UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

 

Commission File Number 1-6903

Trinity Industries, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (214) 631-4420

 

Securities Registered Pursuant to Section 12(b) of the Act

 

 

Securities registered Pursuant to Section 12(g) of the Act: None

 

 

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ      No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o      No þ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ      No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the Registrant is a shell company.   Yes o      No þ

 

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2008) was $2,756.1 million.

 

At January 31, 2009 the number of shares of common stock outstanding was 79,414,004.

 

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive 2009 Proxy Statement.

 

 

TRINITY INDUSTRIES, INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

General Development of Business.  Trinity Industries, Inc., (“Trinity”, “Company”, “we”, or “our”) headquartered in Dallas, Texas, is a multi-industry company that owns a variety of market-leading businesses which provide products and services to the industrial, energy, transportation, and construction sectors. Trinity was incorporated in 1933.

 

Trinity became a Delaware Corporation in 1987. Our principal executive offices are located at 2525 Stemmons Freeway, Dallas, Texas 75207-2401, our telephone number is 214-631-4420, and our Internet website address is www.trin.net.

 

Financial Information About Industry Segments.  Financial information about our industry segments for the years ended December 31, 2008, 2007, and 2006 is presented in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Narrative Description of Business.  We manufacture and sell railcars and railcar parts, inland barges, concrete and aggregates, asphalt, highway products, beams and girders used in highway construction, tank containers, a variety of steel parts, and structural wind towers. In addition, we lease railcars to our customers through a captive leasing business, Trinity Industries Leasing Company (“TILC”).

 

We serve our customers through the following five business groups:

 

Rail Group.  Through wholly owned subsidiaries, our Rail Group is the leading freight railcar manufacturer in North America (“Trinity Rail Group” or “Rail Group”). We provide a full complement of railcars used for transporting a wide variety of liquids, gases, and dry cargo.

 

Trinity Rail Group offers a complete array of railcar solutions to our customers. We manufacture a full line of railcars, including:

 

 

We produce the widest range of railcars in the industry allowing us to capitalize on changing industry trends and developing market opportunities. We also provide a variety of railcar components for the North American market from our plants in the United States and Mexico. We manufacture and sell railcar parts used in manufacturing and repairing railcars, such as auto carrier doors and accessories, discharge gates, yokes, couplers, axles, and hitches. We also have two repair and coating facilities located in Texas.

 

Our customers include railroads, leasing companies, and shippers of products, such as utilities, petrochemical companies, grain shippers, and major construction and industrial companies. We compete against five major railcar manufacturers in the North American market.

For the year ended December 31, 2008, we shipped approximately 28,200 railcars, or approximately 46% of total North American railcar shipments. As of December 31, 2008, our Rail Group backlog was approximately $722.4 million consisting of approximately 8,260 railcars. The railcar backlog dollar value as of December 31, 2008 was as follows:

 

 

The total amount of the backlog dedicated to the Leasing Group was supported by lease agreements with external customers. The final amount dedicated to the Leasing Group or TRIP Rail Leasing LLC (“TRIP Leasing”) may vary by the time of delivery.

 

We hold patents of varying duration for use in our manufacture of railcars and components. We believe patents offer a marketing advantage in certain circumstances. No material revenues are received from licensing of these patents.

 

Railcar Leasing and Management Services Group.  Through wholly owned subsidiaries, primarily TILC, we lease tank cars and freight cars. Our Railcar Leasing and Management Services Group (“Leasing Group”) is a provider of leasing and management services and an important strategic resource that uniquely links our Rail Group with our customers. Trinity’s Rail Group and TILC coordinate sales and marketing activities under the registered trade name TrinityRail^®, thereby providing a single point of contact for railroads and shippers seeking solutions to their rail equipment and service needs. The Leasing Group provides us with revenue, earnings, and cash flow diversification.

 

Our railcars are leased to railroads, shippers, and various other companies that supply their own railcars to the railroads. These companies span the petroleum, chemical, agricultural, and energy industries, among others. Substantially all of our owned railcars are purchased from and manufactured by our Rail Group at prices comparable to the prices for railcars sold by our Rail Group to third parties giving consideration for quantity, features, and production demands. The terms of our railcar leases generally vary from one to twenty years and provide for fixed monthly rentals, with an additional mileage charge when usage exceeds a specified maximum. A small percentage of our fleet is leased on a per diem basis. As of December 31, 2008, our lease fleet included approximately 47,850 owned or leased railcars that were 98.6% utilized. Of this total, approximately 37,630 railcars were owned by TILC and approximately 10,220 railcars were financed in sale leaseback transactions.

 

In addition, we manage railcar fleets on behalf of unaffiliated third parties. We believe our railcar fleet management services complement our leasing business by generating stable fee income, strengthening customer relationships, and enhancing the view of Trinity as a leading provider of railcar products and services.

 

Our railcar leasing business competes against a number of well-established entities that are also in the business of leasing railcars.

 

Construction Products Group.  Through wholly owned subsidiaries, our Construction Products Group produces concrete, aggregates, and asphalt and manufactures highway products as well as beams and girders used in highway bridge construction. Many of these lines of business are seasonal and revenues are impacted by weather conditions.

 

We are a leader in the supply of ready mix concrete in certain areas of Texas. We also have plant locations in Arkansas and Louisiana. Our customers for concrete include contractors and subcontractors in the construction and foundation industry who are located near our plant locations. We also distribute construction aggregates, such as crushed stone, sand and gravel, asphalt rock, and recycled concrete in several larger Texas cities. Our aggregates customers are primarily other concrete producers, paving contractors, and other consumers of aggregates. We compete with ready mix concrete producers and aggregate producers located in the regions where we operate.

We produce and sell asphalt material to state agencies and contractors for road surface and repair. Our customers are located in close proximity to our asphalt plants.

 

In highway products, we are the only full line producer of guardrails, crash cushions, and other protective barriers that dissipate the force of impact in collisions between vehicles and fixed roadside objects. Based on revenues, we believe we are the largest highway guardrail manufacturer in the United States, with a comprehensive nationwide guardrail supply network. The Federal Highway Administration, which determines which products are eligible for federal funds for highway projects, has approved most of our products as acceptable permanent and construction zone highway hardware according to requirements of the National Cooperative Highway Research Program.

 

Our crash cushions and other protective barriers include multiple proprietary products manufactured through various product license agreements with certain public and private research organizations and inventors. We hold patents and are a licensee for certain of our guardrail and end-treatment products that enhance our competitive position for these products.

 

We sell highway products in Canada, Mexico, and all 50 of the United States. We compete against several national and regional guardrail manufacturers. We also export our proprietary highway products to certain other countries.

 

We manufacture structural steel beams and girders for the construction of new, restored, or replacement railroad bridges, county, municipal, and state highway bridges, and power generation plants. We sell bridge construction and support products primarily to owners, general contractors, and subcontractors on highway and railroad construction projects. We also manufacture the bodies of off-road mining dump trucks.

 

Inland Barge Group.  We are the leading manufacturer of inland barges in the United States and the largest manufacturer of fiberglass barge covers. We manufacture a variety of dry cargo barges, such as deck barges, and open or covered hopper barges that transport various commodities, such as grain, coal, and aggregates. We also manufacture tank barges used to transport liquid products. Our fiberglass reinforced lift covers are used primarily for grain barges while our rolling covers are used for other bulk commodities. Our four barge manufacturing facilities are located along the United States inland river systems allowing for rapid delivery to our customers. Our barge order backlog as of December 31, 2008 was approximately $527.8 million.

 

Our primary Inland Barge customers are commercial marine transportation companies. Many companies have the capability to enter into, and from time to time do enter into, the inland barge manufacturing business. We strive to compete through operational efficiency and quality products.

 

Energy Equipment Group.  Through wholly owned subsidiaries, our Energy Equipment Group manufactures tank containers and tank heads for pressure vessels, propane tanks, and structural wind towers.

 

We are a leading manufacturer of tank containers and tank heads for pressure vessels. We manufacture tanks in the United States and Mexico. We market a portion of our products in Mexico under the brand name of TATSA^®.

 

We manufacture propane tanks that are used by industrial plants, utilities, residences, and small businesses in suburban and rural areas. We also manufacture fertilizer containers for bulk storage, farm storage, and the application and distribution of anhydrous ammonia. Our propane tank products range from 9-gallon tanks for motor fuel use to 1,800,000-gallon bulk storage spheres. We sell our propane tanks to propane dealers and large industrial users. In the United States we generally deliver the containers to our customers who install and fill the containers. Our competitors include large and small manufacturers of tanks.

 

We manufacture tank heads, which are pressed metal components used in the manufacturing of many of our finished products. We manufacture the tank heads in various shapes, and we produce pressure rated or non-pressure rated tank heads, depending on their intended use. We use a significant portion of the tank heads we manufacture in the production of our tank cars and containers. We also sell our tank heads to a broad range of other manufacturers. There is strong competition in the tank heads business.

 

We are a leading manufacturer of structural wind towers in North America. We manufacture structural wind towers for use in the wind energy market. These towers are manufactured in the United States and Mexico to

customer specifications and installed by our customers. Our customers are generally turbine producers. Our structural wind towers order backlog as of December 31, 2008 was approximately $1.4 billion.

 

There are a number of well-established entities that actively compete with us in the business of manufacturing energy equipment.

 

All Other.  All Other includes our captive insurance and transportation companies; legal, environmental, and upkeep costs associated with non-operating facilities; other peripheral businesses; and the change in market valuation related to ineffective commodity hedges.

