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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
[_] OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-5666
-----------------------------
UNION TANK CAR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3104688
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 West Washington Street, Chicago, Illinois 60606
---------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (312) 372-9500
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
There is no voting stock held by non-affiliates of the registrant. This report
is being filed by the registrant as a result of undertakings made pursuant to
Section 15(d) of the Securities Exchange Act of 1934.
Included in this filing are 22 pages, sequentially numbered in the bottom center
of each page.
-1-
UNION TANK CAR COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated statement of income -
three months ended March 31, 2003 and 2002 3
Condensed consolidated balance sheet -
March 31, 2003 and December 31, 2002 4
Condensed consolidated statement of cash flows -
three months ended March 31, 2003 and 2002 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 18
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------------
2003 2002
-------------- -------------
(Restated)
Revenues
Services (leasing and other) $ 173,993 $ 172,193
Net sales 132,064 137,930
-------------- -------------
306,057 310,123
Other income, net 2,246 4,606
-------------- -------------
308,303 314,729
Costs and expenses
Cost of services 111,177 105,388
Cost of sales 110,394 110,849
General and administrative 35,816 35,535
Interest 18,000 20,461
-------------- -------------
275,387 272,233
-------------- -------------
Income before income taxes 32,916 42,496
Provision for income taxes 12,057 17,099
-------------- -------------
Net income $ 20,859 $ 25,397
============== =============
See notes to condensed consolidated financial statements.
-3-
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
March 31, December 31,
2003 2002
--------------- -------------
(Unaudited)
Assets
- ------
Cash and cash equivalents $ 80,602 $ 40,222
Short-term investments - 75,187
Accounts receivable, primarily due within one year 128,268 122,674
Accounts and notes receivable, affiliates 44,440 44,921
Inventories, net of LIFO reserves of $33,147
($32,683 at December 31, 2002) 117,891 132,479
Prepaid expenses and deferred charges 15,849 13,715
Advances to parent company, principally at LIBOR plus 1% 361,607 354,339
Railcar lease fleet, net 1,596,872 1,579,029
Intermodal tank container lease fleet, net 292,956 294,939
Fixed assets, net 194,283 198,114
Investment in aircraft direct financing lease 25,379 24,434
Other assets 54,652 56,530
--------------- -------------
Total assets $ 2,912,799 $ 2,936,583
=============== =============
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable $ 45,813 $ 53,596
Accrued liabilities 238,945 255,653
Borrowed debt, including $60,050 due within one year
($46,333 at December 31, 2002) 997,530 1,007,532
--------------- -------------
1,282,288 1,316,781
Deferred income taxes and investment tax credits 523,923 521,162
Minority interest liability 87,729 86,640
Stockholder's equity
Common stock and additional capital 265,061 265,061
Retained earnings 753,798 746,939
--------------- -------------
Total stockholder's equity 1,018,859 1,012,000
--------------- -------------
Total liabilities and stockholder's equity $ 2,912,799 $ 2,936,583
=============== =============
See notes to condensed consolidated financial statements.
-4-
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2003 2002
---------------- ---------------
(Restated)
Cash flows from operating activities:
Net income $ 20,859 $ 25,397
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,659 38,183
Deferred taxes (287) 8,345
Gain on disposition of railcars and other fixed assets (496) (1,205)
Loss on disposition of business 1,494 -
Other non-cash income and expenses 2,001 1,458
Changes in assets and liabilities:
Accounts receivable (9,283) 15,614
Inventories 11,001 (1,709)
Prepaid expenses and deferred charges (2,086) (2,518)
Accounts payable and accrued expenses (22,706) (42,622)
---------------- ---------------
Net cash provided by operating activities 41,156 40,943
Cash flows from investing activities:
Construction and purchase of railcars and other fixed assets (45,657) (26,550)
Decrease in short-term investments 75,187 110,107
Increase in advance to parent (19,614) (14,348)
(Increase) decrease in other assets (462) 215
Proceeds from disposals of railcars and other fixed assets 4,399 3,617
Proceeds from disposition of business 625 -
---------------- ---------------
Net cash provided by investing activities 14,478 73,041
Cash flows from financing activities:
Proceeds from issuance of borrowed debt 37 431
Principal payments of borrowed debt (9,078) (37,456)
Cash dividends (14,000) (17,000)
---------------- ---------------
Net cash used in financing activities (23,041) (54,025)
Effect of exchange rates on cash and cash equivalents 7,787 (190)
---------------- ---------------
Net increase in cash and cash equivalents 40,380 59,769
Cash and cash equivalents at beginning of year 40,222 11,131
---------------- ---------------
Cash and cash equivalents at end of period $ 80,602 $ 70,900
================ ===============
Cash paid during the period for:
Interest (net of amount capitalized) $ 15,294 $ 19,592
Income taxes 1,013 9,122
See notes to condensed consolidated financial statements.
