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,” “our,” or "us") including the accounts of our wholly-owned subsidiaries and partially-owned subsidiaries, TRIP Rail Holdings LLC (“TRIP Holdings”) and RIV 2013 Rail Holdings LLC ("RIV 2013"), in which we have a controlling interest. In our opinion, all normal and recurring adjustments necessary for a fair presentation of our financial position as of September 30, 2022, the results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021, have been made in conformity with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances have been reclassified to conform to the 2022 presentation.
Due to seasonal and other factors, including the ongoing impacts of the coronavirus pandemic (“COVID-19”), the results of operations for the nine months ended September 30, 2022 may not be indicative of expected results of operations for the year ending December 31, 2022. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with our audited Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2021.
Sale of Highway Products Business
In the fourth quarter of 2021, the Company completed the sale of Trinity Highway Products, LLC (“THP”), a wholly-owned subsidiary of the Company, and certain direct and indirect subsidiaries of THP, to Rush Hour Intermediate II, LLC ("Rush Hour"), an entity owned by an affiliated investment fund of Monomoy Capital Partners, for an aggregate purchase price of $375.0 million, subject to a final working capital adjustment, which was recorded in the second quarter of 2022.
We concluded that the sale of THP represented a strategic shift that will have a major effect on the Company’s operations and financial results. Accordingly, we have presented the operating results and cash flows of THP as discontinued operations for all periods in this Quarterly Report on Form 10-Q. Results of prior periods have been recast to reflect these changes and present results on a comparable basis. See Note 2 for further information related to the sale of THP.
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. Payments for our products and services are generally due within normal commercial terms. The following is a description of principal activities from which we generate our revenue, separated by reportable segments. See Note 4 for a further discussion regarding our reportable segments.
Railcar Leasing and Management Services Group
In our Railcar Leasing and Management Services Group ("Leasing Group"), revenue from rentals and operating leases, including contracts that contain non-level fixed lease payments, is recognized monthly on a straight-line basis. Leases not classified as operating leases are generally considered sales-type leases as a result of an option to purchase.
We review our operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the lessee’s payment history, the financial condition of the lessee, and business and economic conditions in the industry in which the lessee operates. In the event that the collectibility of a receivable with respect to any lessee is no longer probable, we derecognize the revenue and related receivable and recognize future revenue only when the lessee makes a rental payment. Contingent rents are recognized when the contingency is resolved.
Selling profit or loss associated with sales-type leases is recognized upon lease commencement, and a net investment in the sales-type lease is recorded in the Consolidated Balance Sheets. Interest income related to sales-type leases is recognized over the lease term using the effective interest method. See "Lease Accounting" below for additional information regarding sales-type leases as of September 30, 2022. We had no sales-type leases as of December 31, 2021.
We report all sales of railcars from the lease fleet and selling profit or loss associated with sales-type leases as a net gain or loss from the disposal of a long-term asset in accordance with ASC 610-20, Gains and losses from the derecognition of non-financial assets. These sales are presented in the Lease portfolio sales line in our Consolidated Statements of Operations.
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
Our railcar manufacturing business recognizes revenue related to new railcars when the customer has submitted its certificate of acceptance and legal title of the railcar has passed to the customer. Certain 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.
Revenue is recognized over time as repair and maintenance projects and sustainable railcar conversions are completed, using an input approach based on the costs incurred relative to the total estimated costs of performing the project. We recorded contract assets of $3.0 million and $4.5 million as of September 30, 2022 and December 31, 2021, respectively, related to unbilled revenues recognized on repair and maintenance services and sustainable railcar conversions 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 in our Consolidated Balance Sheets.
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 September 30, 2022 and the percentage of the outstanding performance obligations as of September 30, 2022 expected to be delivered during the remainder of 2022:
| | | | | | | | | | | |
| Unsatisfied performance obligations at September 30, 2022 |
| Total
Amount | | Percent expected to be delivered in 2022 |
| | (in millions) | | |
Rail Products Group: | | | |
| New railcars: | | | |
External customers (1) | $ | 3,573.7 | | | |
| Leasing Group | 517.2 | | | |
| $ | 4,090.9 | | | 16.2 | % |
| Sustainable railcar conversions | $ | 201.4 | | | 26.5 | % |
| | | |
| | | |
| Railcar Leasing and Management Services Group | $ | 133.6 | | | 6.8 | % |
(1) Unsatisfied performance obligations at September 30, 2022 include 15,000 railcars expected to be delivered through 2028, valued at approximately $1.8 billion, associated with a new long-term railcar supply agreement with GATX Corporation.
The remainder of the unsatisfied performance obligations for the Rail Products Group is expected to be delivered through 2028. The orders in the Rail Products Group's backlog from the Leasing Group are fully supported by lease commitments with external customers. The final amount of backlog attributable to the Leasing Group may vary by the time of delivery as customers may elect to change their procurement decision.
Unsatisfied performance obligations for the Railcar Leasing and Management Services Group are related to servicing, maintenance, and management agreements and are expected to be performed through 2029.
Lease Accounting
Lessee
We are the lessee of operating leases predominantly for office buildings and railcars, as well as manufacturing equipment and office equipment. Our operating leases have remaining lease terms ranging from one year to fifteen years, some of which include options to extend for up to five years, and some of which include options to terminate within one year. As of September 30, 2022, we had no material finance leases in which we were the lessee. As applicable, the lease liability is reduced by the amount of lease incentives that have not yet been reimbursed by the lessor.
The following table summarizes the impact of our operating leases on our Consolidated Financial Statements (in millions, except lease term and discount rate):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Consolidated Statements of Operations | | | | | | | |
| Operating lease expense | $ | 4.6 | | | $ | 4.0 | | | $ | 13.5 | | | $ | 11.3 | |
| Short-term lease expense | $ | 0.1 | | | $ | — | | | $ | 0.3 | | | $ | 0.2 | |
| | | | | | | |
| Consolidated Statements of Cash Flows | | | | | | | |
| Cash flows from operating activities | | | | $ | 13.5 | | | $ | 11.3 | |
| Right-of-use assets recognized in exchange for new lease liabilities | | $ | 21.0 | | | $ | 23.7 | |
| | | | | | | |
| | | | | September 30, 2022 | | December 31, 2021 |
| Consolidated Balance Sheets | | | | | | | |
Right-of-use assets (1) | | | | | $ | 89.9 | | | $ | 82.8 | |
Lease liabilities (2) | | | | | $ | 112.1 | | | $ | 106.3 | |
| Weighted average remaining lease term | | | | | 10.0 years | | 10.8 years |
| Weighted average discount rate | | | | | 2.8 | % | | 3.0 | % |
(1) Included in other assets in our Consolidated Balance Sheets.
(2) Included in other liabilities in our Consolidated Balance Sheets.
Future contractual minimum operating lease liabilities will mature as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Leasing Group | | Non-Leasing Group | | Total |
| Remaining three months of 2022 | $ | 3.2 | | | $ | 2.1 | | | $ | 5.3 | |
| 2023 | 12.0 | | | 7.9 | | | 19.9 | |
| 2024 | 8.0 | | | 6.9 | | | 14.9 | |
| 2025 | 6.0 | | | 6.1 | | | 12.1 | |
| 2026 | 5.7 | | | 5.7 | | | 11.4 | |
| Thereafter | 8.7 | | | 57.8 | | | 66.5 | |
| Total operating lease payments | $ | 43.6 | | | $ | 86.5 | | | $ | 130.1 | |
| Less: Present value adjustment | | | | | (18.0) | |
| | | | | |
| Total operating lease liabilities | | | | | $ | 112.1 | |
Lessor
Our Leasing Group enters into railcar operating leases with third parties with terms generally ranging between one year and ten years. The majority of our fleet operates on leases that earn fixed monthly lease payments. Generally, lease payments are due at the beginning of the applicable month. A portion of our fleet operates on per diem leases that earn usage-based variable lease payments. Some of our leases include options to extend the leases for up to five years, and a small percentage of our leases include early termination options with certain notice requirements and early termination penalties. As of September 30, 2022, non-Leasing Group operating leases were not significant, and we had no direct finance leases.
We manage risks associated with residual values of leased railcars by investing across a diverse portfolio of railcar types, staggering lease maturities within any given railcar type, avoiding concentration of railcar type and industry, and actively participating in secondary markets. Additionally, our lease agreements contain normal wear and tear return condition provisions and high mileage thresholds designed to protect the value of our residual assets. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
The following table summarizes the impact of our leases on our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
| Operating lease revenues | $ | 167.2 | | | $ | 158.2 | | | $ | 500.5 | | | $ | 486.2 | |
| Variable operating lease revenues | $ | 17.7 | | | $ | 18.8 | | | $ | 49.0 | | | $ | 44.7 | |
| | | | | | | |
| Interest income on sales-type lease receivables | $ | 0.2 | | | $ | — | | | $ | 0.5 | | | $ | — | |
Profit recognized at sales-type lease commencement (1) | $ | — | | | $ | — | | | $ | 1.3 | | | $ | — | |
(1) Included in gains on dispositions of property – lease portfolio sales on our Consolidated Statements of Operations.