 

Foreign Operations.  Trinity’s foreign operations are primarily located in Mexico. Continuing operations included sales to foreign customers, primarily in Mexico, which represented 3.1%, 1.9%, and 2.5% of our consolidated revenues for the years ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008, 2007, and 2006, we had approximately 5.0%, 6.0%, and 5.1%, respectively, of our long-lived assets not held for sale located outside the United States.

 

We manufacture railcars, propane tank containers, tank heads, structural wind towers, and other parts at our Mexico facilities for export to the United States and other countries. Any material change in the quotas, regulations, or duties on imports imposed by the United States government and its agencies or on exports imposed by the government of Mexico or its agencies could adversely affect our operations in Mexico. Our foreign activities are also subject to various other risks of doing business in foreign countries, including currency fluctuations, political changes, changes in laws and regulations, and economic instability. Although our operations have not been materially affected by any of these factors to date, any substantial disruption of business as it is currently conducted could adversely affect our operations at least in the short term.

 

Backlog.  As of December 31, 2008, our backlog for new railcars was approximately $722.4 million, approximately $527.8 million for Inland Barge products, and approximately $1.4 billion for structural wind towers. The railcar backlog as of December 31, 2008 and 2007 was as follows:

 

 

The total amount of the backlog dedicated to the Leasing Group was supported by lease agreements with external customers.

 

The majority of our backlog for railcars and barges is expected to be delivered in the 12 months ending December 31, 2009. For multi-year barge orders, the deliveries for 2009 are included in the backlog at this time; deliveries beyond 2009 are not included in the backlog if specific production quantities for future years have not been determined. The backlog for structural wind towers is expected to be evenly delivered over the years ended December 31, 2009, 2010, and 2011.

 

As of December 31, 2007, our backlog for new railcars was approximately $2.7 billion, approximately $752.8 million for Inland Barge products, and approximately $702.4 million for structural wind towers. Included in the railcar backlog was approximately $1,426.7 million of railcars to be sold to our Leasing Group.

 

Marketing.  We sell substantially all of our products and services through our own sales personnel operating from offices in multiple locations in the United States as well as Canada, Mexico, and Sweden. We also use independent sales representatives to a limited extent.

 

Raw Materials and Suppliers.

 

Railcar Specialty Components and Steel.  Products manufactured at our railcar manufacturing facilities require a significant supply of raw materials such as steel, as well as numerous specialty components such as brakes,

wheels, axles, side frames, bolsters, and bearings. Specialty components and steel purchased from third parties comprise approximately 50% of the production cost of each railcar. Although the number of alternative suppliers of specialty components has declined in recent years, at least two suppliers continue to produce most components. However, any unanticipated interruption in the supply chain of specialty components would have an impact on both our margins and production schedules.

 

The principal material used in our Rail, Inland Barge, and Energy Equipment Groups is steel. During 2008, the supply of steel was sufficient to support our manufacturing requirements. However, market steel prices were extremely volatile and rose significantly during most of 2008 before eventually declining and leveling off at the end of the year. We were able to mitigate the majority of this volatility through contract purchases and existing supplier commitments. Steel prices may continue to be volatile in part as a result of scrap surcharges assessed by steel production facilities and other market factors The prices for component parts purchased in 2008 also increased over the base prices we paid in 2007. We often use price escalation clauses and other arrangements with our customers to reduce the impact of these cost increases, thus minimizing the effect on our operating margins for the year.

 

In general, we believe there is enough capacity in the supply industry to meet current production levels. We believe the existing contracts and other relationships we have in place will meet our current production forecasts. However, any unanticipated interruption in our supply chain could have an adverse impact on both our margins and production schedules.

 

Aggregates.  Aggregates can be found throughout the United States, and many producers exist nationwide. However, as a general rule, shipments from an individual quarry are limited in geographic scope because the cost of transporting processed aggregates to customers is high in relation to the value of the product itself. We operate 15 mining facilities strategically located in Texas, Arkansas, and Louisiana to fulfill some of our needs for aggregates.

 

Cement.  Cement required for the concrete and aggregates business is received primarily from Texas and overseas. In 2008, the supply of cement was sufficient in our markets to meet demand. We have not experienced difficulties supplying concrete to our customers.

 

Employees.  The following table presents the approximate breakdown of employees by business group:

 

 

As of December 31, 2008, approximately 9,050 employees were employed in the United States and approximately 4,020 employees were employed in Mexico.

 

Acquisitions and Divestitures.  See Note 2 of the Notes to Consolidated Financial Statements.

 

Environmental Matters.  We are subject to comprehensive federal, state, local, and foreign environmental laws and regulations relating to the release or discharge of materials into the environment; the management, use, processing, handling, storage, transport, and disposal of hazardous and non-hazardous waste and materials; and other activities relating to the protection of human health and the environment. Such laws and regulations not only expose us to liability for our own acts, but also may expose us to liability for the acts of others or for our actions which were in compliance with all applicable laws at the time these actions were taken. In addition, such laws may require significant expenditures to achieve compliance, and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental

laws and regulations. Our operations that involve hazardous materials also raise potential risks of liability under common law.

 

Environmental operating permits are, or may be, required for our operations under these laws and regulations. These operating permits are subject to modification, renewal, and revocation. We regularly monitor and review our operations, procedures, and policies for compliance with our operating permits and related laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of our businesses, as it is with other companies engaged in similar businesses. We believe that our operations and facilities, whether owned, managed, or leased, are in substantial compliance with applicable environmental laws and regulations and that any non-compliance is not likely to have a material adverse effect on our operations or financial condition.

 

However, future events, such as changes in, or modified interpretations of, existing environmental laws and regulations or enforcement policies, or further investigation or evaluation of the potential health hazards associated with our products, business activities, or properties, may give rise to additional compliance and other costs that could have a material adverse effect on our financial condition and operations.

 

In addition to environmental laws, the transportation of commodities by railcar or barge raises potential risks in the event of a derailment, spill, or other accident. Generally, liability under existing law in the United States for a derailment, spill, or other accident depends on the negligence of the party, such as the railroad, the shipper, or the manufacturer of the barge, railcar, or its components. However, under certain circumstances strict liability concepts may apply.

 

Governmental Regulation.

 

Railcar Industry.  The primary regulatory and industry authorities involved in the regulation of the railcar industry are the Environmental Protection Agency; the Research and Special Programs Administration and the Federal Railroad Administration, both divisions of the United States Department of Transportation; and the Association of American Railroads.

 

These organizations establish rules and regulations for the railcar industry, including construction specifications and standards for the design and manufacture of railcars and railcar parts; mechanical, maintenance, and related standards for railcars; safety of railroad equipment, tracks, and operations; and packaging and transportation of hazardous materials.

 

We believe that our operations are in substantial compliance with these regulations. We cannot predict whether any future changes in these rules and regulations could cause added compliance costs that could have a material adverse effect on our financial condition or operations.

 

Inland Barge Industry.  The primary regulatory and industry authorities involved in the regulation of the inland barge industry are the United States Coast Guard; the United States National Transportation Safety Board; the United States Customs Service; the Maritime Administration of the United States Department of Transportation; and private industry organizations such as the American Bureau of Shipping. These organizations establish safety criteria, investigate vessel accidents, and recommend safety standards. Violations of these laws and related regulations can result in substantial civil and criminal penalties as well as injunctions curtailing operations.

 

We believe that our operations are in substantial compliance with applicable laws and regulations. We cannot predict whether future changes that affect compliance costs would have a material adverse effect on our financial condition and operations.

 

Highway Products.  The primary regulatory and industry authorities involved in the regulation of highway products business are the United States Department of Transportation, the Federal Highway Administration, and various state highway departments.

 

These organizations establish certain standards and specifications related to the manufacture of our highway products. If our products were found not to be in compliance with these standards and specifications, we would be required to re-qualify our products for installation on state and national highways.

We believe that our highway products are in substantial compliance with all applicable standards and specifications. We cannot predict whether future changes in these standards and specifications would have a material adverse effect on our financial condition and operations.

 

Occupational Safety and Health Administration and Similar Regulations.  Our operations are subject to regulation of health and safety matters by the United States Occupational Safety and Health Administration. We believe that we employ appropriate precautions to protect our employees and others from workplace injuries and harmful exposure to materials handled and managed at our facilities. However, claims may be asserted against us for work-related illnesses or injury, and our operations may be adversely affected by the further adoption of occupational health and safety regulations in the United States or in foreign jurisdictions in which we operate. While we do not anticipate having to make material expenditures in order to remain in substantial compliance with health and safety laws and regulations, we are unable to predict the ultimate cost of compliance. Accordingly, there can be no assurance that we will not become involved in future litigation or other proceedings or if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.

 

Other Matters.  To date, we have not suffered any material shortages with respect to obtaining sufficient energy supplies to operate our various plant facilities or transportation vehicles. Future limitations on the availability or consumption of petroleum products, particularly natural gas for plant operations and diesel fuel for vehicles, could have a material adverse effect upon our ability to conduct our business. The likelihood of such an occurrence or its duration, and its ultimate effect on our operations, cannot be reasonably predicted at this time.

