Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements of Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,” “Company,” “we,” “our,” or "us") include 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 we have a controlling interest. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the 2022 presentation.
Sale of Highway Products Business
In the fourth quarter of 2021, the Company completed the sale of Trinity Highway Products, LLC (“THP”), a wholly-owned subsidiary of the Company, and certain direct and indirect subsidiaries of THP, to Rush Hour Intermediate II, LLC ("Rush Hour"), an entity owned by an affiliated investment fund of Monomoy Capital Partners, for an aggregate purchase price of $375.0 million. A final working capital adjustment was recorded in the second quarter of 2022.
We concluded that the sale of THP represented a strategic shift that would have a major effect on the Company’s operations and financial results. Accordingly, we have presented the operating results and cash flows of THP as discontinued operations for all periods in this 2022 Annual Report on Form 10-K. Results of prior periods have been recast to reflect these changes and present results on a comparable basis. See Note 2 for further information related to the sale of THP.
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 4 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 derecognize 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 in the Consolidated Balance Sheets. Interest income related to sales-type leases is recognized over the lease term using the effective interest method. See "Lease Accounting" below for additional information regarding sales-type leases as of December 31, 2022. We had no sales-type leases as of December 31, 2021.
During the fourth quarter of 2020, we began presenting sales from our lease fleet in the Leasing Group on a net basis regardless of the age of railcar that is sold. Historically, in accordance with ASC 606, Revenue from contracts with customers, we presented sales of railcars from the lease fleet on a gross basis in Revenues – Leasing and Cost of revenues – Leasing in our Consolidated Statements of Operations if the railcars had 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 had historically been presented as a net gain or loss from the disposal of a long-term asset. We now report all sales of railcars from the lease fleet as a net gain or loss from the disposal of a long-term asset in accordance with ASC 610-20, Gains and losses from the derecognition of non-financial assets. These sales are presented in the Lease portfolio sales line in our Consolidated Statements of Operations; however, because this change in presentation was effected on a prospective basis beginning in the fourth quarter of 2020, lease portfolio sales for the year ended December 31, 2020 only include sales of railcars from the lease fleet owned for more than one year. There were no lease portfolio sales during the fourth quarter of 2020. We have concluded that this presentation is appropriate given the significant change in the strategic focus of the Company. The presentation change had no effect on the Company’s operating profit, net income, earnings per share, or Consolidated Balance Sheet.
We account for shipping and handling costs as activities to fulfill the promise to transfer the good; 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.
Rail Products Group
Our railcar manufacturing business recognizes revenue related to new railcars 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 changes to input costs; this amount represents variable consideration for which we are unable to estimate the final consideration until the railcar is delivered.
Revenue is recognized over time as repair and maintenance projects and sustainable railcar conversions 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 $2.9 million and $4.5 million as of December 31, 2022 and 2021, respectively, related to unbilled revenues recognized on repair and maintenance services and sustainable railcar conversions 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.
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 December 31, 2022 and the percentage of the outstanding performance obligations as of December 31, 2022 expected to be delivered during 2023:
| | | | | | | | | | | |
| Unsatisfied performance obligations at December 31, 2022 |
| Total Amount | | Percent expected to be delivered in 2023 |
| (in millions) | | |
Rail Products Group: | | | |
New railcars: | | | |
External customers (1) | $ | 3,444.1 | | | |
Leasing Group | 458.9 | | | |
| $ | 3,903.0 | | | 48.5 | % |
Sustainable railcar conversions | $ | 166.5 | | | 73.5 | % |
| | | |
| | | |
Railcar Leasing and Management Services Group | $ | 75.5 | | | 20.4 | % |
(1) Unsatisfied performance obligations at December 31, 2022 include 15,000 railcars expected to be delivered through 2028, valued at approximately $1.8 billion, associated with a new long-term railcar supply agreement with GATX Corporation.
The remainder of the unsatisfied performance obligations for the Rail Products Group is expected to be delivered through 2028. The orders in the Rail Products Group's backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may choose to change their procurement decision.
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.
Lease Accounting
Lessee
We are the lessee of operating leases predominantly for office buildings and railcars, as well as manufacturing equipment and office equipment. Our operating leases have remaining lease terms ranging from one year to fourteen 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 December 31, 2022, we had no material finance leases in which we were the lessee. Certain of our operating leases include lease incentives, which reduce the right-of-use asset and are recognized on a straight-line basis over the lease term. As applicable, the lease liability is also reduced by the amount of lease incentives that have not yet been reimbursed by the lessor.
The following table summarizes the impact of our operating leases on our Consolidated Financial Statements (in millions, except lease term and discount rate):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Consolidated Statement of Operations | | | | | |
Operating lease expense | $ | 18.2 | | | $ | 15.2 | | | $ | 15.1 | |
Short-term lease expense | $ | 0.4 | | | $ | 0.2 | | | $ | 2.1 | |
| | | | | |
Consolidated Statement of Cash Flows | | | | | |
Cash flows from operating activities | $ | 18.2 | | | $ | 15.2 | | | $ | 15.1 | |
Right-of-use assets recognized in exchange for new lease liabilities (1) | $ | 28.8 | | | $ | 23.0 | | | $ | 54.5 | |
| | | | | |
| | | December 31, 2022 | | December 31, 2021 |
Consolidated Balance Sheet | | | | | |
Right-of-use assets (2) | | | $ | 93.1 | | | $ | 82.8 | |
Lease liabilities (3) | | | $ | 114.8 | | | $ | 106.3 | |
Weighted average remaining lease term | | | 9.9 years | | 10.8 years |
Weighted average discount rate | | | 2.8 | % | | 3.0 | % |
(1) Includes the commencement of the new headquarters facility for the year ended December 31, 2020.
(2) Included in other assets in our Consolidated Balance Sheets.
(3) Included in other liabilities in our Consolidated Balance Sheets.
Future contractual minimum operating lease liabilities will mature as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Leasing Group | | Non-Leasing Group | | Total |
2023 | $ | 12.0 | | | $ | 8.9 | | | $ | 20.9 | |
2024 | 8.1 | | | 7.7 | | | 15.8 | |
2025 | 6.0 | | | 7.0 | | | 13.0 | |
2026 | 5.7 | | | 6.6 | | | 12.3 | |
2027 | 5.3 | | | 6.5 | | | 11.8 | |
Thereafter | 3.5 | | | 56.4 | | | 59.9 | |
Total operating lease payments | $ | 40.6 | | | $ | 93.1 | | | $ | 133.7 | |
Less: Present value adjustment | | | | | (18.9) | |
| | | | | |
Total operating lease liabilities | | | | | $ | 114.8 | |
Lessor
Our Leasing Group enters into railcar operating leases with third parties with terms generally ranging between one year and ten 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 early termination options with certain notice requirements and early termination penalties. As of December 31, 2022, non-Leasing Group operating leases were not significant, and we had 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 actively participating in 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 in our Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating lease revenues | $ | 679.4 | | | $ | 652.5 | | | $ | 671.4 | |
Variable operating lease revenues | $ | 60.3 | | | $ | 54.2 | | | $ | 51.0 | |
| | | | | |
Interest income on sales-type lease receivables | $ | 0.7 | | | $ | — | | | $ | — | |
Profit recognized at sales-type lease commencement (1) | $ | 1.3 | | | $ | — | | | $ | — | |
(1) Included in gains on dispositions of property – lease portfolio sales on our Consolidated Statements of Operations.
Future contractual minimum revenues for operating leases will mature as follows (in millions)(1):
| | | | | |
2023 | $ | 596.2 | |
2024 | 472.6 | |
2025 | 369.7 | |
2026 | 264.6 | |
2027 | 175.5 | |
Thereafter | 265.1 | |
Total | $ | 2,143.7 | |
(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.
Future contractual minimum lease receivables for sales-type leases will mature as follows (in millions):
| | | | | |
2023 | $ | 1.1 | |
2024 | 1.1 | |
2025 | 1.1 | |
2026 | 1.1 | |
2027 | 1.1 | |
Thereafter | 10.1 | |
Total | 15.6 | |
Less: Unearned interest income | (5.0) | |
Net investment in sales-type leases (1) | $ | 10.6 | |
(1) Included in other assets in our Consolidated Balance Sheets.
Income Taxes
The liability method is used to account for income taxes. Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases and other attributes using currently enacted tax laws and tax rates. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized.
We regularly evaluate the likelihood of realization of tax benefits derived from positions we have taken in various federal and state filings after consideration of all relevant facts, circumstances, and available information. For those tax positions that are deemed more likely than not to be sustained, we recognize the benefit we believe is cumulatively greater than 50% likely to be realized. To the extent that we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, the effective tax rate in a given financial statement period could be materially impacted.
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, investment grade, short-term debt instruments, and highly-rated commercial paper. We 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 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 year ended December 31, 2022, we recognized approximately $2.0 million of credit loss expense and wrote off $1.9 million related to our trade receivables that are in scope of ASC 326, Financial Instruments – Credit Losses, bringing the allowance for credit losses balance from $10.5 million at December 31, 2021 to $10.6 million at December 31, 2022. This balance excludes the general reserve for operating lease receivables that is permitted under ASC 450, Contingencies.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined principally on the first in first out method. Work in process and finished goods include material, labor, and overhead.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. The costs of ordinary maintenance and repair are charged to operating costs. The estimated useful lives are as follows:
| | | | | |
Buildings and improvements | 5 – 30 years |
Leasehold improvements | Generally over the term of the lease |
Machinery and equipment | Generally 3 – 12 years |
Information systems hardware and software | 3 – 5 years |
Railcars in our lease fleet | Generally 35 – 40 years |
Impairment of Long-lived Assets
We periodically evaluate the carrying value of long-lived assets for potential impairment. The carrying value of long-lived assets is considered impaired when their carrying value is not recoverable through undiscounted future cash flows and the fair value of the assets is less than their carrying value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved or market quotes as available. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced by the estimated cost to dispose of the assets. During the year ended December 31, 2020, we recorded impairments of long-lived assets totaling $396.4 million, which included $369.4 million related to our small cube covered hopper railcars, $15.2 million related to the planned divestiture of certain non-strategic maintenance facilities, and $11.8 million related to investments in certain emerging technologies. See Note 11 for more information, including a description of the key assumptions and other significant management judgments utilized in these impairment analyses. Based on our evaluations, no impairment charges were determined to be necessary on assets held and used as of December 31, 2022 and 2021.
Assets Held for Sale
We classify our facilities as assets held for sale at the time management commits to a plan to sell the facility, and the sale is expected to be completed within one year. Assets held for sale are recorded at fair value, less any costs to sell, and are no longer subject to depreciation. As of December 31, 2022 and 2021, assets held for sale totaling $6.6 million and $6.2 million, respectively, are included in the other assets line of our Consolidated Balance Sheets.
Goodwill and Intangible Assets
Goodwill is required to be tested for impairment at least annually, or on an interim basis if events or circumstances change indicating that the carrying amount of the goodwill might be impaired. We have the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment assessment. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company will perform the quantitative impairment test. We can also elect to forgo the qualitative assessment and perform the quantitative test. The quantitative goodwill impairment test compares the reporting unit's estimated fair value with the carrying amount of its net assets. An impairment is recognized if the reporting unit's recorded net assets exceed its fair value. Impairment is assessed at the reporting unit level by applying a fair value-based test for each unit with recorded goodwill. The estimates and judgments that most significantly affect the fair value calculations are assumptions, consisting of Level 3 inputs, related to revenue and operating profit results, discount rates, terminal growth rates and exit multiples. As of December 31, 2022 and 2021, our annual impairment test of goodwill was completed at the reporting unit level, and no impairment charges were determined to be necessary.
Goodwill by segment is as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (in millions) |
Railcar Leasing and Management Services Group | $ | 7.1 | | | $ | 1.8 | |
Rail Products Group | 188.8 | | | 152.4 | |
| $ | 195.9 | | | $ | 154.2 | |
The net book value of intangible assets totaled $79.0 million and $28.1 million as of December 31, 2022 and 2021, respectively, which are primarily finite-lived intangible assets amortized over their estimated useful lives, ranging from one year to fifteen years. See Note 2 for further information regarding the changes in the carrying amounts of our goodwill and intangible assets related to acquisition activity for the year ended December 31, 2022. Based on our evaluations of intangible assets, no impairment charges were determined to be necessary as of December 31, 2022 and 2021.
Restricted Cash
Restricted cash consists of cash and cash equivalents held either as collateral for our non-recourse debt and lease obligations or as security for the performance of certain product sales agreements. As such, they are restricted in use.
