Trinity Industries(TRN) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents unaudited consolidated financial statements and management's discussion of financial condition and operations Item 1. Financial Statements Unaudited consolidated financial statements, including operations, balance sheets, cash flows, and equity, with detailed notes Consolidated Statements of Operations This statement details revenues, operating costs, and net income (loss), showing increased net income in 2021 due to higher revenues and property gains Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2021 (in millions) | 3 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Revenues | $503.5 | $459.4 | $1,273.8 | $1,583.8 | | Operating profit (loss) | $92.2 | $72.9 | $219.8 | $(161.4) | | Net income (loss) attributable to Trinity Industries, Inc. | $32.0 | $25.1 | $48.0 | $(20.1) | | Diluted earnings per common share | $0.33 | $0.21 | $0.45 | $(0.17) | Consolidated Statements of Comprehensive Income (Loss) This statement details comprehensive income (loss) components, including net income and other comprehensive income, showing improvement in 2021 Consolidated Statements of Comprehensive Income (Loss) Highlights | Metric | 3 Months Ended Sep 30, 2021 (in millions) | 3 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | | :------------------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) | $35.9 | $25.9 | $42.0 | $(99.6) | | Comprehensive income (loss) attributable to Trinity Industries, Inc. | $32.7 | $32.9 | $55.0 | $(31.5) | Consolidated Balance Sheets The balance sheets present the company's financial position, showing a slight decrease in total assets and an increase in total liabilities Consolidated Balance Sheets Highlights | Metric | Sep 30, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--------------------------------------- | :------------------------- | :------------------------- | | Total assets | $8,495.6 | $8,701.8 | | Cash and cash equivalents | $221.8 | $132.0 | | Property, plant, and equipment, net | $6,800.1 | $7,003.4 | | Total liabilities | $6,899.2 | $6,685.8 | | Total debt | $5,176.5 | $5,017.0 | | Total stockholders' equity | $1,596.4 | $2,016.0 | Consolidated Statements of Cash Flows This statement outlines cash flows from operating, investing, and financing activities, showing strong operating cash flow and a shift in investing activities Consolidated Statements of Cash Flows Highlights (9 Months Ended September 30) | Metric | 2021 (in millions) | 2020 (in millions) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $427.2 | $456.6 | | Net cash provided by (used in) investing activities | $43.6 | $(361.0) | | Net cash used in financing activities | $(354.1) | $(151.3) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $116.7 | $(55.7) | | Proceeds from lease portfolio sales | $404.5 | $138.7 | | Shares repurchased | $(406.5) | $(120.4) | Consolidated Statements of Stockholders' Equity This statement details changes in stockholders' equity, including net income, dividends, stock-based compensation, and significant share repurchases Trinity Stockholders' Equity Balances | Metric | December 31, 2020 (in millions) | September 30, 2021 (in millions) | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Trinity Stockholders' Equity | $1,738.8 | $1,331.0 | - The company engaged in significant share repurchases during the nine months ended September 30, 2021, totaling $404.7 million, contributing to the decrease in stockholders' equity. Cash dividends declared on common stock for the same period amounted to $65.2 million[14][103] Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the unaudited consolidated financial statements, covering policies, segments, debt, and taxes Note 1. Summary of Significant Accounting Policies This note outlines key accounting principles, including revenue recognition, lease accounting, and goodwill, highlighting a change in lease fleet sales presentation - Beginning in Q4 2020, the company prospectively changed its presentation of sales from the lease fleet to a net gain or loss from the disposal of a long-term asset (ASC 610-20), regardless of railcar age. This change impacts revenue and cost of revenue lines but has no effect on operating profit, net income, or EPS[22] - In January 2021, the company acquired a business operating proprietary railcar cleaning technology systems, resulting in $7.0 million of goodwill[37] Goodwill and Warranty Accruals | Metric | September 30, 2021 (in millions) | December 31, 2020 (in millions) | | :--------------------------------------- | :------------------------------- | :------------------------------- | | Goodwill | $215.8 | $208.8 | | Warranty Ending Balance | $3.9 | $9.2 | Note 2. Derivative Instruments and Fair Value Accounting This note describes the company's use of derivative instruments to manage interest rate and foreign currency risks, detailing fair value measurements - The company uses derivative instruments to mitigate the impact of changes in interest rates (cash flow hedges) and foreign currency exchange rates[40] Derivative Instruments and Fair Value Measurements (September 30, 2021) | Metric | Amount (in millions) | | :--------------------------------------- | :------------------- | | Open Interest Rate Hedge (2017 promissory notes) Notional Amount | $468.0 | | Open Interest Rate Hedge (2017 promissory notes) Asset/(Liability) | $(28.9) | | Foreign