-5-
UNION TANK CAR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)
1. UNION TANK CAR COMPANY (the "Company") is a wholly-owned subsidiary of
Marmon Holdings, Inc. ("Holdings"), substantially all of the stock of which
is owned, directly or indirectly, by trusts for the benefit of certain
members of the Pritzker family. As used herein, "Pritzker family" refers to
the lineal descendants of Nicholas J. Pritzker, deceased.
2. The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of normal recurring accruals, which the
Company considers necessary for a fair presentation. These interim financial
statements do not include all disclosures normally provided in annual
financial statements. Accordingly, they should be read in conjunction with
the consolidated financial statements and notes thereto in the Company's
2002 Annual Report on Form 10-K.
At the close of business on June 30, 2002, the Company distributed the stock
of Atlas Bolt & Screw Company, Atlas Bolt & Screw Sp.zo.o and Pan American
Screw, Inc. to Marmon Industrial LLC (MIC), MIC distributed the stock of the
Company to Holdings and Holdings contributed the stock of Amarillo Gear
Company, Penn Machine Company and WCTU Railway Company to the Company. As a
result of such realignment, (i) Holdings owns all of the Company's capital
stock, (ii) the Company ceased to own any capital stock of Atlas Bolt &
Screw Company, Atlas Bolt & Screw Sp.zo.o and Pan American Screw, Inc. and
(iii) the Company owns all of the capital stock of Amarillo Gear Company,
Penn Machine Company and WCTU Railway Company. The transactions have been
accounted for as a change in reporting entity on an "as if pooled" basis
and, accordingly, all financial and other information has been restated to
reflect these transactions for comparative purpose for all periods
presented. The impact of this realignment is not material.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
The 2003 interim results presented herein are not necessarily indicative of
the results of operations for the full year 2003.
3. As more fully described in the Company's 2002 Annual Report on Form 10-K,
under an arrangement with Holdings, the Company is included in the
consolidated federal income tax return of Holdings. As a member of a
consolidated federal income tax group, the Company is contingently liable
for the federal income taxes of the other members of the group.
4. The Company and its subsidiaries have been named as defendants in a number
of lawsuits, and certain claims are pending. The Company has accrued what it
reasonably expects to pay in resolution of these matters and, in the opinion
of management, their ultimate resolution will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
-6-
5. Foreign currency translation adjustments and transaction gains and losses
are borne by the Company's parent. For the three months ended March 31, 2003
and 2002, the Company's parent absorbed a loss of $3,768 and a gain of $672,
respectively.
6. The Company's short-term investments consist of commercial paper with
original maturities between four and six months. No such investments were
held at March 31, 2003.
7. The Company's foreign subsidiaries periodically enter into foreign currency
forward contracts to hedge against U.S. dollar exposures. There were no
foreign currency forward contracts outstanding at March 31, 2003 and
December 31, 2002.