Investments in Affiliates
We continuously evaluate our investments and other contractual arrangements with third party entities to determine if our variable interests are considered a variable interest entity ("VIE"). Consolidation is required for VIEs in which we are the primary beneficiary. We have determined that we are the primary beneficiary for TRIP Holdings and RIV 2013. At December 31, 2022, the carrying value of our investment in TRIP Holdings and RIV 2013 totaled $136.1 million. See Note 5 for further information regarding our partially-owned leasing subsidiaries.
Insurance
We are effectively self-insured for workers' compensation and employee health care claims. A third party administrator is used to process claims. We accrue our workers' compensation and group medical liabilities based upon independent actuarial studies. These liabilities are calculated based upon loss development factors, which contemplate a number of variables, including claims history and expected trends.
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 years ended December 31, 2022, 2021, and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Beginning balance | $ | 3.1 | | | $ | 11.3 | | | $ | 7.5 | |
Warranty costs incurred | (2.7) | | | (7.4) | | | (2.0) | |
Warranty originations and revisions | 3.2 | | | 0.1 | | | 6.0 | |
Warranty expirations | (0.3) | | | (0.9) | | | (0.2) | |
Ending balance | $ | 3.3 | | | $ | 3.1 | | | $ | 11.3 | |
Foreign Currency Transactions
The functional currency of our Mexico operations is the United States dollar. Certain transactions in Mexico occur in currencies other than the United States dollar. The impact of foreign currency fluctuations on these transactions is recorded in other, net (income) expense in our Consolidated Statements of Operations.
Other Comprehensive Income (Loss)
Other comprehensive net income (loss) consists of foreign currency translation adjustments, unrealized gains and losses on our derivative financial instruments, and the net actuarial gains and losses of our defined benefit plans, the sum of which, together with net income (loss), constitutes comprehensive income (loss). See Note 12. All components are shown net of tax.
Recent Accounting Pronouncements
ASU 2022-04 – In September 2022, the FASB issued ASU No. 2022-04, "Disclosure of Supplier Finance Program Obligations," which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose information about the key terms of these programs, outstanding amounts as of the end of the reporting period, a description of where in the financial statements outstanding amounts are presented, and a rollforward of these obligations. ASU 2022-04 is effective for public companies during interim and annual reporting periods beginning after December 15, 2022 and is to be adopted on a retrospective basis, except for the disclosure of rollforward information, which is effective for public companies during interim and annual reporting periods beginning after December 15, 2023 and is to be adopted on a prospective basis. Early adoption is permitted. We adopted ASU 2022-04 effective January 1, 2023. The adoption did not have a significant impact on our Consolidated Financial Statements.
Management's Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2. Acquisitions and Discontinued Operations
Acquisition of Holden America
On December 30, 2022, we acquired Holden America ("Holden"), a manufacturer of market-leading multi-level vehicle securement and protection systems, gravity-outlet gates, and gate accessories for freight rail in North America. The total cash funded at closing was $71.4 million, which, when combined with potential additional future consideration valued at $15.7 million, resulted in total consideration of $87.1 million.
The purchase agreement includes minimum additional consideration of $10.0 million, which is payable in installments of $5.0 million per year for the next two years. The purchase agreement also contains a provision whereby additional consideration could become payable based on the achievement of certain revenue targets, up to a maximum payout of $10.0 million. The total additional consideration, which is included in other liabilities in our Consolidated Balance Sheets, had an initial estimated fair value of $15.7 million and will be remeasured at each reporting period, with the change in fair value recognized within selling, engineering, and administrative expenses in the Consolidated Statements of Operations.
This transaction was recorded as a business combination within the Rail Products Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The fair values of the assets acquired and liabilities assumed are considered preliminary and are subject to adjustment as additional information is obtained and reviewed. The final allocation of the purchase price may differ from the preliminary allocation based on completion of the valuation. We expect to finalize the purchase price allocation within the measurement period, which will not exceed one year from the acquisition date.
Based on our preliminary purchase price allocation, we recorded identifiable intangible assets of $45.9 million, comprised of customer relationships, patents, trade name and backlog; goodwill of $36.4 million; and certain other immaterial assets, net of liabilities, totaling $4.8 million. The identifiable intangible assets, with the exception of the trade name, which will be considered an indefinite-lived intangible asset, will be amortized over their estimated useful lives, ranging from 1 year to 15 years. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of intangible assets, goodwill and certain other immaterial assets and liabilities.
Other Acquisitions
In June 2022, the Leasing Group acquired a portfolio of railcars for $132.1 million in cash. This transaction was recorded as an asset acquisition within the Leasing Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. As a result of the purchase transaction, the Leasing Group acquired approximately 3,800 railcars, substantially all of which are currently under lease to third parties. We recorded acquired railcars of $125.0 million, lease-related intangible assets of $7.8 million, and certain other immaterial assets and liabilities in our Consolidated Balance Sheet as of the purchase date.
In May 2022, we completed the acquisition of a company that owns and operates an end-to-end rail logistics software platform providing a real-time data universe to freight rail shippers and operators. This transaction was recorded as a business combination within the Leasing Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The acquisition did not have a significant impact on our Consolidated Financial Statements. Based on our preliminary purchase price allocation, we recorded intellectual property of $5.2 million, which will be amortized over five years, goodwill of $5.3 million, and certain other immaterial assets and liabilities.
In January 2021, we completed the acquisition of a company that owns and operates proprietary railcar cleaning technology systems. This transaction was recorded as a business combination within the Rail Products Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The acquisition did not have a significant impact on our Consolidated Financial Statements. This transaction resulted in goodwill of $7.0 million and intellectual property of $11.3 million, which will be amortized over fifteen years.
Sale of Highway Products Business
In the fourth quarter of 2021, we completed the sale of our highway products business, THP. The sale closed on December 31, 2021, and we received net proceeds of approximately $364.7 million, after certain adjustments and closing costs. During the year ended December 31, 2022, we recorded a loss on sale of discontinued operations of $5.8 million ($4.4 million, net of income taxes), which included a $2.7 million payment to Rush Hour representing a final working capital adjustment, as well as additional transaction costs incurred during the period. We concluded that the sale of THP represented a strategic shift that will have a major effect on the Company’s operations and financial results. Accordingly, we have presented the operating results and cash flows of THP as discontinued operations for all periods in this 2022 Annual Report on Form 10-K.
In connection with the sale, Trinity and Rush Hour entered into various agreements to effect the transaction and provide a framework for their relationship after the separation, including a purchase and sale agreement, a transition services agreement, and a lease agreement. The transition services have various durations ranging between one and eighteen months. We determined that the continuing cash flows generated by these agreements did not constitute significant continuing involvement in the operations of THP. The amount billed for transition services was not material to our results of operations for the year ended December 31, 2022. Additionally, in connection with the sale of THP, the Company has agreed to indemnify Rush Hour for certain liabilities related to the highway products business, including certain liabilities resulting from or arising out of the ET-Plus® System, a highway guardrail end-terminal system (the “ET Plus”). Consequently, results from discontinued operations below include certain legal expenses that were directly attributable to the highway products business, which were previously reported in continuing operations. Expenses related to these retained obligations incurred during the year ended December 31, 2022 were, and similar expenses that may be incurred in the future will likewise be, reported in discontinued operations. See Note 15 for further information regarding obligations retained in connection with the THP sale.
The following is a summary of THP's operating results included in income (loss) from discontinued operations for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Revenues | $ | — | | | $ | 296.5 | | | $ | 249.7 | |
Cost of revenues | — | | | 216.6 | | | 178.7 | |
Selling, engineering, and administrative expenses | 21.4 | | | 65.3 | | | 41.2 | |
Restructuring activities | — | | | — | | | 0.1 | |
Other income | — | | | — | | | (0.3) | |
Income (loss) from discontinued operations before income taxes | (21.4) | | | 14.6 | | | 30.0 | |
Provision (benefit) for income taxes | (1.1) | | | 2.7 | | | 5.6 | |
Income (loss) from discontinued operations, net of income taxes | $ | (20.3) | | | $ | 11.9 | | | $ | 24.4 | |
Other discontinued operations
In addition to the THP activities disclosed above, results include certain amounts related to businesses previously disposed, including $1.3 million of loss on sale of discontinued operations, net of income taxes for the year ended December 31, 2022, and losses of $0.8 million, and $0.1 million included in income (loss) from discontinued operations, net of income taxes for the years ended December 31, 2021 and 2020, respectively.
Note 3. Derivative Instruments and Fair Value Measurements
Derivative Instruments
We use derivative instruments to mitigate interest rate risk, including risks associated with the impact of changes in interest rates in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also use derivative instruments to mitigate the impact of changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for by recording the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss ("AOCI") as a separate component of stockholders' equity. These accumulated gains or losses are reclassified into earnings in the periods during which the hedged transactions affect earnings. Derivative instruments that are not designated as hedges are accounted for by recording the realized and unrealized gains or losses on the derivative instrument in other, net (income) expense in our Consolidated Statements of Operations. We continuously monitor our derivative positions and the credit ratings of our counterparties and do not anticipate losses due to non-performance. See Note 8 for a description of our debt instruments.
Derivatives Designated as Hedging Instruments
Interest Rate Hedges
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Included in accompanying balance sheet at December 31, 2022 |
| | | | | | | AOCI – loss/(income) |
| Notional Amount | | Interest Rate (1) | | Asset/(Liability) | | Controlling Interest | | Noncontrolling Interest |
| ($ in millions) |
Expired hedges: | | | | | | | | | |
2018 secured railcar equipment notes | $ | 249.3 | | | 4.41 | % | | $ | — | | | $ | 0.4 | | | $ | — | |
TRIP Holdings warehouse loan | $ | 788.5 | | | 3.60 | % | | $ | — | | | $ | 0.1 | | | $ | — | |
Tribute Rail secured railcar equipment notes (2) | $ | 256.0 | | | 2.86 | % | | $ | — | | | $ | 0.8 | | | $ | 1.0 | |
2017 promissory notes – interest rate cap | $ | 169.3 | | | 3.00 | % | | $ | — | | | $ | (0.3) | | | $ | — | |
Open hedge: | | | | | | | | | |
2017 promissory notes – interest rate swap | $ | 434.7 | | | 2.39 | % | | $ | 19.7 | | | $ | (19.4) | | | $ | — | |
(1) Weighted average fixed interest rate, except for the interest rate cap on the 2017 promissory notes.
(2) In May 2022, Tribute Rail LLC ("Tribute Rail"), an indirect, wholly-owned subsidiary of TRIP Holdings, entered into and subsequently terminated a forward starting interest rate swap to hedge the risk of potential interest rate increases prior to the May 2022 Tribute Rail debt issuance.
| | | | | | | | | | | | | | | | | | | | | | | |
| Effect on interest expense – increase/(decrease) |
| Year Ended December 31, | | Expected effect during next twelve months |
| 2022 | | 2021 | | 2020 | |
| (in millions) |
Expired hedges: | | | | | | | |
2006 secured railcar equipment notes | $ | — | | | $ | — | | | $ | (0.1) | | | $ | — | |
2018 secured railcar equipment notes | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | |
TRIP Holdings warehouse loan | $ | 1.2 | | | $ | 1.8 | | | $ | 2.0 | | | $ | 0.1 | |
TRIP Master Funding secured railcar equipment notes | $ | — | | | $ | 0.1 | | | $ | 0.2 | | | $ | — | |
Tribute Rail secured railcar equipment notes | $ | 0.4 | | | $ | — | | | $ | — | | | $ | 0.7 | |
2017 promissory notes – interest rate cap | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | |
Open hedge (1): | | | | | | | |
2017 promissory notes – interest rate swap | $ | 4.0 | | | $ | 12.3 | | | $ | 11.0 | | | $ | (8.2) | |
(1) Based on the fair value of open hedges as of December 31, 2022.
Foreign Currency Hedge
Our exposure related to foreign currency transactions is currently hedged for up to a maximum of twelve months. Information related to our foreign currency hedge is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in accompanying balance sheet at December 31, 2022 | | Effect on cost of revenues – increase/(decrease) |
Notional Amount | | Asset/(Liability) | | AOCI – loss/(income) | | Year Ended December 31, | | Expected effect during next twelve months(1) |
| | | 2022 | | 2021 | | 2020 | |
(in millions) |
$ | 30.8 | | | $ | 2.0 | | | $ | (3.0) | | | $ | (1.4) | | | $ | (7.7) | | | $ | 3.2 | | | $ | (3.0) | |
(1) Based on the fair value of open hedges as of December 31, 2022.
