Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________ .
Commission File Number 1-6903
trinityinclogoa01.jpg
(Exact name of registrant as specified in its charter)

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No þ
At April 14, 2017 the number of shares of common stock outstanding was 152,173,149.


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




2
Table of Contents

PART I
Item 1. Financial Statements
Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions, except per share amounts)
Revenues:
 
 
 
Manufacturing
$
698.7

 
$
1,010.1

Leasing
178.6

 
177.8

 
877.3

 
1,187.9

Operating costs:
 
 
 
Cost of revenues:
 
 
 
Manufacturing
576.1

 
793.9

Leasing
83.6

 
96.0

 
659.7

 
889.9

Selling, engineering, and administrative expenses:
 
 
 
Manufacturing
56.5

 
61.4

Leasing
10.8

 
10.4

Other
35.0

 
24.7

 
102.3

 
96.5

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

 
2.1

Other
1.3

 
(0.2
)
 
1.3

 
1.9

Total operating profit
116.6

 
203.4

Other (income) expense:
 
 
 
Interest income
(1.7
)
 
(1.2
)
Interest expense
45.0

 
45.8

Other, net
0.8

 
(0.7
)
 
44.1

 
43.9

Income before income taxes
72.5

 
159.5

Provision for income taxes
20.8

 
57.4

Net income
51.7

 
102.1

Net income attributable to noncontrolling interest
5.7

 
4.9

Net income attributable to Trinity Industries, Inc.
$
46.0

 
$
97.2

 
 
 
 
Net income attributable to Trinity Industries, Inc. per common share:
 
 
 
Basic
$
0.30

 
$
0.64

Diluted
$
0.30

 
$
0.64

Weighted average number of shares outstanding:
 
 
 
Basic
148.7

 
148.3

Diluted
150.6

 
148.3

Dividends declared per common share
$
0.11

 
$
0.11

See accompanying notes to consolidated financial statements.

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Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Net income
$
51.7

 
$
102.1

Other comprehensive income (loss):
 
 
 
Derivative financial instruments:
 
 
 
Unrealized losses arising during the period, net of tax benefit of $- and $0.2
—

 
(0.4
)
Reclassification adjustments for losses included in net income, net of tax benefit of $0.3 and $0.4
1.0

 
1.0

Currency translation adjustment
0.3

 
1.5

Defined benefit plans:
 
 
 
Amortization of net actuarial losses, net of tax benefit of $0.4 and $0.5
0.8

 
0.8

 
2.1

 
2.9

Comprehensive income
53.8

 
105.0

Less: comprehensive income attributable to noncontrolling interest
6.5

 
5.4

Comprehensive income attributable to Trinity Industries, Inc.
$
47.3

 
$
99.6

See accompanying notes to consolidated financial statements.

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Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
 
March 31,
2017
 
December 31,
2016
 
(unaudited)
 
 
 
(in millions)
ASSETS
 
 
 
Cash and cash equivalents
$
586.7

 
$
563.4

Short-term marketable securities
192.1

 
234.7

Receivables, net of allowance
323.7

 
378.7

Income tax receivable
133.0

 
102.1

Inventories:
 
 
 
Raw materials and supplies
275.8

 
302.5

Work in process
186.0

 
189.5

Finished goods
170.3

 
173.8

 
632.1

 
665.8

Restricted cash, including partially-owned subsidiaries of $83.4 and $78.4
183.8

 
178.2

Property, plant, and equipment, at cost, including partially-owned subsidiaries of $1,979.8 and $1,979.8
8,161.1

 
7,981.0

Less accumulated depreciation, including partially-owned subsidiaries of $378.0 and $364.9
(2,081.0
)
 
(2,014.2
)
 
6,080.1

 
5,966.8

Goodwill
754.3

 
754.1

Other assets
257.6

 
281.5

 
$
9,143.4

 
$
9,125.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
156.4

 
$
156.1

Accrued liabilities
398.6

 
426.1

Debt:
 
 
 
Recourse, net of unamortized discount of $22.5 and $27.1
854.5

 
850.6

Non-recourse:
 
 
 
Wholly-owned subsidiaries
827.8

 
840.0

Partially-owned subsidiaries
1,353.7

 
1,366.0

 
3,036.0

 
3,056.6

Deferred income
22.7

 
23.5

Deferred income taxes
1,128.5

 
1,072.9

Other liabilities
52.3

 
79.0

 
4,794.5

 
4,814.2

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

 
—

Common stock – 400.0 shares authorized
1.6

 
1.6

Capital in excess of par value
544.4

 
534.6

Retained earnings
3,526.0

 
3,497.3

Accumulated other comprehensive loss
(112.2
)
 
(113.5
)
Treasury stock
(2.7
)
 
(1.5
)
 
3,957.1

 
3,918.5

Noncontrolling interest
391.8

 
392.6

 
4,348.9

 
4,311.1

 
$
9,143.4

 
$
9,125.3

See accompanying notes to consolidated financial statements.

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Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Operating activities:

 

Net income
$
51.7

 
$
102.1

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

 

Depreciation and amortization
72.8

 
69.4

Stock-based compensation expense
7.6

 
10.3

Excess tax benefits from stock-based compensation
—

 
(0.4
)
Provision for deferred income taxes
55.3

 
60.5

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

 
(2.1
)
(Gains) losses on dispositions of property and other assets
(1.3
)
 
0.2

Non-cash interest expense
7.3

 
7.2

Other
0.1

 
(1.0
)
Changes in assets and liabilities:

 

(Increase) decrease in receivables
24.1

 
67.9

(Increase) decrease in inventories
33.7

 
7.0

(Increase) decrease in other assets
22.1

 
30.4

Increase (decrease) in accounts payable
0.3

 
7.0

Increase (decrease) in accrued liabilities
(26.6
)
 
(73.3
)
Increase (decrease) in other liabilities
(27.0
)
 
0.9

Net cash provided by operating activities
220.1

 
286.1



 

Investing activities:

 

(Increase) decrease in short-term marketable securities
42.6

 
(115.0
)
Proceeds from dispositions of property and other assets
3.6

 
1.1

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

 
6.7

Capital expenditures – leasing, net of sold lease fleet railcars owned one year or less with a net cost of $ – and $5.7
(162.9
)
 
(222.8
)
Capital expenditures – manufacturing and other
(24.3
)
 
(26.3
)
Other
0.5

 
0.2

Net cash required by investing activities
(140.5
)
 
(356.1
)


 

Financing activities:

 

Excess tax benefits from stock-based compensation
—

 
0.4

Payments to retire debt
(26.7
)
 
(30.4
)
(Increase) decrease in restricted cash
(5.6
)
 
10.2

Shares repurchased
—

 
(34.7
)
Dividends paid to common shareholders
(16.7
)
 
(16.8
)
Purchase of shares to satisfy employee tax on vested stock
—

 
(0.1
)
Distributions to noncontrolling interest
(7.3
)
 
(6.8
)
Other
—

 
(2.1
)
Net cash required by financing activities
(56.3
)
 
(80.3
)
Net increase (decrease) in cash and cash equivalents
23.3

 
(150.3
)
Cash and cash equivalents at beginning of period
563.4

 
786.0

Cash and cash equivalents at end of period
$
586.7

 
$
635.7

See accompanying notes to consolidated financial statements.

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Table of Contents

Trinity Industries, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(unaudited)
 
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Trinity
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
 
Shares
 
$0.01 Par Value
 
 
 
 
Shares
 
Amount
 
 
 
 
 
(in millions, except par value)
Balances at
December 31, 2016
 
152.2

 
$
1.6

 
$
534.6

 
$
3,497.3

 
$
(113.5
)
 
(0.1
)
 
$
(1.5
)
 
$
3,918.5

 
$
392.6

 
$
4,311.1

Net income
 
—

 
—

 
—

 
46.0

 
—

 
—

 
—

 
46.0

 
5.7

 
51.7

Other comprehensive income
 
—

 
—

 
—

 
—

 
1.3

 
—

 
—

 
1.3

 
0.8

 
2.1

Cash dividends on common stock
 
—

 
—

 
—

 
(16.7
)
 
—

 
—

 
—

 
(16.7
)
 
—

 
(16.7
)
Restricted shares, net
 
—

 
—

 
8.8

 
—

 
—

 
—

 
(1.2
)
 
7.6

 
—

 
7.6

Stock options exercised
 
—

 
—

 
0.1

 
—

 
—

 
—

 
—

 
0.1

 
—

 
0.1

Disbursements to non-controlling interest
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7.3
)
 
(7.3
)
Other
 
—

 
—

 
0.9

 
(0.6
)
 
—

 
—

 
—

 
0.3

 
—

 
0.3

Balances at
March 31, 2017
 
152.2

 
$
1.6

 
$
544.4

 
$
3,526.0

 
$
(112.2
)
 
(0.1
)
 
$
(2.7
)
 
$
3,957.1

 
$
391.8

 
$
4,348.9

See accompanying notes to consolidated financial statements.

7
Table of Contents

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

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The foregoing consolidated financial statements are unaudited and have been prepared from the books and records of Trinity Industries, Inc. and its consolidated subsidiaries (“Trinity,” “Company,” “we,” or “our”) including the accounts of its wholly-owned subsidiaries and its partially-owned subsidiaries, TRIP Rail Holdings LLC (“TRIP Holdings”) and RIV 2013 Rail Holdings LLC ("RIV 2013"), in which the Company has a controlling interest. In our opinion, all normal and recurring adjustments necessary for a fair presentation of the financial position of the Company as of March 31, 2017, and the results of operations and cash flows for the three months ended March 31, 2017 and 2016, have been made in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. Because of seasonal and other factors, the results of operations for the three months ended March 31, 2017 may not be indicative of expected results of operations for the year ending December 31, 2017. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of the Company included in its Form 10-K for the year ended December 31, 2016.
Stockholders' Equity
In December 2015, the Company’s Board of Directors renewed its $250 million share repurchase program effective January 1, 2016 through December 31, 2017. Under the program, no shares were repurchased during the three months ended March 31, 2017. During the three months ended March 31, 2016, the Company repurchased 2,070,600 shares at a cost of approximately $34.7 million. As of March 31, 2017, the remaining authorization under the program totaled $215.4 million
Revenue Recognition
Revenues for contracts providing for a large number of units and few deliveries are recorded as the individual units are produced, inspected, and accepted by the customer as the risk of loss passes to the customer upon delivery acceptance on these contracts. Revenues for certain customer requested “bill and hold” arrangements, primarily in the Energy Equipment Group, are recognized when all of the following conditions have been met: the risks of ownership have passed to the customer, the customer has made a fixed commitment to purchase the goods, there is a fixed delivery schedule consistent with the customer’s business purpose, the customer’s goods have been segregated from our inventory and are not available to fill other orders, the goods are complete and ready for shipment, and no additional performance obligations exist for the Company. Revenue from rentals and operating leases, including contracts that contain non-level fixed rental payments, is recognized monthly on a straight-line basis. Revenue is recognized from the sales of railcars from the lease fleet on a gross basis in leasing revenues and cost of revenues if the railcar has been owned for one year or less at the time of sale. Sales of railcars from the lease fleet owned for more than one year are recognized as a net gain or loss from the disposal of a long-term asset. Fees for shipping and handling are recorded as revenue. For all other products, we recognize revenue when products are shipped or services are provided.
Financial Instruments
The Company considers all highly liquid debt instruments to be either cash and cash equivalents if purchased with a maturity of three months or less, or short-term marketable securities if purchased with a maturity of more than three months and less than one year. The Company intends to hold its short-term marketable securities until they are redeemed at their maturity date and believes that under the "more likely than not" criteria, the Company will not be required to sell the securities before recovery of their amortized cost bases, which may be maturity.
Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments including restricted cash, short-term marketable securities, and receivables. The Company places its cash investments and short-term marketable securities in bank deposits and investment grade, short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. Concentrations of credit risk with respect to receivables are limited due to control procedures that monitor the credit worthiness of customers, the large number of customers in the Company's customer base, and their dispersion across different industries and geographic areas. As receivables are generally unsecured, the Company maintains an allowance for doubtful accounts based upon the expected collectibility of all receivables. Receivable balances determined to be uncollectible are charged against the allowance. The carrying values of cash, short-term marketable securities (using level two inputs), receivables, and accounts payable are considered to be representative of their respective fair values.
Recent Accounting Pronouncements
On January 1, 2017, the Company adopted Accounting Standards Update 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”, (ASU 2016-09”) which changed how companies account for certain aspects of share-based payments to employees. ASU 2016-09 requires, among other things, that excess tax benefits or