Future contractual minimum revenues for operating leases will mature as follows (in millions)(1):
| | | | | |
| Remaining three months of 2022 | $ | 156.7 | |
| 2023 | 519.9 | |
| 2024 | 406.0 | |
| 2025 | 307.4 | |
| 2026 | 220.0 | |
| Thereafter | 369.4 | |
| Total | $ | 1,979.4 | |
(1) Total contractual minimum rental revenues on operating leases relates to our wholly-owned and partially-owned subsidiaries and sub-lease rental revenues associated with the Leasing Group's operating lease obligations.
Future contractual minimum lease receivables for sales-type leases will mature as follows (in millions)(1):
| | | | | |
| Remaining three months of 2022 | $ | 0.3 | |
| 2023 | 1.1 | |
| 2024 | 1.1 | |
| 2025 | 1.1 | |
| 2026 | 1.1 | |
| Thereafter | 11.2 | |
| Total | 15.9 | |
| Less: Unearned interest income | (5.2) | |
Net investment in sales-type leases (1) | $ | 10.7 | |
(1) Included in other assets in our Consolidated Balance Sheets.
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.
Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments, including restricted cash and receivables. We place our cash investments in bank deposits, investment grade, short-term debt instruments, and highly-rated commercial paper. We limit the amount of credit exposure to any one commercial issuer. The carrying values of cash, receivables, and accounts payable are considered to be representative of their respective fair values.
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 end markets and geographic areas. Receivables are generally evaluated at a portfolio level based on these characteristics. As receivables are generally unsecured, we maintain an allowance for credit losses using a forward-looking approach based on historical losses and consideration of current and expected future economic conditions. Historically, we have observed that the likelihood of loss increases when receivables have aged beyond 180 days. When a receivable is deemed uncollectible, the write-off is recorded as a reduction to allowance for credit losses. During the nine months ended September 30, 2022, we recognized approximately $1.7 million of credit loss expense and wrote off $1.9 million related to our trade receivables that are in the scope of ASC 326, Financial Instruments – Credit Losses, bringing the allowance for credit losses balance from $10.5 million at December 31, 2021 to $10.3 million at September 30, 2022. This balance excludes the general reserve for operating lease receivables that is permitted under ASC 450, Contingencies.
Acquisitions
In June 2022, the Leasing Group acquired, from an unrelated seller, a portfolio of railcars for $132.1 million in cash. This transaction was recorded as an asset acquisition within the Leasing Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. As a result of the purchase transaction, the Leasing Group acquired approximately 3,800 railcars, substantially all of which are currently under lease to third parties. We recorded acquired railcars of $125.0 million, lease-related intangible assets of $7.8 million, and certain other immaterial assets and liabilities in our Consolidated Balance Sheet as of the purchase date.
In May 2022, we completed the acquisition of a company that owns and operates an end-to-end rail logistics software platform providing a real-time data universe to freight rail shippers and operators. This transaction was recorded as a business combination within the Leasing Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The acquisition did not have a significant impact on our Consolidated Financial Statements. Based on our preliminary purchase price allocation, we recorded intellectual property of $5.2 million, which will be amortized over five years, goodwill of $5.3 million, and certain other immaterial assets and liabilities.
In January 2021, we completed the acquisition of a company that owns and operates proprietary railcar cleaning technology systems. This transaction was recorded as a business combination within the Rail Products Group, based on valuations of the acquired assets and liabilities at their acquisition date fair value using Level 3 inputs. The acquisition did not have a significant impact on our Consolidated Financial Statements. This transaction resulted in goodwill of $7.0 million.
Goodwill
As of September 30, 2022 and December 31, 2021, the carrying amount of our goodwill totaled $159.5 million and $154.2 million, respectively, which is primarily attributable to the Rail Products Group.
Warranties
We provide various express, limited product warranties that generally range from one year 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 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. The changes in the accruals for warranties for the three and nine months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
| Beginning balance | $ | 2.7 | | | $ | 5.5 | | | $ | 3.1 | | | $ | 11.3 | |
| Warranty costs incurred | (0.4) | | | (3.4) | | | (2.5) | | | (6.2) | |
| Warranty originations and revisions | 0.9 | | | 1.6 | | | 3.1 | | | (1.0) | |
| Warranty expirations | (0.3) | | | (0.2) | | | (0.8) | | | (0.6) | |
| Ending balance | $ | 2.9 | | | $ | 3.5 | | | $ | 2.9 | | | $ | 3.5 | |
Recent Accounting Pronouncements
ASU 2022-04 – In September 2022, the FASB issued ASU No. 2022-04, "Disclosure of Supplier Finance Program Obligations," which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose information about the key terms of these programs, outstanding amounts as of the end of the reporting period, a description of where in the financial statements outstanding amounts are presented, and a rollforward of these obligations. ASU 2022-04 is effective for public companies during interim and annual reporting periods beginning after December 15, 2022 and is to be adopted on a retrospective basis, except for the disclosure of rollforward information, which is effective for public companies during interim and annual reporting periods beginning after December 15, 2023 and is to be adopted on a prospective basis. Early adoption is permitted. We plan to adopt ASU 2022-04 effective January 1, 2023 and are currently evaluating the impact these disclosures will have on our Consolidated Financial Statements.
Note 2. Discontinued Operations
Sale of Highway Products Business
In the fourth quarter of 2021, we completed the sale of our highway products business, THP. The sale closed on December 31, 2021, and we received net proceeds of approximately $364.7 million, after certain adjustments and closing costs. During the nine months ended September 30, 2022, we recorded a loss on sale of discontinued operations of $5.8 million ($4.4 million, net of income taxes), which included a $2.7 million payment to Rush Hour representing a final working capital adjustment, as well as additional transaction costs incurred during the period. There was no loss on sale of discontinued operations during the three months ended September 30, 2022. We concluded that the sale of THP represented a strategic shift that will have a major effect on the Company’s operations and financial results. Accordingly, we have presented the operating results and cash flows of THP as discontinued operations for all periods in this Quarterly Report on Form 10-Q.
In connection with the sale, Trinity and Rush Hour entered into various agreements to effect the transaction and provide a framework for their relationship after the separation, including a purchase and sale agreement, a transition services agreement, and a lease agreement. The transition services have various durations ranging between one and eighteen months. We have determined that the continuing cash flows generated by these agreements do not constitute significant continuing involvement in the operations of THP. The amounts billed for transition services were not material to our results of operations for the three and nine months ended September 30, 2022. Additionally, in connection with the sale of THP, the Company has agreed to indemnify Rush Hour for certain liabilities related to the highway products business, including certain liabilities resulting from or arising out of the ET-Plus® System, a highway guardrail end-terminal system (the “ET Plus”). Consequently, results from discontinued operations below include certain legal expenses that were directly attributable to the highway products business, which were previously reported in continuing operations. Similar expenses related to these retained obligations incurred during the three and nine months ended September 30, 2022, and that may be incurred in the future, will likewise be reported in discontinued operations. See Note 14 for further information regarding obligations retained in connection with the THP sale.
The following is a summary of THP's operating results included in income (loss) from discontinued operations for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
| Revenues | $ | — | | | $ | 83.7 | | | $ | — | | | $ | 230.0 | |
| Cost of revenues | — | | | 60.4 | | | — | | | 165.2 | |
| Selling, engineering, and administrative expenses | 4.4 | | | 9.3 | | | 17.2 | | | 32.5 | |
| | | | | | | |
| | | | | | | |
| Income (loss) from discontinued operations before income taxes | (4.4) | | | 14.0 | | | (17.2) | | | 32.3 | |
| Provision (benefit) for income taxes | (1.0) | | | 3.2 | | | (3.5) | | | 7.2 | |
| Income (loss) from discontinued operations, net of income taxes | $ | (3.4) | | | $ | 10.8 | | | $ | (13.7) | | | $ | 25.1 | |
Other discontinued operations
In addition to the THP activities disclosed above, results include certain amounts related to businesses previously disposed, including a $1.3 million of loss on sale of discontinued operations, net of income taxes for the nine months ended September 30, 2022 and losses of $0.4 million and $0.8 million included in income (loss) from discontinued operations, net of income taxes for the three and nine months ended September 30, 2021, respectively.
Note 3. Derivative Instruments and Fair Value Measurements
Derivative Instruments
We use derivative instruments to mitigate interest rate risk, including risks associated with the impact of changes in interest rates in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also use derivative instruments to mitigate the impact of changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for by recording the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss ("AOCI") as a separate component of stockholders' equity. These accumulated gains or losses are reclassified into earnings in the periods during which the hedged transactions affect earnings. We continuously monitor our derivative positions and the credit ratings of our counterparties and do not anticipate losses due to non-performance. See Note 8 for a description of our debt instruments.
