Railcar Leasing and Management Services Group

9 Months Ended

Sep. 30, 2020

Railcar Leasing and Management Services Group

The Railcar Leasing and Management Services Group owns and operates a fleet of railcars as well as provides third-party fleet leasing, management, and administrative services. Selected consolidated financial information for the Leasing Group is as follows:


	September 30, 2020
	Wholly- Owned Subsidiaries		Partially-Owned Subsidiaries		Total Leasing Group		Eliminations — Lease Subsidiary⁽¹⁾		Adjusted Total Leasing Group
	(in millions)
Cash and cash equivalents	$	2.5	$	—	$	2.5	$	—	$	2.5
Accounts receivable	81.3		9.2		90.5		—		90.5
Property, plant, and equipment, net ⁽²⁾	5,692.5		1,637.8		7,330.3		(826.8)		6,503.5
Restricted cash	73.0		28.1		101.1		—		101.1
Other assets	38.1		1.2		39.3		—		39.3
Total assets	$	5,887.4	$	1,676.3	$	7,563.7	$	(826.8)	$	6,736.9

Accounts payable and accrued liabilities	$	148.6	$	30.4	$	179.0	$	—	$	179.0
Debt, net	3,172.7		1,239.3		4,412.0		—		4,412.0
Deferred income taxes	925.3		1.2		926.5		(193.8)		732.7
Other liabilities	26.9		—		26.9		—		26.9
Total liabilities	4,273.5		1,270.9		5,544.4		(193.8)		5,350.6
Noncontrolling interest	—		276.3		276.3		—		276.3
Total Equity	$	1,613.9	$	129.1	$	1,743.0	$	(633.0)	$	1,110.0


	December 31, 2019
	Wholly- Owned Subsidiaries		Partially-Owned Subsidiaries		Total Leasing Group		Eliminations — Lease Subsidiary⁽¹⁾		Adjusted Total Leasing Group
	(in millions)
Cash and cash equivalents	$	1.8	$	—	$	1.8	$	—	$	1.8
Accounts receivable	73.9		8.7		82.6		—		82.6
Property, plant, and equipment, net	5,818.9		1,786.7		7,605.6		(903.8)		6,701.8
Restricted cash	78.4		33.0		111.4		—		111.4
Other assets	209.8		1.4		211.2		—		211.2
Total assets	$	6,182.8	$	1,829.8	$	8,012.6	$	(903.8)	$	7,108.8

Accounts payable and accrued liabilities	$	100.7	$	44.6	$	145.3	$	—	$	145.3
Debt, net	3,080.7		1,278.4		4,359.1		—		4,359.1
Deferred income taxes	861.7		1.1		862.8		(184.8)		678.0
Other liabilities	32.7		—		32.7		—		32.7
Total liabilities	4,075.8		1,324.1		5,399.9		(184.8)		5,215.1
Noncontrolling interest	—		348.8		348.8		—		348.8
Total Equity	$	2,107.0	$	156.9	$	2,263.9	$	(719.0)	$	1,544.9

⁽¹⁾Net deferred profit on railcars sold to the Leasing Group consists of intersegment profit that is eliminated in consolidation. Net deferred profit and the related deferred tax impact are included as adjustments to the property, plant, and equipment, net and deferred income taxes line items, respectively, in the Eliminations – Lease Subsidiary column above to reflect the net book value of the railcars purchased by the Leasing Group from the Rail Products Group based on manufacturing cost. See Note 4 and Note 7 for a further discussion regarding our investment in our partially-owned leasing subsidiaries and the related indebtedness.

⁽²⁾ See Note 10 for further information regarding impairment of long-lived assets recorded in the nine months ended September 30, 2020.


	Three Months Ended September 30,														Nine Months Ended September 30,
	2020			2019			Percent		2020			2019			Percent
	($ in millions)								Change			($ in millions)					Change
Revenues:
Leasing and management	$	183.9		$	190.1		(3.3)	%	$	558.6		$	566.6		(1.4)	%
Sales of railcars owned one year or less at the time of sale ⁽¹⁾	—			136.3			(100.0)	%	54.4			237.3			(77.1)	%
Total revenues	$	183.9		$	326.4		(43.7)	%	$	613.0		$	803.9		(23.7)	%

Operating profit ⁽²⁾:
Leasing and management	$	86.8		$	79.8		8.8	%	$	247.8		$	234.6		5.6	%
Railcar sales:
Railcars owned one year or less at the time of sale	—			17.8			(100.0)	%	0.4			27.0			(98.5)	%
Railcars owned more than one year at the time of sale	2.9			18.1			(84.0)	%	17.3			44.7			(61.3)	%
Total operating profit	$	89.7		$	115.7		(22.5)	%	$	265.5		$	306.3		(13.3)	%
Total operating profit margin	48.8		%	35.4		%			43.3		%	38.1		%

Leasing and management operating profit margin	47.2		%	42.0		%			44.4		%	41.4		%

Selected expense information:
Depreciation ⁽³⁾⁽⁴⁾	$	51.5		$	59.4		(13.3)	%	$	159.1		$	171.6		(7.3)	%
Maintenance and compliance	$	18.5		$	24.9		(25.7)	%	$	67.4		$	79.2		(14.9)	%
Rent	$	2.1		$	3.8		(44.7)	%	$	8.1		$	13.6		(40.4)	%
Selling, engineering, and administrative expenses	$	11.7		$	10.7		9.3	%	$	39.0		$	36.2		7.7	%
Interest	$	47.0		$	50.0		(6.0)	%	$	149.2		$	146.4		1.9	%

⁽¹⁾ Includes revenues associated with sales-type leases of $26.3 million and $60.5 million for the three and nine months ended September 30, 2019, respectively.

