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 2019 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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Table of Contents Forward-Looking Statements This quarterly report on Form 10-Q (or statements otherwise made by the Company or on the Company's behalf from time to time in other reports, filings with theSecurities 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 sold, used, or installed; •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; •impacts from asset impairments and related charges; •the timing of introduction of new products; •the timing and delivery of customer orders, sales of leased railcars, 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; •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 ; •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; •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; •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; •the inability to sufficiently protect our intellectual property rights; •if the Company does not realize some or all of the benefits expected to result from the spin-off of Arcosa, Inc. ("Arcosa"), a public company focused on infrastructure-related products and services, or if such benefits are delayed; and •if the 2018 distribution of shares of Arcosa, together with certain related transactions, does not qualify as a transaction that is generally tax-free forU.S. federal income tax purposes, the Company's stockholders at the time of the distribution and the Company could be subject to significant tax liability. 36
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Table of Contents 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 2019 Annual Report on Form 10-K, this Form 10-Q and future Forms 10-Q and Current Reports on Forms 8-K.
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Table of Contents Company OverviewTrinity Industries, Inc. and its consolidated subsidiaries ("Trinity," "Company," "we," "our," or "us") own businesses that are leading providers of railcar products and services inNorth America . Our rail-related businesses market their railcar products and services under the trade name TrinityRail®. The TrinityRail integrated platform provides railcar leasing and management services, railcar manufacturing, and railcar maintenance and modification services. We also own businesses engaged in the manufacturing of products used on the nation's roadways and in traffic control. We report our operating results in three principal business segments: (1) theRailcar Leasing andManagement Services Group (the "Leasing Group"), which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services; (2) theRail Products Group , which manufactures and sells railcars and related parts and components, and provides railcar maintenance and modification services; and (3) All Other, which includes our highway products business and legal, environmental, and maintenance costs associated with non-operating facilities. In connection with the implementation of our rail-focused strategy, in the first quarter of 2020, we realigned certain activities previously reported in the All Other segment to now be presented within theRail Products Group . The prior period results have been recast to reflect these changes and present results on a comparable basis. Executive Summary Recent Market Developments COVID-19 The COVID-19 pandemic continued to significantly impact global and North American economic conditions in the third quarter. The social and economic effects of the pandemic have been widespread and the situation continues to evolve. Federal, state and local governments continue to modify protective actions in response to evolving trends related to the spread of the disease. Authorities continue to encourage or require social distancing and wearing of masks. Although most states have reopened schools and many businesses, certain non-essential businesses remain closed, and state and local leaders continue to encourage many members of the public to work from home when possible. During the third quarter, our senior leaders returned to the office full time, and the remainder of theDallas -based employees began working at our headquarters facility on a rotating basis, subject to heightened safety protocols. Our manufacturing businesses withinthe United States continue to operate within critical infrastructure sectors as established by theCybersecurity & Infrastructure Security Agency of theUnited States Department of Homeland Security , and we continue to believe that the majority of our North American customers and suppliers also operate businesses that are deemed essential. Consequently, our rail manufacturing, rail maintenance, and highway products operations inthe United States have continued to operate, subject to significantly enhanced voluntary and government-mandated safety protocols designed to protect the health of our operations workforce. Our manufacturing facilities inMexico have also continued to operate, subject to enhanced health and safety protocols. These facilities operate within critical infrastructure sectors as currently established by theMexico Federal Ministry of Health andFederal Ministry of Communications and Transportation. Disruptions to our supply chain have been minimal, and we expect to be able to sustain the operational capacity required to achieve our manufacturing targets for the remainder of the year. We continue to