 

Executive Officers of the Company.  The following table sets forth the names and ages of all of our executive officers, their positions and offices presently held by them, the year each person first became an executive officer, and the term of each person’s office:

 

 

 

 

 

There are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission (“SEC”), news releases, reports, proxy statements, registration statements, and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include, but are not limited to, the risks described below. Additional risks and uncertainties not presently known to us or that we currently deem immaterial but that which may become material in the future also may impair our business operations. The cautionary statements below discuss important factors that could cause our business, financial condition, operating results, and cash flows to be materially adversely affected. Accordingly, readers are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Negative global economic conditions could continue to result in a decrease in our revenues and an increase in our operating costs, which could adversely affect our business and operating results.  If the current global economic downturn continues, many of our customers may continue to delay or reduce their purchases of railcars, barges, and wind towers. If the negative conditions in the global credit markets continue to prevent our customers’ access to credit, product orders may continue to decrease which could result in lower revenues. Likewise, if our suppliers continue to face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses, they may become unable to continue to offer the materials we use to manufacture our products. These actions could continue to result in reductions in our revenues, increased price competition, and increased operating costs, which could adversely affect our business results of operations and financial condition.

 

Negative global economic conditions may lead to cancellations or delays in our backlog.  The continued lack of stability in the global economy, current conditions in the global credit markets, volatility in the ethanol industry, and/or adverse changes in the financial condition of certain third party lessees could possibly lead to cancellations or delays of backlog orders.

 

The cyclical nature of our business results in lower revenues during economic downturns.  We operate in cyclical industries. Downturns in overall economic conditions usually have a significant adverse effect on cyclical industries due to decreased demand for new and replacement products. Decreased demand could result in lower sales volumes, lower prices, and/or a loss of profits. The railcar, barge, and wind energy industries have previously

experienced deep down cycles and at such times operated with a minimal backlog. If a down cycle were to continue or return in one or more of these cyclical businesses, we could experience losses and close plants, suspend production, and incur related costs.

 

The economic and financial crisis experienced by the United States economy during 2008 impacted our businesses. Steel costs were very volatile and rose significantly during most of the year before eventually declining and leveling off at the end of the year. New orders for railcars and barges dropped significantly in the fourth quarter of 2008 as the transportation industry saw a significant decline in shipment of freight. The outlook for the transportation industry for 2009 is for a significant downturn. Orders for structural wind towers dropped in the second half of the year as green energy companies experienced tightened credit markets coupled with lower prices for electricity sales. The slow down in the residential and commercial construction markets impacted our Construction Products Group as well. We continually assess our manufacturing capacity and take steps to align our production facilities with the nature of the demand. As a result of our assessment, we idled four railcar production facilities and one structural wind towers production facility during the fourth quarter of 2008 and early in 2009.

 

Litigation claims could increase our costs and weaken our financial condition.  We are currently, and may from time to time be, involved in various legal proceedings arising out of our operations. Adverse outcomes in some or all of these claims could result in significant monetary damages against us that could increase our costs and weaken our financial condition. While we maintain reserves for reasonably estimable liability and liability insurance at coverage levels based upon commercial norms in our industries, our reserves may be inadequate to cover the uninsured portion of claims or lawsuits or any future claims or lawsuits arising from our businesses for which we are judged liable. Any such claims or lawsuits could have a material adverse effect on our business, operations or overall financial condition.

 

Increases in the price and demand for steel and other component parts could lower our margins and profitability.  The principal material used in our Rail, Inland Barge, and Energy Equipment Groups is steel. During 2008, the supply of steel was sufficient to support our manufacturing requirements. However, market steel prices were extremely volatile and rose significantly during most of 2008 before eventually declining and leveling off at the end of the year. We were able to mitigate the majority of this volatility through contract purchases and existing supplier commitments. Steel prices may continue to be volatile in part as a result of scrap surcharges assessed by steel production facilities and other market factors. The prices for component parts purchased in 2008 also increased over the base prices we paid in 2007. We often use price escalation clauses and other arrangements with our customers to reduce the impact of these cost increases, thus minimizing the effect on our operating margins for the year.

 

In general, we believe there is enough capacity in the supply industry to meet current production levels. We believe the existing contracts and other relationships we have developed will meet our current production forecasts. However, any unanticipated interruption in our supply chain could have an adverse impact on both our margins and production schedules.

 

We have potential exposure to environmental liabilities, which may increase costs and lower profitability.  Our operations are subject to extensive federal, state, and local environmental laws and regulations, including those dealing with air quality and the handling and disposal of waste products, fuel products, and hazardous substances. In particular, we may incur investigation, remediation, and related expenses related to property conditions that we inherited after acquiring older manufacturing facilities that were constructed and operated before the adoption of current environmental laws. Further, some of the products we manufacture are used to transport hazardous materials.

 

Although we conduct due diligence inquiries and analysis with respect to environmental matters in connection with acquisitions, we may be unable to identify or be indemnified for all potential environmental liabilities relating to any acquired business. Environmental liabilities incurred by us, if not covered by adequate insurance or indemnification, will increase our respective costs and have a negative impact on our profitability.

 

We operate in highly competitive industries, which may impact our financial results.  We face aggressive competition in all geographic markets and each industry sector in which we operate. As a result, competition on pricing is often intense. The effect of this competition could reduce our revenues, limit our ability to grow, increase pricing pressure on our products, and otherwise affect our financial results.

If our railcar leasing subsidiary is unable to obtain acceptable long-term financing of its railcar lease fleet, our lenders may foreclose on the portion of our lease fleet that secures our warehouse facility.  TILC, our wholly owned captive leasing subsidiary, uses borrowings under a warehouse facility to initially finance the railcars it purchases from our rail manufacturing business. Borrowings under the warehouse facility are secured by the specific railcars financed by such borrowings and the underlying leases. The warehouse facility is non-recourse to us and to our subsidiaries other than Trinity Rail Leasing Trust II (“TRL II”), a qualified subsidiary of TILC that is the borrower under the warehouse facility. Borrowings under the warehouse facility are available through August 2009, and unless renewed would be payable in three equal installments in February 2010, August 2010, and February 2011. A decline in the value of the railcars securing borrowings under the warehouse facility or in the creditworthiness of the lessees under the associated leases could reduce TRL II’s ability to obtain long-term financing for such railcars. Additionally, fluctuations in interest rates from the time TRL II purchases railcars with short-term borrowings under the warehouse facility and the time TRL II obtains permanent financing for such railcars could decrease our profitability on the leasing of the railcars and could have an adverse impact on our financial results. If TRL II is unable to obtain long-term financing to replace borrowings under the warehouse facility, Trinity may decide to satisfy TRL II’s indebtedness under the warehouse facility or the lenders under the warehouse facility may foreclose on the portion of TRL II’s lease fleet pledged to secure this facility. As of December 31, 2008, there was $312.7 million of indebtedness outstanding and $287.3 million was available under the warehouse facility.

 

We may be unable to re-market leased railcars on favorable terms, which could result in lower lease utilization rates and reduced revenues.  The profitability of our railcar leasing business is dependent in part on our ability to re-lease or sell railcars we own upon the expiration of existing lease terms, the default of leases or bankruptcy of third party lessees. Our ability to re-lease or sell leased railcars profitably is dependent upon several factors, including, among others:

 

 

A downturn in the industries in which our lessees operate and decreased demand for railcars could also increase our exposure to re-market risk because lessees may demand shorter lease terms, requiring us to re-market leased railcars more frequently. Furthermore, the resale market for previously leased railcars has a limited number of potential buyers. Our inability to re-lease or sell leased railcars on favorable terms could result in lower lease utilization rates and reduced revenues.

 

TILC’s reserve for credit losses may prove inadequate.  TILC’s reserve for possible credit losses is maintained based upon management’s judgment of losses, history, and risks inherent in the railcar lease portfolio. We periodically review our reserve for adequacy considering economic conditions and trends, collateral values; car type concentration risk including our ability to re-market railcars, utilization levels of the lease fleet, market conditions of various industries, credit quality indicators; including: external credit reports, past charge-off experiences and levels of past due receivables. We cannot be certain that our reserve for credit losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy or events adversely affecting specific customers, industries or markets. If the credit quality of our customer base materially deteriorates, our reserves may be inadequate to cover credit losses, and any such losses could have a material adverse effect on our business, operations or overall financial condition.

 

Fluctuations in the supply of component parts used in the production of our railcar-related and structural wind towers products could have a material adverse effect on our ability to cost-effectively manufacture and sell our products.  A significant portion of our business depends on the adequate supply of numerous specialty components

at competitive prices for the railcar business such as brakes, wheels, side frames, bolsters, and bearings as well as flanges for the wind towers business. We depend on third-party suppliers for a significant portion of our component part needs. Specialty components comprise a significant portion of the production cost of each railcar we manufacture. Due to consolidations and challenging industry conditions, the number of alternative suppliers of specialty components has declined in recent years, though generally a minimum of two suppliers continue to produce each type of component we use in our products. While we endeavor to be diligent in contractual relationships with our suppliers, a significant decrease in the availability of specialty components could materially increase our cost of goods sold or prevent us from manufacturing our products on a timely basis.

 

Reductions in the availability of energy supplies or an increase in energy costs may increase our operating costs.  We use natural gas at our manufacturing facilities and use diesel fuel in vehicles to transport our products to customers and to operate our plant equipment. Over the past three years, prices for natural gas have fluctuated significantly. An outbreak or escalation of hostilities between the United States and any foreign power and, in particular, a prolonged armed conflict in the Middle East, could result in a real or perceived shortage of petroleum and/or natural gas, which could result in an increase in the cost of natural gas or energy in general. Hurricanes or other natural disasters could result in a real or perceived shortage of petroleum and/or natural gas, which could result in an increase in natural gas prices or general energy costs. Speculative trading in energy futures in the world markets could also result in an increase in natural gas and general energy cost. Future limitations on the availability or consumption of petroleum products and/or an increase in energy costs, particularly natural gas for plant operations and diesel fuel for vehicles and plant equipment, could have an adverse effect upon our ability to conduct our business cost effectively.