8
Table of Contents

deficiencies related to vested awards, previously recognized in stockholders' equity, be included in income tax expense when the awards vest. The adoption of ASU 2016-09 resulted in an adjustment to retained earnings of $0.6 million, net of tax, as of January 1, 2017 related to the cumulative effect of the standard. For the three months ended March 31, 2017, the effect on the provision for income taxes included in the consolidated statement of operations was not significant.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09") providing common revenue recognition guidance for U.S. GAAP. Under ASU 2014-09, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires additional detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2017.
The Company plans to adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective method of adoption. Under this method, the guidance will be applied only to the most current period presented in the financial statements and the cumulative effect of initially applying the standard will result in an adjustment to the opening balance of retained earnings as of the date of adoption. Using both internal and external resources, the Company continues to evaluate the requirements of the standard and their application to our various business units. While our technical analysis is on-going, we anticipate a change in the timing of revenue recognition for our wind towers and utility structures product lines within our Energy Equipment Group, no longer recognizing revenue when products are delivered, but under the new guidance, recognizing revenue over time as products are manufactured. The impact of this change cannot be reasonably estimated at this time. We expect revenue recognition policies related to our other business segments to remain substantially unchanged as a result of adopting ASU 2014-09, although this could change based on our on-going analysis. Additionally, we do not anticipate significant changes in business processes or systems.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases", ("ASU 2016-02") which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt ASU 2016-02 effective January 1, 2019. We are continuing to assess the potential effects of the new standard, including its effects on our consolidated financial statements and the accounting for revenue from full service leases.
In December 2016, the FASB issued Accounting Standards Update No. 2016-18, "Restricted Cash", ("ASU 2016-18") which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash flows to the related cash and cash equivalents and restricted cash captions in the balance sheet. ASU 2016-18 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company plans to adopt ASU 2016-18 effective January 1, 2018. The effect of adopting this standard is not expected to be significant.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, “Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) which changes how companies that sponsor defined benefit pension plans present the related net periodic benefit cost in the income statement. The service cost component of the net periodic benefit cost will continue to be presented in the same income statement line items, however other components of the net periodic benefit cost will be presented as a component of other income and excluded from operating profit. ASU 2017-07 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company plans to adopt ASU 2016-18 effective January 1, 2018. The effect of adopting this standard is not expected to be significant.

Note 2. Acquisitions and Divestitures
There was no acquisition or divestiture activity for the three months ended March 31, 2017 and 2016.


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Note 3. Fair Value Accounting
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurement as of March 31, 2017
 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
114.7

 
$
—

 
$
—

 
$
114.7

Restricted cash
183.8

 
—

 
—

 
183.8

Equity instruments(1)
—

 
3.5

 
—

 
3.5

Fuel derivative instruments(1)
—

 
0.1

 
—

 
0.1

Total assets
$
298.5

 
$
3.6

 
$
—

 
$
302.1

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate hedge:(2)
 
 
 
 
 
 
 
Partially-owned subsidiaries
$
—

 
$
0.7

 
$
—

 
$
0.7

Total liabilities
$
—

 
$
0.7

 
$
—

 
$
0.7

 
 
 
 
 
 
 
 
 
Fair Value Measurement as of December 31, 2016
 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
188.7

 
$
—

 
$
—

 
$
188.7

Restricted cash
178.2

 
—

 
—

 
178.2

Equity instruments(1)
—

 
3.1

 
—

 
3.1

Fuel derivative instruments(1)
—

 
0.3

 
—

 
0.3

Total assets
$
366.9

 
$
3.4

 
$
—

 
$
370.3

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate hedge:(2)
 
 
 
 
 
 
 
Partially-owned subsidiaries
$
—

 
$
0.9

 
$
—

 
$
0.9

Total liabilities
$
—

 
$
0.9

 
$
—

 
$
0.9

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

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The carrying amounts and estimated fair values of our long-term debt are as follows:
 
March 31, 2017
 
December 31, 2016
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
 
(in millions)
Recourse:
 
 
 
 
 
 
 
Senior notes
$
399.7

 
$
400.3

 
$
399.6

 
$
386.3

Convertible subordinated notes
449.4

 
548.0

 
449.4

 
575.5

Less: unamortized discount
(22.2
)
 
 
 
(26.7
)
 
 
 
427.2

 
 
 
422.7

 
 
Capital lease obligations
31.2

 
31.2

 
32.1

 
32.1

 
858.1

 
979.5

 
854.4

 
993.9

Less: unamortized debt issuance costs
(3.6
)
 
 
 
(3.8
)
 
 
 
854.5

 
 
 
850.6

 
 
Non-recourse:
 
 
 
 
 
 
 
2006 secured railcar equipment notes
188.2

 
195.0

 
194.2

 
201.5

2009 secured railcar equipment notes
171.0

 
187.9

 
172.5

 
189.9

2010 secured railcar equipment notes
277.1

 
280.8

 
280.6

 
284.3

TILC warehouse facility
202.0

 
202.0

 
204.1

 
204.1

TRL 2012 secured railcar equipment notes
419.7

 
390.6

 
425.5

 
395.6

TRIP Master Funding secured railcar equipment notes
948.6

 
953.6

 
955.5

 
960.6

 
2,206.6

 
2,209.9

 
2,232.4

 
2,236.0

Less: unamortized debt issuance costs
(25.1
)
 
 
 
(26.4
)
 
 
 
2,181.5

 
 
 
2,206.0

 
 
Total
$
3,036.0

 
$
3,189.4

 
$
3,056.6

 
$
3,229.9

The estimated fair values of our senior notes and convertible subordinated notes were based on a quoted market price in a market with little activity as of March 31, 2017 and December 31, 2016 (Level 2 input). The estimated fair values of our 2006, 2009, 2010, and 2012 secured railcar equipment notes and TRIP Rail Master Funding LLC (“TRIP Master Funding”) secured railcar equipment notes are based on our estimate of their fair value as of March 31, 2017 and December 31, 2016. These values were determined by discounting their future cash flows at the current market interest rate (Level 3 inputs). The carrying value of our Trinity Industries Leasing Company (“TILC”) warehouse facility approximates fair value because the interest rate adjusts to the market interest rate (Level 3 input). The fair values of all other financial instruments are estimated to approximate carrying value. See Note 11 Debt for a description of the Company's long-term debt.

Note 4. Segment Information
The Company reports operating results in five principal business segments: (1) the Rail Group, which manufactures and sells railcars and related parts, components, and maintenance services; (2) the Construction Products Group, which manufactures and sells highway products and other primarily-steel products and services for infrastructure-related projects, and produces and sells construction aggregates; (3) the Inland Barge Group, which manufactures and sells barges and related products for inland waterway services; (4) the Energy Equipment Group, which manufactures and sells products for energy-related businesses, including structural wind towers, steel utility structures for electricity transmission and distribution, storage and distribution containers, and tank heads for pressure and non-pressure vessels; and (5) the Railcar Leasing and Management Services Group (“Leasing Group”), which owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, maintenance, and administrative services. The segment All Other includes our captive insurance and transportation companies; legal, environmental, and maintenance costs associated with non-operating facilities; and other peripheral businesses. Gains and losses from the sale of property, plant, and equipment related to manufacturing and dedicated to the specific manufacturing operations of a particular segment are included in the operating profit of that respective segment. Gains and losses from the sale of property, plant, and equipment that can be utilized by multiple segments are included in operating profit of the All Other segment.

