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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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. Employer Identification No.)
500 West Monroe Street
Chicago, IL 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The registrant had 1,041,250 shares of $1 par value common stock
outstanding (all owned by GATX Corporation) as of March 5, 2004.
The registrant meets the conditions set forth in General Instructions I (1)
(a) and (b) of Form 10-K and, therefore, is filing this form with the reduced
disclosure format.
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INDEX TO GATX FINANCIAL CORPORATION
2003 FORM 10-K
Item No. Page No.
-------- --------
Part I
Item 1. Business.................................................................................... 2
Business segments........................................................................ 2
GATX Rail............................................................................ 2
GATX Air............................................................................. 3
GATX Technology Services............................................................. 4
GATX Specialty Finance............................................................... 4
Discontinued Operations - Terminals.................................................. 5
Trademarks, Patents and Research Activities.............................................. 5
Seasonal Nature of Business.............................................................. 5
Customer Base............................................................................ 5
Employees................................................................................ 5
Environmental Matters.................................................................... 5
Risk Factors............................................................................. 6
Available Information.................................................................... 8
Item 2. Properties.................................................................................. 9
Item 3. Legal Proceedings........................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................................... 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 12
Item 6. Selected Consolidated Financial Data........................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 12
Year ended December 31, 2003 compared to year ended December 31, 2002.................... 13
Year ended December 31, 2002 compared to year ended December 31, 2001.................... 25
Balance Sheet Discussion................................................................. 34
Cash Flow Discussion..................................................................... 39
Liquidity and Capital Resources.......................................................... 40
Critical Accounting Policies and Estimates............................................... 44
New Accounting Pronouncements............................................................ 46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 47
Item 8. Financial Statements and Supplementary Data................................................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................................. 86
Item 9A. Controls and Procedures..................................................................... 86
Part III
Item 10. Directors and Executive Officers of the Registrant.......................................... 86
Item 11. Executive Compensation...................................................................... 86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters........................................................................ 86
Item 13. Certain Relationships and Related Transactions.............................................. 86
Item 14. Principal Accountant Fees and Services...................................................... 86
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 87
Signatures............................................................................. 88
Exhibits............................................................................... 89
1
PART I
ITEM 1. BUSINESS
GATX Financial Corporation (GFC or the Company) is a wholly owned
subsidiary of GATX Corporation (GATX or the Parent Company). GFC is
headquartered in Chicago, Illinois and provides its services primarily through
four operating segments: GATX Rail (Rail), GATX Air (Air), GATX Technology
Services (Technology) and GATX Specialty Finance (Specialty). Through these
businesses, GFC combines asset knowledge and services, structuring expertise,
partnering and capital to provide business solutions to customers and partners
worldwide. GFC specializes in railcar and locomotive leasing, aircraft operating
leasing, information technology leasing, and financing other large ticket
equipment.
GFC invests in companies and joint ventures that complement its
existing business activities. GFC partners with financial institutions and
operating companies to improve scale in certain markets, broaden diversification
within an asset class, and enter new markets.
At the end of 2003, GFC completed a reorganization which resulted in
changes in management structure and reporting. As a result, GFC expanded its
operating segments from Rail and Financial Services, as previously reported, to
Rail, Air, Technology and Specialty. The results of American Steamship Company
(ASC) and certain corporate expenses not allocated to the segments are included
in Other.
At December 31, 2003, GFC had balance sheet assets of $6.3 billion,
comprised of operating assets such as railcars, commercial aircraft and
information technology equipment. In addition to the $6.3 billion of assets
recorded on the balance sheet, GFC utilizes approximately $1.3 billion of other
assets, such as railcars and aircraft, which were financed with operating leases
and therefore are not recorded on the balance sheet.
See discussion in Note 22 to the consolidated financial statements for
additional details regarding financial information about geographic areas.
BUSINESS SEGMENTS
See discussion in the RISK FACTORS section of Part I and MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS section
of Part II, Item 7 of this document for additional details regarding each
segment's business and operating results.
GATX RAIL
Rail is headquartered in Chicago, Illinois and is principally engaged
in leasing rail equipment, including tank cars, freight cars and locomotives.
Rail provides both full service leases and net leases. Under a full service
lease, Rail maintains and services the railcars, pays ad valorem taxes, and
provides other ancillary services. Under a net lease, the lessee is responsible
for maintenance, insurance and taxes. As of December 31, 2003, GFC's owned
worldwide fleet, including Rail and Specialty owned cars, totaled approximately
125,000 railcars. GFC also has an ownership interest in approximately 27,000
railcars worldwide through Rail and Specialty's investments in affiliated
companies.
As of December 31, 2003, Rail's North American fleet consisted of
approximately 105,000 railcars, comprised of 61,000 tank cars and 44,000 freight
cars. The cars in this fleet have depreciable lives of 30 to 38 years and an
average age of approximately 16 years. The utilization rate of Rail's North
American railcar fleet was 93% at December 31, 2003. Rail has interests in 6,000
railcars and 800 locomotives through its investments in affiliated companies in
North America.
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In North America, Rail typically leases new railcars for terms of
approximately five years. Renewals, or extension of existing leases, are
generally for periods ranging from less than a year to ten years, with an
average lease term of four years. Rail purchases most of its new railcars from a
limited number of manufacturers, including Trinity Industries, Inc., American
Railcar Industries and Union Tank Car Company. Rail signed agreements with
Trinity Industries, Inc. and with Union Tank Car Company for the purchase of
5,000 and 2,500 newly manufactured cars, respectively, for orders through 2007.
Rail's primary competitors in North America are Union Tank Car Company,
General Electric Railcar Services Corporation, and various financial
institutions. At the end of 2003, there were approximately 274,000 tank cars and
1.4 million freight cars owned and leased in North America. At December 31,
2003, Rail's owned fleet comprised approximately 22% of the tank cars in North
America and approximately 3% of the freight cars in North America. Principal
competitive factors include price, service, availability and customer
relationships.
Rail operates a network of major service centers across North America
supplemented by a number of smaller service centers and a fleet of service
trucks. Additionally, Rail utilizes independent third-party repair facilities.
In addition to its North American fleet, Rail has direct or indirect
ownership interests in three European fleets. In March 2001, Rail purchased
Dyrekcja Eksploatacji Cystern Sp. z.o.o. (DEC), Poland's national tank car fleet
and fuel distribution company. DEC's assets include approximately 10,000 tank
cars and a railcar maintenance network. DEC maintains two business offices and
operates three major service centers in Poland.
In December 2002, Rail acquired the remaining interest in KVG
Kesselwagen Vermietgesellschaft mbH, and KVG Kesselwagen Vermietgesellschaft
m.b.h. (collectively KVG), a leading European tank car lessor. Prior to the 2002
acquisition, Rail held a 49.5% interest in KVG. At December 31, 2003, KVG had
approximately 8,000 railcars, a business office in both Germany and Austria and
a service center in Germany. Rail also owns a 37.5% interest in AAE Cargo AG
(AAE), a freight car lessor headquartered in Switzerland that operates
approximately 18,000 cars.
Worldwide, Rail provides more than 120 railcar types used to ship over
650 different commodities, principally chemicals, petroleum, and food products.
During 2003, approximately 36% of railcar leasing revenue was attributable to
shipments of chemical products, 27% related to shipments of petroleum products,
14% related to shipments of food, 11% related to leasing cars to railroads and
12% related to other revenue sources. Rail leases railcars to over 900
customers, including major chemical, oil, food, agricultural and railroad
companies. In 2003, no single customer accounted for more than 3% of total
railcar leasing revenue.
GATX AIR
Air is headquartered in San Francisco, California and is primarily
engaged in leasing newer, narrow-body aircraft widely used by commercial
airlines throughout the world. Air typically enters into net leases under which
the lessee is responsible for maintenance, insurance and taxes. Air owns
directly or with others 163 aircraft, 48 of which are wholly-owned with the
balance owned in combination with other investors. All of the aircraft are in
compliance with Stage III noise standards and together have a weighted average
age of approximately five years based on net book value. Generally, new aircraft
have an estimated useful life of approximately 25 years. Aircraft currently on
lease have an average remaining lease term of approximately four years. Air
typically offers lease terms in the range of three to five years.
Air's customer base is diverse by carrier and geographic location. Air
leases to 59 airlines in 28 countries and in 2003, no single customer
contributed more than 8% of Air's total revenue or represented more than 9% of
Air's total net book value. At December 31, 2003, the countries with significant
concentrations of Air's commercial aircraft were Turkey, with approximately
$262.9 million or 13% of Air's total assets of $2,006.0 million, including off
balance sheet assets of $29.0 million, and Italy with approximately $238.8
million or 12%
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of Air's total assets, including off balance sheet assets. Air purchases new
aircraft from Airbus Industrie (Airbus) and The Boeing Company (Boeing) and also
acquires used aircraft in the secondary market. Air primarily competes with
independent leasing companies, leasing subsidiaries of commercial banks, and
financing arms of equipment manufacturers. The primary competitive factors are
pricing and availability of aircraft types.
Air also manages 74 aircraft for third parties. Air's management role
includes marketing the aircraft, monitoring aircraft maintenance and condition,
and administering the portfolio, including billing and collecting rents,
accounting and tax compliance, reporting and regulatory filings, purchasing
insurance, and lessee credit evaluation.
GATX TECHNOLOGY SERVICES
Technology, headquartered in Tampa, Florida, is a leading independent
lessor of information technology (IT) equipment in North America. In addition,
Technology has ownership interests in technology leasing companies in the United
Kingdom (U.K.) and Germany. Technology assists its customers in acquiring IT
equipment from leading manufacturers and resellers. This equipment includes
personal computers, servers, midrange computers, mainframe computers and
communications equipment. IT equipment is typically depreciated to an estimated
residual value over the lease term, which is approximately three to five years.
The average size of an IT transaction is approximately $.3 million.
In conjunction with leasing technology equipment, Technology provides
life cycle asset management services to help its customers acquire, manage,
remarket and dispose of IT assets. As an independent technology lessor,
Technology is not aligned with any particular manufacturer and it is able to
provide these services with an unbiased perspective. These services include
assessing alternative manufacturers, technologies, products and procurement
plans.
Technology serves a diverse customer base, in a broad range of
industries including data processing and information services, retail,
scientific, utilities, manufacturing, finance and insurance. Technology is not
dependent on any single customer; no single customer accounts for more than 8%
of Technology's revenues.
Technology primarily competes with captive leasing companies of IT
equipment manufacturers, leasing subsidiaries of commercial banks and
independent leasing companies.
GATX SPECIALTY FINANCE
Specialty is headquartered in San Francisco, California and is
comprised of the former specialty finance and venture finance business units,
which are now managed as one operating segment. At the end of 2002, GFC
announced its intention to curtail investment in specialty finance and to sell
or otherwise run-off venture finance.
The Specialty portfolio consists primarily of leases and loans,
frequently including interests in an asset's residual value, and joint venture
investments involving a variety of underlying asset types, including marine,
aircraft and other diversified investments. The portfolio of the discontinued
venture business consists primarily of loans. Specialty also manages portfolios
of assets for third parties with a net book value of $864.0 million. The
majority of these managed assets are in markets in which GFC has a high level of
expertise such as aircraft, power generation, rail equipment, and marine
equipment. Specialty generates fee-based income through transaction structuring
and portfolio management services. Fees are earned at the time a transaction is
completed and/or on an ongoing basis in the case of portfolio management
activities. Specialty also derives remarketing income when assets are sold from
the owned portfolio and residual sharing fees from managed assets sold on behalf
of third parties.
Specialty sold its venture finance portfolios in the U.K. and Canada in
2003, and continues to run-off the remaining venture finance portfolio. GFC
anticipates that the venture finance portfolio will be substantially
4
liquidated by the end of 2005. Venture finance-related assets, including $1.6
million off balance sheet assets, are $105.5 million at December 31, 2003, 15%
of Specialty's total assets of $721.3 million, including $13.7 million of off
balance sheet assets.
The principal competitors of Specialty are captive leasing companies of
equipment manufacturers, leasing subsidiaries of commercial banks, independent
leasing companies, lease brokers and investment banks.
DISCONTINUED OPERATIONS - TERMINALS
GFC completed the divestiture of the GATX Terminals (Terminals) segment
in 2002. Terminals provided bulk liquid storage and pipeline distribution
services. As a result, the financial data for Terminals is presented as
discontinued operations for all periods.
In the first quarter of 2001, GFC sold the majority of Terminals'
domestic operations. The sale included substantially all of Terminals' domestic
terminaling operations, the Central Florida Pipeline Company and Calnev Pipe
Line Company. Also in the first quarter of 2001, GFC sold substantially all of
Terminals' European operations. In the second and third quarters of 2001, GFC
sold Terminals' Asian operations and its interest in a U.S. distillate and
blending distribution affiliate. In the first quarter of 2002, GFC sold its
interest in a bulk-liquid storage facility located in Mexico.
TRADEMARKS, PATENTS AND RESEARCH ACTIVITIES
Patents, trademarks, licenses, and research and development activities
are not material to GFC's businesses taken as a whole.
SEASONAL NATURE OF BUSINESS
Seasonality is not considered significant to the operations of GFC and
its subsidiaries taken as a whole.
CUSTOMER BASE
Neither GFC as a whole nor any of its business segments is dependent
upon a single customer or concentration among a few customers.
EMPLOYEES
As of December 31, 2003, GFC and its subsidiaries had approximately
2,159 employees, of whom 35% were hourly employees covered by union contracts.
ENVIRONMENTAL MATTERS
GFC's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulations. These laws cover
discharges to waters, air emissions, toxic substances, and the generation,
handling, storage, transportation and disposal of waste and hazardous materials.
This regulation has the effect of increasing the cost and liabilities associated
with leasing rail cars. Environmental risks are also inherent in rail
operations, which frequently involve transporting chemicals and other hazardous
materials.