8. Segment Information
Intermodal
Tank
Metals Container Consolidated
Railcar Distribution Leasing All Other Totals
--------- ------------- -------------- ----------- ----------------
(Dollars in Millions)
Three months ended March 31, 2003
- ---------------------------------
Revenues from external customers $ 140.0 $ 95.4 $ 20.5 $ 50.2 $ 306.1
Income before income taxes 26.2 (0.6) 1.7 5.6 32.9
Three months ended March 31, 2002
- ---------------------------------
Revenues from external customers $ 142.1 $ 102.0 $ 19.5 $ 46.5 $ 310.1
Income before income taxes 32.0 3.3 0.9 6.3 42.5
9. Consolidating Financial Information
The following condensed consolidating statements are provided because Procor
Limited, a wholly-owned subsidiary of the Company, has issued three separate
series of equipment trust certificates, guaranteed by the Company, as part of
certain public debt offerings of the Company in the United States.
In 2002, Procor Limited restructured a part of its railcar leasing business.
Procor Limited transferred a number of the railcars it owned to Procor Leasing
Inc. ("PLI") in exchange for the Class A Preferred Shares of PLI. PLI then
transferred these same cars to a new limited partnership, Procor LP, in exchange
for a 98% limited partnership interest in Procor LP. Procor Limited owns a 2%
general partnership interest in Procor LP.
-7-
9. Consolidating Financial Information (Continued)
Condensed consolidating statements of income for the three months ended March
31, 2003 and 2002 are as follows:
Three Months Ended March 31, 2003
---------------------------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
----------------- ------------ ------------- ------------- --------------
Revenues
Services $ 109,750 $ 6,053 $ 68,720 $ (10,530) $ 173,993
Net sales 6,282 271 127,348 (1,837) 132,064
----------------- ------------ ------------- ------------- --------------
116,032 6,324 196,068 (12,367) 306,057
Other income, net 4,252 (1,243) (2,175) 1,412 2,246
----------------- ------------ ------------- ------------- --------------
120,284 5,081 193,893 (10,955) 308,303
Costs and expenses
Cost of services 71,653 7,001 43,053 (10,530) 111,177
Cost of sales 7,486 268 104,477 (1,837) 110,394
General and administrative 9,668 136 26,012 - 35,816
Interest 12,360 791 3,437 1,412 18,000
----------------- ------------ ------------- ------------- --------------
101,167 8,196 176,979 (10,955) 275,387
----------------- ------------ ------------- ------------- --------------
Income before income taxes 19,117 (3,115) 16,914 - 32,916
Provision for income taxes 6,922 (915) 6,050 - 12,057
----------------- ------------ ------------- ------------- --------------
Net income $ 12,195 $ (2,200) $ 10,864 $ - $ 20,859
================= ============ ============= ============= ==============
Three Months Ended March 31, 2002
---------------------------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
----------------- ------------ ------------- ------------- --------------
Revenues
Services $ 113,905 $ 8,594 $ 60,700 $ (11,006) $ 172,193
Net sales 6,735 1,899 132,002 (2,706) 137,930
----------------- ------------ ------------- ------------- --------------
120,640 10,493 192,702 (13,712) 310,123
Other income, net (669) 1,811 1,315 2,149 4,606
----------------- ------------ ------------- ------------- --------------
119,971 12,304 194,017 (11,563) 314,729
Costs and expenses
Cost of services 72,097 5,449 38,848 (11,006) 105,388
Cost of sales 6,606 2,436 104,513 (2,706) 110,849
General and administrative 10,102 97 25,336 - 35,535
Interest 13,831 791 3,690 2,149 20,461
----------------- ------------ ------------- ------------- --------------
102,636 8,773 172,387 (11,563) 272,233
----------------- ------------ ------------- ------------- --------------
Income before income taxes 17,335 3,531 21,630 - 42,496
Provision for income taxes 7,926 1,375 7,798 - 17,099
----------------- ------------ ------------- ------------- --------------
Net income $ 9,409 $ 2,156 $ 13,832 $ - $ 25,397
================= ============ ============= ============= ==============