Currency Hedge Notional Amount | $60.0 | | Foreign Currency Hedge Asset/(Liability) | $(0.9) | | Level 1 Assets (Cash equivalents & Restricted cash) | $131.7 | | Level 2 Liabilities (Interest rate & Foreign currency hedges) | $29.8 | Note 3. Segment Information This note provides financial information for the Railcar Leasing, Rail Products, and All Other segments, detailing revenues and operating profit (loss) - The company operates in three principal business segments: Railcar Leasing and Management Services Group, Rail Products Group, and All Other (including highway products business and non-operating facility costs)[48] Segment Revenues (9 Months Ended September 30) | Segment | 2021 (in millions) | 2020 (in millions) | Change (%) | | :--------------------------------------- | :------------------ | :------------------ | :--------- | | Railcar Leasing and Management Services Group | $554.1 | $613.0 | (9.6)% | | Rail Products Group | $862.7 | $1,296.2 | (33.4)% | | All Other | $230.0 | $195.3 | 17.8% | Segment Operating Profit (Loss) (9 Months Ended September 30) | Segment | 2021 (in millions) | 2020 (in millions) | Change (%) | | :--------------------------------------- | :------------------ | :------------------ | :--------- | | Railcar Leasing and Management Services Group | $268.7 | $265.5 | 1.2% | | Rail Products Group | $(8.7) | $36.2 | (124.0)% | | All Other | $42.8 | $23.9 | 79.1% | Note 4. Partially-Owned Leasing Subsidiaries This note describes partially-owned leasing subsidiaries and the formation of a new railcar investment vehicle, Signal Rail Holdings LLC, accounted for under the equity method - Trinity has a controlling interest in partially-owned leasing subsidiaries TRIP Holdings and RIV 2013, with a weighted average ownership of 38%[55] - A new railcar investment vehicle (RIV) program, Signal Rail Holdings LLC, was formed in August 2021 as a joint venture with Wafra Funds (90% Wafra, 10% TILC). It targets up to $1 billion in total acquisitions over an expected three-year period[60] - An initial portfolio of 3,582 railcars was sold to Signal Rail for approximately $325.1 million, resulting in a gain of $32.9 million and a 10% equity interest in Signal Rail valued at $6.4 million[61] - Signal Rail is accounted for under the equity method, as Trinity does not have the power to direct its most significant economic activities. The carrying value of this investment was $6.1 million at September 30, 2021[62][63] Note 5. Railcar Leasing and Management Services Group This note provides detailed financial and operational information for the Leasing Group, showing increased operating profit despite lower lease rates Leasing Group Financials (Adjusted Total, in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--------------------------------------- | :----------- | :----------- | | Total assets | $6,719.3 | $6,831.8 | | Total liabilities | $5,896.8 | $5,644.0 | Leasing Group Revenues and Operating Profit (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $185.5 | $183.9 | $554.1 | $613.0 | | Total operating profit | $109.3 | $89.7 | $268.7 | $265.5 | | Lease portfolio sales | $322.1 | $6.5 | $410.9 | $193.1 | | Operating profit on lease portfolio sales | $32.9 | $2.9 | $45.7 | $17.7 | Leasing Group Fleet Statistics (September 30) | Metric | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Number of company-owned railcars | 105,915 | 105,925 | | Fleet utilization | 95.0% | 94.8% | Note 6. Property, Plant, and Equipment This note details the composition of property, plant, and equipment by segment, showing a net decrease from December 31, 2020, to September 30, 2021 Property, Plant, and Equipment, Net (in millions) | Category | September 30, 2021 | December 31, 2020 | | :--------------------------------------- | :----------------- | :----------------- | | Manufacturing/Corporate | $384.6 | $401.5 | | Leasing (Wholly-owned subsidiaries) | $5,603.4 | $5,795.9 | | Leasing (Partially-owned subsidiaries) | $1,594.7 | $1,626.3 | | Deferred profit on railcars sold to Leasing Group, net | $(782.6) | $(820.3) | | Total Property, Plant, and Equipment, net | $6,800.1 | $7,003.4 | Note 7. Debt This note provides an overview of the company's debt structure, including recourse and non-recourse debt, and details significant refinancing activities in June 2021 Long-Term Debt Carrying Amounts (in millions) | Debt Type | September 30, 2021 | December 31, 2020 | | :--------------------------------------- | :----------------- | :----------------- | | Corporate – Recourse | $398.5 | $448.2 | | Leasing – Non-recourse (Wholly-owned subsidiaries) | $3,553.5 | $3,340.5 | | Leasing – Non-recourse (Partially-owned subsidiaries) | $1,224.5 | $1,228.3 | | Total debt | $5,176.5 | $5,017.0 | - The company's $450.0 million unsecured corporate revolving credit facility had $421.7 million available for borrowing as of September 30, 2021[74] - The TILC warehouse loan facility was extended through March 15, 2024, and its total commitment increased from $750 million to $1.0 billion, with $485.6 million available as of September 30, 2021[76] - In June 2021, Triumph Rail refinanced $869.1 million of outstanding debt (5.16% all-in rate) with $560.4 million of new Green Secured Railcar Equipment Notes (2.20% all-in rate), incurring an $8.7 million loss on extinguishment of debt[78][79] - In June 2021, TRP-2021 refinanced $348.0 million of outstanding