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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 September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-2328
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GATX Corporation
(Exact name of registrant as specified in its charter)
NEW YORK 36-1124040
(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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 49,163,378 shares of common
stock were outstanding as of October 31, 2003.
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INDEX TO GATX CORPORATION
FORM 10-Q - SEPTEMBER 30, 2003
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income................................................. 1
Consolidated Balance Sheets....................................................... 3
Consolidated Statements of Cash Flows............................................. 5
Consolidated Statements of Comprehensive Income................................... 6
Notes to the Consolidated Financial Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 14
Comparison of First Nine Months of 2003 to First Nine Months of 2002........... 14
Cash Flow and Liquidity........................................................ 18
Comparison of Third Quarter 2003 to Third Quarter 2002......................... 19
New Accounting Pronouncements.................................................. 20
Forward Looking Statements..................................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 21
Item 4. Controls and Procedures.............................................................. 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................................ 23
Item 6. Exhibits and Reports on Form 8-K..................................................... 23
SIGNATURE........................................................................................... 24
EXHIBIT INDEX....................................................................................... 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
GROSS INCOME
Lease income $ 238.2 $ 249.4 $ 716.6 $ 765.9
Marine operating revenue 27.3 29.0 57.0 53.7
Interest income 9.1 15.0 30.9 43.6
Asset remarketing income 7.5 10.6 31.0 40.4
Gain on sale of securities 5.8 2.3 6.3 3.4
Fees 3.9 3.7 14.8 13.1
Other 26.1 12.9 62.7 36.2
---------- ---------- ---------- ----------
Revenues 317.9 322.9 919.3 956.3
Gain on extinguishment of debt - 1.4 .7 15.9
Share of affiliates' earnings 18.5 18.3 59.4 58.1
---------- ---------- ---------- ----------
TOTAL GROSS INCOME 336.4 342.6 979.4 1,030.3
OWNERSHIP COSTS
Depreciation 77.9 87.6 234.4 264.1
Interest, net 48.7 57.9 153.1 167.7
Operating lease expense 45.1 45.6 137.3 133.6
---------- ---------- ---------- ----------
TOTAL OWNERSHIP COSTS 171.7 191.1 524.8 565.4
OTHER COSTS AND EXPENSES
Maintenance expense 43.3 37.8 125.3 112.7
Marine operating expenses 21.8 20.5 45.9 40.1
Other operating expenses 11.3 7.9 31.4 25.6
Selling, general and administrative 47.1 50.4 141.1 151.9
Provision for possible losses .4 2.4 8.8 29.3
Asset impairment charges 4.3 9.2 20.4 15.6
Fair value adjustments for derivatives .2 (.7) 2.6 3.0
---------- ---------- ---------- ----------
TOTAL OTHER COSTS AND EXPENSES 128.4 127.5 375.5 378.2
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 36.3 24.0 79.1 86.7
INCOME TAXES 13.6 4.9 29.8 28.3
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 22.7 19.1 49.3 58.4
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 22.7 19.1 49.3 64.6
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - (34.9)
---------- ---------- ---------- ----------
NET INCOME $ 22.7 $ 19.1 $ 49.3 $ 29.7
========== ========== ========== ==========
1
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
PER SHARE DATA
Basic:
Income from continuing operations before cumulative
effect of accounting change $ .46 $ .39 $ 1.00 $ 1.20
Income from discontinued operations - - - .13
---------- ---------- ---------- ----------
Income before cumulative effect of accounting change .46 .39 1.00 1.33
Cumulative effect of accounting change - - - (.72)
---------- ---------- ---------- ----------
Total $ .46 $ .39 $ 1.00 $ .61
========== ========== ========== ==========
Average number of common shares
(in thousands) 49,106 48,927 49,082 48,857
Diluted:
Income from continuing operations before cumulative
effect of accounting change $ .46 $ .39 $ 1.00 $ 1.20
Income from discontinued operations - - - .13
---------- ---------- ---------- ----------
Income before cumulative effect of accounting change .46 .39 1.00 1.33
Cumulative effect of accounting change - - - (.72)
---------- ---------- ---------- ----------
Total $ .46 $ .39 $ 1.00 $ .61
========== ========== ========== ==========
Average number of common shares and
common share equivalents (in thousands) 54,358 49,127 49,195 49,172
Dividends declared per common share $ .32 $ .32 $ .96 $ .96
The accompanying notes are an integral part of these consolidated
financial statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ ------------
(Unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 152.1 $ 231.1
RESTRICTED CASH 108.6 140.9
RECEIVABLES
Rent and other receivables 92.5 97.8
Finance leases 590.8 713.0
Loans 279.0 434.2
Less: allowance for possible losses (68.0) (82.2)
------------ ------------
894.3 1,162.8
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities 3,186.7 3,076.9
Operating lease investments and other 2,369.9 2,250.1
Less - allowance for depreciation (2,034.9) (2,008.1)
------------ ------------
3,521.7 3,318.9
Progress payments for aircraft and other equipment 47.5 140.9
------------ ------------
3,569.2 3,459.8
INVESTMENTS IN AFFILIATED COMPANIES 830.1 850.9
RECOVERABLE INCOME TAXES 63.9 129.8
GOODWILL, NET 62.5 62.5
OTHER INVESTMENTS 86.3 96.1
OTHER ASSETS 231.3 294.4
------------ ------------
$ 5,998.3 $ 6,428.3
============ ============
3
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 336.2 $ 399.5
DEBT
Short-term 32.2 13.7
Long-term:
Recourse 3,208.6 3,487.9
Nonrecourse 466.4 594.6
Capital lease obligations 123.7 143.7
------------ ------------
3,830.9 4,239.9
DEFERRED INCOME TAXES 683.9 640.0
OTHER LIABILITIES 328.4 347.3
------------ ------------
TOTAL LIABILITIES 5,179.4 5,626.7
SHAREHOLDERS' EQUITY
Preferred stock (aggregate liquidation preference of $1.3
million) * *
Common stock 35.6 35.6
Additional capital 394.2 392.7
Reinvested earnings 604.9 602.7
Accumulated other comprehensive loss (87.1) (100.5)
------------ ------------
947.6 930.5
Less - cost of common shares in treasury (128.7) (128.9)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 818.9 801.6
------------ ------------
$ 5,998.3 $ 6,428.3
============ ============
* Less than $0.1 million.