 

Our manufacturer’s warranties expose us to potentially significant claims.  Depending on the product, we warrant against manufacturing defects due to our workmanship and certain materials pursuant to express limited contractual warranties. Accordingly, we may be subject to significant warranty claims in the future such as multiple claims based on one defect repeated throughout our mass production process or claims for which the cost of repairing or replacing the defective part is highly disproportionate to the original cost of the part. These types of warranty claims could result in costly product recalls, significant repair costs, and damage to our reputation.

 

Increasing insurance claims and expenses could lower profitability and increase business risk.  The nature of our business subjects us to product liability, property damage, and personal injury claims, especially in connection with the repair and manufacture of products that transport hazardous, toxic or volatile materials. We maintain reserves for reasonably estimable liability claims and liability insurance coverage at levels based upon commercial norms in the industries in which we operate and our historical claims experience. Over the last several years, insurance carriers have raised premiums for many companies operating in our industries. Increased premiums may further increase our insurance expense as coverage expires or otherwise cause us to raise our self-insured retention. If the number or severity of claims within our self-insured retention increases, we could suffer costs in excess of our reserves. An unusually large liability claim or a string of claims based on a failure repeated throughout our mass production process may exceed our insurance coverage or result in direct damages if we were unable or elected not to insure against certain hazards because of high premiums or other reasons. In addition, the availability of, and our ability to collect on, insurance coverage is often subject to factors beyond our control. Moreover, any accident or incident involving us, even if we are fully insured or not held to be liable, could negatively affect our reputation among customers and the public, thereby making it more difficult for us to compete effectively, and could significantly affect the cost and availability of insurance in the future.

 

Risks related to our operations outside of the United States could decrease our profitability.  Our operations outside of the United States are subject to the risks associated with cross-border business transactions and activities. Political, legal, trade, or economic changes or instability could limit or curtail our respective foreign business activities and operations. Some foreign countries where we operate have regulatory authorities that regulate railroad safety, railcar design and railcar component part design, performance, and manufacture of equipment used on their railroad systems. If we fail to obtain and maintain certifications of our railcars and railcar parts within the various foreign countries where we operate, we may be unable to market and sell our railcars in those countries. In addition, unexpected changes in regulatory requirements, tariffs and other trade barriers, more stringent rules relating to labor or the environment, adverse tax consequences, and price exchange controls could limit operations and make the manufacture and distribution of our products difficult. Furthermore, any material change in the quotas, regulations,

or duties on imports imposed by the United States government and agencies, or on exports by the government of Mexico or its agencies, could affect our ability to export products that we manufacture in Mexico.

 

Because we do not have employment contracts with our key management employees, we may not be able to retain their services in the future.  Our success depends on the continued services of our key management employees, none of whom currently have employment agreements with us. Although we have historically been successful in retaining the services of our key management, we may not be able to do so in the future. The loss of the services of one or more key members of our management team could result in increased costs associated with attracting and retaining a replacement and could disrupt our operations and result in a loss of revenues.

 

Repercussions from terrorist activities or armed conflict could harm our business.  Terrorist activities, anti-terrorist efforts, and other armed conflict involving the United States or its interests abroad may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. In particular, the negative impacts of these events may affect the industries in which we operate. This could result in delays in or cancellations of the purchase of our products or shortages in raw materials or component parts. Any of these occurrences could have a material adverse impact on our operating results, revenues, and costs.

 

Violations of or changes in the regulatory requirements applicable to the industries in which we operate may increase our operating costs.  We are subject to extensive regulation by governmental regulatory and industry authorities. Our railcar operations are subject to regulation by the United States Environmental Protection Agency; the Research and Special Programs Administration and the Federal Railroad Administration, both divisions of the United States Department of Transportation; and the Association of American Railroads. These organizations establish rules and regulations for the railcar industry, including construction specifications and standards for the design and manufacture of railcars; mechanical, maintenance, and related standards for railcars; safety of railroad equipment, tracks, and operations; and packaging and transportation of hazardous or toxic materials. Future changes that affect compliance costs may have a material adverse effect on our financial condition and operations.

 

Our Inland Barge operations are subject to regulation by the United States Coast Guard; the National Transportation Safety Board; the United States Customs Service; the Maritime Administration of the United States Department of Transportation; and private industry organizations such as the American Bureau of Shipping. These organizations establish safety criteria, investigate vessel accidents and recommend improved safety standards. Violations of these regulations and related laws can result in substantial civil and criminal penalties as well as injunctions curtailing operations.

 

Our operations are also subject to regulation of health and safety matters by the United States Occupational Safety and Health Administration. We believe that we employ appropriate precautions to protect our employees and others from workplace injuries and harmful exposure to materials handled and managed at our facilities. However, claims that may be asserted against us for work-related illnesses or injury, and the further adoption of occupational health and safety regulations in the United States or in foreign jurisdictions in which we operate could increase our operating costs. We are unable to predict the ultimate cost of compliance with these health and safety laws and regulations. Accordingly, there can be no assurance that we will not become involved in future litigation, investigations, or other proceedings or if we were found to be responsible or liable in any litigation, investigations, or proceedings, that such costs would not be material to us.

 

We may be required to reduce our inventory carrying values, which would negatively impact our financial condition and results of operations.  To support our production line continuity, we ended 2008 with railcars in our finished goods inventory due to our decision to build railcars in anticipation of demand from TILC and external customers, including TRIP Leasing. We expect to sell this inventory in the normal course of business. We are required to record all of our inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments in respect to demand requirements and compare those with the current or committed inventory levels. We have historically recorded reductions in inventory carrying values when product lines are discontinued or market conditions change as a result of changes in demand requirements. We may be required to reduce inventory carrying values in the future due to a severe decline in market conditions, which could have a material adverse effect on our financial condition and results of operations.

We may be required to reduce the value of our long-lived assets and/or goodwill, which would weaken our results of operations.  We periodically evaluate for potential impairment the carrying values of our long-lived assets to be held and used. The carrying value of a long-lived asset to be held and used is considered impaired when the carrying value is not recoverable through undiscounted future cash flows and the fair value of the asset is less than the carrying value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved or market quotes as available. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced commensurate with the estimated cost to dispose of the assets. In addition, we are required, at least annually, to evaluate goodwill related to acquired businesses for potential impairment indicators that are based primarily on market conditions in the United States and the operational performance of our reporting units. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss related to reductions in the value of our long-lived assets or our goodwill could weaken our financial condition and results of operations.

 

We may incur increased costs due to fluctuations in interest rates and foreign currency exchange rates.  We are exposed to risks associated with fluctuations in interest rates and changes in foreign currency exchange rates. We seek to minimize these risks, when considered appropriate, through the use of interest rate hedges and similar financial instruments and other activities, although these measures may not be implemented or effective. Any material and untimely changes in interest rates or exchange rates could result in significant losses to us.

 

Additional Information.  Our Internet website address is www.trin.net. Information on the website is available free of charge. We make available on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after such material is filed with, or furnished to, the SEC.

 

 

None.

 

 

We principally operate in various locations throughout the United States and in Mexico all of which are considered to be in good condition, well maintained, and adequate for our purposes. The productive capacity utilized represents the percentage for all of 2008.

 

 

 

See Note 19 of the Notes to Consolidated Financial Statements.

 

 

None.

 

 

Our common stock is traded on the New York Stock Exchange under the ticker symbol “TRN”. The following table shows the closing price range of our common stock by quarter for the years ended December 31, 2008 and 2007.

 

 

 

Our transfer agent and registrar as of December 31, 2008 was American Stock Transfer & Trust Company.

 

Holders

 

At December 31, 2008, we had approximately 1,891 record holders of common stock. The par value of the common stock is $1.00 per share.

 

Dividends

 

Trinity has paid 179 consecutive quarterly dividends. The quarterly dividend was increased to $0.08 per common share effective with the July 2008 dividend payment, an increase of over 14% as compared to the April 2008 dividend payment. This compares to $0.07 per common share, where it had been since October 2007. Quarterly dividends declared by Trinity for the years ended December 31, 2008 and 2007 are as follows:

 

 

Recent Sales of Unregistered Securities

 

None.

Performance Graph

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The following graph compares the Company’s cumulative total stockholder return (assuming reinvestment of dividends) during the five-year period ended December 31, 2008 with an overall stock market index (New York Stock Exchange index) and the Company’s peer group index (Dow Jones Commercial Vehicles & Trucks Index). The data in the graph assumes $100 was invested on December 31, 2003.

 

 

 

Issuer Purchases of Equity Securities

 

This table provides information with respect to purchases by the Company of shares of its common stock during the quarter ended December 31, 2008:

 

 

 

 

The following financial information for the five years ended December 31, 2008 has been derived from our audited consolidated financial statements. Historical information has been reclassified to conform to the 2008 presentation of discontinued operations. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere herein.

 

 

Company Overview

 

Trinity Industries, Inc., headquartered in Dallas, Texas, is a multi-industry company that owns a variety of market-leading businesses which provide products and services to the industrial, energy, transportation, and construction sectors. We operate in five distinct business groups which we report on a segment basis: the Rail Group, Construction Products Group, Inland Barge Group, Energy Equipment Group, and Railcar Leasing and Management Services Group. We also report All Other which includes the Company’s captive insurance and transportation companies; legal, environmental, and upkeep costs associated with non-operating facilities; other peripheral businesses; and the change in market valuation related to ineffective commodity hedges.