Derivatives Not Designated as Hedging Instruments(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Asset/(Liability) at December 31, 2022 | | Effect on other, net (income) expense – increase/(decrease) |
| Notional Amount | | Interest Rate | | | Year Ended December 31, |
| | | | 2022 | | 2021 | | 2020 |
| ($ in millions) |
| | | | | | | | | | | |
TILC warehouse facility – interest rate cap | $ | 800.0 | | | 2.50 | % | | $ | 21.6 | | | $ | (1.6) | | | $ | — | | | $ | — | |
TILC – interest rate cap | $ | 800.0 | | | 2.50 | % | | $ | (21.6) | | | $ | 1.6 | | | $ | — | | | $ | — | |
(1) Derivatives not designated as hedging instruments are comprised of back-to-back interest rate caps entered into with the same counterparty that offset and do not have a net effect on Trinity's consolidated earnings. These derivative contracts were entered into in connection with our risk management objectives.
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 on a recurring basis as Level 1 in the fair value hierarchy are summarized below:
| | | | | | | | | | | |
| Level 1 |
| December 31, 2022 | | December 31, 2021 |
| (in millions) |
Assets: | | | |
Cash equivalents | $ | 29.8 | | | $ | 11.4 | |
Restricted cash | 214.7 | | | 135.1 | |
Total assets | $ | 244.5 | | | $ | 146.5 | |
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 swaps and interest rate caps 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 on a recurring basis as Level 2 in the fair value hierarchy are summarized below:
| | | | | | | | | | | |
| Level 2 |
| December 31, 2022 | | December 31, 2021 |
| (in millions) |
Assets: | | | |
Interest rate hedge (1) | $ | 19.7 | | | $ | — | |
Foreign currency hedge (1) | 2.0 | | | — | |
Derivatives not designated as hedging instruments (1) | 21.6 | | | — | |
Total assets | $ | 43.3 | | | $ | — | |
| | | |
Liabilities: | | | |
Interest rate hedge (2) | $ | — | | | $ | 21.0 | |
Foreign currency hedge (2) | — | | | 0.1 | |
Derivatives not designated as hedging instruments (2) | 21.6 | | | — | |
Total liabilities | $ | 21.6 | | | $ | 21.1 | |
(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 December 31, 2022 and 2021, we have no assets or liabilities measured on a recurring basis as Level 3 in the fair value hierarchy.
See Note 2 for more information regarding non-recurring fair value measurements involving Level 3 inputs resulting from acquisition activity. See Note 11 for more information regarding the non-recurring fair value measurement considerations during the year ended December 31, 2020 for the impairment charge related to our small cube covered hopper railcars. See Note 8 for the estimated fair values of our debt instruments. The fair values of all other financial instruments are estimated to approximate carrying value.
Note 4. Segment Information
We report our operating results in two reportable 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; and (2) the Rail Products Group, which manufactures and sells railcars and related parts and components, and provides railcar maintenance and modification services. Following the sale of THP, which was previously reported within All Other, we have combined the results of the prior Corporate and All Other groupings into a single Corporate and other grouping. The remaining activity previously reported in All Other primarily includes legal, environmental, and maintenance costs associated with non-operating facilities. Results of prior periods 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 impairment of long-lived assets or restructuring activities when evaluating segment operating results; therefore, impairment of long-lived assets and 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. Lease portfolio sales 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).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | Corporate and other | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
External revenue | $ | 769.8 | | | $ | 1,207.5 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,977.3 | |
Intersegment revenue | 0.8 | | | 867.2 | | | — | | | (867.2) | | | (0.8) | | | — | |
Total revenues | $ | 770.6 | | | $ | 2,074.7 | | | $ | — | | | $ | (867.2) | | | $ | (0.8) | | | $ | 1,977.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation & amortization | $ | 236.4 | | | $ | 34.8 | | | $ | 5.2 | | | $ | — | | | $ | — | | | $ | 276.4 | |
Capital expenditures | $ | 928.8 | | | $ | 35.7 | | | $ | 2.3 | | | $ | — | | | $ | — | | | $ | 966.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | Corporate and other | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
External revenue | $ | 734.6 | | | $ | 781.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,516.0 | |
Intersegment revenue | 0.7 | | | 483.4 | | | — | | | (478.5) | | | (5.6) | | | — | |
Total revenues | $ | 735.3 | | | $ | 1,264.8 | | | $ | — | | | $ | (478.5) | | | $ | (5.6) | | | $ | 1,516.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation & amortization | $ | 226.0 | | | $ | 33.6 | | | $ | 6.1 | | | $ | — | | | $ | — | | | $ | 265.7 | |
Capital expenditures | $ | 547.2 | | | $ | 21.3 | | | $ | 2.3 | | | $ | — | | | $ | — | | | $ | 570.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | Corporate and other | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
External revenue | $ | 801.5 | | | $ | 948.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,749.7 | |
Intersegment revenue | 0.8 | | | 661.3 | | | — | | | (652.9) | | | (9.2) | | | — | |
Total revenues | $ | 802.3 | | | $ | 1,609.5 | | | $ | — | | | $ | (652.9) | | | $ | (9.2) | | | $ | 1,749.7 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Depreciation & amortization | $ | 214.7 | | | $ | 35.1 | | | $ | 8.7 | | | $ | — | | | $ | — | | | $ | 258.5 | |
Capital expenditures | $ | 602.2 | | | $ | 78.5 | | | $ | 17.4 | | | $ | — | | | $ | — | | | $ | 698.1 | |
The reconciliation of segment operating profit (loss) to consolidated net income (loss) is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Operating profit (loss): | | | | | |
Railcar Leasing and Management Services Group | $ | 423.3 | | | $ | 350.9 | | | $ | 353.7 | |
Rail Products Group | 59.1 | | | 4.7 | | | 36.3 | |
Segment Totals | 482.4 | | | 355.6 | | | 390.0 | |
Corporate and other | (80.8) | | | (84.1) | | | (99.7) | |
Impairment of long-lived assets | — | | | — | | | (396.4) | |
Restructuring activities, net | (1.0) | | | 3.7 | | | (10.9) | |
Eliminations – Lease Subsidiary | (65.2) | | | (17.2) | | | (35.2) | |
Eliminations – Other | (1.4) | | | (1.2) | | | (2.4) | |
Consolidated operating profit (loss) | 334.0 | | | 256.8 | | | (154.6) | |
Other (income) expense | 207.5 | | | 201.6 | | | 370.0 | |
Provision (benefit) for income taxes | 27.6 | | | 15.9 | | | (274.1) | |
Income (loss) from discontinued operations, net of income taxes | (20.3) | | | 11.1 | | | 24.3 | |
Gain (loss) on sale of discontinued operations, net of income taxes | (5.7) | | | 131.4 | | | — | |
Net income (loss) | $ | 72.9 | | | $ | 181.8 | | | $ | (226.2) | |
Total assets for these segments is shown in the table below.
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (in millions) |
Railcar Leasing and Management Services Group | $ | 7,779.9 | | | $ | 7,585.4 | |
Rail Products Group | 1,440.5 | | | 1,064.4 | |
Segment Totals | 9,220.4 | | | 8,649.8 | |
Corporate and other | 267.2 | | | 365.2 | |
| | | |
Eliminations – Lease Subsidiary | (763.3) | | | (779.1) | |
| | | |
Total assets | $ | 8,724.3 | | | $ | 8,235.9 | |
Corporate and other assets are composed of cash and cash equivalents, short-term marketable securities, notes receivable, certain property, plant, and equipment, and other assets.
We operate principally in North America. Our foreign operations are primarily located in Mexico. Revenues and operating profit for our Mexico operations for the years ended December 31, 2022, 2021, and 2020 were not significant in relation to the Consolidated Financial Statements. Total assets for our Mexico operations as of December 31, 2022 and 2021 are $571.7 million and $414.8 million, respectively. Total long-lived assets for our Mexico operations as of December 31, 2022 and 2021 are $96.3 million and $102.0 million, respectively.
One customer in the Rail Products Group comprised approximately 17%, 22%, and 16% of our consolidated revenues during the years ended December 31, 2022, 2021, and 2020, respectively.
Note 5. Partially-Owned Leasing Subsidiaries
Through our wholly-owned subsidiary, TILC, we formed two subsidiaries, TRIP Holdings and RIV 2013, for the purpose of providing railcar leasing services in North America for institutional investors. Each of TRIP Holdings and RIV 2013 are direct, partially-owned subsidiaries of TILC in which we have 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 December 31, 2022, the carrying value of our investment in TRIP Holdings and RIV 2013 totaled $136.1 million. Our 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 investment in our partially-owned leasing subsidiaries is eliminated in consolidation.
Each of TRIP Holdings and RIV 2013 has wholly-owned subsidiaries that are the owners of railcars acquired from our Rail Products and Leasing Groups. TRIP Holdings has wholly-owned subsidiaries known as Triumph Rail LLC ("Triumph Rail") and Tribute Rail. RIV 2013 has a wholly owned-subsidiary known as TRP 2021 LLC ("TRP-2021"). TILC is the contractual servicer for Triumph Rail, Tribute Rail, and TRP-2021, with the authority to manage and service each entity's owned railcars. Our controlling interest in each of TRIP Holdings and RIV 2013 results from our 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 our 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 Triumph Rail, Tribute Rail, and TRP-2021 may only be used to satisfy the particular subsidiary's liabilities, and the creditors of each of Triumph Rail, Tribute Rail, and TRP-2021 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 Triumph Rail, Tribute Rail, and TRP-2021 and has the potential to earn certain incentive fees. There are no remaining equity commitments with respect to TRIP Holdings or RIV 2013.
See Note 8 regarding TRIP Holdings and RIV 2013, including the debt issuance of Tribute Rail and the repayment of TRIP Railcar Co. LLC's ("TRIP Railcar Co.") outstanding term loan agreement.
Investment in Unconsolidated Affiliate
In August 2021, the Company and Wafra, Inc. announced a new RIV program between Trinity and Wafra Funds. As part of this program, a joint venture was formed, Signal Rail, which was owned 90% by Wafra Funds and 10% by TILC. Signal Rail or its subsidiaries are expected to invest in diversified portfolios of leased railcars originated by TILC targeting up to $1 billion in total acquisitions over an expected three-year investment period; TILC completed the first portfolio sale to Signal Rail under this program in 2021. TILC will service all railcars owned by Signal Rail.
In August 2022, TILC and certain of its subsidiaries sold a second portfolio comprised of 2,678 railcars and related leases to Signal Rail for an aggregate sales price of approximately $254.1 million. TILC recognized a gain of approximately $25.1 million on the sale, and approximately $2.5 million was recognized as revenue for services performed associated with the delivery of railcars with attached leases, during the year ended December 31, 2022. In connection with the sale, TILC contributed $13.5 million of cash to Signal Rail, resulting in an increase in TILC's weighted average equity ownership in Signal Rail to 12.9%. Signal Rail financed the August 2022 purchase primarily through a term loan. To date, TILC has sold 6,260 railcars to Signal Rail for an aggregate sales price of $579.2 million.
Upon consideration under the VIE model of ASC 810, Trinity has concluded that Signal Rail meets the definition of a VIE. TILC has variable interests in Signal Rail arising from its 12.9% equity ownership position and its role as a service provider. We determined that Trinity is not the primary beneficiary and therefore does not consolidate this entity as we do not have the power to direct the activities of the entity that most significantly impact its economic performance. We will absorb portions of Signal Rail’s expected losses and/or receive portions of expected residual returns commensurate with our 12.9% equity interest in Signal Rail.
Our investment in Signal Rail is being accounted for under the equity method of accounting. At December 31, 2022, the carrying value of TILC’s equity investment in Signal Rail was $20.2 million, which is included in other assets in our Consolidated Balance Sheets. The carrying value of this investment, together with any potential future investments described above, collectively represent our maximum exposure in Signal Rail.