Some of GFC's real estate holdings are and have been used for
industrial or transportation-related purposes or leased to commercial or
industrial companies whose activities may have resulted in discharges onto the
property. As a result, GFC is now subject to and will from time to time continue
to be subject to environmental cleanup and enforcement actions. In particular,
the federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the Superfund law, generally imposes joint
5
and several liability for cleanup and enforcement costs, without regard to fault
or the legality of the original conduct, on current and former owners and
operators of a site. Accordingly, GFC may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to cleanup sites at
which certain substances may have been released by GFC, its current lessees,
former owners or lessees of properties, or other third parties. Environmental
remediation and other environmental costs are accrued when considered probable
and amounts can be reasonably estimated. As of December 31, 2003, environmental
costs were not material to GFC's results of operations, financial position or
liquidity. For further discussion, see Note 16 to the consolidated financial
statements.
RISK FACTORS
GFC's businesses are subject to a number of risks which investors should
consider.
- Liquidity and Capital Resources. GFC is dependent in part upon the
issuance of unsecured and secured debt to fund its operations and
contractual commitments. A number of factors could cause GFC to incur
increased borrowing costs and to have greater difficulty accessing
public and private markets for both secured and unsecured debt. These
factors include the global capital market environment and outlook,
financial performance and outlook, and credit ratings as determined
primarily by rating agencies such as Standard & Poor's (S&P) and
Moody's Investor Service (Moody's). In addition, based on GFC's
current credit ratings, access to the commercial paper market and
uncommitted money market lines is uncertain and cannot be relied upon.
It is possible that GFC's other sources of funds, including available
cash, bank facilities, cash flow from operations and portfolio
proceeds may not provide adequate liquidity to fund its operations and
contractual commitments.
- Terrorism/International Conflict. National and international political
developments, instability and uncertainties, including continuing
political unrest and threats of terrorists' attacks, could result in
continued global economic weakness in general and in the United States
in particular, and could have an adverse impact on GFC's businesses.
The effects may include, among other things, a decrease in demand for
air travel and rail services, consolidation and/or additional
bankruptcies in the rail and airline industries, lower utilization of
new and existing aircraft and rail equipment, lower rail and aircraft
rental rates or a slower recovery of such rates, impairment of rail
and air portfolio assets and fewer partners for joint ventures.
Depending upon the severity, scope and duration of these effects, the
impact on GFC's financial position, results of operations and cash
flows could be material.
- Competition. GFC is subject to intense competition in its rail,
aircraft and technology leasing businesses. In many cases, these
competitors are larger entities that have greater financial resources,
higher credit ratings and access to lower cost capital than GFC. These
factors may enable competitors to offer leases and loans to customers
at lower rates than GFC is able to provide, thus impacting GFC's asset
utilization or GFC's ability to lease assets on a profitable basis.
- Lease versus Purchase Decision. GFC's core businesses rely upon its
customers continuing to lease rather than purchase assets. There are a
number of items that factor into the customer's decision to lease or
purchase assets, such as tax considerations, interest rates, balance
sheet considerations, and operational flexibility. GFC has no control
over these external considerations and changes in these factors could
negatively impact demand for its leasing products.
- Effects of Inflation. Inflation in railcar rental rates as well as
inflation in residual values for air and rail equipment have
historically benefited GFC's financial results. Effects of inflation
are unpredictable as to timing and duration, depending on market
conditions and economic factors.
- Asset Obsolescence. GFC's core assets may be subject to functional,
regulatory, or economic obsolescence. Although GFC believes it is
adept at managing obsolescence risk, there is no guarantee
6
that changes in various market fundamentals or the adoption of new
regulatory requirements will not cause unexpected asset obsolescence
in the future.
- Allowance for Possible Losses. GFC's allowance for possible losses may
be inadequate if unexpected adverse changes in the economy exceed the
expectations of management, or if discrete events adversely affect
specific customers, industries or markets. If the allowance for
possible losses is insufficient to cover losses related to reservable
assets, including gross receivables, finance leases, and loans, then
GFC's financial position or results of operations could be negatively
impacted.
- Impaired Assets. An asset impairment charge may result from the
occurrence of unexpected adverse changes that impact GFC's estimates
of expected cash flows generated from our long-term assets. GFC
regularly reviews long-term assets for impairments, including when
events or changes in circumstances indicate the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
the carrying amount of an asset is not recoverable. GFC may be
required to recognize asset impairment charges in the future as a
result of the weak economic environment, challenging market conditions
in the air, rail or technology markets or events related to particular
customers or asset types.
- Insurance. The ability to insure its rail and aircraft assets and
their associated risks is an important aspect of GFC's ability to
manage risk in these core businesses. There is no guarantee that such
insurance will be available on a cost-effective basis consistently in
the future.
- Environmental. GFC is subject to federal and state requirements for
protection of the environment, including those for discharge of
hazardous materials and remediation of contaminated sites. GFC
routinely assesses its environmental exposure, including obligations
and commitments for remediation of contaminated sites and assessments
of ranges and probabilities of recoveries from other responsible
parties. Because of the regulatory complexities and risk of
unidentified contaminants on its properties, the potential exists for
remediation costs to be materially different from the costs GFC has
estimated.
- Potential for Claims and Lawsuits. The nature of assets which GFC owns
and leases exposes the Company to the potential for various claims and
litigation related to, among other things, personal injury and
property damage, environmental claims and other matters. Some of the
commodities transported by GFC's railcars, particularly those
classified as hazardous materials, can pose risks that GFC and its
subsidiaries work with its customers to minimize. The potential
liabilities could have a significant effect on GFC's consolidated
financial condition or results of operations.
- Commodity/Energy Prices. Energy prices, including the price of natural
gas and oil, are significant cost drivers for many of our customers,
particularly in the chemical and airline industries. In addition,
commodity prices such as the price of steel are a large component of
railcar manufacturing. Sustained high energy or commodity prices could
negatively impact these industries resulting in a corresponding
adverse effect on the cost and demand for our products and services.
- Regulation. GFC's air and rail operations are subject to the
jurisdiction of a number of federal agencies, including the Department
of Transportation. State agencies regulate some aspects of rail
operations with respect to health and safety matters not otherwise
preempted by federal law. New regulatory rulings may negatively impact
GFC's financial results and economic value of its assets.
- Risk Concentrations. GFC's revenues are generally derived from a wide
range of asset types, customers and geographic locations. However,
from time to time, GFC could have a large investment in a particular
asset type, a large revenue stream associated with a particular
customer, or a large number of customers located in a particular
geographic region. Decreased demand from a discrete event impacting a
particular asset type, discrete events with a specific customer, or
adverse regional economic conditions, particularly
7
for those assets, customers or regions in which GFC has a concentrated
exposure, could have a negative impact on GFC's results of operations.
- Foreign Currency. GFC's results are exposed to foreign exchange rate
fluctuations as the financial results of certain subsidiaries are
translated from the local currency into U.S. dollars upon
consolidation. As exchange rates vary, revenue and other operating
results, when translated, may differ materially from expectations. GFC
is also subject to gains and losses on foreign currency transactions,
which could vary based on fluctuations in exchange rates and the
timing of the transactions and their settlement. In addition,
fluctuations in foreign exchange rates can have an effect on the
demand and relative price for services provided by GFC domestically
and internationally, and could have a negative impact on GFC's results
of operations.
- Asset Utilization and Lease Rates. GFC's profitability is largely
dependent on its ability to maintain assets on lease (utilization) at
satisfactory lease rates. A number of factors can adversely affect
utilization and lease rates, including, but not limited to: an
economic downturn causing reduced demand or oversupply in the markets
in which the company operates, changes in customer behavior, or any
other change in supply or demand caused by factors discussed in this
Risk section.
- Retirement Benefits. GFC's pension and other post-retirement costs are
dependent on various assumptions used to calculate such amounts,
including discount rates, long-term return on plan assets, salary
increases, health care cost trend rates and other factors. Changes to
any of these assumptions could adversely affect GFC's results of
operations.
- Income Taxes. GFC is subject to taxes in both the U.S. and various
foreign jurisdictions. As a result, GFC's effective tax rate could be
adversely affected by changes in the mix of earnings in the U.S. and
foreign countries with differing statutory tax rates, legislative
changes impacting statutory tax rates, including the impact on
recorded deferred tax assets and liabilities, changes in tax laws or
by material audit assessments. In addition, deferred tax balances
reflect the benefit of net operating loss carryforwards, the
realization of which will be dependent upon generating future taxable
income.
Additional risks and uncertainties not presently known, or that GFC
currently deems immaterial, may also adversely affect GFC's business operations.
AVAILABLE INFORMATION
GFC files annual, quarterly and current reports and other information
with the Securities and Exchange Commission (SEC). You may read and copy any
document GFC files at the SEC's public reference room at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
information about the public reference room. The SEC maintains a website that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including GFC) file electronically with the SEC. The
SEC's website is www.sec.gov.
GFC makes available free of charge at the Parent Company's website,
www.gatx.com, its most recent annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as
reasonably practicable after such material is electronically filed with, or
furnished, to the SEC. The information on GATX's website is not incorporated by
reference into this report.
8
ITEM 2. PROPERTIES
Information regarding the location and general character of certain
properties of GFC is included in ITEM 1, BUSINESS, of this document.
At December 31, 2003, locations of operations were as follows:
RAIL
HEADQUARTERS
Chicago, Illinois
BUSINESS OFFICES
San Francisco, California
Alpharetta, Georgia
Chicago, Illinois
Marlton, New Jersey
Philadelphia, Pennsylvani
Houston, Texas
Calgary, Alberta
Montreal, Quebec
Vienna, Austria
Sydney, Australia
Hamburg, Germany
Mexico City, Mexico
Nowa Wie.Wielka, Poland
Warsaw, Poland
MAJOR SERVICE CENTERS
Colton, California
Waycross, Georgia
Hearne, Texas
Red Deer, Alberta
Sarnia, Ontario
Coteau-du-Lac, Quebec
Montreal, Quebec
Moose Jaw, Saskatchewan
Hanover, Germany
Tierra Blanca, Mexico
Gdansk, Poland
Ostroda, Poland
Slotwiny, Poland
MINI SERVICE CENTERS
Macon, Georgia
Terre Haute, Indiana
Geismar, Louisiana
Kansas City, Missouri
Cincinnati, Ohio
Catoosa, Oklahoma
Freeport, Texas
Plantersville, Texas
Czechowice, Poland
Jedlicze, Poland
Plock, Poland
MOBILE SERVICE UNITS
Mobile, Alabama
Colton, California
Lake City, Florida
East Chicago, Indiana
Norco, Louisiana
Sulphur, Louisiana
Albany, New York
Masury, Ohio
Cooper Hill, Tennessee
Galena Park, Texas
Olympia, Washington
Edmonton, Alberta
Red Deer, Alberta
Clarkson, Ontario
Sarnia, Ontario
Montreal, Quebec
Quebec City, Quebec
Vancouver, British Columbia
Tierra Blanca, Mexico
AFFILIATES
San Francisco, California
La Grange, Illinois
Kansas City, Missouri
Zug, Switzerland
AIR
HEADQUARTERS
San Francisco, California
BUSINESS OFFICES
Seattle, Washington
Toulouse, France
Tokyo, Japan
London, United Kingdom
AFFILIATES
Dublin, Ireland
London, United Kingdom
TECHNOLOGY
HEADQUARTERS
Tampa, Florida
BUSINESS OFFICES
Oldsmar, Florida
Tampa, Florida
AFFILIATES
Bad Homburg, Germany
Hertfordshire, United Kingdom
SPECIALTY
HEADQUARTERS
San Francisco, California
BUSINESS OFFICES
Lafayette, California
Sydney, Australia
OTHER BUSINESS OFFICES
Williamsville, New York
9
ITEM 3. LEGAL PROCEEDINGS
On May 25, 2001, a suit was filed in Civil District Court for the
Parish of Orleans, State of Louisiana, Schneider, et al. vs. CSX Transportation,
Inc., Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The Public Belt Railroad
Commission for The City of New Orleans, GATX Corporation, GATX Capital
Corporation, The City of New Orleans, and The Alabama Great Southern Railroad
Company, Number 2001-8924. The suit asserts that on May 25, 2000, a tank car
owned by the GATX Rail division of GFC leaked the fumes of its cargo, dimethyl
sulfide, in a residential area in the western part of the city of New Orleans
and that the tank car, while still leaking, was subsequently taken by defendant,
New Orleans Public Belt Railroad, to another location in the city of New
Orleans, where it was later repaired. The plaintiffs are seeking compensation
for alleged personal injuries and property damages. The petition alleges that a
class should be certified, but plaintiffs have not yet moved to have the class
certified. Settlement negotiations are ongoing.
In March 2001, 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 GFC, alleging damages of approximately $52 million
arising out of the unlawful taking over by DEC in August of 1998, of a 51%
interest in Kolsped Spedytor Miedzynarodwy Sp. z.o.o. (Kolsped), and removal of
valuable property from Kolsped. The complaint was served on DEC in December
2001. The plaintiff claims that DEC unlawfully obtained confirmation of
satisfaction of a condition precedent to its purchase of 51% interest in
Kolsped, following which it allegedly mismanaged Kolsped and put it into
bankruptcy. The plaintiff claims to have purchased the same 51% interest in
Kolsped in April of 1999, subsequent to DEC's alleged failure to satisfy the
condition precedent. GFC purchased DEC in March 2001 and believes this claim is
without merit, and is vigorously pursuing the defense thereof. DEC has filed a
response denying the allegations set forth in the compliant. The parties have
each confirmed their respective positions in the case at a hearing held in early
March of 2002. At a hearing held on October 22, 2003, the court rendered a
decision in favor of DEC, dismissing Kolia's action. On December 9, 2003, the
plaintiff filed an appeal of the decision.
On December 29, 2003, a suit was filed in the District Court of the
State of Minnesota, County of Hennepin, Fourth Judicial District, MeLea J.
Grabinger, individually, as Personal Representative of the Estate of John T.