-8-
9. Consolidating Financial Information (Continued)
Condensed consolidating balance sheets as of March 31, 2003 and December 31,
2002 are as follows:
March 31, 2003
--------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
Assets
- ------
Cash and cash equivalents $ 79 $ 77,632 $ 2,891 $ - $ 80,602
Accounts receivable 23,351 2,500 103,606 (1,189) 128,268
Accounts and notes receivable, affiliates - - 44,440 - 44,440
Inventories, net 22,513 5,187 90,191 - 117,891
Prepaid expenses and deferred charges 6,886 2,341 6,622 - 15,849
Advances to parent company 167,302 (8,687) 202,514 478 361,607
Railcar lease fleet, net 1,325,702 27,263 243,907 - 1,596,872
Intermodal tank container lease fleet, net - - 292,956 - 292,956
Fixed assets, net 85,983 14,888 93,412 - 194,283
Investment in direct financing lease - 25,379 - - 25,379
Investment in subsidiaries 768,715 77,554 177,427 (1,023,696) -
Other assets 369 932 54,283 (932) 54,652
------------ ---------- ------------ ------------ ------------
Total assets $ 2,400,900 $ 224,989 $ 1,312,249 $ (1,025,339) $ 2,912,799
============ ========== ============ ============ ============
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable $ 30,545 $ 212 $ 16,025 $ (969) $ 45,813
Accrued liabilities 152,270 8,736 75,262 2,677 238,945
Borrowed debt 801,269 33,873 162,388 - 997,530
------------ ---------- ------------ ------------ ------------
984,084 42,821 253,675 1,708 1,282,288
Deferred income taxes and investment tax
credits 402,443 25,599 95,881 - 523,923
Minority interest liability - - 88,661 (932) 87,729
Stockholder's equity
Common stock and additional capital 358,475 14,673 284,115 (392,202) 265,061
Retained earnings 623,712 150,098 614,010 (634,022) 753,798
Equity adjustment from foreign currency
translation 32,186 (8,202) (24,093) 109 -
------------ ---------- ------------ ------------ ------------
Total stockholder's equity 1,014,373 156,569 874,032 (1,026,115) 1,018,859
------------ ---------- ------------ ------------ ------------
Total liabilities and stockholder's
equity $ 2,400,900 $ 224,989 $ 1,312,249 $ (1,025,339) $ 2,912,799
============ ========== ============ ============ ============
-9-
9. Consolidating Financial Information (Continued)
December 31, 2002
-----------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
--------------- ---------- ------------ ------------ ------------
Assets
- ------
Cash and cash equivalents $ 159 $ 36,622 $ 3,441 $ - $ 40,222
Short-term investments - 75,187 - - 75,187
Accounts receivable 21,654 2,429 99,000 (409) 122,674
Accounts and notes receivable, affiliates - - 44,921 - 44,921
Inventories, net 25,330 4,261 102,888 - 132,479
Prepaid expenses and deferred charges 6,244 2,409 5,647 (585) 13,715
Advances to parent company 198,751 (44,677) 199,283 982 354,339
Railcar lease fleet, net 1,311,642 25,674 241,713 - 1,579,029
Intermodal tank container lease fleet, net - - 294,939 - 294,939
Fixed assets, net 89,925 14,319 93,870 - 198,114
Investment in direct financing lease - 24,434 - - 24,434
Investment in subsidiaries 740,678 75,844 171,254 (987,776) -
Other assets 396 798 56,134 (798) 56,530
----------- ---------- ----------- ---------- -----------
Total assets $ 2,394,779 $ 217,300 $ 1,313,090 $ (988,586) $ 2,936,583
=========== ========== =========== ========== ===========
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable $ 28,570 $ 1,550 $ 23,491 $ (15) $ 53,596
Accrued liabilities 188,795 5,294 59,254 2,310 255,653
Borrowed debt 810,326 33,014 164,192 - 1,007,532
----------- ---------- ----------- ---------- -----------
1,027,691 39,858 246,937 2,295 1,316,781
Deferred income taxes and investment tax
credits 396,459 25,492 99,211 - 521,162
Minority interest liability - - 87,438 (798) 86,640
Stockholder's equity
Common stock and additional capital 358,475 13,012 284,115 (390,541) 265,061
Retained earnings 563,855 152,298 630,466 (599,680) 746,939
Equity adjustment from foreign currency
translation 48,299 (13,360) (35,077) 138 -
----------- ---------- ----------- ---------- -----------
