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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
June 30, 2002 1-8319
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GATX Financial Corporation
Incorporated in the IRS Employer Identification No.
State of Delaware 94-1661392
500 West Monroe Street
Chicago, IL 60661-3676
(312) 621-6200
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 ____
Registrant had 1,041,250 shares of $1 par value common stock
outstanding (all owned by GATX Corporation) as of July 31, 2002.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
GROSS INCOME
Revenues $ 337.8 $ 430.6 $ 647.2 $ 794.7
Gain on extinguishment of debt .6 - 14.5 -
Share of affiliates' earnings 21.8 14.6 39.8 29.1
--------- --------- --------- ---------
TOTAL GROSS INCOME 360.2 445.2 701.5 823.8
OWNERSHIP COSTS
Depreciation and amortization 91.0 108.7 183.3 210.8
Interest, net 53.6 67.7 106.4 130.1
Operating lease expense 50.4 47.6 94.8 95.1
--------- --------- --------- ---------
TOTAL OWNERSHIP COSTS 195.0 224.0 384.5 436.0
OTHER COSTS AND EXPENSES
Operating expenses 59.1 61.0 104.7 124.1
Selling, general and administrative 43.9 62.7 84.3 116.1
Provision for possible losses 9.2 16.2 26.9 37.5
Asset impairment charges 3.8 30.6 6.4 30.6
Fair value adjustments for derivatives 2.4 (.7) 3.7 .4
--------- --------- --------- ---------
TOTAL OTHER COSTS AND EXPENSES 118.4 169.8 226.0 308.7
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 46.8 51.4 91.0 79.1
BEFORE INCOME TAXES
INCOME TAXES 16.6 19.9 33.0 31.4
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 30.2 31.5 58.0 47.7
DISCONTINUED OPERATIONS
Operating results, net of taxes - (.4) - 2.7
Gain on sale of portion of segment, net of taxes - - 6.2 171.4
--------- --------- --------- ---------
TOTAL DISCONTINUED OPERATIONS - (.4) 6.2 174.1
--------- --------- --------- ---------
NET INCOME $ 30.2 $ 31.1 $ 64.2 $ 221.8
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30 DECEMBER 31
2002 2001
----------- -----------
(Unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 348.3 $ 222.9
RESTRICTED CASH 132.5 124.4
RECEIVABLES
Rent and other receivables 196.1 139.1
Finance leases 767.5 869.7
Secured loans 498.5 557.4
Less - allowance for possible losses (86.1) (89.2)
----------- -----------
1,376.0 1,477.0
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities 2,863.7 2,958.2
Operating lease investments and other 2,097.6 1,776.3
Less - allowance for depreciation (2,042.6) (2,014.9)
----------- -----------
2,918.7 2,719.6
Progress payments for aircraft and
other equipment 157.4 260.0
----------- -----------
3,076.1 2,979.6
DUE FROM GATX CORPORATION 318.8 440.4
INVESTMENT IN AFFILIATED COMPANIES 948.4 953.0
GOODWILL, NET OF ACCUMULATED AMORTIZATION 74.0 63.3
OTHER ASSETS 354.4 263.3
----------- -----------
$ 6,628.5 $ 6,523.9
=========== ===========
2
JUNE 30 DECEMBER 31
2002 2001
----------- -----------
(Unaudited)
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDER'S
EQUITY
ACCOUNTS PAYABLE $ 311.4 $ 271.9
ACCRUED EXPENSES 9.1 56.2
DEBT
Short-term 41.8 328.5
Long-term:
Recourse 3,218.2 2,897.4
Nonrecourse 667.8 728.2
Capital lease obligations 148.1 163.0
----------- -----------
4,075.9 4,117.1
DEFERRED INCOME TAXES 443.4 389.5
OTHER DEFERRED ITEMS 255.0 241.1
----------- -----------
TOTAL LIABILITIES AND DEFERRED ITEMS 5,094.8 5,075.8
SHAREHOLDER'S EQUITY
Preferred stock 125.0 125.0
Common stock 1.1 1.1
Additional capital 521.5 476.4
Reinvested earnings 960.9 914.6
Accumulated other comprehensive loss (74.8) (69.0)
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 1,533.7 1,448.1
----------- -----------
$ 6,628.5 $ 6,523.9
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- ---------
OPERATING ACTIVITIES
Income from continuing operations $ 30.2 $ 31.5 $ 58.0 $ 47.7
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (17.6) (41.0) (27.4) (49.5)
Gains on sales of securities (.6) (12.3) (1.1) (27.6)
Depreciation and amortization 91.0 108.7 183.3 210.8
Provision for possible losses 9.2 16.2 26.9 37.5
Asset impairment charges 3.8 30.6 6.4 30.6
Deferred income taxes 11.4 3.5 37.4 (32.7)
Gain on extinguishment of debt (.6) - (14.5) -
Payments related to litigation settlement - (2.4) - (96.4)
Other, including working capital (5.9) 13.5 (116.5) 62.5
------- ------- ------- ---------
Net cash provided by continuing operations 120.9 148.3 152.5 182.9
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities (250.0) (198.4) (513.6) (503.4)
Secured loans extended (43.5) (122.9) (55.3) (203.4)
Investments in affiliated companies (12.3) (38.7) (26.6) (155.2)
Progress payments (28.4) (48.4) (58.9) (82.5)
Other investments (15.2) (8.2) (16.6) (112.3)
------- ------- ------- ------------
Portfolio investments and capital additions (349.4) (416.6) (671.0) (1,056.8)
Portfolio proceeds 209.8 277.4 480.6 525.8
Proceeds from other asset sales 2.2 191.4 98.5 196.4
---------- ------- ------- ---------
Net cash (used in) provided by investing activities of (137.4) 52.2 (91.9) (334.6)
continuing
operations
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 578.0 329.1 905.0 391.1
Repayment of long-term debt (351.9) (347.9) (670.3) (652.0)