Grabinger, and as Representative/Trustee of the beneficiaries in the wrongful
death action, v. Canadian Pacific Railway Company, et al. On January 20, 2004,
Canadian Pacific removed the case to the United States District Court for the
District of Minnesota Civil No. 04 CU-140-(DSD/SRN) but on February 19, 2004,
consented to a remand to the District Court of the State of Minnesota, County of
Hennepin. The lawsuit seeks damages for an incident that occurred on Friday,
January 18, 2002 when a Canadian Pacific train containing anhydrous ammonia cars
derailed near Minot, North Dakota. As a result of the derailment, several tank
cars fractured, releasing anhydrous ammonia which formed a vapor cloud. One
person died, as many as 100 people received medical treatment, of which fifteen
were admitted to the hospital and a number of others were purportedly affected.
The plaintiff alleges among other things that the incident (i) caused the
wrongful death of her husband, and (ii) caused her to suffer permanent physical
injuries and emotional and physical pain. The complaint alleges that the
incident was proximately caused by the defendants who are liable under a number
of legal theories, and states that it is plaintiffs' information and belief that
the Canadian Pacific and its related entities are solely at fault for the
incident. However, because the NTSB had not yet released a report of its
investigation into the incident at the date of filing of the Complaint,
plaintiffs were unsure if the tank car suppliers had any responsibility and
therefore named all of the tank car manufacturers and owners with cars involved
in the incident, including GFC (erroneously named as GATX Rail Corporation) to
avoid being barred by the statute of limitations. On March 9, 2004, the NTSB
released a synopsis of its anticipated report, which sets forth a number of
conclusions including that the failure of the track caused the derailment and
that the catastrophic fracture of tank cars increased the severity of the
accident. GFC intends to defend this suit vigorously. On January 9, 2004, the
plaintiff filed an action that is almost identical to this action in United
States District Court, District of North Dakota, Northwest Division, MeLea J.
Grabinger, individually, as Personal Representative of the Estate of John
10
T. Grabinger, and as Representative/Trustee of the beneficiaries in the wrongful
death action, v. Canadian Pacific Railway Company, et al. Case Number A4-04-02.
GFC has not yet been served in the North Dakota action.
GFC and its subsidiaries have been named as defendants in a number of
other legal actions and claims, various governmental proceedings and private
civil suits arising in the ordinary course of business, including those related
to environmental matters, workers' compensation claims by GFC employees and
other personal injury claims. Some of the legal proceedings include claims for
punitive as well as compensatory damages. Several of the Company's subsidiaries
have also been named as defendants or co-defendants in cases alleging injury
relating to asbestos. In these cases, the plaintiffs seek an unspecified amount
of 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
number of these claims and the corresponding demands for indemnity against the
Company increased in 2003. It is possible that the number of these claims could
continue to grow and that the cost of these claims could correspondingly
increase in the future.
The amounts claimed in some of the above described proceedings are
substantial and the ultimate liability cannot be determined at this time.
However, it is the opinion of management that amounts, if any, required to be
paid by GFC and its subsidiaries in the discharge of such liabilities are not
likely to be material to GFC's consolidated financial position or results of
operations. Adverse court rulings or changes in applicable law could affect
claims made against GFC and its subsidiaries, and increase the number, and
change the nature, of such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Required.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
GATX Corporation owns all of the outstanding common stock of GFC.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
Information regarding general information and characteristics of the
Company is included in ITEM 1, BUSINESS, of this document.
The following discussion and analysis should be read in conjunction
with the audited financial statements included herein. Certain statements within
this document 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. In addition, certain factors, including Rick Factors
identified in Part I of this document may affect GFC businesses. As a result,
past financial performance may not be a reliable indicator of future
performance.
STATEMENT OF INCOME DISCUSSION
The following table presents income (loss) from continuing operations
by segment and net income for the years ended December 31, 2003, 2002 and 2001
(in millions):
2003 2002 2001
------------- ------------- ------------
Rail....................................................... $ 54.2 $ 25.2 $ 57.3
Air........................................................ 2.1 8.1 16.8
Technology................................................. 15.2 4.7 30.1
Specialty.................................................. 38.1 4.9 (41.3)
Other...................................................... 2.1 (12.8) (19.5)
------------- ------------- ------------
Income from continuing operations......................... 111.7 30.1 43.4
Discontinued operations.................................... -- 6.2 176.6
------------- ------------- ------------
Net income................................................ $ 111.7 $ 36.3 $ 220.0
============= ============= ============
At the end of 2003, GFC completed a reorganization which resulted in
changes in management structure and reporting. As a result, GFC now provides its
services and products through four operating segments: Rail, Air, Technology and
Specialty. Previously, GFC reported its operating segments as GATX Rail and
Financial Services, which included the results of it business units, air,
technology, specialty finance (including American Steamship Company (ASC)), and
venture finance. All reported amounts have been restated to conform to the
revised segment presentation.
Along with the change to reporting segments, GFC revised its
methodology for allocating corporate SG&A expenses to the segments. Corporate
SG&A expenses relate to administration and support functions
12
performed at the corporate office. Such expenses include information technology,
human resources, legal, financial support and executive costs. Under the revised
allocation methodology, directly attributable expenses are generally allocated
to the segments, and shared costs are retained in Other. Amounts allocated to
the segments are approximated based on management's best estimate and judgment
of direct support services. Rail's previously reported segment net income for
2002 and 2001 has been restated to incorporate the revised methodology for SG&A
allocations.
Debt balances and interest expense were allocated based upon a fixed
leverage ratio for each individual operating segment across all reporting
periods, expressed as a ratio of debt to equity. Rail's leverage ratio was set
at 5:1, Air's leverage ratio was set at 4:1, Technology's leverage ratio was set
at 1:1 (excluding nonrecourse debt), and Specialty's leverage ratio was set at
4:1. Any GFC debt and related interest expense that remained after this
allocation methodology was assigned to Other in each period. Management believes
this leverage and interest expense allocation methodology gives an accurate
indication of each operating segment's risk-adjusted financial return.
See Note 23 to the consolidated financial statements for further
segment information.
Following is management's discussion and analysis of GFC's comparative
results of its segments, in addition to results of Other and discontinued
operations.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
GATX RAIL
Challenging market conditions in the North American rail industry
continued to affect Rail in 2003. An oversupply of certain car types in the
railcar market, short backlogs at new car manufacturers, and a weak economic
environment has resulted in lease rates that are still below peak lease rates of
the late 1990's. Aggressive competition from other lessors pressured lease rates
as well. Despite an improving economy in North America, the earnings recovery
from Rail's existing fleet is likely to be gradual due to the average lease term
of Rail's portfolio and that approximately 36% of Rail's revenue comes from the
chemical sector, which has also lagged the general economy.
With an average lease term of five years, a significant portion of the
North American fleet comes up for renewal each year. During 2003, approximately
26,000 cars previously leased in a stronger market at more attractive rates were
renewed with the same customer or placed with a new customer ("assigned") at
market rates which were lower on average than the previous rate. Although the
downward trend in absolute lease rates has abated somewhat, Rail anticipates
that approximately 25,000 cars during 2004 will also be renewed or assigned at
rates generally lower than the previous contract rate, slowing the pace of
Rail's earnings recovery.
In 2003, utilization of the North American fleet improved from 91% to
93%. The increase in utilization from the prior year end was the result of
aggressive efforts to improve the renewal success rate, to market specific car
types and to scrap older, uneconomic cars from the fleet. Active cars in North
America increased by approximately 1,100 cars after two consecutive years of
decline. The acquisition at the end of the fourth quarter in 2003 of a fleet of
1,200 covered hoppers on long-term lease drove the increase in active cars.
Investment in new cars for North America increased in 2003 over the
prior year. Rail entered into agreements in late 2002 with Trinity Industries,
Inc. and Union Tank Car Company to acquire new cars at pre-negotiated prices.
Under this program, Rail took delivery of approximately 1,000 new cars in 2003.
Rail continued to purchase new cars and actively pursue secondary market
transactions in order to capitalize on the slowly improving market. As the
market improves, increased railcar manufacturing backlogs may affect new car
prices. The recent sharp increase in steel prices may also affect new car
prices.
13
The trend of increasing costs for maintaining the North American fleet
continued in 2003. Despite fewer cars in the total fleet, maintenance costs
rose, largely due to an increase in the number of car assignments. In addition,
maintenance costs were adversely affected in 2003 as a result of an American
Association of Railroads (AAR) requirement to replace bolsters on certain cars
(see discussion below). The trend in maintenance costs is expected to continue
in 2004 due to additional compliance work, anticipated high assignment levels,
and completing the remainder of the bolster replacement work.
In 2003, Rail's European operations generally experienced a more
favorable market environment compared to its North America operations. Rail's
wholly-owned European subsidiaries DEC and KVG primarily serve the tank car
market, and AAE, a European joint venture, primarily serves the general freight
car market. Fleet utilization at both KVG and AAE is in the high 90%'s. AAE has
benefited from the high growth rates of shipping activity at European seaports.
DEC's performance has been negatively affected by a weak Polish economy.
The long-term outlook for the European market is positive. The European
Union is encouraging the use of railways in place of the congested road system.
KVG and DEC are in the early stages of integrating their tank car operations and
DEC is moving from its high cost trip-lease business model to a low cost
operating lease business model as it continues to improve its cost structure.
This transition may negatively affect short-term earnings, but is expected to
result in long-term operational efficiencies.
Rail acquired the remaining interest in KVG in December 2002. As a
result, Rail's year over year income comparability is affected by the inclusion
of 100% of KVG's results in 2003 compared to 49.5% in 2002. KVG's revenues
converted to U.S. dollars were approximately $66.0 million in 2003. KVG's
operating results were affected by a continued weak European economy, offset by
strong new car additions, as its primary markets of chemical, petroleum, mineral
and liquid petroleum gas remained stable. In addition, KVG was instrumental in
placing DEC tank cars in service outside of Poland, a key European strategy for
Rail.
Gross Income
Components of Rail's gross income are summarized below (in millions):
2003 2002
------------- ------------
Lease income.................................................................. $ 635.6 $ 608.6
Asset remarketing income...................................................... 4.7 4.9
Fees.......................................................................... 2.9 3.4
Other......................................................................... 46.6 42.2
------------- ------------
Revenues..................................................................... 689.8 659.1
Share of affiliates' earnings................................................. 12.5 13.1
------------- ------------
Total gross income........................................................... $ 702.3 $ 672.2
============= ============
Rail's 2003 gross income of $702.3 million was $30.1 million higher
than 2002. Excluding the impact of KVG in both periods, gross income was down
$20.5 million from 2002. The decrease was primarily driven by lower North
American lease income resulting from lower average lease rates and fewer
railcars on lease for most of the year. Although average renewal rates continue
to be lower than Rail's prior contractual rate, the percentage decline in
renewal rates improved steadily during 2003.
Share of affiliates' 2003 earnings of $12.5 million were slightly lower
than the prior year. Excluding KVG's pretax earnings of $4.7 million in 2002,
share of affiliates' earnings in 2003 increased $4.1 million. The increase was
the result of favorable maintenance expense at domestic affiliates combined with
a larger fleet and favorable foreign exchange rates at a foreign affiliate.
14
Ownership Costs
Components of Rail's ownership costs are summarized below (in
millions):
2003 2002
------------- -------------
Depreciation.............................................. $ 113.7 $ 102.3
Interest, net............................................. 59.6 53.8
Operating lease expense................................... 183.2 177.6
------------- -------------
Total ownership costs.................................... $ 356.5 $ 333.7
` ============= =============
Ownership costs were $356.5 million in 2003 compared to $333.7 million
in 2002. The increase was primarily due to the acquisition and consolidation of
KVG.
Other Costs and Expenses
Components of Rail's other costs and expenses are summarized below (in
millions):
2003 2002
------------- -------------
Maintenance expense....................................... $ 165.5 $ 150.9
Other operating expenses.................................. 33.9 31.4
Selling, general and administrative....................... 69.0 59.2
(Reversal) provision for possible losses.................. (2.6) 1.4
Reduction in workforce charges............................ -- 2.0
Fair value adjustments for derivatives.................... -- .2
------------- -------------
Total other costs and expenses........................... $ 265.8 $ 245.1
============= =============
Maintenance expense of $165.5 million in 2003 increased $14.6 million
from 2002. Excluding KVG, maintenance expense increased $4.9 million in 2003.
The variance is due primarily to the increase in car assignments discussed
above. Both 2003 and 2002 results include comparable levels of maintenance costs
for certain railroad mandated repairs.
In 2003, the AAR issued a series of early warning letters that required
all owners of railcars in the U.S., Canada and Mexico to inspect or replace
certain bolsters manufactured from the mid 1990s to 2001 by a now bankrupt
supplier. Rail owned approximately 3,500 railcars equipped with bolsters that
were required to be inspected or replaced. Due dates for inspection or
replacement of the bolsters ranged from September 30, 2003 to December 31, 2004
depending on car type and service. As of December 31, 2003, bolsters on
approximately 1,300 cars have been replaced. 2003 maintenance expense included
$3.9 million attributable to the inspection and replacement of bolsters.
Management expects the remaining costs of bolster replacements to approximate
$3.3 million in 2004.
In the second quarter of 2002, the Federal Railroad Administration
issued a Railworthiness Directive (Bar Car Directive) which required Rail to
inspect and repair, if necessary, a certain class of its cars that were built or
modified with reinforcing bars prior to 1974. Approximately 4,200 of Rail's
owned railcars were affected by the Bar Car Directive. The unfavorable impact on
Rail's operating results for 2002 was approximately $2.7 million after-tax,
including lost revenue, inspection, cleaning and replacement car costs, which
were partially offset by gains on the accelerated scrapping of affected cars. As
of year end 2002, substantially all of the subject tank cars were removed from
Rail's fleet.
Selling, general and administrative (SG&A) expenses of $69.0 million
increased $9.8 million in 2003. Excluding KVG, SG&A expenses decreased $1.2
million due to cost savings initiatives. In 2003, Rail recorded a reversal of
provision for possible losses of $2.6 million resulting from improvement in
portfolio quality, recoveries of bad debts, and more favorable aging of Rail's
receivables.