The accompanying notes are an integral part of these consolidated
financial statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ --------
OPERATING ACTIVITIES
Income from continuing operations, including accounting change $ 22.7 $ 19.1 $ 49.3 $ 23.5
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (5.3) (3.9) (26.1) (31.3)
Gains on sales of securities (5.8) (2.3) (6.3) (3.4)
Depreciation 81.6 91.0 246.1 276.0
Provision for possible losses .4 2.4 8.8 29.3
Asset impairment charges 4.3 9.2 20.4 15.6
Deferred income taxes 35.9 69.2 71.3 107.3
Gain on extinguishment of debt - (1.4) (.7) (15.9)
Share of affiliates' earnings, net of dividends (14.6) (12.2) (45.6) (36.2)
Cumulative effect of accounting change - - - 34.9
(Increase) decrease in recoverable federal income taxes, net (23.0) (68.0) 47.9 (58.4)
Pension contribution - (39.2) - (39.2)
Decrease in accrued operating lease payable (17.1) (14.9) (18.6) (19.2)
Other (9.9) 26.4 (21.4) (27.5)
------ ------- ------ --------
Net cash provided by continuing operations 69.2 75.4 325.1 255.5
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities (124.8) (148.7) (463.9) (662.3)
Loans extended (10.9) (35.6) (48.6) (90.9)
Investments in affiliated companies (4.8) (4.4) (49.0) (31.0)
Progress payments (3.5) (25.8) (26.1) (84.7)
Other investments (1.0) (1.9) (25.2) (18.5)
------ ------- ------ --------
Portfolio investments and capital additions (145.0) (216.4) (612.8) (887.4)
Portfolio proceeds 177.8 223.3 568.2 673.2
Proceeds from other asset sales 4.3 7.2 19.1 12.0
Net decrease (increase) in restricted cash 1.1 9.3 (76.1) 1.2
Effect of exchange rate changes on restricted cash - (3.4) 17.7 6.6
------ ------- ------ --------
Net cash provided by (used in) investing activities of continuing operations 38.2 20.0 (83.9) (194.4)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 241.5 144.4 574.5 1,304.7
Repayment of long-term debt (410.0) (319.3) (846.7) (990.7)
Net increase (decrease) in short-term debt 8.3 (.8) 16.8 (287.5)
Net repayments of capital lease obligations (5.2) (5.6) (20.0) (20.5)
Issuance of common stock and other 1.1 .1 1.7 4.4
Cash dividends (15.7) (15.7) (47.1) (46.9)
------ ------- ------ --------
Net cash used in financing activities of continuing operations (180.0) (196.9) (320.8) (36.5)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2.1) 1.8 .6 10.5
NET TRANSFERS TO DISCONTINUED OPERATIONS - (.8) - (12.9)
------ ------- ------ --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FROM (74.7) (100.5) (79.0) 22.2
CONTINUING OPERATIONS
PROCEEDS FROM SALE OF PORTION OF SEGMENT - - - 3.2
------ ------- ------ --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $(74.7) $(100.5) $(79.0) $ 25.4
====== ======= ====== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
NET INCOME $ 22.7 $ 19.1 $ 49.3 $ 29.7
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment 9.2 (6.4) 36.1 (8.8)
Unrealized gain (loss) on securities, net of
reclassification adjustments (a) - - .2 (2.1)
Unrealized (loss) gain on derivatives (6.4) 1.0 (22.9) (2.4)
---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) 2.8 (5.4) 13.4 (13.3)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 25.5 $ 13.7 $ 62.7 $ 16.4
========== ========== ========== ==========
(a) Reclassification adjustments:
Unrealized gain on securities $ 3.5 $ 1.5 $ 4.0 $ -
Less - reclassification adjustment for gains
realized included in net income (3.5) (1.5) (3.8) (2.1)
---------- ---------- ---------- ----------
Unrealized gain (loss) on securities, net of
reclassification adjustments $ - $ - $ .2 $ (2.1)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
6
GATX 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 nine months ended
September 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 Corporation's (GATX 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 GATX Corporation's interest in a bulk-liquid
storage facility located in Mexico, and is net of taxes of $3.0
million. The facility was included in the segment formerly known as
Integrated Solutions Group (ISG).
(4) The Company grants stock options to employees under stock-based
compensation plans. In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No.
123. This statement provides alternative methods of transition for
voluntary changes to the fair value based method of accounting for
stock-based employee compensation. This statement also amends the
disclosure requirements of SFAS No.123 and APB Opinion No. 28, Interim
Financial Reporting, and requires prominent disclosure in both annual
and interim financial statements of the method of accounting for
stock-based employee compensation and the effect on reported results.
As permitted under SFAS No. 148, the Company accounts for all
stock-based employee compensation plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees. Under these guidelines, no compensation expense is
recognized because the exercise price of GATX's employee stock options
equals the market value of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and
has been determined as if GATX had accounted for its employee stock
options under the fair value method.
7
The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation (in millions, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 22.7 $ 19.1 $ 49.3 $ 29.7
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards, net of related tax effects (.7) (1.0) (1.8) (2.4)
---------- ---------- ---------- ----------
Pro forma net income $ 22.0 $ 18.1 $ 47.5 $ 27.3
========== ========== ========== ==========
Net income per share:
Basic, as reported $ .46 $ .39 $ 1.00 $ .61
Basic, pro forma .45 .37 .97 .56
Diluted, as reported .46 .39 1.00 .61
Diluted, pro forma .45 .37 .97 .56
(5) During the fourth quarter of 2002, GATX 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 unit
and curtail investment in the Specialty business unit. The charge also
included costs incurred as part of headcount reductions related to an
integration plan implemented to rationalize the workforce and operations
at Dyrekcja Eksploatacji Cystern Sp. z.o.o. (DEC), GATX's Polish railcar
subsidiary. The total charge included involuntary employee separation and
benefit costs of $14.7 million for 170 employees company-wide, as well as
occupancy costs of $2.2 million. The employee groups terminated included
professional and administrative staff. As of September 30, 2003, 156 of
the employee terminations were completed. The remainder of the originally
anticipated employee terminations are expected to be substantially
completed by the end of 2003.
