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Section 1: 10-Q (10-Q)

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________ .
Commission File Number 1-6903
393198599_trnlogoverticalhrblac.jpg
(Exact name of registrant as specified in its charter)

Delaware
75-0225040
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
2525 N. Stemmons Freeway, Dallas, Texas
75207-2401
(Address of principal executive offices)
(Zip Code)

(214) 631-4420
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No þ
At April 13, 2018 the number of shares of common stock outstanding was 149,290,121.




TRINITY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
 
Caption
Page
 
 
 
 
 
 
 
 
 
 
CERTIFICATIONS
 




2

Table of Contents

PART I
Item 1. Financial Statements
Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in millions, except per share amounts)
Revenues:
 
 
 
Manufacturing
$
657.0

 
$
698.7

Leasing
174.3

 
178.6

 
831.3

 
877.3

Operating costs:
 
 
 
Cost of revenues:
 
 
 
Manufacturing
536.7

 
576.6

Leasing
93.4

 
83.6

 
630.1

 
660.2

Selling, engineering, and administrative expenses:
 
 
 
Manufacturing
53.2

 
56.6

Leasing
12.2

 
10.8

Other
39.5

 
35.1

 
104.9

 
102.5

Gains on dispositions of property:
 
 
 
Net gains on railcar lease fleet sales owned more than one year at the time of sale
2.1

 

Other
0.2

 
1.3

 
2.3

 
1.3

Total operating profit
98.6

 
115.9

Other (income) expense:
 
 
 
Interest income
(3.9
)
 
(1.7
)
Interest expense
46.3

 
45.0

Other, net
(0.2
)
 
0.1

 
42.2

 
43.4

Income before income taxes
56.4

 
72.5

Provision for income taxes
14.8

 
20.8

Net income
41.6

 
51.7

Net income attributable to noncontrolling interest
1.4

 
5.7

Net income attributable to Trinity Industries, Inc.
$
40.2

 
$
46.0

 
 
 
 
Net income attributable to Trinity Industries, Inc. per common share:
 
 
 
Basic
$
0.27

 
$
0.30

Diluted
$
0.26

 
$
0.30

Weighted average number of shares outstanding:
 
 
 
Basic
147.4

 
148.7

Diluted
153.7

 
150.6

Dividends declared per common share
$
0.13

 
$
0.11

See accompanying notes to consolidated financial statements.

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Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Net income
$
41.6

 
$
51.7

Other comprehensive income (loss):
 
 
 
Derivative financial instruments:
 
 
 
Unrealized gains arising during the period, net of tax expense of $0.2 and $-
0.8

 

Reclassification adjustments for losses included in net income, net of tax expense (benefit) of $0.3 and $(0.3)
1.0

 
1.0

Currency translation adjustment
(0.7
)
 
0.3

Defined benefit plans:
 
 
 
Amortization of net actuarial losses, net of tax benefit of $0.4 and $0.4
0.8

 
0.8

 
1.9

 
2.1

Comprehensive income
43.5

 
53.8

Less: comprehensive income attributable to noncontrolling interest
1.8

 
6.5

Comprehensive income attributable to Trinity Industries, Inc.
$
41.7

 
$
47.3

See accompanying notes to consolidated financial statements.

4

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
 
(in millions)
ASSETS
 
 
 
Cash and cash equivalents
$
625.4

 
$
778.6

Short-term marketable securities
220.8

 
319.5

Receivables, net of allowance
342.5

 
369.7

Income tax receivable
30.6

 
29.0

Inventories:
 
 
 
Raw materials and supplies
272.6

 
296.7

Work in process
164.4

 
179.0

Finished goods
162.4

 
164.9

 
599.4

 
640.6

Restricted cash, including partially-owned subsidiaries of $53.8 and $62.9
177.3

 
195.2

Property, plant, and equipment, at cost, including partially-owned subsidiaries of $1,998.4 and $1,985.9
8,706.0

 
8,385.2

Less accumulated depreciation, including partially-owned subsidiaries of $431.2 and $418.0
(2,312.5
)
 
(2,250.5
)
 
6,393.5

 
6,134.7

Goodwill
789.8

 
780.3

Other assets
297.7

 
295.6

 
$
9,477.0

 
$
9,543.2

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
183.4

 
$
175.4

Accrued liabilities
396.4

 
440.0

Debt:
 
 
 
Recourse, net of unamortized discount of $3.6 and $8.5
871.0

 
866.8

Non-recourse:
 
 
 
Wholly-owned subsidiaries
1,012.3

 
1,024.8

Partially-owned subsidiaries
1,340.1

 
1,350.8

 
3,223.4

 
3,242.4

Deferred income
19.8

 
20.5

Deferred income taxes
757.0

 
743.2

Other liabilities
66.4

 
63.7

 
4,646.4

 
4,685.2

Stockholders’ equity:
 
 
 
Preferred stock – 1.5 shares authorized and unissued

 

Common stock – 400.0 shares authorized
1.6

 
1.6

Capital in excess of par value
492.7

 
482.5

Retained earnings
4,158.9

 
4,123.4

Accumulated other comprehensive loss
(122.0
)
 
(104.8
)
Treasury stock
(53.5
)
 
(1.6
)
 
4,477.7

 
4,501.1

Noncontrolling interest
352.9

 
356.9

 
4,830.6

 
4,858.0

 
$
9,477.0

 
$
9,543.2

See accompanying notes to consolidated financial statements.

5

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Operating activities:

 

Net income
$
41.6

 
$
51.7

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
75.3

 
72.8

Stock-based compensation expense
8.3

 
7.6

Provision for deferred income taxes
14.4

 
55.3

Net gains on railcar lease fleet sales owned more than one year at the time of sale
(2.1
)
 

Gains on dispositions of property and other assets
(0.2
)
 
(1.3
)
Non-cash interest expense
7.4

 
7.3

Other
(0.3
)
 
0.1

Changes in assets and liabilities:

 

(Increase) decrease in receivables
49.4

 
24.1

(Increase) decrease in inventories
13.1

 
33.7

(Increase) decrease in other assets
(1.0
)
 
22.1

Increase (decrease) in accounts payable
8.0

 
0.3

Increase (decrease) in accrued liabilities
(42.6
)
 
(26.6
)
Increase (decrease) in other liabilities
2.4

 
(27.0
)
Net cash provided by operating activities
173.7

 
220.1



 

Investing activities:

 