15
Taxes
Rail's income tax expense was $25.8 million in 2003, a decrease of $7.5
million from the 2002 amount of $33.3 million. Rail's 2003 taxes included a $2.3
million deferred tax benefit at DEC attributable to a reduction in Polish tax
rates.
Cumulative Effect of Accounting Change
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, Rail completed a review of all
recorded goodwill in 2002. Fair values were established using discounted cash
flows. Based on this review, Rail recorded a one-time, non-cash impairment
charge of $34.9 million related to DEC in 2002. The charge is non-operational in
nature and was recognized as a cumulative effect of accounting change as of
January 1, 2002 in the consolidated statements of income. The impairment charge
was due primarily to lessened expectations of projected cash flows based on
market conditions at the time of the review and a lower long-term growth rate
projected for DEC.
Net Income
Rail's net income of $54.2 million in 2003 increased $29.0 million from
the prior year. Income before the cumulative effect of accounting change
decreased $5.9 million. The decrease was primarily due to lower North American
lease income driven by lower average lease rates.
GATX AIR
Challenging conditions in the aviation industry continued to negatively
affect Air in 2003. Although the industry appears to be recovering from its
severe downturn, aircraft lessors continued to experience lower lease rates,
credit defaults and asset impairments during 2003. Specifically, aircraft over
15 years in age are proving to be more difficult to lease and present the
greatest uncertainty in value. Rents on older aircraft continued to decline in
2003, while rents on newer aircraft stabilized.
Until the air market more fully recovers, low lease rates, defaults and
potential impairments will continue to pressure earnings. For example, GFC owns
a 50% interest in Pembroke, an aircraft lessor and manager based in Ireland.
Pembroke currently has six fully utilized Boeing 717 aircraft in its portfolio.
Boeing's 717 program is in jeopardy of being cancelled due to weak demand for
the aircraft. This in turn could adversely affect the future marketability of
these aircraft and may result in impairment.
Air's owned portfolio had an average age of eight years (five years on
a weighted average, net book value basis) at the end of 2003. With a relatively
new fleet, Air achieved almost full utilization in 2003. At December 31, 2003,
less than 1% of Air's portfolio was available for lease; over 96% were on lease
with customers, and the remaining 3% were subject to signed letters of intent to
lease with customers.
Air achieved this utilization level by successfully placing 19 owned
aircraft during 2003, including six new and 13 existing aircraft. Air has
entered into letters of intent or leases for 14 of 15 owned aircraft whose
leases are scheduled to expire in 2004. In addition, as of March 12, 2004, Air
has entered into letters of intent to lease three new aircraft scheduled for
delivery in 2004. Additionally, Air is committed for two new aircraft deliveries
in 2006, which are still available for lease.
Air generates income primarily from operating leases, many which have
"floating" rents that are periodically adjusted based on current interest rates.
Air usually match-funds floating rate leases with floating rate debt to offset
the risk of interest rate fluctuations. Air's other significant source of
revenue is fee income and results from remarketing and administering aircraft in
its joint ventures as well as managing aircraft for third
16
parties. Air's level of fee income can be unpredictable, varying with the
performance of the managed fleet and Air's success in remarketing and selling
aircraft.
Despite the current market conditions, Air expects to grow both its
owned and managed portfolios. Besides its existing aircraft commitments, Air
plans to selectively invest in attractive aircraft as opportunities arise.
Additionally, Air will continue to pursue new partnership and portfolio
management opportunities.
17
Gross Income
Components of Air's gross income are summarized below (in millions):
2003 2002
------------- -------------
Lease income.............................................. $ 90.8 $ 73.4
Interest income........................................... .1 2.9
Asset remarketing income.................................. .8 1.4
Gain on sale of securities................................ .6 --
Fees...................................................... 7.4 7.9
Other..................................................... 10.5 3.4
------------- -------------
Revenues................................................. 110.2 89.0
Share of affiliates' earnings............................. 31.6 14.8
------------- -------------
Total gross income....................................... $ 141.8 $ 103.8
============= =============
Air's 2003 gross income of $141.8 million was $38.0 million higher than
2002. The increase was primarily driven by higher lease income due to the full
year revenue recognition on 16 new aircraft which were delivered at various
times during 2002, and an additional six new aircraft deliveries which were
received and put on lease in 2003. Although gross income increased from the
prior year, lower lease rates due to weak market conditions resulted in lower
average yields. Other income also contributed $7.1 million to the increase,
primarily attributable to the recognition of previously collected maintenance
reserves. These maintenance reserves were entirely offset by related impairment
charges taken on the underlying aircraft.
Share of affiliates' earnings of $31.6 million was $16.8 million higher
than the prior year. The increase from the prior year is primarily due to
impairment losses that were recognized in 2002 on a fleet of 28 Fokker 50 and
Fokker 100 aircraft owned by Air's 50% owned Pembroke affiliate.
Ownership Costs
Components of Air's ownership costs are summarized below (in millions):
2003 2002
------------- -------------
Depreciation.............................................. $ 55.1 $ 37.1
Interest, net............................................. 41.2 35.1
Operating lease expense................................... 3.9 3.5
------------- -------------
Total ownership costs.................................... $ 100.2 $ 75.7
============= =============
Ownership costs of $100.2 million in 2003 were $24.5 million higher
than in 2002. The increase was primarily due to the $18.0 million increase in
depreciation resulting from higher operating lease balances due to full year
depreciation on 16 new aircraft deliveries in 2002 and six new deliveries
received and put on lease in 2003. Interest expense also contributed $6.1
million to the increase as a result of higher debt balances due to the new
aircraft deliveries in 2002 and 2003, slightly offset by lower interest rates.
Excluding an accrual reversal in 2002, operating lease expense in 2003
was lower by $4.3 million due to fewer leased-in aircraft compared to the prior
year.
Operating lease expense of $3.5 million in 2002 was net of a credit of
$4.7 million for the reversal of a loss accrual recorded in prior years. GFC was
a lessee of an aircraft under an operating lease running through 2004. GFC had
subleased the aircraft to an unrelated third party with an initial lease term
expiring in 2001. Prior to 2001, as a result of financial difficulties of the
sublessee as well as concerns about subleasing the aircraft for the period 2001
to 2004, the Company recorded a loss for the costs expected to be incurred on
the operating lease in excess of the anticipated revenues. In 2002, the Company
restructured the terms of the lease, ultimately
18
acquiring ownership of the aircraft, and leasing it to a new customer. As a
result, the $4.7 million accrual was reversed as a credit to operating lease
expense.
Other Costs and Expenses
Components of Air's other costs and expenses are summarized below (in
millions):
2003 2002
------------- -------------
Maintenance expense and other operating expenses.......... $ 2.1 $ 1.5
Selling, general and administrative....................... 18.1 13.3
Provision for possible losses............................. 8.2 .3
Asset impairment charges.................................. 10.2 5.4
------------- -------------
Total other costs and expenses........................... $ 38.6 $ 20.5
============= =============
Total other costs and expenses increased by $18.1 million in 2003
primarily due to the increase in SG&A costs, the provision for losses and asset
impairment charges. SG&A costs increased by $4.8 million due to lower
capitalized expenses as a result of fewer aircraft deliveries in 2003. The
provision for losses increased $7.9 million primarily due to a net $9.6 million
loss provision on disposal of an unsecured Air Canada note. Asset impairment
charges of $10.2 million in 2003 include impairment charges of $8.2 million
related to two commercial aircraft that were offset by the recognition into
income of previously collected maintenance reserves, included in other income.
Taxes
Air's income tax expense was $.9 million in 2003, an increase of $1.4
million from the 2002 tax benefit of $.5 million. Income tax expense benefited
from an extraterritorial income exclusion (ETI) for the lease of U.S.
manufactured equipment to foreign lessees. The benefit was $.7 million in 2003
and $3.1 million in 2002. The benefit recorded in 2002 included amounts for both
2001 and 2002.
Net Income
Net income of $2.1 million decreased $6.0 million compared to the prior
year. Improvement in share of affiliates' earnings was offset by an increase in
the provision for possible losses due to the Air Canada bankruptcy and increases
in SG&A expenses.
GATX TECHNOLOGY SERVICES
Continued low demand for new IT equipment in 2003 resulted in lower
than expected new lease originations for Technology. The gradual pace of the
economic recovery during 2003 caused businesses to continue to rationalize their
capital spending. As a result, IT leasing customers elected to retain their
existing IT equipment, rather than acquire new IT equipment. Technology expects
that the economic recovery will continue in 2004 and IT customers will
re-evaluate their decision to retain older equipment, which in turn will result
in increased new lease originations and portfolio acquisitions.
Technology responded to the 2003 economic and industry conditions by
developing strategies and making organizational changes to maximize
profitability. Capitalizing on its customers' preference to retain existing IT
equipment, Technology successfully renewed and rewrote existing lease contracts.
In addition, many Technology customers retained their existing IT equipment at
the expiration of the initial lease term on a "month-to-month" basis. These
transactions generated additional lease income, which offset the reduced gains
from asset dispositions since less IT equipment was returned. On the expense
side, Technology reorganized its infrastructure to be more efficient and
responsive to the needs of its customers. The reorganization resulted in lower
SG&A costs in 2003 compared to prior years.
19
Sustainable growth in Technology's earnings will be difficult to
achieve without growth in its asset base. Technology earns lease income
throughout the contractual term of a lease as well as additional lease income
and/or gains from asset disposition after the contractual term, typically three
years. Recent profitability has been enhanced by income earned after the
contractual lease term from investments made between 1999 and 2001. However,
since 2001, Technology's asset base has been declining, as the level of new
investments in 2002 and 2003 has not offset the run-off of its portfolio.
Because of lower investment levels, the earnings impact from new investments is
not expected to be as significant as in the past. To enhance future earnings,
Technology plans to generate additional fee income by leveraging its asset
knowledge and infrastructure to provide advisory services to its customers.
Gross Income
Components of Technology's gross income are summarized below (in
millions):
2003 2002
------------- -------------
Lease income.............................................. $ 187.5 $ 278.4
Interest income........................................... .4 .4
Asset remarketing income.................................. 10.8 21.0
Fees...................................................... .8 1.1
Other..................................................... 2.5 3.7
------------- -------------
Revenues................................................. 202.0 304.6
Gain on extinguishment of debt............................ .7 15.8
Share of affiliates' earnings............................. 2.9 2.3
------------- -------------
Total gross income....................................... $ 205.6 $ 322.7
============= =============
Gross income of $205.6 million decreased $117.1 million in 2003 from
the prior year. Lower lease income, asset remarketing income, and gain on
extinguishment of debt contributed to the decrease. Lease income of $187.5
million decreased $90.9 million due to declining average operating lease and
finance lease balances and the impact of lower average yields due principally to
the run-off of the higher yielding transactions from a 2001 portfolio
acquisition. Asset remarketing income of $10.8 million in 2003 decreased $10.2
million due to fewer returns of leased equipment, as Technology's customers had
more lease renewals and month-to-month lease activity. The 2001 portfolio
acquisition of leased equipment had an average lease term age of 15 months
resulting in unusually high asset remarketing income in 2002.
In 2002, Technology recorded gains on extinguishment of nonrecourse
debt of $15.8 million, $13.0 million of which was associated with one lease
investment. Approximately $10.0 million of the provision for losses and $2.3
million of asset impairment charges in 2002 were attributable to the same
investment and largely offset the gain.
Ownership Costs
Components of Technology's ownership costs are summarized below (in
millions):
2003 2002
------------- -------------
Depreciation.............................................. $ 118.5 $ 188.4
Interest, net............................................. 24.5 40.7
------------- -------------
Total ownership costs.................................... $ 143.0 $ 229.1
============= =============
Ownership costs of $143.0 million decreased $86.1 million consistent
with lower average assets and debt balances in 2003 compared to the prior year.
20
Other Costs and Expenses
Components of Technology's other costs and expenses are summarized
below (in millions):
2003 2002
------------- -------------
Maintenance expense and other operating expenses.......... $ .2 $ --
Selling, general and administrative....................... 35.1 43.5
(Reversal) provision for possible losses.................. (1.7) 28.8
Asset impairment charges.................................. 4.0 14.0
------------- -------------
Total other costs and expenses........................... $ 37.6 $ 86.3
============= =============
SG&A expense of $35.1 million decreased by $8.4 million in 2003 due to
the cost savings initiatives discussed above.
The combination of provision for possible losses and asset impairment
charges of $2.3 million decreased $40.5 million from 2002 due to improved
portfolio quality, the favorable resolution of two significant non-performing
accounts, and an overall decrease in the reservable asset level. Also
contributing to the decrease was $12.3 million associated with one investment in
2002, which was largely offset by a gain on extinguishment of debt, as discussed
above.
Taxes
Technology's income tax expense was $9.8 million in 2003, an increase
of $7.2 million from the 2002 amount of $2.6 million.
Net Income
Technology's net income of $15.2 million in 2003 increased $10.5
million from 2002. The increase was driven by an overall improved portfolio
quality and reduced SG&A expense.
GATX SPECIALTY FINANCE
The assets of Specialty's portfolio declined during 2003 as a result of
the decision in late 2002 to curtail investment in the specialty finance
portfolio and to sell or otherwise run-off the venture finance portfolio. During
2003, the Canadian and U.K. venture finance loan portfolios and a 90% interest
in the associated warrants were sold. The U.S. venture finance loan portfolio,
which had been retained along with associated warrants, continued to run-off.
Investment volume was primarily related to prior funding commitments. Because of
the reduced portfolio size, the specialty and venture finance businesses were
operationally consolidated under a single management team to realize cost
savings.
Management expects Specialty's assets to continue declining over the
next several years, as new investment is not expected to offset the continued
run-off of the portfolios. The loans related to the venture finance portfolio
are expected to run-off by the end of 2006, the majority of which are scheduled
to be repaid by the end of 2005. Additionally, the run-off of the specialty
finance portfolio may accelerate as it is periodically reviewed to determine if
assets should be sold based on market conditions. Prospectively, new investments
are expected to be generally limited to marine equipment and secondary market
transactions.
