Trinity Industries(TRN) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Trinity Industries reported $1,364.1 million in total revenues for the six months ended June 30, 2023, with net income of $21.4 million and total assets growing to $9.02 billion, alongside improved operating cash flow Consolidated Statements of Operations Highlights (Six Months Ended June 30) | Financial Metric | 2023 (in millions) | 2022 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,364.1 | $889.5 | +53.4% | | Total Operating Profit | $168.1 | $127.8 | +31.5% | | Income from Continuing Operations | $40.3 | $26.4 | +52.7% | | Net Income Attributable to Trinity | $21.4 | $3.0 | +613.3% | | Diluted EPS | $0.26 | $0.04 | +550.0% | Consolidated Balance Sheet Highlights | Account | June 30, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | Total Assets | $9,022.0 | $8,724.3 | | Property, plant, and equipment, net | $7,029.2 | $6,886.8 | | Total Debt | $5,832.6 | $5,607.6 | | Total Stockholders' Equity | $1,249.0 | $1,269.6 | Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Cash Flow Activity | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $134.9 | $(73.3) | | Net cash used in investing activities | $(292.1) | $(201.2) | | Net cash provided by financing activities | $159.5 | $278.6 | Note 1. Summary of Significant Accounting Policies The company recognizes revenue for its Leasing Group on a straight-line basis and for its Rail Products Group upon customer acceptance or over time, with $3.6 billion in unsatisfied performance obligations for new railcars as of June 30, 2023 - Revenue for the Leasing Group is recognized monthly on a straight-line basis for operating leases. Revenue for new railcars in the Rail Products Group is recognized when the customer accepts the railcar and title passes[19][24] Unsatisfied Performance Obligations at June 30, 2023 | Category | Total Amount (in millions) | Percent expected to be delivered in 2023 | | :--- | :--- | :--- | | Rail Products Group: | | | | New railcars (External & Leasing) | $3,605.4 | 28.6% | | Sustainable railcar conversions | $179.9 | 63.1% | | Railcar Leasing and Management Services Group | $72.6 | 13.0% | Note 2. Acquisitions and Discontinued Operations On March 8, 2023, the company acquired RSI Logistics for $72.1 million, resulting in $26.3 million of goodwill, following the December 2022 acquisition of Holden America for $87.1 million, while discontinued operations from the Highway Products Business resulted in a $5.4 million net loss for the first six months of 2023 - On March 8, 2023, the company acquired RSI Logistics, a provider of software and logistics solutions, for an aggregate purchase price of $72.1 million. The acquisition was recorded as a business combination within the Leasing Group[43] - The company acquired Holden America in December 2022 for a total consideration of $87.1 million. The transaction was recorded within the Rail Products Group[45] Loss from Discontinued Operations (THP) | Period | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Three Months Ended June 30 | $(2.3) | $(3.4) | | Six Months Ended June 30 | $(5.4) | $(10.3) | Note 3. Derivative Instruments and Fair Value Measurements Trinity uses derivative instruments, primarily interest rate swaps and caps, to mitigate interest rate and foreign currency risks, holding derivative assets valued at $42.1 million and liabilities at $17.7 million as of June 30, 2023 - The company uses derivative instruments to mitigate interest rate risk on future debt and floating-rate debt, as well as to hedge foreign currency exchange rate risk[50] - In June 2023, a new interest rate swap was executed to fix the SOFR component on a portion of the $272.0 million TRL-2023 term loan[51] Fair Value of Derivative Instruments (June 30, 2023) | Type | Assets (in millions) | Liabilities (in millions) | | :--- | :--- | :--- | | Interest rate hedge | $21.7 | - | | Foreign currency hedge | $2.7 | - | | Derivatives not designated as hedging instruments | $17.7 | $17.7 | Note 4. Segment Information The company operates in two segments: Railcar Leasing and Management Services Group and Rail Products Group, generating $204.0 million and $49.0 million in operating profit respectively for the six months ended June 30, 2023 Segment Operating Profit (Six Months Ended June 30) | Segment | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Railcar Leasing and Management Services Group | $204.0 | $185.3 | | Rail Products Group | $49.0 | $14.5 | Segment Revenues (Six Months Ended June 30, 2023) | Segment | External Revenue (in millions) | Intersegment Revenue (in millions) | Total Revenue (in millions) | | :--- | :--- | :--- | :--- | | Railcar Leasing and Management Services Group | $426.3 | $0.4 | $426.7 | | Rail Products Group | $937.8 | $409.0 | $1,346.8 | Note 8. Debt Total debt increased to $5.83 billion as of June 30, 2023, including $793.9 million in recourse debt and $5.04 billion in non-recourse debt, following the issuance of $400.0 million in senior notes and a new $340.0 million term loan - In June 2023, the company issued $400.0 million in 7.75% senior notes due 2028, with proceeds used to repay borrowings under the revolving credit facility[87] - In June 2023, a subsidiary entered into a new $340.0 million non-recourse term loan (TRL-2023) to finance railcars, maturing in June 2028[90] Total Debt Summary | Debt Category | June 30, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | Total Recourse Debt | $793.9 | $624.1 | | Total Non-Recourse Debt | $5,038.7 | $4,983.5 | | Total Debt | $5,832.6 | $5,607.6 | Note 12. Common Stock and Stock-Based Compensation The company had a $250.0 million share repurchase program authorized in December 2022 with no shares repurchased in the first half of 2023, while stock-based compensation expense was $12.7 million for the same period - A $250.0 million share repurchase program was authorized in December 2022. No shares were repurchased during the six months ended June 30, 2023[105] Stock-Based Compensation Expense | Period | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Three Months Ended June 30 | $6.5 | $5.7 | | Six Months Ended June 30 | $12.7 | $10.8 | Note 14. Contingencies The company faces legal proceedings including indemnification for its former highway products business and new third-party claims related to the East Palestine train derailment, with total accruals for claims at $25.7 million as of June 30, 2023 - The company is indemnifying the buyer of its former highway products business (THP) for certain liabilities, including ongoing state qui tam actions related to the ET Plus guardrail system[114][115] - A subsidiary, TILC, was named as a third-party defendant by Norfolk Southern in lawsuits related to the February 2023 East Palestine, Ohio train derailment. Trinity believes the claims are without merit[123][124] - Total accruals for various claims and lawsuits, including environmental and workplace matters, were $25.7 million as of June 30, 2023. The range of reasonably possible losses for these matters is estimated to be between $25.4 million and $36.9 million[126] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 53.4% year-over-year revenue growth for the first six months of 2023 to higher railcar delivery volumes and improved lease rates, with operating profit increasing 31.5% to $168.1 million and the new railcar backlog growing to $3.6 billion Executive Summary Key operational highlights for the first six months of 2023 include a 53.4% increase in revenue to $1.4 billion, a rise in operating profit to $168.1 million, improved fleet utilization to 97.9%, and a new railcar backlog of $3.6 billion - The new railcar backlog value was $3.6 billion at June 30, 2023, a significant increase from $2.2 billion at June 30, 2022[147] - The Leasing Group's fleet utilization was 97.9% as of June 30, 2023, up from 97.2% a year earlier[147] - Management notes that the business is impacted by cyclical industry trends, foreign currency fluctuations (specifically the strengthening Mexican peso), and elevated steel prices[140][142] Consolidated Results of Operations Consolidated revenue for Q2 2023 increased 73.3% year-over-year to $722.4 million, with six-month revenue rising 53.4% to $1.36 billion, and operating profit increasing 31.5% to $168.1 million, despite higher interest expense Consolidated Results of Operations (Six Months Ended June 30) | Line Item | 2023 (in millions) | 2022 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Revenues | $1,364.1 | $889.5 | +53.4% | | Operating Profit | $168.1 | $127.8 | +31.5% | | Interest Expense, net | $129.0 | $93.2 | +38.4% | | Income from Continuing Operations | $40.3 | $26.4 | +52.7% | - The increase in revenues for the first six months of 2023 was primarily due to a higher volume of external deliveries in the Rail Products Group and improved lease rates, higher utilization, and the acquisition of RSI in the Leasing Group[157] Segment Discussion The Railcar Leasing and Management Services Group saw a 10.1% increase in operating profit, while the Rail Products Group's operating profit surged to $49.0 million on 63.9% revenue growth, with the new railcar backlog growing 64.3% to $3.6 billion Leasing Group Performance (Six Months Ended June 30) | Metric | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Total Revenues | $426.7 | $378.4 | | Total Operating Profit | $204.0 | $185.3 | | Fleet Utilization | 97.9% | 97.2% | Rail Products Group Performance (Six Months Ended June 30) | Metric | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Total Revenues | $1,346.8 | $821.7 | | Operating Profit | $49.0 | $14.5 | | Railcar Deliveries (units) | 9,030 | 4,980 | | Backlog Value | $3.6B | $2.2B | Liquidity and Capital Resources Trinity had total committed liquidity of $698.5 million as of June 30, 2023, including $91.7 million in cash, and generated $140.3 million in cash from continuing operations for the first half of 2023 - Total committed liquidity was $698.5 million as of June 30, 2023, consisting of cash, available revolving credit, and available warehouse loan facility capacity[184] - Net cash from continuing operations was $140.3 million for the six months ended June 30, 2023, compared to a use of $61.3 million in the same period of 2022[190] - The company is in compliance with all financial covenants, with a Maximum Leverage ratio of 2.66 (covenant: <4.25) and Minimum Interest Coverage of 7.79 (covenant: >2.25)[193] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its market risks, including interest rates and foreign currency exchange rates, since the end of the 2022 fiscal year - There has been no material change in the company's market risks since December 31, 2022[211] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures are effective, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[212] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[213] PART II OTHER INFORMATION Legal Proceedings This section incorporates by reference the detailed discussion of legal matters from Note 14 of the Consolidated Financial Statements, covering ongoing litigation and new third-party claims - The information regarding legal proceedings is incorporated by reference from Note 14 of the Consolidated Financial Statements[216] Risk Factors The company states that there have been no material changes from the risk factors previously disclosed in its 2022 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the 2022 Annual Report on Form 10-K[217] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, the company did not repurchase shares under its $250.0 million program but acquired 307,725 shares to satisfy tax withholding obligations related to vested employee stock awards - No shares were repurchased under the company's $250.0 million share repurchase program during the three months ended June 30, 2023[218] - The company acquired 307,385 shares to satisfy tax withholding obligations in connection with the vesting of restricted stock for employees[218] Other Information EVP and CFO Eric R. Marchetto established a Rule 10b5-1(c) stock trading plan on June 29, 2023, to sell up to 42,225 shares of common stock for asset diversification - EVP and CFO Eric R. Marchetto entered into a Rule 10b5-1 stock trading plan on June 29, 2023, to sell up to 42,225 shares for asset diversification[221]