Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

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.

Stockholders' Equity

In December 2017, our Board of Directors authorized a new $500 million share repurchase program effective January 1, 2018 through December 31, 2019. The new program replaced the previous program which expired on December 31, 2017. In the first three quarters of 2018, we repurchased 4,327,158 shares at a cost of approximately $150.1 million. On November 16, 2018, we entered into an accelerated share repurchase program (the "ASR Program") to repurchase $350 million of the Company's common stock. The $350 million notional value of the ASR Program represents the entire remaining amount that was available to us under our existing share repurchase program. During the year ended December 31, 2018, 17,206,643 shares were repurchased at a cost of $430.1 million. This excludes approximately $70.0 million that was funded in 2018 upon the execution of the ASR Program, but was outstanding at December 31, 2018 and is expected to be settled by the end of the first quarter of 2019. The final number of shares to be delivered to Trinity under the ASR Program will be based on Trinity's volume-weighted average stock price, less a discount, during the term of the program. Certain shares of stock repurchased during December 2017, totaling $6.0 million, were cash settled in January 2018 in accordance with normal settlement practices. Under the previous share repurchase program, we repurchased 2,825,400 shares during the year ended December 31, 2017, at a cost of $85.4 million.

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. The following is a description of principal activities from which we generate our revenue, separated by reportable segments. Payments for our products and services are generally due within normal commercial terms. See Note 4 for a further discussion regarding our reportable segments.

Railcar Leasing and Management Services Group

Revenue from rentals and operating leases, including contracts that contain non-level fixed rental payments, is recognized monthly on a straight-line basis. Revenue is recognized from the sales of railcars from the lease fleet on a gross basis in leasing revenues and cost of revenues if the railcar has been owned for one year or less at the time of sale. Sales of railcars from the lease fleet owned for more than one year are recognized as a net gain or loss from the disposal of a long-term asset. Revenue from servicing and management agreements is recognized as each performance period occurs.

We account for shipping and handling costs as activities to fulfill the promise to transfer the 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

The Rail Products Group recognizes revenue when the customer has submitted its certificate of acceptance and legal title of the railcar has passed to the customer. Certain long-term contracts for the sales of railcars include price adjustments based on steel-price indices; this amount represents variable consideration for which we are unable to estimate the final consideration until the railcar is delivered, at which time the pricing becomes fixed.

Within our maintenance services business, revenue is recognized over time as repair and maintenance projects are completed, using an input approach based on the costs incurred relative to the total estimated costs of performing the project. We have contract assets related to unbilled revenues recognized on repair and maintenance services that have been performed, but for which the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within the Receivables, net of allowance line on our Consolidated Balance Sheet.

All Other

Our highway products group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.

Unsatisfied Performance Obligations

The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially satisfied as of December 31, 2018 and the percentage of the outstanding performance obligations as of December 31, 2018 expected to be delivered in 2019:



	Unsatisfied performance obligations at December 31, 2018
	Total Amount		Percent expected to be delivered in 2019
	(in millions)
Rail Products Group:
Products
External Customers	$	2,059.5
Leasing Group	1,588.1
	$	3,647.6	64	%

Maintenance Services	$	100.6	100	%

Railcar Leasing and Management Services Group	$	112.6	21	%

The remainder of the unsatisfied performance obligations for the Rail Products Group is expected to be delivered through 2023. Unsatisfied performance obligations for the Railcar Leasing and Management Services Group are related to servicing and management agreements and are expected to be performed through 2024.

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 the amounts used for income tax purposes. 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, Cash and Cash Equivalents

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. We intend to hold our short-term marketable securities until they are redeemed at their maturity date and believe that under the "more likely than not" criteria, we will not be required to sell the securities before recovery of their amortized cost bases, which may be maturity.

Financial Instruments, Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments including restricted cash, short-term marketable securities, and receivables. We place our cash investments and short-term marketable securities in bank deposits and investment grade, short-term debt instruments and limit 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 our customer base, and their dispersion across different industries and geographic areas. As receivables are generally unsecured, we maintain 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 in the fair value hierarchy), receivables, and accounts payable are considered to be representative of their respective fair values.

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 estimated useful lives are: buildings and improvements - 3 to 30 years; leasehold improvements - the lesser of the term of the lease or 7 years; machinery and equipment - 2 to 10 years; information systems hardware and software - 2 to 5 years; and railcars in our lease fleet - generally 35 years. The costs of ordinary maintenance and repair are charged to operating costs.

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 only 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. Based on our evaluations, no impairment charges were determined to be necessary as of December 31, 2018 and 2017.