As the portfolios continue to decline, future earnings will be
unpredictable because of the uncertain timing of gains on the sale of assets
from the specialty finance portfolio and gains from the sale of securities
associated with the venture finance warrant portfolio. Management expects to
achieve additional SG&A reductions as efficiencies are realized on the declining
portfolio.
21
Gross Income
Components of Specialty's gross income are summarized below (in
millions):
2003 2002
------------- -------------
Lease income.............................................. $ 42.9 $ 59.8
Interest income........................................... 41.1 50.5
Asset remarketing income.................................. 33.1 27.4
Gain on sales of securities............................... 6.7 3.9
Fees...................................................... 7.0 5.2
Other..................................................... 8.8 6.2
------------- -------------
Revenues................................................. 139.6 153.0
Gain on extinguishment of debt............................ 1.8 --
Share of affiliates' earnings............................. 22.7 18.2
------------- -------------
Total gross income....................................... $ 164.1 $ 171.2
============= =============
Specialty's 2003 gross income of $164.1 million was $7.1 million lower
than 2002. The decrease was primarily driven by lower lease and interest income
offset by an increase in asset remarketing income. Lease income decreased by
$16.9 million in 2003 as a result of declining lease balances. Interest income
decreased $9.4 million from 2002 primarily because of declining loan balances
due to the run-off of the venture portfolio. Asset remarketing income is
comprised of both gains from the sale of assets from Specialty's own portfolio
as well as residual sharing fees from the sale of managed assets. Gains from the
sale of Specialty's owned assets increased by $13.6 million and residual sharing
fees from managed portfolios decreased by $7.9 million. Because the timing of
such sales is dependent on changing market conditions, asset remarketing income
does not occur evenly from period to period. Share of affiliates' earnings of
$22.7 million were $4.5 million higher than the prior year as a result of new
marine affiliate investments.
Ownership Costs
Components of Specialty's ownership costs are summarized below (in
millions):
2003 2002
------------- -------------
Depreciation.............................................. $ 10.3 $ 14.6
Interest, net............................................. 43.5 53.9
Operating lease expense................................... 4.4 4.4
------------- -------------
Total ownership costs.................................... $ 58.2 $ 72.9
============= =============
Ownership costs of $58.2 million in 2003 were $14.7 million lower than
in 2002, primarily due to a $4.3 million decrease in depreciation and a $10.4
million decrease in interest expense. Lower depreciation expense is due to lower
operating lease assets as a result of the announced decision to curtail
investments. Lower interest expense resulted from lower debt balances.
22
Other Costs and Expenses
Components of Specialty's other costs and expenses are summarized below
(in millions):
2003 2002
------------- -------------
Maintenance expense and other operating expenses.......... $ 9.0 $ 8.4
Selling, general and administrative....................... 17.3 27.4
(Reversal) provision for possible losses.................. (2.9) 19.8
Asset impairment charges.................................. 16.2 22.7
Reduction in workforce charges............................ -- 9.2
Fair value adjustments for derivatives.................... 4.1 3.3
------------- -------------
Total other costs and expenses........................... $ 43.7 $ 90.8
============= =============
Total other costs and expenses decreased by $47.1 million in 2003
primarily due to the decrease in the provision for losses and SG&A costs. The
provision for losses decreased $22.7 million primarily due to the improving
credit quality of the portfolio and the decrease in the reservable asset base.
SG&A costs decreased $10.1 million from 2002, reflecting lower personnel costs
as a result of the reduction in workforce in the fourth quarter of 2002. In
2003, Specialty impairments were primarily related to an investment in a
corporate aircraft and various equity investments. In 2002, impairments were
primarily related to investments in telecommunication equipment and corporate
aircraft.
Taxes
Specialty's income tax expense was $24.1 million in 2003, an increase
of $21.5 million from 2002 expense of $2.6 million.
Net Income
Net income of $38.1 million increased $33.2 million from 2002 primarily
due to lower overall costs as a result of declining assets and the improving
credit quality of the portfolio.
OTHER
Other is comprised of corporate results, including SG&A and interest
expense not allocated to the segments, and the results of ASC, a Great Lakes
shipping company.
Gross Income
Components of gross income are summarized below (in millions):
2003 2002
------------- -------------
Marine operating revenue.................................. $ 85.0 $ 79.7
Interest income........................................... .2 1.3
Asset remarketing income.................................. (.7) --
Other..................................................... 41.3 24.3
------------- -------------
Revenues................................................. 125.8 105.3
Gain on extinguishment of debt............................ (.4) 2.2
------------- -------------
Total gross income....................................... $ 125.4 $ 107.5
============= =============
Gross income of $125.4 million in 2003 increased $17.9 million from
2002 due to higher marine operating revenue and other income. The increase in
marine operating revenue of $5.3 million was driven by a larger average fleet in
operation in 2003. Other income increased $17.0 million due primarily to the
receipt of
23
settlement proceeds of $16.5 million in 2003 related to litigation GFC had
initiated against various insurers related to coverage issues regarding the
2000-2001 Airlog litigation.
Ownership Costs
Components of ownership costs are summarized below (in millions):
2003 2002
------------- -------------
Depreciation.............................................. $ 5.6 $ 6.5
Interest, net............................................. 9.5 25.5
Operating lease expense................................... .1 .3
------------- -------------
Total ownership costs.................................... $ 15.2 $ 32.3
============= =============
Ownership costs of $15.2 million were $17.1 million lower compared to
2002, primarily due to a decrease in interest expense. Lower average debt
balances and lower average interest rates contributed to the favorable variance
compared to 2002. As discussed previously, the debt not otherwise allocated to
the operating segments (based on set leverage ratios) is assigned to Other,
along with the related interest expense.
Other Costs and Expenses
Components of other costs and expenses are summarized below (in
millions):
2003 2002
------------- -------------
Marine operating expenses................................. $ 68.9 $ 60.7
Other operating expenses.................................. 1.0 .3
Selling, general and administrative....................... 37.5 42.9
Provision (reversal) for possible losses.................. 2.0 (13.7)
Asset impairment charges.................................. 6.0 1.1
Reduction in workforce charges............................ -- 5.7
------------- -------------
Total other cost and expenses............................ $ 115.4 $ 97.0
============= =============
Marine operating expenses of $68.9 million increased by $8.2 million
primarily as a result of a larger average fleet in operation during 2003.
The provision (reversal) for possible losses is derived from GFC's
estimate of possible losses inherent in its portfolio of reservable assets. In
addition to establishing loss estimates for known troubled investments, this
estimate involves consideration of historical loss experience, present economic
conditions, collateral values, and the state of the markets in which GFC
operates. GFC records a provision for possible losses in each operating segment
as well as in Other, targeting an overall allowance for possible losses in
accordance with established GFC policy. This overall allowance for possible
losses is measured and reported as a percentage of total reservable assets.
Reservable assets in accordance with generally accepted accounting principles
(GAAP) include loans, direct finance leases, leveraged leases and receivables.
Operating leases are not reservable assets in accordance with GAAP.
In 2003, GFC recorded a $1.0 million provision for possible losses in
its operating segments and a $2.0 million provision for possible losses in
Other. These provisions resulted in a consolidated allowance for possible losses
at December 31, 2003 of $46.6 million, or 5.5% of reservable assets. In 2002,
GFC recorded a $50.3 million provision for possible losses in its operating
segments, offset by a reversal of $13.7 million of provision for possible losses
in Other. These provisions results in a consolidated allowance for possible
losses as December 31, 2002 of $77.2 million, or 6.2% of reservable assets. The
decrease in the allowance for possible losses as a percentage of reservable
assets in 2003 was driven by the general improvement in the average quality of
GFC's portfolio as well as the large decrease in venture finance assets, which
were reserved at a relatively higher rate then the rest of the portfolio.
24
Asset impairment charges of $6.0 million in 2003 increased $4.9
million. The 2003 charge primarily relates to ASC's off-lakes barge which ceased
operations during the year. The barge was written down to an estimate of future
disposition proceeds.
During 2002, GFC recorded a pre-tax charge of $5.7 million related to
reductions in workforce. The charge in 2002 was predominantly related to a
reduction in corporate overhead costs associated with management's intent to
exit the venture business and curtail investment in the specialty finance
sector. The reduction in workforce charge included involuntary employee
separation and benefit costs as well as occupancy and other costs.
Taxes
Other's income tax benefit was $7.3 million in 2003, a decrease of $1.7
million from the 2002 benefit of $9.0 million. The 2003 tax benefit included
$4.6 million related to the release of federal audit reserves applicable to the
favorable resolution of the Internal Revenue Service's audit for the years
1995-1997.
Net Loss
The net income at Other of $2.1 million in 2003 improved from 2002 by
$14.9 million as a result of the insurance settlements, favorable interest
expense, and the reversal of tax audit reserves, partially offset by increased
provision for possible losses.
CONSOLIDATED INCOME TAXES
GFC's consolidated income tax expense for continuing operations was
$53.3 million in 2003, an increase of $24.3 million from the 2002 amount of
$29.0 million. The 2003 consolidated effective tax rate was 32% compared to the
2002 rate of 31%. The 2003 tax provision was favorably impacted by a fourth
quarter $4.6 million reversal of tax audit reserves due to the final settlement
of an Internal Revenue Service (IRS) audit of 1995-1997. The 2003 tax provision
also benefited from a reduction in deferred taxes resulting from lower rates
enacted in certain foreign jurisdictions and also from the ETI, an exemption for
income from the lease of equipment to foreign lessees. The 2002 tax provision
was favorably impacted by the ETI benefit. See Note 14 for additional
information about income taxes.
DISCONTINUED OPERATIONS
As of March 31, 2002, GFC completed the divestiture of GATX Terminals.
Financial data for Terminals has been segregated as discontinued operations for
all periods presented.
In the first quarter of 2002, GFC sold its interest in a bulk-liquid
storage facility located in Mexico and recognized a $6.2 million after-tax gain.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
GATX RAIL
Rail acquired DEC in March 2001. As a result, comparability is affected
by inclusion of DEC's results for twelve months in 2002 versus nine months in
2001. DEC's revenue converted to U.S. dollars was approximately $35.0 million
for the 2002 full year. DEC's 2001 revenue for the nine month period converted
to U.S. dollars was approximately $26.0 million. DEC's operating results
suffered in 2001-2002 from a weak Polish economy and workforce reduction
expenses related to transitioning DEC from a state-owned company into a more
efficient market competitor.
25
Gross Income
Components of Rail's gross income are summarized below (in millions):
2002 2001
------------- -------------
Lease income.............................................. $ 608.6 $ 627.7
Asset remarketing income.................................. 4.9 2.9
Fees...................................................... 3.4 2.4
Other..................................................... 42.2 41.1
------------- -------------
Revenues................................................. 659.1 674.1
Share of affiliates' earnings............................. 13.1 7.4
------------- -------------
Total gross income....................................... $ 672.2 $ 681.5
============= =============
Rail's 2002 gross income of $672.2 million was $9.3 million lower than
2001. Excluding DEC in both years, lease income was down $25.5 million from
2001. Difficult economic conditions, combined with aggressive competition,
increased railroad efficiency and railcar surpluses resulted in continued
softness in railcar demand and pressure on lease rates. Rail's North American
fleet totaled 107,000 cars at year end compared to 110,000 at the end of the
prior year. Approximately 97,000 railcars were on lease throughout North America
at the end of the year compared to 100,000 cars at the end of the prior year.
Rail's North American utilization rate was 91% at December 31, 2002, flat with
the prior year. The Bar Car Directive favorably affected utilization as existing
idle cars were deployed to replace affected cars and subject cars taken out of
service were scrapped.
Asset remarketing income of $4.9 million was $2.0 million higher than
2001 mainly due to the sale of several residual sharing investments. Share of
affiliates' earnings of $13.1 million increased $5.7 million over 2001.
Excluding nonrecurring adjustments in 2001, share of affiliates' earnings in
2002 increased $3.7 million, largely due to improvement in KVG and AAE Cargo
results.
Ownership Costs
Components of Rail's ownership costs are summarized below (in
millions):
2002 2001
------------- -------------
Depreciation and amortization............................. $ 102.3 $ 106.4
Interest, net............................................. 53.8 67.1
Operating lease expense................................... 177.6 163.8
------------- -------------
Total ownership costs.................................... $ 333.7 $ 337.3
============= =============
Ownership costs of $333.7 million were $3.6 million lower compared to
2001. Excluding the impact of DEC in both periods, ownership costs decreased
$3.1 million from the prior year period primarily due to lower interest costs
resulting from favorable interest rates, partially offset by higher operating
lease expense in 2002. The increase in operating lease expense in 2002 is due to
the full year impact of ownership costs related to a railcar financing entered
into in mid-2001.
26
Other Costs and Expenses
Components of Rail's other costs and expenses are summarized below (in
millions):
2002 2001
------------- -------------
Maintenance expense....................................... $ 150.9 $ 136.9
Other operating expenses.................................. 31.4 54.7
Selling, general and administrative....................... 59.2 62.4
Provision for possible losses............................. 1.4 .6
Reduction in workforce charges............................ 2.0 5.3
Fair value adjustments for derivatives.................... .2 .6
------------- -------------
Total other costs and expenses........................... $ 245.1 $ 260.5
============= =============
Maintenance expense of $150.9 million in 2002 increased $14.0 million
from 2001. Excluding DEC in both years, maintenance expense increased $7.4
million in 2002. The variance is due to a higher number of cars repaired in 2002
and the impact of the Bar Car Directive.
Rail's other operating expenses were $31.4 million in 2002 and $54.7
million in 2001. In 2001, other operating expenses included $24.5 million of
non-comparable items, of which $19.7 million related to the closing of its East
Chicago repair facility. Excluding the non-comparable items, other operating
expenses increased $1.2 million primarily due to the write-off of international
business development costs and software implementation expenses.
SG&A expenses decreased $3.2 million in 2002 from the prior year amount
of $62.4 million. The decrease in SG&A expenses in 2002 is attributable to lower
headcount due to the 2001 reduction in workforce and lower discretionary
spending.
