516-CV23684 (Circuit Court of Jackson County, Missouri). The case was brought by plaintiff for and on behalf of itself and all Missouri
counties with a population of 10,000 or more persons, including the City of St. Louis, and the State of Missouri’s transportation authority. The plaintiff alleged that the Company and THP did not disclose design changes to the ET Plus and these allegedly undisclosed design changes made the ET Plus allegedly defective, unsafe, and unreasonably dangerous. The plaintiff alleged product liability negligence, product liability strict liability, and negligently supplying dangerous instrumentality for supplier’s business purposes. The plaintiff sought compensatory damages, interest, attorneys' fees, and costs, and in the alternative plaintiff sought a declaratory judgment that the ET Plus is defective, the Company’s conduct was unlawful, and class-wide costs and expenses associated with removing and replacing the
ET Plus throughout Missouri. On December 6, 2017, the Court granted plaintiff's Motion for Class Certification, certifying a class of Missouri counties with populations of 10,000 or more persons, including the City of St. Louis and the State of Missouri's transportation authority that have or had ET Plus guardrail end terminals with 4-inch wide guide channels installed on roadways they own or maintain.
As previously reported, the parties reached an agreement to settle all claims in this case without any admission of liability or fault. Defendants have denied and continue to deny specifically each and all of the claims and contentions alleged in this case. The Company’s settlement with the class avoids the uncertainty and expense of continued litigation. Pursuant to the settlement, the
Company will pay for the past replacement of certain ET Plus systems, for locating and replacing certain existing undamaged ET Plus systems, and for attorneys’ fees and costs. In accordance with ASC 450, Contingencies, the Company recorded a pre-tax charge of $i23.9 million ($i18.3 million,
net of income taxes) during the year ended December 31, 2021, which was included in income from discontinued operations, net of income taxes, in our Consolidated Statement of Operations, based on the Company’s assessment that a settlement was probable and the estimated costs to resolve this action. To date, the Company has funded $i17.5 million in
connection with the settlement and refined certain estimates, resulting in a remaining liability of $i7.8 million as of March 31, 2023.
Certain amounts involved in the settlement cannot be precisely determined at this time as the actual number of qualifying ET Plus systems that will be replaced as part of the settlement is not currently known. Consequently, the corresponding liability will be periodically reviewed and adjusted, when appropriate, for a number
of factors, including differences between actual and estimated costs. The accrual and related range of reasonably possible loss related to this matter are included in the amounts described below under "Other matters."
Product liability cases
The Company is currently defending product liability lawsuits in several different states that are alleged to involve the ET Plus as well as other products manufactured by THP. These cases are diverse in light of the randomness of collisions in general and the fact that each accident involving a roadside device, such as an end terminal, or any other fixed object along the highway, has its own unique facts and circumstances. The Company carries general liability insurance
to mitigate the impact of adverse judgment exposures in these product liability cases. To the extent that the Company believes that a loss is probable with respect to these product liability cases, the accrual for such losses is included in the amounts described below under "Other matters".
The Company is involved in claims and lawsuits incidental to our business arising from various matters, including product warranty,
personal injury, environmental issues, workplace laws, and various governmental regulations. The Company evaluates its exposure to such claims and suits periodically and establishes accruals for these contingencies when a range of loss can be reasonably estimated. The range of reasonably possible losses for such matters is $i10.0 million to $i20.9
million. This range includes any amounts related to the Highway Products litigation matters described above in the section titled “Highway products litigation." At March 31, 2023, total accruals of $i10.5 million, including environmental and workplace matters described below, are included in accrued liabilities in the accompanying Consolidated Balance Sheets. The Company believes any additional liability would not
be material to its financial position or results of operations.
Trinity is subject to remedial orders and federal, state, local, and foreign laws and regulations relating to the environment and the workplace. The Company has reserved $i1.2 million to cover our probable and estimable liabilities with respect to the investigations, assessments, and remedial responses to such matters, taking into account currently available information
and our contractual rights to indemnification and recourse to third parties. However, estimates of liability arising from future proceedings, assessments, or remediation are inherently imprecise. Accordingly, there can be no assurance that we will not become involved in future litigation or other proceedings involving the environment and the workplace or, if we are found to be responsible or liable in any such litigation or proceeding, that such costs would not be material to the Company. We believe that we are currently in substantial compliance with environmental and workplace laws and regulations.
