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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE CO.
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
 
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
403816957_trnlogoverticalhrblacaa12.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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange
on which registered
Common Stock
TRN
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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 ¨
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 24, 2020, the number of shares of common stock, $0.01 par value, outstanding was 117,833,593.




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




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,
 
2020
 
2019
 
(in millions, except per share amounts)
Revenues:
 
 
 
Manufacturing
$
379.1

 
$
404.6

Leasing
236.1

 
200.2

 
615.2

 
604.8

Operating costs:
 
 
 
Cost of revenues:
 
 
 
Manufacturing
343.4

 
351.6

Leasing
138.6

 
111.8

 
482.0

 
463.4

Selling, engineering, and administrative expenses:
 
 
 
Manufacturing
21.9

 
23.2

Leasing
14.3

 
12.8

Other
28.1

 
23.6

 
64.3

 
59.6

Gains (losses) on dispositions of property:
 
 
 
Net gains on railcar lease fleet sales owned more than one year at the time of sale
8.7

 
7.9

Other
0.9

 
2.1

 
9.6

 
10.0

 
 
 
 
Restructuring activities, net
5.5

 

Total operating profit
73.0

 
91.8

Other (income) expense:
 
 
 
Interest income
(2.4
)
 
(1.3
)
Interest expense
61.3

 
52.7

Other, net
(0.8
)
 
0.3

 
58.1

 
51.7

Income from continuing operations before income taxes
14.9

 
40.1

Provision (benefit) for income taxes:
 
 
 
Current
(372.8
)
 
(0.8
)
Deferred
225.2

 
9.7

 
(147.6
)
 
8.9

Income from continuing operations
162.5

 
31.2

Loss from discontinued operations, net of benefit for income taxes of $0.1 and $0.2
(0.2
)
 
(1.1
)
Net income
162.3

 
30.1

Net income (loss) attributable to noncontrolling interest
0.6

 
(0.5
)
Net income attributable to Trinity Industries, Inc.
$
161.7

 
$
30.6

 
 
 
 
Basic earnings per common share:

 
 
Income from continuing operations
$
1.36

 
$
0.24

Income (loss) from discontinued operations

 
(0.01
)
Basic net income attributable to Trinity Industries, Inc.
$
1.36

 
$
0.23

Diluted earnings per common share:
 
 
 
Income from continuing operations
$
1.33

 
$
0.24

Income (loss) from discontinued operations

 
(0.01
)
Diluted net income attributable to Trinity Industries, Inc.
$
1.33

 
$
0.23

Weighted average number of shares outstanding:
 
 
 
Basic
118.0

 
130.4

Diluted
119.9

 
132.2

See accompanying notes to Consolidated Financial Statements.

3

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Net income
$
162.3

 
$
30.1

Other comprehensive income (loss):
 
 
 
Derivative financial instruments:
 
 
 
Unrealized losses arising during the period, net of tax benefit of $7.7 and $1.7
(25.6
)
 
(5.5
)
Reclassification adjustments for losses included in net income, net of tax benefit of $0.5 and $0.4
1.0

 
0.9

Defined benefit plans:
 
 
 
Amortization of prior service cost, net of tax benefit of $0.1 and $-
0.2

 

Amortization of net actuarial losses, net of tax benefit of $0.3 and $0.3
1.2

 
0.8

 
(23.2
)
 
(3.8
)
Comprehensive income
139.1

 
26.3

Less: comprehensive income (loss) attributable to noncontrolling interest
0.9

 
(0.2
)
Comprehensive income attributable to Trinity Industries, Inc.
$
138.2

 
$
26.5

See accompanying notes to Consolidated Financial Statements.