Interest Rate Hedges
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Included in accompanying balance sheet at September 30, 2022 |
| | | | | | | AOCI – loss/(income) |
| | Notional Amount | | Interest Rate (1) | | Asset/(Liability) | | Controlling Interest | | Noncontrolling Interest |
| | ($ in millions) |
| Expired hedges: | | | | | | | | | |
| 2018 secured railcar equipment notes | $ | 249.3 | | | 4.41 | % | | $ | — | | | $ | 0.5 | | | $ | — | |
| TRIP Holdings warehouse loan | $ | 788.5 | | | 3.60 | % | | $ | — | | | $ | 0.1 | | | $ | 0.2 | |
Tribute Rail secured railcar equipment notes (2) | $ | 256.0 | | | 2.86 | % | | $ | — | | | $ | 0.9 | | | $ | 1.1 | |
| 2017 promissory notes – interest rate cap | $ | 169.3 | | | 3.00 | % | | $ | — | | | $ | (0.3) | | | $ | — | |
| Open hedge: | | | | | | | | | |
| 2017 promissory notes – interest rate swap | $ | 441.4 | | | 2.39 | % | | $ | 19.6 | | | $ | (19.6) | | | $ | — | |
(1) Weighted average fixed interest rate, except for the interest rate cap on the 2017 promissory notes.
(2) In May 2022, Tribute Rail LLC ("Tribute Rail"), an indirect, wholly-owned subsidiary of TRIP Holdings, entered into and subsequently terminated a forward starting interest rate swap to hedge the risk of potential interest rate increases prior to the May 2022 Tribute Rail debt issuance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Effect on interest expense – increase/(decrease) |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Expected effect during next twelve months |
| | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) |
Expired hedges: | | | | | | | | | |
2018 secured railcar equipment notes | $ | — | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.2 | | | $ | 0.2 | |
| TRIP Holdings warehouse loan | $ | 0.3 | | | $ | 0.4 | | | $ | 1.0 | | | $ | 1.4 | | | $ | 0.3 | |
| Triumph Rail secured railcar equipment notes | $ | — | | | $ | — | | | $ | — | | | $ | 0.1 | | | $ | — | |
| Tribute Rail secured railcar equipment notes | $ | 0.1 | | | $ | — | | | $ | 0.2 | | | $ | — | | | $ | 0.7 | |
| 2017 promissory notes – interest rate cap | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | |
Open hedge (1): | | | | | | | | | |
| 2017 promissory notes – interest rate swap | $ | 0.3 | | | $ | 3.1 | | | $ | 5.3 | | | $ | 9.3 | | | $ | 5.6 | |
(1) Based on the fair value of open hedges as of September 30, 2022.
Foreign Currency Hedge
Our exposure related to foreign currency transactions is currently hedged for up to a maximum of twelve months. Information related to our foreign currency hedge is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Included in accompanying balance sheet at September 30, 2022 | | Effect on cost of revenues – increase/(decrease) |
Notional
Amount | | Asset/ (Liability) | | AOCI –
loss/(income) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Expected effect during next twelve months (1) |
| | | 2022 | | 2021 | | 2022 | | 2021 | |
| (in millions) |
| $ | 40.8 | | | $ | 1.1 | | | $ | (1.6) | | | $ | (0.5) | | | $ | (1.4) | | | $ | (0.7) | | | $ | (7.4) | | | $ | (1.6) | |
(1) Based on the fair value of open hedges as of September 30, 2022.
Fair Value Measurements
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. Our cash equivalents and restricted cash are instruments of the U.S. Treasury or highly-rated money market mutual funds. The assets measured as Level 1 in the fair value hierarchy are summarized below:
| | | | | | | | | | | |
| Level 1 |
| | September 30, 2022 | | December 31, 2021 |
| (in millions) |
| Assets: | | | |
| Cash equivalents | $ | 34.7 | | | $ | 11.4 | |
| Restricted cash | 180.2 | | | 135.1 | |
| Total assets | $ | 214.9 | | | $ | 146.5 | |
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. Interest rate hedges are valued at exit prices obtained from each counterparty. Foreign currency hedges are valued at exit prices obtained from each counterparty, which are based on currency spot and forward rates and forward points. The assets and liabilities measured as Level 2 in the fair value hierarchy are summarized below:
| | | | | | | | | | | |
| Level 2 |
| | September 30, 2022 | | December 31, 2021 |
| (in millions) |
| Assets: | | | |
Interest rate hedge (1) | $ | 19.6 | | | $ | — | |
Foreign currency hedge (1) | 1.1 | | | — | |
| Total assets | $ | 20.7 | | | $ | — | |
| | | |
| Liabilities: | | | |
Interest rate hedge (2) | $ | — | | | $ | 21.0 | |
Foreign currency hedge (2) | — | | | 0.1 | |
| Total liabilities | $ | — | | | $ | 21.1 | |
(1) Included in other assets in our Consolidated Balance Sheets.
(2) Included in accrued liabilities in our Consolidated Balance Sheets.
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. As of September 30, 2022 and December 31, 2021, we have no assets measured on a recurring basis as Level 3 in the fair value hierarchy.
See Note 1 for more information regarding non-recurring fair value measurements involving Level 3 inputs resulting from acquisition activity. See Note 8 for the estimated fair values of our debt instruments. The fair values of all other financial instruments are estimated to approximate carrying value.
Note 4. Segment Information
We report our operating results in two reportable segments: (1) the Railcar Leasing and Management Services Group, which owns and operates a fleet of railcars and provides third-party fleet leasing, management, and administrative services; and (2) the Rail Products Group, which manufactures and sells railcars and related parts and components, and provides railcar maintenance and modification services. Following the sale of THP, which was previously reported within All Other, we have combined the results of the prior Corporate and All Other groupings into a single Corporate and other grouping. The remaining activity previously reported in All Other primarily includes legal, environmental, and maintenance costs associated with non-operating facilities. Results of prior periods have been recast to reflect these changes and present results on a comparable basis.
Gains and losses from the sale of property, plant, and equipment are included in the operating profit of each respective segment. Our Chief Operating Decision Maker ("CODM") regularly reviews the operating results of our reportable segments in order to assess performance and allocate resources. Our CODM does not consider restructuring activities when evaluating segment operating results; therefore, restructuring activities are not allocated to segment profit or loss.
Sales and related net profits ("deferred profit") from the Rail Products Group to the Leasing Group are recorded in the Rail Products Group and eliminated in consolidation and are reflected in "Eliminations – Lease Subsidiary" in the tables 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 our original manufacturing cost of the railcars. Lease portfolio sales 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 (in millions). We operate principally in North America.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | | | | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
| External revenue | $ | 194.6 | | | $ | 302.0 | | | | | | | $ | — | | | $ | — | | | $ | 496.6 | |
| Intersegment revenue | 0.2 | | | 295.3 | | | | | | | (295.3) | | | (0.2) | | | — | |
| Total revenues | $ | 194.8 | | | $ | 597.3 | | | | | | | $ | (295.3) | | | $ | (0.2) | | | $ | 496.6 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | | | | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
| External revenue | $ | 185.3 | | | $ | 234.5 | | | | | | | $ | — | | | $ | — | | | $ | 419.8 | |
| Intersegment revenue | 0.2 | | | 105.4 | | | | | | | (105.3) | | | (0.3) | | | — | |
| Total revenues | $ | 185.5 | | | $ | 339.9 | | | | | | | $ | (105.3) | | | $ | (0.3) | | | $ | 419.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
| External revenue | $ | 572.6 | | | $ | 813.5 | | | | | $ | — | | | $ | — | | | $ | 1,386.1 | |
| Intersegment revenue | 0.6 | | | 605.5 | | | | | (605.5) | | | (0.6) | | | — | |
| Total revenues | $ | 573.2 | | | $ | 1,419.0 | | | | | $ | (605.5) | | | $ | (0.6) | | | $ | 1,386.1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Railcar Leasing and Management Services Group | | Rail Products Group | | | | Eliminations – Lease Subsidiary | | Eliminations – Other | | Consolidated Total |
| External revenue | $ | 553.6 | | | $ | 490.2 | | | | | $ | — | | | $ | — | | | $ | 1,043.8 | |
| Intersegment revenue | 0.5 | | | 372.5 | | | | | (367.6) | | | (5.4) | | | — | |
| Total revenues | $ | 554.1 | | | $ | 862.7 | | | | | $ | (367.6) | | | $ | (5.4) | | | $ | 1,043.8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The reconciliation of segment operating profit to consolidated net income is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in millions) |
| Operating profit: | | | | | | | |
| Railcar Leasing and Management Services Group | $ | 107.9 | | | $ | 109.3 | | | $ | 293.2 | | | $ | 268.7 | |
| Rail Products Group | 26.0 | | | (3.1) | | | 40.5 | | | (8.7) | |
| Segment Totals | 133.9 | | | 106.2 | | | 333.7 | | | 260.0 | |
| Corporate and other | (21.4) | | | (23.1) | | | (62.2) | | | (63.1) | |
| | | | | | | |
| Restructuring activities, net | — | | | 0.1 | | | (1.0) | | | 1.1 | |
| Eliminations – Lease Subsidiary | (19.6) | | | (4.5) | | | (48.7) | | | (9.3) | |
| Eliminations – Other | (0.2) | | | (0.4) | | | (1.3) | | | (1.1) | |
| Consolidated operating profit | 92.7 | | | 78.3 | | | 220.5 | | | 187.6 | |
| Other (income) expense | 54.4 | | | 44.5 | | | 147.0 | | | 160.5 | |
| Provision (benefit) for income taxes | 8.6 | | | 8.3 | | | 17.4 | | | 9.4 | |
| Income (loss) from discontinued operations, net of income taxes | (3.4) | | | 10.4 | | | (13.7) | | | 24.3 | |
| Loss on sale of discontinued operations, net of income taxes | — | | | — | | | (5.7) | | | — | |
| Net income | $ | 26.3 | | | $ | 35.9 | | | $ | 36.7 | | | $ | 42.0 | |
Note 5. Partially-Owned Leasing Subsidiaries
Through our wholly-owned subsidiary, Trinity Industries Leasing Company ("TILC"), we formed two subsidiaries, TRIP Holdings and RIV 2013, for the purpose of providing railcar leasing services in North America for institutional investors. Each of TRIP Holdings and RIV 2013 are direct, partially-owned subsidiaries of TILC in which we have 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 September 30, 2022, the carrying value of our investment in TRIP Holdings and RIV 2013 totaled $134.5 million. Our weighted average ownership interest in TRIP Holdings and RIV 2013 is 38% while the remaining 62% weighted average interest is owned by third-party, investor-owned funds. The investment in our partially-owned leasing subsidiaries is eliminated in consolidation.