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. The quantitative goodwill impairment test is a two-step process, with step one requiring the comparison of the reporting unit's estimated fair value with the carrying amount of its net assets. If necessary, step two of the impairment test determines the amount of goodwill impairment to be recorded when 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 three inputs, related to revenue and operating profit growth, discount rates, and exit multiples. As of December 31, 2018 and 2017, our annual impairment test of goodwill was completed at the reporting unit level and no impairment charges were determined to be necessary.

The net book value of intangible assets totaled $22.4 million and $10.4 million as of December 31, 2018 and 2017, respectively, and included finite-lived intangible assets of $19.9 million and $7.9 million, respectively, which are amortized over their estimated useful lives ranging from 1 to 20 years. Based on our evaluations of intangible assets, no impairment charges were determined to be necessary as of December 31, 2018 and 2017.

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.

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 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, accepted 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.

Foreign Currency Translation

Foreign Currency Transaction

The functional currency of our Mexico operations is considered to be 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 our Consolidated Statement of Operations. See Note 12.

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 15. All components are shown net of tax.

Recent Accounting Pronouncements

Effective in 2018

ASU 2014-09 — On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," ("ASC 606") which provides common revenue recognition guidance for U.S. generally accepted accounting principles. Under ASC 606, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive 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.

We applied ASC 606 to all contracts that were not complete as of January 1, 2018 using the modified retrospective method of adoption; therefore, the comparative information for the years ended December 31, 2017 and 2016 was not adjusted and continues to be reported under Accounting Standards Codification ("ASC") Topic 605.

Upon adoption of ASC 606, we determined that revenue in our maintenance services business should be recognized over time as repair and maintenance projects are completed, using an input approach based on the costs incurred relative to the total estimated costs of performing the project. Accordingly, we have recorded contract assets of $10.2 million as of December 31, 2018 related to unbilled revenues recognized on repair and maintenance services that have been performed, but for which the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within the Receivables, net of allowance line on our Consolidated Balance Sheet. The impact of revenue recognition over time was nominal upon the initial adoption of ASC 606 and therefore no adjustment to January 1, 2018 opening retained earnings was recorded.

Revenue recognition policies for our other continuing businesses were substantially unchanged by the adoption of ASU 2014-09.

ASU 2018-02 — In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (“ASU 2018-02”) which gives entities the option to reclassify from Accumulated Other Comprehensive Loss ("AOCL") to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017. ASU 2018-02 became effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We elected to adopt ASU 2018-02 as of January 1, 2018 resulting in a reclassification adjustment from AOCL, increasing retained earnings by $18.7 million for the year ended December 31, 2018.

ASU 2017-07 — 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 net periodic benefit cost continues to be presented in the same income statement line items; however, other components of net periodic benefit cost are now presented in other income and excluded from operating profit. We adopted ASU 2017-07 effective January 1, 2018. Amounts previously reported have been adjusted to reflect this change.

ASU 2016-18 —In November 2016, the FASB issued Accounting Standards Update No. 2016-18, "Restricted Cash," ("ASU 2016-18") which clarifies how entities should present restricted cash and restricted cash equivalents in the Statement of Cash Flows. This 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 Consolidated Balance Sheets. We adopted ASU 2016-18 effective January 1, 2018. Amounts previously reported have been adjusted to reflect this change.

Effective in 2019

ASU 2016-02 —In February 2016, the FASB issued ASU No. 2016-02, "Leases," ("ASC 842") 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. ASC 842 is effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which permits entities to record the right-of-use asset and lease liability on the date of adoption, with no requirement to recast comparative periods.

We adopted ASC 842 effective January 1, 2019 and are currently finalizing the impact of the standard on our accounting policies, processes, disclosures, and internal control over financial reporting. We elected the optional transition method of recognizing a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. Therefore, comparative financial information will not be adjusted and will continue to be reported under ASC 840. We also elected the transition relief package of practical expedients and as a result we will not assess 1) whether existing or expired contracts contain leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less. We will not separate lease components from non-lease components for our specified asset classes. We have not elected the practical expedient to use hindsight in determining a lease term and impairment of right-of-use assets at the adoption date.

Upon adoption, we currently expect to recognize right-of-use assets and corresponding lease liabilities of approximately $40 million to $50 million on our Consolidated Balance Sheet based on the present value of future minimum lease payments under operating leases for which we are the lessee. This estimate excludes the impact of railcars that were previously under operating leases as of December 31, 2018 but which were purchased in January 2019 and are now wholly-owned by our Leasing Group. Additionally, we expect to record an adjustment to opening retained earnings of approximately $10 million to $15 million related to the derecognition of deferred profit related to sale-leaseback transactions. We expect that our accounting treatment under ASC 842 for leases in which we are the lessor will remain substantially unchanged from our current accounting treatment under ASC Topic 840. The adoption of ASC 842 is not expected to have a significant impact to our consolidated results of operations or cash flows.

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.