11
Table of Contents

Sales and related net profits ("deferred profit") from the Rail Group to the Leasing Group are recorded in the Rail Group and eliminated in consolidation and reflected in the "Eliminations - Lease subsidiary" line in the table below. Sales between these groups are recorded at prices comparable to those charged to external customers, taking into consideration quantity, features, and production demand. Amortization of deferred profit on railcars sold to the Leasing Group is included in the operating profit of the Leasing Group, resulting in the recognition of depreciation expense based on the Company's original manufacturing cost of the railcars. Sales of railcars from the lease fleet are included in the Leasing Group, with related gains and losses computed based on the net book value of the original manufacturing cost of the railcars.
The financial information for these segments is shown in the tables below. We operate principally in North America.

Three Months Ended March 31, 2017
 
Revenues
 
Operating Profit (Loss)
 
External
 
Intersegment
 
Total
 
 
(in millions)
Rail Group
$
286.0

 
$
192.3

 
$
478.3

 
$
50.7

Construction Products Group
120.9

 
2.2

 
123.1

 
15.6

Inland Barge Group
62.7

 
—

 
62.7

 
6.4

Energy Equipment Group
227.8

 
27.6

 
255.4

 
29.8

Railcar Leasing and Management Services Group
178.6

 
0.3

 
178.9

 
85.0

All Other
1.3

 
21.5

 
22.8

 
(4.6
)
Segment Totals before Eliminations and Corporate
877.3

 
243.9

 
1,121.2

 
182.9

Corporate
—

 
—

 
—

 
(35.0
)
Eliminations – Lease subsidiary
—

 
(181.0
)
 
(181.0
)
 
(28.9
)
Eliminations – Other
—

 
(62.9
)
 
(62.9
)
 
(2.4
)
Consolidated Total
$
877.3

 
$
—

 
$
877.3

 
$
116.6

Three Months Ended March 31, 2016 
 
Revenues
 
Operating Profit (Loss)
 
External
 
Intersegment
 
Total
 
 
(in millions)
Rail Group
$
543.2

 
$
303.7

 
$
846.9

 
$
157.2

Construction Products Group
121.6

 
3.3

 
124.9

 
15.9

Inland Barge Group
110.8

 
—

 
110.8

 
12.6

Energy Equipment Group
232.5

 
40.9

 
273.4

 
37.4

Railcar Leasing and Management Services Group
177.8

 
0.7

 
178.5

 
74.2

All Other
2.0

 
19.9

 
21.9

 
(5.1
)
Segment Totals before Eliminations and Corporate
1,187.9

 
368.5

 
1,556.4

 
292.2

Corporate
—

 
—

 
—

 
(24.7
)
Eliminations – Lease subsidiary
—

 
(283.3
)
 
(283.3
)
 
(65.5
)
Eliminations – Other
—

 
(85.2
)
 
(85.2
)
 
1.4

Consolidated Total
$
1,187.9

 
$
—

 
$
1,187.9

 
$
203.4


12
Table of Contents

Note 5. Partially-Owned Leasing Subsidiaries
The Company, through its wholly-owned subsidiary, TILC, formed two subsidiaries, TRIP Holdings and RIV 2013, for the purpose of providing railcar leasing in North America. Each of TRIP Holdings and RIV 2013 are direct, partially-owned subsidiaries of TILC in which the Company has a controlling interest. Each is governed by a seven-member board of representatives, two of whom are designated by TILC. TILC is the agent of each of TRIP Holdings and RIV 2013 and as such, has been delegated the authority, power, and discretion to take certain actions on behalf of the respective companies.
At March 31, 2017, the Company's carrying value of its investment in TRIP Holdings and RIV 2013 totaled $221.5 million. The Company's weighted average ownership interest in TRIP Holdings and RIV 2013 is 39% while the remaining 61% weighted average interest is owned by third-party investor-owned funds. The Company's investments in its partially-owned leasing subsidiaries are eliminated in consolidation.
Each of TRIP Holdings and RIV 2013 has wholly-owned subsidiaries that are the owners of railcars acquired from the Company's Rail and Leasing Groups. These wholly-owned subsidiaries are TRIP Master Funding (wholly-owned by TRIP Holdings) and Trinity Rail Leasing 2012 LLC ("TRL 2012," wholly-owned by RIV 2013). Railcar purchases by these subsidiaries were funded by secured borrowings and capital contributions from TILC and third-party equity investors.TILC is the contractual servicer for TRIP Master Funding and TRL 2012, with the authority to manage and service each entity's owned railcars. The Company's controlling interest in each of TRIP Holdings and RIV 2013 results from its combined role as both equity member and agent/servicer. The noncontrolling interest included in the accompanying consolidated balance sheets represents the non-Trinity equity interest in these partially-owned subsidiaries.
Trinity has no obligation to guarantee performance under any of the partially-owned subsidiaries' (or their respective subsidiaries') debt agreements, guarantee any railcar residual values, shield any parties from losses, or guarantee minimum yields.
The assets of each of TRIP Master Funding and TRL 2012 may only be used to satisfy the particular subsidiary's liabilities, and the creditors of each of TRIP Master Funding and TRL 2012 have recourse only to the particular subsidiary's assets. Each of TILC and the third-party equity investors receive distributions from TRIP Holdings and RIV 2013, when available, in proportion to its respective equity interests, and has an interest in the net assets of the partially-owned subsidiaries upon a liquidation event in the same proportion. TILC is paid fees for the services it provides to TRIP Master Funding and TRL 2012 and has the potential to earn certain incentive fees. TILC and the third-party equity investors have commitments to provide additional equity funding to TRIP Holdings that expire in May 2019 contingent upon certain returns on investment in TRIP Holdings and other conditions being met. There are no remaining equity commitments with respect to RIV 2013.
See Note 11 Debt regarding the debt of TRIP Holdings and RIV 2013 and their respective subsidiaries.