 

Our Rail and Inland Barge Groups and our structural wind towers business operate in cyclical industries. Our Construction Products and Energy Equipment Groups are subject to seasonal fluctuations with the first quarter historically being the weakest quarter. Fluctuations in the Railcar Leasing and Management Services Group are primarily driven by railcar sales from the lease fleet. The economic and financial crisis experienced by the United States economy during 2008 impacted our businesses. During 2008, market steel prices were extremely volatile and rose significantly during most of 2008 before eventually declining and leveling off at the end of the year. However, we were able to mitigate the majority of this volatility through contract purchases, existing supplier commitments and price escalation clauses and other arrangements with our customers. New orders for railcars dropped significantly in the fourth quarter of this year as the transportation industry saw a significant decline in business volumes. The outlook for the transportation industry for 2009 appears to be for a significant downturn. Demand for structural wind towers dropped in the second half of the year as green energy companies experienced tightened credit markets and lower prices for electricity sales. The slow down in the residential and commercial construction markets impacted our Construction Products group as well. We continually assess our manufacturing capacity and take steps to align our production facilities with demand. As a result of our assessment, we idled four railcar production facilities and one structural wind towers production facility during the fourth quarter of 2008 and early in 2009.

 

Executive Summary

 

The Company’s revenues for 2008 exceeded $3.8 billion. Our Rail Group provided external revenues of more than $1.3 billion. Operating profit from continuing operations was $549.0 million for 2008. The Rail Group provided the highest operating profits from external revenues of $247.7 million.

 

For the year ended December 31, 2008, we experienced decreases in both income from continuing operations and net income over the prior year. Income from continuing operations decreased $6.5 million and net income decreased $7.3 million.

 

Capital expenditures for 2008 were $1,243.1 million with $1,110.8 million utilized for lease fleet additions, net of deferred profit of $86.3 million.

 

We ended 2008 with a backlog in our Rail Group of approximately $722.4 million consisting of approximately 8,260 railcars. The railcar backlog dollar value as of December 31, 2008 was as follows:

 

 

The total amount of the backlog dedicated to the Leasing Group was supported by lease agreements with external customers. The final amount dedicated to the Leasing Group or TRIP Leasing may vary by the time of delivery.

Global Insight, Inc., an independent industry research firm, has estimated in its First Quarter 2009 report that the average age of the North American freight car fleet is approximately 19.3 years, with over 39% older than 25 years and has estimated that United States carload traffic could decline by more than 10% in 2009, with an increase of 2.3% for 2010 and a 4.7% increase in 2011.

 

The table below is an average of the January 2009 estimates of approximate industry railcar deliveries for the next five years from two independent third party research firms, Global Insight, Inc. and Economic Planning Associates, Inc.

 

 

TILC purchases a portion of our railcar production, financing a portion of the purchase price through a non-recourse warehouse lending facility and periodically refinances those borrowings through sale/leaseback and other leveraged lease or equipment financing transactions. In 2008, TILC purchased approximately 50.0% of our railcar production, up from 36.4% in 2007. This percentage increase is the result of a strategic decision to grow our lease fleet. On a segment basis, sales to TILC and related profits are included in the operating results of our Rail Group but are eliminated in consolidation.

 

In 2007, the Company purchased 20% of the equity in newly-formed TRIP Rail Holdings LLC (“TRIP Holdings”). TRIP Holdings provides railcar leasing and management services in North America. Railcars are purchased from Trinity by a wholly-owned subsidiary of TRIP Holdings, TRIP Leasing.

 

In June 2008, the Company entered into an agreement with an equity investor of TRIP Holdings potentially requiring Trinity to acquire from the equity investor up to an additional 5% equity ownership in TRIP Holdings if the option were to be exercised to its fullest extent. Subsequent to December 31, 2008, the equity investor exercised the option requiring the Company to acquire an additional 5% equity ownership in TRIP Holdings for approximately $9.0 million. As a result, the Company now owns a 25% equity ownership in TRIP Holdings, increasing the Company’s total commitment by $12.3 million to $61.3 million, of which $35.9 million has been paid. The exercising of this agreement does not change the accounting treatment of TRIP Holdings in the Company’s consolidated financial statements.

 

In May 2008, Trinity Rail Leasing VI LLC, a Delaware limited liability company (“TRL VI”), a limited purpose, indirect wholly-owned subsidiary of Trinity, owned by Trinity through Trinity Industries Leasing Company (“TILC”), issued $572.2 million of 30-year promissory notes to financial institutions. The proceeds were used to repay a portion of our warehouse facility and to finance unencumbered railcars on our consolidated balance sheet. See Financing Activities.

 

On December 13, 2007, the Company’s Board of Directors authorized a $200 million stock repurchase program of its common stock. This program allows for the repurchase of the Company’s common stock through December 31, 2009. During the year ended December 31, 2008, 2,615,500 shares were repurchased under this program at a cost of approximately $58.3 million. Since the inception of this program, the Company has repurchased a total of 2,719,700 shares at a cost of approximately $61.2 million.

Results of Operations

 

Years Ended December 31, 2008, 2007, and 2006

 

Overall Summary for Continuing Operations

 

Revenues

 

 

 

Our revenues for the year ended December 31, 2008 increased due to improved sales in all our business groups, except the Railcar Leasing and Management Services Group (“Leasing Group”). Revenues for the Rail Group improved due to an increase in shipments to our Leasing Group. Revenues for the Construction Products Group improved due to increased volumes in our highway products business and sales generated by our entry into the asphalt business offset by decreased volumes in our bridge girder business and the impact of divestitures in the concrete and aggregates businesses. Revenues of the Construction Products Group were also offset by lower revenues in the concrete and aggregates businesses due to adverse weather conditions in Texas and Louisiana as well as a decreased demand for concrete and aggregates products. Inland Barge Group revenues increased primarily as a result of greater barge shipments, a change in the mix of barges sold, and an increase in raw material costs resulting in higher prices. An increase in structural wind towers sales was the primary reason for the increase in revenues in the Energy Equipment Group. The decline in sales of railcars from the lease fleet caused an overall decrease in revenues in the Leasing Group.

 

Our revenues for the year ended December 31, 2007 increased due to higher total sales across all segments. Increased railcar shipments to our Leasing Group yielded higher revenues for the Rail Group. The increased revenue for the Construction Products Group was primarily attributable to increased sales volumes in our aggregates business, our entry into the asphalt business, and increases in various raw material costs, which resulted in higher sales prices offset by decreased volumes in our bridge girder and concrete businesses. Inland Barge Group revenues increased primarily as a result of greater barge shipments and a change in the mix of barges sold. An increase in structural wind towers sales was the primary reason for the increase in revenues in the Energy Equipment Group. Higher rental revenues related to additions to the fleet and higher average lease rates, and increased sales of cars from the lease fleet drove the increase in revenue in the Railcar Leasing and Management Services Group.

 

Operating Profit (Loss)

 

 

Our operating profit for the year ended December 31, 2008 increased as the result of overall higher revenues, an increase in the size of our lease fleet, and higher barge and structural wind towers sales. These increases in operating profit were offset by higher raw material costs and competitive pricing pressure in the market for new railcars. Selling, engineering, and administrative expenses as a percentage of revenues increased to 6.3% for 2008 as compared to 6.0% for 2007. Overall, selling, engineering, and administrative expenses increased $14.1 million year over year as a result of increased headcount and related costs, increased professional services, and approximately 4.2 million for due diligence related to potential acquisitions that are no longer being pursued.

 

Our operating profit for the year ended December 31, 2007 increased as the result of higher revenues, an increase in the size of our lease fleet, higher average lease rates, and increased sales of railcars from the lease fleet offset by a $15.0 million charge for the potential resolution of a barge litigation settlement. Selling, engineering, and administrative expenses as a percentage of revenue decreased to 6.0% for 2007 compared to 6.5% for 2006. Overall, selling, engineering, and administrative expenses increased $20.8 million year over year as a result of increased headcount and related costs, higher incentive costs, and increased professional services.

Other Income and Expense.  Interest expense, net of interest income and capitalized interest of $0.9 million and $0.6 million, respectively, was $95.3 million for the year ended December 31, 2008 and $64.0 million for the year ended December 31, 2007. Interest income in 2008 decreased $7.1 million over the prior year as a result of lower interest rates and a decrease in cash available for investment. Interest expense in 2008 increased $24.2 million over the prior year due to an increase in debt levels and expense related to the ineffective portion of interest rate hedges. In addition, interest expense for the year ended December 31, 2008 included $6.8 million of interest expense related to the ineffective portion of interest rate hedges. The decrease in Other, net for the year ended December 31, 2008 was primarily due to a decrease in the gain on disposition of property, plant, and equipment compared to the prior year, partially offset by a write-down of an equity investment in the prior year.

 

Interest expense, net of interest income and capitalized interest, was $64.0 million for the year ended December 31, 2007 and $49.3 million for the year ended December 31, 2006. Interest income in 2007 decreased $2.6 million from the same period in 2006 due to lower investment income as a result of lower interest rates and a decrease in cash available for investment. Interest expense in 2007 increased $12.1 million over the same period in 2006 due to an increase in debt levels. During 2007 and 2006, the Company capitalized interest expense of $0.6 million and $0.3 million, respectively, as part of the cost of construction of facilities and equipment. The decrease in Other, net in 2007 was primarily due to the write-down of an equity investment partially offset by the gains on the disposal of property, plant, and equipment and foreign currency gains.

 

Income Taxes.  The effective tax rate of 37.9% for continuing operations for 2008 varied from the statutory rate of 35.0% due primarily to state income taxes and the loss of the benefit of the domestic production deduction. The prior year effective tax rate for continuing operations of 36.6% varied from the statutory rate of 35.0% due primarily to state income taxes, offset by an increase in the temporary credit to be applied against the State of Texas margin tax, the benefit of the domestic production deduction, and the utilization of capital losses previously not benefited. The effective tax rate for continuing operations for 2006 of 38.2% was greater than the statutory rate of 35.0% due to state income taxes and the change in the State of Texas margin tax.