4

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
 
March 31, 2020
 
December 31, 2019
 
(unaudited)
 
 
 
(in millions)
ASSETS
 
 
 
Cash and cash equivalents
$
213.2

 
$
166.2

Receivables, net of allowance
297.8

 
260.1

Income tax receivable
389.1

 
14.7

Inventories:
 
 
 
Raw materials and supplies
239.8

 
263.4

Work in process
113.2

 
108.8

Finished goods
89.0

 
61.2

 
442.0

 
433.4

Restricted cash, including partially-owned subsidiaries of $27.3 and $33.0
96.3

 
111.4

Property, plant, and equipment, at cost, including partially-owned subsidiaries of $2,069.6 and $2,065.3
9,335.7

 
9,272.5

Less accumulated depreciation, including partially-owned subsidiaries of $540.5 and $527.7
(2,217.0
)
 
(2,161.9
)
 
7,118.7

 
7,110.6

Goodwill
208.8

 
208.8

Other assets
237.0

 
396.2

Total assets
$
9,002.9

 
$
8,701.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
208.5

 
$
203.9

Accrued liabilities
348.5

 
342.1

Debt:
 
 
 
Recourse
527.9

 
522.8

Non-recourse:
 
 
 
Wholly-owned subsidiaries
3,078.8

 
3,080.7

Partially-owned subsidiaries
1,263.5

 
1,278.4

 
4,870.2

 
4,881.9

Deferred income taxes
1,016.1

 
798.3

Other liabilities
93.5

 
96.3

Total liabilities
6,536.8

 
6,322.5

 
 
 
 
Preferred stock – 1.5 shares authorized and unissued

 

Common stock – 400.0 shares authorized
1.2

 
1.2

Capital in excess of par value
8.0

 

Retained earnings
2,321.0

 
2,182.9

Accumulated other comprehensive loss
(176.6
)
 
(153.1
)
Treasury stock
(37.2
)
 
(0.9
)
 
2,116.4

 
2,030.1

Noncontrolling interest
349.7

 
348.8

Total stockholders' equity
2,466.1

 
2,378.9

Total liabilities and stockholders' equity
$
9,002.9

 
$
8,701.4

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,
 
2020
 
2019
 
(in millions)
Operating activities:

 

Net income
$
162.3

 
$
30.1

Loss from discontinued operations, net of income taxes
0.2

 
1.1

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

Depreciation and amortization
66.9

 
67.5

Stock-based compensation expense
7.3

 
5.5

Provision for deferred income taxes
225.2

 
9.7

Net gains on railcar lease fleet sales owned more than one year at the time of sale
(8.7
)
 
(7.9
)
Gains on dispositions of property and other assets
(4.7
)
 
(2.1
)
Restructuring activities
5.2

 

Non-cash interest expense
3.7

 
3.6

Loss on early extinguishment of debt
5.0

 

Other
2.0

 

Changes in operating assets and liabilities:

 

(Increase) decrease in receivables
(37.8
)
 
(93.4
)
(Increase) decrease in income tax receivable
(374.4
)
 
24.3

(Increase) decrease in inventories
(8.6
)
 
(93.7
)
(Increase) decrease in other assets
159.4

 
4.3

Increase (decrease) in accounts payable
3.3

 
(14.8
)
Increase (decrease) in accrued liabilities
(30.8
)
 
(52.8
)
Increase (decrease) in other liabilities
(1.7
)
 
(6.2
)
Net cash provided by (used in) operating activities – continuing operations
173.8

 
(124.8
)
Net cash used in operating activities – discontinued operations
(0.2
)
 
(1.1
)
Net cash provided by (used in) operating activities
173.6

 
(125.9
)


 

Investing activities:

 

Proceeds from dispositions of property and other assets
9.8

 
7.3

Proceeds from railcar lease fleet sales owned more than one year at the time of sale
68.5

 
29.4

Capital expenditures – leasing, net of sold lease fleet railcars owned one year or less with a net cost of $42.5 and $12.5
(129.2
)
 
(465.0
)
Capital expenditures – manufacturing and other
(14.0
)
 
(11.5
)
Other
0.3

 
1.3

Net cash used in investing activities
(64.6
)
 
(438.5
)


 

Financing activities:

 

Payments to retire debt
(471.4
)
 
(214.8
)
Proceeds from issuance of debt
452.4

 
649.7

Shares repurchased
(35.4
)
 
(15.0
)
Dividends paid to common shareholders
(22.7
)
 
(17.3
)
Purchase of shares to satisfy employee tax on vested stock

 
(0.5
)
Distributions to noncontrolling interest

 
(0.4
)
Net cash provided by (used in) financing activities
(77.1
)
 
401.7

Net increase (decrease) in cash, cash equivalents, and restricted cash
31.9

 
(162.7
)
Cash, cash equivalents, and restricted cash at beginning of period
277.6

 
350.8

Cash, cash equivalents, and restricted cash at end of period
$
309.5

 
$
188.1

See accompanying notes to Consolidated Financial Statements.

6

Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements 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 and per common share amounts)
Balances at
December 31, 2019
119.7

 
$
1.2

 
$

 
$
2,182.9

 
$
(153.1
)
 
(0.1
)
 
$
(0.9
)
 
$
2,030.1

 
$
348.8

 
$
2,378.9

Net income

 

 

 
161.7

 

 

 

 
161.7

 
0.6

 
162.3

Other comprehensive (loss) income

 

 

 

 
(23.5
)
 

 

 
(23.5
)
 
0.3

 
(23.2
)
Cash dividends declared on common stock (1)

 

 

 
(24.6
)
 

 

 

 
(24.6
)
 

 
(24.6
)
Stock-based compensation expense

 

 
7.3

 

 

 

 

 
7.3

 

 
7.3

Shares repurchased

 

 

 

 

 
(1.9
)
 
(35.4
)
 
(35.4
)
 

 
(35.4
)
Other restricted share activity

 

 
0.7

 

 

 

 
(0.9
)
 
(0.2
)
 

 
(0.2
)
Cumulative effect of adopting new accounting standard

 

 

 
0.5

 

 

 

 
0.5

 

 
0.5

Other

 

 

 
0.5

 

 

 

 
0.5

 

 
0.5

Balances at
March 31, 2020
119.7

 
$
1.2

 
$
8.0

 
$
2,321.0

 
$
(176.6
)
 
(2.0
)
 
$
(37.2
)
 
$
2,116.4

 
$
349.7

 
$
2,466.1

 
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 and per common share amounts)
Balances at
   December 31, 2018
133.3

 
$
1.3

 
$
1.2

 
$
2,326.1

 
$
(116.8
)
 
(0.1
)
 
$
(1.0
)
 
$
2,210.8

 
$
351.2

 
$
2,562.0

Net income

 

 

 
30.6

 

 

 

 
30.6

 
(0.5
)
 
30.1

Other comprehensive (loss) income

 

 

 

 
(4.1
)
 

 

 
(4.1
)
 
0.3

 
(3.8
)
Cash dividends declared on common stock (1)

 

 

 
(22.3
)
 

 

 

 
(22.3
)
 

 
(22.3
)
Stock-based compensation expense

 

 
5.5

 

 

 

 

 
5.5

 

 
5.5

Shares repurchased

 

 
70.0

 

 

 
(3.5
)
 
(89.0
)
 
(19.0
)
 

 
(19.0
)
Other restricted share activity

 

 
0.6

 

 

 

 
(1.1
)
 
(0.5
)
 

 
(0.5
)
Distributions to noncontrolling interest

 

 

 

 

 

 

 

 
(0.4
)
 
(0.4
)
Cumulative effect of adopting new accounting standard

 

 

 
13.7

 

 

 

 
13.7

 

 
13.7

Other

 

 

 
(0.2
)
 

 

 

 
(0.2
)
 

 
(0.2
)
Balances at
   March 31, 2019
133.3

 
$
1.3

 
$
77.3

 
$
2,347.9

 
$
(120.9
)
 
(3.6
)
 
$
(91.1
)
 
$
2,214.5

 
$
350.6

 
$
2,565.1

(1) Dividends of $0.19 and $0.17 per common share for the three months ended March 31, 2020 and 2019, respectively.

