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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-8319
--------------------------------
GATX Financial Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 94-1661392
(State of incorporation) (I.R.S. Employee Identification No.)
500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
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 Exchange Act) Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,041,250 shares of $1 par
value common stock were outstanding (all owned by GATX Corporation) as of
July 31, 2003.
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INDEX TO GATX FINANCIAL CORPORATION
FORM 10-Q - JUNE 30, 2003
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income.......................................................1
Consolidated Balance Sheets.............................................................2
Consolidated Statements of Cash Flows...................................................4
Consolidated Statements of Comprehensive Income.........................................5
Notes to the Consolidated Financial Statements..........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................11
Comparison of First Six Months of 2003 to First Six Months of 2002.....................11
Cash Flow and Liquidity................................................................14
Comparison of Second Quarter 2003 to Second Quarter 2002...............................16
New Accounting Pronouncements..........................................................17
Forward Looking Statements.............................................................17
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................18
Item 4. Controls and Procedures...................................................................18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................19
SIGNATURE..............................................................................................19
EXHIBIT INDEX..........................................................................................20
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
------------------------------ -----------------------------
2003 2002 2003 2002
------------ ------------- ----------- ------------
GROSS INCOME
Lease income $ 238.7 $ 260.9 $ 478.4 $ 516.5
Marine operating revenue 25.5 22.8 29.7 24.7
Interest income 12.2 13.2 21.8 28.6
Asset remarketing income 13.2 18.5 23.5 29.8
Gain on sale of securities .1 .6 .5 1.1
Fees 4.3 3.8 10.9 9.4
Other 26.2 18.3 51.6 36.3
-------- ------- -------- --------
Revenues 320.2 338.1 616.4 646.4
Gain on extinguishment of debt - .6 .7 14.5
Share of affiliates' earnings 22.4 21.8 40.9 39.8
-------- ------- -------- --------
TOTAL GROSS INCOME 342.6 360.5 658.0 700.7
OWNERSHIP COSTS
Depreciation 76.7 87.1 154.9 175.4
Interest, net 45.3 52.5 95.1 103.1
Operating lease expense 48.4 48.4 96.5 90.6
-------- ------- -------- --------
TOTAL OWNERSHIP COSTS 170.4 188.0 346.5 369.1
OTHER COSTS AND EXPENSES
Maintenance expense 41.7 37.1 82.0 74.9
Marine operating expenses 20.9 17.7 24.1 19.6
Other operating expenses 8.4 8.2 20.1 17.7
Selling, general and administrative 44.9 47.3 85.1 91.4
(Reversal) provision for possible losses (10.3) 9.2 8.4 26.9
Asset impairment charges 12.5 3.8 16.1 6.4
Fair value adjustments for derivatives .3 2.4 2.4 3.7
-------- ------- -------- --------
TOTAL OTHER COSTS AND EXPENSES 118.4 125.7 238.2 240.6
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 53.8 46.8 73.3 91.0
INCOME TAXES 19.8 16.6 26.8 33.0
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 34.0 30.2 46.5 58.0
DISCONTINUED OPERATIONS
Gain on sale of portion of segment, net of taxes - - - 6.2
-------- ------- -------- --------
TOTAL DISCONTINUED OPERATIONS - - - 6.2
-------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 34.0 30.2 46.5 64.2
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - (34.9)
-------- ------- -------- --------
NET INCOME $ 34.0 $ 30.2 $ 46.5 $ 29.3
======= ======= ======= =======
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
2003 2002
------------------ ------------------
(Unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 226.4 $ 230.7
RESTRICTED CASH 109.7 140.9
RECEIVABLES
Rent and other receivables 86.1 92.6
Finance leases 624.5 713.0
Loans 335.1 434.2
Less: allowance for possible losses (64.3) (77.2)
---------- ----------
981.4 1,162.6
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities 3,081.2 2,979.3
Operating lease investments and other 2,370.3 2,250.1
Less - allowance for depreciation (2,021.3) (2,001.2)
---------- ----------
3,430.2 3,228.2
Progress payments for aircraft and other equipment 57.8 140.9
---------- ----------
3,488.0 3,369.1
DUE FROM GATX CORPORATION 448.2 422.5
INVESTMENTS IN AFFILIATED COMPANIES 827.2 850.9
RECOVERABLE INCOME TAXES 35.6 86.1
GOODWILL, NET 62.5 62.5
OTHER INVESTMENTS 86.0 96.1
OTHER ASSETS 196.8 242.3
---------- ----------
$ 6,461.8 $ 6,663.7
========= =========
2
JUNE 30 DECEMBER 31
2003 2002
------------------ ------------------
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 331.9 $ 374.9
DEBT
Short-term 22.2 27.1
Long-term:
Recourse 3,117.0 3,216.5
Nonrecourse 481.8 594.6
Capital lease obligations 128.9 143.7
---------- ----------
3,749.9 3,981.9
DEFERRED INCOME TAXES 609.2 558.2
OTHER LIABILITIES 235.2 247.0
---------- ----------
TOTAL LIABILITIES 4,926.2 5,162.0
SHAREHOLDER'S EQUITY
Preferred stock 125.0 125.0