(Increase) decrease in short-term marketable securities
98.7

 
42.6

Proceeds from dispositions of property and other assets
2.5

 
3.6

Proceeds from railcar lease fleet sales owned more than one year at the time of sale
15.5

 

Capital expenditures – leasing
(318.2
)
 
(162.9
)
Capital expenditures – manufacturing and other
(15.8
)
 
(24.3
)
Acquisitions, net of cash acquired
(25.0
)
 

Other
0.8

 
0.5

Net cash required by investing activities
(241.5
)
 
(140.5
)


 

Financing activities:

 

Payments to retire debt
(26.5
)
 
(26.7
)
Proceeds from issuance of debt
0.9

 

Shares repurchased
(49.3
)
 

Dividends paid to common shareholders
(19.5
)
 
(16.7
)
Purchase of shares to satisfy employee tax on vested stock
(0.1
)
 

Distributions to noncontrolling interest
(5.8
)
 
(7.3
)
Other
(3.0
)
 

Net cash required by financing activities
(103.3
)
 
(50.7
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(171.1
)
 
28.9

Cash, cash equivalents, and restricted cash at beginning of period
973.8

 
741.6

Cash, cash equivalents, and restricted cash at end of period
$
802.7

 
$
770.5

See accompanying notes to consolidated financial statements.

6

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(unaudited)
 
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Trinity
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
 
Shares
 
$0.01 Par Value
 
 
 
 
Shares
 
Amount
 
 
 
 
 
(in millions, except par value)
Balances at
December 31, 2017
 
150.9

 
$
1.6

 
$
482.5

 
$
4,123.4

 
$
(104.8
)
 
(0.1
)
 
$
(1.6
)
 
$
4,501.1

 
$
356.9

 
$
4,858.0

Cumulative effect of adopting accounting standards (see Note 1)
 

 

 

 
14.7

 
(18.7
)
 

 

 
(4.0
)
 

 
(4.0
)
Net income
 

 

 

 
40.2

 

 

 

 
40.2

 
1.4

 
41.6

Other comprehensive income
 

 

 

 

 
1.5

 

 

 
1.5

 
0.4

 
1.9

Cash dividends on common stock
 

 

 

 
(19.4
)
 

 

 

 
(19.4
)
 

 
(19.4
)
Restricted shares, net
 

 

 
10.1

 

 

 
(0.1
)
 
(1.9
)
 
8.2

 

 
8.2

Shares repurchased
 

 

 

 

 

 
(1.5
)
 
(50.0
)
 
(50.0
)
 

 
(50.0
)
Stock options exercised
 

 

 
0.1

 

 

 

 

 
0.1

 

 
0.1

Distributions to noncontrolling interest
 

 

 

 

 

 

 

 

 
(5.8
)
 
(5.8
)
Balances at
March 31, 2018
 
150.9

 
$
1.6

 
$
492.7

 
$
4,158.9

 
$
(122.0
)
 
(1.7
)
 
$
(53.5
)
 
$
4,477.7

 
$
352.9

 
$
4,830.6

See accompanying notes to consolidated financial statements.

7

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The foregoing consolidated financial statements are unaudited and have been prepared from the books and records of Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,” “Company,” “we,” or “our”) including the accounts of its wholly-owned subsidiaries and its partially-owned subsidiaries, TRIP Rail Holdings LLC (“TRIP Holdings”) and RIV 2013 Rail Holdings LLC ("RIV 2013"), in which the Company has a controlling interest. In our opinion, all normal and recurring adjustments necessary for a fair presentation of the financial position of the Company as of March 31, 2018, and the results of operations and cash flows for the three months ended March 31, 2018 and 2017, have been made in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. Because of seasonal and other factors, the results of operations for the three months ended March 31, 2018 may not be indicative of expected results of operations for the year ending December 31, 2018. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of the Company included in its Form 10-K for the year ended December 31, 2017.
Stockholders' Equity
In December 2017, the Company’s Board of Directors authorized a $500 million share repurchase program effective January 1, 2018 through December 31, 2019. Under the program, 1,519,503 shares were repurchased during the three months ended March 31, 2018, at a cost of approximately $50.0 million leaving a remaining authorization of $450.0 million. Certain shares of stock repurchased during March 31, 2018, totaling $6.7 million, were cash settled in April 2018 in accordance with normal settlement practices. Under the Company's previous program that expired on December 31, 2017, no shares were repurchased during the three months ended March 31, 2017.
Revenue Recognition
Revenue is measured based on the allocation of the transaction price in a contract to satisfied performance obligations. The transaction price does not include any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of principle activities from which the Company generates its revenue, separated by reportable segments. Payments for our products and services are generally due within normal commercial terms. For a further discussion regarding the Company’s reportable segments, see Note 4 Segment Information.
Rail Group
The Rail Group recognizes revenue when the customer has submitted its certificate of acceptance and legal title of the rail car has passed to the customer. Certain long-term contracts for the sales of railcars include price adjustments based on steel-price indices; this amount represents variable consideration for which we are constrained and we do not estimate these amounts prior to the time the railcar is delivered at which time the pricing becomes fixed.
Construction Products Group
The Construction Products Group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Inland Barge Group
The Inland Barge Group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Energy Equipment Group
Within the Energy Equipment Group, revenue is recognized for our wind tower and certain utility structure product lines over time as the products are manufactured using an input approach based on the costs incurred relative to the total estimated costs of production. We recognize revenue over time for these products as they are highly customized to the needs of an individual customer resulting in no alternative use to the Company if not purchased by the customer after the contract is executed, and we have the right to bill the customer for our work performed to date plus at least a reasonable profit margin for work performed. For all other products, revenue is recognized when the customer has accepted the product and legal title of the product has passed to the customer.