See accompanying notes to Consolidated Financial Statements.

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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,” “our,” or "us") including the accounts of our wholly-owned subsidiaries and partially-owned subsidiaries, TRIP Rail Holdings LLC (“TRIP Holdings”) and RIV 2013 Rail Holdings LLC ("RIV 2013"), in which we have a controlling interest. In our opinion, all normal and recurring adjustments necessary for a fair presentation of our financial position as of March 31, 2020, and the results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019, have been made in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the 2020 presentation.
Due to seasonal and other factors, including the potential impacts of the coronavirus disease 2019 (“COVID-19”) pandemic and the related governmental response, the results of operations for the three months ended March 31, 2020 may not be indicative of expected results of operations for the year ending December 31, 2020. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with our audited Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2019.
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. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. Payments for our products and services are generally due within normal commercial terms. The following is a description of principal activities from which we generate our revenue, separated by reportable segments. See Note 3 for a further discussion regarding our reportable segments.
Railcar Leasing and Management Services Group
In our Railcar Leasing and Management Services Group ("Leasing Group"), revenue from rentals and operating leases, including contracts that contain non-level fixed lease payments, is recognized monthly on a straight-line basis. Leases not classified as operating leases are generally considered sales-type leases as a result of an option to purchase.
We review our operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the lessee’s payment history, the financial condition of the lessee, and business and economic conditions in the industry in which the lessee operates. In the event that the collectibility of a receivable with respect to any lessee is no longer probable, we de-recognize the revenue and related receivable and recognize future revenue only when the lessee makes a rental payment. Contingent rents are recognized when the contingency is resolved.
Selling profit or loss associated with sales-type leases is recognized upon lease commencement, and a net investment in the sales-type lease is recorded on the Consolidated Balance Sheet. Interest income related to sales-type leases is recognized over the lease term using the effective interest method. We had no sales-type leases as of March 31, 2020.
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 and management agreements is recognized as each performance period occurs.
We account for shipping and handling costs as activities to fulfill the promise to transfer the goods; as such, these fees are recorded in revenue. The fees and costs of shipping and handling activities are accrued when the related performance obligation has been satisfied.

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Table of Contents

Rail Products Group
Our railcar manufacturing business recognizes revenue when the customer has submitted its certificate of acceptance and legal title of the railcar has passed to the customer. Certain contracts for the sales of railcars include price adjustments based on steel-price indices; this amount represents variable consideration for which we are unable to estimate the final consideration until the railcar is delivered.
Within our maintenance services business, revenue is recognized over time as repair and maintenance projects are completed, using an input approach based on the costs incurred relative to the total estimated costs of performing the project. We recorded contract assets of $9.3 million and $5.2 million as of March 31, 2020 and December 31, 2019, respectively, related to unbilled revenues recognized on repair and maintenance services that have been performed, but for which the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within the Receivables, net of allowance line in our Consolidated Balance Sheets.
All Other
Our highway products business recognizes revenue when shipment has occurred and legal title of the product has passed to the customer.
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, 2020 and the percentage of the outstanding performance obligations as of March 31, 2020 expected to be delivered during the remainder of 2020:
 
Unsatisfied performance obligations at March 31, 2020
 
Total
Amount
 
Percent expected to be delivered in 2020
 
(in millions)
 
 
Rail Products Group:
 
 
 
Products:
 
 
 
External Customers
$
976.1

 
 
Leasing Group
581.7

 
 
 
$
1,557.8

 
53
%
 
 
 
 
Maintenance Services
$
20.0

 
92
%
 
 
 
 
Railcar Leasing and Management Services Group
$
102.4

 
12
%

The remainder of the unsatisfied performance obligations for the Rail Products Group is expected to be delivered through 2023. 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 through 2029.