Each of TRIP Holdings and RIV 2013 has wholly-owned subsidiaries that are the owners of railcars acquired from our Rail Products and Leasing Groups. TRIP Holdings has wholly-owned subsidiaries known as Triumph Rail LLC ("Triumph Rail") and Tribute Rail. RIV 2013 has a wholly-owned subsidiary known as TRP 2021 LLC ("TRP-2021"). TILC is the contractual servicer for Triumph Rail, Tribute Rail, and TRP-2021, with the authority to manage and service each entity's owned railcars. Our controlling interest in each of TRIP Holdings and RIV 2013 results from our 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 our 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 Triumph Rail, Tribute Rail, and TRP-2021 may only be used to satisfy the particular subsidiary's liabilities, and the creditors of each of Triumph Rail, Tribute Rail, and TRP-2021 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 Triumph Rail, Tribute Rail, and TRP-2021 and has the potential to earn certain incentive fees. There are no remaining equity commitments with respect to TRIP Holdings or RIV 2013.
See Note 8 regarding TRIP Holdings and RIV 2013, including the debt issuance of Tribute Rail and the repayment of TRIP Railcar Co. LLC's ("TRIP Railcar Co.") outstanding term loan agreement.
Investment in Unconsolidated Affiliate
In August 2021, the Company and Wafra, Inc. (“Wafra”), a global alternative investment manager, announced a new railcar investment vehicle (“RIV”) program between Trinity and certain funds managed by Wafra (“Wafra Funds”). As part of this program, a joint venture was formed, Signal Rail Holdings LLC (“Signal Rail”), which was owned 90% by Wafra Funds and 10% by TILC. Signal Rail or its subsidiaries are expected to invest in diversified portfolios of leased railcars originated by TILC targeting up to $1 billion in total acquisitions over an expected three-year investment period. TILC will service all railcars owned by Signal Rail.
In August 2022, TILC and certain of its subsidiaries sold a second portfolio comprised of 2,678 railcars and related leases to Signal Rail for an aggregate sales price of approximately $254.1 million. TILC recognized a gain of approximately $25.1 million on the sale and approximately $2.5 million was recognized as revenue for services performed associated with the delivery of railcars with attached leases during the three and nine months ended September 30, 2022. In connection with the sale, TILC contributed $13.5 million of cash to Signal Rail, resulting in an increase in TILC's weighted average equity ownership in Signal Rail to 12.9%. Signal Rail financed the August 2022 purchase primarily through a term loan. To date, TILC has sold 6,260 railcars to Signal Rail for an aggregate sales price of $579.2 million.
Upon consideration under the variable interest entity (“VIE”) model of ASC 810, Trinity has concluded that Signal Rail meets the definition of a VIE. TILC has variable interests in Signal Rail arising from its 12.9% equity ownership position and its role as a service provider. We determined that Trinity is not the primary beneficiary and therefore does not consolidate this entity as we do not have the power to direct the activities of the entity that most significantly impact its economic performance. We will absorb portions of Signal Rail’s expected losses and/or receive portions of expected residual returns commensurate with our 12.9% equity interest in Signal Rail.
Our investment in Signal Rail is being accounted for under the equity method of accounting. At September 30, 2022, the carrying value of TILC’s equity investment in Signal Rail was $20.6 million, which is included in other assets in our Consolidated Balance Sheets. The carrying value of this investment, together with any potential future investments described above, collectively represent our maximum exposure in Signal Rail.
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, and administrative services. Selected consolidated financial information for the Leasing Group is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Wholly-
Owned
Subsidiaries | | Partially-Owned Subsidiaries | | Total Leasing Group | | Eliminations – Lease Subsidiary(1) | | Adjusted Total Leasing Group |
| (in millions) |
| Cash and cash equivalents | $ | 4.4 | | | $ | — | | | $ | 4.4 | | | $ | — | | | $ | 4.4 | |
| Accounts receivable | 97.3 | | | 12.3 | | | 109.6 | | | — | | | 109.6 | |
| Property, plant, and equipment, net | 5,793.1 | | | 1,533.5 | | | 7,326.6 | | | (774.4) | | | 6,552.2 | |
| Restricted cash | 117.1 | | | 63.1 | | | 180.2 | | | — | | | 180.2 | |
| Other assets | 132.6 | | | 1.9 | | | 134.5 | | | — | | | 134.5 | |
| Total assets | $ | 6,144.5 | | | $ | 1,610.8 | | | $ | 7,755.3 | | | $ | (774.4) | | | $ | 6,980.9 | |
| | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 114.9 | | | $ | 42.9 | | | $ | 157.8 | | | $ | — | | | $ | 157.8 | |
| Debt, net | 3,844.5 | | | 1,190.2 | | | 5,034.7 | | | — | | | 5,034.7 | |
| Deferred income taxes | 1,147.0 | | | 0.9 | | | 1,147.9 | | | (177.6) | | | 970.3 | |
| Other liabilities | 41.7 | | | — | | | 41.7 | | | — | | | 41.7 | |
| Total liabilities | 5,148.1 | | | 1,234.0 | | | 6,382.1 | | | (177.6) | | | 6,204.5 | |
| Noncontrolling interest | — | | | 255.2 | | | 255.2 | | | — | | | 255.2 | |
| Total Equity | $ | 996.4 | | | $ | 121.6 | | | $ | 1,118.0 | | | $ | (596.8) | | | $ | 521.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Wholly-
Owned
Subsidiaries | | Partially-Owned Subsidiaries | | Total Leasing Group | | Eliminations – Lease Subsidiary(1) | | Adjusted Total Leasing Group |
| (in millions) |
| Cash and cash equivalents | $ | 3.4 | | | $ | — | | | $ | 3.4 | | | $ | — | | | $ | 3.4 | |
| Accounts receivable | 90.7 | | | 10.1 | | | 100.8 | | | — | | | 100.8 | |
| Property, plant, and equipment, net | 5,706.1 | | | 1,570.6 | | | 7,276.7 | | | (779.1) | | | 6,497.6 | |
| Restricted cash | 76.5 | | | 58.6 | | | 135.1 | | | — | | | 135.1 | |
| Other assets | 67.3 | | | 2.1 | | | 69.4 | | | — | | | 69.4 | |
| Total assets | $ | 5,944.0 | | | $ | 1,641.4 | | | $ | 7,585.4 | | | $ | (779.1) | | | $ | 6,806.3 | |
| | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 113.4 | | | $ | 30.1 | | | $ | 143.5 | | | $ | — | | | $ | 143.5 | |
| Debt, net | 3,555.8 | | | 1,216.1 | | | 4,771.9 | | | — | | | 4,771.9 | |
| Deferred income taxes | 1,114.2 | | | 1.1 | | | 1,115.3 | | | (176.6) | | | 938.7 | |
| Other liabilities | 35.6 | | | — | | | 35.6 | | | — | | | 35.6 | |
| Total liabilities | 4,819.0 | | | 1,247.3 | | | 6,066.3 | | | (176.6) | | | 5,889.7 | |
| Noncontrolling interest | — | | | 267.0 | | | 267.0 | | | — | | | 267.0 | |
| Total Equity | $ | 1,125.0 | | | $ | 127.1 | | | $ | 1,252.1 | | | $ | (602.5) | | | $ | 649.6 | |
(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 5 and Note 8 for a further discussion regarding our investment in our partially-owned leasing subsidiaries and the related indebtedness.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | Percent | | 2022 | | 2021 | | Percent |
| ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | |
| Leasing and management | $ | 194.8 | | | $ | 185.5 | | | 5.0 | % | | $ | 573.2 | | | $ | 554.1 | | | 3.4 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Operating profit (1): | | | | | | | | | | | |
| Leasing and management | $ | 73.6 | | | $ | 76.4 | | | (3.7) | % | | $ | 220.2 | | | $ | 223.0 | | | (1.3) | % |
Lease portfolio sales (2) | 34.3 | | | 32.9 | | | * | | 73.0 | | | 45.7 | | | * |
| Total operating profit | $ | 107.9 | | | $ | 109.3 | | | (1.3) | % | | $ | 293.2 | | | $ | 268.7 | | | 9.1 | % |
| Total operating profit margin | 55.4 | % | | 58.9 | % | | | | 51.2 | % | | 48.5 | % | | |
| | | | | | | | | | | |
Leasing and management operating profit margin | 37.8 | % | | 41.2 | % | | | | 38.4 | % | | 40.2 | % | | |
| | | | | | | | | | | |
| Selected expense information: | | | | | | | | | | | |
Depreciation (3) | $ | 59.1 | | | $ | 58.7 | | | 0.7 | % | | $ | 175.7 | | | $ | 170.5 | | | 3.0 | % |
| Maintenance and compliance | $ | 28.2 | | | $ | 22.8 | | | 23.7 | % | | $ | 84.7 | | | $ | 73.7 | | | 14.9 | % |
| Rent and ad valorem taxes | $ | 5.2 | | | $ | 5.0 | | | 4.0 | % | | $ | 15.5 | | | $ | 14.3 | | | 8.4 | % |
Selling, engineering, and administrative expenses | $ | 14.2 | | | $ | 11.6 | | | 22.4 | % | | $ | 39.6 | | | $ | 36.1 | | | 9.7 | % |
Interest (4) | $ | 49.2 | | | $ | 39.9 | | | 23.3 | % | | $ | 133.9 | | | $ | 142.6 | | | (6.1) | % |
* Not meaningful
(1) Operating profit includes: depreciation; fleet operating costs, which include maintenance, compliance, freight, and storage; rent and ad valorem taxes; 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.