During 2002 and 2001, Rail recorded pre-tax charges of $2.0 million and
$5.3 million, respectively, related to reductions in workforce. The charge in
2002 was predominantly related to an ongoing plan to streamline the workforce
and operations of DEC. The charge in 2001 was part of GFC's initiative to reduce
SG&A expenses in response to poor North American economic conditions. The
reduction in workforce charge in 2002 and 2001 included involuntary employee
separation and benefit costs for 85 and 47 employees, respectively, as well as
occupancy and other costs.
Cumulative Effect of Accounting Change
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
Rail completed a review of all recorded goodwill in 2002. Fair values were
established using discounted cash flows. Based on this review, Rail recorded a
one-time, non-cash impairment charge of $34.9 million related to DEC. The charge
is non-operational in nature and was recognized as a cumulative effect of
accounting change as of January 1, 2002 in the consolidated statements of
income. The impairment charge was due primarily to lessened expectations of
projected cash flows based on market conditions at the time of the review and a
lower long-term growth rate projected for DEC.
Taxes
Rail's income tax expense was $33.3 million in 2002, an increase of
$6.9 million from the 2001 amount of $26.4 million. Rail's 2001 taxes included a
$6.1 million deferred tax benefit attributable to a reduction in Canadian tax
rates.
27
Net Income
Rail's net income of $25.2 million was $32.1 million lower than the
prior year primarily due to the cumulative effect of accounting change, the
impact of unfavorable market conditions on lease income, and the impact of the
Bar Car Directive, partially offset by reduced SG&A expenses and the absence of
2001 closure costs related to its East Chicago repair facility.
GATX AIR
Gross Income
Components of Air's gross income are summarized below (in millions):
2002 2001
------------- -------------
Lease income.............................................. $ 73.4 $ 63.9
Interest income........................................... 2.9 6.2
Asset remarketing income.................................. 1.4 8.1
Fees...................................................... 7.9 9.9
Other..................................................... 3.4 (1.0)
------------- -------------
Revenues................................................. 89.0 87.1
Share of affiliates' earnings............................. 14.8 33.1
------------- -------------
Total gross income....................................... $ 103.8 $ 120.2
============= =============
Air's 2002 gross income of $103.8 million was $16.4 million lower than
2001. The decrease was primarily driven by lower asset remarketing income and
share of affiliates' earnings, offset by higher lease income. Asset remarketing
income decreased $6.7 million from 2001. Lease income increased $9.5 million as
a result of new aircraft deliveries placed on lease during 2002.
Share of affiliates' earnings of $14.8 million were $18.3 million lower
than 2001. The decrease from the prior year is primarily due to the impairment
losses that occurred in 2002 on a fleet of 28 Fokker 50 and 100 aircraft owned
by the 50% owned Pembroke affiliate.
Ownership Costs
Components of Air's ownership costs are summarized below (in millions):
2002 2001
------------- -------------
Depreciation.............................................. $ 37.1 $ 20.4
Interest, net............................................. 35.1 32.9
Operating lease expense................................... 3.5 12.9
------------- -------------
Total ownership costs.................................... $ 75.7 $ 66.2
============= =============
Ownership costs of $75.7 million in 2002 were $9.5 million higher than
in 2001. The increase was primarily due to the $16.7 million increase in
depreciation offset by the $9.4 million decrease in operating lease expense. The
increase in depreciation expense of $16.7 million resulted from higher operating
lease assets due to new aircraft deliveries which were received and put on lease
in 2002.
Excluding the $4.7 million accrual reversal in 2002 discussed
previously, operating lease expense was $4.7 million lower compared to 2001 due
to fewer leased-in aircraft compared to prior the year.
28
Other Costs and Expenses
Components of Air's other costs and expenses are summarized below (in
millions):
2002 2001
------------- -------------
Maintenance expense and other operating expenses.......... $ 1.5 $ 2.2
Selling, general and administrative....................... 13.3 15.8
Provision (reversal) for possible losses.................. .3 (.2)
Asset impairment charges.................................. 5.4 7.8
Reduction in work force charges........................... -- .3
------------- -------------
Total other costs and expenses........................... $ 20.5 $ 25.9
============= =============
Total other costs and expenses decreased $5.4 million primarily due to
the decrease in other operating expenses, SG&A costs and asset impairment
charges. SG&A costs decreased $2.5 million due to higher capitalized expenses as
a result of more aircraft deliveries in 2002. Asset impairment charges of $7.8
million in 2001 resulted from the environment following the events of September
11th.
Taxes
Air's income tax benefit was $.5 million in 2002, a decrease of $11.8
million from the 2001 tax expense of $11.3 million. The 2002 amount was impacted
by a benefit of $3.1 million from the ETI. ETI is an exemption from U.S. federal
income tax for the lease of U.S. manufactured equipment to foreign lessees. The
benefit recorded in 2002 included both the 2001 and 2002 amounts.
Net Income
Net income of $8.1 million decreased $8.7 million from 2001 due to a
weakened portfolio as a result of the economic conditions in the Air industry
and impairment losses recorded at an affiliate.
GATX TECHNOLOGY SERVICES
Gross Income
Components of Technology's gross income are summarized below (in
millions):
2002 2001
------------- -------------
Lease income.............................................. $ 278.4 $ 383.3
Interest income........................................... .4 1.1
Asset remarketing income.................................. 21.0 23.0
Fees...................................................... 1.1 1.0
Other..................................................... 3.7 .7
------------- -------------
Revenues................................................. 304.6 409.1
Gain on the extinguishment of debt........................ 15.8 --
Share of affiliates' earnings............................. 2.3 2.3
------------- -------------
Total gross income....................................... $ 322.7 $ 411.4
============= =============
Gross income of $322.7 million in 2002 decreased $88.7 million compared
to 2001. Lease income of $278.4 million decreased by $104.9 million in 2002 due
to declining average operating lease and finance lease balances and the impact
of lower average yields. In the first quarter of 2001, Technology acquired a
portfolio of technology leases from El Camino Resources that contributed
significantly to the higher level of lease income in 2001. Lower lease income in
2002 was partially offset by gains on extinguishment of debt of $15.8 million.
$13.0 million of the total gain was associated with one lease investment, which
was largely offset by approximately $10.0 million of provision for losses and
$2.3 million of asset impairment charges in 2002.
29
Ownership Costs
Components of Technology's ownership costs are summarized below (in
millions):
2002 2001
------------- -------------
Depreciation and amortization............................. $ 188.4 $ 241.5
Interest, net............................................. 40.7 55.0
------------- -------------
Total ownership costs.................................... $ 229.1 $ 296.5
============= =============
Ownership costs of $229.1 million decreased by $67.4 million,
consistent with the decline in average assets in 2002 compared to 2001.
Other Costs and Expenses
Components of Technology's other costs and expenses are summarized
below (in millions):
2002 2001
------------- -------------
Maintenance expense and other operating expenses.......... $ -- $ .3
Selling, general and administrative....................... 43.5 48.5
Provision for possible losses............................. 28.8 14.6
Asset impairment charges.................................. 14.0 2.1
Reduction in workforce charges............................ -- .2
------------- -------------
Total other costs and expenses........................... $ 86.3 $ 65.7
============= =============
SG&A expense of $43.5 million in 2002 decreased $5.0 million compared
to 2001 due to higher costs in 2001 associated with the administration of the El
Camino portfolio acquisition.
Technology's provision for possible losses of $28.8 million increased
$14.2 million from 2001 primarily due to the impact of the investment discussed
above, which was largely offset by the gain on extinguishment of nonrecourse
debt. Asset impairment charges of $14.0 million in 2002 increased $11.9 million
and were unusually high due to charges related to customers' bankruptcies of
$6.8 million, a portion which was offset by gains on extinguishment of debt.
Additionally, losses of $3.8 million were recorded in 2002 as the result of
several mid-term lease rewrite transactions, which include a portion of the
customer's equipment being returned early. Under the terms of the transactions,
rent flows on the returned equipment are typically incorporated into the
rewritten lease and underlying equipment retained by the customer. An impairment
charge on the portion of the equipment returned by the customer may be
recognized, if applicable. Finally, Technology had a return of leased equipment
from a customer for which it recorded an asset impairment charge and an
offsetting early termination fee classified in lease income of $3.1 million.
Taxes
Technology's income tax expense was $2.6 million in 2002, a decrease of
$16.5 million from the 2001 amount of $19.1 million.
Net Income
Technology's net income of $4.7 million in 2002 decreased $25.4 million
from the previous year as a result of higher provision for possible losses and
asset impairment charges, net of gains on extinguishment of debt, and the impact
of a smaller lease portfolio with lower average yields.
30
GATX SPECIALTY FINANCE
Gross Income
Components of Specialty's gross income are summarized below (in
millions):
2002 2001
------------- -------------
Lease income.............................................. $ 59.8 $ 69.5
Interest income........................................... 50.5 63.4
Asset remarketing income.................................. 27.4 65.0
Gain on sales of securities............................... 3.9 38.7
Fees...................................................... 5.2 6.2
Other..................................................... 6.2 1.7
------------- -------------
Revenues................................................. 153.0 244.5
Share of affiliates' earnings (loss) ..................... 18.2 (10.0)
------------- -------------
Total gross income....................................... $ 171.2 $ 234.5
============= =============
Specialty's 2002 gross income of $171.2 million was $63.3 million lower
than 2001. The decrease was primarily driven by lower asset remarketing income
and net gains on sales of securities offset by an increase in share of
affiliates' income. Asset remarketing income decreased $37.6 million in 2002
primarily as a result of a 2001 gain of $25.0 million from the disposition of a
steel manufacturing facility. Because the timing of such sales is dependent on
changing market conditions, asset remarketing income does not occur evenly from
period to period. Gain on sales of securities, which are derived from warrants
received as part of financing and leasing transactions with non-public
companies, decreased $34.8 million in 2002. Decreases in gains on the sale of
securities in 2002 are reflective of limited initial public offering and merger
and acquisition activity compared to 2001.
Share of affiliates' earnings of $18.2 million were $28.2 million
higher than 2001. The increase from the prior year is primarily due to the
absence of losses that were incurred by telecommunication joint ventures in
2001.
Ownership Costs
Components of Specialty's ownership costs are summarized below (in
millions):
2002 2001
------------- -------------
Depreciation and amortization............................. $ 14.6 $ 22.9
Interest, net............................................. 53.9 78.7
Operating lease expense................................... 4.4 6.5
------------- -------------
Total ownership costs.................................... $ 72.9 $ 108.1
============= =============
Ownership costs of $72.9 million in 2002 were $35.2 million lower than
in 2001. The decrease was primarily due to the $8.3 million decrease in
depreciation and the $24.8 million decrease in interest expense. Lower
depreciation expense is the result of lower operating lease assets at Specialty
due to 2001's high level of remarketing activity. Lower interest expense in 2002
resulted from lower debt balances.
31
Other Costs and Expenses
Components of Specialty's other costs and expenses are summarized below
(in millions):
2002 2001
------------- -------------
Maintenance expense and other operating expenses.......... $ 8.4 $ 5.8
Selling, general and administrative....................... 27.4 40.9
Provision for possible losses............................. 19.8 72.2
Asset impairment charges.................................. 22.7 75.1
Reduction in workforce charges............................ 9.2 2.3
Fair value adjustments for derivatives.................... 3.3 (.1)
------------- -------------
Total other costs and expenses........................... $ 90.8 $ 196.2
============= =============
Total other costs and expenses decreased by $105.4 million in 2002
primarily due to the decrease in SG&A costs, and a reduction in the provision
for losses and asset impairment charges, offset by an increase in reduction in
workforce charges. SG&A costs decreased $13.5 million primarily due to a
reduction in workforce announced at the end of 2001. The provision for losses
decreased $52.4 million as a result of the absence of the provision for certain
venture and telecommunication investments. Asset impairment charges decreased
$52.4 million due to the absence of impairment charges related to
telecommunications equipment. In 2001, asset impairments at Specialty reached a
historically high level due primarily to valuation issues on telecommunication
leases and bonds originated by GFC in the late 1990's. The recessionary economy,
the sharp decline in the stock market, and a dramatic reduction in funding
available to newer stage telecommunication companies caused many business
failures in the telecom industry and losses in Specialty's portfolio. Reduction
in workforce charges increased $6.9 million due to the fourth quarter 2002
charge that resulted from GATX's announced intention to curtail investment in
specialty finance and to sell or otherwise run-off venture finance.
Taxes
Specialty's income tax expense was $2.6 million in 2002, an increase of
$31.1 million from the 2001 income tax benefit amount of $28.5 million.
Net Income
Net income of $4.9 million increased $46.2 million from the prior year
primarily due to the absence of the provision for losses and asset impairment
charges related to certain venture and telecommunication investments.
OTHER
Gross Income
Components of gross income are summarized below (in millions):
2002 2001
------------- -------------
Lease income.............................................. $ -- $ .2
Marine operating revenue.................................. 79.7 77.7
Interest income........................................... 1.3 .6
Other..................................................... 24.3 30.5
------------- -------------
Revenues................................................. 105.3 109.0
Gain on extinguishment of debt............................ 2.2 --
------------- -------------
Total gross income....................................... $ 107.5 $ 109.0
============= =============
Gross income of $107.5 million in 2002 was comparable to the prior
year.
32
Ownership Costs
Components of ownership costs are summarized below (in millions):
2002 2001
------------- -------------
Depreciation.............................................. $ 6.5 $ 6.6
Interest, net............................................. 25.5 15.3
Operating lease expense................................... .3 1.0
------------- -------------
Total ownership costs.................................... $ 32.3 $ 22.9
============= =============
Ownership costs of $32.3 million in 2002 were $9.4 million higher than
the prior year due to an increase in interest expense. Higher average debt
balances contributed to the unfavorable variance compared to 2001. The 2001
period also included interest income on the proceeds received from the sale of
Terminals.
Other Costs and Expenses
Components of other costs and expenses are summarized below (in
millions):
2002 2001
------------- -------------
Marine operating expenses................................. $ 60.7 $ 59.7
Other operating expenses.................................. .3 1.5
Selling, general and administrative....................... 42.9 57.7
(Reversal) provision for possible losses.................. (13.7) 11.2
Asset impairment charges.................................. 1.1 .2
Reversal for litigation charges........................... -- (13.1)
Reduction in workforce charges............................ 5.7 2.8
------------- -------------
Total other cost and expenses........................... $ 97.0 $ 120.0
============= =============
SG&A expenses of $42.9 million decreased $14.8 million due to lower
headcount as a result of the 2001 reduction in workforce and lower discretionary
spending.
In 2002, GFC recorded a $50.3 million provision for possible losses in
its operating segments, offset by a reversal of $13.7 million of provision for
possible losses in Other. These provisions resulted in a consolidated allowance
for possible losses at December 31, 2002 of $77.2 million, or 6.2% of reservable
assets. In 2001, GFC recorded an $87.2 million provision for possible losses in
its operating segments and a $11.2 million provision for possible losses in
Other. These provisions resulted in a consolidated allowance for possible losses
at December 31, 2001 of $89.2 million, or 5.8% of reservable assets.
GFC, formerly known as GATX Capital Corporation (GCC), was a party to
litigation arising from the issuance by the Federal Aviation Administration of
Airworthiness Directive 96-01-03 in 1996, the effect of which significantly
reduced the amount of freight that ten 747 aircraft were authorized to carry.
GATX/Airlog, a California partnership in which a subsidiary of GCC was a
partner, through a series of contractors, modified these aircraft from passenger
to freighter configuration between 1988 and 1994. GCC reached settlements
covering five of the aircraft, and the remaining five were the subject of this
litigation. On February 16, 2001, a jury found that GATX/Airlog breached certain
warranties under the applicable aircraft modification agreements, and
fraudulently failed to disclose information to the operators of the aircraft. In
2001, GCC reached settlement with each of the plaintiffs in this litigation. GFC
had recorded a pre-tax charge of $160.5 million in 2000 to accrue for its
obligation under the various settlement agreements. Upon settlement of these
matters, $13.1 million of the previously recorded provision was reversed in
2001.
During 2002, GFC recorded a pre-tax charge of $5.7 million related to
reductions in workforce. The charge in 2002 was predominantly related to a
reduction in corporate overhead costs associated with management's intent to
exit the venture business and curtail investment in the specialty finance
sector. In 2001,
33
this action was part of GFC's previously announced initiative to reduce SG&A
expenses in response to economic conditions at that time. The reduction in
workforce charge for both years included involuntary employee separation and
benefit costs well as occupancy and other costs.
Taxes
Other's income tax benefit was $9.0 million in 2002, a decrease of $5.4
million from the 2001 amount of $14.4 million.
Net Loss
The 2002 net loss of $12.8 million at Other improved from 2001 by $6.7
million. The variance was primarily due to the lower provision for possible loss
requirements partially offset by favorable interest in 2001 related to proceeds
from the sale of Terminals.
CONSOLIDATED INCOME TAXES
GFC's consolidated income tax expense for continuing operations was
$29.0 million in 2002, an increase of $15.1 million from the 2001 amount of
$13.9 million. The 2002 consolidated effective tax rate was 31% compared to the
2001 rate of 24%. The 2002 tax provision was favorably impacted by the benefit
of the extraterritorial income exclusion (an exemption for income from the lease
of U.S. manufactured equipment to foreign lessees). The 2001 tax provision
included a favorable deferred tax adjustment attributable to a reduction in
foreign tax rates. See Note 14 for additional information on income taxes.
DISCONTINUED OPERATIONS
A net after-tax gain of $173.9 million was recognized on the sale of
Terminals assets in 2001. In the first quarter of 2002, GFC sold its interest in
a bulk-liquid storage facility located in Mexico and recognized a $6.2 million
after-tax gain.
Operating results for 2002 were zero, compared to $2.7 million in the
prior year. Comparisons between periods were affected by the timing of the sale
of Terminal's assets.
BALANCE SHEET DISCUSSION
ASSETS
Total assets decreased to $6.3 billion in 2003 from $6.7 billion in
2002. Decreases in finance leases and loans, progress payments and recoverable
income taxes were partially offset by increases in operating lease assets and
facilities during the year. In 2003, Rail disposed of a leveraged lease
commitment on passenger rail equipment, whereby $184.9 million of assets were
sold, including restricted cash and progress payments.
In addition to the $6.3 billion of assets recorded on the balance
sheet, GFC utilizes approximately $1.3 billion of other assets, such as railcars
and aircraft, which were financed with operating leases and therefore are not
recorded on the balance sheet. The $1.3 billion of off balance sheet assets
represents the present value of GFC's committed future operating lease payments
at a 10% discount rate.
34
The following table presents continuing assets (on and off balance
sheet) by segment (in millions):
2003 2002
----------------------------------------- -----------------------------------
ON OFF
BALANCE OFF BALANCE ON BALANCE BALANCE TOTAL
DECEMBER 31 SHEET SHEET TOTAL ASSETS SHEET SHEET ASSETS
-------- ----------- ------------ ---------- -------- --------
Rail................ $2,308.8 $ 1,265.5 $ 3,574.3 $ 2,289.9 $1,291.2 $3,581.1
Air................. 1,977.0 29.0 2,006.0 1,885.6 55.1 1,940.7
Technology.......... 604.3 8.4 612.7 684.5 9.7 694.2
Specialty........... 707.6 13.7 721.3 1,088.0 14.9 1,102.9
Other............... 672.4 20.6 693.0 715.7 25.6 741.3
-------- ----------- ------------ ---------- -------- --------
$6,270.1 $ 1,337.2 $ 7,607.3 $ 6,663.7 $1,396.5 $8,060.2
======== =========== ============ ========== ======== ========
RESTRICTED CASH
Restricted cash of $60.9 million decreased by $80.0 million from 2002.
The decrease is primarily due to Rail's disposal of a leveraged lease commitment
on passenger rail equipment, which included restricted cash of $108.4 million.
RECEIVABLES
Receivables of $840.0 million, including finance leases and loans,
decreased $399.8 million compared to the prior year. Technology and Specialty
receivables reflect lower finance lease balances as a result of portfolio
run-off exceeding new volume. Specialty also sold the U.K. and Canadian
venture-related loan portfolios in December 2003.
ALLOWANCE FOR POSSIBLE LOSSES
The purpose of the allowance is to provide an estimate of credit losses
inherent in the investment portfolio for which reserving is appropriate. In
addition to establishing loss estimates for known troubled investments, this
estimate involves consideration of historical loss experience, present economic
conditions, collateral values, and the state of the markets in which GFC
operates. GFC records a provision for possible losses in each operating segment
as well in Other, targeting an overall allowance for possible losses in
accordance with established GFC policy. This overall allowance for possible
losses is measured and reported as a percentage of total reservable assets.
Reservable assets in accordance with GAAP include loans, direct finance leases,
leveraged leases and receivables.
The following summarizes changes in GFC's consolidated allowance for
possible losses (in millions):
DECEMBER 31
---------------------------
2003 2002
------------ ----------
Balance at the beginning of the year................ $ 77.2 $ 89.2
Provision for possible losses....................... 3.0 36.6
Charges to allowance................................ (36.1) (56.0)
Recoveries and other................................ 2.5 7.4
------------ ----------
Balance at end of the year.......................... $ 46.6 $ 77.2
============ ==========
35
The following table presents the allowance for possible losses by
segment (in millions):
DECEMBER 31
---------------------------
2003 2002
------------ ----------
Rail................................................ $ 6.6 $ 8.5
Air................................................. 1.7 4.7
Technology.......................................... 6.1 15.6
Specialty........................................... 26.2 44.4
Other............................................... 6.0 4.0
------------ ----------
$ 46.6 $ 77.2
============ ==========
There were no material changes in estimation methods and assumptions
for the allowance that took place during 2003. The allowance for possible losses
is periodically reviewed for adequacy by considering changes in economic
conditions and credit quality indicators. GFC believes that the allowance is
adequate to cover losses inherent in the reservable portfolio as of December 31,
2003. The allowance is based on judgments and estimates, which could change in
the future, causing a corresponding change in the recorded allowance.
The allowance for possible losses of $46.6 million decreased $30.6
million from 2002 and represented 5.5% of reservable assets, a decline from 6.2%
in the prior year. The decrease in the allowance for possible losses as a
percentage of reservable assets in 2003 was driven by the general improvement in
the average quality of GFC's portfolio as well as the large decrease in venture
finance assets, which were reserved for at a relatively higher rate than the
rest of the portfolio. Net charge-offs, which is calculated as charge-offs less
recoveries, totaled $30.7 million for the year, a decrease of $23.2 million from
2002. The 2003 charge-offs were primarily Air, Specialty and Technology
investments. 2002 charge-offs were primarily in Specialty's venture portfolio
and Technology's investments. Specialty's 2003 activity included a $7.3 million
reduction in the allowance due to the sale of the U.K. and Canadian
venture-related loan portfolios completed in December 2003.
NON-PERFORMING INVESTMENTS
Finance leases and loans that are 90 days or more past due, or where
reasonable doubt exists as to timely collection of payments related thereto, are
generally classified as non-performing. Non-performing assets also include
operating lease assets which are subject to the impairment rules of SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets as they are
not considered reservable assets. The allowance for possible losses, discussed
above, relates only to rent and other receivables, finance leases and loans.
Non-performing investments do not include operating lease assets that are off
lease or held for sale, investments within joint ventures or off balance sheet
assets. Lease or interest income accrued but not collected is reversed when a
lease or loan is classified as non-performing. Payments received on
non-performing leases and loans for which the ultimate collectibility of
principal is uncertain are applied as principal reductions. Otherwise, such
collections are credited to income when received.
The following summarizes non-performing assets by segment (in
millions):
DECEMBER 31
---------------------------
2003 2002
------------ ----------
Rail................................................ $ 1.4 $ 3.6
Air................................................. 30.4 23.8
Technology.......................................... 1.7 18.4
Specialty........................................... 52.2 52.7
------------ ----------
$ 85.7 $ 98.5
============ ==========
Non-performing investments at December 31, 2003 were $85.7 million,
$12.8 million lower than the prior year amount of $98.5 million. The decrease in
non-performing leases and loans was driven by improvement in the technology
portfolio.
36
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Net operating lease assets and facilities increased $281.9 million from
2002 primarily due to railcar investments. Rail took delivery of approximately
1,000 new cars in 2003 under its committed purchase program and also acquired
1,200 cars in December 2003, which are on a long-term lease with a customer.
PROGRESS PAYMENTS
GFC classifies amounts deposited toward the construction of
wholly-owned aircraft and other equipment, including capitalized interest, as
progress payments. Progress payments made for aircraft owned by joint ventures
in which GFC participates are classified as investments in affiliated companies.
Progress payments decreased $87.3 million from $140.9 million in 2002
to $53.6 million at December 31, 2003. The decrease is primarily due to the
reclassification of $52.2 million of progress payments to operating lease assets
for aircraft delivered during 2003. Also in 2003, Rail disposed of a leveraged
lease commitment on passenger rail equipment that included $48.0 million of
progress payments.
DUE FROM GATX CORPORATION
Due from GATX Corporation was $340.6 million, a decrease of $81.9
million from the 2002 balance of $422.5 million. In 2003, the Parent company
issued $125.0 million of convertible debt and repaid a portion of its payable to
GFC, which was partially offset by dividends paid by GFC to the Parent company.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies increased $17.3 million in 2003.
GFC invested $100.8 million and $93.3 million in joint ventures in 2003 and
2002, respectively. Share of affiliates' earnings were $69.7 million and $48.4
million in 2003 and 2002, respectively. Distributions from affiliates were
$148.1 million and $148.8 million in 2003 and 2002, respectively.
The following table shows GFC's investment in affiliated companies by
segment (in millions):
DECEMBER 31
---------------------------
2003 2002
------------ ----------
Rail............................................... $ 140.9 $ 145.0
Air................................................ 484.9 470.5
Technology......................................... 20.6 15.2
Specialty.......................................... 221.8 220.2
----------- ---------
$ 868.2 $ 850.9
=========== =========
RECOVERABLE INCOME TAXES
Recoverable income taxes of $47.3 million at December 31, 2003
represent estimated refunds from prior years as a result of carrying back the
2003 tax net operating loss. Recoverable income taxes received during 2003
allocated to GFC were approximately $101.7 million.
GOODWILL, NET
Goodwill, net, was $94.8 million, an increase of $32.3 million as
compared to the prior year. The increase was due to a $16.4 million purchase
accounting adjustment related to Rail's 2002 purchase of the
37
remaining 50.5% of KVG and a foreign currency exchange effect of $15.9 million.
The Company's changes in carrying value of goodwill are further discussed in
Note 8 to the Company's consolidated financial statements.
OTHER INVESTMENTS
Other investments of $101.9 million were comparable to the prior year
and include $26.4 million of investments classified as available-for-sale. Refer
to Note 9 to the Company's consolidated financial statements for further
information regarding the Company's available-for-sale securities.
OTHER ASSETS
Other assets of $188.7 million were $53.6 million lower than the prior
year due to a decrease in capitalized costs from Rail's disposal of the
leveraged lease commitment discussed above and a decrease in the fair value of
derivatives.
LIABILITIES
Total liabilities decreased to $4.7 billion in 2003 from $4.7 billion
in 2002. In addition to the $5.2 billion of liabilities recorded on the balance
sheet, GFC has approximately $1.3 billion of off balance sheet debt related to
assets that are financed with operating leases. The $1.3 billion of off balance
sheet debt represents the present value of GFC's committed future operating
lease payments at a 10% discount rate.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were $326.5 million, a decrease
of $48.4 million from the prior year end largely due to the January 2003 funding
of a portion of the KVG purchase price. KVG was acquired in December 2002.
DEBT
Total debt decreased $520.4 million from the 2002 year end primarily
due to decreases in recourse and nonrecourse long-term debt of $352.3 million
and $149.0 million, respectively.