Following is the reserve activity for the nine months ending September
30, 2003:
Reserve balance at 12/31/02 $ 16.6
Benefits paid (11.4)
Occupancy costs paid (1.0)
----------
Reserve balance at 9/30/03 $ 4.2
==========
During 2001, GATX recorded a pre-tax charge of $13.4 million related to a
reduction in workforce in 2001. This reduction was part of GATX's
initiative to reduce selling, general and administrative costs in
response to economic conditions and the divestiture of ISG operations.
This charge included involuntary employee separation and benefit costs of
$6.8 million for 147 employees company-wide, as well as legal fees of $.5
million, occupancy costs of $5.1 million and other costs of $1.0 million.
The employee groups terminated included professional and administrative
staff, and corporate personnel. As of December 31, 2002, all of the
employee terminations were completed.
8
Following is the reserve activity for the nine months ending September
30, 2003:
Reserve balance at 12/31/02 $ 3.9
Benefits paid -
Occupancy and other costs paid (.6)
----------
Reserve balance at 9/30/03 $ 3.3
==========
Management expects the Company's reserve balance at September 30, 2003
related to the reductions in workforce to be adequate.
(6) Investments in affiliated companies represent investments in, and loans
to and from, domestic and foreign companies and joint ventures that are
in businesses similar to those of GATX, 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.
For purposes of preparing the following information, GATX made certain
adjustments to the information provided by the joint ventures. Pre-tax
income was adjusted to reverse interest income or expense recognized by
the joint ventures on loans to or from GATX.
For all affiliated companies held at the end of the quarter, operating
results, as if GATX held 100 percent interest, were (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Gross income $ 220.3 $ 214.4 $ 620.8 $ 643.5
Pre-tax income 49.0 41.9 119.1 133.3
(7) Restricted cash of $108.6 million at September 30, 2003 is comprised of
cash and cash equivalents which are restricted as to withdrawal or use.
GATX'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 GATX's principal subsidiary, GATX
Financial Corporation (GFC).
(8) In June 2003, GATX disposed of a leveraged lease commitment on
passenger rail equipment and recorded asset remarketing income of $4.1
million. The gain is partially offset by related ownership costs of
this investment, the net result of which is a contribution to net
income of $.9 million in 2003. $184.9 million of assets were sold,
including $108.4 million of restricted cash and $48.0 million of
progress payments. In addition, $183.4 million of liabilities,
primarily nonrecourse debt, were assumed by the acquirer.
(9) 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 applied immediately to
VIE's created or acquired after January 31, 2003. No VIE's were created
or obtained in the first nine months of 2003. For other VIE's, FIN 46
first applied in periods beginning after June 15, 2003. In October
2003, the FASB deferred the effective date of FIN 46 to interim periods
ending after December 15, 2003 in order to address a number of
interpretation and implementation issues. GATX is in the process of
completing an assessment of the
9
impact of FIN 46. Based on this review to date, GATX does not expect
FIN 46 to have a material impact on its financial statements.
(10) 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, GATX has
entered into various guarantees which could require performance in the
event of demands by third parties. Similar to GATX's balance sheet
investments, these guarantees expose GATX to credit and market risk;
accordingly, GATX 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. GATX is not aware of any event of default
which would require it to satisfy these guarantees, and expects the
affiliates to generate sufficient cash flow to satisfy their lease and
loan obligations.
Asset residual value guarantees represent GATX'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 September 30, 2003, the maximum potential amount of lease, loan or
residual value guarantees under which GATX or its subsidiaries could be
required to perform was $693.8 million. 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 a liability of $3.6 million. The
expirations of these guarantees range from 2003 to 2017. Any liability
resulting from GATX's performance pursuant to the residual value
guarantees will be reduced by the value realized from the underlying
asset or group of assets. Historically, gains associated with the
residual value guarantees have exceeded any losses incurred and are
recorded in asset remarketing income in the consolidated statements of
income. Based on known facts and current market conditions, management
does not believe that the guarantees will result in any material
adverse financial impact to GATX.
10
(11) The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
NUMERATOR:
Income from continuing operations before
cumulative effect of accounting change $ 22.7 $ 19.1 $ 49.3 $ 58.4
Income from discontinued operations - - - 6.2
Cumulative effect of accounting change - - - (34.9)
Less: dividends paid and accrued on preferred stock * * * *
---------- ---------- ---------- ----------
NUMERATOR FOR BASIC EARNINGS PER SHARE - 22.7 19.1 49.3 29.7
INCOME AVAILABLE TO COMMON SHAREHOLDERS
Effect of dilutive securities:
Add: dividends paid and accrued on preferred
stock * * * *
After-tax interest expense on convertible
securities (a) 2.2 - - -
---------- ---------- ---------- ----------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 24.9 $ 19.1 $ 49.3 $ 29.7
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES 49.1 48.9 49.1 48.9
Effect of dilutive securities:
Stock options * .1 * .2
Convertible preferred stock .1 .1 .1 .1
Convertible securities (a) 5.1 - - -
---------- ---------- ---------- ----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -
ADJUSTED WEIGHTED AVERAGE AND ASSUMED
CONVERSION 54.3 49.1 49.2 49.2
BASIC EARNINGS PER SHARE (b) :
Income from continuing operations before
cumulative effect of accounting change $ .46 $ .39 $ 1.00 $ 1.20
Income from discontinued operations - - - .13
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change .46 .39 1.00 1.33
Cumulative effect of accounting change - - - (.72)
---------- ---------- ---------- ----------
TOTAL BASIC EARNINGS PER SHARE $ .46 $ .39 $ 1.00 $ .61
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE (b) :
Income from continuing operations before
cumulative effect of accounting change $ .46 $ .39 $ 1.00 $ 1.20
Income from discontinued operations - - - .13
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change .46 .39 $ 1.00 1.33
Cumulative effect of accounting change - - - (.72)
---------- ---------- ---------- ----------
TOTAL DILUTED EARNINGS PER SHARE $ .46 $ .39 $ 1.00 $ .61
========== ========== ========== ==========
* Less than $0.1 million.