Net decrease in short-term debt (43.7) (417.2) (286.7) (372.6)
Net decrease in capital lease obligations (2.9) (3.1) (14.9) (11.3)
Equity contribution from GATX Corporation - - 45.0 50.0
Issuance of common stock and other 17.4 23.2 121.6 28.2
Cash dividends (10.0) (17.3) (17.9) (75.3)
------- ------- ------- ---------
Net cash provided by (used in) financing activities of 186.9 (433.2) 81.8 (641.9)
continuing operations
NET TRANSFERS FROM (TO) DISCONTINUED OPERATIONS 1.5 - (12.1) (6.1)
------- ------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM 171.9 (232.7) 130.3 (799.7)
CONTINUING OPERATIONS
PROCEEDS FROM SALE OF PORTION OF SEGMENT - 115.7 3.2 1,137.0
TAXES PAID ON GAIN FROM SALE OF SEGMENT - (148.2) - (148.2)
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS - - - (13.2)
------- -------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 171.9 $(265.2) $ 133.5 $ 175.9
======= ======= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET INCOME $ 30.2 $ 31.1 $ 64.2 $ 221.8
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment 7.0 20.8 (2.4) 10.2
Unrealized loss on securities, net of
reclassification adjustments (a) (.8) (6.7) (2.1) (20.4)
Unrealized (loss) gain on derivatives (9.1) (4.6) (1.3) .1
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME (2.9) 9.5 (5.8) (10.1)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 27.3 $ 40.6 $ 58.4 $ 211.7
=========== =========== =========== ===========
(a) Reclassification adjustments:
Unrealized (loss) gain on securities $ (.5) $ .8 $ (1.5) (3.6)
Less - reclassification adjustment
for gains realized included in
net income (.3) (7.5) (.6) (16.8)
----------- ----------- ----------- -----------
Unrealized loss on securities, net of
reclassification adjustments $ (.8) $ (6.7) $ (2.1) $ (20.4)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated balance sheet at December 31, 2001 has been derived from
the audited financial statements at that date. All other consolidated
financial statements are unaudited but include all adjustments,
consisting only of normal recurring items, which management considers
necessary for a fair statement of the consolidated statements of income,
balance sheets and cash flows for the respective periods. Operating
results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2002. For further information, refer to GATX Financial
Corporation's (GFC or the Company) annual report on Form 10-K for the
year ended December 31, 2001.
(2) On June 21, 2002, GATX Corporation (GATX or Parent Company) transferred
100% of the stock of American Steamship Company (ASC) to GFC. The
financial data of GFC has been restated for all periods presented to
reflect the inclusion of ASC's operations.
(3) Certain amounts in the 2001 financial statements have been reclassified
to conform to the current presentation.
(4) Discontinued operations - Operating results for GATX Terminals
Corporation are shown net of taxes of $0.9 million and $2.7 million,
respectively, for the three and six month periods ended June 30, 2001.
The 2002 gain on sale of a portion of segment represents the sale of
GFC's interest in a bulk-liquid storage facility located in Mexico and is
net of taxes of $3.0 million. The 2001 gain on sale of portion of segment
primarily reflects the sale of substantially all of the Company's
interest in GATX Terminals Corporation and its subsidiary companies and
is net of taxes of $199.8 million.
(5) GFC and its subsidiaries are engaged in various matters of litigation and
have a number of unresolved claims pending, including proceedings under
governmental laws and regulations related to environmental matters. While
the amounts claimed are substantial and the ultimate liability with
respect to such litigation and claims cannot be determined at this time,
it is the opinion of management that amounts, if any, required to be paid
by GFC and its subsidiaries in the discharge of such liabilities, are not
likely to be material to GFC's consolidated financial position or results
of operations.
(6) Effective January 1, 2002, GFC adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. Under these new rules, goodwill is
no longer amortized, but rather subject to an annual impairment test in
accordance with the Statements. During the second quarter of 2002, the
Company completed the first step of the goodwill impairment test related
to $74.0 million of recorded goodwill. Based on this review, the Company
has determined that the carrying value of its Polish railcar reporting
unit, Dyrekcja Eksploatacji Cystern (DEC) is in excess of its fair market
value at January 1, 2002. The Company is in the process of completing the
second step of the goodwill impairment test, used to measure the amount
of impairment loss, which it expects to complete in the third or fourth
quarter of 2002. As a result, the Company anticipates recording a
one-time, non-cash impairment charge for some portion of the $35.2
million of goodwill related to DEC in 2002. Such charge would be
non-operational in nature and would be reflected as a cumulative effect
of an accounting change in the consolidated statements of income.