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Table of Contents

Lease Accounting
Lessee
We are the lessee of operating leases predominantly for railcars, as well as office buildings, manufacturing equipment, and office equipment. Our operating leases have remaining lease terms ranging from one year to forty years, some of which include options to extend for up to five years, and some of which include options to terminate within one year. As of March 31, 2020, we had no finance leases in which we were the lessee.
The following table summarizes the impact of our operating leases on our Consolidated Financial Statements (in millions, except lease term and discount rate):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Consolidated Statement of Operations
 
 
 
Operating lease expense
$
3.9

 
$
5.2

Short-term lease expense
$
0.2

 
$
1.4

 
 
 
 
 
March 31, 2020
 
December 31, 2019
Consolidated Balance Sheet
 
 
 
Right-of-use assets (1)
$
42.6

 
$
44.2

Lease liabilities (2)
$
43.4

 
$
44.8

 
 
 
 
Weighted average remaining lease term
4.6 years

 
4.8 years

Weighted average discount rate
4.1
%
 
4.1
%
 
 
 
 
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Consolidated Statement of Cash Flows
 
 
 
Cash flows from operating activities
$
3.9

 
$
5.2

Right-of-use assets recognized in exchange for new lease liabilities
$
2.1

 
$

(1) Included in other assets in our Consolidated Balance Sheet
(2) Included in other liabilities in our Consolidated Balance Sheet
Future contractual minimum operating lease liabilities will mature as follows (in millions):
 
Leasing Group
 
Non-Leasing Group (1)
 
Total
Remaining nine months of 2020
$
7.8

 
$
3.0

 
$
10.8

2021
8.5

 
3.0

 
11.5

2022
7.8

 
2.8

 
10.6

2023
5.9

 
2.5

 
8.4

2024
2.7

 
1.3

 
4.0

Thereafter
1.8

 
2.9

 
4.7

Total operating lease payments
$
34.5

 
$
15.5

 
$
50.0

Less: Present value adjustment
 
 
 
 
(6.6
)
Total operating lease liabilities

 
 
 
$
43.4


(1) Excludes approximately $77.9 million of legally binding minimum operating lease liabilities for a lease that has been signed but has not yet commenced for the relocation of our corporate headquarters. See Note 10 for more information.
Lessor
Our Leasing Group enters into railcar operating leases with third parties with terms generally ranging between one year and ten years, although certain leases entered into in prior periods had lease terms of up to twenty years. The majority of our fleet operates on leases that earn fixed monthly lease payments. Generally, lease payments are due at the beginning of the applicable month. A portion of our fleet operates on per diem leases that earn usage-based variable lease payments. Some of our leases include options to extend the leases for up to five years, and a small percentage of our leases include options to terminate within one year with certain notice requirements and early termination penalties.

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Table of Contents

Leases previously classified as sales-type leases included an option for the lessee to purchase the leased railcars with certain notice. During the three months ended March 31, 2020, the lessee exercised its option to purchase the leased railcars. As of March 31, 2020, non-Leasing Group operating leases were not significant, and we had no sales-type leases and no direct finance leases.
We manage risks associated with residual values of leased railcars by investing across a diverse portfolio of railcar types, staggering lease maturities within any given railcar type, avoiding concentration of railcar type and industry, and participating in active secondary markets. Additionally, our lease agreements contain normal wear and tear return condition provisions and high mileage thresholds designed to protect the value of our residual assets. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
The following table summarizes the impact of our leases on our Consolidated Statement of Operations (in millions):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Operating lease revenues
$
172.2

 
$
179.2

Variable operating lease revenues
$
12.6

 
$
10.8

Interest income on sales-type lease receivables
$
1.7

 
$



Future contractual minimum revenues for operating leases will mature as follows (in millions):
Remaining nine months of 2020
$
446.5