debt (3.59% all-in rate) with $355.0 million of new Green Secured Railcar Equipment Notes (2.13% all-in rate), incurring a $3.0 million loss on extinguishment of debt[82][83] Note 8. Income Taxes This note discusses effective tax rates, highlighting differences from the U.S. statutory rate, and details significant income tax refunds and receivables Effective Tax Rates from Continuing Operations | Period | 2021 Effective Tax Rate | 2020 Effective Tax Rate | | :--------------------------------------- | :---------------------- | :---------------------- | | Three Months Ended September 30 | 23.9% expense | 34.9% benefit | | Nine Months Ended September 30 | 27.8% expense | 69.5% benefit | - Income tax refunds received, net of payments, totaled $246.9 million for the nine months ended September 30, 2021[88] - The total income tax receivable position was $191.9 million as of September 30, 2021, primarily related to carryback claims[88] Note 9. Employee Retirement Plans This note summarizes net retirement costs, primarily for profit sharing and the Supplemental Executive Retirement Plan, and details the 2020 Pension Plan settlement Net Retirement Cost (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net expense | $3.2 | $2.2 | $8.8 | $7.4 | - The Trinity Industries, Inc. Consolidated Pension Plan was settled in Q4 2020, resulting in a pre-tax non-cash pension settlement charge of $151.5 million[91] - During the nine months ended September 30, 2021, $10.9 million of the Pension Plan surplus was used to fund profit sharing obligations, and $2.2 million was used for pension administrative expenses[92] Note 10. Asset Impairments and Restructuring Activities This note details the 2020 impairment charge for railcars and outlines restructuring activities, resulting in net gains in 2021 from asset dispositions - An aggregate impairment charge of $369.4 million was recorded for long-lived assets (small cube covered hopper railcars) for the nine months ended September 30, 2020, due to economic pressures in the oil and gas industry. No impairment was recorded in 2021[93][94] Restructuring Activities, Net (in millions) | Period | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | 3 Months Ended September 30 | $0.1 gain | $4.7 charge | | 9 Months Ended September 30 | $1.1 gain | $10.5 charge | - The net gain in 2021 restructuring activities was primarily due to a $1.6 million gain on the disposition of certain non-operating facilities, partially offset by $0.5 million in employee severance costs[95] Note 11. Accumulated Other Comprehensive Loss This note presents changes in Accumulated Other Comprehensive Loss (AOCL), reflecting derivative gains/losses and actuarial adjustments, showing improvement in 2021 Accumulated Other Comprehensive Loss (AOCL) (in millions) | Metric | December 31, 2020 | September 30, 2021 | | :--------------------------------------- | :---------------- | :----------------- | | Balances | $(30.9) | $(23.9) | | Other comprehensive income (9 months ended Sep 30, 2021) | N/A | $7.0 | Note 12. Common Stock and Stock-Based Compensation This note details common stock activities, including significant share repurchases and stock-based compensation expenses, and a new repurchase program authorization - On April 29, 2021, the company repurchased 8.1 million shares of common stock from ValueAct Capital Master Fund, L.P. for $222.5 million in a privately negotiated transaction[100] - In September 2021, the Board of Directors authorized a new share repurchase program for up to $250.0 million of common stock, effective through December 31, 2022[101] Share Repurchase Activity (Previous Program) | Period | Shares Repurchased | Cost (in millions) | | :--------------------------------------- | :----------------- | :----------------- | | Oct 23, 2020 through Sep 30, 2021 (Total) | 9,522,882 | $250.0 | | July 1, 2021 through Sep 30, 2021 | 2,815,307 | $77.1 | Stock-Based Compensation Expense (in millions) | Period | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | 3 Months Ended September 30 | $6.5 | $4.8 | | 9 Months Ended September 30 | $16.3 | $19.7 | Note 13. Earnings Per Common Share This note explains the computation of basic and diluted earnings per common share (EPS), showing significant improvement in 2021 compared to a 2020 loss Earnings Per Common Share (EPS) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.33 | $0.21 | $0.46 | $(0.17) | | Diluted EPS | $0.33 | $0.21 | $0.45 | $(0.17) | | Diluted weighted average shares outstanding (in millions) | 99.5 | 117.0 | 105.7 | 117.2 | Note 14. Contingencies This note discloses ongoing legal proceedings, primarily False Claims Act lawsuits related to the ET-Plus® System, and details insurance recoveries from a tornado event - The United States Court of Appeals for the Fifth Circuit reversed a $682.4 million judgment against the company in a federal False Claims Act (FCA) lawsuit related to the ET-Plus® System, and the Supreme Court denied further review, ending the action[110][111] - Several state qui tam actions (Virginia, Massachusetts, Tennessee, New Jersey) and a class-action lawsuit in Jackson County, Missouri, related to the ET-Plus® System are pending. The company believes these lawsuits are without merit and intends to vigorously defend them[112][114][115] - The range of reasonably possible losses for other claims and lawsuits (including product warranty, personal