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, and administrative services. Selected consolidated financial information for the Leasing Group is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Wholly- Owned Subsidiaries | | Partially-Owned Subsidiaries | | Total Leasing Group | | Eliminations – Lease Subsidiary (1) | | Adjusted Total Leasing Group |
| (in millions) |
Cash and cash equivalents | $ | 2.6 | | | $ | — | | | $ | 2.6 | | | $ | — | | | $ | 2.6 | |
Accounts receivable | 89.9 | | | 10.8 | | | 100.7 | | | — | | | 100.7 | |
Property, plant, and equipment, net | 5,788.1 | | | 1,521.3 | | | 7,309.4 | | | (763.3) | | | 6,546.1 | |
Restricted cash | 140.3 | | | 74.4 | | | 214.7 | | | — | | | 214.7 | |
Other assets | 150.3 | | | 2.2 | | | 152.5 | | | — | | | 152.5 | |
Total assets | $ | 6,171.2 | | | $ | 1,608.7 | | | $ | 7,779.9 | | | $ | (763.3) | | | $ | 7,016.6 | |
| | | | | | | | | |
Accounts payable and accrued liabilities | $ | 109.7 | | | $ | 44.1 | | | $ | 153.8 | | | $ | — | | | $ | 153.8 | |
Debt, net | 3,800.7 | | | 1,182.8 | | | 4,983.5 | | | — | | | 4,983.5 | |
Deferred income taxes | 1,152.3 | | | 1.1 | | | 1,153.4 | | | (173.1) | | | 980.3 | |
Other liabilities | 38.8 | | | — | | | 38.8 | | | — | | | 38.8 | |
Total liabilities | 5,101.5 | | | 1,228.0 | | | 6,329.5 | | | (173.1) | | | 6,156.4 | |
Noncontrolling interest | — | | | 257.2 | | | 257.2 | | | — | | | 257.2 | |
Total Equity | $ | 1,069.7 | | | $ | 123.5 | | | $ | 1,193.2 | | | $ | (590.2) | | | $ | 603.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Wholly- Owned Subsidiaries | | Partially-Owned Subsidiaries | | Total Leasing Group | | Eliminations – Lease Subsidiary (1) | | Adjusted Total Leasing Group |
| (in millions) |
Cash and cash equivalents | $ | 3.4 | | | $ | — | | | $ | 3.4 | | | $ | — | | | $ | 3.4 | |
Accounts receivable | 90.7 | | | 10.1 | | | 100.8 | | | — | | | 100.8 | |
Property, plant, and equipment, net | 5,706.1 | | | 1,570.6 | | | 7,276.7 | | | (779.1) | | | 6,497.6 | |
Restricted cash | 76.5 | | | 58.6 | | | 135.1 | | | — | | | 135.1 | |
Other assets | 67.3 | | | 2.1 | | | 69.4 | | | — | | | 69.4 | |
Total assets | $ | 5,944.0 | | | $ | 1,641.4 | | | $ | 7,585.4 | | | $ | (779.1) | | | $ | 6,806.3 | |
| | | | | | | | | |
Accounts payable and accrued liabilities | $ | 113.4 | | | $ | 30.1 | | | $ | 143.5 | | | $ | — | | | $ | 143.5 | |
Debt, net | 3,555.8 | | | 1,216.1 | | | 4,771.9 | | | — | | | 4,771.9 | |
Deferred income taxes | 1,114.2 | | | 1.1 | | | 1,115.3 | | | (176.6) | | | 938.7 | |
Other liabilities | 35.6 | | | — | | | 35.6 | | | — | | | 35.6 | |
Total liabilities | 4,819.0 | | | 1,247.3 | | | 6,066.3 | | | (176.6) | | | 5,889.7 | |
Noncontrolling interest | — | | | 267.0 | | | 267.0 | | | — | | | 267.0 | |
Total Equity | $ | 1,125.0 | | | $ | 127.1 | | | $ | 1,252.1 | | | $ | (602.5) | | | $ | 649.6 | |
(1) Net deferred profit on railcars sold to the Leasing Group consists of intersegment profit that is eliminated in consolidation. Net deferred profit and the related deferred tax impact are included as adjustments to the property, plant, and equipment, net and deferred income taxes line items, respectively, in the Eliminations – Lease Subsidiary column above to reflect the net book value of the railcars purchased by the Leasing Group from the Rail Products Group based on manufacturing cost. See Note 5 and Note 8 for a further discussion regarding our investment in our partially-owned leasing subsidiaries and the related indebtedness.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percent Change |
| 2022 | | 2021 | | 2020 | | 2022 versus 2021 | | 2021 versus 2020 |
| ($ in millions) | | |
Revenues: | | | | | | | | | |
Leasing and management | $ | 770.6 | | | $ | 735.3 | | | $ | 747.9 | | | 4.8 | % | | (1.7) | % |
Sales of railcars owned one year or less at the time of sale (1) | — | | | — | | | 54.4 | | | * | | * |
Total revenues | $ | 770.6 | | | $ | 735.3 | | | $ | 802.3 | | | 4.8 | % | | (8.4) | % |
| | | | | | | | | |
Operating profit (2): | | | | | | | | | |
Leasing and management | $ | 295.8 | | | $ | 296.8 | | | $ | 336.0 | | | (0.3) | % | | (11.7) | % |
Lease portfolio sales (3) | 127.5 | | | 54.1 | | | 17.7 | | | * | | * |
| | | | | | | | | |
Total operating profit | $ | 423.3 | | | $ | 350.9 | | | $ | 353.7 | | | 20.6 | % | | (0.8) | % |
Total operating profit margin | 54.9 | % | | 47.7 | % | | 44.1 | % | | | | |
| | | | | | | | | |
Leasing and management operating profit margin | 38.4 | % | | 40.4 | % | | 44.9 | % | | | | |
| | | | | | | | | |
Selected expense information: | | | | | | | | | |
Depreciation (4) | $ | 236.4 | | | $ | 226.0 | | | $ | 214.7 | | | 4.6 | % | | 5.3 | % |
Maintenance and compliance | $ | 113.4 | | | $ | 95.0 | | | $ | 88.1 | | | 19.4 | % | | 7.8 | % |
Rent and ad valorem taxes | $ | 19.3 | | | $ | 18.4 | | | $ | 21.1 | | | 4.9 | % | | (12.8) | % |
Selling, engineering, and administrative expenses | $ | 54.0 | | | $ | 50.6 | | | $ | 51.3 | | | 6.7 | % | | (1.4) | % |
Interest (5) | $ | 186.7 | | | $ | 181.6 | | | $ | 196.2 | | | 2.8 | % | | (7.4) | % |
* Not meaningful
(1) Beginning in the fourth quarter of 2020, we made a prospective change in the presentation of sales of railcars from the lease fleet. Therefore, all railcar sales for the years ended December 31, 2022 and 2021 are presented as a net gain or loss from the disposal of a long-term asset regardless of the age of railcar that is sold. See Note 1 for more information.
(2) Operating profit includes: depreciation; fleet operating costs, which include maintenance, compliance, freight, and storage; rent and ad valorem taxes; and selling, engineering, and administrative expenses. Amortization of deferred profit on railcars sold from the Rail Products Group to the Leasing Group is included in the operating profits of the Leasing Group, resulting in the recognition of depreciation expense based on our original manufacturing cost of the railcars. Interest expense is not a component of operating profit and includes the effect of hedges.
(3) Includes $1.3 million selling profit associated with sales-type leases for the year ended December 31, 2022.
(4) Depreciation expense includes $12.1 million and $8.8 million for the years ended December 31, 2022 and 2021, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program. Additionally, depreciation expense related to our small cube covered hopper railcars decreased by approximately $7.0 million for the years ended December 31, 2021 and 2020 as a result of the impairment charge recorded in the second quarter of 2020 related to these railcars.
(5) Interest expense for the year ended December 31, 2022 includes $1.5 million of loss on extinguishment of debt associated with the repayment of TRIP Railcar Co.'s outstanding term loan agreement. See Note 8 for more information. Interest expense for the year ended December 31, 2021 includes $11.7 million of loss on extinguishment of debt associated with the refinancing of our partially-owned subsidiaries' debt. Interest expense for the year ended December 31, 2020 includes $5.0 million of loss on extinguishment of debt associated with the early redemption of debt.
Information related to lease portfolio sales is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Lease portfolio sales | $ | 750.7 | | | $ | 460.7 | | | $ | 193.1 | |
Operating profit on lease portfolio sales (1) | $ | 126.2 | | | $ | 54.1 | | | $ | 17.7 | |
Operating profit margin on lease portfolio sales | 16.8 | % | | 11.7 | % | | 9.2 | % |
(1) Excludes $1.3 million selling profit associated with sales-type leases for the year ended December 31, 2022.
Railcar Leasing Equipment Portfolio. The Leasing Group's equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured predominantly by the Rail Products Group and enters into lease contracts with third parties with terms generally ranging between one year and ten years. The Leasing Group primarily enters into operating leases. Future contractual minimum rental revenues on operating leases related to our wholly-owned and partially-owned subsidiaries are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| (in millions) |
Future contractual minimum rental revenues | $ | 586.5 | | | $ | 467.9 | | | $ | 366.2 | | | $ | 262.7 | | | $ | 175.0 | | | $ | 265.0 | | | $ | 2,123.3 | |
Debt. Wholly-owned subsidiaries. The Leasing Group’s debt at December 31, 2022 consisted primarily of non-recourse debt. As of December 31, 2022, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $5,443.1 million, which is pledged solely as collateral for Leasing Group debt held by those subsidiaries. The net book value of unpledged equipment at December 31, 2022 was $334.9 million. See Note 8 for more information regarding the Leasing Group's debt.
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. As of December 31, 2022, TRIP Holdings held equipment with a net book value of $1,063.8 million, which is pledged solely as collateral for the TRIP Holdings' debt held by its subsidiaries. As of December 31, 2022, TRP-2021 equipment with a net book value of $457.5 million is pledged solely as collateral for the TRP-2021 debt. See Note 5 for a description of TRIP Holdings and RIV 2013 and their respective subsidiaries.
Operating Lease Obligations. Future amounts due as well as future contractual minimum rental revenues related to the Leasing Group's railcar operating lease obligations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| (in millions) |
Future operating lease obligations | $ | 11.9 | | | $ | 8.0 | | | $ | 6.0 | | | $ | 5.7 | | | $ | 5.3 | | | $ | 3.5 | | | $ | 40.4 | |
Future contractual minimum rental revenues | $ | 9.7 | | | $ | 4.7 | | | $ | 3.5 | | | $ | 1.9 | | | $ | 0.5 | | | $ | 0.1 | | | $ | 20.4 | |
Operating lease obligations totaling $1.3 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries. The Leasing Group also has future amounts due for operating lease obligations related to office space of approximately $0.2 million, which is excluded from the table above.
Note 7. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (in millions) |
Manufacturing/Maintenance/Corporate: | | | |
Land | $ | 15.7 | | | $ | 17.4 | |
Buildings and improvements | 384.6 | | | 377.4 | |
Machinery and other | 405.5 | | | 415.1 | |
Construction in progress | 18.1 | | | 18.1 | |
| 823.9 | | | 828.0 | |
Less: accumulated depreciation | (483.2) | | | (478.7) | |
| 340.7 | | | 349.3 | |
Leasing: | | | |
Wholly-owned subsidiaries: | | | |
Machinery and other | 21.7 | | | 20.7 | |
Equipment on lease | 7,247.3 | | | 7,061.3 | |
| 7,269.0 | | | 7,082.0 | |
Less: accumulated depreciation | (1,480.9) | | | (1,375.9) | |
| 5,788.1 | | | 5,706.1 | |
Partially-owned subsidiaries: | | | |
Equipment on lease | 2,230.4 | | | 2,242.9 | |
Less: accumulated depreciation | (709.1) | | | (672.3) | |
| 1,521.3 | | | 1,570.6 | |
| | | |
Deferred profit on railcars sold to the Leasing Group | (1,050.7) | | | (1,047.3) | |
Less: accumulated amortization | 287.4 | | | 268.2 | |
| (763.3) | | | (779.1) | |
| $ | 6,886.8 | | | $ | 6,846.9 | |
We lease certain equipment and facilities under operating leases. See Note 1 for future operating lease obligations on non-Leasing Group leases. See Note 1 and Note 6 for information related to the lease agreements, future operating lease obligations, and future minimum rental revenues associated with the Leasing Group.
We estimate the fair market value of properties no longer in use based on the location and condition of the properties, the fair market value of similar properties in the area, and our experience selling similar properties in the past. As of December 31, 2022, we had non-operating plants with a net book value of $2.6 million.
See Note 1 for more information regarding assets classified as held for sale as of December 31, 2022 and 2021.