2021
482.1

2022
376.3

2023
268.8

2024
183.7

Thereafter
330.8

Total
$
2,088.2


(1) Total contractual minimum rental revenues on operating leases relates to our wholly-owned and partially-owned subsidiaries and sub-lease rental revenues associated with the Leasing Group's operating lease obligations.
Financial Instruments
We consider 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.
Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments including restricted cash and receivables. We place our cash investments in bank deposits and investment grade, short-term debt instruments and limit the amount of credit exposure to any one commercial issuer. The carrying values of cash, receivables, and accounts payable are considered to be representative of their respective fair values.
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 our customer base, and their dispersion across different end markets and geographic areas. Receivables are generally evaluated at a portfolio level based on these characteristics. As receivables are generally unsecured, we maintain an allowance for credit losses using a forward-looking approach based on historical expected losses and consideration of current and expected future economic conditions. Historically, we have observed that the likelihood of loss increases when receivables have aged beyond 180 days. When a receivable is deemed uncollectible, the write-off is recorded as a reduction to allowance for credit losses. During the three months ended March 31, 2020, we recognized approximately $1.2 million of credit loss expense related to our in-scope receivables, bringing the allowance for credit losses balance at March 31, 2020 to $6.7 million. This balance excludes the general reserve for operating lease receivables that is permitted under ASC 842.


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Table of Contents

Property, Plant, and Equipment
In early 2020, we finalized an assessment of the estimated useful lives and salvage value assumptions for the railcars in our lease fleet. Based upon analysis of historical fleet data, review of industry standards, and consideration of certain economic factors by railcar type, we determined that it was appropriate to revise the useful lives and salvage values of certain railcar types in our lease fleet. The net impact of these changes, which took effect January 1, 2020, resulted in a change in the weighted average useful life from approximately 34 years to approximately 37 years. This change was accounted for as a change in accounting estimate, which is required to be accounted for on a prospective basis. This change in estimate resulted in a decrease in depreciation expense and an increase in income from continuing operations of approximately $7.7 million, as well as an increase in net income of approximately $5.9 million for the three months ended March 31, 2020. Further, basic and diluted earnings per share increased $0.05 per share for the three months ended March 31, 2020, respectively.
Goodwill
As of March 31, 2020 and December 31, 2019, the carrying amount of our goodwill totaled $208.8 million, which is primarily attributable to the Rail Products Group.
Warranties
We provide various express, limited product warranties that generally range from one year to five years depending on the product. The warranty costs are estimated using a two-step approach. First, an engineering estimate is made for the cost of all claims that have been asserted by customers. Second, based on historical claims experience, a cost is accrued for all products still within a warranty period for which no claims have been filed. We provide for the estimated cost of product warranties at the time revenue is recognized related to products covered by warranties and assess the adequacy of the resulting reserves on a quarterly basis. The changes in the accruals for warranties for the three months ended March 31, 2020 and 2019 are as follows:
 
Three Months Ended
March 31,
 
2020
 
2019
 
(in millions)
Beginning balance
$
8.1

 
$
7.4

Warranty costs incurred
(0.9
)
 
(0.9
)
Warranty originations and revisions
0.6

 
0.7

Warranty expirations
(0.1
)
 
(0.1
)
Ending balance
$
7.7

 
$
7.1


Recent Accounting Pronouncements
Adopted in 2020
ASU 2016-13 In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments," which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This approach may result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses," which excludes operating lease receivables from the scope of ASU 2016-13. ASU 2016-13 is effective for public companies during interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.
We adopted ASU 2016-13 effective January 1, 2020 using a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2020. Therefore, comparative financial information was not adjusted. We assessed our outstanding receivables by reportable segment and determined the expected loss rate using historical loss information and aging considerations, as well as the current and future economic conditions of our customer base and the end markets in which they operate. The Leasing Group's outstanding receivables primarily relate to their servicing and management agreements. The method for evaluating the Leasing Group's operating lease receivables remained unchanged by ASU 2016-13. The Rail Products Group's outstanding receivables primarily relate to amounts due on manufactured railcars, as well as completed repairs and maintenance projects. Upon adoption, we recorded an adjustment to opening retained earnings of approximately $0.7 million ($0.5 million, net of tax). The ongoing application of ASU 2016-13 is not expected to materially impact our results of operations, financial position, or cash flows.