injury, environmental, workplace laws) is $11.2 million to $18.4 million, with total accruals of $11.7 million as of September 30, 2021[118] - The company recorded a $4.7 million gain for insurance recoveries in excess of net book value received during Q3 2021 for assets damaged by a tornado at its rail maintenance facility in Cartersville, Georgia[120] Key Financial Performance (9 Months Ended September 30) | Metric | 2021 (in millions) | 2020 (in millions) | | :--------------------------------------- | :------------------ | :------------------ | | Net Income (Loss) Attributable to Trinity Industries, Inc. | $48.0 | $(20.1) | | Total Assets (as of Sep 30) | $8,495.6 | $8,701.8 (Dec 31) | | Total Liabilities (as of Sep 30) | $6,899.2 | $6,685.8 (Dec 31) | | Net cash provided by operating activities | $427.2 | $456.6 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section offers management's perspective on financial condition, operations, and liquidity, covering market developments, capital structure, and segment performance Matters Affecting Comparability This section highlights a prospective change in accounting presentation for lease fleet railcar sales, now reported as a net gain or loss from asset disposal - Beginning in Q4 2020, sales of railcars from the lease fleet are presented on a net basis as a gain or loss from the disposal of a long-term asset (ASC 610-20), regardless of the railcar's age. This change affects the presentation of revenues and cost of revenues but has no impact on operating profit, net income, earnings per share, or the Consolidated Balance Sheet[124] Forward-Looking Statements This section contains cautionary statements regarding future expectations and financial performance, emphasizing risks and uncertainties that could cause actual results to differ - The report contains forward-looking statements that involve risks and uncertainties, including market conditions, cyclical industries, COVID-19 impacts, asset impairments, supply chain disruptions, steel and labor costs, interest rates, litigation, and regulatory changes[125][126] - Trinity undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, except as required by federal securities laws[127] Company Overview This section describes Trinity Industries, Inc. as a leading North American railcar products and services provider, operating in three principal business segments - Trinity Industries, Inc. is a leading provider of railcar products and services in North America, marketed under the TrinityRail® trade name[128] - The company reports operating results in three segments: Railcar Leasing and Management Services Group, Rail Products Group, and All Other (highway products and non-operating facility costs)[128] Executive Summary This section provides a high-level overview of market developments, financial and operational highlights, capital returns, and updates on capital structure and litigation Recent Market Developments This section discusses the ongoing impact of COVID-19, cyclical industry trends, reduced railcar demand, and significant increases in steel prices and labor costs - The COVID-19 pandemic negatively impacted results of operations for the three and nine months ended September 30, 2021, with economic pressures expected to continue in the near term due to evolving variants[129] - The industries in which the company operates are cyclical, experiencing reduced demand for railcars, and pressure on lease rates and utilization, despite improving railcar loading volumes and new orders[131][132] - Steel prices and labor costs have increased significantly since Q4 2020, impacting cost of revenues and potentially reducing demand for new railcars[133] Financial and Operational Highlights This section summarizes key financial and operational achievements, including revenue changes, new railcar investment vehicle, lease fleet utilization, and railcar backlog Financial and Operational Highlights (9 Months Ended September 30) | Metric | 2021 (in millions) | 2020 (in millions) | | :--------------------------------------- | :------------------ | :------------------ | | Revenues | $1,273.8 | $1,583.8 | | Operating Profit (Loss) | $219.8 | $(161.4) | | Operating Cash Flows from Continuing Operations | $428.0 | $456.8 | | Free Cash Flow After Investments and Dividends | $515.5 | $48.5 | - The company completed an initial railcar portfolio sale to Signal Rail Holdings LLC, a new railcar investment vehicle program with Wafra, Inc., in Q3 2021[137] - Lease fleet utilization was 95.0% on 105,915 company-owned railcars as of September 30, 2021, a slight increase from 94.8% in the prior year[137] - The total value of the railcar backlog was $1.2 billion at September 30, 2021, with orders for 8,510 railcars received and 6,070 delivered during the nine-month period[137] - The Rail Products Group introduced a sustainable railcar conversion program, generating $38.8 million in revenues from 361 railcars for the nine months ended September 30, 2021[137] Returns of Capital to Shareholders This section summarizes the company's activities in returning capital to shareholders through dividends and share repurchases, including a new program authorization - The company paid $68.5 million in dividends to common stockholders during the nine months ended September 30, 2021[191] - Total share repurchases amounted to $406.5 million during the nine months ended September 30, 2021, including