Georgia tornado
On March 26, 2021, a tornado damaged the Company’s
rail maintenance facility in Cartersville, Georgia. We incurred costs related to cleanup and damage remediation activities in order for the facility to resume operations in the second quarter of 2021. We believe our insurance coverage is sufficient to cover property damage costs related to the event. To date, we have received total advanced payments from insurance of approximately $i28.9 million, which includes $i8.1 million
for reimbursement of cleanup and damage remediation expenditures. As of March 31, 2023, we have utilized $i19.6 million of the advanced payments from insurance towards new capital expenditures in support of the reconstruction efforts.
During the three months ended March 31, 2023, we recorded a gain of $i1.2 million
for property damage insurance recoveries received in excess of the net book value of assets destroyed, which is included in the gains on dispositions of other property line in our Consolidated Statements of Operations.
Any additional property damage insurance proceeds received in excess of the net book value of property lost will be accounted for as gains in future quarters.
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.
This quarterly report on Form 10-Q (or statements otherwise made by the Company or on the Company’s behalf from time to time in
other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings or otherwise) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not historical facts are forward-looking statements and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performances, estimates, projections, goals, and forecasts. Trinity uses the words “anticipates,”“believes,”“estimates,”“expects,”“intends,”“forecasts,”“may,”“will,”“should,” and similar expressions to identify these forward-looking statements. Potential factors, which could cause our actual results of operations
to differ materially from those in the forward-looking statements, include, among others:
•market conditions and customer demand for our business products and services;
•the cyclical nature of the industries in which we compete;
•variations in weather in areas where our products are manufactured, delivered, or used;
•naturally-occurring events, pandemics, and/or disasters causing disruption to our manufacturing, product deliveries, and production capacity, thereby giving rise to an increase in expenses, loss of revenue, and property losses;
•the impact of the coronavirus pandemic (“COVID-19”) and the response thereto, on,
among other things, demand for our products and services, our customers' ability to pay, disruptions to our supply chain, our liquidity and financial position, results of operations, stock price, payment of dividends, our ability to generate new railcar orders, our ability to originate and/or renew leases at favorable rates, our ability to convert backlog to revenue, and the operational status of our facilities;
•disruptions in the transportation network used to deliver our products, which may impact our ability to timely deliver railcars to our customers;
•shortages of labor;
•impacts from asset impairments and related charges;
•the timing of introduction of new products;
•the
inability to effectively integrate acquired businesses;
•the timing and delivery of customer orders, lease portfolio sales, or a breach of customer contracts;
•the creditworthiness of customers and their access to capital;
•product price changes;
•changes in mix of products sold;
•the costs incurred to align manufacturing capacity with demand and the extent of its utilization;
•the operating leverage and efficiencies that can be achieved by our manufacturing businesses;
•availability
and costs of steel, component parts, supplies, and other raw materials;
•competition and other competitive factors;
•changing technologies;
•material failure, interruption of service, compromised data security, phishing emails, or cybersecurity breaches in our information technology (or that of the third-party vendors who provide information technology or other services);
•surcharges and other fees added to fixed pricing agreements for steel, component parts, supplies, and other raw materials;
•inflation, interest rates, and capital costs;
•counter-party risks
for financial instruments;
•long-term funding of our operations;
•taxes;
•the stability of the governments and political and business conditions in certain foreign countries, particularly Mexico;
•geopolitical events, including armed conflicts, and their impact on supply chains, pricing, and the global economy;
•changes in import and export quotas and regulations;
•business conditions in emerging economies;
•costs and results of litigation, including trial and appellate costs;
•changes
in accounting standards or inaccurate estimates or assumptions in the application of accounting policies;
•changes in laws and regulations that may have an adverse effect on demand for our products and services, our results of operations, financial condition or cash flows;
•legal, regulatory, and environmental issues, including compliance of our products with mandated specifications, standards, or testing criteria and obligations to remove and replace our products following installation or to recall our products and install different products;
•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.
Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,”“Company,”“we,”“our,” or "us") own businesses that are leading providers of railcar products and services
in North America. We market our railcar products and services under the trade name TrinityRail®. The TrinityRail platform provides railcar leasing and management services; railcar manufacturing, maintenance and modifications; and other railcar logistics products and services.