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Table of Contents

Note 6. Railcar Leasing and Management Services Group
The Railcar Leasing and Management Services Group owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, maintenance, and administrative services. Selected consolidating financial information for the Leasing Group is as follows:
 
March 31, 2017
 
Leasing Group
 
 
 
 
 
Wholly-
Owned
Subsidiaries
 
Partially-Owned Subsidiaries
 
Manufacturing/
Corporate
 
Total
 
(in millions)
Cash, cash equivalents, and short-term marketable securities
$
6.9

 
$
—

 
$
771.9

 
$
778.8

Property, plant, and equipment, net
$
4,079.8

 
$
1,863.9

 
$
956.0

 
$
6,899.7

Net deferred profit on railcars sold to the Leasing Group
 
 
 
 
 
 
(819.6
)
Consolidated property, plant and equipment, net
 
 
 
 
 
 
$
6,080.1

Restricted cash
$
100.3

 
$
83.4

 
$
0.1

 
$
183.8

Debt:
 
 
 
 
 
 
 
Recourse
$
31.2

 
$
—

 
$
849.4

 
$
880.6

Less: unamortized discount
—

 
—

 
(22.5
)
 
(22.5
)
Less: unamortized debt issuance costs
(0.1
)
 
—

 
(3.5
)
 
(3.6
)
 
31.1

 
—

 
823.4

 
854.5

Non-recourse
838.3

 
1,368.3

 
—

 
2,206.6

Less: unamortized debt issuance costs
(10.5
)
 
(14.6
)
 
—

 
(25.1
)
 
827.8

 
1,353.7

 
—

 
2,181.5

Total debt
$
858.9

 
$
1,353.7

 
$
823.4

 
$
3,036.0

Net deferred tax liabilities
$
992.1

 
$
2.0

 
$
118.5

 
$
1,112.6

 
 
December 31, 2016
 
Leasing Group
 
 
 
 
 
Wholly-
Owned
Subsidiaries
 
Partially-Owned Subsidiaries
 
Manufacturing/
Corporate
 
Total
 
(in millions)
Cash, cash equivalents, and short-term marketable securities
$
7.2

 
$
—

 
$
790.9

 
$
798.1

Property, plant, and equipment, net
$
3,923.6

 
$
1,879.6

 
$
961.7

 
$
6,764.9

Net deferred profit on railcars sold to the Leasing Group
 
 
 
 
 
 
(798.1
)
Consolidated property, plant and equipment, net
 
 
 
 
 
 
$
5,966.8

Restricted cash
$
99.7

 
$
78.4

 
$
0.1

 
$
178.2

Debt:
 
 
 
 
 
 
 
Recourse
$
32.1

 
$
—

 
$
849.4

 
$
881.5

Less: unamortized discount
—

 
—

 
(27.1
)
 
(27.1
)
Less: uamortized debt issuance costs
(0.1
)
 
—

 
(3.7
)
 
(3.8
)
 
32.0

 
—

 
818.6

 
850.6

Non-recourse
851.4

 
1,381.0

 
—

 
2,232.4

Less: unamortized debt issuance costs
(11.4
)
 
(15.0
)
 
—

 
(26.4
)
 
840.0

 
1,366.0

 
—

 
2,206.0

Total debt
$
872.0

 
$
1,366.0

 
$
818.6

 
$
3,056.6

Net deferred tax liabilities
$
956.6

 
$
2.0

 
$
98.4

 
$
1,057.0

Net deferred profit on railcars sold to the Leasing Group consists of intersegment profit that is eliminated in consolidation and is, therefore, not allocated to an operating segment. See Note 5 Partially-Owned Leasing Subsidiaries and Note 11 Debt for a further discussion regarding the Company’s investment in its partially-owned leasing subsidiaries and the related indebtedness.

14
Table of Contents

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
Percent
 
 
($ in millions)
 
Change
Revenues:
 
 
 
 
 
 
Leasing and management
 
$
178.9

 
$
170.5

 
4.9
 %
Sales of railcars owned one year or less at the time of sale
 
—

 
8.0

 
*
Total revenues
 
$
178.9

 
$
178.5

 
0.2

 
 
 
 
 
 
 
Operating profit:
 
 
 
 
 
 
Leasing and management
 
$
85.0

 
$
69.8

 
21.8

Railcar sales:
 
 
 
 
 
 
Railcars owned one year or less at the time of sale
 
—

 
2.3

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

 
2.1

 
*
Total operating profit
 
$
85.0

 
$
74.2

 
14.6

 
 
 
 
 
 
 
Operating profit margin:
 
 
 
 
 
 
Leasing and management
 
47.5
%
 
40.9
%
 
 
Railcar sales
 
*

 
*

 
 
Total operating profit margin
 
47.5
%
 
41.6
%
 
 
 
 
 
 
 
 
 
Selected expense information(1):
 
 
 
 
 
 
Depreciation
 
$
42.1

 
$
37.4

 
12.6

Maintenance and compliance
 
$
20.5

 
$
31.6

 
(35.1
)
Rent
 
$
10.1

 
$
9.5

 
6.3

Interest
 
$
30.6

 
$
31.8

 
(3.8
)
 * Not meaningful
(1) Depreciation, maintenance and compliance, and rent expense are components of operating profit. Amortization of deferred profit on railcars sold from the Rail Group to the Leasing Group is included in the operating profit of the Leasing Group resulting in the recognition of depreciation expense based on the Company's original manufacturing cost of the railcars. Interest expense is not a component of operating profit and includes the effect of hedges.
During the three months ended March 31, 2017 and 2016, the Company received proceeds from the sales of leased railcars as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in millions)
Leasing Group:
 
 
 
Railcars owned one year or less at the time of sale
$
—

 
$
8.0

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

 
6.7

Rail Group
—

 
8.1

 
$
—

 
$
22.8

Equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured predominantly by the Rail Group and enters into lease contracts with third parties with terms generally ranging from one to twenty years. The Leasing Group primarily enters into operating leases. Future contractual minimum rental revenues on leases are as follows:
 
 
Remaining nine months of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
 
(in millions)
Future contractual minimum rental revenue
 
$
406.5

 
$
465.5

 
$
383.7

 
$
303.5

 
$
200.9

 
$
402.1

 
$
2,162.2

Debt. The Leasing Group’s debt at March 31, 2017 consisted primarily of non-recourse debt. As of March 31, 2017, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $1,379.8 million which is pledged as collateral for Leasing Group debt held by those subsidiaries, including equipment with a net book value of $41.9 million securing capital lease obligations. The net book value of unpledged equipment at March 31, 2017 was $2,633.9 million. See Note 11 Debt for the form, maturities, and descriptions of Leasing Group debt.