 

Segment Discussion

 

Rail Group

 

 

Railcar shipments in 2008 increased 3.0% over 2007 shipments to approximately 28,200 railcars compared to the railcars shipped in 2007 and 2006 of approximately 27,370 and 25,240 railcars, respectively. As of December 31, 2008, our Rail Group backlog was approximately $722.4 million and consisted of approximately 8,260 railcars. The railcar backlog dollar value as of December 31, 2008, 2007, and 2006 was as follows:

 

The total amount of the backlog dedicated to the Leasing Group was supported by lease agreements with external customers. The final amount dedicated to the Leasing Group or TRIP Leasing may vary by the time of delivery. Backlog as of December 31, 2007 and 2006 was approximately 31,870 and 35,930 railcars, respectively. Results for the years ended December 31, 2008 and December 31, 2007 included $337.5 million and $232.6 million, respectively, in railcars sold to TRIP Leasing that resulted in gains of $61.6 million and $41.1 million, respectively, of which $12.4 million and $8.2 million, respectively, in profit was deferred based on our 20% equity interest.

 

Operating profit for the Rail Group decreased for the year ended December 31, 2008 by $99.9 million compared to the prior year. This decrease was primarily due to the competitive pricing environment, increases in raw material costs, and a reserve for future losses on railcar sales. Steel costs were very volatile and rose significantly during most of the year before eventually declining and leveling off at the end of the year. On certain fixed price railcar contracts, actual cost increases and surcharges caused the total cost of the railcar to exceed the amounts originally anticipated, and in some cases, the actual contractual sale price of the railcar. The expense related to reserves for estimated losses on fixed price contracts of $4.6 million was recorded during the year ended December 31, 2008. The expense related to reserves for estimated losses on fixed price contracts was not significant for the years ended December 31, 2007 and 2006.

 

Operating profit for the Rail Group increased for the year ended December 31, 2007 by $93.7 million compared to the same period in 2006. The increase was primarily due to increased pricing, product mix, and volume, as well as improved operating efficiencies.

 

In the year ended December 31, 2008, railcar shipments included sales to the Leasing Group of $1,162.4 million compared to $828.5 million in 2007 with a deferred profit of $86.3 million compared to $138.0 million for the year ended December 31, 2007. Railcar sales to the Leasing Group for 2006 were $620.0 million with a deferred profit of $83.3 million. Sales to the Leasing Group and related profits are included in the operating results of the Rail Group but eliminated in consolidation.

 

Construction Products Group

 

 

The increase in revenues for the year ended December 31, 2008 compared to the same period in 2007 was primarily attributable to an increase in volume in our highway products business, sales generated by our entry into the asphalt business in 2007, and an increase in various raw material costs that have resulted in higher sales prices. These increases were offset by a decrease in volume in our bridge girder business and the impact of divestitures in the concrete and aggregates businesses. Revenues were also offset by lower revenues in the concrete and aggregates businesses due to adverse weather conditions in Texas and Louisiana during the year ended December 31, 2008 as well as decreased demand. Revenues increased for the year ended December 31, 2007 compared to the same period in 2006 primarily due to increased volume in our aggregates business, our entry into the asphalt business, and increased prices in our concrete business offset by decreased volumes in our bridge girder and concrete businesses.

 

Operating profit and operating margin for the year ended December 31, 2008 compared to the year ended December 31, 2007 remained unchanged. This can be attributed to increased sales in the highway products and asphalt businesses offset by lower margins in the concrete and aggregates businesses due to volume decreases, unfavorable weather conditions, and increased raw material prices. Operating profit and operating profit margin for

the year ended December 31, 2007 compared to the same period in 2006 decreased due to higher production costs in the highway products business and lost production days in our concrete business as a result of inclement weather.

 

Inland Barge Group

 

 

Revenues increased for the year ended December 31, 2008 compared to the same period in 2007 due to an increase in the sales of hopper and tank barges, a change in the mix of barges sold, and an increase in raw material costs that resulted in higher sales prices. The increase in revenues for the year ended December 31, 2007 compared to the same period in 2006 was due to an increase in the sales of hopper and tank barges and a change in the mix of barges sold.

 

Operating profit for the year ended December 31, 2008 increased compared to the same period in 2007 due to increased revenues, a change in the mix of barges sold, and improved margins due to operating efficiencies. Operating profit also increased due to the refund of $2.0 million in unclaimed settlement funds related to the Waxler Case (see Note 19 of the Notes to the Consolidated Financial Statements). Operating profit for the year ended December 31, 2007 increased compared to the same period in 2006 due to increased revenues, a change in the mix of barges sold, and improved margins due to operating efficiencies, partially offset by a $15.0 million charge for the resolution of the Waxler Case. Barge litigation and related costs were $0.2 million for 2008 compared to $16.5 million for 2007, which included the $15.0 million charge for the resolution of the Waxler Case, and $3.2 million for 2006, respectively. As of December 31, 2008, the backlog for the Inland Barge Group was approximately $527.8 million compared to approximately $752.8 million and approximately $463.6 million for 2007 and 2006, respectively.

 

Energy Equipment Group

 

 

Revenues increased for the year ended December 31, 2008 compared to the same period in 2007 due to an increase in sales of structural wind towers and products manufactured and sold in Mexico offset by lower sales in the weaker domestic container market. Revenues increased for the year ended December 31, 2007 compared to the same period in 2006 due to higher sales of structural wind towers. As of December 31, 2008, the backlog for structural wind towers was approximately $1.4 billion compared to approximately $702.4 million and approximately $248.5 million for 2007 and 2006, respectively.

 

Operating profit and operating profit margin for the year ended December 31, 2008 increased compared to the same period in 2007 due to an increase in sales of structural wind towers and the improved margins on containers produced in Mexico. Operating profit for the year ended December 31, 2007 increased compared to the same period in 2006 primarily due to higher sales of structural wind towers. The operating profit margin for the year ended

December 31, 2007 was lower than the same period in 2006 due to expansion costs related to structural wind towers production and a weaker LPG tank market in the United States and in Mexico during 2007.

 

Railcar Leasing and Management Services Group

 

 

Total revenues decreased for the year ended December 31, 2008 due to decreased sales from the lease fleet offset by increased rental revenues related to additions to the lease fleet, growth of the per diem fleet, and management and origination fees. Total revenues increased for the year ended December 31, 2007 compared to the same period in 2006 due to increased sales from the lease fleet, increased rental revenues related to additions to the leasing and management fleet, and higher average rental rates on the re-marketed fleet.

 

Operating profit for leasing and management operations increased for the year ended December 31, 2008 primarily due to rental proceeds from fleet additions. Operating profit for leasing and management operations increased for the year ended December 31, 2007 primarily due to an increase in rental proceeds from fleet additions and higher average lease rates. Results for the years ended December 31, 2008 and December 31, 2007 included $134.2 million and $283.6 million, respectively, in sales of railcars to TRIP Leasing that resulted in gains of $20.8 million and $48.6 million, respectively, of which $4.2 million and $9.7 million, respectively, in profit was deferred based on our 20% equity interest.

 

To fund the continued expansion of its lease fleet to meet market demand, the Leasing Group generally uses its non-recourse warehouse facility or excess cash to provide initial financing for a portion of the purchase price of the railcars. Subsequently, the Leasing Group generally obtains long-term financing for the railcars in the lease fleet through long-term recourse debt such as equipment trust certificates, long-term non-recourse operating leases pursuant to sales/leaseback transactions, non-recourse asset-backed securities, or recourse convertible subordinated notes. In February 2008, the warehouse facility was increased to $600 million with the availability period of this facility remaining through August 2009. In May 2008, Trinity Rail Leasing VI LLC issued $572.2 million of 30-year promissory notes. See Financing Activities.

 

As of December 31, 2008, the Leasing Group’s lease fleet of approximately 47,850 owned or leased railcars had an average age of 4.6 years and an average remaining lease term of 4.5 years.

All Other

 

 

The increase in revenues and operating profit for the year ended December 31, 2008 over 2007 and 2006 was primarily attributable to an increase in intersegment sales by our transportation company. The increase in operating profit for the year ended December 31, 2008 as compared to 2007 was due to the increase in intersegment sales, partially offset by an increase in legal and environmental costs associated with non-operating facilities and a decline in the market valuation of commodity hedges that are required to be marked to market. The increase in the operating profit for the year ended December 31, 2007 compared to 2006 was due to the increase in intersegment sales, income related to the market valuation of commodity hedges that are required to be marked to market, and a decrease in costs associated with non-operating facilities. The operating loss for the year ended December 31, 2006 was due to legal and environmental costs associated with non-operating facilities and the expense related to the market valuation of ineffective commodity hedges.

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities.  Net cash provided by the operating activities of continuing operations for the year ended December 31, 2008 was $417.9 million compared to $344.6 million of net cash provided by the operating activities of continuing operations for the same period in 2007. Raw materials inventory at December 31, 2008 increased approximately 17% over the prior year primarily attributable to increased steel prices. There was $1.3 million of net cash provided by the operating activities of discontinued operations for the year ended December 31, 2008 compared to $0.1 million of net cash required by operating activities for discontinued operations for the same period in 2007.