In the fourth quarter of 2021, we completed the sale of Trinity Highway Products, LLC (“THP”) to Rush Hour Intermediate II, LLC ("Rush Hour"), an entity owned by an affiliated investment fund of Monomoy Capital Partners. Upon completion of the sale, the accounting requirements for reporting THP as a discontinued operation were met. In connection with the sale of THP, we agreed to indemnify Rush Hour for certain liabilities related to the ET-Plus® System, a highway guardrail end-terminal system (the “ET Plus”). Consequently,
expenses incurred during the three months ended March 31, 2023 and 2022, and that may be incurred in the future related to these retained obligations, will be reported in discontinued operations. See Note 2 of the Consolidated Financial Statements for further information related to the sale of THP and Note 14 of the Consolidated Financial Statements for information regarding the retained liabilities.
We report our operating results in two reportable segments: (1) the Railcar Leasing and Management Services Group (the "Leasing Group"), which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services, as well as other railcar logistics products and services; and (2) the Rail Products Group, which manufactures and sells railcars and related parts and components,
and provides railcar maintenance and modification services.
Executive Summary
Recent Market Developments
Cyclical, Seasonal and Other Trends Impacting Our Business
Although lease rates and lease fleet utilization continue to improve, the industries in which our customers operate are cyclical in nature. Weaknesses in certain sectors of the North American and global economy may make it more difficult to sell or lease certain types of railcars. Additionally, changes in certain commodity prices, or changes in demand for certain commodities, could impact customer demand for various types of railcars. Further, disruptions in the global supply chain have impacted demand for, and the costs of, certain of our products and services.
We continuously assess
demand for our products and services and take steps to rationalize and diversify our leased railcar portfolio and align our operating capacity appropriately. We evaluate the creditworthiness of our customers and monitor performance of relevant market sectors; however, weaknesses in any of these market sectors could affect the financial viability of our underlying Leasing Group customers, which could negatively impact our recurring leasing revenues and operating profits. We continue to believe that our rail platform is able to respond to cyclical changes in demand and perform throughout the railcar cycle.
Steel prices, which are subject to volatility, were elevated over much of the last two years and are a major component of our cost of revenues. We typically use contract-specific purchasing practices, existing supplier commitments, contractual
price escalation provisions, and other arrangements with our customers to reduce the impact of plate and coil steel price volatility on our operating profit. Additionally, the cost and volume of lease fleet maintenance and compliance events increased in 2022, and we expect elevated levels of these activities to continue in the near term. Further, although we remain committed to attracting and retaining a highly skilled and diverse workforce, challenging labor market conditions and increases in labor costs have negatively impacted our operations. We continue to monitor the impact of potential margin and operating profit headwinds resulting from these factors.
As a result of disruptions in the global supply chain, we have continued to experience shortages of materials used to manufacture or repair certain railcar types, as well as disruptions in the transportation network used to deliver our products, which have impacted our
ability to timely deliver these railcars to our customers. While we believe these challenges will be resolved over time, they may persist over the foreseeable future, which could continue to impact our operations. We will continue to monitor the situation and take appropriate steps within our control to mitigate the potential impacts on our production schedules and delivery timelines.
Due to their transactional nature, lease portfolio sales are the primary driver of fluctuations in results in the Leasing Group.
•Our
revenues for the three months ended March 31, 2023 were $641.7 million, representing an increase of 35.8%, compared to the three months ended March 31, 2022. Our operating profit for the three months ended March 31, 2023 was $69.0 million compared to $54.8 million for the three months ended March 31, 2022.
•The Leasing Group's lease fleet of 108,865 company-owned railcars was 98.2% utilized as of March 31, 2023, compared to a lease fleet utilization of 96.5% on 107,090 company-owned railcars as of March 31, 2022. Our company-owned
lease fleet includes wholly-owned railcars, partially-owned railcars, and railcars under leased-in arrangements.
•For the three months ended March 31, 2023, we made a net investment in our lease fleet of approximately $134.8 million, which primarily includes new railcar additions, sustainable railcar conversions, railcar modifications, and other betterments, net of deferred profit, and secondary market purchases; and is net of proceeds from lease portfolio sales.
•The total value of the new railcar backlog at March 31, 2023 was $3.7 billion, compared to $1.9 billion at March 31, 2022. The Rail Products Group received orders for 2,690 railcars and delivered 4,045 railcars in the three
months ended March 31, 2023, in comparison to orders for 5,055 railcars and deliveries of 2,470 railcars in the three months ended March 31, 2022.