(a) Shares underlying the convertible securities issued in first
quarter of 2002 were included in the calculation of diluted
earnings per share for the three months ended September 30,
2003 because of dilutive effects.
(b) Quarterly earnings per share results may not be additive, as
per share amounts are computed independently for each quarter.
11
(12) 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 GATX'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. GATX
provides its services and products through two operating segments: GATX
Rail and Financial Services.
The Financial Services segment consists of four businesses: Air,
Technology, Venture Finance (Venture) and Specialty Finance
(Specialty). GATX plans to run-off Venture and curtail investment in
Specialty. GATX's segments were determined based on the management
approach and meet the required characteristics of operating segments
under SFAS No. 131. The chief operating decision maker at GATX, the
Chief Executive Officer, regularly reviews the operating results of
Financial Services as a whole to assess performance and determine
resource allocation.
GATX FINANCIAL CORPORATE INTER-
(IN MILLIONS) RAIL SERVICES AND OTHER SEGMENT TOTAL
--------- ---------- --------- --------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 2003
PROFITABILITY
Revenues $ 172.4 $ 145.0 $ .7 $ (.2) $ 317.9
Gain on extinguishment of debt - - - - -
Share of affiliates' earnings 4.0 14.5 - - 18.5
--------- --------- --------- --------- ---------
Total gross income 176.4 159.5 .7 (.2) 336.4
Depreciation 28.5 49.4 - - 77.9
Interest, net 15.2 31.0 2.7 (.2) 48.7
Operating lease expense 43.1 2.0 - - 45.1
Income (loss) before income taxes 20.6 22.9 (7.2) - 36.3
Income (loss) 13.6 13.6 (4.5) - 22.7
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2003
Investments in affiliated companies 140.8 689.3 - - 830.1
Identifiable assets 2,269.4 3,559.9 197.3 (28.3) 5,998.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 21.1 50.0 (8.7) 6.8 69.2
Portfolio proceeds .8 177.0 - - 177.8
--------- --------- --------- --------- ---------
Total cash provided (used) 21.9 227.0 (8.7) 6.8 247.0
Portfolio investments and capital additions 30.6 114.4 - - 145.0
--------- --------- --------- --------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 2002
PROFITABILITY
Revenues $ 161.4 $ 161.8 $ .1 $ (.4) $ 322.9
Gain on extinguishment of debt - 1.3 .1 - 1.4
Share of affiliates' earnings 2.7 15.6 - - 18.3
--------- --------- --------- --------- ---------
Total gross income 164.1 178.7 .2 (.4) 342.6
Depreciation 26.4 61.2 - - 87.6
Interest, net 13.4 37.5 7.4 (.4) 57.9
Operating lease expense 42.6 3.0 - - 45.6
Income (loss) before income taxes 18.7 16.9 (11.6) - 24.0
Income (loss) 14.7 12.2 (7.8) - 19.1
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - - 850.9
Identifiable assets 2,385.3 3,811.9 273.1 (42.0) 6,428.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 16.8 105.5 (50.6) 3.7 75.4
Portfolio proceeds 3.4 219.9 - - 223.3
--------- --------- --------- --------- ---------
Total cash provided (used) 20.2 325.4 (50.6) 3.7 298.7
Portfolio investments and capital additions 19.2 197.2 - - 216.4
--------- --------- --------- --------- ---------
12
GATX FINANCIAL CORPORATE INTER-
(IN MILLIONS) RAIL SERVICES AND OTHER SEGMENT TOTAL
--------- ---------- --------- --------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 2003
PROFITABILITY
Revenues $ 518.0 $ 401.0 $ 1.0 $ (.7) $ 919.3
Gain on extinguishment of debt - .7 - - .7
Share of affiliates' earnings 8.7 50.7 - - 59.4
--------- --------- --------- --------- ---------
Total gross income 526.7 452.4 1.0 (.7) 979.4
Depreciation 86.5 147.9 - - 234.4
Interest, net 49.1 92.8 11.9 (.7) 153.1
Operating lease expense 130.6 6.7 - - 137.3
Income (loss) before income taxes 55.9 49.1 (25.9) - 79.1
Income (loss) 36.1 29.9 (16.7) - 49.3
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2003
Investments in affiliated companies 140.8 689.3 - - 830.1
Identifiable assets 2,269.4 3,559.9 197.3 (28.3) 5,998.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 114.4 249.8 (25.6) (13.5) 325.1
Portfolio proceeds 7.3 560.9 - - 568.2
--------- --------- --------- --------- ---------
Total cash provided (used) 121.7 810.7 (25.6) (13.5) 893.3
Portfolio investments and capital additions 123.0 489.8 - - 612.8
--------- --------- --------- --------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 2002
PROFITABILITY
Revenues $ 496.8 $ 460.5 $ .2 $ (1.2) $ 956.3
Gain on extinguishment of debt - 15.8 .1 - 15.9
Share of affiliates' earnings 8.7 49.4 - - 58.1
--------- --------- --------- --------- ---------
Total gross income 505.5 525.7 .3 (1.2) 1,030.3
Depreciation 78.8 185.3 - - 264.1
Interest, net 42.9 109.7 16.3 (1.2) 167.7
Operating lease expense 128.7 4.9 - - 133.6
Income (loss) before income taxes 65.2 52.6 (31.1) - 86.7
Income (loss) 44.9 34.3 (20.8) - 58.4
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - - 850.9
Identifiable assets 2,385.3 3,811.9 273.1 (42.0) 6,428.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 130.0 168.5 (36.8) (6.2) 255.5
Portfolio proceeds 8.9 664.3 - - 673.2
--------- --------- --------- --------- ---------
Total cash provided (used) 138.9 832.8 (36.8) (6.2) 928.7
Portfolio investments and capital additions 58.6 828.8 - - 887.4
--------- --------- --------- --------- ---------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST NINE MONTHS OF 2003
TO FIRST NINE MONTHS OF 2002
GATX Corporation's (GATX or the Company) net income for the first nine months of
2003 was $49.3 million, a $19.6 million increase from the $29.7 million reported
for the same period in 2002. Earnings per share on a diluted basis increased to
$1.00 in 2003 from $.61 in the 2002 period. Comparisons between periods are
affected by several items. In the first nine months of 2003, GATX reported a net
$6.0 million after-tax loss provision related to the Air Canada bankruptcy.