 

Investing Activities.  Net cash required by investing activities of continuing operations for the year ended December 31, 2008 was $1,000.2 million compared to $534.8 million for the same period last year. Capital expenditures for the year ended December 31, 2008 were $1,243.1 million, of which $1,110.8 million were for additions to the lease fleet. This compares to $894.1 million of capital expenditures for the same period last year, of which $705.4 million were for additions to the lease fleet. Proceeds from the sale of property, plant, and equipment and other assets were $242.9 million for the year ended December 31, 2008, composed primarily of railcar sales from the lease fleet, which included $134.2 million to TRIP Leasing, and the sale of non-operating assets. This compared to $410.3 million for the same period in 2007 composed primarily of railcar sales from the lease fleet, which included $283.6 million to TRIP Leasing, and the sale of non-operating assets. For the year ended December 31, 2007, $51.0 million of cash was required for acquisitions by our Construction Products Group.

 

Financing Activities.  Net cash provided by financing activities during the year ended December 31, 2008 was $453.2 million compared to $168.4 million for the same period in 2007. We intend to use our cash to fund the operations, expansions, and growth initiatives of the Company.

 

At December 31, 2008, there were no borrowings under our $425 million revolving credit facility that matures on October 19, 2012. Interest on the revolving credit facility is calculated at prime or LIBOR plus 75 basis points. After $98.8 million was considered for letters of credit, $326.2 million was available under the revolving credit facility as of December 31, 2008.

 

On October 15, 2008, the Company sent a notice to the holders of its Convertible Subordinated Notes. This notice, as required by the Indenture, notified the holders that as a result of increases in the Company’s dividend, the Conversion Rate has been adjusted to 19.2004 and the Conversion Price has been adjusted to $52.08.

In May 2008, TRL VI, a limited purpose, indirect wholly-owned subsidiary of Trinity, issued $572.2 million of 30-year promissory notes (the “Promissory Notes”) to financial institutions. The Promissory Notes were secured by a portfolio of railcars valued at approximately $743.1 million, operating leases thereon, and certain cash reserves. The Promissory Notes are obligations of TRL VI and are non-recourse to Trinity. TRL VI acquired the railcars securing the Promissory Notes by purchase from TILC and a subsidiary. The proceeds were used to repay a portion of our warehouse facility and to finance unencumbered railcars on our consolidated balance sheet. TILC entered into certain agreements relating to the transfer of the railcars to TRL VI and the management and servicing of TRL VI’s assets. The Promissory Notes bear interest at a floating rate of one-month LIBOR plus a margin of 1.50%. The LIBOR portion of the interest rate on the Promissory Notes is fixed at approximately 4.13% for the first seven years from the date of issuance of the Promissory Notes through interest rate hedges. The interest rate margin on the Promissory Notes will increase by 0.50% on each of the seventh and eighth anniversary dates of the issuance of the Promissory Notes and by an additional 2.00% on the tenth anniversary date of the issuance of the Promissory Notes. The Promissory Notes may be prepaid at any time and may be prepaid without penalty at any time after the third anniversary date of the issuance of the Promissory Notes.

 

In February 2008, TILC increased its warehouse facility to $600 million with the availability period of the facility remaining through August 2009. This facility, established to finance railcars owned by TILC, had $312.7 million outstanding at December 31, 2008. The warehouse facility is due August 2009 and, unless renewed, will be payable in three equal installments in February 2010, August 2010, and February 2011. The Company is currently working to renew this facility, and believes the interest rate will rise to reflect the current market. Railcars financed by the warehouse facility have historically been refinanced under long-term financing agreements. Specific railcars and the underlying leases secure the facility. Advances under the facility may not exceed 78% of the fair market value of the eligible railcars securing the facility as defined by the agreement. Advances under the facility bear interest at a defined index rate plus a margin, for an all-in-rate of 3.04% at December 31, 2008. At December 31, 2008, $287.3 million was available under this facility.

 

On December 13, 2007, the Company’s Board of Directors authorized a $200 million stock repurchase program of its common stock. This program allows for the repurchase of the Company’s common stock through December 31, 2009. During the year ended December 31, 2008, 2,615,500 shares were repurchased under this program at a cost of approximately $58.3 million. Since the inception of this program, the Company has repurchased a total of 2,719,700 shares at a cost of approximately $61.2 million.

 

The economic and financial crisis experienced by the United States economy during 2008 impacted our businesses. During 2008, market steel prices were extremely volatile and rose significantly during most of the year before eventually declining and leveling off at the end of the year. However, we were able to mitigate the majority of the volatility through contract purchases, existing supplier commitments and price escalation clauses and other arrangements with our customers. New orders for railcars and barges dropped significantly in the fourth quarter of 2008 as the transportation industry saw a significant decline in the shipment of freight. The outlook for the transportation industry for 2009 is for a significant downturn. Orders for structural wind towers dropped in the second half of the year as green energy companies experienced tightened credit markets coupled with lower prices for electricity sales. The slow down in the residential and commercial construction markets impacted our Construction Products Group as well. We continually assess our manufacturing capacity and take steps to align our production facilities with the nature of the demand. As a result of our assessment, we idled four railcar production facilities and one structural wind towers production facility during the fourth quarter of 2008 and in early 2009.

 

Equity Investment

 

See Note 5 of the Notes to the Consolidated Financial Statements.

 

Future Operating Requirements

 

We expect to finance future operating requirements with cash flows from operations, and depending on market conditions, long-term and short-term debt, and equity. Debt instruments that the Company has utilized include its revolving credit facility, the warehouse facility, senior notes, convertible subordinated notes, asset-backed

securities, and sale/leaseback transactions. The Company has also issued equity at various times. For the year ended December 31, 2008, the Company generated a tax loss. This loss was a result of the “Economic Stimulus Act of 2008” which provided for the immediate tax deduction of 50% of the basis of property placed in service during 2008. The Company is anticipating a refund $98.7 million. As of December 31, 2008, the Company had $326.2 million available under its revolving credit facility and $287.3 million available under its warehouse facility. Despite the volatile conditions in both the credit and stock markets, the Company believes it has access to adequate capital resources to fund operating requirements and is active in the financial markets.

 

Off Balance Sheet Arrangements

 

See Note 4 of the Notes to the Consolidated Financial Statements.

 

Derivative Instruments

 

We use derivative instruments to mitigate the impact of increases in zinc, natural gas, and diesel fuel prices and interest rates, as well as to convert a portion of our variable-rate debt to fixed-rate debt. We also use derivatives to lock in fixed interest rates in anticipation of future debt issuances. For instruments designated as hedges, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments, or forecasted transactions. At the time a derivative contract is entered into, and at least quarterly thereafter, the Company assesses whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting in ineffectiveness, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in Accumulated Other Comprehensive Loss (“AOCL”) as a separate component of stockholders’ equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Trinity monitors its derivative positions and credit ratings of its counterparties and does not anticipate losses due to counterparties’ non- performance.

 

Interest rate hedges

 

In anticipation of a future debt issuance, we entered into interest rate swap transactions during the fourth quarter of 2006 and during 2007. These instruments, with a notional amount of $370 million, hedged the interest rate on a portion of a future debt issuance associated with an anticipated railcar leasing transaction, which closed in May 2008. These instruments settled during the second quarter of 2008. The weighted average fixed interest rate under these instruments was 5.34%. These interest rate swaps were accounted for as cash flow hedges with changes in the fair value of the instruments of $24.5 million recorded as a loss in AOCL through the date the related debt issuance closed with a principal balance of $572.2 million in May 2008. The balance is being amortized over the term of the related debt. At December 31, 2008, the balance remaining in AOCL was $21.9 million. The effect on interest expense for the year ended December 31, 2008 was an increase of $7.1 million. Of the expense, $4.5 million was due to the ineffective portion of the hedges associated with hedged interest payments that will not be made and $2.6 million was due to amortization of the AOCL balance. It is expected that $4.0 million in net unrealized losses will be realized in earnings during 2009.

 

In May 2008, we entered into an interest rate swap transaction which is being used to fix the LIBOR component of the debt issuance which closed in May 2008. The fixed interest rate under this instrument is 4.126%. The amount recorded for this instrument as of December 31, 2008 in the consolidated balance sheet was a liability of $56.5 million, with $55.8 million of expense in AOCL. The effect on interest expense for the year ended December 31, 2008 was an increase of $5.5 million, which included the mark to market valuation on the interest rate swap transaction and the monthly settlement of interest. It is expected that $17.9 million in net unrealized losses will be realized in earnings during 2009.

 

During the fourth quarter of 2008, we entered into interest rate swap transactions, with a notional amount of $200 million, which are being used to counter our exposure to changes in the variable interest rate associated with

our warehouse facility. The weighted average fixed interest rate under these instruments at December 31, 2008 was 1.798%. The amount recorded for these instruments as of December 31, 2008 on the consolidated balance sheet was a liability of $2.4 million. The effect on interest expense for the year ended December 31, 2008 was an increase of $2.4 million, which included the mark to market valuation on the interest rate swap transactions and the monthly settlement of interest.

 

During 2005 and 2006, we entered into interest rate swap transactions in anticipation of a future debt issuance. These instruments, with a notional amount of $200 million, fixed the interest rate on a portion of a future debt issuance associated with a railcar leasing transaction in 2006 and settled at maturity in the first quarter of 2006. The weighted average fixed interest rate under these instruments was 4.87%. These interest rate swaps were being accounted for as cash flow hedges with changes in the fair value of the instruments of $4.5 million in income recorded in AOCL through the date the related debt issuance closed in May 2006. The balance is being amortized over the term of the related debt. At December 31, 2008, the balance remaining in AOCL was $3.4 million of income. The effect of the amortization on interest expense for the years ended December 31, 2008, 2007, and 2006 was a decrease of $0.4 million, $0.4 million, and $0.2 million, respectively.