Total stockholder's equity 970,629 151,950 879,504 (990,083) 1,012,000
----------- ---------- ----------- ---------- -----------
Total liabilities and stockholder's
equity $ 2,394,779 $ 217,300 $ 1,313,090 $ (988,586) $ 2,936,583
=========== ========== =========== ========== ===========
-10-
9. Consolidating Financial Information (Continued)
Condensed consolidating statements of cash flows for the three months ended
March 31, 2003 and 2002 are as follows:
Three Months Ended March 31, 2003
---------------------------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
-------------- ----------- ------------ ------------ ------------
Net cash provided by operating activities: $ 1,541 $ (5,926) $ 45,541 $ - $ 41,156
Cash flows from investing activities:
Construction and purchase of railcars and other
fixed assets (34,464) (97) (11,096) - (45,657)
Decrease in short-term investments - 75,187 - - 75,187
Decrease (increase) in advance to parent 52,729 (35,990) (2,728) (33,625) (19,614)
Increase in other assets - - (462) - (462)
Proceeds from disposals of railcars and other
fixed assets 3,171 101 1,127 - 4,399
Proceeds from disposals of business - - 625 - 625
------------ ---------- ---------- ---------- -----------
Net cash provided by (used in) investing
activities 21,436 39,201 (12,534) (33,625) 14,478
Cash flows from financing activities:
Proceeds from issuance of borrowed debt - - 37 - 37
Principal payments of borrowed debt (9,057) - (21) - (9,078)
Cash dividends (14,000) - (33,625) 33,625 (14,000)
------------ ---------- ---------- ---------- -----------
Net cash (used in) provided by financing
activities (23,057) - (33,609) 33,625 (23,041)
Effect of exchange rates on cash and cash
equivalents - 7,735 52 - 7,787
------------ ---------- ---------- ---------- -----------
Net (decrease) increase in cash and cash
equivalents (80) 41,010 (550) - 40,380
Cash and cash equivalents at beginning of year 159 36,622 3,441 - 40,222
------------ ---------- ---------- ---------- -----------
Cash and cash equivalents at end of period $ 79 $ 77,632 $ 2,891 $ - $ 80,602
============ ========== ========== ========== ===========
-11-
9. Consolidating Financial Information (Continued)
Three Months Ended March 31, 2002
---------------------------------
Union Tank Car Procor Other
Company Limited Subsidiaries Eliminations Consolidated
---------------- ----------- ------------ ------------ ------------
Net cash provided by operating activities: $ 5,152 $ 4,776 $ 31,015 $ - $ 40,943
Cash flows from investing activities:
Construction and purchase of railcars and other
fixed assets (17,896) (218) (8,436) - (26,550)
Decrease in short-term investments - 110,107 - - 110,107
Decrease (increase) in advance to parent 54,199 (42,871) 742 (26,418) (14,348)
Decrease in other assets - - 215 - 215
Proceeds from disposals of railcars and other
fixed assets 1,848 722 1,047 - 3,617
---------------- ----------- ------------ ------------ ------------
Net cash provided by (used in) investing 38,151 67,740 (6,432) (26,418) 73,041
activities
Cash flows from financing activities:
Proceeds from issuance of borrowed debt - - 431 - 431
Principal payments of borrowed debt (23,848) (12,617) (991) - (37,456)
Cash dividends (17,000) - (26,418) 26,418 (17,000)
---------------- ----------- ------------ ------------ ------------
Net cash (used in) provided by financing
activities (40,848) (12,617) (26,978) 26,418 (54,025)
Effect of exchange rates on cash and cash
equivalents - (189) (1) - (190)
---------------- ----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 2,455 59,710 (2,396) - 59,769
Cash and cash equivalents at beginning of year 60 8,590 2,481 - 11,131
---------------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,515 $ 68,300 $ 85 $ - $ 70,900
================ =========== ============ ============ ============
-12-
10. The Company is obligated under one residual value guarantee totalling
$2.1 million until March 2006 and several performance guarantees
totalling $3.4 million until August 2006. Additionally, the Company
provides warranties on certain products for varying lengths of time.