Note 8. Debt
The carrying amounts and estimated fair values of our debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| (in millions) |
Corporate – Recourse: | | | | | | | |
Revolving credit facility | $ | 225.0 | | | $ | 225.0 | | | $ | — | | | $ | — | |
Senior notes, net of unamortized discount of $0.1 and $0.1 | 399.9 | | | 387.5 | | | 399.9 | | | 420.8 | |
| 624.9 | | | 612.5 | | | 399.9 | | | 420.8 | |
Less: unamortized debt issuance costs | (0.8) | | | | | (1.2) | | | |
Total recourse debt | 624.1 | | | | | 398.7 | | | |
| | | | | | | |
Leasing – Non-recourse: | | | | | | | |
Wholly-owned subsidiaries: | | | | | | | |
2009 secured railcar equipment notes | 115.8 | | | 116.6 | | | 128.5 | | | 144.9 | |
2010 secured railcar equipment notes | 204.1 | | | 197.1 | | | 220.6 | | | 234.6 | |
2017 promissory notes, net of unamortized discount of $5.6 and $7.8 | 716.0 | | | 716.0 | | | 760.2 | | | 760.2 | |
2018 secured railcar equipment notes, net of unamortized discount of $0.1 and $0.1 | 398.9 | | | 360.9 | | | 416.5 | | | 423.3 | |
2019 secured railcar equipment notes, net of unamortized discount of $0.2 and $0.3 | 786.0 | | | 716.9 | | | 822.8 | | | 847.3 | |
2020 secured railcar equipments notes, net of unamortized discount of $— and $0.1 | 330.4 | | | 284.6 | | | 348.8 | | | 349.9 | |
2021 secured railcar equipment notes, net of unamortized discount of $— and $— | 307.7 | | | 253.9 | | | 320.3 | | | 319.6 | |
2022 secured railcar equipment notes, net of unamortized discount of $— and $— | 241.1 | | | 239.7 | | | — | | | — | |
TILC warehouse facility | 721.8 | | | 721.8 | | | 561.8 | | | 561.8 | |
| 3,821.8 | | | 3,607.5 | | | 3,579.5 | | | 3,641.6 | |
Less: unamortized debt issuance costs | (21.1) | | | | | (23.7) | | | |
| 3,800.7 | | | | | 3,555.8 | | | |
Partially-owned subsidiaries: | | | | | | | |
TRP-2021 secured railcar equipment notes, net of unamortized discount of $— and $0.1 | 347.0 | | | 291.8 | | | 352.2 | | | 347.7 | |
Triumph Rail secured railcar equipment notes, net of unamortized discount of $0.2 and $0.2 | 523.0 | | | 451.4 | | | 551.3 | | | 548.1 | |
Tribute Rail secured railcar equipment notes, net of unamortized discount of $0.1 and $— | 322.6 | | | 281.1 | | | — | | | — | |
TRIP Railcar Co. term loan | — | | | — | | | 323.7 | | | 323.7 | |
| 1,192.6 | | | 1,024.3 | | | 1,227.2 | | | 1,219.5 | |
Less: unamortized debt issuance costs | (9.8) | | | | | (11.1) | | | |
| 1,182.8 | | | | | 1,216.1 | | | |
Total non–recourse debt | 4,983.5 | | | | | 4,771.9 | | | |
Total debt | $ | 5,607.6 | | | $ | 5,244.3 | | | $ | 5,170.6 | | | $ | 5,281.9 | |
The estimated fair value of our 4.55% senior notes due 2024 ("Senior Notes") is based on a quoted market price in a market with little activity (Level 2 input). The estimated fair values of our secured railcar equipment notes are based on our estimate of their fair value using unobservable input values provided by a third party (Level 3 inputs). The respective carrying values of our revolving credit facility, 2017 promissory notes, TILC warehouse loan facility, and TRIP Railcar Co. term loan approximate fair value because the interest rate adjusts to the market interest rate.
Revolving Credit Facility – We have a $450.0 million unsecured corporate revolving credit facility. In July 2022, we amended our revolving credit facility to extend its maturity date to the earlier of (i) July 25, 2027 or (ii) July 2, 2024 if our Senior Notes have not been repaid in full by that date. During the year ended December 31, 2022, we had total borrowings of $785.0 million and total repayments of $560.0 million under the revolving credit facility. Additionally, we had outstanding letters of credit issued in an aggregate amount of $16.8 million. Of the $208.2 million remaining unused amount, the full $208.2 million was available for borrowing as of December 31, 2022. The majority of our outstanding letters of credit as of December 31, 2022 are scheduled to expire in November 2023. Our letters of credit obligations support performance bonds related to certain railcar orders. The revolving credit facility bears interest at a variable rate of Secured Overnight Financing Rate ("SOFR") plus 1.75%, for an all-in interest rate of 6.15% as of December 31, 2022. A commitment fee accrues on the average daily unused portion of the revolving credit facility at the rate of 0.175% to 0.40% (0.25% as of December 31, 2022).
The revolving credit facility requires the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. In December 2022, we amended our revolving credit facility to increase the maximum leverage ratio to provide additional flexibility. As of December 31, 2022, we were in compliance with all such financial covenants. Borrowings under the credit facility are guaranteed by certain of our 100%-owned subsidiaries.
Senior Notes Due 2024 – In September 2014, we issued $400.0 million aggregate principal amount of 4.55% senior notes due October 2024. Interest on the Senior Notes is payable semiannually commencing April 1, 2015. The Senior Notes rank senior to existing and future subordinated debt and rank equal to existing and future senior indebtedness, including our revolving credit facility. The Senior Notes are subordinated to all our existing and future secured debt to the extent of the value of the collateral securing such indebtedness. The Senior Notes contain covenants that limit our ability and/or certain subsidiaries' ability to create or permit to exist certain liens; enter into sale and leaseback transactions; and consolidate, merge, or transfer all or substantially all of our assets. Our Senior Notes are fully and unconditionally and jointly and severally guaranteed by each of Trinity’s domestic subsidiaries that is a guarantor under our revolving credit facility. See "Liquidity and Capital Resources" in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
Wholly-owned leasing subsidiaries
TRL VII – In November 2009, Trinity Rail Leasing VII LLC, a Delaware limited liability company (“TRL VII”) and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued $238.3 million in aggregate principal amount of Secured Railcar Equipment Notes, Series 2009-1 (the “2009 Notes”), of which $115.8 million was outstanding as of December 31, 2022. The 2009 Notes were issued pursuant to a Master Indenture, dated November 5, 2009 between TRL VII and Wilmington Trust Company, as indenture trustee. The 2009 Notes bear interest at a fixed rate of 6.66% per annum, are payable monthly, and have a final maturity date of November 16, 2039. The 2009 Notes are obligations of TRL VII and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL VII.
TRL-2010 – In October 2010, Trinity Rail Leasing 2010 LLC, a Delaware limited liability company ("TRL-2010") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued $369.2 million in aggregate principal amount of Secured Railcar Equipment Notes, Series 2010-1 (the “TRL-2010 Notes"), of which $204.1 million was outstanding as of December 31, 2022. The TRL-2010 Notes were issued pursuant to an Indenture, dated as of October 25, 2010 between TRL-2010 and Wilmington Trust Company, as indenture trustee. The TRL-2010 Notes bear interest at a fixed rate of 5.19%, are payable monthly, and have a stated final maturity date of October 16, 2040. The TRL-2010 Notes are obligations of TRL-2010 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2010.
TILC Warehouse Loan Facility – TILC has a $1.0 billion warehouse loan facility, which was established to finance railcars owned by TILC. During the year ended December 31, 2022, we had total borrowings of $652.1 million and total repayments of $492.1 million under the TILC warehouse loan facility. Of the remaining unused facility amount of $278.2 million, $110.1 million was available as of December 31, 2022 based on the amount of warehouse-eligible, unpledged equipment. The warehouse loan facility is a non-recourse obligation and is secured by a portfolio of railcars and operating leases, certain cash reserves, and other assets acquired and owned by the warehouse loan facility trust. The principal and interest of this indebtedness are paid from the cash flows of the underlying leases. In August 2022, we amended our warehouse loan facility to transition the facility benchmark rate from LIBOR to SOFR plus a benchmark adjustment. Advances under the facility bear interest at one-month term SOFR plus (1) a benchmark adjustment of 11 basis points and (2) a facility margin of 185 basis points, for an all-in interest rate of 6.09% at December 31, 2022.
TRL-2017 – Trinity Rail Leasing 2017, LLC, a Delaware limited liability company ("TRL-2017") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, previously issued $302.4 million of promissory notes (the "Original 2017 Promissory Notes") due May 15, 2024. In November 2018, the Original 2017 Promissory Notes were extended through November 8, 2025 at an increased aggregate amount of $663.0 million. In July 2020, TRL-2017 issued an additional $225.0 million of promissory notes pursuant to a provision contained in its existing Amended and Restated Loan Agreement dated November 8, 2018 (together with previously-issued promissory notes, the "2017 Promissory Notes"). As of December 31, 2022, $721.6 million of the 2017 Promissory Notes was outstanding. The 2017 Promissory Notes bear interest at a rate of LIBOR plus 1.50%, for an all-in interest rate of 5.88% as of December 31, 2022, payable monthly. The 2017 Promissory Notes are obligations of TRL-2017 and are non-recourse to Trinity. The 2017 Promissory Notes are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2017. In February 2023, we amended the Amended and Restated Loan Agreement and the TRL 2017 interest rate swap agreements to transition the benchmark rate from LIBOR to SOFR plus a benchmark adjustment. The Company has elected to apply the optional accounting expedient under ASC 848, Reference Rate Reform, for hedging relationships affected by reference rate reform.
TRL-2018 – In June 2018, Trinity Rail Leasing 2018, LLC, a Delaware limited liability company ("TRL-2018") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued $482.5 million in Secured Railcar Equipment Notes (the "TRL-2018 Secured Railcar Equipment Notes"). The TRL-2018 Secured Railcar Equipment Notes consisted of two classes of notes with (i) an aggregate principal amount of $200.0 million of TRL-2018's Series 2018-1 Class A-1 Secured Railcar Equipment Notes (the "TRL-2018 Class A-1 Notes"), and (ii) an aggregate principal amount of $282.5 million of TRL-2018's Series 2018-1 Class A-2 Secured Railcar Equipment Notes (the “TRL-2018 Class A-2 Notes”). The TRL-2018 Secured Railcar Equipment Notes were issued pursuant to a Master Indenture, dated June 20, 2018 between TRL-2018 and Wilmington Trust Company, as indenture trustee. In October 2020, TRL-2018 issued $155.5 million of Series 2020-1 Class A Secured Railcar Equipment Notes (the “2020-1 Notes”) (the TRL-2018 Class A-1 Notes, the TRL-2018 Class A-2 Notes, and the 2020-1 Notes are, collectively, the “TRL-2018 Notes”) under the existing indenture. In a separate transaction during October 2020, TRL-2018 redeemed its TRL-2018 Class A-1 Notes, of which $153.1 million was outstanding at the redemption date. The fixed interest rate for these notes was 3.82% per annum.
The TRL-2018 Class A-2 Notes, of which $282.5 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 4.62%, are payable monthly, and have a stated final maturity date of June 17, 2048. The 2020-1 Notes, of which $116.5 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 1.96%, are payable monthly, and have a stated final maturity date of October 17, 2050. The TRL-2018 Notes are obligations of TRL-2018 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2018.
TRL-2019 – In April 2019, Trinity Rail Leasing 2019 LLC, a Delaware limited liability company ("TRL-2019") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued $528.3 million in Secured Railcar Equipment Notes (the "TRL-2019 Notes"). The TRL-2019 Notes were issued pursuant to a Master Indenture, dated as of April 10, 2019 between TRL-2019 and U.S. Bank National Association, as indenture trustee. The TRL-2019 Notes, of which $447.4 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.82%, are payable monthly, and have a stated final maturity date of April 17, 2049. The TRL-2019 Notes are obligations of TRL-2019 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2019.
In October 2019, TRL-2019 issued an additional $386.5 million in Secured Railcar Equipment Notes (the "TRL-2019-2 Notes"). The TRL-2019-2 Notes consisted of two classes of notes with (i) an aggregate principal amount of $106.9 million of TRL-2019's Series 2019-2 Class A-1 Secured Railcar Equipment Notes (the "TRL-2019 Class A-1 Notes"), and (ii) an aggregate principal amount of $279.6 million of TRL-2019's Series 2019-2 Class A-2 Secured Railcar Equipment Notes (the “TRL-2019 Class A-2 Notes”). The TRL-2019-2 Notes were issued pursuant to a Master Indenture, dated April 10, 2019 between TRL-2019 and U.S. Bank National Association, as indenture trustee, as supplemented by a Series 2019-2 Supplement dated as of October 17, 2019. The TRL-2019 Class A-1 Notes, of which $59.2 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 2.39%, are payable monthly, and have a stated final maturity date of October 17, 2049. The TRL-2019 Class A-2 Notes, of which $279.6 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.10%, are payable monthly, and have a stated final maturity date of October 17, 2049. The TRL-2019-2 Notes are obligations of TRL-2019 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2019.