15
Table of Contents

Partially-owned subsidiaries. Debt owed by TRIP Holdings and RIV 2013 and their respective subsidiaries is nonrecourse to Trinity and TILC. Creditors of each of TRIP Holdings and RIV 2013 and their respective subsidiaries have recourse only to the particular subsidiary's assets. TRIP Master Funding equipment with a net book value of $1,300.1 million is pledged as collateral for the TRIP Master Funding debt. TRL 2012 equipment with a net book value of $563.8 million is pledged solely as collateral for the TRL 2012 secured railcar equipment notes. See Note 5 Partially-Owned Leasing Subsidiaries for a description of TRIP Holdings and RIV 2013.
Off Balance Sheet Arrangements. In prior years, the Leasing Group completed a series of financing transactions whereby railcars were sold to one or more separate independent owner trusts (“Trusts”). Each of the Trusts financed the purchase of the railcars with a combination of debt and equity. In each transaction, the equity participant in each of the respective Trusts is considered to be the primary beneficiary of the Trust and therefore, the accounts of the Trusts, including the debt related to each of the Trusts, are not included as part of the consolidated financial statements. The Leasing Group, through wholly-owned, qualified subsidiaries, leased railcars from the Trusts under operating leases with terms of 22 years, and subleased the railcars to independent third-party customers under shorter term operating rental agreements.
These Leasing Group subsidiaries had total assets as of March 31, 2017 of $145.1 million, including cash of $53.6 million and railcars of $63.6 million. The subsidiaries' cash, railcars, and an interest in each sublease are pledged to collateralize the lease obligations to the Trusts and are included in the consolidated financial statements of the Company. Trinity does not guarantee the performance of the subsidiaries’ lease obligations. Certain ratios and cash deposits must be maintained by the Leasing Group’s subsidiaries in order for excess cash flow, as defined in the agreements, from the lease to third parties to be available to Trinity. Future operating lease obligations of the Leasing Group’s subsidiaries as well as future contractual minimum rental revenues related to these leases due to the Leasing Group are as follows:
 
 
Remaining nine months of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
 
(in millions)
Future operating lease obligations of Trusts’ railcars
 
$
21.9

 
$
29.2

 
$
28.8

 
$
26.1

 
$
26.1

 
$
117.9

 
$
250.0

Future contractual minimum rental revenues of Trusts’ railcars
 
$
33.1

 
$
34.3

 
$
24.0

 
$
14.7

 
$
9.6

 
$
14.6

 
$
130.3

Operating Lease Obligations. Future amounts due as well as future contractual minimum rental revenues related to operating leases other than leases discussed above are as follows: 
 
 
Remaining nine months of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
 
(in millions)
Future operating lease obligations
 
$
9.0

 
$
12.0

 
$
9.5

 
$
7.7

 
$
7.6

 
$
13.5

 
$
59.3

Future contractual minimum rental revenues
 
$
10.3

 
$
8.3

 
$
6.2

 
$
4.3

 
$
3.3

 
$
4.1

 
$
36.5

Operating lease obligations totaling $8.3 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries. See Note 6 of the December 31, 2016 Consolidated Financial Statements filed on Form 10-K for a detailed explanation of these financing transactions.


16
Table of Contents

Note 7. Derivative Instruments
We may use derivative instruments to mitigate the impact of changes in interest rates, both in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also may use derivative instruments to mitigate the impact of changes in natural gas and diesel fuel prices and changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for in accordance with applicable accounting standards. See Note 3 Fair Value Accounting for discussion of how the Company valued its commodity hedges and interest rate swap at March 31, 2017. See Note 11 Debt for a description of the Company's debt instruments.
Interest rate hedges
 
 
 
 
 
Included in accompanying balance sheet
at March 31, 2017
 
Notional
Amount
 
Interest
Rate(1)
 
Liability
 
AOCL –
loss/
(income)
 
Noncontrolling
Interest
 
(in millions, except %)
Expired hedges:
 
 
 
 
 
 
 
 
 
2006 secured railcar equipment notes
$
200.0

 
4.87
%
 
$
—

 
$
(0.6
)
 
$
—

TRIP Holdings warehouse loan
$
788.5

 
3.60
%
 
$
—

 
$
5.4

 
$
7.3

Open hedge:
 
 
 
 
 
 
 
 
 
TRIP Master Funding secured railcar equipment notes
$
37.0

 
2.62
%
 
$
0.7

 
$
0.3

 
$
0.4

(1) 
Weighted average fixed interest rate
 
Effect on interest expense - increase/(decrease)
 
Three Months Ended
March 31,
 
Expected effect during next twelve months(1)
 
2017
 
2016
 
 
(in millions)
Expired hedges:
 
 
 
 
 
2006 secured railcar equipment notes
$
(0.1
)
 
$
(0.1
)
 
$
(0.2
)
TRIP Holdings warehouse loan
$
1.2

 
$
1.2

 
$
4.1

Open hedge:
 
 
 
 
 
TRIP Master Funding secured railcar equipment notes
$
0.2

 
$
0.3

 
$
0.5

(1) Based on the fair value of open hedge as of March 31, 2017
During 2005 and 2006, we entered into interest rate swap derivatives in anticipation of issuing our 2006 Secured Railcar Equipment Notes. These derivative instruments, with a notional amount of $200.0 million, were settled in 2006 and fixed the interest rate on a portion of the related debt issuance. These derivative instrument transactions are being accounted for as cash flow hedges with changes in the fair value of the instruments of $4.5 million in income recorded in Accumulated Other Comprehensive Loss ("AOCL") through the date the related debt issuance closed in 2006. The balance is being amortized over the term of the related debt. The effect on interest expense is due to amortization of the AOCL balance.
Between 2007 and 2009, TRIP Holdings, as required by the TRIP Warehouse Loan, entered into interest rate swap derivatives, all of which qualified as cash flow hedges, to reduce the effect of changes in variable interest rates in the TRIP Warehouse Loan. In July 2011, these interest rate hedges were terminated in connection with the refinancing of the TRIP Warehouse Loan. Balances included in AOCL at the date the hedges were terminated are being amortized over the expected life of the new debt with $4.1 million of additional interest expense expected to be recognized during the twelve months following March 31, 2017. Also in July 2011, TRIP Holdings’ wholly-owned subsidiary, TRIP Master Funding, entered into an interest rate swap derivative instrument, expiring in 2021, with an initial notional amount of $94.1 million to reduce the effect of changes in variable interest rates associated with the Class A-1b notes of the TRIP Master Funding secured railcar equipment notes. The effect on interest expense is primarily a result of monthly interest settlements.
See Note 11 Debt regarding the related debt instruments.
Other Derivatives
Natural gas and diesel fuel
We maintain a program to mitigate the impact of fluctuations in the price of natural gas and diesel fuel. The intent of the program is to protect our operating profit from adverse price changes by entering into derivative instruments. For those instruments that do not qualify for hedge accounting treatment, any changes in their valuation are recorded directly to the consolidated statement of

17
Table of Contents

operations. The effect on operating income for these instruments was not significant. The amount recorded in the consolidated balance sheets as of March 31, 2017 and December 31, 2016 for these instruments was an asset of $0.1 million and $0.3 million, respectively.

Note 8. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment as of March 31, 2017 and December 31, 2016.
 