a $222.5 million repurchase from ValueAct Capital Master Fund, L.P[198] - A new share repurchase program authorizing up to $250.0 million of common stock was approved in September 2021, effective through December 31, 2022[145] Capital Structure Updates This section updates significant changes to the capital structure, including facility extensions, major share repurchases, and debt refinancing activities at lower interest rates - The TILC warehouse facility was extended through March 15, 2024, and its total commitment increased from $750 million to $1.0 billion[139] - In June 2021, Triumph Rail issued $560.4 million of Series 2021-2 Green Secured Railcar Equipment Notes (2.20% all-in rate) to redeem $869.1 million of existing debt (5.16% all-in rate)[141] - TRP-2021 issued $355.0 million of Series 2021-1 Green Secured Railcar Equipment Notes (2.13% all-in rate) in June 2021 to redeem $348.0 million of existing debt (3.59% all-in rate)[143] - TRL-2021 issued $325.0 million of Series 2021-1 Green Secured Railcar Equipment Notes (2.31% all-in rate) in June 2021, with proceeds used to repay borrowings under TILC's secured warehouse credit facility[144] Litigation Updates This section refers to Note 14 of the Consolidated Financial Statements for the latest information on Highway Products litigation, indicating no new material updates - For updates on the Highway Products litigation, refer to Note 14 of the Consolidated Financial Statements[146] Consolidated Results of Operations This section analyzes consolidated financial performance, including revenues, costs, and operating profit, highlighting improvements in 2021 due to property gains and no impairment Revenues This section details consolidated and segment-level revenues, showing a 3-month increase but a 9-month decrease due to lower deliveries and accounting changes Consolidated Revenues (in millions) | Period | 2021 | 2020 | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | | 3 Months Ended September 30 | $503.5 | $459.4 | 9.6% | | 9 Months Ended September 30 | $1,273.8 | $1,583.8 | (19.6)% | - The 3-month increase was primarily due to increased demand and higher pricing in the highway products business and higher external deliveries in the Rail Products Group[152] - The 9-month decrease was primarily related to lower deliveries in the Rail Products Group and the change in the presentation of sales of railcars from the lease fleet[153] Operating Costs This section breaks down operating costs, including cost of revenues, selling, engineering, and administrative expenses, influenced by delivery volumes and accounting changes Consolidated Cost of Revenues (in millions) | Period | 2021 | 2020 | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | | 3 Months Ended September 30 | $398.7 | $334.5 | 19.2% | | 9 Months Ended September 30 | $953.9 | $1,213.1 | (21.4)% | - The 3-month increase was primarily due to higher costs associated with external deliveries and operating inefficiencies (labor shortages, turnover) in the Rail Products Group's maintenance services, and increased demand/input costs in the highway products business[154] - The 9-month decrease was primarily due to lower deliveries in the Rail Products Group and the change in the presentation of sales of railcars from the lease fleet[155] Operating Profit (Loss) This section presents consolidated operating profit (loss), showing significant increases in 2021 due to higher lease portfolio sales and the absence of a prior year impairment charge Consolidated Operating Profit (Loss) (in millions) | Period | 2021 | 2020 | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | | 3 Months Ended September 30 | $92.2 | $72.9 | 26.5% | | 9 Months Ended September 30 | $219.8 | $(161.4) | 236.2% | | (Note: 2020 9-month period included a $369.4M impairment charge) | | | | - The 9-month operating profit increase was significantly influenced by the absence of a $369.4 million impairment charge related to small cube covered hopper railcars in the prior year[162] Discussion of Consolidated Results This section discusses consolidated financial results, elaborating on drivers for changes in revenues, costs, property gains, impairment, restructuring, interest, and taxes - Selling, engineering, and administrative expenses increased by 6.1% for the three months ended September 30, 2021, primarily due to higher employee-related costs, but decreased by 3.4% for the nine-month period due to lower consulting costs in the prior year[156] - Gains on dispositions of property increased by $45.1 million for the nine months ended September 30, 2021, primarily due to a higher volume of railcar sales from the lease portfolio and gains from non-operating facilities, including a $4.7 million gain from insurance recoveries related to a tornado[157][158] - Interest expense, net, decreased for both the three and nine months ended September 30, 2021, primarily driven by lower overall borrowing costs associated with the company's debt facilities, partially offset by higher overall average debt[164] - A loss on extinguishment of debt of $11.7 million was recognized for the nine months ended September 30, 2021, due to the refinancing of partially-owned subsidiaries' debt, including a $3.3 million early redemption premium and $8.4 million in unamortized debt issuance costs write-off[165] Segment Discussion This section discusses the financial performance of each