8

Table of Contents

Railcar Leasing and Management Services Group
Revenue from rentals and operating leases, including contracts that contain non-level fixed rental payments, is recognized monthly on a straight-line basis. Revenue is recognized from the sales of railcars from the lease fleet on a gross basis in leasing revenues and cost of revenues if the railcar has been owned for one year or less at the time of sale. Sales of railcars from the lease fleet owned for more than one year are recognized as a net gain or loss from the disposal of a long-term asset. Revenue from servicing, maintenance, and management agreements is recognized as each performance period occurs.
Fees for shipping and handling are recorded as revenue. The Company has elected to account for shipping and handling costs as activities to fulfill the promise to transfer the good. The fees and costs of shipping and handling activities are accrued if the related performance obligation has been satisfied.
Unsatisfied Performance Obligations
The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially satisfied as of March 31, 2018 and the percentage of the outstanding performance obligations as of March 31, 2018 expected to be delivered during the remainder of 2018:
 
Unsatisfied performance obligations at March 31, 2018
 
Total
Amount
 
Percent expected to be delivered in 2018
 
(in millions)
 
 
Rail Group:
 
 
 
Railcars:
 
 
 
External Customers
$
1,420.7

 
 
Leasing Group
719.6

 
 
 
$
2,140.3

 
54
%
Components and maintenance services
$
63.8

 
100
%
 
 
 
 
Inland Barge Group
$
124.5

 
64
%
 
 
 
 
Energy Equipment Group:
 
 
 
Wind towers and utility structures
$
809.7

 
41
%
Other
$
42.9

 
100
%
 
 
 
 
Railcar Leasing and Management Services Group
$
127.1

 
15
%
The remainder of the unsatisfied performance obligations for the Rail Group are expected to be delivered from 2019-2021. The remainder of the unsatisfied performance obligations for wind towers and utility structures are expected to be delivered from 2019-2020. Unsatisfied performance obligations for the Railcar Leasing and Management Services Group are related to servicing, maintenance, and management agreements and are expected to be performed from 2019-2027. Substantially all other unsatisfied performance obligations beyond 2018 are expected to be delivered during 2019.
Financial Instruments
The Company considers all highly liquid debt instruments to be either cash and cash equivalents if purchased with a maturity of three months or less, or short-term marketable securities if purchased with a maturity of more than three months and less than one year. The Company intends to hold its short-term marketable securities until they are redeemed at their maturity date and believes that under the "more likely than not" criteria, the Company will not be required to sell the securities before recovery of their amortized cost bases, which may be at maturity.
Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments including restricted cash, short-term marketable securities, and receivables. The Company places its cash investments and short-term marketable securities in bank deposits and investment grade, short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. Concentrations of credit risk with respect to receivables are limited due to control procedures that monitor the credit worthiness of customers, the large number of customers in the Company's customer base, and their dispersion across different industries and geographic areas. As receivables are generally unsecured, the Company maintains an allowance for doubtful accounts based upon the expected collectibility of all receivables. Receivable balances determined to be uncollectible are charged against the allowance. The carrying values of cash, short-term marketable securities (using level two inputs), receivables, and accounts payable are considered to be representative of their respective fair values.

9

Table of Contents

Restricted Cash
Restricted cash consists of cash and cash equivalents held either as collateral for the Company's non-recourse debt and lease obligations or as security for the performance of certain product sales agreements. As such, they are restricted in use.
Recent Accounting Pronouncements
On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09") which provides common revenue recognition guidance for U.S. generally accepted accounting principles. Under ASU 2014-09, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires additional detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company applied ASU 2014-09 to all contracts that were not complete as of January 1, 2018 using the modified retrospective method of adoption, resulting in a reduction to retained earnings of $4.0 million, net of tax, as of January 1, 2018 related to the cumulative effect of applying this standard. Therefore, the comparative information for the three months ended March 31, 2017 has not been adjusted and continues to be reported under ASC Topic 605.
The primary impact of adopting the standard is a change in the timing of revenue recognition for our wind towers and certain utility structures product lines within our Energy Equipment Group. Previously, the Company recognized revenue when the product was delivered. Under ASU 2014-09, revenue is recognized over time as the products are manufactured. Revenue recognition policies in our other business segments remain substantially unchanged.
The following tables summarize the impact of adopting ASU 2014-09 on the Company’s consolidated financial statements as of March 31, 2018 and for the three months then ended:
 
As Reported
 
Adjustments
 
Balance without adjustment for adoption of ASU 2014-09
 
(in millions)
Consolidated Statement of Operations
 
 
 
 
 
Revenues - manufacturing
$
657.0

 
$
18.0

 
$
675.0

Cost of revenues - manufacturing
536.7

 
14.0

 
550.7

Operating profit
98.6

 
4.0

 
102.6

Income before income taxes
56.4

 
4.0

 
60.4

Provision for income taxes
14.8

 
0.9

 
15.7

Net income
41.6

 
3.1

 
44.7

Net income attributable to Trinity Industries, Inc.
40.2

 
3.1

 
43.3

 
 
 
 
 
 
Consolidated Balance Sheet
 
 
 
 
 
Receivables, net of allowance
$
342.5

 
$
(10.1
)
 
$
332.4

Inventories:
 
 
 
 
 
Raw materials and supplies
272.6

 

 
272.6

Work in process
164.4

 
12.9

 
177.3

Finished goods
162.4

 
0.7

 
163.1

 
 
 
 
 
 
Accrued liabilities
396.4

 
(5.6
)
 
390.8

Deferred income taxes
757.0

 
2.0

 
759.0

Retained earnings
4,158.9

 
7.1

 
4,166.0

 
 
 
 
 
 
Consolidated Statement of Cash Flows
 
 
 
 
 
Operating activities:
 
 
 
 
 
Net income
$
41.6

 
$
3.1

 
$
44.7

Provision for deferred income taxes
14.4

 
0.8

 
15.2

(Increase) decrease in receivables
49.4

 
2.3

 
51.7

(Increase) decrease in inventories
13.1

 
14.0

 
27.1

Increase (decrease) in accrued liabilities
(42.6
)
 
(20.2
)
 
(62.8
)
Net cash provided by operating activities
173.7

 

 
173.7


10

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In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases", ("ASU 2016-02") which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt ASU 2016-02 effective January 1, 2019. We are continuing to assess the potential effects of the new standard, including its effects on our consolidated financial statements and the accounting for revenue from full service leases.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, "Restricted Cash", ("ASU 2016-18") which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash flows to the related cash and cash equivalents and restricted cash captions in the balance sheet. ASU 2016-18 became effective for public companies during interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company adopted ASU 2016-18 effective January 1, 2018. Amounts previously reported have been adjusted to reflect this change.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, “Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, (“ASU 2017-07”) which changes how companies that sponsor defined benefit pension plans present the related net periodic benefit cost in the income statement. The service cost component of the net periodic benefit cost will continue to be presented in the same income statement line items, however other components of the net periodic benefit cost will be presented as a component of other income and excluded from operating profit. ASU 2017-07 became effective for public companies during interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company adopted ASU 2017-07 effective January 1, 2018. Amounts previously reported have been adjusted to reflect this change.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, (“ASU 2018-02”) which gives entities the option to reclassify from AOCL to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. ASU 2018-02 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company elected to adopt ASU 2018-02 as of January 1, 2018 resulting in a reclassification adjustment from AOCL, increasing retained earnings by $18.7 million for the three months ended March 31, 2018.
Reclassifications
Certain prior year balances have been reclassified in the Notes to Consolidated Financial Statements to conform to the 2018 presentation.