TRL-2020 – In November 2020, Trinity Rail Leasing 2020 LLC, a Delaware limited liability company (“TRL-2020”) and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued an aggregate principal amount of (i) $110.0 million of TRL-2020’s Series 2020-2 Class A-1 Secured Railcar Equipment Notes (the “TRL-2020 Class A-1 Notes”), (ii) $240.3 million of TRL-2020’s Series 2020-2 Class A-2 Secured Railcar Equipment Notes (the “TRL-2020 Class A-2 Notes”), and (iii) $20.5 million of TRL-2020’s Series 2020-2 Class B Secured Railcar Equipment Notes (the “TRL-2020 Class B Notes”) (the TRL-2020 Class A-1 Notes, the TRL-2020 Class A-2 Notes, and the TRL-2020 Class B Notes are, collectively, the “TRL-2020 Notes”). The TRL-2020 Notes were issued pursuant to a Master Indenture, dated November 19, 2020 between TRL-2020 and U.S. Bank National Association, as indenture trustee, as supplemented by a Series 2020-2 Supplement dated November 19, 2020. The TRL-2020 Class A-1 Notes, of which $69.6 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 1.83%. The TRL-2020 Class A-2 Notes, of which $240.3 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 2.56%. The TRL-2020 Class B Notes, of which $20.5 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.69%. The TRL-2020 Notes are payable monthly, and have a stated final maturity date of November 19, 2050. The TRL-2020 Notes are obligations of TRL-2020 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2020.
TRL-2021 – In June 2021, Trinity Rail Leasing 2021 LLC, a Delaware limited liability company ("TRL-2021") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued an aggregate principal amount of (i) $305.2 million of its Series 2021-1 Class A Green Secured Railcar Equipment Notes (the "TRL-2021 Class A Notes") and (ii) $19.8 million of its Series 2021-1 Class B Green Secured Railcar Equipment Notes (the "TRL-2021 Class B Notes") (the TRL-2021 Class A Notes and the TRL-2021 Class B Notes are, collectively, the “TRL-2021 Notes”). The TRL-2021 Class A Notes, of which $287.9 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 2.26%. The TRL-2021 Class B Notes, of which $19.8 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.08%. The TRL-2021 Notes are payable monthly, and have a stated final maturity date of July 19, 2051. The TRL-2021 Notes are obligations of TRL-2021 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by TRL-2021.
TRL-2022 – In April 2022, Trinity Rail Leasing 2022 LLC, a Delaware limited liability company ("TRL-2022") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued an aggregate principal amount of $244.8 million of its Series 2022-1 Class A Green Secured Railcar Equipment Notes (the "TRL-2022 Notes"). The TRL-2022 Notes, of which $241.1 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 4.55%, are payable monthly, and have a stated final maturity date of May 20, 2052. We incurred $2.6 million in debt issuance costs, which will be amortized to interest expense through the anticipated repayment date of the TRL-2022 Notes. The TRL-2022 Notes are obligations of TRL-2022 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets to be acquired and owned by TRL-2022. Net proceeds received from the railcars acquired in connection with the issuance of the TRL-2022 Notes were used to repay approximately $209.9 million of borrowings under TILC's warehouse loan facility and for general corporate purposes.
Partially-owned leasing subsidiaries
Triumph Rail – In June 2021, Triumph Rail issued an aggregate principal amount of (i) $535.0 million of its Series 2021-2 Class A Green Secured Railcar Equipment Notes (the “Triumph Class A Notes”) and (ii) $25.4 million of its Series 2021-2 Class B Green Secured Railcar Equipment Notes (the “Triumph Class B Notes”) (the Triumph Class A Notes and the Triumph Class B Notes are, collectively, the “Triumph Notes”). The Triumph Class A Notes, of which $497.8 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 2.15%. The Triumph Class B Notes, of which $25.4 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.08%. The Triumph Notes are payable monthly, and have a stated final maturity date of June 15, 2051. The Triumph Notes are non-recourse to Trinity, TILC, TRIP Holdings, and the other equity investors in TRIP Holdings, and are secured by Triumph Rail's portfolio of railcars and operating leases thereon, its cash reserves, and all other assets owned by Triumph Rail.
TRIP Railcar Co. Term Loan – In June 2021, TRIP Railcar Co. drew down $329.6 million under a term loan agreement ("TRIP Railcar Co. term loan"). The TRIP Railcar Co. term loan was established to finance railcars and operating leases thereon purchased by TRIP Railcar Co. from Triumph Rail. In May 2022, as described below, Tribute Rail used the proceeds from the sale of secured notes to purchase railcars and related operating leases from TRIP Railcar Co. TRIP Railcar Co. used the proceeds from Tribute Rail to repay its outstanding term loan agreement due June 2025, of which $319.4 million was outstanding at the redemption date. In connection with the redemption, we recognized a loss on extinguishment of debt of $1.5 million, which related to the write-off of unamortized debt issuance costs. This write-off is reflected in the loss on extinguishment of debt line of our Consolidated Statements of Operations for the year ended December 31, 2022.
Tribute Rail – In May 2022, Tribute Rail issued an aggregate principal amount of (i) $290.0 million of its Series 2022-1 Class A Green Secured Railcar Equipment Notes (the “Class A Notes”) and (ii) $37.0 million of its Series 2022-1 Class B Green Secured Railcar Equipment Notes (the “Class B Notes”) (the Class A Notes and the Class B Notes are, collectively, the “Tribute Rail Notes”). The Class A Notes, of which $285.7 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 4.76%. The Class B Notes, of which $37.0 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 5.75%%. The Tribute Rail Notes are payable monthly and have a stated final maturity date of May 17, 2052. We incurred $3.4 million in debt issuance costs, which will be amortized to interest expense through the anticipated repayment date of the Tribute Rail Notes. The Tribute Rail Notes are non-recourse to Trinity, TILC, TRIP Holdings, and the other equity investors in TRIP Holdings, and are secured by Tribute Rail's portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by Tribute Rail. Tribute Rail used the proceeds from the sale of the Tribute Rail Notes to purchase railcars and related operating leases from TRIP Railcar Co. as described above.
TRP-2021 – In June 2021, TRP-2021 issued an aggregate principal amount of (i) $334.0 million of its Series 2021-1 Class A Green Secured Railcar Equipment Notes (the “TRP-2021 Class A Notes”) and (ii) $21.0 million of its Series 2021-1 Class B Green Secured Railcar Equipment Notes (the “TRP-2021 Class B Notes”) (the TRP-2021 Class A Notes and the TRP-2021 Class B Notes are, collectively, the “TRP-2021 Notes”). The TRP-2021 Class A Notes, of which $326.0 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 2.07%. The TRP-2021 Class B Notes, of which $21.0 million was outstanding as of December 31, 2022, bear interest at a fixed rate of 3.06%. The TRP-2021 Notes are payable monthly, and have a stated final maturity date of June 15, 2051. The TRP-2021 Notes are non-recourse to Trinity, TILC, RIV 2013, and the other equity investors in RIV 2013, and are secured by TRP-2021's portfolio of railcars and operating leases thereon, its cash reserves, and all other assets owned by TRP-2021.
In connection with the refinancings of Triumph Rail and TRP-2021, during the year ended December 31, 2021, we recognized a loss on extinguishment of debt of $11.7 million, which included a $3.3 million early redemption premium and a write-off of $8.4 million in unamortized debt issuance costs. These charges are reflected in the loss on extinguishment of debt line of our Consolidated Statements of Operations for the year ended December 31, 2021.
Triumph Rail and Tribute Rail are wholly-owned subsidiaries of TRIP Holdings, and TRP-2021 is a wholly-owned subsidiary of RIV 2013. TRIP Holdings and RIV 2013 are partially-owned subsidiaries of the Company, through its wholly-owned subsidiary, TILC. Our combined weighted average ownership interest in TRIP Holdings and RIV 2013 is 38%. See Note 5 for further explanation.
Scheduled Repayments of Debt
Each of our secured railcar equipment notes generally has an anticipated repayment date and a stated final maturity date. While the stated final maturity dates of each of these notes can be up to 30 years after the respective issuance dates, the cash flows from the encumbered assets of each of these notes will be applied, pursuant to the payment priorities of their respective indentures, so as to amortize their respective notes to achieve monthly targeted principal balances. If the cash flow assumptions used in determining the targeted balances are met, it is anticipated that the notes will be repaid well in advance of their stated final maturity date; the repayments reflected in the table below are based on the earlier anticipated repayment dates rather than the stated final maturity dates. There can be no assurance, however, that such cash flow assumptions will be realized. If these notes are not repaid by the anticipated repayment date, the respective interest rates on these notes would increase from the fixed rates stated above.
The remaining principal payments under existing debt agreements as of December 31, 2022 based on the anticipated repayment dates are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| (in millions) |
Recourse: | |
Corporate | $ | — | | | $ | 400.0 | | | $ | — | | | $ | — | | | $ | 225.0 | | | $ | — | | | $ | 625.0 | |
Non-recourse – leasing (Note 6): | | | | | | | | | | | | | |
2009 secured railcar equipment notes | 14.0 | | | 14.5 | | | 19.8 | | | 18.5 | | | 17.5 | | | 31.5 | | | 115.8 | |
2010 secured railcar equipment notes | 34.3 | | | 18.4 | | | 20.6 | | | 25.7 | | | 28.5 | | | 76.6 | | | 204.1 | |
2017 promissory notes | 44.4 | | | 44.4 | | | 632.8 | | | — | | | — | | | — | | | 721.6 | |
2018 secured railcar equipment notes | 20.5 | | | 19.0 | | | 14.8 | | | 14.5 | | | 18.2 | | | 312.0 | | | 399.0 | |
2019 secured railcar equipment notes | 34.9 | | | 36.6 | | | 35.2 | | | 679.5 | | | — | | | — | | | 786.2 | |
2020 secured railcar equipment notes | 18.3 | | | 14.3 | | | 11.3 | | | 14.1 | | | 272.4 | | | — | | | 330.4 | |
2021 secured railcar equipment notes | 12.2 | | | 13.3 | | | 12.6 | | | 14.0 | | | 14.0 | | | 241.6 | | | 307.7 | |
2022 secured railcar equipment notes | 8.3 | | | 9.0 | | | 6.7 | | | 8.1 | | | 8.3 | | | 200.7 | | | 241.1 | |
TILC warehouse facility | 24.3 | | | 24.3 | | | 6.1 | | | — | | | — | | | — | | | 54.7 | |
Facility termination payments – TILC warehouse facility | — | | | — | | | 667.1 | | | — | | | — | | | — | | | 667.1 | |
TRP-2021 secured railcar equipment notes | 10.9 | | | 15.6 | | | 15.8 | | | 17.2 | | | 287.5 | | | — | | | 347.0 | |
Triumph Rail secured railcar equipment notes | 16.2 | | | 32.6 | | | 29.5 | | | 23.6 | | | 421.3 | | | — | | | 523.2 | |
Tribute Rail secured railcar equipment notes | 3.8 | | | 13.9 | | | 15.1 | | | 289.9 | | | — | | | — | | | 322.7 | |
| | | | | | | | | | | | | |
Total principal payments | $ | 242.1 | | | $ | 655.9 | | | $ | 1,487.4 | | | $ | 1,105.1 | | | $ | 1,292.7 | | | $ | 862.4 | | | $ | 5,645.6 | |
Note 9. Income Taxes
The components of the provision (benefit) for income taxes from continuing operations are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Current: | | | | | |
Federal: | | | | | |
Effect of CARES Act | $ | (0.5) | | | $ | 2.1 | | | $ | (373.3) | |
Other | 2.1 | | | (3.0) | | | (142.1) | |
| 1.6 | | | (0.9) | | | (515.4) | |
State | 3.5 | | | (0.6) | | | (1.5) | |
Foreign | 7.8 | | | 4.3 | | | 4.3 | |
Total current | 12.9 | | | 2.8 | | | (512.6) | |
Deferred: | | | | | |
Federal: | | | | | |
Effect of CARES Act | — | | | 0.4 | | | 192.9 | |
Other | 14.5 | | | 10.4 | | | 31.3 | |
| 14.5 | | | 10.8 | | | 224.2 | |
State | 0.4 | | | 2.4 | | | 4.1 | |
Foreign | (0.2) | | | (0.1) | | | 10.2 | |
Total deferred | 14.7 | | | 13.1 | | | 238.5 | |
Provision (benefit) | $ | 27.6 | | | $ | 15.9 | | | $ | (274.1) | |
The provision for income taxes from continuing operations results in effective tax rates that differ from the statutory rates. The following is a reconciliation between the statutory U.S. federal income tax rate and our effective income tax rate on income before income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Foreign branch taxes | 2.1 | | | 3.0 | | | (0.2) | |
State taxes | 1.7 | | | 3.0 | | | 1.1 | |
Executive compensation limitations | 1.3 | | | 1.8 | | | (0.3) | |
Noncontrolling interest in partially-owned subsidiaries | (2.1) | | | — | | | 0.1 | |
Equity compensation | (1.1) | | | (4.0) | | | — | |
Changes in valuation allowance and reserves | (0.9) | | | (4.3) | | | 0.7 | |
Effect of CARES Act | (0.5) | | | 4.5 | | | 34.4 | |
Changes in state laws and apportionment | (0.5) | | | 0.3 | | | (1.4) | |
Foreign rate differential | — | | | 1.4 | | | (0.1) | |
Nondeductible excise tax | — | | | 1.3 | | | — | |
Nondeductible compensation | — | | | 1.2 | | | (0.2) | |
Impairment - noncontrolling interest in partially-owned subsidiaries | — | | | — | | | (3.3) | |
Interest expense limitations from partially-owned subsidiaries | — | | | — | | | 0.2 | |
Other, net | 0.8 | | | (0.4) | | | 0.2 | |
Effective rate | 21.8 | % | | 28.8 | % | | 52.2 | % |
The effective tax rate is based upon the U.S. statutory rate of 21.0% for the years ended December 31, 2022, 2021, and 2020. For the year ended December 31, 2022, the difference between the U.S. statutory rate and the Company's effective tax rate is primarily due to foreign taxes, state income taxes and non-deductible executive compensation, offset by taxes not recorded on our non-controlling interests in partially-owned subsidiaries, reductions in tax reserves for uncertain tax positions, and excess tax benefits associated with equity-based compensation. For the year ended December 31, 2021, the difference between the U.S. statutory rate and effective tax rate is primarily due to an adjustment to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") carryback benefit previously recognized, state taxes, and foreign taxes, partially offset by excess tax benefits associated with equity-based compensation. For the year ended December 31, 2020, the difference between the U.S. statutory rate and effective tax rate is primarily due the impact of the CARES Act partially offset by the portion of the non-cash small cube covered hopper railcar impairment charge that is not tax-effected because it is related to the noncontrolling interest. See Note 5 for a further explanation of activities with respect to our partially-owned leasing subsidiaries.