6
Changes in the carrying amount of goodwill by segment during the first
six months of 2002 are as follows (in millions):
FINANCIAL GATX
SERVICES RAIL TOTAL
--------- --------- ---------
BALANCE AT DECEMBER 31, 2001 $ 21.4 $ 41.9 $ 63.3
Purchase accounting adjustments - 10.7 10.7
--------- --------- ---------
BALANCE AT JUNE 30, 2002 $ 21.4 $ 52.6 $ 74.0
========= ========= =========
Application of the non-amortization of goodwill provisions of the
Statement, including equity method goodwill, is expected to result in an
increase in net income from continuing operations of approximately $6.8
million for the full year 2002, compared to the full year 2001.
As required by SFAS No. 142, the results of operations for periods prior
to adoption have not been restated. Following is a reconciliation of net
income, as reported, to net income, as adjusted, for the three and
six month periods ended June 30, 2001, computed as if SFAS No. 142 had
been adopted effective January 1, 2001 (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
----------------- ----------------
NET INCOME, AS REPORTED $ 31.1 $ 221.8
Adjusted for:
Goodwill amortization, net of tax 1.3 2.1
Amortization of equity method
goodwill, net of tax 1.0 1.6
--------- -----------
NET INCOME, AS ADJUSTED $ 33.4 $ 225.5
========= ===========
(7) In the fourth quarter of 2001, GFC recorded a pre-tax charge of $10.9
million related to a reduction in workforce. This action was part of
GFC's initiative to reduce selling, general and administrative costs in
response to economic conditions and the divestiture of the ISG
operations. The reduction in workforce charge included involuntary
employee separation and benefit costs for 135 employees company wide, as
well as legal fees, occupancy and other costs. The employee groups
terminated included professional and administrative staff. At the end of
2001, the remaining accrual was $8.7 million.
As of June 30, 2002, all of the employee terminations were completed. The
amount of termination benefits paid in the first six months of 2002
totaled $3.4 million. Occupancy and other costs of $0.9 million were also
paid in the first half of 2002. Remaining cash payments of $4.4 million
will be funded from ongoing operations and are not expected to have a
material impact on GFC's liquidity position.
(8) Restricted cash of $132.5 million at June 30, 2002 is comprised of cash
and cash equivalents which are restricted as to withdrawal or usage.
GFC's restricted cash primarily includes an amount designated to fund the
construction of railcars for a customer, which was financed through
issuance of nonrecourse debt, and additional amounts maintained as
required by contract for three bankruptcy remote, special-purpose
corporations that are wholly owned by GFC.
(9) In the first quarter 2002, GFC entered into a railcar financing
transaction with GATX Rail Holdings I, Inc. a wholly-owned subsidiary of
GATX Corporation, for a $93.6 million sale-leaseback of covered hopper
cars and tank cars.
(10) Interest income on advances to GATX, which is included in gross income on
the income statement, was $13.0 million for the first six months of 2002,
compared to $15.5 million in the prior year period. These
7
advances have no fixed maturity date. Interest income on advances to
GATX was based on an interest rate that is adjusted annually and is
reflective of current market rates.
In the first quarter of 2002, the Parent Company issued convertible debt
securities for net proceeds of $169.5 million. The proceeds were
subsequently provided to GFC, $124.5 million as repayment of advances due
from GATX and $45.0 million as an equity contribution. GFC also provides
a guarantee on this $175.0 million of convertible debt issued by the
Parent Company.
(11) The financial data presented below conforms to SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and depicts the
profitability, identifiable assets and cash flow of each of GFC's
continuing business segments. Segment profitability is presented to
reflect operating results inclusive of allocated support expenses from
the Parent Company and applicable interest costs.
Previously, GFC provided its services and products through two operating
segments: GATX Capital and GATX Rail. In June 2002, the Parent Company
transferred to GFC, ownership in ASC, an operator of a fleet of
self-unloading vessels on the Great Lakes. The ASC operations were
combined with the former GATX Capital segment to comprise the Financial
Services segment. As a result, GFC now operates through the Financial
Services and GATX Rail segments.
In prior years, the former GATX Capital segment included a rail business
unit that leased freight cars and locomotives under operating and finance
leases. In 2001, GFC combined the rail business unit of GATX Capital with
GATX Rail, a full service lessor of railcars, primarily tank cars into
one rail segment. Financial data for Financial Services and GATX Rail has
been restated for all periods presented to reflect these changes in the
composition of each operating segment.