 

Natural gas and diesel fuel

 

We continued a program to mitigate the impact of fluctuations in the price of natural gas and diesel fuel purchases. The intent of the program is to protect our operating profit from adverse price changes by entering into derivative instruments. For those instruments that do not qualify for hedge accounting treatment, any changes in their valuation are recorded directly to the consolidated statement of operations. In July 2008, we settled our outstanding diesel fuel hedge contracts. The effect of the change in fair value of the diesel fuel hedges, as well as the effect of the settled diesel fuel contracts, on the consolidated statement of operations for the year ended December 31, 2008 was income of $9.5 million. The amount recorded in the consolidated balance sheet for natural gas hedges was a liability of $2.0 million as of December 31, 2008 and $1.0 million of expense in AOCL for both types of derivative instruments. The effect of the natural gas hedges on the consolidated statement of operations for the year ended December 31, 2008 was expense of $1.3 million, including losses of $0.8 million resulting from the mark to market valuation for the year ended December 31, 2008. The amount recorded in the consolidated balance sheet for both types of derivative instruments at December 31, 2007 was an asset of $1.5 million and $0.1 million of income in AOCL. The effect on the consolidated statement of operations for the year ended December 31, 2007 was income of $2.2 million and for the year ended December 31, 2006 was expense of $5.2 million.

 

Zinc

 

We also continued a program to mitigate the impact of fluctuations in the price of zinc purchases. The intent of this program is to protect our operating profit from adverse price changes by entering into derivative instruments. These instruments are short term with monthly maturities and no remaining balances in AOCL as of December 31, 2008. The effect on the consolidated statement of operations for the years ended December 31, 2008 and December 31, 2007 was income of $1.8 million and $2.6 million, respectively.

 

Stock-Based Compensation

 

We have a stock-based compensation plan covering our employees and our Board of Directors. See Note 17 of the Notes to the Consolidated Financial Statements.

 

Employee Retirement Plans

 

As disclosed in Note 13 of the Notes to the Consolidated Financial Statements, the projected benefit obligation for the employee retirement plans exceeds the plans’ assets by $133.4 million as of December 31, 2008 as compared to $67.2 million as of December 31, 2007. The change was primarily due to a decrease in actual investment returns and well as a reduction in the actuarial gains, offset by an increase in employer contributions. We continue to sponsor an employee savings plan under the existing 401(k) plan that covers substantially all employees and

includes a Company matching contribution of up to 6% based on our performance, as well as a Supplemental Profit Sharing Plan.

 

Employer contributions for the year ending December 31, 2009 are expected to be $20.3 million for the defined benefit plans compared to $25.8 million contributed during 2008. Employer contributions to the 401(k) plans and the Supplemental Profit Sharing Plan for the year ending December 31, 2009 are expected to be $7.6 million compared to $7.0 million during 2008.

 

Subsequent to December 31, 2008, the Company’s amended its Supplemental Retirement Plan (the “Supplemental Plan”) designed to reduce future retirement plan costs. This amendment provides that all benefit accruals under the Supplemental Plan shall cease effective March 31, 2009, and the Supplemental Plan will be frozen as of that date. In addition, the Company amended the Trinity Industries, Inc. Standard Pension Plan (the “Pension Plan”). The amendment was designed to reduce future pension costs and provides that, effective March 31, 2009, all future benefit accruals under the Pension Plan will automatically cease for all participants, and the accrued benefits under the Pension Plan will be determined and frozen as of that date. The Company estimates that the financial impact of these actions will not be significant.

 

Contractual Obligations and Commercial Commitments

 

As of December 31, 2008, we had the following contractual obligations and commercial commitments:

 

 

 

 

On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”). See Note 12 of the Notes to Consolidated Financial Statements. As of December 31, 2008 and December 31, 2007, we had approximately $43.5 million and $31.7 million, respectively, of tax liabilities, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, property, plant, and equipment, goodwill, income taxes, warranty obligations, insurance, restructuring costs, contingencies, and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and

liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Inventory

 

We state all our inventories at the lower of cost or market. Our policy related to excess and obsolete inventory requires the inventory to be analyzed at the business unit level on a quarterly basis and to record any required adjustments. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. It is possible that changes in required inventory reserves may occur in the future due to then current market conditions.

 

Long-lived Assets

 

We periodically evaluate the carrying value of long-lived assets to be held and used for potential impairment. The carrying value of long-lived assets to be held and used is considered impaired when the carrying value is not recoverable through undiscounted future cash flows and the fair value of the asset is less than its carrying value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved or market quotes as available. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced by the estimated cost to dispose of the assets.

 

Goodwill

 

SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”) requires goodwill to be tested for impairment annually, or whenever events or circumstances change indicating that the carrying amount of the asset might be impaired. The goodwill impairment test is a two-step process which requires management to make judgmental assumptions regarding fair value. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment is assessed at the “reporting unit” level by applying a fair value-based test. We perform this testing for our five principal business segments: (1) the Rail Group, (2) the Construction Products Group, (3) the Inland Barge Group, (4) the Energy Equipment Group, and (5) the Railcar Leasing and Management Services Group. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimates and judgments that most significantly affect the fair value calculations are assumptions related to revenue and operating profit growth, discount rates and exit multiples. We determined that there was no impairment of the recorded goodwill balance of $504.0 million as of December 31, 2008. The Company will continue to consider potential goodwill impairment indicators in 2009, including a prolonged decline in our stock price and further business declines.

 

Warranties

 

The Company provides warranties against workmanship and materials defects ranging from one to five years depending on the product. The warranty costs are estimated using a two step approach. First, an estimate is made for the cost of all claims that have been filed 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. The Company provides for the estimated cost of product warranties at the time revenue is recognized related to products covered by warranties and assesses the adequacy of the resulting reserves on a quarterly basis.

 

Insurance

 

We are effectively self-insured for workers’ compensation claims. A third-party administrator processes all such claims. We accrue our workers’ compensation liability based upon independent actuarial studies. To the extent actuarial assumptions change and claims experience rates differ from historical rates, our liability may change.

Contingencies and Litigation

 

We are currently involved in certain legal proceedings. As discussed in Note 19 of the Notes to Consolidated Financial Statements, as of December 31, 2008, we have accrued our estimate of the probable settlement or judgment costs for the resolution of certain of these claims. This estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. We do not believe these proceedings will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these proceedings.

 

Environmental

 

We are involved in various proceedings related to environmental matters. We have provided reserves to cover probable and estimable liabilities with respect to such proceedings, taking into account currently available information and our contractual rights of indemnification. However, estimates of future response costs are necessarily imprecise. Accordingly, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.

 

Recent Accounting Pronouncements

 

See Note 1 of the Notes to the Consolidated Financial Statements.

 

Forward-Looking Statements

 

This annual report on Form 10-K (or statements otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the SEC, news releases, conferences, World Wide Web postings or otherwise) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not historical facts are forward-looking statements and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performances, estimates, projections, goals, and forecasts. Trinity uses the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify these forward-looking statements. Potential factors, which could cause our actual results of operations to differ materially from those in the forward-looking statements, include among others:

 

 

 

Any forward-looking statement speaks only as of the date on which such statement is made. Trinity undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

 

Our earnings could be affected by changes in interest rates due to the impact those changes have on our variable rate debt obligations, which represented approximately 45.7% of our total debt as of December 31, 2008. If interest rates average one percentage point more in fiscal year 2009 than they did during 2008, and our debt level remained constant, our interest expense would increase by $1.1 million. In comparison, at December 31, 2007, we estimated that if interest rates averaged one percentage point more in fiscal year 2008 than they did during the year ended December 31, 2007, our interest expense would increase by $2.4 million. The impact of an increase in interest rates was determined based on the impact of the hypothetical change in interest rates and scheduled principal payments on our variable-rate debt obligations as of December 31, 2008 and 2007. A one percentage point increase in the interest rate yield would decrease the fair value of the fixed rate debt by approximately $138.9 million. A one percentage point decrease in the interest rate yield would increase the fair value of fixed rate debt by approximately $169.7 million.

 

Trinity uses derivative instruments to mitigate the impact of increases in natural gas, diesel fuel prices, and zinc. Existing hedge transactions as of December 31, 2008 are based on the New York Mercantile Exchange for natural gas and heating oil. Hedge transactions are settled with the counterparty in cash. At December 31, 2008, we had recorded in the consolidated balance sheet a liability of $2.0 million, and at December 31, 2007 we had recorded in the consolidated balance sheet an asset of $1.5 million. The effect on the consolidated statement of operations for the year ended December 31, 2008 was income of $10.0 million, and for the year ended December 31, 2007 was income of $4.8 million.

 

The following table is an estimate of the impact to earnings that could result from hypothetical price changes during the year ending December 31, 2009 and the balance sheet impact from the hypothetical price change, both based on hedge positions at December 31, 2008.

 

Sensitivity Analysis

 

 

In addition, we are subject to market risk related to our net investments in our foreign subsidiaries. The net investment in foreign subsidiaries as of December 31, 2008 was $228.5 million. The impact of such market risk

exposures as a result of foreign exchange rate fluctuations has not been material to us. See Note 11 of the Notes to the Consolidated Financial Statements.

 

 

Trinity Industries, Inc.

 

Index to Financial Statements

 

 

 

The Board of Directors and Stockholders

  Trinity Industries, Inc.

 

We have audited Trinity Industries, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Trinity Industries, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Trinity Industries, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Trinity Industries, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2008 of Trinity Industries, Inc. and Subsidiaries and our report dated February 18, 2009 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP