<PAGE>
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 September 30, 1998
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
-------- --------
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 12 pages, sequentially numbered in the bottom center
of each page.
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<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1.
Condensed consolidated statement of income -
three and nine month periods ended
September 30, 1998 and 1997 3
Condensed consolidated balance sheet -
September 30, 1998 and December 31, 1997 4
Condensed consolidated statement of cash flows -
nine months ended September 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6 - 7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8 - 10
Part II. Other Information
Item 1.
Legal Proceedings 11
Item 6.
Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Services (leasing and other) $147,465 $141,054 $433,521 $417,799
Net sales 75,114 72,022 199,702 193,101
-------- -------- -------- --------
222,579 213,076 633,223 610,900
Other income 1,695 3,805 16,625 12,975
-------- -------- -------- --------
224,274 216,881 649,848 623,875
Costs and expenses
Cost of services 80,132 81,978 239,271 241,276
Cost of sales 63,423 63,269 168,014 168,942
General and administrative 15,965 13,612 46,111 42,241
Interest 18,068 18,140 54,431 56,585
-------- -------- -------- --------
177,588 176,999 507,827 509,044
-------- -------- -------- --------
Income before income taxes 46,686 39,882 142,021 114,831
Provision for income taxes
Current 15,215 10,953 44,620 34,504
Deferred 4,544 4,799 12,575 8,165
-------- -------- -------- --------
19,759 15,752 57,195 42,669
-------- -------- -------- --------
Net income $ 26,927 $ 24,130 $ 84,826 $ 72,162
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 56,883 $ 99,709
Accounts receivable, primarily due within one year 99,977 72,959
Inventories 93,641 71,395
Prepaid expenses and deferred charges 13,528 13,675
Advances to parent company,
principally at LIBOR plus 1% 169,457 177,705
Railcar lease fleet, net 1,557,661 1,578,433
Fixed assets, net 168,727 163,309
Investment in aircraft direct financing lease 32,688 35,341
Other assets 31,623 17,138
---------- ----------
Total assets $2,224,185 $2,229,664
========== ==========
Liabilities, Deferred Items and Stockholder's Equity
- ----------------------------------------------------
Accounts payable $ 23,943 $ 18,636
Accrued liabilities 240,031 196,119
Borrowed debt, including $76,484 due within
one year ($66,382 at December 31, 1997) 901,119 925,038
---------- ----------
1,165,093 1,139,793
Deferred income taxes and investment tax credits 438,266 494,871
Stockholder's equity
Common stock and additional capital 113,035 113,035
Retained earnings 507,791 481,965
---------- ----------
Total stockholder's equity 620,826 595,000
---------- ----------
Total liabilities, deferred items and
stockholder's equity $2,224,185 $2,229,664
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
UNION TANK CAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 84,826 $ 72,162
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 90,780 83,785
Deferred taxes 12,575 8,165
Gain on disposition of railcars and other fixed assets (1,752) (1,971)
Other non-cash income and expenses 1,308 1,828
Changes in assets and liabilities:
Accounts receivable (18,558) 103
Inventories (15,835) (15,825)
Prepaid expenses and deferred charges 695 (2,171)
Accounts payable and accrued expenses (9,365) (12,767)
--------- ---------
Net cash provided by operating activities 144,674 133,309
Cash flows from investing activities:
Construction and purchase of railcars and other fixed assets (189,115) (198,731)
Decrease in advance to parent 20,082 26,717
Net disposal of other assets - 12,413
Purchases of businesses, net of cash acquired (21,989) -
Proceeds from disposals of railcars and other fixed assets 14,430 4,898
--------- ---------
Net cash used in investing activities (176,592) (154,703)
Cash flows from financing activities:
Proceeds from issuance of borrowed debt 80,550 300,000
Proceeds from sale-leaseback transactions 130,018 -
Principal payments of borrowed debt (155,970) (195,611)
Cash dividends (59,000) (50,000)
--------- ---------
Net cash (used in) provided by financing activities (4,402) 54,389
Effect of exchange rates on cash and cash equivalents (6,506) (576)
--------- ---------
Net (decrease) increase in cash and cash equivalents (42,826) 32,419
Cash and cash equivalents at beginning of year 99,709 71,915
--------- ---------
Cash and cash equivalents at end of period $ 56,883 $ 104,334
========= =========
Cash paid during the period for:
Interest (net of amount capitalized) $ 56,131 $ 51,511
Income taxes 42,823 39,141
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
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 Industrial Corporation ("Marmon Industrial"). Marmon Industrial is a
wholly-owned subsidiary of Marmon Holdings, Inc. ("Marmon 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 1997 Annual Report on Form 10-K.
The 1998 interim results presented herein are not necessarily indicative of
the results of operations for the full year 1998.
3. As more fully described in the Company's 1997 Annual Report on Form 10-K,
under an arrangement with Marmon Industrial, the Company is included in the
consolidated federal income tax return of Marmon 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
effect on the Company's consolidated financial position or results of
operations.