March 31,
2017
 
December 31,
2016
 
(in millions)
Manufacturing/Corporate:
 
 
 
Land
$
105.7

 
$
103.3

Buildings and improvements
647.7

 
642.6

Machinery and other
1,163.9

 
1,151.1

Construction in progress
38.5

 
39.1

 
1,955.8

 
1,936.1

Less accumulated depreciation
(999.8
)
 
(974.4
)
 
956.0

 
961.7

Leasing:
 
 
 
Wholly-owned subsidiaries:
 
 
 
Machinery and other
10.7

 
10.7

Equipment on lease
4,862.3

 
4,673.0

 
4,873.0

 
4,683.7

Less accumulated depreciation
(793.2
)
 
(760.1
)
 
4,079.8

 
3,923.6

Partially-owned subsidiaries:
 
 
 
Equipment on lease
2,309.2

 
2,309.4

Less accumulated depreciation
(445.3
)
 
(429.8
)
 
1,863.9

 
1,879.6

 
 
 
 
Deferred profit on railcars sold to the Leasing Group
(976.9
)
 
(948.2
)
Less accumulated amortization
157.3

 
150.1

 
(819.6
)
 
(798.1
)
 
$
6,080.1

 
$
5,966.8


Note 9. Goodwill
Goodwill by segment is as follows:
 
March 31,
2017
 
December 31,
2016
 
 
 
(as reported)
 
(in millions)
Rail Group
$
134.6

 
$
134.6

Construction Products Group
111.0

 
111.0

Energy Equipment Group
506.9

 
506.7

Railcar Leasing and Management Services Group
1.8

 
1.8

 
$
754.3

 
$
754.1

Changes in goodwill during the three months ended March 31, 2017 resulted from fluctuations in foreign currency exchange rates.


18
Table of Contents

Note 10. Warranties
The changes in the accruals for warranties for the three months ended March 31, 2017 and 2016 are as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Beginning balance
$
15.7

 
$
21.5

Warranty costs incurred
(1.7
)
 
(2.8
)
Warranty originations and revisions
0.8

 
1.6

Warranty expirations
(0.8
)
 
(1.6
)
Ending balance
$
14.0

 
$
18.7


Note 11. Debt
The following table summarizes the components of debt as of March 31, 2017 and December 31, 2016:
 
March 31,
2017
 
December 31,
2016
 
(in millions)
Corporate – Recourse:
 
 
 
Revolving credit facility
$
—

 
$
—

Senior notes, net of unamortized discount of $0.3 and $0.4
399.7

 
399.6

Convertible subordinated notes, net of unamortized discount of $22.2 and $26.7
427.2

 
422.7

 
826.9

 
822.3

Less: unamortized debt issuance costs
(3.5
)
 
(3.7
)
 
823.4

 
818.6

Leasing – Recourse:
 
 
 
Capital lease obligations, net of unamortized debt issuances costs of $0.1 and $0.1
31.1

 
32.0

Total recourse debt
854.5

 
850.6

 
 
 
 
Leasing – Non-recourse:
 
 
 
Wholly-owned subsidiaries:
 
 
 
2006 secured railcar equipment notes
188.2

 
194.2

2009 secured railcar equipment notes
171.0

 
172.5

2010 secured railcar equipment notes
277.1

 
280.6

TILC warehouse facility
202.0

 
204.1

 
838.3

 
851.4

Less: unamortized debt issuance costs
(10.5
)
 
(11.4
)
 
827.8

 
840.0

Partially-owned subsidiaries:
 
 
 
TRL 2012 secured railcar equipment notes
419.7

 
425.5

TRIP Master Funding secured railcar equipment notes
948.6

 
955.5

 
1,368.3

 
1,381.0

Less: unamortized debt issuance costs
(14.6
)
 
(15.0
)
 
1,353.7

 
1,366.0

Total non–recourse debt
2,181.5

 
2,206.0

Total debt
$
3,036.0

 
$
3,056.6

We have a $600.0 million unsecured corporate revolving credit facility that matures in May 2020. As of March 31, 2017, we had letters of credit issued under our revolving credit facility in an aggregate principal amount of $92.3 million, leaving $507.7 million available for borrowing. Other than these letters of credit, there were no borrowings under our revolving credit facility as of March 31, 2017, or during the three month period then ended. Of the outstanding letters of credit as of March 31, 2017, approximately $91.6 million is expected to expire in 2017 and the remainder in 2018. The majority of our letters of credit obligations support the Company’s various insurance programs and generally renew by their terms each year. Trinity’s revolving credit facility requires the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. As of March 31, 2017, we were in compliance with all such financial covenants. Borrowings under the credit facility bear interest at a defined index rate plus a margin and are guaranteed by certain 100%-owned subsidiaries of the Company.

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The Company's Convertible Subordinated Notes due 2036 (“Convertible Subordinated Notes”) bear an interest rate of 3 7/8% per annum on the principal amount payable semi-annually in arrears on June 1 and December 1 of each year. In addition, commencing with the six-month period beginning June 1, 2018 and for each six-month period thereafter, we will pay contingent interest to the holders of the Convertible Subordinated Notes under certain circumstances. The Convertible Subordinated Notes mature on June 1, 2036, unless redeemed, repurchased, or converted earlier. We may not redeem the Convertible Subordinated Notes before June 1, 2018. On or after that date, we may redeem all or part of the Convertible Subordinated Notes for cash at 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest (including any contingent interest) up to, but excluding, the redemption date. Holders of the Convertible Subordinated Notes may require us to purchase all or a portion of their notes on June 1, 2018 or upon a fundamental change, in each case for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest (including any contingent interest) up to, but excluding, the purchase date.
The Convertible Subordinated Notes are recorded net of unamortized discount to reflect their underlying economics by capturing the value of the conversion option as borrowing costs. As of March 31, 2017 and December 31, 2016, capital in excess of par value included $92.5 million related to the estimated value of the Convertible Subordinated Notes’ conversion options, in accordance with ASC 470-20. Debt discount recorded in the consolidated balance sheet is being amortized through June 1, 2018 to yield an effective annual interest rate of 8.42% based upon the estimated market interest rate for comparable non-convertible debt as of the issuance date of the Convertible Subordinated Notes. Total interest expense recognized on the Convertible Subordinated Notes for the three months ended March 31, 2017 and 2016 is as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Coupon rate interest
$
4.4