(2) Includes $1.3 million selling profit associated with sales-type leases for the nine months ended September 30, 2022.
(3) Depreciation expense includes $2.4 million and $8.5 million for the three and nine months ended September 30, 2022, respectively, related to the disposal of certain railcar components associated with our sustainable railcar conversion program. For the three and nine months ended September 30, 2021, depreciation expense includes $4.7 million and $7.3 million, respectively, related to our sustainable railcar conversion program.
(4) Interest expense for the nine months ended September 30, 2022 includes $1.5 million of loss on extinguishment of debt associated with the repayment of TRIP Railcar Co.'s outstanding term loan agreement. Interest expense for the nine months ended September 30, 2021 includes $11.7 million of loss on extinguishment of debt associated with the refinancing of our partially-owned subsidiaries' debt.
Information related to lease portfolio sales is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($ in millions) |
| Lease portfolio sales | $ | 299.6 | | | $ | 322.1 | | | $ | 514.8 | | | $ | 410.9 | |
Operating profit on lease portfolio sales (1) | $ | 34.3 | | | $ | 32.9 | | | $ | 71.7 | | | $ | 45.7 | |
| Operating profit margin on lease portfolio sales | 11.4 | % | | 10.2 | % | | 13.9 | % | | 11.1 | % |
(1) Excludes $1.3 million selling profit associated with sales-type leases for the nine months ended September 30, 2022.
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. 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 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| | (in millions) |
| Future contractual minimum rental revenues | $ | 154.2 | | | $ | 512.2 | | | $ | 402.2 | | | $ | 304.8 | | | $ | 218.1 | | | $ | 368.9 | | | $ | 1,960.4 | |
Debt. Wholly-owned subsidiaries. The Leasing Group’s debt at September 30, 2022 consisted primarily of non-recourse debt. As of September 30, 2022, Trinity’s wholly-owned subsidiaries included in the Leasing Group held equipment with a net book value of $5,431.2 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, 2022 was $350.8 million. See Note 8 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. As of September 30, 2022, TRIP Holdings held equipment with a net book value of $1,078.6 million, which is pledged solely as collateral for the TRIP Holdings' debt held by its subsidiaries. As of September 30, 2022, TRP-2021 equipment with a net book value of $454.9 million is pledged solely as collateral for the TRP-2021 debt. See Note 5 for a description of TRIP Holdings and RIV 2013 and their respective subsidiaries.
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 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| | (in millions) |
Future operating lease obligations | $ | 3.2 | | | $ | 11.9 | | | $ | 7.9 | | | $ | 6.0 | | | $ | 5.7 | | | $ | 8.7 | | | $ | 43.4 | |
| Future contractual minimum rental revenues | $ | 2.5 | | | $ | 7.7 | | | $ | 3.8 | | | $ | 2.6 | | | $ | 1.9 | | | $ | 0.5 | | | $ | 19.0 | |
Operating lease obligations totaling $1.4 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 $0.2 million, which is excluded from the table above.
Note 7. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | (in millions) |
| Manufacturing/Corporate: | | | |
| Land | $ | 15.8 | | | $ | 17.4 | |
| Buildings and improvements | 385.0 | | | 377.4 | |
| Machinery and other | 406.0 | | | 415.1 | |
| Construction in progress | 15.9 | | | 18.1 | |
| 822.7 | | | 828.0 | |
| Less: accumulated depreciation | (481.1) | | | (478.7) | |
| 341.6 | | | 349.3 | |
| Leasing: | | | |
| Wholly-owned subsidiaries: | | | |
| Machinery and other | 21.6 | | | 20.7 | |
| Equipment on lease | 7,223.5 | | | 7,061.3 | |
| 7,245.1 | | | 7,082.0 | |
| Less: accumulated depreciation | (1,452.0) | | | (1,375.9) | |
| 5,793.1 | | | 5,706.1 | |
| Partially-owned subsidiaries: | | | |
| Equipment on lease | 2,234.5 | | | 2,242.9 | |
| Less: accumulated depreciation | (701.0) | | | (672.3) | |
| 1,533.5 | | | 1,570.6 | |
| | | |
| Deferred profit on railcars sold to the Leasing Group | (1,057.5) | | | (1,047.3) | |
| Less: accumulated amortization | 283.1 | | | 268.2 | |
| (774.4) | | | (779.1) | |
| $ | 6,893.8 | | | $ | 6,846.9 | |
Note 8. Debt
The carrying amounts of our debt are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | (in millions) |
| Corporate – Recourse: | | | |
| Revolving credit facility | $ | 60.0 | | | $ | — | |
Senior notes, net of unamortized discount of $0.1 and $0.1 | 399.9 | | | 399.9 | |
| 459.9 | | | 399.9 | |
| Less: unamortized debt issuance costs | (0.9) | | | (1.2) | |
| Total recourse debt | 459.0 | | | 398.7 | |
| | | |
| Leasing – Non-recourse: | | | |
| Wholly-owned subsidiaries: | | | |
Secured railcar equipment notes, net of unamortized discount of $0.4 and $0.5 | 2,412.3 | | | 2,257.5 | |
2017 promissory notes, net of unamortized discount of $6.2 and $7.8 | 726.6 | | | 760.2 | |
| TILC warehouse facility | 728.2 | | | 561.8 | |
| 3,867.1 | | | 3,579.5 | |
| Less: unamortized debt issuance costs | (22.6) | | | (23.7) | |
| 3,844.5 | | | 3,555.8 | |
| Partially-owned subsidiaries: | | | |
Secured railcar equipment notes, net of unamortized discount of $0.4 and $0.3 | 1,200.7 | | | 903.5 | |
| TRIP Railcar Co. term loan | — | | | 323.7 | |
| 1,200.7 | | | 1,227.2 | |
| Less: unamortized debt issuance costs | (10.5) | | | (11.1) | |
| 1,190.2 | | | 1,216.1 | |
| Total non–recourse debt | 5,034.7 | | | 4,771.9 | |
| Total debt | $ | 5,493.7 | | | $ | 5,170.6 | |
Estimated Fair Value of Debt – The estimated fair value of our 4.55% senior notes due 2024 ("Senior Notes") is based on a quoted market price in a market with little activity (Level 2 input). The estimated fair values of our secured railcar equipment notes are based on our estimate of their fair value using unobservable input values provided by a third party (Level 3 inputs). The respective carrying values of our revolving credit facility, 2017 promissory notes, TILC warehouse facility, and TRIP Railcar Co. term loan approximate fair value because the interest rate adjusts to the market interest rate. The estimated fair values of our debt are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (in millions) |
| Level 1 | $ | 1,514.8 | | | $ | 1,645.7 | |
| Level 2 | 381.5 | | | 420.8 | |
| Level 3 | 3,284.8 | | | 3,215.4 | |
| $ | 5,181.1 | | | $ | 5,281.9 | |
Revolving Credit Facility – We have a $450.0 million unsecured corporate revolving credit facility. In July 2022, we amended our revolving credit facility to extend its maturity date to the earlier of (i) July 25, 2027 or (ii) July 2, 2024 if our Senior Notes have not been repaid in full by that date.
During the nine months ended September 30, 2022, we had total borrowings of $545.0 million and total repayments of $485.0 million under the revolving credit facility. Additionally, we had outstanding letters of credit issued in an aggregate amount of $4.9 million. Of the $385.1 million remaining unused amount, $264.1 million was available for borrowing as of September 30, 2022. The majority of our outstanding letters of credit as of September 30, 2022 are scheduled to expire in November 2023. Our letters of credit obligations support performance bonds related to certain railcar orders. The revolving credit facility bears interest at a variable rate of Secured Overnight Financing Rate ("SOFR") plus 2.35%, for an all-in interest rate of 5.34% as of September 30, 2022. A commitment fee accrues on the average daily unused portion of the revolving credit facility at the rate of 0.175% to 0.40% (0.35% as of September 30, 2022).