•During the three months ended March 31, 2023, sustainable railcar conversion revenues totaled $53.9 million, representing 590 railcars.
•For the three months ended March 31, 2023, we generated operating cash flows from continuing operations and Adjusted Free Cash Flow After Investments and Dividends ("Adjusted Free Cash Flow") of $102.5 million and $36.2 million(1), respectively, in comparison to $28.5 million and $47.8 million(1),
respectively, for the three months ended March 31, 2022.
(1) Non-GAAP financial measure. See the Non-GAAP Financial Measures section within this Form 10-Q for a reconciliation to the most directly comparable GAAP measure and why management believes this measure is useful to management and investors.
See "Consolidated Results of Operations" and "Segment Discussion" below for additional information regarding our operating results.
Returns
of capital to shareholders in the form of dividends and share repurchases are summarized below:
(1)Dividend yield is calculated as dividends paid for the four previous quarters divided by the closing stock price on the last trading day of each respective quarter.
(2) In the second quarter of 2022, we completed the final settlement of an accelerated share repurchase agreement ("ASR").
(3) In the fourth quarter of 2022, our Board of Directors terminated
the existing share repurchase program and authorized a new $250.0 million share repurchase program.
Litigation Updates
See Note 14 of the Consolidated Financial Statements for an update on the status of certain litigation retained in connection with the sale of THP.
Operating costs are comprised of cost of revenues; selling, engineering, and administrative costs; gains or losses on property disposals; and restructuring activities. Operating costs by segment for the three months ended March 31, 2023 and 2022 were as follows:
Revenues – Our revenues for the three months ended March 31, 2023 were $641.7 million, representing an increase of $169.0 million, or 35.8%, over the prior year period. The increase in revenues was primarily due to a higher volume of, and improved pricing on, external deliveries in the Rail Products Group and improved lease rates in the Leasing Group.
Cost
of revenues – Our cost of revenues for the three months ended March 31, 2023 was $538.5 million, representing an increase of $140.0 million, or 35.1%, over the prior year period. The increase in cost of revenues was primarily due to a higher volume of external deliveries, higher labor costs and operational inefficiencies in the Rail Products Group.
Selling, engineering, and administrative expenses – Selling, engineering, and administrative expenses for the three months ended March 31, 2023 were $49.9 million, representing an increase of $5.2 million or 11.6% when compared to the prior year period, primarily as a result of higher employee-related costs.
Gains on dispositions of property – Gains on dispositions
of property decreased by $10.0 million for the three months ended March 31, 2023 when compared to the prior year period primarily due to higher gains associated with the disposition of certain non operating facilities and insurance recoveries in the prior year period, partially offset by higher profits on lease portfolio sales in the current year period. Results for the three months ended March 31, 2023 and 2022 included gains of $1.2 million and $6.4 million, respectively, related to insurance recoveries in excess of net book value for assets damaged by a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021. See Note 14 of the Consolidated Financial Statements for more information.
Operating profit – Operating profit for the three months ended March 31, 2023 totaled $69.0 million, representing an increase of $14.2 million, or 25.9%, from the prior year period primarily due to a higher volume of, and improved pricing on, external deliveries in the Rail Products Group and improved lease rates in the Leasing Group, partially offset by higher employee-related and other operating costs across the enterprise. Operating profit was favorably impacted in the current and prior year periods by insurance recoveries related to a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021.
For further information regarding the operating results of individual
segments, see "Segment Discussion" below.
Interest expense, net – Interest expense, net for the three months ended March 31, 2023 totaled $62.1 million, compared to $43.5 million for the three months ended March 31, 2022, primarily driven by higher variable interest rates associated with TILC's warehouse loan facility and the revolving credit facility and higher overall average debt in 2023.
Income taxes – The effective tax rate from continuing operations for the three months ended March 31, 2023 was a benefit of 217.0%, which differs from the U.S. statutory rate of 21.0% primarily due to the release of residual taxes out of accumulated other comprehensive income, the re-measurement
of our net deferred tax liabilities due to the acquisition of RSI Logistics ("RSI"), changes in our valuation allowances, state income taxes, and foreign income taxes. See Note 9 of the Consolidated Financial Statements for additional information.