11

Table of Contents

Note 2. Acquisitions and Divestitures
In March 2018, we completed the acquisition of certain assets of an inland barge business which was recorded, as of March 31, 2018 as a business combination, based on preliminary valuations of the acquired assets and liabilities at their acquisition date fair value using level three inputs. Such assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level. See Note 3 Fair Value Accounting for a discussion of inputs in determining fair value.
There was no acquisition or divestiture activity for the three months ended March 31, 2017.

Note 3. Fair Value Accounting
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurement as of March 31, 2018
 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
58.9

 
$

 
$

 
$
58.9

Restricted cash
177.3

 

 

 
177.3

Equity instruments(1)

 
1.0

 

 
1.0

Interest rate hedge(1)

 
2.6

 

 
2.6

Total assets
$
236.2

 
$
3.6

 
$

 
$
239.8

 
 
 
 
 
 
 
 
 
Fair Value Measurement as of December 31, 2017
 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
113.1

 
$

 
$

 
$
113.1

Restricted cash
195.2

 

 

 
195.2

Equity instruments(1)

 
1.3

 

 
1.3

Interest rate hedge(1)

 
1.6

 

 
1.6

Total assets
$
308.3

 
$
2.9

 
$

 
$
311.2

(1) Included in other assets on the consolidated balance sheet.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to establish a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are listed below:
Level 1 – This level is defined as quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents and restricted cash are instruments of the U.S. Treasury or highly-rated money market mutual funds.
Level 2 – This level is defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's fuel derivative instruments, which are commodity swaps, are valued using energy and commodity market data. Interest rate hedges are valued at exit prices obtained from each counterparty. See Note 7 Derivative Instruments and Note 11 Debt. The equity instruments consist of warrants for the purchase of certain publicly-traded equity securities and are valued using the Black-Scholes-Merton option pricing model and certain assumptions regarding the exercisability of the options under the related agreement.
Level 3 – This level is defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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Table of Contents

The carrying amounts and estimated fair values of our long-term debt are as follows:
 
March 31, 2018
 
December 31, 2017
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
 
(in millions)
Recourse:
 
 
 
 
 
 
 
Senior notes
$
399.7

 
$
399.3

 
$
399.7

 
$
400.3

Convertible subordinated notes
449.4

 
612.5

 
449.4

 
715.0

Less: unamortized discount
(3.3
)
 
 
 
(8.2
)
 
 
 
446.1

 
 
 
441.2

 
 
Capital lease obligations
27.4

 
27.4

 
28.3

 
28.3

Other
0.5

 
0.5

 
0.5

 
0.5

 
873.7

 
1,039.7

 
869.7

 
1,144.1

Less: unamortized debt issuance costs
(2.7
)
 
 
 
(2.9
)
 
 
 
871.0

 
 
 
866.8

 
 
Non-recourse:
 
 
 
 
 
 
 
2006 secured railcar equipment notes
152.8

 
161.6

 
158.5

 
165.7

2009 secured railcar equipment notes
164.8

 
181.2

 
166.2

 
169.6

2010 secured railcar equipment notes
264.3

 
272.3

 
266.9

 
281.9

2017 promissory notes
289.8

 
289.8

 
293.6

 
293.6

TILC warehouse facility
154.5

 
154.5

 
150.7

 
150.7

TRL 2012 secured railcar equipment notes
397.1

 
376.8

 
402.8

 
390.4

TRIP Master Funding secured railcar equipment notes
957.0

 
975.6

 
962.5

 
1,007.6

 
2,380.3

 
2,411.8

 
2,401.2

 
2,459.5

Less: unamortized debt issuance costs
(27.9
)
 
 
 
(25.6
)
 
 
 
2,352.4

 
 
 
2,375.6

 
 
Total
$
3,223.4

 
$
3,451.5

 
$
3,242.4

 
$
3,603.6

The estimated fair values of our senior notes and convertible subordinated notes were based on a quoted market price in a market with little activity as of March 31, 2018 and December 31, 2017 (Level 2 input). The estimated fair values of our 2006, 2009, 2010, and 2012 secured railcar equipment notes and TRIP Rail Master Funding LLC (“TRIP Master Funding”) secured railcar equipment notes are based on our estimate of their fair value as of March 31, 2018 and December 31, 2017 using unobservable input values provided by a third party (Level 3 inputs). The carrying value of our Trinity Industries Leasing Company (“TILC”) warehouse facility and 2017 promissory notes approximate fair value because the interest rate adjusts to the market interest rate (Level 3 input). The fair values of all other financial instruments are estimated to approximate carrying value. See Note 11 Debt for a description of the Company's long-term debt.


13

Table of Contents

Note 4. Segment Information
The Company reports operating results in five principal business segments: (1) the Rail Group, which manufactures and sells railcars and related parts, components, and maintenance services; (2) the Construction Products Group, which manufactures and sells highway products and trench shields and shoring products and services for infrastructure-related projects, and produces and sells construction aggregates; (3) the Inland Barge Group, which manufactures and sells barges and related products for inland waterway services; (4) the Energy Equipment Group, which manufactures and sells products for energy-related businesses, including structural wind towers, steel utility structures for electricity transmission and distribution, storage and distribution containers, and tank heads for pressure and non-pressure vessels; and (5) the Railcar Leasing and Management Services Group (“Leasing Group”), which owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, maintenance, and administrative services. The segment All Other includes our captive insurance and transportation companies; legal, environmental, and maintenance costs associated with non-operating facilities; and other peripheral businesses. Gains and losses from the sale of property, plant, and equipment related to manufacturing and dedicated to the specific manufacturing operations of a particular segment are included in the operating profit of that respective segment. Gains and losses from the sale of property, plant, and equipment that can be utilized by multiple segments are included in operating profit of the All Other segment.
Sales and related net profits ("deferred profit") from the Rail Group to the Leasing Group are recorded in the Rail Group and eliminated in consolidation and reflected in the "Eliminations - Lease subsidiary" line in the table below. Sales between these groups are recorded at prices comparable to those charged to external customers, taking into consideration quantity, features, and production demand. Amortization of deferred profit on railcars sold to the Leasing Group is included in the operating profit of the Leasing Group, resulting in the recognition of depreciation expense based on the Company's original manufacturing cost of the railcars. Sales of railcars from the lease fleet are included in the Leasing Group, with related gains and losses computed based on the net book value of the original manufacturing cost of the railcars.
The financial information for these segments is shown in the tables below. We operate principally in North America.
Three Months Ended March 31, 2018
 