The revolving credit facility requires the maintenance of ratios related to minimum interest coverage for the leasing and manufacturing operations and maximum leverage. In July 2022, we amended our revolving credit facility to increase the maximum leverage ratio to provide additional flexibility. As of September 30, 2022, we were in compliance with all such financial covenants.
TILC Warehouse Loan Facility – TILC has a $1.0 billion warehouse loan facility, which was established to finance railcars owned by TILC. During the nine months ended September 30, 2022, we had total borrowings of $554.1 million and total repayments of $387.7 million under the TILC warehouse loan facility. Of the remaining unused facility amount of $271.8 million, $142.1 million was available as of September 30, 2022 based on the amount of warehouse-eligible, unpledged equipment. In August 2022, we amended our warehouse loan facility to transition the facility benchmark rate from LIBOR to SOFR plus a benchmark adjustment. Advances under the facility bear interest at one-month term SOFR plus (1) a benchmark adjustment of 11 basis points and (2) a facility margin of 185 basis points, for an all-in interest rate of 4.48% at September 30, 2022.
TRL-2022 – In April 2022, Trinity Rail Leasing 2022 LLC, a Delaware limited liability company ("TRL-2022") and a limited purpose, indirect wholly-owned subsidiary of the Company owned through TILC, issued an aggregate principal amount of $244.8 million of its Series 2022-1 Class A Green Secured Railcar Equipment Notes (the "TRL-2022 Notes"). The TRL-2022 Notes bear interest at a fixed rate of 4.55%, are payable monthly, and have a stated final maturity date of May 20, 2052. We incurred $2.6 million in debt issuance costs, which will be amortized to interest expense through the anticipated repayment date of the TRL-2022 Notes. The TRL-2022 Notes are obligations of TRL-2022 and are non-recourse to Trinity. The obligations are secured by a portfolio of railcars and operating leases thereon, certain cash reserves, and other assets to be acquired and owned by TRL-2022. Net proceeds received from the railcars acquired in connection with the issuance of the TRL-2022 Notes were used to repay approximately $209.9 million of borrowings under TILC's warehouse loan facility and for general corporate purposes.
Tribute Rail – In May 2022, Tribute Rail, an indirect, wholly-owned subsidiary of TRIP Holdings, issued an aggregate principal amount of (i) $290.0 million of its Series 2022-1 Class A Green Secured Railcar Equipment Notes (the “Class A Notes”) and (ii) $37.0 million of its Series 2022-1 Class B Green Secured Railcar Equipment Notes (the “Class B Notes”) (the Class A Notes and the Class B Notes are, collectively, the “Tribute Rail Notes”). The Class A Notes bear interest at a fixed rate of 4.76%, and the Class B Notes bear interest at a fixed rate of 5.75%. The Tribute Rail Notes are payable monthly and have a stated final maturity date of May 17, 2052. We incurred $3.4 million in debt issuance costs, which will be amortized to interest expense through the anticipated repayment date of the Tribute Rail Notes. The Tribute Rail Notes are non-recourse to Trinity, TILC, TRIP Holdings, and the other equity investors in TRIP Holdings, and are secured by Tribute Rail's portfolio of railcars and operating leases thereon, certain cash reserves, and other assets acquired and owned by Tribute Rail.
Tribute Rail used the proceeds from the sale of the Tribute Rail Notes to purchase railcars and related operating leases from TRIP Railcar Co. TRIP Railcar Co. used the proceeds from Tribute Rail to repay its outstanding term loan agreement due June 2025, of which $319.4 million was outstanding at the redemption date. In connection with the redemption, we recognized a loss on extinguishment of debt of $1.5 million, which related to the write-off of unamortized debt issuance costs. This write-off is reflected in the loss on extinguishment of debt line of our Consolidated Statements of Operations for the nine months ended September 30, 2022.
Each of our secured railcar equipment notes, including the TRL-2022 Notes and the Tribute Rail Notes, generally has an anticipated repayment date and a stated final maturity date. While the stated final maturity date of these notes is in 2052, the cash flows from the encumbered assets of each of TRL-2022 and Tribute Rail will be applied, pursuant to the payment priorities of their respective indentures, so as to amortize their respective notes to achieve monthly targeted principal balances. If the cash flow assumptions used in determining the targeted balances are met, it is anticipated that the notes will be repaid well in advance of their stated final maturity date. There can be no assurance, however, that such cash flow assumptions will be realized. If these notes are not repaid by the anticipated repayment date, the respective interest rates on these notes would increase from the fixed rates stated above.
Terms and conditions of our other long-term debt, including recourse and non-recourse provisions and scheduled maturities, are described in Note 8 of our 2021 Annual Report on Form 10-K.
Note 9. Income Taxes
The effective tax rate from continuing operations for the three and nine months ended September 30, 2022 was 22.5% and 23.7%, respectively, which differs from the U.S. statutory rate of 21.0% primarily due to state income taxes, foreign taxes, non-deductible executive compensation, excess tax benefits associated with equity-based compensation, taxes not recorded on our non-controlling interests in partially-owned subsidiaries, and a reduction of our uncertain tax positions balance due to a lapse of a state statute of limitations.
For the three months ended September 30, 2021, we recorded income tax expense of $8.3 million on income from continuing operations before income taxes of $33.8 million, which differs from the U.S. statutory rate primarily due to excess tax benefits associated with equity-based compensation. For the nine months ended September 30, 2021, we recorded income tax expense of $9.4 million on income from continuing operations before income taxes of $27.1 million, which differs from the U.S. statutory rate primarily due to adjustments to the Coronavirus Aid, Relief, and Economic Security Act carryback benefit previously recognized, partially offset by excess tax benefits associated with equity-based compensation.
The total income tax receivable position as of September 30, 2022 was $11.0 million.
Our tax years through 2019 are effectively settled except with respect to carryback claims related to the 2013 through 2015 tax years, which are currently in review. We do not expect any significant changes to the carryback claims. We have state tax returns that are under audit in the normal course of business, and our Mexican subsidiaries' tax returns statutes of limitations remain open for auditing 2017 forward. We believe we are appropriately reserved for any potential matters.
Note 10. Employee Retirement Plans
Our defined contribution expense for the three and nine months ended September 30, 2022 was $2.5 million and $6.8 million, respectively. Our defined contribution expense for the three and nine months ended September 30, 2021 was $2.5 million and $6.8 million, respectively.
The net periodic benefit cost related to our Supplemental Executive Retirement Plan was $0.2 million and $0.5 million for the three and nine months ended September 30, 2022. The net periodic benefit cost related to our Supplemental Executive Retirement Plan was $0.1 million and $0.5 million for the three and nine months ended September 30, 2021, respectively. The non-service cost components of net periodic benefit cost are included in other, net (income) expense in our Consolidated Statements of Operations.
Pension Plan Termination
In September 2019, our Board of Directors approved the termination of the Trinity Industries, Inc. Consolidated Pension Plan (the "Pension Plan"), effective December 31, 2019. The Pension Plan was settled in the fourth quarter of 2020, which resulted in the Company no longer having any remaining funded pension plan obligations. Upon settlement, we recognized a pre-tax non-cash pension settlement charge in the fourth quarter of 2020 of $151.5 million, which was inclusive of all unamortized losses previously recorded in AOCI.
During the nine months ended September 30, 2021, we used $2.2 million to fund pension administrative expenses required to finalize the settlement of the Pension Plan, which is included in other, net (income) expense in our Consolidated Statements of Operations. There were no pension administrative expenses for the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, we used $0.2 million to fund pension administrative expenses, resulting in a remaining surplus of the Pension Plan of $0.4 million at September 30, 2022.
Note 11. Accumulated Other Comprehensive Income (Loss)
Changes in AOCI for the nine months ended September 30, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Currency translation adjustments | | Unrealized gains/(losses) on derivative financial instruments | | Net actuarial gains/(losses) of defined benefit plans | | Accumulated other comprehensive income (loss) |
| | (in millions) |
Balances at December 31, 2021 | $ | (1.3) | | | $ | (12.2) | | | $ | (3.5) | | | $ | (17.0) | |
| Other comprehensive income, net of tax, before reclassifications | — | | | 26.8 | | | — | | | 26.8 | |
Amounts reclassified from AOCI, net of tax benefit of $—, $1.2, $—, and $1.2 | — | | | 4.6 | | | 0.2 | | | 4.8 | |
| Amounts reclassified to discontinued operations, net of tax | 1.3 | | | — | | | — | | | 1.3 | |
| Less: noncontrolling interest | — | | | 0.5 | | | — | | | 0.5 | |
| Other comprehensive income | 1.3 | | | 31.9 | | | 0.2 | | | 33.4 | |
Balances at September 30, 2022 | $ | — | | | $ | 19.7 | | | $ | (3.3) | | | $ | 16.4 | |
See Note 3 for information on the reclassification of amounts in AOCI into earnings. Reclassifications of unrealized before-tax gains and losses on derivative financial instruments are included in interest expense, net for our interest rate hedges and in cost of revenues for our foreign currency hedges in our Consolidated Statements of Operations. Reclassifications of before-tax net actuarial gains/(losses) of defined benefit plans are included in other, net (income) expense in our Consolidated Statements of Operations. Changes in currency translation adjustments above relate to the final resolution of amounts associated with businesses previously disposed and are included in loss on sale of discontinued operations, net of income taxes in our Consolidated Statements of Operations.