The effective tax rate from continuing operations for the three months ended March 31, 2022 was an expense of 23.3%, which differs from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign income taxes, and non-deductible executive compensation, net of the benefits of excess deductions on equity compensation.
(1)Operating profit includes: depreciation; fleet operating costs, which include maintenance, compliance, freight, and storage; rent and ad valorem taxes; and selling, engineering, and administrative expenses. Amortization of deferred profit on railcars sold from the Rail Products Group to the Leasing Group is included in the operating profits of the Leasing Group, resulting in the recognition of depreciation expense based on our original manufacturing cost of the railcars. Interest expense is not a component of operating profit and includes the effect of hedges.
(2)Includes $1.3 million selling profit associated with sales-type leases for the three months ended March 31, 2022.
(3)
Depreciation expense includes $4.7 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program.
Information related to lease portfolio sales is as follows:
(1)Excludes $1.3 million selling profit associated with sales-type leases for the three months ended March 31, 2022.
Total revenues for the Railcar Leasing and Management Services Group increased by 11.1% for the three months ended March 31, 2023 compared to the prior year period. Leasing and management revenues for the three months ended March 31, 2023 were favorably impacted primarily by improved lease rates and higher utilization, which resulted in higher revenues when compared to the three months ended March 31, 2022. Revenues for the Leasing Group were also favorably impacted for the three months ended March 31, 2023 by the acquisition of RSI.
Leasing
and management operating profit for the three months ended March 31, 2023 increased by 5.9% compared to the prior year period primarily due to improved lease rates and higher utilization, partially offset by higher maintenance costs and increased depreciation. Leasing Group operating profit increased by 7.1% for the three months ended March 31, 2023 compared to the prior year period and was favorably impacted by higher profit from lease portfolio sales.
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:
(1) Includes sustainable railcar conversion revenues of $53.9 million, representing 590 railcars, for the three months ended March 31, 2023. Includes sustainable railcar conversion revenues of $49.8 million, representing 445 railcars for the three months ended March 31, 2022.
Revenues for the Rail Products Group increased for the three months ended March 31, 2023 by 63.1% when compared to the prior year period. Revenues in our rail products business increased as a result of higher deliveries and favorable pricing, partially offset by the mix of railcars sold. Revenues in our maintenance services business increased as a result of higher volumes, favorable pricing, and the mix of repairs. Revenues
in other were driven by the growth of our parts business, including the impact of acquisitions.
Cost of revenues for the Rail Products Group increased for the three months ended March 31, 2023 by 56.4% when compared to the prior year period. In our rail products business, the increase in cost of revenues was driven by higher deliveries, labor inefficiencies associated with onboarding of new employees, higher labor costs related to hiring and retention activities, and operational inefficiencies associated with supply chain disruptions. In our maintenance services business, cost of revenues increased as a result of a higher volume of general repairs and the mix of repairs and continues to be impacted by labor shortages leading to operating inefficiencies.
Operating profit for the three months ended March
31, 2023 was favorably impacted by higher deliveries and improved pricing, partially offset by labor inefficiencies, higher labor costs, and the mix of railcars sold. Additionally, during the three months ended March 31, 2023 and 2022, operating profit was favorably impacted by gains of $1.2 million and $6.4 million, respectively, related to insurance recoveries in excess of net book value for assets damaged by a tornado at the Company’s rail maintenance facility in Cartersville, Georgia in the first quarter of 2021.
Information
related to our Rail Products Group backlog of new railcars is as follows. In addition to the amounts below, as of March 31, 2023, our backlog related to sustainable railcar conversions totaled $173.7 million, representing 2,085 railcars.
(1)The adjustment for the three months ended March 31, 2022 includes 300 railcars valued at $34.6 million that were removed from the new railcar backlog and shifted to the sustainable railcar conversion backlog.
Total backlog dollars
increased by 95.5% when compared to the prior year period due to an increase in the volume and average selling price of orders received primarily driven by a new long-term railcar supply agreement with GATX Corporation executed in the third quarter of 2022. We expect to deliver approximately 42.3% of our railcar backlog value during 2023 and 22.5% during 2024, with the remainder to be delivered through 2028. The orders in our backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may elect to change their procurement decision.
Transactions between the Rail Products Group and the Leasing Group are as follows:
Selling, engineering, and administrative expenses for the three months ended March 31, 2023 increased 17.1% compared to the prior year period, primarily from higher employee-related costs. Total operating costs during the three months ended March 31, 2022 were favorably impacted by gains associated with the disposition of non-operating facilities. As we continue to streamline our operational footprint, we may have additional gains or losses on the disposition of other non-operating facilities.
We expect to finance future operating requirements with cash, cash equivalents, and short-term marketable securities; cash flows from operations; and short-term debt, long-term debt, and equity. Debt instruments that we have utilized include the TILC warehouse loan facility, senior notes, convertible subordinated notes, asset-backed securities, non-recourse promissory notes, sale-leaseback transactions, and our revolving credit facility.
As of March 31, 2023, we have total committed liquidity of $451.5 million. Our total available liquidity includes: $81.9 million of unrestricted cash and cash equivalents; $278.2 million unused and available under our revolving credit facility; and
$91.4 million unused and available under the TILC warehouse loan facility based on the amount of warehouse-eligible, unpledged equipment. We believe we have access to adequate capital resources to fund operating requirements and are an active participant in the capital markets.
The Company’s $400.0 million aggregate principal amount of 4.55% senior notes are due in 2024 (“Senior Notes”). We are exploring various alternatives to refinance the Senior Notes during 2023, including by issuing or incurring new debt. Any issuance or incurrence of new debt will depend on prevailing market conditions and other factors, and may have a material impact on our financial results.
Liquidity Highlights
Revolving Credit Facility–
In March 2023, we amended our revolving credit facility to increase the total facility commitment from $450.0 million to $600.0 million, increase the maximum leverage ratio to provide additional flexibility, modify the limitations on restricted payments, and allow up to $100.0 million of annual dividends on the Company's common stock. See Note 8 of the Consolidated Financial Statements for additional information regarding this amendment.
Dividend Payments – We paid $21.1 million in dividends to our common stockholders during the three months ended March 31, 2023.
Share Repurchase Authorization – In December 2022, our Board of Directors authorized a new share repurchase program effective December
9, 2022 with no expiration. The new share repurchase program authorizes the Company to repurchase up to $250.0 million of its common stock. There were no shares repurchased during the three months ended March 31, 2023.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022:
Operating Activities. Net cash provided by operating activities from continuing operations for the three months ended March 31, 2023 was $102.5 million compared to net cash provided by operating activities from continuing operations of $28.5 million for the three months ended March 31, 2022. The changes in our operating assets and liabilities are as follows:
(Increase) decrease in receivables, inventories, and other assets
$
6.8
$
(42.1)
Increase (decrease) in accounts payable, accrued liabilities, and other liabilities
26.1
9.0
Changes
in operating assets and liabilities
$
32.9
$
(33.1)
The changes in our operating assets and liabilities resulted in a net source of $32.9 million for the three months ended March 31, 2023, as compared to a net use of $33.1 million for the three months ended March 31, 2022. Operating assets in the prior year period were impacted by higher inventory balances in anticipation of higher volumes of railcar deliveries in future periods, as well as continued supply chain challenges.
Investing Activities. Net
cash used in investing activities from continuing operations for the three months ended March 31, 2023 was $203.1 million compared to $0.2 million of net cash used in investing activities from continuing operations for the three months ended March 31, 2022. Significant investing activities are as follows:
•We made a net investment in our lease fleet of $134.8 million during the three months ended March 31, 2023, compared to $13.5 million in the prior year period. Our investment in the lease fleet primarily includes new railcar additions, sustainable railcar conversions, railcar modifications, and other betterments, net of deferred profit, and secondary market purchases; and is net of proceeds from lease portfolio sales.
•During
the three months ended March 31, 2023, we acquired a company that is a provider of proprietary software and logistics and terminal management solutions for net cash of $66.2 million. We had no acquisitions during the three months ended March 31, 2022.
Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2023 was $72.4 million compared to $28.7 million of net cash provided by financing activities for the three months ended March 31, 2022. Significant financing activities are as follows:
•During the three months ended March 31, 2023, we had
total borrowings of $246.3 million and total repayments of $149.6 million, for net proceeds of $96.7 million, primarily from debt proceeds to support our investment in the lease fleet and for general corporate purposes. During the three months ended March 31, 2022, we had total borrowings of $127.2 million and total repayments of $73.0 million, for net proceeds of $54.2 million, primarily from debt proceeds to support our investment in the lease fleet.
•We paid $21.1 million and $19.1 million in dividends to our common stockholders during the three months ended March 31, 2023 and 2022, respectively.
Current Debt Obligations
The revolving credit facility contains several
financial covenants that require the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. In March 2023, we amended our revolving credit facility to increase the maximum leverage ratio to provide additional flexibility and to amend certain other terms. A summary of our financial covenants is detailed below:
(1)Defined as the ratio of consolidated total indebtedness
to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") for the Borrower and its restricted subsidiaries for the period of four consecutive quarters ending with March 31, 2023.
(2) Defined as the ratio of the difference of (A) consolidated EBITDA less (B) consolidated capital expenditures – manufacturing and other to consolidated interest expense to the extent paid in cash, in each case for the Borrower and its restricted subsidiaries for the period of four consecutive quarters ending with March 31, 2023.
As of March
31, 2023, we were in compliance with all such financial covenants. Please refer to Note 8 of the Consolidated Financial Statements for a description of our current debt obligations.
Our Senior Notes are fully and unconditionally and jointly and severally guaranteed by certain of Trinity’s 100%-owned subsidiaries: Trinity Industries Leasing Company; Trinity North American Freight Car, Inc.; Trinity Rail Group, LLC; Trinity Tank Car, Inc.; and TrinityRail Maintenance
Services, Inc. (collectively, the "Guarantor Subsidiaries”).
The Senior Notes indenture agreement includes customary provisions for the release of the guarantees by the Guarantor Subsidiaries upon the occurrence of certain allowed events including the release of one or more of the Guarantor Subsidiaries as guarantor under our revolving credit facility. See Note 8 of our 2022 Annual Report on Form 10-K. The Senior Notes are not guaranteed by any of our remaining 100%-owned subsidiaries
or partially-owned subsidiaries (“Non-Guarantor Subsidiaries”).
As of March 31, 2023, assets held by the Non-Guarantor Subsidiaries included $173.1 million of restricted cash that was not available for distribution to Trinity Industries, Inc. (“Parent”), $7,255.5 million of equipment securing certain non-recourse debt, and $545.7 million of assets located in foreign locations. As of December 31, 2022, assets held by the Non-Guarantor Subsidiaries included $209.8
million of restricted cash that was not available for distribution to the Parent, $7,153.3 million of equipment securing certain non-recourse debt, and $571.7 million of assets located in foreign locations.
The following tables include the summarized financial information for Parent and Guarantor Subsidiaries (together, the obligor group) on a combined basis after elimination of intercompany transactions within the obligor group (in millions). Investments in and equity in the earnings of the Non-Guarantor Subsidiaries (the non-obligor group) have been excluded.
(1)There were no net sales from the obligor group to Non-Guarantor Subsidiaries during the three months ended March 31, 2023.
(2) Cost of revenues includes $94.3 million of purchases from Non-Guarantor Subsidiaries during the three months ended March 31, 2023.
(3) Net income (loss) includes $3.1 million of net loss related to discontinued operations.
(4) Receivables, net of allowance includes $87.4 million and $87.9 million of receivables from Non-Guarantor Subsidiaries
as of March 31, 2023 and December 31, 2022, respectively.
For the full year 2023, we anticipate a net investment in our lease fleet of between $250 million and $350 million. Capital expenditures related to manufacturing and other activities, including expansion of our fleet maintenance capabilities and systems upgrades, are projected to range between $40 million and $50 million for the full year 2023.
Equity Investment
See Note 5 of the Consolidated Financial Statements for information about our investment in partially-owned leasing subsidiaries.
Off Balance Sheet Arrangements
As of March 31, 2023, we had letters of credit issued under our revolving credit facility
in an aggregate amount of $16.8 million, the majority of which are expected to expire in October 2023. Our letters of credit obligations support performance bonds related to certain railcar orders. See Note 8 of the Consolidated Financial Statements for further information about our corporate revolving credit facility.
Derivative Instruments
We use derivative instruments to mitigate interest rate risk, including risks associated with the impact of changes in interest rates in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also may use derivative instruments from time to time to mitigate the impact of changes in foreign currency exchange rates. Derivative instruments are accounted for in accordance with applicable accounting standards. See Note 3 of the Consolidated Financial Statements for discussion
of how we utilize our derivative instruments.
LIBOR Transition
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), previously announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after June 2023. In the U.S., the Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to LIBOR. In February 2023, we amended the promissory notes and derivative instruments for Trinity Rail Leasing 2017 LLC to transition the facility benchmark rate from LIBOR to SOFR plus a benchmark adjustment. Following the completion of these amendments, we have no remaining LIBOR-based contracts.
We have included financial measures compiled in accordance with GAAP and certain non-GAAP measures in this Quarterly Report on Form 10-Q to provide management and investors with additional information regarding our financial results. Non-GAAP measures should not be considered in isolation or as a substitute for our reporting results prepared in accordance with GAAP and, as calculated, may not be comparable to other similarly titled measures for other companies. For each non-GAAP financial measure, we provide a reconciliation to the most comparable GAAP measure.
Adjusted Free Cash Flow
Adjusted Free Cash Flow After Investments and Dividends ("Adjusted Free Cash Flow") is a non-GAAP financial measure. We believe Adjusted Free Cash Flow is
useful to both management and investors as it provides a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. Adjusted Free Cash Flow is reconciled to net cash provided by operating activities from continuing operations, the most directly comparable GAAP financial measure, in the following table.
Adjusted Free Cash Flow is defined as net cash provided by operating activities from continuing operations as computed in accordance with GAAP, plus cash proceeds from lease portfolio sales, less capital expenditures for manufacturing, dividends paid, and Equity CapEx for leased railcars. Equity CapEx for leased railcars is defined as leasing capital expenditures, adjusted to exclude net proceeds from (repayments of) recourse and non-recourse debt.
Net cash provided by operating activities – continuing operations
$
102.5
$
28.5
Proceeds from lease portfolio sales
56.7
71.1
Capital
expenditures – manufacturing and other
(7.1)
(2.3)
Dividends paid to common stockholders
(21.1)
(19.1)
Equity CapEx for leased railcars
(94.8)
(30.4)
Adjusted Free Cash Flow After Investments and Dividends
$
36.2
$
47.8
Capital
expenditures – leasing
$
191.5
$
84.6
Less:
Payments to retire debt
(149.6)
(73.0)
Proceeds from issuance of debt
246.3
127.2
Net
proceeds from (repayments of) debt
96.7
54.2
Equity CapEx for leased railcars
$
94.8
$
30.4
Contractual Obligations and Commercial Commitments
Except as described below, as of March 31, 2023, there have been no material
changes to our contractual obligations from December 31, 2022:
•In March 2023, we amended our revolving credit facility to increase the total facility commitment from $450.0 million to $600.0 million and to amend certain other terms.
See Note 8 of the Consolidated Financial Statements for additional information regarding this amendment.
Recent Accounting Pronouncements
See Note 1 of the Consolidated Financial Statements for information about recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in our market risks since December 31, 2022 as set forth in Item 7A of our 2022 Annual Report on Form 10-K. Refer to Note 3 and Note 8 of the Consolidated Financial Statements for a discussion of the impact of hedging activity and debt-related activity, respectively, for the three months ended March 31, 2023.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that we are able to collect and record the information we are required to disclose in the reports we file with the SEC, and to process, summarize, and disclose this information within the time periods specified in the rules of the SEC. Our Chief Executive and Chief Financial Officers are responsible for establishing and maintaining these procedures and, as required by the rules of the SEC, evaluating their effectiveness. Based on their evaluation of our disclosure controls and procedures that took place as of the end of the period covered by this report, the Chief Executive and Chief Financial Officers concluded that these procedures are effective to 1) ensure that we are able to collect, process, and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods and 2) accumulate and communicate this information to our management, including our Chief
Executive and Chief Financial Officers, to allow timely decisions regarding this disclosure.
Internal Controls over Financial Reporting
During the period covered by this report, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
(1)These columns include the following transactions during the three months ended March 31, 2023: (i) the surrender to the Company of 11,438 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees, and (ii) the purchase of 361 shares of common stock by the Trustee for assets held in a non-qualified employee profit sharing plan trust.
(2) 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 under the new share repurchase program during the three months ended March 31, 2023. The approximate dollar value of shares that were eligible to be repurchased under our share repurchase program is shown as of the end of such month or quarter.
Inline
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.