5. Foreign currency translation adjustments and transaction gains and losses
are assumed by the Company's parent. For the nine months ended September
30, 1998 and 1997, Marmon Industrial absorbed a gain of $3,508 and a loss
of $108, respectively.
6. The Company's Canadian subsidiaries periodically enter into foreign
currency forward contracts to hedge against U.S. dollar exposures. Foreign
currency forward contracts, all with initial maturities of less than one
year, amounted to $2,900 at September 30, 1998 and $1,500 at December 31,
1997.
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<PAGE>
7. Summarized Financial Information of Procor Limited
Summarized consolidated financial information for the Company's wholly-
owned subsidiary, Procor Limited, in thousands of U.S. dollars, is as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Balance Sheet:
Railcar lease fleet, net $168,105 $189,814
All other assets 168,712 215,403
Borrowed debt 97,249 121,009
All other liabilities 112,805 158,143
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Statement of Income:
Services and net sales $29,111 $28,534 $83,667 $79,288
Gross profit 10,255 10,002 27,721 28,654
Net income 6,648 4,989 15,239 12,223
</TABLE>
8. In August and September 1998, the Company issued an aggregate total of
$80,000 principal amount of unsecured Medium-Term Notes. The notes bear
interest at rates between 5.78% and 6.51% per year, with maturity ranging
from three to ten years. Interest on $55,000 principal amount of notes
issued in August 1998 will be payable semiannually on February 15 and
August 15, commencing on February 15, 1999. Interest on $25,000 principal
amount of notes issued in September 1998 will be payable semiannually on
March 1 and September 1, commencing on March 1, 1999. The notes are non-
redeemable and not subject to a sinking fund. Proceeds from sale of the
notes are being used for general corporate purposes. These notes were
issued pursuant to a registration statement filed by the Company with the
Securities and Exchange Commission on January 28, 1998, covering an
aggregate $300,000 of debt securities and pass through certificates which
may be issued from time to time.
9. Subsequent Event
On October 1, 1998 the Company prepaid $24,512 principal amount of
equipment obligations which had a 10.03% interest rate and were originally
due semiannually through October 2003.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
3rd Quarter 1998 versus 1997
- ----------------------------
Service revenues increased $6.4 million primarily due to the effect of railcars
added to the lease fleet.
Sales revenues increased $3.1 million. The increase primarily resulted from the
Company's sulphur service processing operations with the remaining increase
primarily due to increased fastener sales, partially offset by lower sales of
covered hopper railcars.
Income tax provision as a percentage of income before income taxes increased
primarily due to a higher effective foreign tax rate.
Nine Months 1998 versus 1997
- ----------------------------
Service revenues increased $15.7 million primarily due to the effect of railcars
added to the lease fleet.
Sales revenues increased $6.6 million. The increase primarily resulted from the
Company's sulphur service processing operations with the remaining increase
primarily due to increased fastener sales, partially offset by lower sales of
covered hopper railcars.
Other income increased $3.7 million primarily due to the sale of certain rights
retained as a condition of the May 1996 sale of a storage facility used in the
liquefied petroleum gas storage operations.
Income tax provision as a percentage of income before income taxes increased
primarily due to a higher effective foreign tax rate.
Financial Condition
- -------------------
1998 versus 1997
- ----------------
Operating activities provided $144.7 million of cash. These funds, along with
the proceeds from the sale-leaseback transactions, issuance of medium-term
notes, and the collection of funds advanced to parent were used to provide
financing for railcar additions, acquisition of businesses, service borrowed
debt obligations and pay dividends to the Company's stockholder.
Management expects future cash to be provided from operating activities, long-
term railcar financings and collection of funds previously advanced to parent
will be adequate to provide for the continued expansion of the Company's
business and enable it to meet its debt service obligations.
-8-
<PAGE>
Year 2000 Program
- -----------------
Because of the potential importance to the Company of Year 2000 questions, the
Company has established a Year 2000 program to determine the Company's state of
readiness and the costs that it anticipates it will have to incur in light of
the possible problems.
Based on its assessment to date, the Company has determined that its information
processing and delivery systems are not yet capable of handling certain Year
2000 processing tasks. The Company believes its Year 2000 program will mitigate
any material Year 2000 risks. However, if this program is not implemented or
completed on a timely basis, Year 2000 problems could have a material adverse
impact on the operations of the Company.
The Company's Year 2000 program involves the following phases: assessment,
remediation, testing, and final implementation. As part of the assessment
phase, the Company reviewed its hardware, software, and operating systems to
identify potential problems and to prioritize remedial actions to be taken. The
Company reviewed the resources, both financial and personnel, necessary to
address the Year 2000 problems, assigned responsibility for implementation of
the Year 2000 program to a senior manager, and has provided for regular
reporting and monitoring of the Year 2000 program by senior management.