Revenues
 
Operating Profit (Loss)
 
External
 
Intersegment
 
Total
 
 
(in millions)
Railcars
 
 
 
 
$
521.1

 
 
Components and maintenance services
 
 
 
 
77.4

 
 
Rail Group
$
302.4

 
$
296.1

 
598.5

 
$
58.9

 
 
 
 
 
 
 
 
Highway products
 
 
 
 
54.8

 
 
Construction aggregates
 
 
 
 
52.6

 
 
Other
 
 
 
 
17.6

 
 
Construction Products Group
123.4

 
1.6

 
125.0

 
19.4

 
 
 
 
 
 
 
 
Inland Barge Group
30.8

 

 
30.8

 
(0.7
)
 
 
 
 
 
 
 
 
Wind towers and utility structures
 
 
 
 
147.5

 
 
Other
 
 
 
 
79.2

 
 
Energy Equipment Group
199.2

 
27.5

 
226.7

 
21.3

 
 
 
 
 
 
 
 
Leasing and management
 
 
 
 
174.6

 
 
Sales of leased railcars owned one year or less at the time of sale
 
 
 
 

 
 
Railcar Leasing and Management Services Group
174.3

 
0.3

 
174.6

 
71.1

 
 
 
 
 
 
 
 
All Other
1.2

 
23.6

 
24.8

 
(3.3
)
 
 
 
 
 
 
 
 
Segment Totals before Eliminations and Corporate
831.3

 
349.1

 
1,180.4

 
166.7

Corporate

 

 

 
(39.5
)
Eliminations – Lease subsidiary

 
(296.1
)
 
(296.1
)
 
(28.7
)
Eliminations – Other

 
(53.0
)
 
(53.0
)
 
0.1

Consolidated Total
$
831.3

 
$

 
$
831.3

 
$
98.6


14

Table of Contents

Three Months Ended March 31, 2017 

 
Revenues
 
Operating Profit (Loss)
 
External
 
Intersegment
 
Total
 
 
(in millions)
Railcars
 
 
 
 
$
425.1

 
 
Components and maintenance services
 
 
 
 
53.2

 
 
Rail Group
$
286.0

 
$
192.3

 
478.3

 
$
50.5

 
 
 
 
 
 
 
 
Highway products
 
 
 
 
63.5

 
 
Construction aggregates
 
 
 
 
49.6

 
 
Other
 
 
 
 
10.0

 
 
Construction Products Group
120.9

 
2.2

 
123.1

 
15.5

 
 
 
 
 
 
 
 
Inland Barge Group
62.7

 

 
62.7

 
6.3

 
 
 
 
 
 
 
 
Wind towers and utility structures
 
 
 
 
180.8

 
 
Other
 
 
 
 
74.6

 
 
Energy Equipment Group
227.8

 
27.6

 
255.4

 
29.6

 
 
 
 
 
 
 
 
Leasing and management
 
 
 
 
178.9

 
 
Sales of leased railcars owned one year or less at the time of sale
 
 
 
 

 
 
Railcar Leasing and Management Services Group
178.6

 
0.3

 
178.9

 
85.0

 
 
 
 
 
 
 
 
All Other
1.3

 
21.5

 
22.8

 
(4.6
)
 
 
 
 
 
 
 
 
Segment Totals before Eliminations and Corporate
877.3

 
243.9

 
1,121.2

 
182.3

Corporate

 

 

 
(35.1
)
Eliminations – Lease subsidiary

 
(192.2
)
 
(192.2
)
 
(29.4
)
Eliminations – Other

 
(51.7
)
 
(51.7
)
 
(1.9
)
Consolidated Total
$
877.3

 
$

 
$
877.3

 
$
115.9


15

Table of Contents

Note 5. Partially-Owned Leasing Subsidiaries
The Company, through its wholly-owned subsidiary, TILC, formed two subsidiaries, TRIP Holdings and RIV 2013, for the purpose of providing railcar leasing in North America. Each of TRIP Holdings and RIV 2013 are direct, partially-owned subsidiaries of TILC in which the Company has a controlling interest. Each is governed by a seven-member board of representatives, two of whom are designated by TILC. TILC is the agent of each of TRIP Holdings and RIV 2013 and as such, has been delegated the authority, power, and discretion to take certain actions on behalf of the respective companies.
At March 31, 2018, the Company's carrying value of its investment in TRIP Holdings and RIV 2013 totaled $191.7 million. The Company's weighted average ownership interest in TRIP Holdings and RIV 2013 is 38% while the remaining 62% weighted average interest is owned by third-party investor-owned funds. The Company's investments in its partially-owned leasing subsidiaries are eliminated in consolidation.
Each of TRIP Holdings and RIV 2013 has wholly-owned subsidiaries that are the owners of railcars acquired from the Company's Rail and Leasing Groups. These wholly-owned subsidiaries are TRIP Master Funding (wholly-owned by TRIP Holdings) and Trinity Rail Leasing 2012 LLC ("TRL 2012," wholly-owned by RIV 2013). Railcar purchases by these subsidiaries were funded by secured borrowings and capital contributions from TILC and third-party equity investors. TILC is the contractual servicer for TRIP Master Funding and TRL 2012, with the authority to manage and service each entity's owned railcars. The Company's controlling interest in each of TRIP Holdings and RIV 2013 results from its combined role as both equity member and agent/servicer. The noncontrolling interest included in the accompanying consolidated balance sheets represents the non-Trinity equity interest in these partially-owned subsidiaries.
Trinity has no obligation to guarantee performance under any of the partially-owned subsidiaries' (or their respective subsidiaries') debt agreements, guarantee any railcar residual values, shield any parties from losses, or guarantee minimum yields.
The assets of each of TRIP Master Funding and TRL 2012 may only be used to satisfy the particular subsidiary's liabilities, and the creditors of each of TRIP Master Funding and TRL 2012 have recourse only to the particular subsidiary's assets. Each of TILC and the third-party equity investors receive distributions from TRIP Holdings and RIV 2013, when available, in proportion to its respective equity interests, and has an interest in the net assets of the partially-owned subsidiaries upon a liquidation event in the same proportion. TILC is paid fees for the services it provides to TRIP Master Funding and TRL 2012 and has the potential to earn certain incentive fees. TILC and the third-party equity investors have commitments to provide additional equity funding to TRIP Holdings that expire in May 2019 contingent upon certain returns on investment in TRIP Holdings and other conditions being met. There are no remaining equity commitments with respect to RIV 2013.
See Note 11 Debt regarding the debt of TRIP Holdings and RIV 2013 and their respective subsidiaries.