 
$
4.4

Amortized debt discount
4.5

 
4.2

 
$
8.9

 
$
8.6

Holders of the Convertible Subordinated Notes may convert their notes under the following circumstances: 1) if the daily closing price of our common stock is greater than or equal to 130% of the conversion price during 20 of the last 30 trading days of the preceding calendar quarter; 2) upon notice of redemption; or 3) upon the occurrence of specified corporate transactions pursuant to the terms of the applicable indenture. Upon conversion, the Company is required to pay cash up to the aggregate principal amount of the Convertible Subordinated Notes to be converted. Any conversion obligation in excess of the aggregate principal amount of the Convertible Subordinated Notes to be converted may be settled in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election. The conversion price, which is subject to adjustment upon the occurrence of certain events, was $24.51 per share as of March 31, 2017. The Convertible Subordinated Notes were not subject to conversion as of April 1, 2017. See Note 17 Earnings Per Common Share for an explanation of the effects of the Convertible Subordinated Notes on earnings per share. The Company has not entered into any derivatives transactions associated with these notes.
The $1.0 billion TILC warehouse loan facility, established to finance railcars owned by TILC, had $202.0 million in outstanding borrowings as of March 31, 2017. Under the facility, $798.0 million was unused and available as of March 31, 2017 based on the amount of warehouse-eligible, unpledged equipment. The warehouse loan facility is a non-recourse obligation which expires in April 2018 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. Advances under the facility bear interest at a defined index rate plus a margin, for an all-in interest rate of 2.78% at March 31, 2017. Amounts outstanding at maturity, absent renewal, are payable under the facility in April 2019.
Terms and conditions of other debt, including recourse and non-recourse provisions, are described in Note 11 of the December 31, 2016 Consolidated Financial Statements filed on Form 10-K.

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The remaining principal payments under existing debt agreements as of March 31, 2017 are as follows:
 
Remaining nine months of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
(in millions)
Recourse:
 
Corporate
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
849.4

Leasing – capital lease obligations (Note 6)
2.7

 
28.5

 
—

 
—

 
—

 
—

Non-recourse – leasing (Note 6):
 
 
 
 
 
 
 
 
 
 
 
2006 secured railcar equipment notes
29.9

 
25.3

 
28.0

 
29.8

 
29.2

 
46.0

2009 secured railcar equipment notes
4.8

 
6.4

 
11.2

 
6.6

 
13.4

 
128.6

2010 secured railcar equipment notes
10.2

 
10.0

 
7.6

 
14.2

 
20.1

 
215.0

TILC warehouse facility
6.1

 
8.2

 
2.1

 
—

 
—

 
—

Facility termination payments - TILC warehouse facility
—

 
—

 
185.6

 
—

 
—

 
—

TRL 2012 secured railcar equipment notes
16.9

 
22.9

 
21.9

 
19.3

 
19.9

 
318.8

TRIP Master Funding secured railcar equipment notes
21.9

 
41.5

 
49.5

 
48.8

 
49.8

 
737.1

Total principal payments
$
92.5

 
$
142.8

 
$
305.9

 
$
118.7

 
$
132.4

 
$
2,294.9


Note 12. Other, Net
Other, net (income) expense consists of the following items:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Foreign currency exchange transactions
$
1.6

 
$
(0.3
)
Other
(0.8
)
 
(0.4
)
Other, net
$
0.8

 
$
(0.7
)
Other for the three months ended March 31, 2017 includes $0.4 million in income related to the change in fair value of certain equity instruments.

Note 13. Income Taxes
The provision for income taxes 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 the Company’s effective income tax rate on income before income taxes:
 
Three Months Ended
March 31,
 
2017
 
2016
Statutory rate
35.0
 %
 
35.0
 %
State taxes
1.4

 
1.1

Noncontrolling interest in partially-owned subsidiaries
(0.4
)
 
(1.3
)
Changes in valuation allowance and reserves
0.2

 
—

Settlements with tax authorities
(8.0
)
 
—

Other, net
0.5

 
1.2

Effective rate
28.7
 %
 
36.0
 %
Our effective tax rate reflects the Company's estimate for 2017 of its state income tax expense, income attributable to the noncontrolling interests in partially-owned leasing subsidiaries for which no income tax expense is provided, and the impact of the completion of income tax audits that resulted in a net tax benefit. See Note 5 Partially-Owned Leasing Subsidiaries for a further explanation of activities with respect to our partially-owned leasing subsidiaries.

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Taxing authority examinations
During the three months ended March 31, 2017, the Internal Revenue Service ("IRS") formally closed its audit of the 2006-2009 tax years and, accordingly, we have adjusted unrecognized tax benefits and deferred tax amounts related to these tax years resulting in a $5.8 million tax benefit. The 2013 and 2015 tax years are currently under IRS audit examination.
We have various subsidiaries in Mexico that file separate tax returns and are subject to examination by taxing authorities at different times. The 2007 tax year of one of our Mexican subsidiaries is still under review for transfer pricing purposes only, and its statute of limitations remains open through October 2017. The remaining entities are generally open for their 2010 tax years and forward.
Unrecognized tax benefits
The change in unrecognized tax benefits for the three months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Beginning balance
$
28.2

 
$
65.2

Additions for tax positions related to the current year
—

 
1.5

Additions for tax positions of prior years
0.1

 
1.0

Reductions for tax positions of prior years
—

 
(0.1
)
Settlements
(23.3
)
 
—

Ending balance
$
5.0

 
$
67.6

Additions for tax positions related to the current year in the amount of $1.5 million recorded in the three months ended March 31, 2016 were amounts provided for tax positions that will be taken for federal and state income tax purposes when we file those tax returns. Additions for tax positions related to prior years of $0.1 million and $1.0 million recorded in the three months ended March 31, 2017 and 2016, respectively, are due to a state filing position. The reductions for tax positions of prior years of $0.1 million for the three months ended March 31, 2016 were primarily related to changes in state taxes. Settlements during the three months ended March 31, 2017 were due to the resolution of our 2006-2009 income tax years.
The total amount of unrecognized tax benefits including interest and penalties at March 31, 2017 and 2016, that would affect the Company’s overall effective tax rate if recognized was $5.4 million and $14.9 million, respectively. There is a reasonable possibility that unrecognized federal and state tax benefits will decrease by $1.3 million by March 31, 2018, due to settlements and lapses in statutes of limitations for assessing tax for tax years in which an extension was not requested by the taxing authority.
Trinity 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 as of March 31, 2017 and December 31, 2016 was $3.5 million and $8.9 million, respectively. Income tax expense included a decrease of $5.4 million and an increase of $0.5 million in interest expense and penalties related to uncertain tax positions for the three months ended March 31, 2017 and March 31, 2016, respectively.

Note 14. Employee Retirement Plans
The following table summarizes the components of net retirement cost for the Company:
 
Three Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Expense Components
 
 
 
Service cost
$
0.1

 
$
0.1

Interest
4.9

 
5.2

Expected return on plan assets
(6.8
)
 
(6.8
)
Amortization of actuarial loss
1.2

 
1.3

Defined benefit expense
(0.6
)
 
(0.2
)
Profit sharing
4.0

 
4.6

Multiemployer plan
0.6

 
0.6

Net expense
$
4.0

 
$
5.0


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