Common stock 1.0 1.0
Additional capital 521.5 521.5
Reinvested earnings 956.3 933.0
Accumulated other comprehensive loss (68.2) (78.8)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 1,535.6 1,501.7
---------- ----------
$ 6,461.8 $ 6,663.7
========= =========
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
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
OPERATING ACTIVITIES
Income from continuing operations, including accounting change $ 34.0 $ 30.2 $ 46.5 $ 23.1
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (11.9) (17.6) (20.8) (27.4)
Gains on sales of securities (.1) (.6) (.5) (1.1)
Depreciation 80.4 91.0 162.5 183.3
(Reversal) provision for possible losses (10.3) 9.2 8.4 26.9
Asset impairment charges 12.5 3.8 16.1 6.4
Deferred income taxes 29.6 26.1 51.7 37.4
Gain on extinguishment of debt - (.6) (.7) (14.5)
Share of affiliates' earnings, net of dividends (17.0) (11.3) (31.0) (24.0)
Cumulative effect of accounting change - - - 34.9
Federal tax refund 89.7 - 89.7 -
Other, including working capital (11.3) (10.2) (29.8) (61.8)
-------- -------- -------- ----------
Net cash provided by continuing operations 195.6 120.0 292.1 183.2
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities (173.2) (250.0) (339.1) (513.6)
Loans extended (8.7) (43.5) (37.7) (55.3)
Investments in affiliated companies (29.3) (12.3) (44.2) (26.6)
Progress payments (5.4) (28.4) (22.6) (58.9)
Other investments (1.2) (15.2) (24.2) (16.6)
-------- -------- -------- ----------
Portfolio investments and capital additions (217.8) (349.4) (467.8) (671.0)
Portfolio proceeds 162.5 210.7 384.8 449.9
Leveraged lease disposition, net (102.8) - (102.8) -
Proceeds from other asset sales 5.4 2.2 14.8 98.5
-------- -------- -------- ----------
Net cash used in investing activities of continuing
operations (152.7) (136.5) (171.0) (122.6)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 89.8 578.0 333.0 905.0
Repayment of long-term debt (136.4) (351.9) (434.4) (670.3)
Net increase (decrease) in short-term debt 7.1 (43.7) 8.5 (286.7)
Net repayments of capital lease obligations (3.4) (2.9) (14.8) (14.9)
Equity contribution from GATX Corporation - - - 45.0
Net decrease (increase) in amount due from GATX Corporation 24.7 17.4 (25.7) 121.6
Cash dividends paid to GATX Corporation (16.9) (10.0) (23.2) (17.9)
-------- -------- -------- ----------
Net cash (used in) provided by financing activities of (35.1) 186.9 (156.6) 81.8
continuing operations
NET TRANSFERS FROM (TO) DISCONTINUED OPERATIONS - 1.5 - (12.1)
-------- -------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS 7.8 171.9 (35.5) 130.3
PROCEEDS FROM SALE OF PORTION OF SEGMENT - - - 3.2
-------- -------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 7.8 $ 171.9 $ (35.5) $ 133.5
======= ========= ========= ==========
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
------------------------------- -----------------------------
2003 2002 2003 2002
--------------- ------------ -------------- ------------
NET INCOME $ 34.0 $ 30.2 $ 46.5 $ 29.3
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment 20.9 7.0 26.9 (2.4)
Unrealized gain (loss) on securities, net of
reclassification adjustments (A) 1.6 (.8) .2 (2.1)
Unrealized loss on derivatives (12.9) (9.1) (16.5) (1.3)
-------- -------- -------- -------
OTHER COMPREHENSIVE INCOME (LOSS) 9.6 (2.9) 10.6 (5.8)
-------- -------- -------- -------
COMPREHENSIVE INCOME $ 43.6 $ 27.3 $ 57.1 $ 23.5
======== ======== ======== ========
(A) Reclassification adjustments:
Unrealized gain (loss) on securities $ 1.7 $ (.5) $ .5 $ (1.5)
Less - reclassification adjustment for gains
realized included in net income (.1) (.3) (.3) (.6)
-------- -------- -------- -------
Unrealized gain (loss) on securities, net of
reclassification adjustments $ 1.6 $ (.8) $ .2 $ (2.1)
======== ========= ======== ========
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, 2002 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 results of operations,
financial position and cash flow for the respective periods. Operating
results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2003. 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, 2002.
(2) Certain amounts in the 2002 financial statements have been reclassified
to conform to the current presentation.
(3) Discontinued operations - The 2002 gain on sale of a portion of segment
represents the sale of GFC's interest in a bulk-storage facility located
in Mexico, and is net of taxes of $3.0 million. The facility was included
in the segment formerly known as GATX Terminals Corporation (Terminals).
(4) During the fourth quarter of 2002, GFC recorded a pre-tax charge of $16.9
million related to a reduction in workforce in 2002. The reduction was
part of GATX's announced intention to exit the venture business and
curtail investment in the specialty finance sector. The charge included
costs as well as headcount reductions related to an integration plan
implemented to rationalize the workforce and operations at Dyrekcja
Eksploatacji Cystern Sp. z.o.o. (DEC), GFC's Polish railcar subsidiary.
This charge included involuntary employee separation and benefit costs
for 170 employees company-wide, as well as legal fees, occupancy and
other costs. The employee groups terminated included professional and
administrative staff. As of June 30, 2003, 153 of the employee
terminations were completed. Employee terminations are expected to be
substantially completed by the end of 2003.