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Table of Contents

Note 6. Railcar Leasing and Management Services Group
The Railcar Leasing and Management Services Group owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, maintenance, and administrative services. Selected consolidating financial information for the Leasing Group is as follows:
 
March 31, 2018
 
Leasing Group
 
 
 
 
 
Wholly-
Owned
Subsidiaries
 
Partially-Owned Subsidiaries
 
Manufacturing/
Corporate
 
Total
 
(in millions)
Cash, cash equivalents, and short-term marketable securities
$
6.1

 
$

 
$
840.1

 
$
846.2

Property, plant, and equipment, net
$
4,427.7

 
$
1,822.8

 
$
972.2

 
$
7,222.7

Net deferred profit on railcars sold to the Leasing Group
 
 
 
 
 
 
(829.2
)
Consolidated property, plant and equipment, net
 
 
 
 
 
 
$
6,393.5

Restricted cash
$
123.4

 
$
53.8

 
$
0.1

 
$
177.3

Debt:
 
 
 
 
 
 
 
Recourse
$
27.4

 
$

 
$
849.9

 
$
877.3

Less: unamortized discount

 

 
(3.6
)
 
(3.6
)
Less: unamortized debt issuance costs

 

 
(2.7
)
 
(2.7
)
 
27.4

 

 
843.6

 
871.0

Non-recourse
1,026.2

 
1,354.1

 

 
2,380.3

Less: unamortized debt issuance costs
(13.9
)
 
(14.0
)
 

 
(27.9
)
 
1,012.3

 
1,340.1

 

 
2,352.4

Total debt
$
1,039.7

 
$
1,340.1

 
$
843.6

 
$
3,223.4

Net deferred tax liabilities
$
660.9

 
$
0.8

 
$
75.6

 
$
737.3

 
 
December 31, 2017
 
Leasing Group
 
 
 
 
 
Wholly-
Owned
Subsidiaries
 
Partially-Owned Subsidiaries
 
Manufacturing/
Corporate
 
Total
 
(in millions)
Cash, cash equivalents, and short-term marketable securities
$
3.3

 
$

 
$
1,094.8

 
$
1,098.1

Property, plant, and equipment, net
$
4,147.5

 
$
1,824.6

 
$
972.7

 
$
6,944.8

Net deferred profit on railcars sold to the Leasing Group
 
 
 
 
 
 
(810.1
)
Consolidated property, plant and equipment, net
 
 
 
 
 
 
$
6,134.7

Restricted cash
$
132.2

 
$
62.9

 
$
0.1

 
$
195.2

Debt:
 
 
 
 
 
 
 
Recourse
$
28.3

 
$

 
$
849.9

 
$
878.2

Less: unamortized discount

 

 
(8.5
)
 
(8.5
)
Less: uamortized debt issuance costs

 

 
(2.9
)
 
(2.9
)
 
28.3

 

 
838.5

 
866.8

Non-recourse
1,035.9

 
1,365.3

 

 
2,401.2

Less: unamortized debt issuance costs
(11.1
)
 
(14.5
)
 

 
(25.6
)
 
1,024.8

 
1,350.8

 

 
2,375.6

Total debt
$
1,053.1

 
$
1,350.8

 
$
838.5

 
$
3,242.4

Net deferred tax liabilities
$
653.7

 
$
0.8

 
$
69.4

 
$
723.9

Net deferred profit on railcars sold to the Leasing Group consists of intersegment profit that is eliminated in consolidation and is, therefore, not allocated to an operating segment. See Note 5 Partially-Owned Leasing Subsidiaries and Note 11 Debt for a further discussion regarding the Company’s investment in its partially-owned leasing subsidiaries and the related indebtedness. See Note 13 Income Taxes for a discussion of the effects of the Tax Cuts and Jobs Act on net deferred tax liabilities. See Note 19 Financial Statements of Guarantors of the Senior Notes for a discussion of subsidiary guarantees of the Senior Notes.

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Table of Contents

 
Three Months Ended March 31,
 
2018
 
2017
 
Percent
 
($ in millions)
 
Change
Revenues:
 
 
 
 
 
Leasing and management
$
174.6

 
$
178.9

 
(2.4
)%
Sales of railcars owned one year or less at the time of sale

 

 
*
Total revenues
$
174.6

 
$
178.9

 
(2.4
)
 
 
 
 
 
 
Operating profit:
 
 
 
 
 
Leasing and management
$
69.0

 
$
85.0

 
(18.8
)
Railcar sales:
 
 
 
 
 
Railcars owned one year or less at the time of sale

 

 
*
Railcars owned more than one year at the time of sale
2.1

 

 
*
Total operating profit
$
71.1

 
$
85.0

 
(16.4
)
 
 
 
 
 
 
Operating profit margin:
 
 
 
 
 
Leasing and management
39.5
%
 
47.5
%
 
 
Railcar sales
*

 
*

 
 
Total operating profit margin
40.7
%
 
47.5
%
 
 
 
 
 
 
 
 
Selected expense information(1):
 
 
 
 
 
Depreciation
$
45.1

 
$
42.1

 
7.1

Maintenance and compliance
$
26.4

 
$
20.5

 
28.8

Rent
$
10.1

 
$
10.1

 

Interest
$
31.5

 
$
30.6

 
2.9

 * Not meaningful
(1) Depreciation, maintenance and compliance, and rent expense are components of operating profit. Amortization of deferred profit on railcars sold from the Rail Group to the Leasing Group is included in the operating profit of the Leasing Group resulting in the recognition of depreciation expense based on the Company's original manufacturing cost of the railcars. Interest expense is not a component of operating profit and includes the effect of hedges.
During the three months ended March 31, 2018 and 2017, the Company received proceeds from the sales of leased railcars as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Leasing Group:
 
 
 
Railcars owned one year or less at the time of sale
$

 
$

Railcars owned more than one year at the time of sale
15.5

 

Rail Group

 

 
$
15.5

 
$

Equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured predominantly by the Rail Group and enters into lease contracts with third parties with terms generally ranging from one to twenty years. The Leasing Group primarily enters into operating leases. Future contractual minimum rental revenues on leases are as follows:
 
 
Remaining nine months of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
 
(in millions)
Future contractual minimum rental revenue
 
$
389.4

 
$
444.4

 
$
360.9

 
$
255.9

 
$
193.0

 
$
378.8

 
$
2,022.4

Debt. Wholly-owned subsidiaries. The Leasing Group’s debt at March 31, 2018 consisted primarily of non-recourse debt. As of March 31, 2018, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $1,735.5 million which is pledged as collateral for Leasing Group debt held by those subsidiaries, including equipment with a net book value of $40.4 million securing capital lease obligations. The net book value of unpledged equipment at March 31, 2018 was $2,627.8 million. See Note 11 Debt for the form, maturities, and descriptions of Leasing Group debt.

