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TRINITY INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide readers of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is presented in the following sections: •Executive Summary •Results of Operations •Liquidity and Capital Resources •Contractual Obligations and Commercial Commitments •Recent Accounting Pronouncements •Forward-Looking Statements Our MD&A should be read in conjunction with the unaudited consolidated financial statements of Trinity Industries, Inc. and subsidiaries ("Trinity", "Company", "we", and "our") and related Notes in Part I, Item 1 of the Quarterly Report on Form 10-Q and Item 8, Financial Statements and Supplementary Data, of the Annual Report on Form 10-K for the year-ended December 31, 2013.



Executive Summary

The Company's revenues for the three and six months ended June 30, 2014 were $1,485.3 million and $2,945.8 million, respectively, representing an increase of $419.2 million and $946.8 million, respectively, or 39% and 47%, respectively, over the same periods in 2013. Operating profit for the three and six months ended June 30, 2014 increased by 65% and 102%, respectively, to $302.0 million and $693.3 million, respectively, compared to $183.4 million and $342.9 million, respectively, for the same periods in 2013. The increase in revenues for the six months ended June 30, 2014, when compared to the prior year period, resulted from higher shipment volumes and higher pricing due to increased overall demand and a more favorable product mix in our Rail Group. Additionally, our Leasing Group experienced significantly higher revenues from external railcar sales along with higher leasing and management revenues related to higher utilization and rental rates. Revenues in our Energy Equipment Group increased primarily due to higher volumes and acquisitions. Revenues in our Construction Products Group were slightly higher in our Aggregates business due to acquisitions offset by lower revenue volumes in our Highway Business. A more favorable product mix led to slightly higher revenues for our Inland Barge Group. Overall operating profit and margin grew for the six months ended June 30, 2014, when compared with the prior year, primarily due to higher shipment levels and the effects of a more favorable product mix in our Rail Group, higher railcar sales from our Leasing Group, and increased shipping volumes in our Energy Equipment Group. Selling, engineering, and administrative expenses increased for the six months ended June 30, 2014 primarily due to higher performance-related compensation costs and increased staffing in addition to increased legal expenses. The Company's headcount, including both production and non-production personnel, has increased approximately 8% since the end of 2013 primarily due to production expansion and acquisitions. Net income from continuing operations for the three and six months ended June 30, 2014 was $173.3 million and $406.6 million, respectively, and increased $84.1 million and $245.2 million, respectively, or 94% and 152%, respectively, over the same periods in 2013.



Our Rail and Inland Barge Groups and our structural wind towers and storage containers businesses operate in cyclical industries. Results in our Construction Products and Energy Equipment Groups are subject to seasonal fluctuations with the first quarter historically being the weakest quarter. Railcar sales from the lease fleet are the primary driver of fluctuations in results in the Railcar Leasing and Management Services Group.

Demand conditions and corresponding order levels for new railcars and barges serving the oil, gas, and chemicals industries continue to be favorable. Demand conditions and corresponding order levels in other markets, including cement and agricultural products, have recently begun to strengthen for both freight railcars and hopper barges while demand for products supporting the coal market remains weak. The slowdown in the commercial construction markets, budgetary constraints at the Federal and state level, and unfavorable weather conditions have negatively impacted the results of our Highway Products business while acquisition related volumes have contributed favorably to the results in our Aggregates business. We continually assess our manufacturing capacity and take steps to align our production capacity with demand for our products. Due to improvements in demand for certain products, we have continued to increase production staff at certain facilities. We expect that facilities on non-operating status will be available for future operations should demand increase further. 31



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As of June 30, 2014 and 2013 our backlog of firm and noncancellable orders was as follows: June 30, 2014 June 30, 2013 (in millions) Rail Group External Customers $ 4,366.1$ 4,174.7 Leasing Group 1,100.7 879.8 $ 5,466.8$ 5,054.5 Inland Barge Group $ 466.7 $ 563.6



Structural wind towers Not subject to ongoing litigation $ 611.3 $ 230.4 Subject to ongoing litigation