Following is the reserve activity for the quarter ending June 30, 2003:
Reserve balance at 3/31/03 $ 13.9
Benefits paid (8.1)
Occupancy and other costs paid (.8)
------
Reserve balance at 6/30/03 $ 5.0
======
During 2001, GFC recorded a pre-tax charge of $10.9 million related to a
reduction in workforce in 2001. This reduction was part of GFC's
initiative to reduce selling, general and administrative costs in
response to economic conditions and the divestiture of Terminals'
operations. This 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, and corporate personnel. As of
December 31, 2002, all of the employee terminations were completed.
Management expects the Company's reserve balance at June 30, 2003 related
to the reductions in workforce to be adequate.
(5) Investments in affiliated companies represent investments in and loans to
domestic and foreign companies and joint ventures that are in businesses
similar to those of GFC, such as commercial aircraft leasing, rail
equipment leasing, technology equipment leasing and other business
activities, including ventures that provide asset residual value
guarantees in both domestic and foreign markets.
6
For purposes of preparing the following information, GFC made certain
adjustments to the information provided by the joint ventures. Pre-tax
income was adjusted to reverse interest expense recognized by the joint
ventures on loans from GFC.
For all affiliated companies held at the end of the quarter, operating
results, as if GFC held 100 percent interest, were (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
Gross income $ 202.4 $ 219.2 $ 400.5 $ 429.1
Pre-tax income 32.3 46.3 70.1 91.4
(6) Restricted cash of $109.7 million at June 30, 2003 is comprised of cash
and cash equivalents which are restricted as to withdrawal or use. GFC's
restricted cash primarily relates to an amount designated as collateral
for a joint venture loan and additional amounts maintained as required by
contract for three bankruptcy remote, special-purpose corporations that
are wholly owned by GFC.
(7) Interest income on advances to GATX, which is included in gross income on
the income statement, was $6.6 million for the second quarter compared to
$6.5 million in the prior year quarter. For the first six months of 2003,
interest income was $15.1 million compared to $13.0 million in the prior
year period. These advances have no fixed maturity date. Interest income
on advances to GATX is based on an interest rate that is adjusted
annually and is reflective of current market rates.
(8) In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses
consolidation by a business of variable interest entities (VIE) in which
it is the primary beneficiary. FIN 46 applies immediately to VIE's
created or acquired after January 31, 2003. No VIE's were created or
obtained in the first six months of 2003. For other VIE's, FIN 46 applies
in the first quarter or interim period beginning after June 15, 2003. GFC
is in the process of completing an assessment of the impact of FIN 46.
Based on this review to date, GFC does not expect FIN 46 to have a
material impact on its financial statements.
(9) In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others. FIN 45 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, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur.
In connection with certain investments or transactions, GFC has entered
into various guarantees which could require performance in the event of
demands by third parties. Similar to GFC's balance sheet investments,
these guarantees expose GFC to credit and market risk; accordingly, GFC
evaluates commitment and other contingent obligations using the same
techniques used to evaluate funded transactions.
Lease and loan payment guarantees generally involve guaranteeing
repayment of the financing utilized to acquire assets being leased by an
affiliate to customers, and are in lieu of making direct equity
investments in the affiliate. GFC is not aware of any event of default
which would require it to satisfy
7
these guarantees, and expects the affiliates to generate sufficient cash
flow to satisfy their lease and loan obligations.
Asset residual value guarantees represent GFC's commitment to third
parties that an asset, or group of assets, will be worth a specified
amount at the end of the term of the lease to which the asset relates.
Revenue in the form of an initial fee and sharing in any proceeds
received upon disposition of assets in excess of the amount guaranteed is
earned for providing these asset value guarantees.
At June 30, 2003, the maximum potential amount of lease, loan or residual
value guarantees under which GFC or its subsidiaries could be required to
perform was $878.9 million, which includes $175.0 million related to
GFC's guarantee of the Parent Company's convertible debt. The related
carrying value of the guarantees on the balance sheet, including deferred
revenue primarily associated with residual value guarantees entered into
prior to the effective date of FIN 45, was $3.7 million. The expirations
of these guarantees range from 2003 to 2020. GFC's liability resulting
from the performance pursuant to the residual value guarantees may be
reduced by the value realized from the underlying asset or group of
assets. Based on known and expected market conditions, management does
not believe that the asset residual value guarantees will result in any
material adverse financial impact to GFC.
8
(10) 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 estimated applicable interest costs. Discontinued
operations and the cumulative effect of accounting change are not
included in the financial data presented below. GFC provides its services
and products through two operating segments: GATX Rail and Financial
Services.