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Table of Contents

Partially-owned subsidiaries. Debt owed by TRIP Holdings and RIV 2013 and their respective subsidiaries is nonrecourse to Trinity and TILC. Creditors of each of TRIP Holdings and RIV 2013 and their respective subsidiaries have recourse only to the particular subsidiary's assets. TRIP Master Funding equipment with a net book value of $1,273.4 million is pledged as collateral for the TRIP Master Funding debt. TRL 2012 equipment with a net book value of $549.4 million is pledged solely as collateral for the TRL 2012 secured railcar equipment notes. See Note 5 Partially-Owned Leasing Subsidiaries for a description of TRIP Holdings and RIV 2013.
Off Balance Sheet Arrangements. In prior years, the Leasing Group completed a series of financing transactions whereby railcars were sold to one or more separate independent owner trusts (“Trusts”). Each of the Trusts financed the purchase of the railcars with a combination of debt and equity. In each transaction, the equity participant in each of the respective Trusts is considered to be the primary beneficiary of the Trust and therefore, the accounts of the Trusts, including the debt related to each of the Trusts, are not included as part of the consolidated financial statements. The Leasing Group, through wholly-owned, qualified subsidiaries, leased railcars from the Trusts under operating leases with terms of 22 years, and subleased the railcars to independent third-party customers under shorter term operating rental agreements. Under the terms of the operating lease agreements between the subsidiaries and the remaining Trusts, the Leasing Group has the option to purchase, at a predetermined fixed price, certain railcars from the remaining Trusts in 2019. In January 2018, the Leasing Group provided the Trusts with an irrevocable twelve-month notice of intent to exercise their option to purchase all of the Trusts' railcars for $223.6 million.
These Leasing Group subsidiaries had total assets as of March 31, 2018 of $138.0 million, including cash of $48.0 million and railcars of $62.9 million. The subsidiaries' cash, railcars, and an interest in each sublease are pledged to collateralize the lease obligations to the Trusts and are included in the consolidated financial statements of the Company. Trinity does not guarantee the performance of the subsidiaries’ lease obligations. Certain ratios and cash deposits must be maintained by the Leasing Group’s subsidiaries in order for excess cash flow, as defined in the agreements, from the lease to third parties to be available to Trinity. Future operating lease obligations of the Leasing Group’s subsidiaries as well as future contractual minimum rental revenues related to these leases due to the Leasing Group are as follows:
 
 
Remaining nine months of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
 
(in millions)
Future operating lease obligations of Trusts’ railcars
 
$
21.9

 
$
28.8

 
$
26.1

 
$
26.1

 
$
24.9

 
$
93.0

 
$
220.8

Future contractual minimum rental revenues of Trusts’ railcars
 
$
30.8

 
$
28.8

 
$
18.7

 
$
13.1

 
$
8.9

 
$
7.7

 
$
108.0

Operating Lease Obligations. Future amounts due as well as future contractual minimum rental revenues related to operating leases other than leases discussed above are as follows: 
 
 
Remaining nine months of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
 
(in millions)
Future operating lease obligations
 
$
8.9

 
$
9.7

 
$
7.7

 
$
7.6

 
$
6.8

 
$
7.1

 
$
47.8

Future contractual minimum rental revenues
 
$
8.2

 
$
8.2

 
$
5.3

 
$
3.8

 
$
3.3

 
$
1.4

 
$
30.2

Operating lease obligations totaling $4.8 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries. See Note 6 of the December 31, 2017 Consolidated Financial Statements filed on Form 10-K for a detailed explanation of these financing transactions.


19

Table of Contents

Note 7. Derivative Instruments
We may use derivative instruments to mitigate the impact of changes in interest rates, both in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also may use derivative instruments to mitigate the impact of changes in natural gas and diesel fuel prices and changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for in accordance with applicable accounting standards. See Note 3 Fair Value Accounting for discussion of how the Company valued its commodity hedges and interest rate swap at March 31, 2018. See Note 11 Debt for a description of the Company's debt instruments.
Interest rate hedges
 
 
 
 
 
Included in accompanying balance sheet
at March 31, 2018
 
Notional
Amount
 
Interest
Rate(1)
 
Asset / (liability)
 
AOCL –
loss/
(income)
 
Noncontrolling
Interest
 
(in millions, except %)
Expired hedges:
 
 
 
 
 
 
 
 
 
2006 secured railcar equipment notes
$
200.0

 
4.87
%
 
$

 
$
(0.4
)
 
$

TRIP Holdings warehouse loan
$
788.5

 
3.60
%
 
$

 
$
3.7

 
$
5.0

TRIP Master Funding secured railcar equipment notes
$
34.8

 
2.62
%
 
$

 
$
0.3

 
$
0.4

Open hedge:
 
 
 
 
 
 
 
 
 
2017 promissory notes
$
173.9

 
3.00
%
 
$
2.6

 
$
(0.2
)
 
$

(1) 
Weighted average fixed interest rate, except for 2017 promissory notes. Interest rate cap for 2017 promissory notes.
 