monitor the potential operational and financial impacts of the pandemic and other economic factors, and have taken appropriate measures to preserve cash and ensure sufficient liquidity. In addition to cost savings initiatives already underway, we have eliminated many non-essential expenditures and streamlined our workforce in response to current operating conditions. As described in the Liquidity and Capital Resources section below, as ofSeptember 30, 2020 , we have total committed liquidity of approximately$719 million . We believe we have sufficient liquidity and capital resources to fund our operating requirements as well as the other capital allocation and investment activities planned for 2020. We are currently, and believe we will continue to be, in compliance with any applicable debt covenants. As previously reported, we concluded in the second quarter that the decline in leasing income for small cube covered hopper railcars will continue and recorded an impairment charge of$369.4 million , which is included in our results for the nine months endedSeptember 30, 2020 . See Note 10 of the Consolidated Financial Statements for more information. We identified no additional permanent declines during the third quarter and, accordingly, recorded no additional impairment charges. To date, theLeasing Group has experienced an insignificant increase in lease payment delinquencies related to car types other than small cube covered hoppers and has granted limited rent payment extensions to a relatively small number of customers. 38
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Table of Contents Because we have not experienced significant interruptions to our daily operations, the pandemic did not materially impact operating costs for our manufacturing businesses for the three and nine months endedSeptember 30, 2020 . However, in response to declining order volumes, we anticipate that our results of operations will remain under pressure in the near term as we adjust our future production plans. We qualitatively assessed whether it was more likely than not that our goodwill was impaired during the third quarter and have concluded that no such impairment charges are necessary at this time. We will continue to monitor business conditions, including the impact of the pandemic, and will make appropriate adjustments to our operations and related financial projections and estimates as necessary. We can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in market conditions, our operating results, changes in the assumptions utilized in our financial projections, or the financial performance of other investments in emerging technologies. Please refer to the "Forward-Looking Statements" section above and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for additional information regarding the potential impacts of COVID-19 on our business. Other Cyclical and Seasonal Trends Impacting Our Business The industries in which we 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, adverse changes in commodity prices, including continued depressed prices in the crude oil market, or lower demand for certain commodities, could result in a decline in customer demand for various types of railcars. As noted previously, declines in crude oil prices and production have left the frac sand industry financially vulnerable. We continuously assess demand for our products and services and take steps to rationalize and diversify our leased railcar portfolio and align our manufacturing capacity appropriately. We diligently evaluate the creditworthiness of our customers and monitor performance of relevant market sectors, including the crude oil and frac sand markets; however, additional weaknesses in any of these market sectors could affect the financial viability of our underlyingLeasing Group customers, which could continue to negatively impact our recurring leasing revenues and operating profits. Additionally, current economic conditions within the industries in which our customers operate have resulted in reduced demand for railcars. These factors, combined with declining railcar loading volumes and a growing supply of underutilized railcar assets inNorth America , are pressuring railcar lease rates and utilization, as well as orders for new railcar equipment. While we currently expect this trend to continue in the near term, we believe that our integrated rail platform is designed to respond to cyclical changes in demand and perform throughout the railcar cycle. Due to their transactional nature, railcar sales from the lease fleet are the primary driver of fluctuations in results in theLeasing Group . Results in ourAll Other Group are affected by seasonal fluctuations, with the second and third quarters historically being the quarters with the highest revenues. Asset Impairments and Restructuring Activities As described above, we recorded an impairment of long-lived assets of$369.4 million during the nine months endedSeptember 30, 2020 related to our small cube covered hopper railcars. See Note 10 of the Consolidated Financial Statements for more information, including a description of the key assumptions and other significant management judgments utilized in the impairment analysis. In the nine months endedSeptember 30, 2020 , and in connection with our continued assessment of future needs to support our go-forward business strategy, we recognized restructuring charges of approximately$10.5 million , consisting of$7.5 million for severance costs,$5.9 million of non-cash charges primarily from the write-down of our corporate headquarters campus and certain other assets, and$0.6 million in contract termination costs, partially offset by a$3.5 million net gain on the disposition of a non-operating facility and certain related assets. We expect to identify additional streamlining and cost savings opportunities in the near term. 39