GATX FINANCIAL
(IN MILLIONS) RAIL SERVICES OTHER TOTAL
----------- ----------- ------------ ------------
THREE MONTHS ENDED JUNE 30, 2003
PROFITABILITY
Revenues $ 174.7 $ 139.0 $ 6.5 $ 320.2
Share of affiliates' earnings 2.6 19.8 - 22.4
-------- --------- ---------- ----------
Total gross income 177.3 158.8 6.5 342.6
Depreciation 28.1 48.6 - 76.7
Interest, net 15.5 29.4 .4 45.3
Operating lease expense 46.0 2.4 - 48.4
Income before income taxes 20.0 28.1 5.7 53.8
Income 12.8 17.5 3.7 34.0
SELECTED BALANCE SHEET DATA AT JUNE 30, 2003
Investments in affiliated companies 137.9 689.3 - 827.2
Identifiable assets 2,198.8 3,653.1 609.9 6,461.8
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 54.4 146.2 (5.0) 195.6
Portfolio proceeds .4 162.1 - 162.5
-------- --------- ---------- ----------
Total cash provided (used) 54.8 308.3 (5.0) 358.1
Portfolio investments and capital additions 43.5 174.3 - 217.8
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
PROFITABILITY
Revenues $ 163.7 $ 168.1 $ 6.3 $ 338.1
Gain on extinguishment of debt - .6 - .6
Share of affiliates' earnings 2.3 19.5 - 21.8
-------- --------- ---------- ----------
Total gross income 166.0 188.2 6.3 360.5
Depreciation 25.5 61.6 - 87.1
Interest, net 14.4 37.1 1.0 52.5
Operating lease expense 45.1 3.3 - 48.4
Income before income taxes 17.6 24.3 4.9 46.8
Income 11.9 15.1 3.2 30.2
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - 850.9
Identifiable assets 2,289.9 3,811.9 561.9 6,663.7
ITEMS AFFECTING CASH FLOW
Net cash provided by operating activities 90.7 28.8 .5 120.0
Portfolio proceeds - 210.7 - 210.7
-------- --------- ---------- ----------
Total cash provided 90.7 239.5 .5 330.7
Portfolio investments and capital additions 25.8 323.6 - 349.4
- -------------------------------------------------------------------------------------------------------------------
9
GATX FINANCIAL
(IN MILLIONS) RAIL SERVICES OTHER TOTAL
----------- ----------- ------------ ----------
SIX MONTHS ENDED JUNE 30, 2003
PROFITABILITY
Revenues $ 345.6 $ 256.0 $ 14.8 $ 616.4
Gain on extinguishment of debt - .7 - .7
Share of affiliates' earnings 4.7 36.2 - 40.9
-------- --------- ---------- ----------
Total gross income 350.3 292.9 14.8 658.0
Depreciation 56.4 98.5 - 154.9
Interest, net 31.7 61.8 1.6 95.1
Operating lease expense 91.8 4.7 - 96.5
Income before income taxes 34.8 26.2 12.3 73.3
Income 22.2 16.3 8.0 46.5
SELECTED BALANCE SHEET DATA AT JUNE 30, 2003
Investments in affiliated companies 137.9 689.3 - 827.2
Identifiable assets 2,198.8 3,653.1 609.9 6,461.8
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 98.7 198.0 (4.6) 292.1
Portfolio proceeds .9 383.9 - 384.8
-------- --------- ---------- ----------
Total cash provided (used) 99.6 581.9 (4.6) 676.9
Portfolio investments and capital additions 92.4 375.4 - 467.8
- -----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
PROFITABILITY
Revenues $ 335.4 $ 298.7 $ 12.3 $ 646.4
Gain on extinguishment of debt - 14.5 - 14.5
Share of affiliates' earnings 6.0 33.8 - 39.8
-------- --------- ---------- ----------
Total gross income 341.4 347.0 12.3 700.7
Depreciation 51.3 124.1 - 175.4
Interest, net 28.7 72.2 2.2 103.1
Operating lease expense 88.7 1.9 - 90.6
Income before income taxes 45.9 35.7 9.4 91.0
Income 29.8 22.1 6.1 58.0
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - 850.9
Identifiable assets 2,289.9 3,811.9 561.9 6,663.7
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 120.2 73.4 (10.4) 183.2
Portfolio proceeds 5.5 444.4 - 449.9
-------- --------- ---------- ----------
Total cash provided (used) 125.7 517.8 (10.4) 633.1
Portfolio investments and capital additions 39.4 631.6 - 671.0
- -----------------------------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST SIX MONTHS OF 2003
TO FIRST SIX MONTHS OF 2002
GFC Corporation's (GFC or the Company) net income for the first six months of
2003 was $46.5 million, a $17.2 million increase from the $29.3 million reported
for the same period in 2002. Comparisons between periods are affected by various
items. Earnings for the first six months of 2002 included a $6.2 million
after-tax gain related to the sale of a portion of the discontinued Terminals
segment, and a $34.9 million charge related to the write-off of goodwill at the
Rail segment. In the first six months of 2003, GFC reported a net $6.0 million
after-tax loss provision related to the Air Canada bankruptcy, reflecting an
$11.1 million after-tax first quarter loss provision offset by the second
quarter $5.1 million after-tax recovery. Earnings for the first six months of
2003 also included a $2.7 million after-tax insurance recovery on previously
expensed litigation-related charges.
RESULTS OF CONTINUING OPERATIONS
GFC's gross income from continuing operations for the first six months of 2003
of $658.0 million was $42.7 million lower than the prior year period. Income
from continuing operations before cumulative effect of accounting change for the
first six months of 2003 was $46.5 million compared to $58.0 million in the
prior year period.
GATX RAIL (RAIL)
In December 2002, Rail acquired the remaining interests in KVG Kesselwagen
Vermietgesellschaft mbH and KVG Kesselwagen Vermietgesellschaft m.b.h.
(collectively KVG), a leading European railcar lessor. Prior to the December
acquisition, Rail held a 49.5% interest in KVG. As a result of the acquisition,
KVG's results are now included in Rail's consolidated financial results.