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Table of Contents

ASU 2018-15 In August 2018, the FASB issued ASU No. 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 is effective for public companies during interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We adopted ASU 2018-15 effective January 1, 2020 on a prospective basis. Beginning January 1, 2020, capitalized implementation costs are included within other assets in the Consolidated Balance Sheet and are depreciated within selling, general, and administrative expenses in the Consolidated Statement of Operations. The adoption did not have a significant impact on our Consolidated Financial Statements.
ASU 2020-04 In March 2020, the FASB issued ASU No. 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to accounting guidance on contract modifications and hedge accounting to ease the potential financial reporting burdens as the market transitions from the London Interbank Offered Rate ("LIBOR") to alternative reference rates. ASU 2020-04 was effective upon issuance. ASU 2020-04 is in response to the July 2017 announcement by United Kingdom's Financial Conduct Authority, which regulates the LIBOR, that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. We currently have LIBOR-based contracts that extend beyond 2021 including derivative instruments, promissory notes for Trinity Rail Leasing 2017, LLC, a Delaware limited liability company and a limited purpose, indirect wholly-owned subsidiary of the Company owned through Trinity Industries Leasing Company (“TILC”), TILC's warehouse loan facility, and our revolving credit facility. The adoption did not have a significant impact on our Consolidated Financial Statements.

13

Table of Contents

Note 2. Derivative Instruments and Fair Value Accounting
Derivative Instruments
We 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 by recording the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive loss ("AOCL") as a separate component of stockholders' equity and reclassified into earnings in the period during which the hedged transaction affects earnings. We continuously monitor our derivative positions and the credit ratings of our counterparties and do not anticipate losses due to non-performance. See Note 7 for a description of our debt instruments.
Interest Rate Hedges
 
 
 
 
 
Included in accompanying balance sheet
at March 31, 2020
 
Notional Amount
 
Interest Rate (1)
 
Asset/(Liability)
 
AOCL – loss/(income)
 
Noncontrolling Interest
 
(in millions, except %)
Expired hedges:
 
 
 
 
 
 
 
 
 
2018 secured railcar equipment notes
$
249.3

 
4.41
%
 
$

 
$
1.0

 
$

TRIP Holdings warehouse loan
$
788.5

 
3.60
%
 
$

 
$
2.0

 
$
2.7

TRIP Master Funding secured railcar equipment notes
$
34.8

 
2.62
%
 
$

 
$
0.1

 
$
0.1

2017 promissory notes - interest rate cap
$
169.3

 
3.00
%
 
$

 
$
(0.6
)
 
$

Open hedge:
 
 
 
 
 
 
 
 
 
2017 promissory notes - interest rate swap
$
563.6

 
2.68
%
 
$
(51.5
)
 
$
51.1

 
$

(1) Weighted average fixed interest rate, except for the interest rate cap on the 2017 promissory notes.
 
Effect on interest expense-increase/(decrease)
 
Three Months Ended
March 31,
 
Expected effect during next twelve months(1)
 
2020
 
2019
 
 
(in millions)
Expired hedges:
 
 
 
 
 
2006 secured railcar equipment notes (2)
$
(0.1
)
 
$

 
$

2018 secured railcar equipment notes
$
0.1

 
$
0.1

 
$
0.2

TRIP Holdings warehouse loan
$
0.5

 
$
0.5

 
$
2.0

TRIP Master Funding secured railcar equipment notes
$
0.1

 
$
0.1

 
$
0.1

2017 promissory notes - interest rate cap
$

 
$

 
$
(0.1
)
Open hedge:
 