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Table of Contents Financial and Operational Highlights •Our revenues for the nine months endedSeptember 30, 2020 were$1,583.8 million , representing a decrease of 26.5%, compared to the nine months endedSeptember 30, 2019 . Our operating loss for the nine months endedSeptember 30, 2020 was$161.4 million compared to operating profit for the nine months endedSeptember 30, 2019 of$319.1 million , and includes a$369.4 million impairment charge recorded in the second quarter of 2020 associated with our small cube covered hopper railcars. •The Leasing Group reported additions to the wholly-owned and partially-owned lease fleet of 3,835 railcars, for a total of 105,925 railcars as ofSeptember 30, 2020 , an increase of 3.8% compared toSeptember 30, 2019 . •The Leasing Group's lease fleet of 105,925 company-owned rail cars was 94.8% utilized as ofSeptember 30, 2020 , in comparison to a lease fleet utilization of 96.7% on 102,090 company-owned railcars as ofSeptember 30, 2019 . Our company-owned railcars include wholly-owned, partially-owned, and railcars under sale-leaseback arrangements. •For the nine months endedSeptember 30, 2020 , we made a net investment in our lease fleet of approximately$310.1 million , which primarily includes new railcar additions and railcar modifications, net of deferred profit, and secondary market purchases; and is net of proceeds from the sales of leased railcars owned more than one year at the time of sale. •The total value of the railcar backlog atSeptember 30, 2020 was$1.2 billion , compared to$2.4 billion atSeptember 30, 2019 .The Rail Products Group received orders for 4,810 railcars and delivered 9,295 railcars in the nine months endedSeptember 30, 2020 , in comparison to orders for 7,635 railcars and deliveries of 15,080 railcars in the nine months endedSeptember 30, 2019 . •For the nine months endedSeptember 30, 2020 , we generated operating cash flows and Free Cash Flow before Capital expenditures - leasing ("Free Cash Flow") of$456.8 million and$457.0 million (1), respectively, in comparison to$166.3 million and$217.2 million (1), respectively, for the nine months endedSeptember 30, 2019 . (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. 40
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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-20200930_g2.jpg]] [[Image Removed: trn-20200930_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) Shares repurchased during Q1 2019 exclude 2.6 million shares, at a cost of approximately$70.0 million , representing the final settlement of an accelerated share repurchase program. The shares remained outstanding as ofDecember 31, 2018 but were funded inNovember 2018 . (3) There were no shares repurchased during the second quarter of 2020. (4) In the third quarter of 2020, we completed the existing share repurchase program. Capital Structure Updates Early Redemption of TRL V - InMarch 2020 ,Trinity Rail Leasing V, L.P. , a limited partnership ("TRL V") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, redeemed its 2006 Secured Railcar Equipment Notes dueMay 2036 , of which$104.7 million was outstanding at the redemption date. The fixed interest rate for these notes was at 5.90% per annum. The net book value of the assets securing TRL V at the time of redemption was$303.3 million . TRL-2017 - InJuly 2020 ,Trinity Rail Leasing 2017 LLC ("TRL-2017"), a wholly-owned subsidiary of the Company, issued an additional$225.0 million of promissory notes pursuant to a provision in its existing loan agreement. The promissory notes bear interest at LIBOR plus 1.50%. Net proceeds received from the transaction were used to repay borrowings under TILC's secured warehouse credit facility and under the Company's revolving credit facility, and for general corporate purposes. See "Liquidity and Capital Resources" below for further information regarding these activities. Litigation Updates See Note 14 of the Consolidated Financial Statements for an update on the status of our Highway Products litigation. Subsequent Events TRL-2018 - InOctober 2020 ,Trinity Rail Leasing 2018 LLC ("TRL-2018"), a wholly-owned subsidiary of the Company, issued$155.5 million of Series 2020-1 Class A Secured Railcar Equipment Notes (the "2020-1 Notes") under an existing indenture. The 2020-1 Notes bear interest at a fixed rate of 1.96% per annum and have a stated final maturity date of 2050. In a separate transaction duringOctober 2020 , TRL-2018 redeemed its Series 2018-1 Class A-1 Secured Railcar Equipment Notes, of which$153.1 million was outstanding at the redemption date. The fixed interest rate for these notes was 3.82% per annum. New Share Repurchase Program - InOctober 2020 , our Board of Directors authorized a new share repurchase program effectiveOctober 23, 2020 throughDecember 31, 2021 . The new share repurchase program authorizes the Company to repurchase up to$250.0 million of its common stock. 41
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