- 412.5 $ 611.3 $ 642.9 For the six months ended June 30, 2014, our rail manufacturing businesses received orders for 19,505 railcars. The increase in backlog as of June 30, 2014 reflects the value of orders taken during the period. The orders in our backlog from the Leasing Group are supported by lease commitments with external customers. The final amount dedicated to the Leasing Group may vary by the time of delivery. Deliveries for multi-year barge agreements are included in the backlog when specific production quantities for future years have been determined. Approximately $412.5 million included in our backlog at June 30, 2013 is the subject of ongoing litigation with one of the Company's structural wind tower customers leaving a remainder of $230.4 million not subject to litigation. As of September 30, 2013, the Company removed the amount subject to litigation from its wind tower backlog due to the expectation that the purchases will not be made as contracted. The litigation, in which Trinity seeks damages for lost profits under the contract, is pending and is discussed in Note 18 of the Consolidated Financial Statements under "Other Matters". During the six months ended June 30, 2014, the Company received proceeds of $635.7 million from the sale of leased railcars to Element Financial Corporation ("Element") under the strategic alliance with Element announced in December 2013, including $81.6 million recorded as revenue by the Rail Group. From the total proceeds received from Element, the Leasing Group recorded $331.4 million in revenue from the sale of railcars owned one year or less at the time of sale. The remainder of the proceeds of $222.7 million is attributable to the sale of railcars owned more than one year at the time of sale and is, consequently, excluded from revenue. In March 2014, the Company's Board of Directors authorized a new $250 million share repurchase program that expires on December 31, 2015 and replaced the Company's previously authorized $200 million share repurchase program. Under the new program, 63,600 shares and 340,146 shares, respectively, were repurchased during the three and six months ended June 30, 2014, at a cost of approximately $2.5 million and $12.5 million, respectively. In May 2014, the Company's partially-owned leasing subsidiary, TRIP Rail Holdings LLC ("TRIP Holdings"), acquired $388 million in railcar equipment from Trinity Industries Leasing Company ("TILC"). In connection with this portfolio purchase, TRIP Master Funding issued $335.7 million in aggregate principal amount of Series 2014-1 Secured Railcar Equipment Notes pursuant to the Master Indenture between TRIP Master Funding and Wilmington Trust Company, as indenture trustee, with a final maturity date of April 2044. The TRIP Master Funding Series 2014-1 Secured Railcar Equipment Notes consist of two classes with the Class A-1 notes bearing interest at 2.86% and the Class A-2 notes bearing interest at 4.09%. The TRIP Master Funding Secured Railcar Equipment Notes are non-recourse to Trinity, TILC, TRIP Holdings, and the other equity investors in TRIP Holdings and are secured by TRIP Master Funding's portfolio of railcars and operating leases thereon, its cash reserves, and all other assets owned by TRIP Master Funding. As of June 30, 2014, there were $114.3 million and $220.7 million of Class A-1 and Class A-2 notes outstanding, respectively. The remainder of the purchase price was provided by TILC and the third-party investors of TRIP Holdings who contributed $21.6 million and $49.6 million, respectively, net of expenses. In May 2014, the Company's Board of Directors authorized a 2-for-1 stock split. The stock split was issued in the form of a 100% stock dividend. The additional shares were distributed on June 19, 2014, to shareholders of record at the close of business on June 5, 2014. All share and per share information, including dividends, has been retroactively adjusted to reflect the 2-for-1 stock split, except for the statement of stockholders' equity which will reflect the stock split by reclassifying from "Capital in Excess of Par Value" to "Common Stock" in the amount of $78.0 million which equals the par value of the additional shares issued to effect the stock split. Additionally, the Company increased its quarterly dividend in May 2014 by 33%. On a stock-split adjusted basis, the Company increased its quarterly dividend to $0.10 per share compared to the previous, split-adjusted level of $0.075 per share. 32



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In June 2014, Trinity entered into an agreement to acquire the assets of Meyer Steel Structures ("Meyer"), the utility steel structures division of Thomas & Betts Corporation, a member of the ABB Group, for approximately $600 million. Meyer is one of North America's leading providers of tubular steel structures for electricity transmission and distribution. The transaction is expected to close during the quarter ending September 30, 2014 subject to regulatory approval. During the six months ended June 30, 2014, we completed the acquisition of WesMor Cryogenic Companies and Alloy Custom Products, Inc., expanding the Company's engineering and manufacturing capabilities to provide cryogenic storage and transportation products. We also completed the acquisition of Platinum Energy Services in Alberta, Canada, a manufacturer and reseller of oil and gas process and storage equipment and the acquisition of a galvanizing services business located in Texas.