FINANCIAL GATX
(IN MILLIONS) SERVICES RAIL OTHER TOTAL
--------- --------- --------- ---------
THREE MONTHS ENDED JUNE 30, 2002
- --------------------------------
PROFITABILITY
Revenues $ 168.1 $ 163.5 $ 6.2 $ 337.8
Gain on extinguishment of debt .6 - - .6
Share of affiliates' earnings 19.5 2.3 - 21.8
--------- --------- --------- ---------
Total gross income 188.2 165.8 6.2 360.2
Depreciation 62.8 28.2 - 91.0
Interest, net 37.1 15.5 1.0 53.6
Operating lease expense 5.0 45.4 - 50.4
Income from continuing operations
before income taxes 24.3 17.6 4.9 46.8
Income from continuing operations 15.1 11.9 3.2 30.2
SELECTED BALANCE SHEET DATA AT JUNE 30, 2002
Investments in affiliated companies 746.3 202.1 - 948.4
Identifiable assets 3,814.0 2,197.5 617.0 6,628.5
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 29.7 90.7 0.5 120.9
Portfolio proceeds 209.8 - - 209.8
--------- --------- --------- ---------
Total cash provided 239.5 90.7 0.5 330.7
Portfolio investments and capital additions 323.6 25.8 - 349.4
- -------------------------------------------------------------------------------------------
8
FINANCIAL GATX
(IN MILLIONS) SERVICES RAIL OTHER TOTAL
--------- --------- --------- ---------
THREE MONTHS ENDED JUNE 30, 2001
- --------------------------------
PROFITABILITY
Revenues $ 250.8 $ 171.1 $ 8.7 $ 430.6
Share of affiliates' earnings 12.1 2.5 - 14.6
--------- --------- --------- ---------
Total gross income 262.9 173.6 8.7 445.2
Depreciation and amortization 79.5 29.2 - 108.7
Interest, net 49.9 18.3 (.5) 67.7
Operating lease expense 7.4 40.2 - 47.6
Income from continuing operations
before income taxes 22.3 20.3 8.8 51.4
Income from continuing operations 13.5 12.2 5.8 31.5
SELECTED BALANCE SHEET DATA DECEMBER 31, 2001
Investments in affiliated companies 752.4 200.6 - 953.0
Identifiable assets 3,701.6 2,280.9 541.4 6,523.9
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 73.1 73.2 2.0 148.3
Portfolio proceeds 281.8 (4.4) - 277.4
--------- --------- --------- ---------
Total cash provided 354.9 68.8 2.0 425.7
Portfolio investments and capital additions 336.4 80.2 - 416.6
- -------------------------------------------------------------------------------------------
9
FINANCIAL GATX
(IN MILLIONS) SERVICES RAIL OTHER TOTAL
--------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 2002
PROFITABILITY
Revenues $ 298.7 $ 336.3 $ 12.2 $ 647.2
Gain on extinguishment of debt 14.5 - - 14.5
Share of affiliates' earnings 33.8 6.0 - 39.8
--------- --------- ----------- ---------
Total gross income 347.0 342.3 12.2 701.5
Depreciation 126.5 56.8 - 183.3
Interest, net 72.2 32.0 2.2 106.4
Operating lease expense 5.7 89.1 - 94.8
Income from continuing operations
before income taxes 35.7 45.9 9.4 91.0
Income from continuing operations 22.1 29.8 6.1 58.0
SELECTED BALANCE SHEET DATA AT JUNE 30, 2002
Investments in affiliated companies 746.3 202.1 - 948.4
Identifiable assets 3,814.0 2,197.5 617.0 6,628.5
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) continuing
operations 42.7 120.2 (10.4) 152.5
Portfolio proceeds 475.1 5.5 - 480.6
--------- --------- --------- ---------
Total cash provided 517.8 125.7 (10.4) 633.1
Portfolio investments and capital additions 631.6 39.4 - 671.0
- -------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
- ------------------------------
PROFITABILITY
Revenues $ 444.2 $ 333.8 $ 16.7 $ 794.7
Share of affiliates' earnings 24.6 4.5 - 29.1
--------- --------- --------- ---------
Total gross income 468.8 338.3 16.7 823.8
Depreciation and amortization 153.3 57.5 - 210.8
Interest, net 99.9 36.3 (6.1) 130.1
Operating lease expense 15.7 79.4 - 95.1
Income from continuing operations
before income taxes 40.1 16.6 22.4 79.1
Income from continuing operations 24.2 8.9 14.6 47.7
SELECTED BALANCE SHEET DATA AT
DECEMBER 31, 2001
Investments in affiliated companies 752.4 200.6 - 953.0
Identifiable assets 3,701.6 2,280.9 541.4 6,523.9
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 74.9 100.9 7.1 182.9
Portfolio proceeds 500.1 25.7 - 525.8
--------- --------- --------- ---------
Total cash provided 575.0 126.6 7.1 708.7
Portfolio investments and capital additions 823.8 233.0 - 1,056.8
- -------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FIRST SIX MONTHS OF 2002
TO FIRST SIX MONTHS OF 2001
GATX Financial Corporation's (GFC or the Company) net income for the first six
months of 2002 was $64.2 million, a $157.6 million decrease from the $221.8
million reported for the same period in 2001. Comparisons between periods are
affected by gains on the sale of discontinued operations in both periods, and
various non-comparable items in 2001, primarily telecommunications (telecom)
related charges and costs associated with the closing of a railcar repair
facility in the first half of 2001. Excluding these non-comparable items, income
for the six-month period ended June 30, 2002 was $58.0 million compared to $92.2
million for the same period in 2001.
RESULTS OF CONTINUING OPERATIONS
GFC's gross income from continuing operations for the first six months of 2002
of $701.5 million was $122.3 million lower than the prior year primarily as a
result of a decrease in lease income and lower gains with respect to asset
remarketing and sales of securities. Income from continuing operations for the
first six months of 2002 was $58.0 million compared to $47.7 million in the
prior year period. The 2002 period was favorably impacted by reduced selling,
general and administrative (SG&A) as a result of a reduction in workforce
implemented last year, and lower operating costs, largely due to the costs
associated with the closure of a GATX Rail service facility recorded in the 2001
period. Also contributing to the increase in income from continuing operations
was a decrease in pre-tax asset impairment charges of $24.2 million compared to
the prior year period.