Due to the enactment of the CARES Act, Trinity filed a carryback claim for the 2018-2020 tax losses to the 2013-2015 tax years, allowing the recovery of taxes previously paid. The income taxes associated with the carryback claims were paid at a federal rate of 35.0%, rather than the current rate of 21.0% in effect beginning with the 2018 tax year. The overall net impact of the CARES Act was a tax benefit of $0.5 million, a tax expense of $2.5 million, and a tax benefit of $180.4 million for the years ended December 31, 2022 2021, and 2020, respectively.
Income (loss) from continuing operations before income taxes for the years ended December 31, 2022, 2021, and 2020 was $127.1 million, $44.6 million, and $(517.2) million, respectively, for U.S. operations, and $(0.6) million, $10.6 million, and $(7.4) million, respectively, for foreign operations, principally Mexico and Canada.
Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax liabilities and assets are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (in millions) |
Deferred tax liabilities: | | | |
Depreciation, depletion, and amortization | $ | 1,072.6 | | | $ | 1,032.2 | |
| | | |
Partially-owned subsidiaries basis difference | 134.3 | | | 139.2 | |
Right-of-use assets | 20.9 | | | 18.7 | |
Equity items | 4.8 | | | — | |
Accrued liabilities and other | 3.0 | | | 1.9 | |
Total deferred tax liabilities | 1,235.6 | | | 1,192.0 | |
Deferred tax assets: | | | |
Workers compensation, pensions, and other benefits | 27.4 | | | 28.7 | |
Interest expense | 31.3 | | | — | |
Warranties and reserves | 2.8 | | | 7.3 | |
Equity items | — | | | 5.9 | |
Tax loss carryforwards and credits | 40.4 | | | 38.4 | |
Inventory | 3.6 | | | 6.0 | |
| | | |
Lease liabilities | 25.8 | | | 24.4 | |
Total deferred tax assets | 131.3 | | | 110.7 | |
Net deferred tax liabilities before valuation allowances | 1,104.3 | | | 1,081.3 | |
Valuation allowances | 29.5 | | | 24.4 | |
Net deferred tax liabilities before reserve for uncertain tax positions | 1,133.8 | | | 1,105.7 | |
Deferred tax assets included in reserve for uncertain tax positions | (0.7) | | | (1.1) | |
Net deferred tax liability | $ | 1,133.1 | | | $ | 1,104.6 | |
At December 31, 2022, we had $0.2 million of federal consolidated net operating loss carryforwards and $21.3 million of tax-effected state loss carryforwards remaining. We have established valuation allowances for federal, state, and foreign tax operating losses and credits that we have estimated may not be realizable.
Taxing authority examinations
Our tax years through 2019 are effectively settled except with respect to carryback claims related to the 2013 through 2015 tax years, which are currently in review. We do not expect any significant changes to the carryback claims. We have state tax returns that are under audit in the normal course of business, and our Mexican subsidiaries' tax returns statutes of limitations remain open for auditing 2017 forward. We believe we are appropriately reserved for any potential matters.
Unrecognized tax benefits
The change in unrecognized tax benefits was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Beginning balance | $ | 2.3 | | | $ | 2.3 | | | $ | 2.3 | |
Additions for tax positions related to the current year | 1.1 | | | — | | | — | |
Additions for tax positions of prior years | 1.7 | | | — | | | — | |
Reductions for tax positions of prior years | — | | | — | | | — | |
Settlements | — | | | — | | | — | |
Expiration of statute of limitations | (1.3) | | | — | | | — | |
Ending balance | $ | 3.8 | | | $ | 2.3 | | | $ | 2.3 | |
The total amount of unrecognized tax benefits, including interest and penalties, at December 31, 2022 and 2021, that would affect our effective tax rate if recognized, was $2.5 million and $4.3 million, respectively. The additions for tax positions in the current year and prior years are due to foreign positions of an acquired subsidiary that was recorded as part of our purchase accounting. The expiration of statute of limitations relates to a state tax position for which the statute of limitations has lapsed.
The Company accounts for interest expense and penalties related to income tax issues as income tax expense. Accordingly, interest expense and penalties associated with an uncertain tax position are included in the income tax provision. The total amount of accrued interest and penalties from continuing operations as of December 31, 2022 and 2021 was $2.2 million and $3.0 million, respectively. Income tax expense for the years ended December 31, 2022, 2021, and 2020 included a decrease of $(0.8) million, and an increase of $0.1 million, and $0.2 million, respectively, with regard to interest expense and penalties related to uncertain tax positions.
On August 16, 2022, the Inflation Reduction Act (the “IRA”) was signed into law, imposing a 15% minimum tax on U.S. based companies with global net income in excess of $1 billion, and a 1% excise tax on stock buy backs on all publicly traded companies, starting in 2023. We do not believe the IRA will have a material impact on our income tax liability or effective tax rate, and will monitor this position on a regular basis.
Note 10. Employee Retirement Plans
We sponsor defined benefit plans and a defined contribution plan (the "401(k) plan") that provide retirement income and death benefits for eligible employees. The annual measurement date of the benefit obligations, fair value of plan assets, and funded status is December 31.
Pension Plan Termination
In September 2019, our Board of Directors approved the termination of the Trinity Industries, Inc. Consolidated Pension Plan (the "Pension Plan"), effective December 31, 2019. The Pension Plan was settled in the fourth quarter of 2020, which resulted in the Company no longer having any remaining funded pension plan obligations. Upon settlement, we recognized a pre-tax non-cash pension settlement charge in the fourth quarter of 2020 of $151.5 million, which was inclusive of all unamortized losses previously recorded in AOCI.
As of December 31, 2020, the remaining surplus of the Pension Plan was $23.6 million. During the year ended December 31, 2021, as permitted by applicable regulations, we used $10.9 million of the Pension Plan surplus to fund obligations associated with the Company's profit sharing plans and used $2.5 million to fund pension administrative expenses required to finalize the settlement of the Pension Plan. Additionally, we received a $6.4 million net refund upon final settlement of the annuity contract, which resulted in a remaining surplus of the Pension Plan of $16.6 million. During the fourth quarter of 2021, we reverted $16.0 million of the surplus pension assets to the Company and incurred an excise tax of approximately $3.2 million. These activities are included in the pension plan settlement line in our Consolidated Statements of Operations. As of December 31, 2021, the remaining surplus of the Pension Plan was $0.6 million.
During the year ended December 31, 2022, we used $0.2 million to fund pension administrative expenses, resulting in a remaining surplus of the Pension Plan of $0.4 million at December 31, 2022.
Actuarial assumptions
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Assumptions used to determine benefit obligations at the annual measurement date were: | | | | | |
Obligation discount rate (1) | N/A | | N/A | | N/A |
| | | | | |
Assumptions used to determine net periodic benefit costs were: | | | | | |
Obligation discount rate (1) | N/A | | N/A | | 2.71 | % |
Long-term rate of return on plan assets (1) | N/A | | N/A | | 3.90 | % |
| | | | | |
(1) Not applicable as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021 as all qualified pension plans were settled as of December 31, 2020.
Prior to the settlement of our Pension Plan, the obligation discount rate assumption was determined by deriving a single discount rate from a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for the plans' projected benefit payments. The expected long-term rate of return on the plans' assets was an assumption reflecting the anticipated weighted average rate of earnings on the portfolio over the long-term. To arrive at this rate, estimates were developed based upon the anticipated performance of the plans' assets. Substantially all of the accrued benefits of our remaining pension plans were frozen in 2009, with all qualified pension plans settled as of December 31, 2020.
Components of Net Periodic Benefit Cost and Other Retirement Expenses
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Expense Components | | | | | |
Service cost | $ | — | | | $ | — | | | $ | — | |
Interest | 0.4 | | | 0.4 | | | 14.8 | |
Expected return on plan assets | — | | | — | | | (20.9) | |
Amortization of actuarial loss | 0.3 | | | 0.3 | | | 6.0 | |
Amortization of prior service cost | — | | | — | | | 1.2 | |
Settlement loss | — | | | — | | | 151.5 | |
| | | | | |
Net periodic benefit cost | 0.7 | | | 0.7 | | | 152.6 | |
Defined contribution expense | 9.1 | | | 8.6 | | | 7.5 | |
Net expense | $ | 9.8 | | | $ | 9.3 | | | $ | 160.1 | |
The expected return on plan assets for the year ended December 31, 2020 was based on the plan assets' fair value. Amortization of actuarial loss is determined using the corridor method. Under the corridor method, unamortized actuarial gains or losses in excess of 10% of the greater of the projected benefit obligation or the fair value of plan assets as of the beginning of the plan year are amortized, for frozen plans, over the average expected remaining lifetime of frozen and inactive participants. The non-service cost components of net periodic benefit cost are included in other, net (income) expense in our Consolidated Statements of Operations.
Obligations and funded status
At December 31, 2022 and 2021, the projected benefit obligations and net funded status of our Supplemental Executive Retirement Plan ("SERP") were $11.2 million and $14.5 million, respectively, which are included in accrued liabilities in our Consolidated Balance Sheets.
Amounts recognized in other comprehensive income (loss)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Settlement of pension plan | $ | — | | | $ | — | | | $ | 151.5 | |
Actuarial gain (loss) | 2.6 | | | 0.4 | | | 10.4 | |
Amortization of actuarial loss | 0.3 | | | 0.3 | | | 6.0 | |
Amortization of prior service cost | — | | | — | | | 1.2 | |
| | | | | |
Total before income taxes | 2.9 | | | 0.7 | | | 169.1 | |
Income tax (benefit) expense | 0.6 | | | 0.2 | | | 39.2 | |
Net amount recognized in other comprehensive income (loss) | $ | 2.3 | | | $ | 0.5 | | | $ | 129.9 | |
At December 31, 2022, AOCI included unrecognized actuarial losses related to our SERP of $2.3 million ($1.2 million net of related income taxes). Actuarial losses included in AOCI and expected to be recognized in net periodic pension cost for the year ended December 31, 2023 are $0.1 million ($0.1 million net of related income taxes).
Plan assets
The target and actual investment allocation strategy at December 31, 2022 and 2021 is 100% cash and cash equivalents. The estimated fair value of the plans' assets at December 31, 2022 and 2021 was $0.4 million and $0.6 million, respectively, of temporary cash investments (Level 1).
The pension plans' assets are valued at fair value. Temporary cash investments consist of U.S. dollars held in master trust accounts with the trustee. These temporary cash investments are classified as Level 1 instruments. See Note 3 for a description of the valuation methodologies used in determining fair value.
Funding of Defined Contribution Plans
The Company's 401(k) plan utilizes a qualified automatic contribution arrangement safe harbor plan structure. The matching structure provides for a dollar-for-dollar Company match on up to 6% of participants' eligible compensation, subject to a two-year cliff vesting period. Employer contributions to the 401(k) plan and the Trinity Industries, Inc. Deferred Compensation Plan for the year ending December 31, 2023 are expected to be $8.7 million, compared to $8.6 million contributed during 2022.