 
 
 
 
2017 promissory notes - interest rate swap
$
1.7

 
$
0.6

 
$
6.8

(1) Based on the fair value of open hedges as of March 31, 2020.
(2) Upon settlement of the debt in March 2020, the remaining balance of $0.1 million in AOCL was recognized through interest expense. See Note 7 for additional information on the debt redemption.
Other Derivatives
 
 
 
Included in accompanying balance sheet at March 31, 2020
 
Effect on cost of revenues –increase/(decrease)
 
Notional
Amount
 
Asset/(Liability)
 
AOCL –
loss/(income)
 
Three Months Ended
March 31, 2020
 
Expected effect during next twelve months(1)
 
(in millions)
Foreign currency hedge
$
35.0

 
$
(6.7
)
 
$
7.6

 
$
(0.8
)
 
$
7.6

(1) Based on the fair value of open hedges as of March 31, 2020.

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Table of Contents

Our exposure related to foreign currency and commodity transactions is currently hedged for up to a maximum of twelve months. The effect of commodity hedge transactions was immaterial to the Consolidated Financial Statements for all periods presented herein.
Fair Value Measurements
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. Our cash equivalents and restricted cash are instruments of the U.S. Treasury or highly-rated money market mutual funds. The assets measured as Level 1 in the fair value hierarchy are summarized below:
 
Level 1
 
March 31, 2020
 
December 31, 2019
 
(in millions)
Assets:
 
 
 
Cash equivalents
$
104.4

 
$
57.9

Restricted cash
96.3

 
111.4

Total assets
$
200.7

 
$
169.3


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. Interest rate hedges are valued at exit prices obtained from each counterparty. Foreign currency hedges are valued at exit prices obtained from each counterparty, which are based on currency spot and forward rates and forward points. The assets and liabilities measured as Level 2 in the fair value hierarchy are summarized below:
 
Level 2
 
March 31, 2020
 
December 31, 2019
 
(in millions)
Assets:
 
 
 
Foreign currency hedge (1)
$

 
$
1.2

Total assets
$

 
$
1.2

 
 
 
 
Liabilities:
 
 
 
Interest rate hedge (2)
$
51.5

 
$
28.0

Foreign currency hedge (2)
6.7

 

Total liabilities
$
58.2

 
$
28.0

(1) Included in other assets in our Consolidated Balance Sheets.
(2) Included in accrued liabilities in our Consolidated Balance Sheets.

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. As of March 31, 2020 and December 31, 2019, we have no assets measured as Level 3 in the fair value hierarchy, except as described in Note 10 to this Form 10-Q and Note 10 to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K.
See Note 7 for the estimated fair values of our debt instruments. The fair values of all other financial instruments are estimated to approximate carrying value.


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Table of Contents

Note 3. Segment Information
We report our operating results in three principal business segments: (1) the Railcar Leasing and Management Services Group, which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services; (2) the Rail 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 the Rail Products Group. The prior period results have been recast to reflect these changes and present results on a comparable basis.
Gains and losses from the sale of property, plant, and equipment are included in the operating profit of each respective segment. Our Chief Operating Decision Maker ("CODM") regularly reviews the operating results of our reportable segments in order to assess performance and allocate resources. Our CODM does not consider restructuring activities when evaluating segment operating results; therefore, restructuring activities are not allocated to segment profit or loss.
Sales and related net profits ("deferred profit") from the Rail Products Group to the Leasing Group are recorded in the Rail Products Group and eliminated in consolidation and are reflected in "Eliminations Lease Subsidiary" in the tables 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 our 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 (in millions). We operate principally in North America.
 
Three Months Ended March 31, 2020
 
Railcar Leasing and Management Services Group
 
Rail Products Group
 
All Other
 
Corporate
 
Eliminations  Lease Subsidiary
 
Eliminations  Other
 
Consolidated Total
External Revenue
$
236.1

 
$