Changes to the Company's product warranty accrual during the periods
are as follows:
Three Months Ended
March 31,
----------------------------------
2003 2002
----------- ------------
(Dollars in Thousands)
Balance, beginning of year $ 724 $ 877
Warranties issued 100 60
Settlements (188) (136)
------------ ------------
Balance, end of period $ 636 $ 801
============ ============
The Company maintains appropriate allowances for warranties and
periodically reviews the amount of allowances based on management's
assessment of various factors, including claims experience.
11. On February 8, 1988, Procor Limited ("Procor") entered into an
Operating Lease Agreement ("Lease") with Air Canada for one Boeing
767-233 aircraft. On the same day and as part of the same transaction,
Procor entered into a Trust Indenture ("Indenture") under which it
borrowed Cdn$45.0 million and granted a security interest in the
aircraft to the trustee. On April 1, 2003, Air Canada filed for an
interim court order for protection from its creditors under the
Canadian Companies Creditors Arrangement Act. On May 9, 2003, Air
Canada notified Procor that it was electing to terminate the Lease
effective as of May 30, 2003. This filing and the termination of the
Lease constitute defaults under the Lease. The defaults under the Lease
constitute defaults under the Indenture and allow the trustee, among
other things, to declare the remaining principal and interest
immediately due, without any make-whole provision. The trustee has not
done so at this point. The amount remaining due under the Indenture is
approximately Cdn$19.5 million. The next payment under the Indenture is
due on June 30, 2003. Procor intends to make that payment.
The net book value of the airplane is Cdn$37.3 million as of March 31,
2003. While a substantial writedown in the value of the aircraft is
expected in the future, the amount of such writedown is not estimatable
at this time. The Company expects to be able to better assess the
situation in the second quarter.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
1st Quarter 2003 versus 2002
- ----------------------------
Performance of the railcar leasing business continues to be adversely affected
by the continuing general economic slowdown in all major markets. Demand for
existing equipment remained low causing downward pressure on both lease rental
rates and fleet utilization. Service revenues increased $1.8 million primarily
due to a $1.4 million increase on sulphur processing revenues and a $1.0 million
increase on intermodal tank container leasing revenues, offset by a $1.1 million
decrease on railcar leasing and service revenues. Gross margin on service
revenues decreased $4.0 million primarily due to $5.9 million lower margin on
railcar leasing and service operations including a $1.3 million provision for
staff reduction cost, offset by a $1.8 million improvement in intermodal tank
container operations.
Demand for new railcars remained weak, resulting in continuing low levels of
production and capacity utilization. Demand for the products of the metals
distribution business was also impacted by the continuing general economic
slowdown in the U.S. As a result, overall sales revenues decreased $5.9 million
primarily due to a $6.6 million decrease in metal products. Gross margin on
sales revenues decreased $5.4 million primarily due to a $2.8 million decrease
in margin in the metals distribution business.
Other income decreased $2.4 million due to, among other things, $1.5 million
loss on disposition of a foreign metals distribution subsidiary and $0.5 million
decrease on interest income reflective of lower average interest rates.
The effective income tax rate decreased due to the utilization of foreign tax
credits.
Financial Condition and Liquidity
- ---------------------------------
2003 versus 2002
- ----------------
Operating activities provided $41.2 million of cash in the first quarter of
2003. These funds, along with redemption of short-term investments, were used to
finance lease fleet additions, advance funds to parent, pay dividends to the
Company's stockholder, and service borrowed debt obligations.