operating segment: Railcar Leasing, Rail Products, All Other, and Corporate, highlighting key drivers and challenges Railcar Leasing and Management Services Group The Leasing Group's revenues decreased for the nine-month period due to accounting changes, but operating profit increased due to higher lease portfolio sales and utilization Leasing Group Performance (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $185.5 | $183.9 | $554.1 | $613.0 | | Total operating profit | $109.3 | $89.7 | $268.7 | $265.5 | | Lease portfolio sales | $322.1 | $6.5 | $410.9 | $193.1 | | Operating profit on lease portfolio sales | $32.9 | $2.9 | $45.7 | $17.7 | | Depreciation | $58.7 | $51.5 | $170.5 | $159.1 | - Leasing and management revenues were relatively flat, impacted by growth in the lease fleet, slightly higher utilization, and increased servicer fees, offset by lower rental rates[173] - The lease fleet utilization was 95.0% on 105,915 company-owned railcars as of September 30, 2021[176] Rail Products Group The Rail Products Group saw decreases in revenues and operating profit due to lower deliveries and product mix, with costs impacted by input costs and inefficiencies Rail Products Group Performance (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $339.9 | $381.2 | $862.7 | $1,296.2 | | Operating profit (loss) | $(3.1) | $3.2 | $(8.7) | $36.2 | - Revenues and cost of revenues decreased due to lower deliveries and a shift in the mix of railcar products and services sold. Cost of revenues was negatively impacted by higher input costs, supply chain disruptions, and operating inefficiencies (labor shortages, turnover) in maintenance services[180][181] Rail Products Group Backlog | Metric | September 30, 2021 | September 30, 2020 | Change (%) | | :--------------------------------------- | :----------------- | :----------------- | :--------- | | Total backlog (value, in millions) | $1,228.4 | $1,155.4 | 6.3% | | Total backlog (units) | 11,425 | 10,050 | 13.7% | | Sustainable railcar conversions backlog (value, in millions) | $98.3 | N/A | N/A | | New railcar deliveries (units, 9 months) | 6,070 | 9,295 | (34.7)% | All Other The All Other segment reported significant increases in revenues and operating profit, driven by increased demand, higher pricing, and gains from non-operating facility dispositions All Other Segment Performance (in millions) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenues | $83.7 | $62.6 | $230.0 | $195.3 | | Operating profit | $14.7 | $7.3 | $42.8 | $23.9 | - The increases in revenues and operating profit were primarily driven by increased demand and higher pricing in the highway products business, along with gains from the disposition of non-operating facilities[185] Corporate Corporate operating costs increased for the three-month period but remained flat for nine months, primarily due to higher employee-related costs and litigation expenses Corporate Operating Costs (in millions) | Period | 2021 | 2020 | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | | 3 Months Ended September 30 | $23.9 | $21.0 | 13.8% | | 9 Months Ended September 30 | $73.7 | $73.3 | 0.5% | - The increase in operating costs was primarily due to higher employee-related costs (including incentive-based compensation) and litigation-related expenses, partially offset by reduced costs from streamlining the corporate structure[186] Liquidity and Capital Resources This section discusses the company's financial flexibility, funding sources, and liquidity events, highlighting available liquidity, cash flow, debt, and capital allocation Overview This section outlines the company's strategy for financing future operations using cash, cash equivalents, and debt, reporting $1.1 billion in committed liquidity as of September 30, 2021 - The company expects to finance future operating requirements using cash, cash equivalents, marketable securities, cash flows from operations, and various debt and equity instruments[188] - Total committed liquidity was $1.1 billion as of September 30, 2021, comprising $221.8 million in unrestricted cash, $421.7 million available under the revolving credit facility, and $485.6 million available under the TILC warehouse facility[189] Liquidity Highlights This section summarizes key liquidity events, including facility extensions, note issuances, dividend payments, and significant share repurchases, and a new repurchase program - The TILC warehouse facility was extended through March 15, 2024, and its total commitment increased from $750 million to $1.0 billion[190] - TRL-2021 issued $325.0 million of Series 2021-1 Green Secured Railcar Equipment Notes in June 2021, with proceeds used to repay borrowings under TILC's secured warehouse credit facility[191] - The company paid $68.5 million in dividends to common stockholders and repurchased $404.7 million of common stock (including $222.5 million from ValueAct) during the nine months ended September 30, 2021[191][192][194] - A new share repurchase program authorizing up to $250.0 million of common stock was approved in September 2021[193] Cash Flows This section provides a summary and discussion of cash flows from operating, investing, and financing activities, noting a shift to net cash provided by investing and increased cash used in financing Cash Flows (9 Months Ended September 30, in millions) | Activity | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Net cash provided by operating activities – continuing operations | $428.0 | $456.8 | | Net cash provided by (used in) investing activities | $43.6 | $(361.0) | | Net cash used in financing activities | $(354.1) | $(151.3) | - Investing activities shifted to a net cash provider in 2021, with proceeds from lease portfolio sales exceeding investment in the lease fleet by $40.6 million, compared to a net investment of $310.1 million in 2020[196] - Financing activities used more cash in 2021, primarily due to $406.5 million in share repurchases and net debt repayments of $136.9 million[198] Current Debt Obligations This section details revolving credit facility covenants, including maximum leverage and minimum interest coverage ratios, with the company in compliance as of September 30, 2021 - The revolving credit facility requires maintenance of a maximum leverage ratio (no greater than 4.25 to 1.00) and a minimum interest coverage ratio (no less than 1.75 to 1.00)[197] Financial Covenant Compliance (September 30, 2021) | Ratio | Covenant | Actual | | :--------------------------------------- | :----------------------- | :----- | | Maximum leverage | No greater than 4.25 to 1.00 | 2.01 | | Minimum interest coverage | No less than 1.75 to 1.00 | 7.28 | - The company was in compliance with all financial covenants as of September 30, 2021, following an amendment in March 2021 to increase the maximum leverage ratio and decrease the minimum interest coverage ratio for near-term flexibility[197] Supplemental Guarantor Financial Information This section provides summarized financial information for the Parent and Guarantor Subsidiaries, highlighting assets held by Non-Guarantor Subsidiaries not available to the Parent - Senior Notes are fully and unconditionally, jointly and severally guaranteed by certain 100%-owned subsidiaries (Guarantor Subsidiaries)[199] - As of September 30, 2021, Non-Guarantor Subsidiaries held $84.2 million in restricted cash, $6,566.0 million in equipment securing non-recourse debt, and $119.4 million in foreign assets, which are not available for distribution to the Parent[201] Summarized Financial Information for Obligor Group (9 Months Ended Sep 30, 2021, in millions) | Metric | Amount | | :--------------------------------------- | :----- | | Revenues | $706.0 | | Cost of revenues | $628.5 | | Net income (loss) | $(76.7) | Capital Expenditures This section outlines projected capital expenditures for 2021, including net investment in the lease fleet and manufacturing and other activities - For the full year 2021, the company anticipates a net investment in its lease fleet of between $40 million and $70 million[205] - Capital expenditures related to manufacturing and other activities are projected to range between $30 million and $40 million for the full year 2021[205] Equity Investment This section refers to Note 4 for information regarding the company's investment in partially-owned leasing subsidiaries, with no new material updates - Information about the company's investment in partially-owned leasing subsidiaries can be found in Note 4 of the Consolidated Financial Statements[206] Off Balance Sheet Arrangements This section discloses outstanding letters of credit under the Credit Agreement, supporting various insurance programs, expected to expire in July 2022 - As of September 30, 2021, the company had $28.3 million in outstanding letters of credit under its Credit Agreement, which are expected to expire in July 2022 and support various insurance programs[207] Derivative Instruments This section states the company's use of derivative instruments to manage market risks related to interest rates, fuel prices, and foreign currency exchange rates - The company uses derivative instruments to mitigate the impact of changes in interest rates, natural gas and diesel fuel prices, and foreign currency exchange rates, which are accounted for as cash flow hedges[208] LIBOR Transition This section addresses the upcoming LIBOR phase-out and the transition to SOFR, noting potential changes in interest rates and higher borrowing costs for LIBOR-based contracts - The London Interbank Offered Rate (LIBOR) is expected to be phased out after June 2023, with the Secured Overnight Financing Rate (SOFR) identified as the preferred alternative[209] - The company has LIBOR-based contracts extending beyond June 2023, and the transition to an alternative benchmark rate may adversely affect interest rates and result in higher borrowing costs[209] Non-GAAP Financial Measures This section explains the inclusion of "Free Cash Flow After Investments and Dividends" as a non-GAAP measure for liquidity insights, unaffected by lease fleet sales presentation changes - The company includes "Free Cash Flow After Investments and Dividends" (Free Cash Flow) as a non-GAAP financial measure to provide insights into liquidity and ability to fund operations and repay debt[211][212] - The change in presentation of sales of railcars from the lease fleet, effective Q4 2020, had no effect on previously reported Free Cash Flow[211] Free Cash Flow After Investments and Dividends (9 Months Ended September 30, in millions) | Metric | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Total Free Cash Flow After Investments and Dividends | $515.5 | $48.5 | Contractual Obligations and Commercial Commitments This section states no material changes to contractual obligations since