Rail's gross income of $350.3 million for the first six months of 2003 increased
$8.9 million over the prior year period. Excluding KVG, gross income of $327.7
million was $13.7 million lower than the prior year period.
Lease income of $315.7 million was $3.8 million higher than the prior year
period. Excluding KVG, lease income of $290.8 million was $21.1 million lower
than the prior year period. The North American rail market continues to be
negatively impacted by the economic downturn and aggressive competition
continues to negatively impact lease rates. However, Rail has experienced
improvement in renewals and assignments of railcars in the first half of 2003.
Rail's North American fleet totaled 105,100 cars at the end of the second
quarter compared to 110,500 at the end of the prior year period. Approximately
97,500 railcars were on lease throughout North America at the end of the second
quarter, compared to 100,400 a year ago and 97,200 at December 31, 2002. Rail's
North American utilization was 93% at June 30, 2003, compared to 91% at June 30,
2002 and 91% at December 31, 2002. The increase in utilization from year end was
due to both additional railcars on lease and the scrapping of railcars.
Asset remarketing income includes gains from the sale of assets from Rail's own
portfolio as well as residual sharing fees from the sale of managed assets.
Asset remarketing income of $4.6 million was comparable with the prior year
period. Asset remarketing income in 2003 includes a gain of $4.3 million
resulting from the disposition of a leveraged lease commitment on passenger rail
equipment. The gain is partially offset by certain costs, the net result of
which is an increase to net income of $1.0 million. Share of affiliates'
earnings of $4.7 million were $1.3 million lower than the prior year period.
Excluding KVG's earnings of $2.5 million in 2002, share of affiliates' earnings
increased $1.2 million over the prior year period. Domestic share of affiliates'
earnings include the reversal of a maintenance reserve of $.6 million in the
current year and a loss on a sale leaseback transaction of $.5 million in the
prior year period.
11
Ownership costs of $179.9 million were $11.2 million higher than the prior year
period. Excluding KVG, ownership costs of $169.4 million increased $.7 million,
driven primarily by higher depreciation and increased interest expense due to
lower capitalized interest and higher average debt balances, partially offset by
a decrease in operating lease expense due to lower variable rates on certain
leases in the 2003 period.
Maintenance expense increased $5.7 million from the prior year period to $80.2
million. Excluding KVG, maintenance expense of $76.3 million was up $1.8 million
from the prior year period due to an increase in the number of cars repaired, at
a higher cost per car, resulting from increased customer activity. Additionally,
certain railroad mandated repairs undertaken in 2003 contributed to the
increase. In the first quarter of 2003, the American Association of Railroads
(AAR) issued an early warning letter that required all owners of railcars in the
U.S. to inspect or replace certain bolsters manufactured by National Castings
Inc. from the mid to late 1990s. Rail owns approximately 3,200 railcars that
will be required to have the bolsters inspected or replaced by December 2003.
Approximately 60% of the affected railcars are on full service leases under
which Rail is responsible for the associated costs of inspection or replacement.
The remainder are on net leases, under which Rail expects the lessees to pay for
all or a portion of such costs. The increase in maintenance expense due to the
replacement of bolsters is $1.1 million. Management expects the cost of bolster
inspections and replacements to total up to $6.0 million pre-tax over the
2003-2004 period.
Selling, general and administrative (SG&A) expenses of $37.5 million were $.4
million lower than the prior year period. Excluding KVG, SG&A expenses of $32.5
million decreased $5.4 million due to lower incentive compensation expense,
timing, and cost savings.
Provision for possible losses was $.8 million lower than the prior year period
due to recoveries on previously written-off accounts.
In 2002, Rail recognized a cumulative effect of accounting change of $34.9
million. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
Rail completed a review of all recorded goodwill in 2002 and established fair
values using discounted cash flows. Based on this review, Rail recorded a
one-time, non-cash impairment charge related to DEC. The impairment charge was
due primarily to lower expectations of projected cash flows based on current
market conditions and a lower long-term growth rate projected for DEC.
Rail's net income of $22.2 million was $27.3 million higher than the prior year
period. Income before cumulative effect of accounting change of $22.2 million
was $7.6 million lower than the prior year period primarily due to fewer active
cars in the North American fleet combined with lower rates on renewals and
assignments.
FINANCIAL SERVICES
Financial Services is comprised of four business units: Air, Technology, Venture
Finance (Venture) and Specialty Finance (Specialty). In December 2002, GATX
announced its intention to sell or otherwise run-off Venture and curtail
investment at Specialty. During the second quarter of 2003, GATX determined that
Venture would not be sold. Venture represents $202.6 million of GFC's total
assets (including $2.0 million of off balance sheet assets) at June 30, 2003.
Specialty represents $871.4 million of GFC's total assets (including $18.2
million of off balance sheet assets) at June 30, 2003.
Financial Services continues to be negatively affected by the current economic
environment and challenging market conditions. In addition, despite showing
better operating performance than in the first quarter of 2003, volatility
continues in the airline industry, and GFC may experience unscheduled returns of
aircraft, lease restructurings and continued pressure on lease rates in its Air
business unit.
With respect to Air's delivery and renewal schedule, there are currently leases
in place for all of the six new aircraft scheduled for delivery in 2003.
Financial Services has eight aircraft leases scheduled for renewal in 2003, with
respect to which five leases are in place and one letter of intent has been
signed.