It is the Company's policy to pay to its stockholder a quarterly dividend equal
to 70% of net income. To the extent that the Company generates cash in excess of
its operating needs, such funds, in excess of the amounts paid as dividends, are
advanced to its parent and bear interest at commercial rates. Conversely, when
the Company requires additional funds to support its operations, prior advances
are repaid by its parent. No restrictions exist regarding the amount of
dividends which may be paid or advances which may be made by the Company to its
parent.
During the first quarter of 2003, the Company spent $45.7 million for
construction and purchase of railcars and other fixed assets. Since capital
expenditures for railcars are generally incurred subsequent to receipt of firm
customer lease orders, such expenditures are discretionary to the Company based
on its desire to enter into those lease orders. Capital expenditures for
intermodal tank containers are likewise discretionary in the intermodal tank
container business.
-14-
During the first quarter of 2003, the Company's financing activities included
the use of $9.1 million for principal repayments on borrowed debt and $14.0
million for cash dividends. Net cash used in financing activities was $23.0
million.
Management expects future cash to be provided from operating activities,
long-term financings and collection of funds previously advanced to parent will
be adequate to provide for the continued investment in the Company's business
and enable it to meet its debt service obligations.
New Accounting Pronouncements
- -----------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities". This
Interpretion requires that an enterprise's consolidated financial statements
include subsidiaries in which the enterprise has a controlling financial
interest. At March 31, 2003, the Company did not have any unconsolidated
variable interest entities.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This Interpretation also incorporates,
without change, the guidance in FIN No. 34, "Disclosure of Indirect Guarantees
of Indebtedness of Others", which is being superseded. The initial recognition
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN No. 45 did not have a
material impact on the Company's consolidated financial statements or financial
position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15, 2002.
The Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. The Company adopted the new rule on
asset retirement obligations on January 1, 2003. The effect of adoption of SFAS
No. 143 did not have a material effect on the Company's results of operations or
financial position.
Forward-Looking Statements
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This quarterly report on Form 10-Q for the quarter ended March 31, 2003 contains
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. This information may involve
risks and uncertainties that could cause actual results to differ materially
from those set forth herein. These risks and uncertainties include, but are not
limited to, unanticipated changes in the markets served by the Company such as
the railcar leasing, service and sales, intermodal tank container leasing and
metal products distribution industries.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2003, there had been no significant change to the Company's
exposure to market risk since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing of this report, the Company carried
out an evaluation, under the supervision of the Company's Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the United States
Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation,
the Company's Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
Subsequent to the date of their evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls.
The Company's management, including the Principal Executive Officer and
Principal Financial Officer, does not expect that its disclosure controls and
procedures or internal controls and procedures will prevent all error and all
fraud. A control system can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to "Business - Environmental Matters" in the
Company's Annual Report on Form 10-K for the year ended December 31,
2002 for a description of certain environmental matters.
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA at the Calumet Containers site in Hammond, Indiana.
Costs incurred to date have not been material. Because of the nature
of the Company's involvement at this site, management believes that
future costs related to this site will not be material. The Company
has not entered into any cost sharing arrangements with other PRP's
that make it reasonably possible the Company will incur material costs
beyond its pro rata share. Further, management does not believe that
any problems or uncertainties as to the financial liabilities of other
PRP's make it reasonably possible the Company will incur material
costs beyond its pro rata share at this site. The Company's accruals
for the site are based on the amount it reasonably expects to pay with
respect to the site.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K during the quarter ended March 31, 2003
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION TANK CAR COMPANY
REGISTRANT
Dated: May 14, 2003 /s/ Mark J. Garrette
----------------------------------
Mark J. Garrette
Vice President
(principal financial officer
and principal accounting officer)
CERTIFICATIONS
I, Kenneth P. Fischl, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Tank Car
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact or
omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
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a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Kenneth P. Fischl
------------------
Kenneth P. Fischl
Principal Executive Officer
I, Mark J. Garrette, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Tank Car
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact or
omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
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4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Mark J. Garrette
-------------------
Mark J. Garrette
Principal Financial Officer
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