Railcar Leasing and Management Services Group

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, 2018
	Leasing Group
	Wholly- Owned Subsidiaries			Partially- Owned Subsidiaries			Manufacturing/ Corporate			Total
	(in millions)
Cash and cash equivalents	$	6.0		$	—		$	173.2		$	179.2
Property, plant, and equipment, net	$	4,976.5		$	1,814.7		$	370.9		$	7,162.1
Net deferred profit on railcars sold to the Leasing Group										(827.7		)
Consolidated property, plant, and equipment, net										$	6,334.4
Restricted cash	$	134.9		$	36.6		$	0.1		$	171.6
Debt:
Recourse	$	—		$	—		$	400.0		$	400.0
Less: unamortized discount	—			—			(0.3		)	(0.3		)
Less: unamortized debt issuance costs	—			—			(2.3		)	(2.3		)
	—			—			397.4			397.4
Non-recourse	2,339.0			1,327.9			—			3,666.9
Less: unamortized discount	(2.7		)	—			—			(2.7		)
Less: unamortized debt issuance costs	(19.7		)	(12.7		)	—			(32.4		)
	2,316.6			1,315.2			—			3,631.8
Total debt	$	2,316.6		$	1,315.2		$	397.4		$	4,029.2
Net deferred tax liabilities	$	797.6		$	1.0		$	(67.0	)	$	731.6



	December 31, 2017
	Leasing Group
	Wholly- Owned Subsidiaries			Partially- Owned Subsidiaries			Manufacturing/ Corporate			Total
	(in millions)
Cash, cash equivalents, and short-term marketable securities	$	3.3		$	—		$	1,094.8		$	1,098.1
Property, plant, and equipment, net	$	4,140.0		$	1,822.7		$	395.8		$	6,358.5
Net deferred profit on railcars sold to the Leasing Group										(800.7		)
Consolidated property, plant, and equipment, net										$	5,557.8
Restricted cash	$	132.2		$	62.9		$	0.1		$	195.2
Debt:
Recourse	$	28.3		$	—		$	849.4		$	877.7
Less: unamortized discount	—			—			(8.5		)	(8.5		)
Less: unamortized debt issuance costs	—			—			(2.9		)	(2.9		)
	28.3			—			838.0			866.3
Non-recourse	1,035.9			1,365.3			—			2,401.2
Less: unamortized debt issuance costs	(11.1		)	(14.5		)	—			(25.6		)
	1,024.8			1,350.8			—			2,375.6
Total debt	$	1,053.1		$	1,350.8		$	838.0		$	3,241.9
Net deferred tax liabilities	$	653.7		$	0.8		$	54.5		$	709.0

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 and Note 11 for a further discussion regarding our investment in our partially-owned leasing subsidiaries and the related indebtedness. See Note 13 for a discussion of the effects of the Tax Act on net deferred tax liabilities. See Note 19 for a discussion of subsidiary guarantees of the Senior Notes.



	Year Ended December 31,									Percent Change
	2018			2017			2016			2018 versus 2017		2017 versus 2016
	($ in millions)
Revenues:
Leasing and management	$	728.9		$	743.6		$	700.9		(2.0	)%	6.1	%
Sale of railcars owned one year or less at the time of sale	113.9			99.6			126.1			*		*
Total revenues	$	842.8		$	843.2		$	827.0		—		2.0

Operating profit:
Leasing and management	$	291.8		$	341.3		$	312.5		(14.5	)	9.2
Railcar sales:
Railcars owned one year or less at the time of sale	21.5			19.7			34.1			*		*
Railcars owned more than one year at the time of sale	50.4			83.5			13.5			*		*
Property disposition losses ⁽¹⁾	(12.6		)	—			—			*		*
Total operating profit	$	351.1		$	444.5		$	360.1		(21.0	)	23.4
Total operating profit margin	41.7		%	52.7		%	43.5		%