12
Financial Services' gross income of $292.9 million decreased $54.1 million from
the prior year period. The prior year period included $14.5 million attributable
to a gain on extinguishment of debt primarily associated with one Technology
investment, which was largely offset by a related loss provision and asset
impairment charge. Excluding gains on extinguishment of debt in both periods,
gross income decreased $40.3 million principally due to decreases in lease and
interest income and lower gains with respect to asset remarketing.
Lease income of $162.7 million declined $41.9 million from the prior year period
due to lower Technology and Specialty lease assets, slightly offset by an
increase in operating lease income from new aircraft deliveries at Air. Interest
income of $21.8 million decreased $6.8 million due to lower average loan
balances at Venture and Specialty compared to the prior year period, consistent
with GATX's plan to exit or curtail investment in these businesses.
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 $18.9 million decreased $7.0 million
from the prior year period primarily due to a decrease in remarketing activity
at Technology. Fee income of $9.1 million increased $1.2 million from the prior
year period due to a guarantee fee received at Specialty during the first
quarter of 2003. Other income of $13.3 million increased $7.4 million from the
prior year period due in part to the receipt of insurance proceeds of $4.5
million related to previously expensed litigation as well as higher foreign
currency translation gains which were largely offset in fair value adjustments
for derivatives.
Share of affiliates' earnings of $36.2 million was $2.4 million higher than
2002. The increase is due primarily to slightly higher income from certain Air,
Technology and Venture affiliates offset in part by lower income at Specialty
affiliates.
Ownership costs of $165.0 million decreased $33.2 million compared to the prior
year. Depreciation expense of $98.5 million decreased $25.6 million from 2002,
reflecting lower average operating lease assets at Technology, partially offset
by higher depreciation expense at Air due to new aircraft deliveries. Operating
lease expense of $4.7 million was $2.8 million higher than the prior year
period, which included the reversal of a previously recorded sublease liability.
Interest expense of $61.8 million decreased $10.4 million from 2002 due to a
decrease in average debt balances and lower interest rates.
SG&A expenses of $46.7 million decreased $6.2 million compared to the prior year
due to lower human resource and administrative expenses as a result of the
fourth quarter 2002 reduction in workforce, lower incentive compensation expense
and reduced commission expense at Technology due to a decrease in asset
remarketing activity.
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 $8.6 million
decreased $17.7 million from the prior year period. A provision of $18.1 million
was made in the first quarter of 2003 to fully reserve for an unsecured Air
Canada note as a result of the bankruptcy filing. During the second quarter of
2003 the Air Canada note was sold and $8.5 million of the provision was
reversed. The prior year period included a $10.0 million provision related to
one Technology leasing investment which was largely offset by a $13.1 million
gain on extinguishment of nonrecourse debt related to the same investment. Asset
impairment charges of $16.1 million increased $9.7 million from the prior year
and primarily relate to Specialty assets.
The allowance for possible losses of $55.4 million decreased $13.2 million from
December 31, 2002 and was approximately 6.1% of reservable assets, moderately
lower than 6.3% at year end. Reservable assets are defined as gross receivables,
finance leases and loans. Net charge-offs of reservable assets totaled $23.6
million for the
13
current six-month period and included a $12.8 million write-off related to the
Air Canada note as well as write-offs related to Venture and Technology
investments.
Non-performing assets of $144.2 million increased $49.3 million from year end
primarily due to higher Air investments on non-accrual status.
Net income of $16.3 million decreased $5.8 million from last year. The
combination of provision for losses and asset impairment charges (net of gains
on extinguishment of debt), had a $3.5 million unfavorable income impact
compared to the prior year and was principally driven by the net loss provision
related to the Air Canada note. The addition of lower yielding aircraft and
technology assets also contributed to the decrease in net income, partially
offset by lower SG&A expenses and a $2.7 million after-tax insurance recovery of
litigation expenses.
OTHER
Other net income was $8.0 million for the first six months of 2003 compared to
$6.1 million for the prior year period. The increase in net income was primarily
due to lower interest expense.
TAXES
The Parent Company reported a net operating loss on its 2002 U.S. consolidated
income tax return and anticipates a loss on its 2003 return, largely due to
bonus tax depreciation on new assets. In accordance with IRS rules, and subject
to certain limitations, these losses may be carried back to offset taxable
income in prior years, resulting in tax refunds. GFC's recoverable income taxes
as of June 30, 2003 were $35.6 million.
RESULTS OF DISCONTINUED OPERATIONS
As of March 31, 2002, GFC completed the divestiture of 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 in Mexico and recognized a $6.2 million after-tax gain.
CASH FLOW AND LIQUIDITY
GFC generates a significant amount of cash from its operating activities and
proceeds from its investment portfolio, which is used to service debt, pay
dividends, and fund portfolio investments and capital additions. 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.
Net cash provided by operating activities of continuing operations for the first
six months of 2003 was $292.1 million, $108.9 million higher than the prior year
period. The 2003 period includes a federal income tax refund allocable to GFC of
$89.7 million. Comparison of cash from operations between periods is also
affected by other changes in working capital, including timing of lease
payments.
Portfolio proceeds of $384.8 million were down $65.1 million from $449.9 million
in the 2002 period due to lower proceeds from disposals of leased equipment and
a decrease in finance lease payments received, partially offset by increases in
cash distributions from joint venture investments and loan principal payments
received.
Portfolio investments and capital additions for the first six months of 2003
totaled $467.8 million, a decrease of $203.2 million from the first six months
of 2002. Portfolio investments and capital additions at Financial Services of
$375.4 million were $256.2 million lower than the prior year period, primarily
due to fewer aircraft progress payments and deliveries, lower volume at
Technology and curtailed investment at Specialty and Venture. Rail invested
$92.4 million in the first six months of 2003, an increase of $53.0 million from
the prior year. The increase was primarily attributable to Rail's December 2002
acquisition of the remaining interest in KVG, a portion of which was funded in
2003, as well as additional KVG railcar investments. Future portfolio
investments
14
and capital additions (excluding contractual commitments) will depend on market
conditions and opportunities to acquire desirable assets.
Net leveraged lease disposition of $102.8 million represents asset remarketing
proceeds of $5.6 million from the sale of a commitment to lease passenger rail
equipment, offset by restricted cash transferred to the acquirer. Related
balances also transferred include non-recourse debt, progress payments, and
other assets.
GFC's operating subsidiaries fund investments and meet debt, lease and dividend
obligations through cash flow from operations, portfolio proceeds (including
proceeds from asset sales), commercial paper borrowings, 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.
In the current six-month period GFC issued $333.0 million and repaid $434.4
million of long-term debt. Significant financings in the first half of 2003
included $103.6 million of aircraft financing guaranteed by the European Export
Credit Agencies, $100.0 million from a commercial paper conduit securitization
facility, $79.8 million of technology nonrecourse financing and $37.1 million of
aircraft financing guaranteed by the U.S. Export-Import Bank.
GFC has revolving credit facilities totaling $539.3 million, consisting of three
agreements for $254.3 million, $145.0 million and $140.0 million, expiring in
2004, 2005 and 2006, respectively. In June 2003, GFC replaced an expiring $350.0
million facility with the $140.0 million credit facility. The new agreement is a
three-year unsecured revolving credit facility maturing in June 2006, and will
be used for short-term funding requirements. At June 30, 2003, availability
under all credit facilities was $513.9 million, with $25.4 million of letters of
credit backed by the most recent facility. The revolving credit facilities
contain various restrictive covenants, including an asset coverage test,
requirements to maintain a defined minimum net worth and a fixed charges
coverage ratio. At June 30, 2003, GFC was in compliance with the covenants and
conditions of the credit facilities.
In the second quarter 2003, GFC registered $1.0 billion of unsecured debt
securities and pass through certificates under a shelf registration statement
filed with the Securities and Exchange Commission. Pass through certificates are
securities that evidence an ownership interest in a pass through trust. The
property held by each pass through trust may include promissory notes secured by
railcars or aircraft that are owned or leased by GFC. No amounts were issued
pursuant to the shelf registration as of June 30, 2003.
The availability of these funding options may be adversely impacted by certain
factors. Access to capital markets at competitive rates is 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 April 15, 2003, S&P downgraded GFC's
long-term unsecured debt from BBB to BBB- and removed its ratings from credit
watch. GFC's current outlook from S&P is stable. On March 27, 2003, Moody's
affirmed the credit rating on GFC's long-term unsecured debt at Baa3 but revised
the rating outlook to negative from stable. GFC's existing credit rating has
increased the cost of borrowing from prior years and constrained GFC's access to
the commercial paper market. As a result, GFC may have more difficulty accessing
the long-term capital market on a cost efficient basis.
Unconditional purchase obligations of GFC's subsidiaries consist primarily of
committed aircraft deliveries and railcar orders. Unconditional purchase
obligations at June 30, 2003 were $800.8 million, comprised as follows: $206.9
million in the remainder of 2003, $392.4 million in 2004-2005, $181.4 million in
2006-2007, and $20.1 million thereafter.
15
COMPARISON OF SECOND QUARTER 2003
TO SECOND QUARTER 2002
In the second quarter 2003, GFC reported net income of $34.0 million compared to
$30.2 million in the prior year period.
GATX RAIL
Rail's gross income of $177.3 million for the second quarter of 2003 increased
$11.2 million over the prior year period. Excluding KVG, gross income was $1.3
million lower than the prior year period. Fewer active cars in the North
American fleet combined with lower rates on renewals and assignments contributed
to an $11.1 million decline in lease income.
Asset remarketing income of $4.5 million was $4.3 million higher than the prior
year period. Second quarter 2003 asset remarketing income includes a $4.3
million gain on the disposition of a leveraged lease commitment on passenger
rail equipment. The gain is partially offset by certain costs, the net result of
which is an increase to net income of $1.9 million. Share of affiliates'
earnings of $2.6 million were $.3 million higher than the prior year period.
Excluding KVG's earnings of $1.3 million in 2002, share of affiliates' earnings
were $1.6 million higher than the prior year period. The increase was due to
improved earnings at domestic affiliates as well as AAE Cargo. Domestic share of
affiliates' earnings include the reversal of a maintenance reserve of $.6
million in the current year quarter and a loss on a sale leaseback transaction
of $.5 million in the prior year period.
Ownership costs of $89.6 million were $4.6 million higher than the prior year
period. Excluding KVG, ownership costs of $84.2 million were $.8 million lower
than the prior year period resulting from a decrease in operating lease expense.