Note 11. Asset Impairments and Restructuring Activities
Second quarter of 2020 impairment of small cube covered hopper railcars
We monitor the carrying values of long-lived assets and right-of-use assets for potential impairment. The carrying values of long-lived assets and right-of-use assets are considered impaired when the asset's carrying value is not recoverable through undiscounted future cash flows and the asset's carrying value exceeds its fair value.
During the second quarter of 2020, the oil and gas proppants (or “frac sand”) industry continued to experience economic pressure created by low oil prices, reduced fracking activity, and the ongoing economic impact of COVID-19. Significant price declines in the crude oil market, as well as lower demand for certain commodities, resulted in a decline in customer demand for certain types of railcars. As a result, certain of the Leasing Group's small cube covered hopper customers requested rent relief and, in a number of cases, filed for bankruptcy in the second quarter of 2020. We concluded that the collective impact of these developments, including the shift towards the use of in-basin sand, constituted a fundamental and other-than-temporary change in the future demand for this railcar type. Therefore, we determined that the events and circumstances that arose during the second quarter of 2020 constituted an impairment triggering event related to the small cube covered hopper car type in our lease fleet portfolio.
We performed a cash flow recoverability test of our small cube covered hopper railcars and compared the undiscounted cash flows to the carrying value of the assets. This analysis indicated that the carrying value exceeded the estimated undiscounted cash flows, and therefore, we were required to measure the fair value of our fleet of small cube covered hopper railcars and determine the amount of an impairment loss, if any.
The fair value of the asset group was determined using an income approach, which we believe most accurately reflects a market participant's viewpoint in valuing these railcars. The results of our analysis indicated an estimated fair value of the asset group of approximately $191.7 million, in comparison to the asset group's carrying amount of $550.0 million, net of deferred profit. As a result, during the second quarter, we recorded a pre-tax non-cash impairment charge of $358.3 million related to our small cube covered hopper railcars. Additionally, we evaluated the right-of-use assets associated with our leased-in portfolio of small cube covered hopper railcars and determined that these assets were impaired based on consideration of an expected decline in future cash flows over the remaining lease term, which resulted in an additional pre-tax non-cash impairment charge of approximately $11.1 million. The aggregate impairment charge of $369.4 million, which includes $81.3 million associated with noncontrolling interest, is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.
Significant management judgment was used to determine the key assumptions utilized in our impairment analysis, the substantial majority of which represent unobservable (Level 3) inputs. These assumptions included, but were not limited to: estimates regarding the remaining useful life over which the railcars are expected to generate cash flows; average lease rates; railcar utilization percentages; operating expenses; and the selection of an appropriate discount rate. Management selected these estimates and assumptions based on our railcar industry expertise. We also consulted with third-party energy and frac sand industry experts to gain insights with respect to the long-term outlook for these underlying markets.
Other asset write-downs
During the fourth quarter of 2020, management approved a plan to exit certain non-strategic maintenance facilities (the "disposal group"). We determined that the planned divestiture of the disposal group met the criteria to be classified as assets held for sale, and consequently, we measured the assets of the disposal group at fair value, less any costs to sell. The results of our analysis indicated a pre-tax non-cash write-down of $15.2 million, which we recorded during the year ended December 31, 2020. The charge is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.
Additionally, during the year ended December 31, 2020, we recorded a pre-tax non-cash charge to write off $11.8 million related to investments in certain emerging technologies. This charge is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.
Restructuring activities
Throughout 2020, as part of our ongoing efforts to better align support services with our rail-focused strategy, we approved a restructuring plan that resulted in headcount reductions across multiple functions, including certain corporate and operational support functions primarily at our Dallas headquarters.
During the year ended December 31, 2020, we recorded total restructuring charges of $10.9 million, consisting of $7.7 million for severance costs, $5.3 million of non-cash charges primarily from the write-down of our corporate headquarters campus and certain other assets, and $0.6 million in contract termination costs, partially offset by a $2.7 million net gain on the disposition of a non-operating facility and certain related assets.
During the year ended December 31, 2021, restructuring activities resulted in a net gain of $3.7 million, primarily as a result of a $4.0 million net gain on the disposition of our prior corporate headquarters facility and certain non-operating facilities, partially offset by $0.3 million in employee severance costs.
During the year ended December 31, 2022, we recorded total restructuring charges of $1.0 million related to the disposition of certain assets related to our prior corporate headquarters. As of December 31, 2022 and 2021, the restructuring liability was not material and is included in other liabilities in our Consolidated Balance Sheet.
As we continue to optimize our organizational structure, it is possible that we will engage in additional restructuring activities in the future.
Although restructuring activities are not allocated to our reportable segments, the following tables summarize the restructuring activities by reportable segment for the years ended December 31, 2021 and 2020. For the year ended December 31, 2022, restructuring charges of $1.0 million related to the Corporate and other grouping.
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| Year Ended December 31, 2021 |
| Employee Severance Costs | | | | Gain on Disposition of Assets | | | | Total |
| (in millions) |
Railcar Leasing and Management Services Group | $ | — | | | | | $ | — | | | | | $ | — | |
Rail Products Group | 0.3 | | | | | — | | | | | 0.3 | |
Corporate and other | — | | | | | (4.0) | | | | | (4.0) | |
Total restructuring activities | $ | 0.3 | | | | | $ | (4.0) | | | | | $ | (3.7) | |
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| Year Ended December 31, 2020 |
| Employee Severance Costs | | Contract Termination Costs | | (Gain)/Loss on Disposition of Assets | | Write-down of Assets | | Total |
| (in millions) |
Railcar Leasing and Management Services Group | $ | 1.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1.4 | |
Rail Products Group | 4.0 | | | 0.2 | | | (2.9) | | | — | | | 1.3 | |
Corporate and other | 2.3 | | | 0.4 | | | 0.2 | | | 5.3 | | | 8.2 | |
Total restructuring activities | $ | 7.7 | | | $ | 0.6 | | | $ | (2.7) | | | $ | 5.3 | | | $ | 10.9 | |
Note 12. Accumulated Other Comprehensive Income (Loss)
Changes in AOCI for the years ended December 31, 2022 and 2021 are as follows:
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| Currency translation adjustments | | Unrealized gain/(loss) on derivative financial instruments | | Net actuarial gains/(losses) of defined benefit plans | | Accumulated Other Comprehensive Income (Loss) |
| (in millions) |
Balances at December 31, 2020 | $ | (1.3) | | | $ | (25.6) | | | $ | (4.0) | | | $ | (30.9) | |
Other comprehensive income, net of tax, before reclassifications | — | | | 9.2 | | | 0.3 | | | 9.5 | |
Amounts reclassified from AOCI, net of tax benefit of $—, $1.2, $0.1, and $1.3 | — | | | 5.4 | | | 0.2 | | | 5.6 | |
| | | | | | | |
Less: noncontrolling interest | — | | | (1.2) | | | — | | | (1.2) | |
Other comprehensive income | — | | | 13.4 | | | 0.5 | | | 13.9 | |
Balances at December 31, 2021 | (1.3) | | | (12.2) | | | (3.5) | | | (17.0) | |
Other comprehensive income, net of tax, before reclassifications | — | | | 29.3 | | | 2.1 | | | 31.4 | |
Amounts reclassified from AOCI, net of tax benefit of $—, $0.8, $0.1, and $0.9 | — | | | 3.5 | | | 0.2 | | | 3.7 | |
Amounts reclassified to discontinued operations, net of tax | 1.3 | | | — | | | — | | | 1.3 | |
Less: noncontrolling interest | — | | | 0.3 | | | — | | | 0.3 | |
Other comprehensive income | 1.3 | | | 33.1 | | | 2.3 | | | 36.7 | |
Balances at December 31, 2022 | $ | — | | | $ | 20.9 | | | $ | (1.2) | | | $ | 19.7 | |
See Note 3 for information on the reclassification of amounts in AOCI into earnings. Reclassifications of unrealized before-tax gains and losses on derivative financial instruments are included in interest expense, net for our interest rate hedges and in cost of revenues for our foreign currency hedges in our Consolidated Statements of Operations. Reclassifications of before-tax net actuarial gains/(losses) of defined benefit plans are included in other, net (income) expense in our Consolidated Statements of Operations. Changes in currency translation adjustments above relate to the final resolution of amounts associated with businesses previously disposed and are included in loss on sale of discontinued operations, net of income taxes in our Consolidated Statements of Operations.
Note 13. Common Stock and Stock-Based Compensation
Stockholders' Equity
New Share Repurchase Authorization
In December 2022, our Board of Directors authorized a new share repurchase program effective December 9, 2022 with no expiration. The new share repurchase program authorizes the Company to repurchase up to $250.0 million of its common stock. There were no shares repurchased under the new share repurchase program during the year ended December 31, 2022.
Previous Share Repurchase Authorization
In September 2021, our Board of Directors authorized a share repurchase program effective September 9, 2021 through December 31, 2022. The share repurchase program authorized the Company to repurchase up to $250.0 million of its common stock. In December 2021, we entered into an accelerated share repurchase agreement (the "ASR") to repurchase $125.0 million of our common stock. Approximately 3.3 million shares totaling $100.0 million that were repurchased as part of the ASR on December 31, 2021 were delivered to the Company in January 2022 in accordance with normal settlement practices, representing approximately 80% of the total notional value of the ASR. The ASR was completed in April 2022. Our Board of Directors terminated this share repurchase program effective December 8, 2022, and the remaining authorization of $21.3 million under this program expired unused. Share repurchase activity under this program was as follows:
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| Shares Repurchased | | Remaining Authorization to Repurchase | |
Period | Number of shares | | Cost (in millions) | | Cost (in millions) | |
September 9, 2021 Authorization | | | | | $ | 250.0 | | |
September 9, 2021 through September 30, 2021 | — | | | $ | — | | | $ | 250.0 | | |
October 1, 2021 through December 31, 2021 | 5,155,491 | | | 151.9 | | | $ | 98.1 | | |
January 1, 2022 through March 31, 2022 | — | | | — | | | $ | 98.1 | | |
April 1, 2022 through June 30, 2022 | 1,760,462 | | | 50.3 | | | $ | 47.8 | | (1) | |
July 1, 2022 through September 30, 2022 | 610,000 | | | 14.1 | | | $ | 33.7 | | |
October 1, 2022 through December 31, 2022 | 427,383 | | | 12.4 | | | $ | 21.3 | | |
Total | 7,953,336 | | | $ | 228.7 | | | | |
(1) Share repurchases during the second quarter of 2022 included 760,602 shares at a cost of $25.0 million representing the final settlement of the ASR, which was funded in December 2021 but a portion of which remained outstanding as of December 31, 2021.
During the years ended December 31, 2022, 2021, and 2020, share repurchases totaled 2.8 million, 28.5 million, and 9.3 million shares, respectively, at a cost of approximately $76.8 million, $806.6 million, and $193.1 million, respectively. Share repurchases during the year ended December 31, 2021 included 16.9 million shares, at a cost of approximately $472.5 million, from privately negotiated transactions with ValueAct Capital Master Fund, L.P ("ValueAct"). The repurchases from ValueAct were approved by our Board of Directors separately from, and did not reduce the authorized amount remaining under, any of our share repurchase programs.
Stock-Based Compensation
Stock Award Plans
Our 2004 Fourth Amended and Restated Trinity Industries, Inc. Stock Option and Incentive Plan (the "Plan”) provides for awarding 20,150,000 (adjusted for stock splits) shares of common stock plus (i) shares covered by forfeited, expired, and canceled options granted under prior plans; and (ii) shares tendered as full or partial payment for the purchase price of an award or to satisfy tax withholding obligations. At December 31, 2022, a total of 1,772,345 shares were available for issuance. The Plan provides for the granting of nonqualified and incentive stock options having maximum ten-year terms to purchase common stock at its market value on the award date; stock appreciation rights based on common stock fair market values with settlement in common stock or cash; restricted stock awards; restricted stock units; and performance awards with settlement in common stock or cash on achievement of specific business objectives. Our stock options have contractual terms of ten years and become exercisable over a three-year period.
Stock-Based Compensation Expense
The cost of employee services received in exchange for awards of equity instruments is referred to as stock-based compensation and is recognized over the applicable vesting periods based on the grant date fair-value of those awards. Stock-based compensation expense totaled $22.5 million, $20.7 million, and $25.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The income tax benefit related to stock-based compensation expense was $2.6 million, $10.7 million, and $0.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.