⁽²⁾Operating profit includes: depreciation; maintenance and compliance; rent; and selling, engineering, and administrative expenses. Amortization of deferred profit on railcars sold from the Rail Products Group to the Leasing Group is included in the operating 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.

⁽³⁾ Effective January 1, 2020, we revised the estimated useful lives and salvage values of certain railcar types in our lease fleet. This change in estimate resulted in a decrease in depreciation expense in the three and nine months ended September 30, 2020 of approximately $7.7 million and $23.1 million, respectively. This decrease was partially offset by higher depreciation associated with growth in the lease fleet. See Note 1 of the Consolidated Financial Statements for further information.

⁽⁴⁾ As a result of the impairment of long-lived assets related to our small cube covered hopper railcars recorded in the second quarter of 2020, our quarterly depreciation expense beginning in the third quarter of 2020 has decreased by approximately $3.5 million.

During the three and nine months ended September 30, 2020 and 2019, information related to the sales of leased railcars is as follows:


	Three Months Ended September 30,									Nine Months Ended September 30,
	2020			2019			2020			2019
	(in millions)
Sales of leased railcars:
Railcars owned one year or less at the time of sale ⁽¹⁾	$	—		$	136.3		$	54.4		$	237.3
Railcars owned more than one year at the time of sale	6.5			75.1			138.7			175.0
	$	6.5		$	211.4		$	193.1		$	412.3

Operating profit on sales of leased railcars:
Railcars owned one year or less at the time of sale	$	—		$	17.8		$	0.4		$	27.0
Railcars owned more than one year at the time of sale	2.9			18.1			17.3			44.7
	$	2.9		$	35.9		$	17.7		$	71.7

Operating profit margin on sales of leased railcars:
Railcars owned one year or less at the time of sale	—		%	13.1		%	0.7		%	11.4		%
Railcars owned more than one year at the time of sale	44.6		%	24.1		%	12.5		%	25.5		%
Weighted average operating profit margin on sales of leased railcars	44.6		%	17.0		%	9.2		%	17.4		%

⁽¹⁾ Includes revenues associated with sales-type leases of $26.3 million and $60.5 million for the three and nine months ended September 30, 2019, respectively.

Railcar Leasing Equipment Portfolio. The Leasing Group's equipment consists primarily of railcars leased by third parties. The Leasing Group purchases equipment manufactured predominantly by the Rail Products Group and enters into lease contracts with third parties with terms generally ranging between one year and ten years, although certain leases entered into in prior periods had lease terms of up to twenty years. The Leasing Group primarily enters into operating leases. Future contractual minimum rental revenues on operating leases related to our wholly-owned and partially-owned subsidiaries are as follows:


	Remaining three months of 2020		2021		2022		2023		2024		Thereafter		Total
	(in millions)
Future contractual minimum rental revenues	$	150.3	$	511.2	$	402.8	$	295.2	$	214.5	$	391.5	$	1,965.5

Debt. Wholly-owned subsidiaries. The Leasing Group’s debt at September 30, 2020 consisted primarily of non-recourse debt. As of September 30, 2020, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $4,249.1 million, which is pledged solely as collateral for Leasing Group debt held by those subsidiaries. The net book value of unpledged equipment at September 30, 2020 was $1,431.3 million. See Note 7 for more information regarding the Leasing Group debt.

Partially-owned subsidiaries. Debt owed by TRIP Holdings and RIV 2013 and their respective subsidiaries is nonrecourse to Trinity and TILC. Creditors of each of TRIP Holdings and RIV 2013 and their respective subsidiaries have recourse only to the particular subsidiary's assets. TRIP Master Funding equipment with a net book value of $1,159.5 million is pledged solely as collateral for the TRIP Master Funding debt. TRL-2012 equipment with a net book value of $478.3 million is pledged solely as collateral for the TRL-2012 secured railcar equipment notes. See Note 4 for a description of TRIP Holdings and RIV 2013.

Operating Lease Obligations. Future amounts due as well as future contractual minimum rental revenues related to the Leasing Group's railcar operating lease obligations are as follows:


	Remaining three months of 2020		2021		2022		2023		2024		Thereafter		Total
	(in millions)
Future operating lease obligations	$	2.1	$	8.2	$	7.5	$	5.7	$	2.5	$	0.9	$	26.9
Future contractual minimum rental revenues	$	1.7	$	5.3	$	3.7	$	1.7	$	0.7	$	0.1	$	13.2

Operating lease obligations totaling $2.1 million are guaranteed by Trinity Industries, Inc. and certain subsidiaries. The Leasing Group also has future amounts due for operating lease obligations related to office space of approximately $2.1 million, which is excluded from the table above.