Earnings for the first nine months of 2003 also included $10.0 million of
after-tax insurance recoveries on previously expensed litigation-related
charges. Earnings for the first nine months of 2002 included a $6.2 million
after-tax gain related to the sale of a portion of the discontinued Integrated
Solutions Group (ISG) segment and a $34.9 million charge related to the
write-off of goodwill upon adoption of SFAS No. 142.
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 $526.7 million for the first nine months of 2003
increased $21.2 million over the prior year period. Excluding KVG, gross income
of $490.8 million was $14.7 million lower than the prior year period. North
American lease income of $411.7 million was $25.6 million lower than the prior
year period, as the North American rail market continues to be negatively
impacted by challenging market conditions and pressure on lease rates.
Rail's North American fleet totaled 104,500 cars at the end of the third quarter
compared to 108,400 at the end of the prior year period. 97,000 railcars were on
lease throughout North America at the end of the third quarter, compared to
97,300 a year ago and 97,200 at December 31, 2002. Rail's North American
utilization was 93% at September 30, 2003, compared to 90% at September 30, 2002
and 91% at December 31, 2002. The increase in utilization from year end reflects
a combination of idle cars moving to active status 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 $4.4 million in 2003 was comparable with the prior
year period and includes a gain of $4.1 million resulting from the disposition
of a leveraged lease commitment on passenger rail equipment. The gain is
partially offset by related ownership costs of this investment, the net result
of which is a contribution to net income of $.9 million. Share of affiliates'
earnings of $8.7 million were flat compared to the prior year period. Excluding
KVG's earnings of $3.5 million in 2002, share of affiliates' earnings increased
$3.5 million over the prior year period. The impact of favorable maintenance
expense at domestic affiliates combined with a larger fleet and favorable
foreign exchange rates at foreign affiliates drove this increase.
Ownership costs of $266.2 million were $15.8 million higher than the prior year
period. Excluding KVG, aggregate ownership costs of $250.7 million were
comparable with the prior year. Interest expense increased $3.0 million in the
2003 period due to lower capitalized interest and higher average debt balances.
Operating lease expense declined $2.7 million due to lower variable rates on
certain leases in the 2003 period.
Maintenance expense increased $10.8 million from the prior year period to $123.0
million. Excluding KVG, maintenance expense of $115.7 million was up $3.5
million from the prior year period substantially due to certain railroad
mandated repairs. In the first quarter of 2003, the American Association of
Railroads (AAR) issued an
14
early warning letter that required all owners of railcars in the U.S. to inspect
or replace certain bolsters manufactured by a now bankrupt supplier from the mid
to late 1990s. Rail owns approximately 3,200 railcars that will be required to
have the bolsters inspected by December 31, 2003. Approximately 2,100 of Rail's
affected railcars are on full service leases in which case Rail is responsible
for the costs of inspection or replacement. To date, 1,000 of the 2,100 cars
have been inspected and replaced. Maintenance expense in the first nine months
of 2003 includes $3.0 million due to the inspection and replacement of bolsters.
Management expects the total cost of bolster inspections and replacements to
approximate $7.0 million pre-tax for the full service lease fleet over the
2003-2004 period. Management does not believe its share of the cost of bolster
replacements for the cars which are on net leases will be material.
Selling, general and administrative (SG&A) expenses of $56.6 million were $1.2
million higher than the prior year period. Excluding KVG, SG&A expenses of $49.2
million decreased $6.2 million due to cost saving initiatives and timing of
expenses.
Provision for possible losses decreased $2.6 million compared to the prior year
period due to lower reserve requirements and recoveries of previously reserved
or written-off accounts.
European results were favorably impacted by fleet growth, the integration of the
remaining 50.5% of KVG operations and the strong performance of local currencies
versus the U.S. dollar.
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, Rail's Polish railcar
subsidiary. 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 $36.1 million was $26.1 million higher than the prior year
period. Income before cumulative effect of accounting change of $36.1 million
was $8.8 million lower than the prior year period primarily due to lower North
American lease income resulting from lower lease rates and slightly fewer active
cars, slightly offset by improved European results.
FINANCIAL SERVICES
Financial Services is comprised of four businesses: 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 in its entirety. The Venture portfolio includes assets
of $184.3 million, including off balance sheet assets, at September 30, 2003.
The Specialty portfolio includes assets of $814.7 million, including off balance
sheet assets, at September 30, 2003.
Financial Services continues to be negatively affected by the current economic
environment, which has resulted in a high level of losses and impairments as
well as lower investment volume in Technology. In addition, despite the reduced
level of lease renegotiation requests and stabilizing lease rates during the
period, volatility continues in the airline industry, and GATX may experience
unscheduled returns of aircraft, lease restructurings, continued pressure on
lease rates and asset impairments in its Air business unit, especially during
the slower fall and winter months ahead.
Air's 2003 delivery and renewal schedule for owned aircraft for which the
Company has direct remarketing responsibility includes six new aircraft
deliveries and eight scheduled renewals. There are currently leases in place for
all of the six new aircraft scheduled for delivery and five leases in place for
the aircraft scheduled for renewal.
15
Financial Services' gross income of $452.4 million for the nine month period
ended September 30, 2003 decreased $73.3 million from the prior year period. The
prior year period included $15.8 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 $58.2 million principally due to decreases in lease and interest
income and lower asset remarketing income.
Lease income of $241.0 million for the nine month period ended September 30,
2003 declined $66.4 million from the prior year period due primarily to lower
Technology and Specialty lease assets, slightly offset by an increase in
operating lease income from new aircraft deliveries at Air. In addition, lease
income as a percentage of average lease assets declined from the prior year for
all business units. Interest income of $30.9 million decreased $12.7 million due
to lower average loan balances at Venture and Specialty, consistent with GATX's
plan to exit or curtail investment in these businesses. The prior year period
also included higher interest income related to the Air Canada loan that was
sold during the second quarter of 2003.
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 $26.6 million decreased $9.5 million
from the prior year period primarily due to a decrease in remarketing activity
at Technology. A significant portion of Financial Services' asset remarketing
income has historically come from Specialty. With the curtailment in investment
in Specialty, remarketing income will naturally decrease as the portfolio runs
off over time. Gains on the sale of securities of $6.3 million increased $2.9
million from the prior year period. Gains on the sale of securities include the
gain on the sale of stock derived from warrants received as part of financing
transactions with non-public companies and will vary from period to period. Fee
income of $12.1 million increased $1.7 million from the prior year period due to
a guarantee fee received at Specialty during the current year period.
Other income of $27.1 million increased $21.2 million from the prior year period
due primarily to the receipt of $16.5 million from the settlement of litigation
GATX had initiated against various insurers.
Share of affiliates' earnings of $50.7 million was $1.3 million higher than
2002. The increase is due primarily to slightly higher income from Technology
and Venture affiliates offset in part by lower income at Specialty affiliates.
Ownership costs of $247.4 million decreased $52.5 million compared to the prior
year due to lower depreciation and interest expense. Depreciation expense of
$147.9 million decreased $37.4 million from 2002, reflecting lower average
operating lease assets at Technology and Specialty, partially offset by higher
depreciation expense at Air due to new aircraft deliveries. Interest expense of
$92.8 million decreased $16.9 million from 2002 due to a decrease in average
debt balances and lower average interest rates.
SG&A expenses of $69.5 million decreased $11.9 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 and reduced commission expense at
Technology due to a decrease in investment volume and 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 $10.5 million
decreased $17.9 million from the prior year period. As a result of Air Canada's
bankruptcy filing, a net provision of $9.6 million was recorded in 2003 to
reserve for an unsecured note to Air Canada which was subsequently sold. The
prior year period included a $10.0 million provision related to one Technology
leasing investment which was largely offset by a gain on extinguishment of
nonrecourse debt related to the
16
same investment. Asset impairment charges of $20.4 million increased $4.8
million from the prior year and primarily relate to Specialty assets, including
marine operating assets.
The allowance for possible losses of $54.9 million decreased $13.7 million from
December 31, 2002 and was approximately 6.7% of reservable assets, moderately
higher than 6.3% at year end. Reservable assets are defined as gross
receivables, finance leases and loans. Net charge-offs of reservable assets
totaled $25.9 million for the current nine-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 $148.5 million increased $53.6 million from year end
primarily due to higher Air and Specialty investments on non-accrual status.
Non-performing assets include operating lease assets, which are not included in
reservable assets discussed above. The increase in non-performing assets from
year end was primarily attributable to operating lease assets.
Net income of $29.9 million decreased $4.4 million from last year. The effect of
lower yielding leases and lower asset remarketing income contributed to the
decrease in net income, partially offset by lower SG&A expenses and a $10.0
million after-tax insurance recovery of litigation expenses.
CORPORATE AND OTHER
Corporate and other net expense was $16.7 million for the first nine months of
2003 compared to $20.8 million for the prior year period. The decrease in net
expense was primarily due to lower interest expense.
TAXES
GATX's effective tax rate from continuing operations was 38% for the nine months
ended September 30, 2003 compared to 33% for the nine months ended September 30,
2002. The Company expects the full year effective tax rate to be approximately
38%. The lower rate in 2002 was attributable to the extraterritorial income
(ETI) exclusion on certain qualifying cross-border leases. The Company
anticipates a lower ETI benefit in 2003.
In January 2003, the Company concluded federal income tax audits of years 1992
through 1996 and paid tax deficiencies, including interest, of $21.4 million.
The tax deficiencies were primarily due to the previously disclosed IRS
settlement related to disallowed interest expense on loans in the Company's
corporate owned life insurance (COLI) programs, and were accrued for in previous
years.
The 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. GATX received a $118.0 million refund as a
result of the carryback of the 2002 net loss in May 2003. The company estimates
that recoverable income taxes as of September 30, 2003 were $63.9 million.
RESULTS OF DISCONTINUED OPERATIONS
As of March 31, 2002, GATX completed the divestiture of the ISG segment. The ISG
segment was comprised of GATX Terminals Corporation (Terminals), GATX Logistics,
Inc. (Logistics), and minor business development efforts. Financial data for the
ISG segment has been segregated as discontinued operations for all periods
presented.
In the first quarter of 2002, GATX sold its interest in a bulk-liquid storage
facility in Mexico and recognized a $6.2 million after-tax gain.
17
CASH FLOW AND LIQUIDITY
GATX generates a significant amount of cash from its operating activities and
proceeds from its investment portfolio, which is used to service debt, fund
portfolio investments and capital additions, and pay dividends. A continued weak
economic environment could decrease demand for GATX'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
nine months of 2003 was $325.1 million, $69.6 million higher than the prior year
period due in part to the timing of federal tax refunds and payments and a $39.2
million pension contribution in 2002. The 2003 period includes a federal income
tax refund of $118.0 million as a result of the carryback of the 2002 net loss
and a federal income tax payment of $21.4 million related to the settlement of
the IRS audit for the period 1992 - 1996. Comparison of cash from operations
between periods is also affected by other changes in working capital.
Portfolio proceeds of $568.2 million were down $105.0 million from $673.2
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.
Portfolio investments and capital additions for the first nine months of 2003
totaled $612.8 million, a decrease of $274.6 million from the first nine months
of 2002. Portfolio investments and capital additions at Financial Services of
$489.8 million were $339.0 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
$123.0 million in the first nine months of 2003, an increase of $64.4 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 and capital additions (excluding contractual commitments) will
depend on market conditions and opportunities to acquire desirable assets.
GATX's operating subsidiaries fund investments and meet debt, lease and dividend
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. GATX utilizes both the domestic and international bank and capital
markets.
In the current nine-month period GATX issued $125.0 million of long-term
convertible debt. Including the financing activity of its wholly-owned
subsidiary, GFC, GATX issued a total of $574.5 million and repaid $846.7 million
of long-term debt. Other significant financings in the first nine months of 2003
included $171.5 million of aircraft financing guaranteed by the European Export
Credit Agencies, $128.6 million of technology nonrecourse financing, $100.0
million from a commercial paper conduit securitization facility 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. At September 30, 2003, availability under all
credit facilities was $513.9 million, with $25.4 million of letters of credit
outstanding under the most recent facility. The revolving credit facilities
contain various restrictive covenants, which limit GFC's ability to dividend or
lend funds to GATX, including an asset coverage test, requirements to maintain a
defined minimum net worth and a fixed charges coverage ratio. At September 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
18
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 September 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 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.
One of the factors that the rating agencies monitor in reviewing GFC's credit
rating is its use of secured debt. In particular, S&P monitors the ratio of
GFC's secured assets as a percentage of total assets. Over the last two years,
this ratio has increased substantially as GFC has financed 24 new aircraft
deliveries with secured debt supported by the European Credit Agencies and the
U.S. Export-Import Bank. GATX currently believes that its secured asset ratio
can be maintained at levels acceptable to the rating agencies. However, if GFC
became unable to access unsecured financing in the future, it may have to rely
on secured financing and could suffer a credit rating downgrade if the resulting
increase in its secured asset ratio became unacceptable to one or both rating
agencies.
Unconditional purchase obligations of GATX's subsidiaries consist primarily of
committed aircraft deliveries and railcar orders. Unconditional purchase
obligations at September 30, 2003 were $711.0 million, comprised as follows:
$80.3 million in the remainder of 2003, $361.0 million in 2004-2005, $249.6
million in 2006-2007, and $20.1 million thereafter.
COMPARISON OF THIRD QUARTER 2003
TO THIRD QUARTER 2002
In the third quarter 2003, GATX reported net income of $22.7 million or $.46 per
diluted share compared to $19.1 million or $.39 per share on a diluted basis in
the prior year period.
GATX RAIL
Rail's gross income of $176.4 million for the third quarter of 2003 increased
$12.3 million over the prior year period. Excluding KVG, gross income was $1.0
million lower than the prior year period. Fewer active cars in the North
American fleet combined with lower lease rates contributed to a $2.6 million
decline in North American lease income. The decline in North American lease
income was partially offset by improved European lease income due to a larger
fleet.
Share of affiliates' earnings of $4.0 million were $1.3 million higher than the
prior year period. Excluding KVG's earnings of $1.0 million in 2002, share of
affiliates' earnings were $2.3 million higher than the prior year period due to
improved earnings at both domestic and European affiliates. The domestic share
of affiliates' earnings increase is primarily the result of favorable
maintenance expense in the current year period. European share of affiliates'
earnings increased $.7 million over the prior year period due to a larger fleet
and favorable currency translation.
Ownership costs of $86.8 million were $4.4 million higher than the prior year
period. Excluding KVG, ownership costs of $81.6 million were comparable to the
prior year period.
19
Maintenance expense increased $5.1 million from the prior year period to $42.8
million. Excluding KVG, maintenance expense of $39.6 million was $1.9 million
higher than the prior year period. The increase was primarily due to $1.5
million of costs related to bolster inspections and replacements.
SG&A expenses of $19.1 million were up $1.6 million from the prior year period.
Excluding KVG, SG&A expenses of $16.7 million decreased $.8 million primarily
due to cost saving initiatives.
Rail's net income of $13.6 million was $1.1 million lower than the prior year
period. Excluding KVG, net income of $12.7 million was down $2.0 million from
the prior year period primarily due to lower North American lease income and
increased maintenance expense, partially offset by improved results in Europe.
FINANCIAL SERVICES
Financial Services' gross income of $159.5 million decreased $19.2 million from
the prior year period due to lower lease, interest and asset remarketing income.
Lease income of $78.3 million was down $24.5 million primarily due to a decline
in Technology lease assets slightly offset by an increase in operating lease
income from new aircraft deliveries at Air. Interest income of $9.1 million
decreased $5.9 million from the prior year period primarily due to declining
loan balances at Venture. The prior year period also included interest related
to the Air Canada loan that was sold during the second quarter of this year.
Asset remarketing income of $7.7 million was lower than the prior year period by
$2.5 million primarily due to a decrease in remarketing activity at Technology.
Other income of $13.8 million increased from zero in the prior year due to a
$12.0 million insurance recovery on previously expensed litigation-related
charges and the absence of foreign currency translation losses in the current
year period.
Share of affiliates' earnings of $14.5 million decreased $1.1 million from the
prior year period earnings of $15.6 million primarily due to lower income at Air
affiliates as the result of additional aircraft placed on non-accrual status
during the current year period.
Ownership costs of $82.4 million decreased $19.3 million compared to the prior
year period due to lower depreciation and interest expense. Depreciation expense
of $49.4 million decreased $11.8 million from 2002 reflecting the lower level of
investment in Technology operating lease assets offset slightly by an increase
in operating lease assets at Air. Interest expense of $31.0 million decreased
$6.5 million due to a decrease in average debt balances and lower interest
rates.
SG&A expenses of $22.8 million decreased $5.7 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 commission expense at
Technology due to a decrease in asset remarketing activity and lower legal and
consulting fees.
Net income for the current three-month period was $13.6 million, compared to
$12.2 million in the prior year period. The increase from the prior year period
was principally the result of the receipt of settlement proceeds of $7.3 million
after-tax related to claims against various insurers with respect to previously
expensed litigation-related charges and lower ownership costs, partially offset
by lower lease, interest and asset remarketing income.