FINANCIAL SERVICES
Financial Services' gross income of $347.0 million included $14.5 million
attributable to a gain on extinguishment of debt, as discussed below. Excluding
this gain, gross income decreased $136.3 million from the prior year period
principally due to decreases in lease and interest income and lower gains with
respect to asset remarketing and sales of securities. Lease income of $204.6
million declined $72.6 million from the prior year period due to lower average
finance lease balances and lower technology operating lease assets combined with
lower lease rates. Interest income of $28.6 million decreased $8.8 million due
to lower average secured loan balances compared to the prior year period.
Financial Services continues to be negatively impacted by the current economic
environment and challenging market conditions. Air traffic has increased as the
industry recovers from the impact of September 11, 2001, however, competition in
the aircraft leasing industry has negatively affected lease rates as most
lessors have aggressively attempted to maintain high utilization. As a result,
lease rates remain under pressure. Currently, there are leases in place or
signed letters of intent with respect to all of the 16 new aircraft scheduled
for delivery in 2002. In addition, the Company has either signed leases or
signed letters of intent for all 2002 scheduled renewals for which the Company
has direct remarketing responsibility. Although air traffic has shown signs of
improvement since the end of 2001, the industry remains in a weakened condition.
GFC continues to closely monitor its air portfolio due to the greater potential
for credit losses and asset impairment in this environment.
Asset remarketing income includes gains from the sale of assets from Financial
Services' own portfolio as well as residual sharing fees from the sale of
managed assets. Asset remarketing income of $25.9 million decreased $37.1
million from the prior year period primarily due to decreased residual sharing
fees from managed portfolios, partially offset by an increase in technology
asset remarketing activity. The prior year period also included a gain of $25.4
million on the sale of manufacturing related equipment. Gains on the sale of
securities, which are derived from warrants received as part of financing
transactions with non-public companies, were $1.1 million, down significantly
from the $27.6 million recorded in the prior year. Decreases in gains from the
sale of securities are indicative of limited initial public offering activity
compared to 2001. Because the timing of such sales is dependent on changing
market conditions, gains from the sale of securities and asset remarketing
income do not occur evenly from period to period. In addition, based on current
valuations on early stage companies, it is
11
unlikely that gains from the sales of securities will approach 2001 levels in
the near future.
Share of affiliates' earnings of $33.8 million was $9.2 million higher than
2001. The increase is due primarily to higher income from certain specialty
finance affiliates and the absence of losses from telecom affiliates compared to
the prior year period.
Ownership costs of $204.4 million decreased $64.5 million compared to the prior
year. Depreciation expense of $126.5 million decreased $26.8 million from 2001,
reflecting lower average operating lease balances. Operating lease expense of
$5.7 million decreased $10.0 million from the prior year period due to the
reversal of a previously recorded sublease liability and the completion of
leases in 2001. Interest expense of $72.2 million decreased $27.7 million from
2001 due to lower borrowing rates and average debt balances. SG&A expenses of
$46.8 million decreased $24.3 million compared to the prior year due to lower
human resource and administrative expenses as a result of the fourth quarter
2001 reduction in workforce and reduced legal expenses attributable to
litigation in 2001.
The provision for possible losses is Financial Services' estimate of possible
credit losses inherent in the investment portfolio based on a review of credit,
collateral and market risks. The provision for possible losses of $26.3 million
decreased $10.9 million from the prior year. Approximately $10.0 million of the
current year provision and $2.3 million of the asset impairment loss discussed
below were related to one technology leasing investment, which were largely
offset by the gain on extinguishment of nonrecourse debt associated with the
same investment. Financial Services frequently utilizes nonrecourse debt to
finance its technology portfolio. The prior year provision for possible losses
reflected the deterioration of certain steel, venture and telecom investments.
Asset impairment charges of $6.4 million decreased $24.2 million from the prior
year, which included charges of $30.4 million related to deterioration in the
telecom portfolio.
The allowance for possible losses decreased $8.5 million from December 31, 2001
to $78.0 million and was approximately 6.1% of reservable assets, up from 6.0%
at year end. Reservable assets are defined as rent receivables, direct financing
leases, leveraged leases and secured loans. Net charge-offs of reservable assets
totaled $34.7 million for the six-month period primarily related to venture and
technology investments, including $12.0 million related to the technology
investment discussed above.
Financial Services previously provided financing to start-up telecom service
providers as an activity in its Venture Finance business unit. Venture Finance
has discontinued this financing activity and its remaining exposure was $10.8
million, or approximately 0.3% of Financial Services' total assets at June 30,
2002. Separately, Financial Services also leases various types of equipment to
non-start up telecom service providers in its Technology business unit.
Non-performing assets, excluding assets within joint ventures, of $111.4 million
increased $15.0 million from year end primarily due to the placement of one
airline credit of $24.9 million on non-accrual, partially offset by specialty
and air investments becoming current, and charge-offs of technology and venture
investments.
Net income of $22.1 million decreased $2.1 million from last year principally as
a result of the decline in lease income, asset remarketing income, and gain on
sale of securities from the 2001 period, partially offset by lower ownership
costs and SG&A expenses and the absence of losses related to telecom
investments.
