Note 11. Asset Impairment Charges and Restructuring Activities (Notes)

12 Months Ended

Dec. 31, 2020

Impairment of small cube covered hopper railcars

We monitor the carrying value of long-lived assets and right-of-use assets for potential impairment. The carrying value of long-lived assets and right-of-use assets is considered impaired when the asset's carrying value is not recoverable through undiscounted future cash flows and the asset's carrying value exceeds its fair value.

During the second quarter, the oil and gas proppants (or “frac sand”) industry continued to experience economic pressure created by low oil prices, reduced fracking activity, and the ongoing economic impact of COVID-19. Significant price declines in the crude oil market, as well as lower demand for certain commodities, resulted in a decline in customer demand for certain types of railcars. In particular, small cube covered hopper railcars are primarily used in North America to serve the frac sand industry. In recent years, these railcars primarily transported Northern White sand from Wisconsin and other locations in the Midwest for use in fracking operations, including operations located in the Permian Basin. However, given the decline in global oil prices, reduced fracking activity, and pressure on the oil and gas industry to maintain a low cost structure, fracking operations, particularly those located in the Permian Basin, have increasingly shifted away from the use of Northern White sand and towards the use of in-basin sand, which can be sourced locally rather than transporting by rail. Consequently, the cash flows and profitability of the frac sand industry continued to decline during the second quarter. As a result, certain of the Leasing Group's small cube covered hopper customers requested rent relief and, in a number of cases, filed for bankruptcy in the second quarter.

We believe that the collective impact of these developments, including the shift towards the use of in-basin sand, constituted a fundamental and other-than-temporary change in the future demand for this railcar type. Therefore, we determined that the events and circumstances that arose during the second quarter of 2020 constituted an impairment triggering event related to the small cube covered hopper car type in our lease fleet portfolio.

We performed a cash flow recoverability test of our small cube covered hopper railcars and compared the undiscounted cash flows to the carrying value of the assets. This analysis indicated that the carrying value exceeded the estimated undiscounted cash flows, and therefore, we were required to measure the fair value of our fleet of small cube covered hopper railcars and determine the amount of an impairment loss, if any.

The fair value of the asset group was determined using an income approach, which we believe most accurately reflects a market participant's viewpoint in valuing these railcars. The results of our analysis indicated an estimated fair value of the asset group of approximately $191.7 million, in comparison to the asset group's carrying amount of $550.0 million, net of deferred profit. As a result, during the second quarter, we recorded a pre-tax non-cash impairment charge of $358.3 million related to our small cube covered hopper railcars. Additionally, we evaluated the right-of-use assets associated with our leased-in portfolio of small cube covered hopper railcars and determined that these assets were impaired based on consideration of an expected decline in future cash flows over the remaining lease term, which resulted in an additional pre-tax non-cash impairment charge of approximately $11.1 million. The aggregate impairment charge of $369.4 million, which includes $81.3 million associated with noncontrolling interest, is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.

Significant management judgment was used to determine the key assumptions utilized in our impairment analysis, the substantial majority of which represent unobservable (Level 3) inputs. These assumptions include, but are not limited to: estimates regarding the remaining useful life over which the railcars are expected to generate cash flows; average lease rates; railcar utilization percentages; operating expenses; and the selection of an appropriate discount rate. Management selected these estimates and assumptions based on our railcar industry expertise. We also consulted with third-party energy and frac sand industry experts to gain insights with respect to the long-term outlook for these underlying markets. Although we believe the estimates utilized in our analysis were reasonable, any change in these estimates could materially affect the amount of the impairment charge.

Other asset write-downs

During the fourth quarter of 2020, management approved a plan to exit certain non-strategic maintenance facilities (the "disposal group"). We determined that the planned divestiture of the disposal group met the criteria to be classified as assets held for sale, and consequently, we measured the assets of the disposal group at fair value, less any costs to sell. The results of our analysis indicated a pre-tax non-cash write-down of $15.2 million, which we recorded during the year ended December 31, 2020. The charge is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.

Additionally, during the year ended December 31, 2020, we recorded a pre-tax non-cash charge to write off $11.8 million related to investments in certain emerging technologies. This charge is reflected in the impairment of long-lived assets line of our Consolidated Statements of Operations for the year ended December 31, 2020.

Restructuring and Related Activities Disclosure [Text Block]

Restructuring activities

In November 2019, we approved a restructuring plan to resize certain resources, reduce stranded costs, and better align support services with our rail-focused strategy. As part of the restructuring program, we eliminated positions across multiple locations and functions, including certain corporate and operational support functions. During the year ended December 31, 2019, we recorded total restructuring charges of $14.7 million, consisting of approximately $3.8 million in cash charges for severance costs and approximately $10.9 million of non-cash charges, primarily from write-downs of assets associated with our non-operating facilities that will no longer be utilized as we execute our rail-focused strategy.

Throughout 2020, we continued our efforts to better align support services with our rail-focused strategy, which resulted in headcount reductions across multiple functions, including certain corporate and operational support functions primarily at our Dallas headquarters. Additionally, we executed a lease agreement on a new headquarters facility to better suit our new organizational structure, which prompted the need to perform a recoverability test on our existing corporate headquarters campus to evaluate for impairment. This test indicated that the carrying value was not recoverable. The fair value of our corporate headquarters campus was measured based on a third-party valuation estimate using Level 2 and Level 3 inputs in the fair value hierarchy and resulted in a non-cash impairment charge of $5.2 million during the year ended December 31, 2020.

During the year ended December 31, 2020, we recorded total restructuring charges of $11.0 million, consisting of $7.8 million for severance costs, $5.3 million of non-cash charges primarily from the write-down of our corporate headquarters campus described above and certain other assets, and $0.6 million in contract termination costs, partially offset by a $2.7 million net gain on the disposition of a non-operating facility and certain related assets.

As we continue to reposition the organization, it is possible that we will engage in additional restructuring activities in the near term.

The following table sets forth the restructuring activity and balance of the restructuring liability, which is included in other liabilities in our Consolidated Balance Sheet:


	Accrued charges as of December 31, 2019		Charges and adjustments		Payments		Accrued charges as of December 31, 2020
	(in millions)
Cash charges:
Employee severance costs	$	3.4	$	7.8	$	(9.8)	$	1.4
Contract termination costs	—		0.6		(0.6)		—
	$	3.4	$	8.4	$	(10.4)	$	1.4
Asset impairment charges:
Write-down of assets			$	5.3
(Gain)/loss on disposition of assets			(2.7)
			$	2.6
Total restructuring activities			$	11.0

Although restructuring activities are not allocated to our reportable segments, the following tables summarize the restructuring activities by reportable segment:


	Year Ended December 31, 2020
	Employee Severance Costs		Contract Termination Costs		(Gain)/Loss on Disposition of Assets		Write-down of Assets		Total
	(in millions)
Railcar Leasing and Management Services Group	$	1.4	$	—	$	—	$	—	$	1.4
Rail Products Group	4.0		0.2		(2.9)		—		1.3
All Other	0.2		—		0.2		—		0.4
Corporate	2.2		0.4		—		5.3		7.9
Total restructuring activities	$	7.8	$	0.6	$	(2.7)	$	5.3	$	11.0


	Year Ended December 31, 2019
	Employee Severance Costs		Write-down of Assets		Total
	(in millions)
Railcar Leasing and Management Services Group	$	0.2	$	—	$	0.2
Rail Products Group	0.7		—		0.7
All Other	0.5		10.9		11.4
Corporate	2.4		—		2.4
Total restructuring activities	$	3.8	$	10.9	$	14.7