December 31, 2020, except for specific debt transactions detailed in Note 7 - There have been no material changes to contractual obligations since December 31, 2020, except for specific debt transactions detailed in Note 7[217] - Key debt transactions include the extension and increase of the TILC warehouse facility, and several issuances and redemptions of secured railcar equipment notes and term loans for wholly-owned and partially-owned leasing subsidiaries in June 2021[219] Recent Accounting Pronouncements This section confirms no material changes in recently issued or adopted accounting standards since the 2020 Annual Report on Form 10-K - There have been no material changes in recently issued or adopted accounting standards from those disclosed in the 2020 Annual Report on Form 10-K[218] Key Financial and Operational Highlights (9 Months Ended September 30) | Metric | 2021 (in millions) | 2020 (in millions) | | :--------------------------------------- | :------------------ | :------------------ | | Revenues | $1,273.8 | $1,583.8 | | Operating Profit (Loss) | $219.8 | $(161.4) | | Operating Cash Flows from Continuing Operations | $428.0 | $456.8 | | Free Cash Flow After Investments and Dividends | $515.5 | $48.5 | - The company's total committed liquidity was $1.1 billion as of September 30, 2021, including $221.8 million in unrestricted cash and $907.3 million in available credit facilities[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states no material changes in the company's market risks since December 31, 2020, and refers to the notes for discussions on debt-related and hedging activities - There has been no material change in the company's market risks since December 31, 2020[220] - Refer to Note 7 for debt-related activity and Note 2 for hedging activity for the three and nine months ended September 30, 2021[220] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures, as well as the absence of any material changes in internal controls over financial reporting during the reporting period Disclosure Controls and Procedures The Chief Executive and Chief Financial Officers concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, ensuring timely collection, processing, and disclosure of required information - The Chief Executive and Chief Financial Officers concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, to ensure timely collection, processing, and disclosure of required information[221] Internal Controls over Financial Reporting This section reports that there have been no material changes in the company's internal controls over financial reporting during the period covered by the report - There have been no changes in the company's internal controls over financial reporting that have materially affected or are reasonably likely to materially affect them during the period covered by this report[222] PART II OTHER INFORMATION This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section incorporates by reference information from Note 14 of the Consolidated Financial Statements regarding ongoing legal proceedings, primarily highway products litigation - Information regarding legal proceedings is incorporated by reference from Note 14 of the Consolidated Financial Statements[224] Item 1A. Risk Factors This section states no material changes from the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in Item 1A of the 2020 Annual Report on Form 10-K[225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes common stock repurchase activities during Q3 2021 under previously authorized programs, including the completion of one and authorization of a new one Common Stock Repurchase Activity (Q3 2021) | Period | Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------------- | :------------------------- | :--------------------------- | | July 1, 2021 through July 31, 2021 | 1,574,520 | $26.56 | | August 1, 2021 through August 31, 2021 | 1,242,686 | $28.36 | | September 1, 2021 through September 30, 2021 | 983 | $27.86 | | Total | 2,818,189 | | - The company completed its $250.0 million share repurchase program (authorized October 2020) in Q3 2021, repurchasing 2,815,307 shares at a cost of approximately $77.1 million during the quarter[226] - A new $250.0 million share repurchase program was authorized in September 2021, but no shares were repurchased under this new program during Q3 2021[226] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[228] Item 4. Mine Safety Disclosures This section states that this item is not applicable to the company - Item 4, Mine Safety Disclosures, is not applicable to the company[228] Item 5. Other Information This section states that there is no other information to report under this item - No other information is reported under this item[228] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including subsidiary guarantors, certifications of officers, and Inline XBRL documents - Exhibits include subsidiary guarantors, Rule 13a-15(e) and 15d-15(e) Certifications of the Chief Executive Officer and Chief Financial Officer, Certification pursuant to 18 U.S.C. Section 1350, and various Inline XBRL documents[229] SIGNATURES This section contains the required signatures for the Form 10-Q, confirming its submission on behalf of Trinity Industries, Inc - The report was signed by Eric R. Marchetto, Executive Vice President and Chief Financial Officer, on October 26, 2021[231]