12
GATX RAIL (RAIL)
Rail's gross income of $342.3 million for the first six months of 2002 increased
$4.0 million over the prior year period. Rental revenue of $311.9 million was
flat with the prior year period. In March 2001, Rail acquired Dyrekcja
Eksploatacji Cystern (DEC), Poland's national tank car fleet. Excluding DEC,
rental revenue of $296.7 million was down $6.3 million compared to last year due
to a soft rail market. This factor, coupled with aggressive competition,
increased railroad efficiency and railcar surpluses, have resulted in continued
softness in demand and pressure on lease rates. Asset remarketing income of $3.9
million increased $2.2 million from the prior year period primarily due to the
sale of a portfolio of residual sharing investments in the first quarter of
2002. Share of affiliates' earnings of $6.0 million increased $1.5 million
primarily due to increased earnings at the European affiliates in 2002.
Rail's North American fleet totaled 132,000 cars at the end of the second
quarter compared to 131,000 at the end of the prior year period. In May 2002,
Rail acquired 2,700 railcars in Mexico. Approximately 121,000 railcars were on
lease throughout North America at the end of the second quarter, comparable with
the active fleet in the prior year period. Rail's North American utilization was
92% at June 30, 2002. The Railworthiness Directive (Directive) issued by the
Federal Railroad Administration (FRA), discussed below, impacted utilization as
existing idle cars were deployed to replace affected cars and cars taken out of
service were scrapped. Absent this activity, utilization would have been 91% at
June 30, 2002. Railcar demand remains soft, negatively impacting utilization;
this condition is expected to continue through the remainder of 2002. In
response to current rail market conditions, Rail has retired excess cars and
limited orders of new railcars to specific customer lease commitments.
Ownership costs of $177.9 million increased $4.7 million from last year
primarily due to the acquisition of DEC.
Operating costs were $81.2 million, down $21.7 million from the prior year.
Excluding DEC, operating costs were $73.1 million, a decrease of $26.0 million
from the prior year. In the prior year period, Rail's operating costs included
$24.5 million of non-comparable items. Of this amount, $19.7 million related to
the closing of its East Chicago repair facility. The 2001 period also included
higher maintenance costs due to increased use of third party contract repair
shops as a result of a labor dispute at Rail's domestic service centers. The
labor dispute was resolved in the first quarter of 2001. SG&A expenses decreased
$7.9 million from the prior year period to $36.9 million primarily due to the
fourth quarter 2001 reduction in workforce.
Rail is continuing to address the Directive issued by the FRA in April 2002
relating to a certain class of tank cars that were built or modified with
reinforcing bars by GATX Rail prior to 1974. In its Directive, the FRA indicated
that cars within this class must be inspected, and repaired if necessary,
according to an FRA approved maintenance plan. Approximately 4,200 of Rail's
owned railcars with a net book value of approximately $4.0 million, or 3% of
Rail's North American fleet, are affected by this Directive. The impact of this
Directive on Rail's operating results for the first six months of 2002 was
approximately $0.9 million and includes lost revenue, inspection, cleaning and
replacement car costs, partially offset by scrapping gains. The 2002 full year
impact is expected to be between $5.0 million to $7.0 million after tax.
Rail's net income of $29.8 million was $20.9 million higher than the prior year
primarily due to the absence of 2001 closure costs related to its East Chicago
repair facility. Excluding non-comparable items, net income increased $4.7
million primarily due to higher asset remarketing income and lower SG&A.
OTHER
Other net income was $6.1 million for the first six months of 2002 compared to
$14.6 million for the prior year period, with the variance primarily due to an
increase in net interest expense. The 2001 period included the utilization of
the proceeds from the sale of GATX Terminals Corporation.
13
RESULTS OF DISCONTINUED OPERATIONS
In the first quarter 2002, GFC completed the divestiture of GATX Terminals
Corporation (Terminals). Financial data for Terminals has been segregated as
discontinued operations for all periods presented.
In the first quarter of 2002, GFC sold its interest in a bulk-liquid storage
facility located in Mexico and recognized a $6.2 million after-tax gain. In the
first quarter of 2001, GFC sold the majority of Terminals' operations and
recognized a net after-tax gain of $171.4 million.
Operating results for the first six months of 2002 were zero, down $2.7 million
from the prior year period. Comparisons between periods were affected by the
timing of the sale of GATX Terminals' assets.
CASH FLOW AND LIQUIDITY
Net cash provided by operating activities of continuing operations for the first
six months of 2002 was $152.5 million, or $30.4 million less than the prior year
period reflecting lower operating results at both Financial Services and Rail.
The 2002 period was impacted by the deferral of tax benefits generated by the
current year tax net operating loss. The prior year period included payments in
the amount of $96.4 million related to a litigation settlement.
Portfolio proceeds were $480.6 million, down $45.2 million from $525.8 million
in the 2001 period and included an increase in finance lease and loan principal
payments received, partially offset by lower proceeds from disposals of leased
equipment, stock sales and cash distributions from joint venture investments.