Note 12. Common Stock and Stock-Based Compensation
Stockholders' Equity
In September 2021, our Board of Directors authorized a new share repurchase program effective September 9, 2021 through December 31, 2022. The new share repurchase program authorizes the Company to repurchase up to $250.0 million of its common stock. In December 2021, we entered into an accelerated share repurchase agreement (the "ASR") to repurchase $125.0 million of our common stock. Approximately 3.3 million shares repurchased as part of the ASR on December 31, 2021 were delivered to the Company in January 2022 in accordance with normal settlement practices, representing approximately 80% of the total notional value of the ASR. The ASR was completed in April 2022. Share repurchase activity under the authorized program is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Shares Repurchased | | Remaining Authorization to Repurchase | |
| Period | Number of Shares | | Cost
(in millions) | | Cost
(in millions) | |
| September 9, 2021 Authorization | | | | | $ | 250.0 | | |
| September 9, 2021 through September 30, 2021 | — | | | $ | — | | | $ | 250.0 | | |
| October 1, 2021 through December 31, 2021 | 5,155,491 | | | 151.9 | | | $ | 98.1 | | |
| January 1, 2022 through March 31, 2022 | — | | | — | | | $ | 98.1 | | |
| April 1, 2022 through June 30, 2022 | 1,760,462 | | | 50.3 | | | $ | 47.8 | | (1) |
| July 1, 2022 through September 30, 2022 | 610,000 | | | 14.1 | | | $ | 33.7 | | |
| Total | 7,525,953 | | | $ | 216.3 | | | | |
(1) Share repurchases during the second quarter of 2022 included 760,602 shares at a cost of $25.0 million representing the final settlement of the ASR, which was funded in December 2021 but a portion of which remained outstanding as of December 31, 2021.
Certain shares of stock repurchased during September 2022, totaling $2.6 million, were cash settled in October 2022 in accordance with normal settlement practices.
During the three and nine months ended September 30, 2021, share repurchases totaled 2.8 million and 14.6 million, respectively, at a cost of approximately $77.1 million and $404.7 million, respectively. Share repurchases during the nine months ended September 30, 2021 included 8.1 million shares, at a cost of approximately $222.5 million, from a privately negotiated transaction with ValueAct Capital Master Fund, L.P ("ValueAct"). The repurchase from ValueAct was approved by our Board of Directors separately from, and did not reduce the authorized amount remaining under, the previous share repurchase program, which was completed in the third quarter of 2021.
Stock-Based Compensation
Stock-based compensation expense totaled approximately $5.9 million and $16.7 million for the three and nine months ended September 30, 2022, respectively. Stock-based compensation expense totaled approximately $6.0 million and $15.2 million for the three and nine months ended September 30, 2021, respectively. The Company's annual grant of share-based awards generally occurs in the second quarter under our 2004 Fourth Amended and Restated Stock Option and Incentive Plan (the "Plan”). Our stock options have contractual terms of ten years and become exercisable over a three-year period. Expense related to stock options is recognized on a straight-line basis over the vesting period. Expense related to restricted stock units ("RSUs") issued to eligible employees under the Plan is recognized over the vesting period, generally between three years and four years. Beginning in 2020, certain RSU grants provide for full vesting when the award recipients retire having reached 60 years of age and having provided at least ten years of service to the Company, provided that the awards remain outstanding for a period of six months from the date of grant. The expense for these awards is recognized over the applicable service period for each of the eligible award recipients. Expense related to RSUs and restricted stock awards ("RSAs") granted to non-employee directors under the Plan is recognized on a straight-line basis over the vesting period, generally one year. Expense related to performance units is recognized on a straight-line basis from their award date to the end of the performance period, generally three years.
The following table summarizes stock-based compensation awards granted during the nine months ended September 30, 2022:
| | | | | | | | | | | |
| Number of Shares Granted | | Weighted Average Grant-Date Fair Value per Award |
| | | |
| Restricted stock units | 630,449 | | | $ | 25.64 | |
| Restricted stock awards | 26,339 | | | $ | 25.43 | |
| Performance units | 243,084 | | | $ | 29.89 | |
Note 13. Earnings Per Common Share
Basic net income attributable to Trinity Industries, Inc. per common share ("EPS") is computed by dividing net income attributable to Trinity remaining after allocation to unvested restricted shares by the weighted average number of basic common shares outstanding for the period. Except when the effect would be antidilutive, the calculation of diluted EPS includes the net impact of potentially dilutive common shares. The Company has certain unvested RSAs that participate in dividends on a nonforfeitable basis and are therefore considered to be participating securities. Consequently, diluted net income attributable to Trinity Industries, Inc. per common share is calculated under both the two-class method and the treasury stock method, and the more dilutive of the two calculations is presented.
The following table sets forth the computation of basic and diluted net income attributable to Trinity Industries, Inc.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (in millions, except per share amounts) |
| Income from continuing operations | $ | 29.7 | | | $ | 25.5 | | | $ | 56.1 | | | $ | 17.7 | |
| Less: Net (income) loss attributable to noncontrolling interest | (0.5) | | | (3.9) | | | (7.9) | | | 6.0 | |
| | | | | | | |
| Net income from continuing operations attributable to Trinity Industries, Inc. | 29.2 | | | 21.6 | | | 48.2 | | | 23.7 | |
| Income (loss) from discontinued operations, net of income taxes | (3.4) | | | 10.4 | | | (13.7) | | | 24.3 | |
| Loss on sale of discontinued operations, net of income taxes | — | | | — | | | (5.7) | | | — | |
| | | | | | | |
| Net income (loss) from discontinued operations attributable to Trinity Industries, Inc. | (3.4) | | | 10.4 | | | (19.4) | | | 24.3 | |
| Net income attributable to Trinity Industries, Inc. | $ | 25.8 | | | $ | 32.0 | | | $ | 28.8 | | | $ | 48.0 | |
| | | | | | | |
| Basic weighted average shares outstanding | 81.7 | | | 97.7 | | | 82.3 | | | 103.4 | |
| Effect of dilutive securities | 1.6 | | | 1.8 | | | 2.1 | | | 2.3 | |
Diluted weighted average shares outstanding | 83.3 | | | 99.5 | | | 84.4 | | | 105.7 | |
| | | | | | | |
Basic earnings per common share: | | | | | | | |
| Income from continuing operations | $ | 0.36 | | | $ | 0.22 | | | $ | 0.59 | | | $ | 0.23 | |
| Income (loss) from discontinued operations | (0.04) | | | 0.11 | | | (0.24) | | | 0.23 | |
| Basic net income attributable to Trinity Industries, Inc. | $ | 0.32 | | | $ | 0.33 | | | $ | 0.35 | | | $ | 0.46 | |
| Diluted earnings per common share: | | | | | | | |
| Income from continuing operations | $ | 0.35 | | | $ | 0.22 | | | $ | 0.57 | | | $ | 0.22 | |
| Income (loss) from discontinued operations | (0.04) | | | 0.11 | | | (0.23) | | | 0.23 | |
| Diluted net income attributable to Trinity Industries, Inc. | $ | 0.31 | | | $ | 0.33 | | | $ | 0.34 | | | $ | 0.45 | |
| | | | | | | |
| Potentially dilutive securities excluded from EPS calculation: | | | | | | | |
| Antidilutive restricted shares | 0.3 | | | 0.1 | | | 0.1 | | | 0.1 | |
| Antidilutive stock options | — | | | — | | | — | | | — | |
Note 14. Contingencies
Highway products litigation
We previously reported the filing of a False Claims Act (“FCA”) complaint in the United States District Court for the Eastern District of Texas, Marshall Division (“District Court”) styled Joshua Harman, on behalf of the United States of America, Plaintiff/Relator v. Trinity Industries, Inc., Defendant, Case No. 2:12-cv-00089-JRG (E.D. Tex.). In this case, in which the U.S. Government declined to intervene, the relator, Mr. Joshua Harman, alleged the Company violated the FCA pertaining to sales of the ET Plus. On October 20, 2014, a trial in this case concluded with a jury verdict stating that the Company and THP “knowingly made, used or caused to be made or used, a false record or statement material to a false or fraudulent claim," and the District Court entered judgment on the verdict in the total amount of $682.4 million. On September 29, 2017, the United States Court of Appeals for the Fifth Circuit ("Fifth Circuit") reversed the District Court’s $682.4 million judgment and rendered judgment as a matter of law in favor of the Company and THP. On January 7, 2019, the United States Supreme Court denied Mr. Harman's petition for certiorari seeking review of the Fifth Circuit's decision. The denial of Mr. Harman's petition ended this action.
Pursuant to the purchase and sale agreement related to the sale of THP, the Company has agreed to indemnify Rush Hour for certain liabilities related to the highway products business, including those liabilities resulting from or arising out of (a) the proceedings set forth under “State actions” and "Missouri class action" below and (b) any other proceedings to the extent resulting from or arising out of ET Plus systems or specified ET Plus component parts that are both (i) manufactured prior to December 31, 2021, and (ii) sold in the United States on or prior to April 30, 2022, or related warranty obligations with respect thereto.