The Company's Year 2000 assessment indicated that the Company's accounting,
invoicing, general business and fleet management systems would be affected by
Year 2000 problems. The Company has begun the necessary corrective work on
these systems. This work is approximately 65% complete. The Company's
timetable calls for this work to be substantially completed by December 31,
1998, with testing of the completed systems to be done by April 1, 1999.
The Company does not believe its main products (i.e., tank cars and other rail
cars) have any material Year 2000 exposures. Therefore, the Company does not
believe Year 2000 problems present a material exposure to the Company in this
area.
Similarly, no material problems have been identified in connection with the
Company's production machinery and equipment.
As part of its Year 2000 program, the Company has been gathering information
about how Year 2000 issues might affect its significant suppliers. At this
point, the Company does not know of any Year 2000 problem with any suppliers
that could materially impact the Company's results of operations. However, the
Company cannot be sure this will be true and the potential impact of any
problems is difficult to determine.
The Company's systems interact directly with certain third parties, including
financial institutions. The Company is working with these third parties to
minimize any Year 2000 problems. The Company understands that these third
parties are in the process of addressing their Year 2000 problems and that they
believe their problems will be addressed on a timely basis.
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<PAGE>
The Company is using both in-house resources and outside consultants to
implement the necessary changes required by its Year 2000 program. The total
cost of the program is estimated to be $4.7 million, which will be funded from
operating cash flow. So far the Company has spent approximately $2.0 million
related to its Year 2000 program. Of this amount $1.5 million has been expensed
and $.5 million has been capitalized. Of the remaining amount, approximately
$1.7 million is expected to be capitalized with the rest being expensed.
While management of the Company believes that its Year 2000 program will be
effective to resolve all material Year 2000 problems in a timely manner, the
Company has not yet completed all phases of its program. If the Company does
not complete its program or if the program is not completed on time, the Company
could experience delays in taking customer orders, invoicing customers, and
other fleet management work. In addition, disruptions in the general economy
resulting from Year 2000 issues could materially adversely affect the Company.
The amount of any potential liability or lost revenue from any of these cannot
be reasonably estimated at this time.
At present the Company's Year 2000 program does not include contingency plans in
the event that all phases of the Year 2000 program are not timely completed.
The Company will continue to evaluate the need for contingency plans as it
implements its Year 2000 program.
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<PAGE>
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,
1997 for a description of certain environmental matters.
In connection with the investigation by the Pennsylvania Office of
Attorney General ("OAG") and the Pennsylvania Department of
Environmental Resources of alleged violations of the Pennsylvania
Solid Waste Management Act ("Act") at the Company's railcar repair
facility in Altoona, Pennsylvania, the Company and OAG have reached a
plea agreement which is currently scheduled to be entered on November
20, 1998, subject to the approval of the Court of Common Pleas of
Blair County, Pennsylvania.
The agreement provides that the Company will be charged with four
third-degree misdemeanor violations of the Act and that the Company
will make contributions totaling $455,735 to three local government
agencies, will remediate the site, will reimburse $82,077 in
investigation and grand jury costs, will be placed on probation for a
period to be determined by the Court, and will cooperate with the
OAG's continuing investigation.
Item 6. Exhibits and Reports on Form 8-K
b. Report on Form 8-K
On August 26, 1998, the Company filed a report on Form 8-K disclosing
that on August 12, 1998, the Company had entered into a Selling Agency
Agreement with Morgan Stanley & Co. Incorporated relating to the
issuance and sale of up to $55,000,000 principal amount of Medium-Term
Notes, Series B.
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<PAGE>
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: November 13, 1998 /s/ R.C. Gluth
------------------------------------------
R.C. Gluth
Executive Vice President,
Director and Treasurer
(principal financial officer
and principal accounting
officer)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the September 30, 1998 condensed consolidated balance sheet, condensed
consolidated statement of income for the nine months ended September 30, 1998,
and the notes thereto, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,883
<SECURITIES> 0
<RECEIVABLES> 104,127
<ALLOWANCES> 4,150
<INVENTORY> 93,641
<CURRENT-ASSETS> 0<F1>
<PP&E> 3,107,884
<DEPRECIATION> 1,381,496
<TOTAL-ASSETS> 2,224,185
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 901,119
0
0
<COMMON> 106,689
<OTHER-SE> 514,137
<TOTAL-LIABILITY-AND-EQUITY> 2,224,185
<SALES> 199,702
<TOTAL-REVENUES> 649,848<F2>
<CGS> 168,014
<TOTAL-COSTS> 407,285
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,431
<INCOME-PRETAX> 142,021
<INCOME-TAX> 57,195
<INCOME-CONTINUING> 84,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,826
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0
<FN>
<F1> The Company issues financial statements utilizing a non-classified balance
sheet.
<F2> The Company's revenues are derived primarily from railcar leasing.
<F3> The Company is a wholly-owned subsidiary.
</FN>
</TABLE>