Portfolio investments and capital additions for the first six months of 2002
totaled $671.0 million, a decrease of $385.8 million from the first six months
of 2001. Portfolio investments and capital additions at Financial Services of
$631.6 million were $192.2 million lower than the prior year period, primarily
due to lower volume in technology and venture investments, partially offset by
higher air investments. In the first quarter of 2001, Financial Services
acquired a portfolio of technology leases from El Camino Resources for $129.8
million (net of the assumption of $255.6 million of nonrecourse debt). Rail
invested $39.4 million in the first six months of 2002, a decrease of $193.6
million from the prior year. Current year investments include a fleet
acquisition of 2,700 railcars in Mexico. The prior year period included
approximately $95.8 million for the acquisition of DEC. Indicative of current
market conditions, Rail's capital spending for its railcar fleet was $97.8
million lower than the prior year period. Railcar additions are not anticipated
to exceed prior year activity.
In the current six-month period, GFC repaid $670.3 million and issued $905.0
million of long-term debt. Significant financings in the first half of 2002
included the issuance of $250.0 million of senior unsecured term notes, $174.9
million of U.S. Export-Import Bank aircraft financing, a $142.2 million aircraft
warehouse facility, $138.1 million of European Credit Agency aircraft financing
and a $75.0 million aircraft bridge loan which has been repaid. Debt issuance
costs related to 2002 financings were approximately $13.7 million. GFC also
provides a guarantee on the $175.0 million of convertible debt issued by the
parent company in the first quarter of 2002.
GFC funds asset growth and meets debt and lease obligations through cash flow
from operations, portfolio proceeds (including proceeds from asset sales),
uncommitted money market lines, committed revolving credit facilities, the
issuance of unsecured debt, and a variety of secured borrowings. GFC utilizes
both the domestic and international bank and capital markets. The availability
of these funding options may be adversely impacted by certain factors. Access to
capital markets at competitive rates is partly dependent on GFC's credit rating
as determined by rating agencies such as Standard & Poor's (S&P) and Moody's
Investors Service (Moody's).
On March 13, 2002, Moody's downgraded GFC's long-term unsecured debt to Baa3
from Baa2 and GFC's commercial paper to Prime-3 from Prime-2. Moody's currently
maintains a stable outlook on GFC's ratings. On March 14, 2002, S&P downgraded
GFC's long-term unsecured debt from BBB+ to BBB and GFC's commercial paper from
A-2 to A-3. S&P also placed GFC's long-term unsecured debt on credit watch with
negative
14
implications. In May 2002, S&P removed GFC from credit watch but maintained the
negative outlook. Due to these rating agency actions, GFC's access to the
commercial paper market has been seriously constrained and GFC may have more
difficulty accessing the long-term capital market on a cost efficient basis. A
continued weak economic environment could decrease demand for GFC's services,
which could impact the Company's ability to generate cash flow from operations
and portfolio proceeds.
As of June 30, 2002, GFC had revolving credit facilities totaling $775.0
million. GFC's credit facilities included two agreements for $350.0 million and
$283.3 million, expiring in 2003 and 2004, respectively, and a 364-day agreement
for $141.7 million, originally scheduled to expire in June, which was extended.
The 364-day facility was subsequently replaced in July with a three-year credit
facility for $145.0 million, which is intended to be utilized by GFC for
short-term funding requirements. At June 30, 2002, all credit facilities were
unused and available. The revolving credit facilities contain various
restrictive covenants, including requirements to maintain a defined minimum net
worth and certain financial ratios. At June 30, 2002, GFC was in compliance with
all of the covenants and conditions of the credit agreements. GFC has a shelf
registration for $1.0 billion of debt securities of which $850.0 million had
been issued through June 30, 2002.
GFC's unconditional purchase obligations, consisting primarily of committed
aircraft deliveries, at June 30, 2002 were $734.8 million, scheduled as follows:
$272.3 million in the remainder of 2002, $273.6 million in 2003 and $188.9
million in 2004.
COMPARISON OF SECOND QUARTER 2002
TO SECOND QUARTER 2001
In the second quarter 2002, GFC reported net income of $30.2 million compared to
$31.1 million in the prior year period. For the second quarter 2002, continuing
operations generated income of $30.2 million compared to income from continuing
operations of $31.5 million in the prior year period.
FINANCIAL SERVICES
Financial Services' gross income of $188.2 million decreased $74.7 million from
the prior year period due to lower lease income, asset remarketing income, and
gains from the stock derived from warrants. Lease income of $105.9 million was
down $34.5 million primarily due to lower average finance lease balances and
lower technology operating lease assets combined with lower lease rates. Asset
remarketing income of $18.3 million was lower than the prior year period by
$30.9 million. Gains from the sale of stock were $0.6 million, down from $12.3
million in the prior year period.
Share of affiliates' earnings of $19.5 million increased $7.4 million from last
year primarily due to the absence of losses from telecom joint ventures. Prior
period earnings from telecom affiliates were negatively impacted by $8.1
million, primarily comprised of provision for possible losses and asset
impairment charges.
Ownership costs of $104.9 million decreased $31.9 million compared to the prior
year period due to lower depreciation and interest expense. Depreciation and
amortization expense of $62.8 million decreased $16.7 million from 2001
reflecting the lower level of investment in technology operating lease assets.
SG&A expense decreased $13.7 million over the prior year due to lower human
resource and administrative expenses as a result of the fourth quarter 2001
reduction in workforce and reduced legal expenses attributable to litigation in
2001.
15
The provision for possible losses of $8.9 million decreased $7.1 million from
2001. The prior year quarter reflected the deterioration of certain venture and
telecom investments. Net charge-offs of reservable assets totaled $15.1 million
for the current three-month period and included write-offs of venture and
technology investments.