State actions
Mr. Harman also has a separate state qui tam action currently pending pursuant to the Virginia Fraud Against Taxpayers Act ("VFATA") (Commonwealth of Virginia ex rel. Joshua M. Harman v. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No. CL13-698, in the Circuit Court, Richmond, Virginia). In this matter, Mr. Harman alleged the Company violated the VFATA pertaining to sales of the ET Plus, and he is seeking damages, civil penalties, attorneys’ fees, costs, and interest. The Commonwealth of Virginia Attorney General has intervened in the Virginia matter, which is scheduled for trial on April 17, 2023. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations.
In a similar Tennessee state qui tam action filed by Mr. Harman (State of Tennessee ex rel. Joshua M. Harman v. Trinity Industries, Inc., and Trinity Highway Products, LLC, Case No. 14C2652, in the Circuit Court for Davidson County, Tennessee), Mr. Harman alleged the Company violated the Tennessee False Claim Act pertaining to sales of the ET Plus, and he is seeking damages, civil penalties, attorneys’ fees, costs, and interest. The State of Tennessee Attorney General filed a Notice of Election to Decline Intervention in this matter. On January 10, 2022, the trial court granted Trinity’s Motion to Dismiss Harman’s Second Amended Complaint and entered an order dismissing Mr. Harman’s complaint with prejudice. On February 7, 2022, Mr. Harman filed a Notice of Appeal of the trial court's order dismissing the case. Mr. Harman's appeal remains pending. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations.
In a similar New Jersey state qui tam action (State of New Jersey ex rel. Joshua M. Harman v. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No.L-1344-14, in the Superior Court of New Jersey Law Division: Mercer County) that was previously dismissed by the trial court, Mr. Harman sought leave to file an amended complaint pursuant to the New Jersey False Claims Act. On February 16, 2022, the trial court denied Mr. Harman’s motion. On March 9, 2022, Mr. Harman filed a motion for reconsideration of the trial court’s order denying leave to file an amended complaint. On June 27, 2022, the trial court denied Mr. Harman’s motion for reconsideration seeking leave to file an amended complaint with prejudice. On August 9, 2022, Mr. Harman filed a Notice of Appeal of the trial court's order denying Mr. Harman's motion for reconsideration. Mr. Harman's appeal remains pending. The Company believes that the claims in this matter are without merit and intends to vigorously defend against all allegations.
As previously reported, state qui tam actions filed by Mr. Harman in the states of Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Minnesota, Montana, Nevada, Rhode Island, and California were dismissed. Also as previously reported, in June 2022, a state qui tam action filed by Mr. Harman in the state of Massachusetts was settled for $5.0 million, which is included in income (loss) from discontinued operations, net of income taxes, in our Consolidated Statement of Operations for the nine months ended September 30, 2022.
Based on information currently available to the Company and previously disclosed, we currently do not believe that a loss is probable in the Virginia, Tennessee, and New Jersey state qui tam actions described under "State actions," therefore no accrual has been included in the accompanying Consolidated Financial Statements. Because of the complexity of these actions, as well as the current status of certain of these actions, we are not able to estimate a range of possible losses with respect to any one or more of these actions. While the financial impacts of these state actions are currently unknown, they could be material.
Missouri class action
On November 5, 2015, a lawsuit was filed against the Company titled Jackson County, Missouri, individually and on behalf of a class of others similarly situated vs. Trinity Industries, Inc. and Trinity Highway Products, LLC, Case No. 1516-CV23684 (Circuit Court of Jackson County, Missouri). The case was being brought by plaintiff for and on behalf of itself and all Missouri counties with a population of 10,000 or more persons, including the City of St. Louis, and the State of Missouri’s transportation authority. The plaintiff alleged that the Company and THP did not disclose design changes to the ET Plus and these allegedly undisclosed design changes made the ET Plus allegedly defective, unsafe, and unreasonably dangerous. The plaintiff alleged product liability negligence, product liability strict liability, and negligently supplying dangerous instrumentality for supplier’s business purposes. The plaintiff sought compensatory damages, interest, attorneys' fees, and costs, and in the alternative plaintiff sought a declaratory judgment that the ET Plus is defective, the Company’s conduct was unlawful, and class-wide costs and expenses associated with removing and replacing the ET Plus throughout Missouri. On December 6, 2017, the Court granted plaintiff's Motion for Class Certification, certifying a class of Missouri counties with populations of 10,000 or more persons, including the City of St. Louis and the State of Missouri's transportation authority that have or had ET Plus guardrail end terminals with 4-inch wide guide channels installed on roadways they own or maintain.
The parties reached an agreement to settle all claims in this case without any admission of liability or fault. Defendants have denied and continue to deny specifically each and all of the claims and contentions alleged in this case. The Company’s settlement with the class avoids the uncertainty and expense of continued litigation. On May 30, 2022, the trial court granted preliminary approval of the settlement, and on August 30, 2022, the trial court granted final approval of the settlement. Pursuant to the settlement, the Company will pay for the past replacement of certain ET Plus systems, for locating and replacing certain existing undamaged ET Plus systems, and for attorneys’ fees and costs. In accordance with ASC 450, Contingencies, the Company recorded a pre-tax charge of $23.9 million ($18.3 million, net of income taxes) during the year ended December 31, 2021, which was included in income from discontinued operations, net of income taxes, in our Consolidated Statement of Operations, based on the Company’s assessment that a settlement was probable and the estimated costs to resolve this action. Certain amounts involved in the settlement cannot be precisely determined at this time as the actual number of qualifying ET Plus systems that will be replaced as part of the settlement is not currently known. Consequently, the corresponding liability will be periodically reviewed and adjusted, when appropriate, for a number of factors, including differences between actual and estimated costs. The accrual and related range of reasonably possible loss related to this matter are included in the amounts described below under "Other matters."
Product liability cases
The Company is currently defending product liability lawsuits in several different states that are alleged to involve the ET Plus as well as other products manufactured by THP. These cases are diverse in light of the randomness of collisions in general and the fact that each accident involving a roadside device, such as an end terminal, or any other fixed object along the highway, has its own unique facts and circumstances. The Company carries general liability insurance to mitigate the impact of adverse judgment exposures in these product liability cases. To the extent that the Company believes that a loss is probable with respect to these product liability cases, the accrual for such losses is included in the amounts described below under "Other matters".
Other matters
The Company is involved in claims and lawsuits incidental to our business arising from various matters, including product warranty, personal injury, environmental issues, workplace laws, and various governmental regulations. The Company evaluates its exposure to such claims and suits periodically and establishes accruals for these contingencies when a range of loss can be reasonably estimated. The range of reasonably possible losses for such matters is $37.0 million to $51.2 million, which includes our rights in indemnity and recourse to third parties of approximately $10.1 million, which is recorded in other assets in our Consolidated Balance Sheet as of September 30, 2022. This range includes any amounts related to the Highway Products litigation matters described above in the section titled “Highway products litigation." At September 30, 2022, total accruals of $37.3 million, including environmental and workplace matters described below, are included in accrued liabilities in the accompanying Consolidated Balance Sheets. The Company believes any additional liability would not be material to its financial position or results of operations.
Trinity is subject to remedial orders and federal, state, local, and foreign laws and regulations relating to the environment and the workplace. The Company has reserved $1.0 million to cover our probable and estimable liabilities with respect to the investigations, assessments, and remedial responses to such matters, taking into account currently available information and our contractual rights to indemnification and recourse to third parties. However, estimates of liability arising from future proceedings, assessments, or remediation are inherently imprecise. Accordingly, there can be no assurance that we will not become involved in future litigation or other proceedings involving the environment and the workplace or, if we are found to be responsible or liable in any such litigation or proceeding, that such costs would not be material to the Company. We believe that we are currently in substantial compliance with environmental and workplace laws and regulations.
Georgia tornado
On March 26, 2021, a tornado damaged the Company’s rail maintenance facility in Cartersville, Georgia. We incurred costs related to cleanup and damage remediation activities in order for the facility to resume operations in the second quarter of 2021. We believe our insurance coverage is sufficient to cover property damage costs related to the event. To date, we have received total advanced payments from insurance of approximately $25.4 million, which includes $8.1 million for reimbursement of cleanup and damage remediation expenditures. As of September 30, 2022, we have utilized $17.0 million of the advanced payments from insurance towards new capital expenditures in support of the reconstruction efforts.
During the first six months of 2022, we recorded an insurance receivable of approximately $7.3 million for additional property damage recoveries that we expect to be reimbursed under the terms of our insurance policy, and we recorded a corresponding gain, net of the applicable deductible, of $6.4 million, which is included in the gains on dispositions of other property line in our Consolidated Statements of Operations. We received $4.8 million of reimbursements for property damage recoveries, resulting in a remaining insurance receivable of $2.5 million as of June 30, 2022.
During the third quarter of 2022, we recorded an additional insurance receivable of approximately $2.9 million for additional insurance recoveries that we expect to be reimbursed under the terms of our insurance policy, and we recorded a gain of $1.1 million, which is included in the gains on dispositions of other property line in our Consolidated Statements of Operations. We received $2.8 million of reimbursements during the third quarter of 2022, resulting in a remaining insurance receivable of $2.6 million as of September 30, 2022.
Any additional property damage insurance proceeds received in excess of the net book value of property lost will be accounted for as gains in future quarters.