Effect on interest expense - increase/(decrease)
 
Three Months Ended
March 31,
 
Expected effect during next twelve months
 
2018
 
2017
 
 
(in millions)
 
 
 
 
 
 
2006 secured railcar equipment notes
$
(0.1
)
 
$
(0.1
)
 
$
(0.1
)
TRIP Holdings warehouse loan
$
0.7

 
$
1.2

 
$
2.0

TRIP Master Funding secured railcar equipment notes
$
0.1

 
$
0.2

 
$
0.2

During 2005 and 2006, we entered into interest rate swap derivatives in anticipation of issuing our 2006 Secured Railcar Equipment Notes. These derivative instruments, with a notional amount of $200.0 million, were settled in 2006 and fixed the interest rate on a portion of the related debt issuance. These derivative instrument transactions are being accounted for as cash flow hedges with changes in the fair value of the instruments of $4.5 million in income recorded in Accumulated Other Comprehensive Loss ("AOCL") through the date the related debt issuance closed in 2006. The balance is being amortized over the term of the related debt. The effect on interest expense is due to amortization of the AOCL balance.
Between 2007 and 2009, TRIP Holdings, as required by the TRIP Warehouse Loan, entered into interest rate swap derivatives, all of which qualified as cash flow hedges, to reduce the effect of changes in variable interest rates in the TRIP Warehouse Loan. In July 2011, these interest rate hedges were terminated in connection with the refinancing of the TRIP Warehouse Loan. Balances included in AOCL at the date the hedges were terminated are being amortized over the life of the terminated hedge with $2.0 million of additional interest expense expected to be recognized during the twelve months following March 31, 2018.
In July 2011, TRIP Holdings’ wholly-owned subsidiary, TRIP Master Funding, entered into an interest rate swap derivative instrument, expiring in 2021, with an initial notional amount of $94.1 million to reduce the effect of changes in variable interest rates associated with the Class A-1b notes of the TRIP Master Funding secured railcar equipment notes. The TRIP Master Funding interest rate hedge was terminated in August 2017 in connection with the refinancing of the related indebtedness. The effect on interest expense is due to amortization of the AOCL balance. The balance included in AOCL at the date the hedge was terminated is being amortized over the life of the terminated hedge with $0.2 million of additional interest expense expected to be recognized during the twelve months following March 31, 2018.
In May 2017, TRL 2017 purchased an interest rate cap derivative, which qualified as a cash flow hedge, to limit the Libor component of the interest rate on the 2017 promissory notes to a maximum rate of 3%. The effect on interest expense is primarily the result of amortization of the cost of the derivative and is not expected to be significant during the next twelve months.
See Note 11 Debt regarding the related debt instruments.

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Table of Contents

Other Derivatives
Natural gas and diesel fuel
We maintain a program to mitigate the impact of fluctuations in the price of natural gas and diesel fuel. For those instruments that do not qualify for hedge accounting treatment, any changes in their valuation are recorded directly to the consolidated statement of operations. The effect on operating income for these instruments was not significant. The amount recorded in the consolidated balance sheet as of March 31, 2018 for these instruments was not significant.
Note 8. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment as of March 31, 2018 and December 31, 2017.
 
March 31,
2018
 
December 31,
2017
 
(in millions)
Manufacturing/Corporate:
 
 
 
Land
$
122.0

 
$
122.1

Buildings and improvements
668.5

 
668.1

Machinery and other
1,240.8

 
1,223.6

Construction in progress
33.2

 
32.6

 
2,064.5

 
2,046.4

Less accumulated depreciation
(1,092.3
)
 
(1,073.7
)
 
972.2

 
972.7

Leasing:
 
 
 
Wholly-owned subsidiaries:
 
 
 
Machinery and other
10.7

 
10.7

Equipment on lease
5,310.9

 
4,995.7

 
5,321.6

 
5,006.4

Less accumulated depreciation
(893.9
)
 
(858.9
)
 
4,427.7

 
4,147.5

Partially-owned subsidiaries:
 
 
 
Equipment on lease
2,331.5

 
2,317.7

Less accumulated depreciation
(508.7
)
 
(493.1
)
 
1,822.8

 
1,824.6

 
 
 
 
Deferred profit on railcars sold to the Leasing Group
(1,011.6
)
 
(985.2
)
Less accumulated amortization
182.4

 
175.1

 
(829.2
)
 
(810.1
)
 
$
6,393.5

 
$
6,134.7


Note 9. Goodwill
Goodwill by segment is as follows:
 
March 31,
2018
 
December 31,
2017
 
 
 
(as reported)
 
(in millions)
Rail Group
$
134.6

 
$
134.6

Construction Products Group
136.0

 
136.0

Inland Barge Group
9.9

 

Energy Equipment Group
507.5

 
507.9

Railcar Leasing and Management Services Group
1.8

 
1.8

 
$
789.8

 
$
780.3

The increase in the Inland Barge Group goodwill during the three months ended March 31, 2018 is due to an acquisition. See Note 2 Acquisitions and Divestitures. Changes in goodwill in the Energy Equipment Group during the three months ended March 31, 2018 resulted from fluctuations in foreign currency exchange rates.


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Table of Contents

Note 10. Warranties
The changes in the accruals for warranties for the three months ended March 31, 2018 and 2017 are as follows:
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Beginning balance
$
12.7

 
$
15.7

Warranty costs incurred
(1.5
)
 
(1.7
)
Warranty originations and revisions
1.3

 
0.8

Warranty expirations
(0.3
)
 
(0.8
)
Ending balance
$
12.2

 
$
14.0


Note 11. Debt
The following table summarizes the components of debt as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31,
2017
 
(in millions)
Corporate – Recourse:
 
 
 
Revolving credit facility
$

 
$

Senior notes, net of unamortized discount of $0.3 and $0.3
399.7

 
399.7

Convertible subordinated notes, net of unamortized discount of $3.3 and $8.2
446.1

 
441.2

Other
0.5

 
0.5

 
846.3

 
841.4

Less: unamortized debt issuance costs
(2.7
)
 
(2.9
)
 
843.6

 
838.5

Leasing – Recourse:
 
 
 
Capital lease obligations
27.4

 
28.3

Total recourse debt
871.0

 
866.8

 
 
 
 
Leasing – Non-recourse:
 
 
 
Wholly-owned subsidiaries:
 
 
 
2006 secured railcar equipment notes
152.8

 
158.5

2009 secured railcar equipment notes
164.8

 
166.2

2010 secured railcar equipment notes
264.3

 
266.9

2017 promissory notes
289.8

 
293.6

TILC warehouse facility
154.5

 
150.7

 
1,026.2

 
1,035.9

Less: unamortized debt issuance costs
(13.9
)
 
(11.1
)
 
1,012.3

 
1,024.8

Partially-owned subsidiaries:
 
 
 
TRL 2012 secured railcar equipment notes
397.1

 
402.8

TRIP Master Funding secured railcar equipment notes
957.0

 
962.5

 
1,354.1

 
1,365.3</