Net income for the current three-month period was $15.1 million, compared to
$13.5 million in the prior year period. The increase from last year was
principally the result of a decrease to the loss provision and asset impairment
charges, partially offset by lower lease income, asset remarketing income, and
gains from the sale of stock derived from warrants.
GATX RAIL
Rail's gross income of $165.8 million for the second quarter of 2002 was $7.8
million lower than the prior year. Rental revenue of $155.0 million was down
$5.1 million from the prior year period. The decrease in rental revenue is a
consequence of on ongoing unfavorable market conditions, which in turn resulted
in lower average rental rates. Share of affiliates' earnings of $2.3 million
decreased $0.2 million from the prior year period.
Ownership costs of $89.0 million were $1.3 million higher than the prior year.
Rail's operating costs of $40.4 million were down $1.2 million from the prior
period. SG&A expenses of $18.6 million decreased $5.1 million from the prior
year period due to the fourth quarter 2001 reduction in workforce.
Rail's net income of $11.9 million in the second quarter of 2002 was impacted by
the FRA Directive by $0.9 million and includes lost revenue, inspection,
cleaning and replacement car costs, partially offset by scrapping gains. Net
income for the current three-month period was down $0.3 million from the prior
year period.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, GFC adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. Under these new rules, goodwill is no longer amortized,
but rather subject to an annual impairment test in accordance with the
Statements. During the second quarter of 2002, the Company completed the first
step of the goodwill impairment test related to $74.0 million of recorded
goodwill. Based on this review, the Company has determined that the carrying
value of a reporting unit, its Polish railcar subsidiary, DEC, is in excess of
its fair market value at January 1, 2002. The Company is in the process of
completing the second step of the goodwill impairment test used to measure the
amount of impairment loss, which it expects to complete in the third or fourth
quarter of 2002. As a result, the Company anticipates recording a one-time,
non-cash impairment charge for some portion, yet to be determined, of the $35.2
million of goodwill related to DEC in 2002. Such charge would be non-operational
in nature and would be reflected as a cumulative effect of an accounting change
in the consolidated statements of income. Application of the non-amortization
provisions of the Statement is expected to result in an increase in net income
from continuing operations of approximately $6.8 million for the full year 2002,
compared to the full year 2001.
Also effective January 1, 2002, GFC adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. Although the new rules retain many of the fundamental
recognition and measurement provisions of SFAS No. 121, they modify the criteria
required to classify an asset as held-for-sale. SFAS No. 144 also supersedes
certain provisions of APB Opinion 30 with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be separately reported in discontinued
operations during the period in which the losses are incurred (rather than as of
the measurement date as presently required by APB 30). GFC does not expect this
Statement to have a material impact on GFC's consolidated financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
effective for fiscal years beginning after May 15, 2002, with early application
encouraged. The provisions of this Statement update, clarify and simplify
certain existing
16
accounting pronouncements. For the period ended June 30, 2002, GFC applied the
provisions of SFAS No. 145. SFAS No. 145 rescinds SFAS No. 4, which previously
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effects. In accordance with the Statement, GFC's gain on extinguishment of
nonrecourse debt of $14.5 million recognized in the six month period ended June
30, 2002, is not considered an extraordinary item, and was therefore included in
results of operations.
FORWARD LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis may constitute
forward-looking statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. These statements are
identified by words such as "anticipate," "believe," "estimate," "expects,"
"intend," "predict," or "project" and similar expressions. This information may
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. Risks
and uncertainties include, but are not limited to, general economic conditions;
aircraft and railcar lease rates and utilization levels; conditions in the
capital markets and the potential for a downgrade in our credit rating, either
of which could have an effect on our borrowing costs or our ability to access
the markets for commercial paper or secured and unsecured debt; dynamics
affecting customers within the chemical, petroleum and food industries;
unanticipated costs or issues arising from the Federal Railroad Administration's
Railworthiness Directive HM-04 or subsequent regulatory rulings that impact the
economic value of assets; competitors in the rail and air markets who may have
access to capital at lower costs than GFC; additional potential write-downs
and/or provisions within GFC's portfolio; impaired asset charges, including
goodwill as a result of implementing SFAS 142; and general market conditions in
the rail, air, technology, venture, and other large-ticket industries.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
GFC and its subsidiaries are engaged in various matters of litigation and have a
number of unresolved claims pending, including proceedings under governmental
laws and regulations related to environmental matters. While the amounts claimed
are substantial and the ultimate liability with respect to such litigation and
claims cannot be determined at this time, it is the opinion of management that
amounts, if any, required to be paid by GFC and its subsidiaries in the
discharge of such liabilities are not likely to be material to GFC's
consolidated financial position or results of operations.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Reference is made to the exhibit index which is included herewith and
is incorporated by reference hereto.
(b) Reports on Form 8-K:
None.
SIGNATURE
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.
GATX FINANCIAL CORPORATION
(Registrant)
/s/ Brian A. Kenney
--------------------------
Brian A. Kenney
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: August 14, 2002
EXHIBIT LISTING
The following exhibits are filed as part of this quarterly report:
Exhibit
12. Statement regarding computation of earnings to fixed charges
99.1 Certification Pursuant to 18 U.S.C. Section 1350 (CEO Certification)
99.2 Certification Pursuant to 18 U.S.C. Section 1350 (CFO Certification)
18