Maintenance expense increased $3.9 million from the prior year period to $40.8
million. Excluding KVG, maintenance expense of $38.6 million was $1.7 million
higher than the prior year period. The increase of $1.7 million was due to
higher repair and severance costs at DEC.
SG&A expenses of $19.2 million were comparable to the prior year period.
Excluding KVG, SG&A expenses of $16.5 million decreased $2.6 million due to
lower incentive compensation expense, timing, and cost savings.
Rail's net income of $12.8 million was $.9 million higher than the prior year
period. Excluding KVG, net income of $12.3 million was comparable with the prior
year period. The net impact of the gain on disposition of the leveraged lease
commitment of $1.9 million, in addition to lower SG&A expenses, were largely
offset by lower North American lease income.
FINANCIAL SERVICES
Financial Services' gross income of $158.8 million decreased $29.4 million from
the prior year period due to lower lease and asset remarketing income. Lease
income of $81.0 million was down $24.9 million primarily due to a decline in
Technology and Specialty lease assets offset by an increase in operating lease
income from new aircraft deliveries at Air. Asset remarketing income of $8.7
million was lower than the prior year period by $9.6 million primarily due to a
decrease in remarketing activity at Technology and losses at Specialty during
the quarter related to the sale of its interest in an affiliate. Other income of
$8.1 million increased $4.1 million from the prior year due to a $4.5 million
insurance recovery on previously expensed litigation related charges.
Share of affiliates' earnings of $19.8 million is comparable to the prior year
period earnings of $19.5 million. The current period earnings included higher
income at Air as a result of a gain from the sale of certain assets, which
largely offset an impairment loss on these assets recorded in the first quarter
2003. Lower income at Specialty due to the absence of income from a dissolved
real estate joint venture offset the increase in income at Air.
Ownership costs of $80.4 million decreased $21.6 million compared to the prior
year period due to lower depreciation and interest expense. Depreciation expense
of $48.6 million decreased $13.0 million from 2002 reflecting the lower level of
investment in Technology operating lease assets offset slightly by an increase
in
16
operating lease assets at Air. Interest expense of $29.4 million decreased $7.7
million due to a decrease in average debt at Technology and lower interest rates
slightly offset by an increase in recourse debt at Air.
SG&A expenses of $25.3 million decreased $2.6 million from the prior year period
due to lower human resource and administrative expenses as a result of the
fourth quarter 2002 reduction in workforce, lower incentive compensation expense
and lower commission expense at Technology due to a decrease in asset
remarketing activity.
The (reversal) provision for possible losses of $(10.5) million was $19.4
million lower than the prior year quarter. The current quarter provision
includes an $8.5 million reversal of the loss provision related to an unsecured
Air Canada note which had been fully reserved for during the first quarter of
2003.
Net income for the current three-month period was $17.5 million, compared to
$15.1 million in the prior year period. The increase from the prior year period
was principally the result of a $5.1 million after-tax recovery on the Air
Canada note that had been reserved for during the first quarter 2003, insurance
proceeds of $2.7 million after-tax related to previously expensed
litigation-related charges, and lower ownership costs, partially offset by lower
lease and asset remarketing income and higher asset impairment charges.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is in effect for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. In addition, all provisions of this statement should be applied
prospectively. The provisions of this statement that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
freestanding financial instruments with characteristics of both liabilities and
equity and requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). This statement
is effective as of July 1, 2003. The adoption of this statement is not expected
to have a material impact on the Company's consolidated financial statements.
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 "may", "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 rate 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; regulatory rulings that may impact the economic value of assets;
competitors in the rail and air markets
17
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;
and general market conditions in the rail, air, technology, venture, and other
large-ticket industries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GFC and its subsidiaries are exposed to certain market risks, including changes
in interest rates and currency exchange rates. To manage these risks, pursuant
to established and authorized policies, such subsidiaries enter into derivative
transactions, principally interest rate swaps, Treasury derivatives and currency
swaps. These instruments and other derivatives are entered into for hedging
purposes only. Neither GFC nor its subsidiaries hold or issue derivative
financial instruments for speculative purposes.
Since December 31, 2002, there have been no material changes in GFC's interest
rate and foreign currency exposures or types of derivative instruments used to
hedge these exposures, and no significant changes in underlying market
conditions.
ITEM 4. CONTROLS AND PROCEDURES
GFC management, with the participation of the Chief Executive Officer (the
"CEO") and Chief Financial Officer (the "CFO"), have conducted an evaluation of
the effectiveness of disclosure controls and procedures in accordance with Rule
13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based on
such evaluation, the Company's CEO and CFO have concluded as of the end of the
period covered by this report, that GFC's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure
that information required to be disclosed by GFC in this Quarterly Report on
Form 10-Q has been recorded, processed, summarized, and reported to them in a
timely manner. There have been no significant changes in the company's internal
controls over financial reporting that occurred during the period covered by
this report that has materially affected or is reasonably likely to materially
affect these controls.
18
PART II - OTHER INFORMATION
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:
Form 8-K filed on June 18, 2003 reporting a Credit
Agreement for a three-year credit facility.
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 13, 2003
19
EXHIBIT INDEX
The following exhibits are furnished as part of this quarterly report:
EXHIBIT
- -------
12 Computation of Ratios of Earnings to Fixed Charges
31a Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CEO Certification)
31b Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CFO Certification)
32 Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO
Certification)
20