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
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their respective effective dates. The adoption of this statement does not 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 "anticipate," "believe," "estimate," "expect,"
"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 GATX's or GFC's credit
rating, either of which could have an effect on the Company's 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 who may have access to capital at lower
costs than GATX; additional potential write-downs and/or provisions within
GATX'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
Since December 31, 2002, there have been no material changes in GATX'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
GATX 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 GATX'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 GATX 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GATX previously reported that East European Kolia-System Financial Consultant
S.A. (Kolia) filed a complaint in the Regional Court (Commercial Division) in
Warsaw, Poland against Dyrekcja Eksploatacji Cystern Sp. z.o.o. (DEC), an
indirect wholly owned subsidiary of GATX Corporation. The complaint alleges
damages of approximately $52 million arising out of the unlawful acquisition by
DEC, in August of 1998, of a 51% interest in Kolsped Spedytor Miedzynarodwy Sp.
z.o.o. (Kolsped), and subsequent removal of valuable property from Kolsped. At a
hearing held on October 22, 2003 in Warsaw, the court rendered a decision in
favor of DEC, dismissing Kolia's action. The plaintiff will have until November
12, 2003 to file an appeal and has indicated its intention to do so.
GATX previously reported entering into a settlement with the Burlington Northern
Santa Fe Railway Company (Burlington Northern) of a suit arising from an
incident in which a Burlington Northern train proceeding through New Iberia,
Louisiana derailed several of its cars, including a tank car owned by the GATX
Rail division of GATX Financial Corporation that ruptured and leaked xylene. As
part of the settlement, Burlington Northern agreed to indemnify and defend GATX
against all claims of plaintiffs, including three groups of plaintiffs who opted
out of the class action settlement, except for punitive damage claims. Following
the settlement with GATX, Burlington Northern offered to stipulate to liability
in return for the agreement by the three groups of opt-out plaintiffs not to
seek punitive damages. In August 2003, all three opt-out plaintiff groups agreed
to the Burlington Northern proposal and the court has approved the motions
implementing the proposal. Consequently, GATX has no further liability with
respect to any of the plaintiffs.
GATX and its subsidiaries have been named as defendants in other litigation, and
have a number of unresolved pending claims, including proceedings under
governmental laws and regulations related to environmental matters. Several of
the Company's subsidiaries have also been named as defendants or co-defendants
in cases alleging injury relating to asbestos. In each of these cases, the
plaintiffs seek unspecified damages based on common law, statutory or premises
liability or, in the case of ASC, the Jones Act, which makes limited remedies
available to certain maritime employees. In addition, demand has been made
against the Company under a limited indemnity given in connection with the sale
of a subsidiary with respect to asbestos-related claims filed against the former
subsidiary. The amounts claimed in some of these proceedings are substantial and
the ultimate liability cannot be determined at this time. In addition, adverse
court rulings or changes in applicable law could affect claims made against GATX
and its subsidiaries, and increase the number, and change the nature, of such
claims. However, based on known facts, it is the opinion of management that
amounts, if any, required to be paid by GATX and its subsidiaries in the
discharge of such liabilities are not reasonably likely to be material to GATX's
consolidated financial position or results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 15, 2003, the Company completed a private offering of $125 million
aggregate principle amount of senior unsecured convertible notes issued under
Section 4(2) of the Securities Act of 1933 to qualified institutional buyers.
The 20 year notes are unconditionally guaranteed by GATX's wholly-owned
subsidiary, GATX Financial Corporation, and carry a 5% coupon and may be
convertible at any time prior to maturity into GATX common stock at an initial
conversion price of $23.6915 per share, in multiples of $1,000 principal amount,
under any of the following circumstances: (i) during any period from and
including the eleventh trading day in a calendar quarter up to, but not
including, the eleventh day of the following calendar quarter (the "conversion
period") if the Sale Price (defined as the price per share for the securities
exchange on which the common stock is traded) of common stock for at least 20
trading days in a period of 30 consecutive trading days ending on the last
trading day preceding such conversion period is greater than or equal to 120% of
the conversion price; or (ii) during any period that (A) the long-term credit
rating assigned to the notes by both Moody's Investors Service, Inc. and
Standard & Poor's Rating Services is lower than Ba2 and BB, respectively, (B)
both Moody's and Standard & Poor's no longer rate the notes or have withdrawn
their ratings with respect to the notes, or (C) either Moody's or Standard &
Poor's no longer rate the notes or have withdrawn or suspended such rating and
the remaining rating is lower than Ba2 or BB, as applicable; or (iii) if the
Company has called the notes for redemption; or (iv) during the five business
day period after any five consecutive trading day period in which the trading
price of the notes for each day within the period is less than 95% of the
conversion value of the notes during that period; provided, however, that no
notes may be converted based on the satisfaction of this condition if on any day
during such five consecutive trading day period, the Sale Price of common stock
is between the conversion price and 120% of the conversion price; or (v) upon
the occurrence of specified corporate transactions including a distribution to
stockholders of rights to purchase shares at less than the Sale Price at the
time, a distribution of assets, debt securities or rights to purchase securities
at a per share value exceeding 10% of the Sale Price or a consolidation, merger
or binding share exchange pursuant to which common stock would be converted to
cash securities or property. The conversion price will be subject to adjustment
in certain events. The Company may elect, at its option, to deliver, in lieu of
common stock, cash or any combination of cash and common stock.
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 August 15, 2003 reporting the completion of
a private offering of $125 million of senior unsecured
convertible notes.
Form 8-K filed on October 29, 2003 reporting the press release
of third quarter 2003 results and the transcript of the
October 23, 2003 earnings conference call.
Form 8-K filed on October 31, 2003 providing the slide
presentation made at the Piper Jaffray Financial Services
Conference on October 29, 2003.
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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 CORPORATION
(Registrant)
/s/ Brian A. Kenney
---------------------------------------------
Brian A. Kenney
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: November 12, 2003
EXHIBIT INDEX
The following exhibits are furnished as part of this quarterly report:
EXHIBIT
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)
99 Certain instruments evidencing long-term indebtedness of GATX
Corporation are not being filed as exhibits to this Report
because the total amount of securities authorized under any
single such instrument does not exceed 10% of GATX
Corporation's total assets. GATX Corporation will furnish
copies of any such instruments upon request of the Securities
and Exchange Commission.
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