Results of Operations

Overall Summary for Continuing Operations

Revenues Three Months Ended June 30, 2014 Three Months Ended June 30, 2013 Revenues Revenues Percent External Intersegment Total External Intersegment Total Change ($ in millions) Rail Group $ 760.7$ 134.9$ 895.6$ 474.1$ 193.9$ 668.0 34.1 % Construction Products Group 149.9 1.8 151.7 149.3 5.2 154.5 (1.8 ) Inland Barge Group 165.4 - 165.4 150.0 - 150.0 10.3 Energy Equipment Group 183.2 44.4 227.6 121.4 31.1 152.5 49.2 Railcar Leasing and Management Services Group 225.4 6.1 231.5 169.6 - 169.6 36.5 All Other 0.7 27.4 28.1 1.7 20.0 21.7 29.5 Segment Totals before Eliminations 1,485.3 214.6 1,699.9 1,066.1 250.2 1,316.3 29.1 Eliminations - Lease subsidiary - (128.6 ) (128.6 ) - (189.5 ) (189.5 ) Eliminations - Other - (86.0 ) (86.0 ) - (60.7 ) (60.7 ) Consolidated Total $ 1,485.3 $ - $ 1,485.3$ 1,066.1 $ - $ 1,066.1 39.3 Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Revenues Revenues Percent External Intersegment Total External Intersegment Total Change ($ in millions) Rail Group $ 1,361.8$ 391.2$ 1,753.0$ 897.7$ 395.8$ 1,293.5 35.5 % Construction Products Group 262.1 2.7 264.8 247.3 11.0 258.3 2.5 Inland Barge Group 302.3 - 302.3 297.4 - 297.4 1.6 Energy Equipment Group 350.2 88.0 438.2 249.9 57.3 307.2 42.6 Railcar Leasing and Management Services Group 667.6 7.0 674.6 304.0 - 304.0 121.9 All Other 1.8 49.5 51.3 2.7 38.3 41.0 25.1 Segment Totals before Eliminations 2,945.8 538.4 3,484.2 1,999.0 502.4 2,501.4 39.3 Eliminations - Lease subsidiary - (377.7 ) (377.7 ) - (387.5 ) (387.5 ) Eliminations - Other - (160.7 ) (160.7 ) - (114.9 ) (114.9 ) Consolidated Total $ 2,945.8 $ - $ 2,945.8$ 1,999.0 $ - $ 1,999.0 47.4 Our revenues for the three and six months ended June 30, 2014 increased by 39% and 47%, respectively, from the prior year periods. The increase for both periods was primarily due to higher shipment volumes and pricing due to increased overall demand and a more favorable product mix in our Rail Group combined with the effects of higher volumes in our Energy Equipment Group. Revenues from our Inland Barge Group increased as a result of favorable product mix changes for both periods. Our Construction Products Group experienced slightly lower revenues for the three months ended June 30, 2014 due to overall lower volumes and higher revenues for the six months ended June 30, 2014 primarily due to acquisitions. Our Leasing Group experienced higher leasing and management revenues due to increased rental rates, higher utilization, and higher external railcar sales. 33



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Table of Contents Operating Costs Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (in millions) Rail Group $ 719.6$ 560.1$ 1,409.5$ 1,082.7 Construction Products Group 129.3 135.5 220.7 231.6 Inland Barge Group 134.5 129.1 244.7 252.2 Energy Equipment Group 199.3 138.2 387.0 278.0 Railcar Leasing and Management Services Group 129.1 93.9 341.9 166.7 All Other 30.7 25.5 59.3 47.4 Segment Totals before Eliminations and Corporate $ 1,342.5$ 1,082.3$ 2,663.1$ 2,058.6 Corporate 29.7 15.5 52.8 32.1 Eliminations - Lease subsidiary (101.7 ) (154.8 ) (301.5 ) (320.4 ) Eliminations - Other (87.2 ) (60.3 ) (161.9 ) (114.2 ) Consolidated Total $ 1,183.3$ 882.7$ 2,252.5$ 1,656.1 Operating costs for the three and six months ended June 30, 2014 increased by 34.1% and 36.0%, respectively, over the prior year periods primarily due to higher shipment levels in our Rail and Energy Equipment Groups and higher railcar sales in our Leasing Group. Operating costs from our Inland Barge Group varied due to changes in the mix of barge types. Operating costs in the Construction Products Group included a significant gain from the sale of land held by our Aggregates business. Selling, engineering, and administrative expenses increased overall due primarily to higher compensation costs from increased staffing and improved performance in addition to increased legal expenses. As a percentage of revenue, selling, engineering, and administrative expenses decreased to 6.5% and 6.1%, respectively, for the three and six months ended June 30, 2014 as compared to 6.7% and 7.0%, respectively, for the same periods in 2013. Operating Profit (Loss) Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (in millions) Rail Group $ 176.0$ 107.9$ 343.5$ 210.8 Construction Products Group 22.4 19.0 44.1 26.7 Inland Barge Group 30.9 20.9 57.6 45.2 Energy Equipment Group 28.3 14.3 51.2 29.2 Railcar Leasing and Management Services Group 102.4 75.7 332.7 137.3 All Other (2.6 ) (3.8 ) (8.0 ) (6.4 ) Segment Totals before Eliminations and Corporate 357.4 234.0 821.1 442.8 Corporate (29.7 ) (15.5 ) (52.8 ) (32.1 ) Eliminations - Lease subsidiary (26.9 ) (34.7 ) (76.2 ) (67.1 ) Eliminations - Other 1.2 (0.4 ) 1.2 (0.7 ) Consolidated Total $ 302.0$ 183.4$ 693.3$ 342.9 Our operating profit for the three and six months ended June 30, 2014 increased primarily as a result of higher shipment levels in our Rail and Energy Equipment Groups as well as higher railcar sales in our Leasing Group. 34



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For a further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below.

Other Income and Expense. Other income and expense is summarized in the following table:


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