Leasing and management operating profit margin:	40.0		%	45.9		%	44.6		%

Selected expense information ⁽²⁾:
Depreciation	$	196.6		$	172.3		$	156.2		14.1		10.3
Maintenance and compliance	$	99.3		$	96.4		$	104.3		3.0		(7.6	)
Rent	$	42.4		$	39.9		$	39.3		6.3		1.5
Selling, engineering, and administrative expenses	$	51.1		$	50.7		$	45.4		0.8		11.7
Interest	$	142.3		$	125.8		$	125.2		13.1		0.5

* Not meaningful

(1) Property disposition losses include a non-cash charge of $12.6 million associated with our election to forego the early purchase options contained in certain lease agreements, which is further discussed below.

(2) Depreciation, maintenance and compliance, rent, and selling, engineering, and administrative expenses are components of operating profit. Amortization of deferred profit on railcars sold from the Rail Products Group 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. Interest expense is not a component of operating profit and includes the effect of hedges.

During the years ended December 31, 2018, 2017, and 2016, we received proceeds from the sale of leased railcars as follows:



	Year Ended December 31,
	2018		2017		2016
	(in millions)
Leasing Group:
Railcars owned one year or less at the time of sale	$	113.9	$	99.6	$	126.1
Railcars owned more than one year at the time of sale	230.5		360.7		37.7
Rail Products Group	—		—		8.1
	$	344.4	$	460.3	$	171.9

Equipment consists primarily of railcars leased to 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 and twenty years. The Leasing Group primarily enters into operating leases. Future contractual minimum rental revenues on leases are as follows:



	2019		2020		2021		2022		2023		Thereafter		Total
	(in millions)
Future contractual minimum rental revenues	$	541.8	$	445.2	$	333.1	$	251.3	$	160.2	$	297.3	$	2,028.9

Debt. Wholly-owned subsidiaries. The Leasing Group’s debt at December 31, 2018 consisted primarily of non-recourse debt. In 2009, we entered into capital lease obligations totaling $56.6 million. The capital lease obligations were guaranteed by Trinity Industries, Inc. and certain subsidiaries, and secured by railcar equipment and related leases. During the fourth quarter of 2018, we recorded a non-cash charge of $12.6 million associated with our election to forego the early purchase options contained in the lease agreements, which represents the difference between the respective carrying values of the equipment and the associated lease obligation. As of December 31, 2018, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $3,440.0 million which is pledged as collateral for Leasing Group debt held by those subsidiaries. The net book value of unpledged equipment at December 31, 2018 was $1,459.4 million. See Note 11 for the form, maturities, and descriptions of Leasing Group debt.

Partially-owned subsidiaries. Debt owed by TRIP Holdings and RIV 2013 and their respective subsidiaries is non-recourse 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 $1,264.4 million is pledged as collateral for the TRIP Master Funding debt. TRL-2012 equipment with a net book value of $550.2 million is pledged solely as collateral for the TRL-2012 secured railcar equipment notes. See Note 5 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 (the “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 was 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, were 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. The terms of the operating lease agreements between the subsidiaries and the remaining Trusts provided the Leasing Group with the option to purchase, at a predetermined fixed price, certain railcars from the remaining Trusts in 2019. In January 2018, the Leasing Group provided the Trusts with an irrevocable twelve-month notice of intent to exercise their option to purchase all of the Trusts' railcars. We completed the purchase in January 2019 at a purchase price of $218.4 million. As a result, 6,779 railcars previously under lease are now wholly owned by our Leasing Group. The future contractual minimum rental revenues associated with these railcars are included in the table above.

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:



	2019		2020		2021		2022		2023		Thereafter		Total
	(in millions)
Future operating lease obligations	$	13.5	$	8.4	$	7.6	$	6.8	$	4.9	$	1.7	$	42.9
Future contractual minimum rental revenues	$	10.6	$	7.1	$	5.2	$	3.6	$	1.4	$	—	$	27.9

Operating lease obligations totaling $1.8 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries.