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 2021 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.
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Forward-Looking Statements
This quarterly report on Form 10-Q (or statements otherwise made by the Company
or on the Company's behalf from time to time in other reports, filings with the
•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 sold 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 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; •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, particularlyMexico ; •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 manufactured by us or our competitors; 33
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Table of Contents •actions byU.S. and/or foreign governments (particularlyMexico andCanada ) 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 2021 Annual Report on Form 10-K, this Form 10-Q and future Forms 10-Q and Current Reports on Forms 8-K.
Company Overview
In the fourth quarter of 2021, the Company completed the sale of
We concluded that the sale of THP represented a strategic shift that will have a
major effect on the Company's operations and financial results. Accordingly, we
have presented the operating results and cash flows of THP as discontinued
operations for all periods in this Quarterly Report on Form 10-Q. Results of
prior periods have been recast to reflect these changes and present results on a
comparable basis. 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, results from
discontinued operations include certain legal expenses that were directly
attributable to the highway products business, which were previously reported in
continuing operations. Similar expenses incurred during the three and six months
ended
Following the sale of THP, we report our operating results in two reportable
segments: (1) the
Executive Summary Recent Market Developments COVID-19
The COVID-19 pandemic significantly impacted global and North American economic
conditions. The social and economic effects of the pandemic have been widespread
and are ongoing. We continue to monitor the operational and financial impacts of
the pandemic and other economic factors. Although we have not experienced
significant interruptions to our daily operations or a material impact to our
operating costs, the economic pressures created by the pandemic have negatively
impacted our results of operations for the three and six months ended
Please refer to the "Forward-Looking Statements" section above and Part I, Item 1A "Risk Factors" of the 2021 Annual Report on Form 10-K for additional information regarding the potential impacts of COVID-19 on our business.
Other Cyclical and Seasonal Trends Impacting Our Business
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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
commodity prices, including fluctuations in the crude oil market, 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 diligently 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
Railcar loading volumes, levels of railcars in storage, and orders for new railcar equipment have improved, and the recovery of railcar lease rates and utilization is ongoing. We continue to believe that our rail platform is designed to respond to cyclical changes in demand and perform throughout the railcar cycle.
Steel prices and labor costs have increased significantly since the fourth quarter of 2020 and are major components 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. However, higher steel prices have resulted in increases in the cost of certain railcar components and could reduce demand for new railcars. Additionally, although we remain committed to attracting and retaining a highly skilled and diverse workforce, labor shortages, high turnover, 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 recently experienced temporary 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 shortages are short-term in nature, we will continue to monitor the situation and take appropriate steps to mitigate the impact 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
Financial and Operational Highlights
•Our revenues for the six months ended
•The Leasing Group's lease fleet of 110,560 company-owned railcars was 97.2%
utilized as of
•For the six months ended
•The total value of the new railcar backlog at
•The Rail Products Group offers a sustainable railcar conversion program whereby
certain tank cars and freight cars are converted or upgraded to better meet
changing market demands. During the six months ended
•For the six months ended
(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.
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Table of Contents See "Consolidated Results of Operations" and "Segment Discussion" below for additional information regarding our operating results.
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Table of Contents Returns of Capital to Shareholders
Returns of capital to shareholders in the form of dividends and share repurchases are summarized below: [[Image Removed: trn-20220630_g2.jpg]] [[Image Removed: trn-20220630_g3.jpg]] (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 2021, we entered into a stock repurchase agreement
with
(3) In the third quarter of 2021, we completed the existing share repurchase
program, and our Board of Directors authorized a new
(4) In the fourth quarter of 2021, we entered into an additional stock
repurchase agreement with
(5) There were no shares repurchased during the first quarter of 2022 due to the ongoing ASR.
(6) In the second quarter of 2022, we completed the final settlement of the ASR. See Note 12 of the Consolidated Financial Statements for more information on the ASR.
Capital Structure Updates
TRL-2022 - In
Tribute Rail - In
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.
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Table of Contents Subsequent Events
Revolving Credit Facility - On
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