Nonrecourse debt decreased as investments at Technology continued to
decline year over year. Rail's 2003 disposition of a leveraged lease commitment
on passenger rail equipment included $183.4 million of liabilities, consisting
primarily of nonrecourse debt, which were assumed by the buyer.
GFC issued $715.7 million in long-term debt in 2003. Significant
borrowings in 2003 included secured financing supported by the European Credit
Agencies (ECA) and the Export-Import Bank of the United States (Ex-Im) for
aircraft deliveries, railcar secured financings, senior unsecured term notes and
technology nonrecourse financing. 2003 repayments of long-term debt totaled $1.1
billion.
38
The following table summarizes GFC's debt by major component, including
off balance sheet debt, as of December 31, 2003 (in millions):
SECURED UNSECURED TOTAL
---------- ----------- ----------
Short-term debt............................ $ -- $ 15.9 $ 15.9
Unsecured notes............................ -- 1,631.1 1,631.1
Bank loans................................. 52.3 308.6 360.9
ECA and Ex-Im debt......................... 780.2 -- 780.2
Nonrecourse debt........................... 445.6 -- 445.6
Other long-term debt....................... 13.6 91.8 105.4
Capital lease obligations.................. 122.4 -- 122.4
---------- ----------- ----------
Balance sheet debt......................... 1,414.1 2,047.4 3,461.5
Recourse off balance sheet debt............ 1,024.2 -- 1,024.2
Nonrecourse off balance sheet debt......... 313.0 -- 313.0
---------- ----------- ----------
$ 2,751.3 $ 2,047.4 $ 4,798.7
========== =========== ==========
DEFERRED INCOME TAXES
Deferred income taxes increased $56.5 million from 2002 due largely to
accelerated tax depreciation (including bonus depreciation on new equipment)
offset by a net operating loss carry forward asset of $21.7 million.
SHAREHOLDER'S EQUITY
Shareholder's equity increased $107.2 million from 2002 reflecting net
income of $111.7 million and changes in accumulated other comprehensive loss of
$51.4 million, partially offset by dividends paid of $55.9 million to GATX. The
change in accumulated other comprehensive loss was driven by foreign currency
translation gains due to the strengthening of the Canadian dollar, Euro and
Zloty, slightly offset by unrealized losses on derivative instruments.
CASH FLOW DISCUSSION
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 environment could decrease demand for GFC's services, which in
turn could impact the Company's ability to generate cash flow from operations
and portfolio proceeds.
NET CASH PROVIDED BY CONTINUING OPERATIONS
Net cash provided by continuing operations of $440.6 million decreased
$23.5 million compared to 2002. The impact of reduced investment volume and
portfolio run-off in 2003 was largely offset by the receipt of recoverable
income taxes and lower pension plan contributions. Comparison between periods is
also affected by other changes in working capital.
39
PORTFOLIO INVESTMENTS AND CAPITAL ADDITIONS
Portfolio investments and capital additions of $875.0 million decreased
$396.8 million from 2002.
The following table presents portfolio investments and capital
additions by segment (in millions):
DECEMBER 31
------------------------
2003 2002
---------- -----------
Rail....................................... $ 249.6 $ 117.5
Air........................................ 227.9 571.5
Technology................................. 246.4 253.8
Specialty.................................. 130.9 327.3
Other...................................... 20.2 1.7
---------- -----------
$ 875.0 $ 1,271.8
========== ===========
Rail invested $249.6 million in 2003, an increase of $132.1 million
from the prior year. The increase was primarily attributable to railcar
investments related to the committed railcar purchase program, railcar
investments at KVG and the fourth quarter 2003 acquisition of a fleet of covered
hoppers. Portfolio investments and capital additions at Air of $227.9 million
were $343.6 million lower than the prior year, primarily due to $319.9 million
fewer aircraft progress payments and deliveries. Air investments included $21.7
million of progress payments and $176.4 million of final delivery payments for
six aircraft in 2003. Technology investments of $246.4 million approximate the
prior year. Investments at Specialty were significantly lower in 2003 as a
result of the run-off of the venture business and curtailment in specialty
investments. Future portfolio investments and capital additions (excluding
contractual commitments) will depend on market conditions and opportunities to
acquire desirable assets.
PORTFOLIO PROCEEDS
Portfolio proceeds of $759.5 million decreased $123.3 million from
2002. The decrease was primarily due to lower proceeds from disposals of leased
equipment and a decrease in finance lease payments received, partially offset by
increases in loan principal received and cash distributions from joint venture
investments.
PROCEEDS FROM OTHER ASSET SALES
Proceeds from other asset sales of $23.0 million in 2003 primarily
relate to railcar scrappings.
NET CASH USED IN FINANCING ACTIVITIES FOR CONTINUING OPERATIONS
Net cash used in financing activities of continuing operations was
$357.6 million in 2003 compared to $195.3 million in 2002. Net proceeds from
issuance of long-term debt were $715.7 million in 2003. Significant financings
in 2003 included the $100.0 million commercial paper (CP) conduit securitization
facility, $150.0 million of senior unsecured term notes, $171.5 million of ECA
aircraft financing, $37.1 million of aircraft financing from the Ex-Im and
$214.9 million of technology nonrecourse financing.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
GFC has historically funded investments and met its obligations through
cash flow from operations, portfolio proceeds (including proceeds from asset
sales), uncommitted money market lines, committed revolving credit facilities,
the issuance of unsecured debt, and a variety of secured borrowings. GFC
utilizes both the domestic and international bank and capital markets.
40
In December 2002, GFC announced its decision to exit its venture
finance business and curtail investment in specialty finance. The former
business units, Specialty Finance and Venture Finance, are now managed as one
business segment, Specialty. In addition, GFC experienced a relatively weak
investment environment for its Technology segment over the last few years. As a
result, assets of $1,334.0 million (including $22.1 million of off balance sheet
assets) as of December 31, 2003 in these segments decreased by $898.3 million
from the end of 2001. This run-off has caused cash flow from operations and
portfolio proceeds to run at a level of over $1 billion during both 2002 and
2003. Looking forward, Specialty's venture loan portfolio will substantially
run-off by the end of 2005 and the rate of decline in the remaining assets in
the Specialty segment could slow. Combined with the effect of the reduced
investment in Technology over the last few years, GFC expects that both cash
flow from operations and portfolio proceeds will decline in 2004. Despite this,
GFC believes its current liquidity remains strong due to its cash position,
available and committed credit lines, lower 2004-2005 scheduled debt maturities
relative to recent years, and more cost effective access to the capital markets
relative to recent years.
CREDIT FACILITIES
GFC has revolving credit facilities totaling $539.3 million. GFC's
credit facilities include three agreements for $254.3 million, $145.0 million,
and $140.0 million expiring in 2004, 2005, and 2006, respectively. At December
31, 2003, availability under all credit facilities was $512.5 million, with
$26.8 million of letters of credit outstanding under the most recent facility.
The $145.0 million and $140.0 million facilities, which closed in July 2002 and
June 2003, respectively, are intended to be utilized to meet short-term funding
requirements. The $254.3 million facility, which expires in June 2004, was
originally established as a back-up line. The Company intends to replace this
facility with one of similar terms for the purpose of funding short-term
requirements.
RESTRICTIVE COVENANTS
All revolving credit facilities contain various restrictive covenants,
including requirements to maintain a defined net worth and a fixed charge
coverage ratio. In addition, the credit facilities contain certain negative
pledge provisions, including an asset coverage test. Terms of the $140.0 million
credit facility also include a limitation on liens condition for borrowings on
this facility.
As defined in the credit facilities, the net worth of GFC at December
31, 2003 was $1.6 billion, which was in excess of the most restrictive minimum
net worth requirement of $1.1 billion. Additionally, the ratio of earnings to
fixed charges as defined by the credit facilities was 1.9x for the period ended
December 31, 2003, in excess of the most restrictive covenant of 1.3x.
The indentures for GFC's public debt also contain restrictive
covenants, including limitations on loans, advances or investments in related
parties (including the Parent Company) and dividends it may distribute to the
Parent Company. Certain of the indentures also contain limitation on liens
provisions that limit the amount of secured indebtedness that GFC may incur,
subject to several exceptions, including those permitting an unlimited amount of
purchase money indebtedness and non-recourse indebtedness. In addition to the
other specified exceptions, GFC would be able to incur liens securing a maximum
of $781.4 million of additional indebtedness as of December 31, 2003 based on
the most restrictive limitation on liens provision.
The covenants in the credit facilities and indentures effectively limit
the ability of GFC to transfer funds to the Parent Company in the form of loans,
advances or dividends. At December 31, 2003, the maximum amount that GFC could
transfer to the Parent Company without violating its financial covenants was
$674.2 million, implying that $594.0 million of subsidiary net assets were
restricted. Restricted assets are defined as GFC's equity, less intercompany
receivables from the Parent company, less the amount that could be transferred
to the Parent company.
41
In addition to the credit facilities and indentures, GFC and its
subsidiaries are subject to financial covenants related to certain bank
financings. GFC does not anticipate any covenant violation of credit facilities,
bank financings, or indentures, nor does GFC anticipate that any of these
covenants will restrict its operations or its ability to procure additional
financing.
As December 31, 2003, GFC was in compliance with the covenants and
conditions of all of its credit facilities.
LONG-TERM FINANCING
Secured financings are comprised of the sale-leaseback of railcars,
loans secured by railcars and aircraft, technology nonrecourse financing, and a
CP conduit securitization facility. The railcar sale-leasebacks qualify as
operating leases and the assets or liabilities associated with this equipment
are not recorded on the balance sheet. In March 2003, $100.0 million was funded
through the CP conduit securitization facility. In December 2003, the CP conduit
securitization facility was restructured as a $50.0 million facility.
In November 2003, GFC registered $1.0 billion of unsecured debt
securities and pass through certificates under a shelf registration statement
filed with the SEC. 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. As of December 31, 2003, $150.0 million of senior
unsecured notes had been issued against the shelf registration.
During 2003, GFC issued a total of $715.7 million and repaid $1,077.3
million of long-term debt. Other significant financings in 2003 included $171.5
million of aircraft financing guaranteed by the European Export Credit Agencies,
$214.9 million of technology nonrecourse financing and $37.1 million of aircraft
financing guaranteed by the U.S. Export-Import Bank.
CREDIT RATINGS
The availability of the above funding options may be adversely impacted
by certain factors including the global capital market environment and outlook
as well as GFC's financial performance and outlook. Access to capital markets at
competitive interest rates is partly dependent on GFC's credit rating as
determined primarily by rating agencies such as S&P and 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 situation has increased the cost of borrowing and
constrained GFC's access to the commercial paper market.
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 ECA and the Ex-Im. GFC
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.
2004 LIQUIDITY POSITION
GFC expects that it will be able to meet its contractual obligations
for 2004 through a combination of its current cash position, projected cash flow
from operations, portfolio proceeds, ECA financing, and its revolving credit
facilities. GFC previously arranged financing supported by the ECA to fund GFC's
2001-2004 Airbus
42
A320 aircraft deliveries. Approximately $110.0 million of ECA financing is
expected to be funded in 2004, secured by three deliveries.
CONTRACTUAL COMMITMENTS
At December 31, 2003, GFC's contractual commitments, including debt
maturities, lease payments, and unconditional purchase obligations were (in
millions):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
---------- --------- --------- --------- -------- -------- ----------
Long-term debt........ $ 3,280.4 $ 554.6 $ 500.9 $ 874.4 $ 101.2 $ 254.3 $ 995.0
Capital lease
obligations........... 174.9 31.2 20.4 17.4 16.7 14.8 74.4
Operating leases -
recourse.......... 1,818.4 143.2 154.7 148.2 137.5 139.9 1,094.9
Operating leases -
nonrecourse....... 640.1 39.9 41.5 40.0 38.8 39.0 440.9
Unconditional purchase
obligations.......... 673.5 273.7 104.7 162.6 94.8 37.7 --
Other................. 36.2 -- 36.2 -- -- -- --
---------- --------- --------- --------- -------- -------- ----------
$ 6,623.5 $ 1,042.6 $ 858.4 $ 1,242.6 $ 389.0 $ 485.7 $ 2,605.2
========== ========= ========= ========= ======== ======== ==========
The carrying value of long-term debt is adjusted for fair value hedges.
As of December 31, 2003, long-term debt of $3,280.4 million excludes a fair
value adjustment of $42.8 million. The adjustment for qualifying fair value
hedges is excluded from the above table as such amount does not represent a
contractual commitment with a fixed amount or maturity date. Other represents
GFC's obligation under the terms of the DEC acquisition agreement to cause DEC
to make qualified investments of $36.2 million by December 31, 2005. To the
extent there are not satisfactory investment opportunities during 2005, DEC may
invest in long term securities for purposes of future investment.
UNCONDITIONAL PURCHASE OBLIGATIONS
At December 31, 2003, GFC's unconditional purchase obligations of
$673.5 million consisted primarily of commitments to purchase railcars and
scheduled aircraft acquisitions. GFC had commitments of $401.1 related to the
committed railcar purchase program, entered into in 2002. GFC also had
commitments of $169.8 million for orders and options for interests in five new
aircraft to be delivered in 2004 and 2006. Additional unconditional purchase
obligations include $73.1 million of other rail related commitments.
At December 31, 2003, GFC's unconditional purchase obligations by
segment were (in millions):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
---------- --------- --------- --------- -------- -------- ----------
Rail.................. $ 474.2 $ 155.5 $ 93.0 $ 93.8 $ 94.5 $ 37.4 $ --
Air................... 169.8 95.8 5.7 68.3 -- -- --
Technology............ 6.4 6.4 -- -- -- -- --
Specialty............. 23.1 16.0 6.0 .5 .3 .3 --
---------- --------- --------- --------- -------- -------- ----------
$ 673.5 $ 273.7 $ 104.7 $ 162.6 $ 94.8 $ 37.7 $ --
========== ========= ========= ========= ======== ======== ==========
GUARANTEES
In connection with certain investments or transactions, GFC has entered
into various commercial commitments, such as guarantees and standby letters of
credit, which could potentially 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
43
affiliate. GFC 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. GFC also provides a guarantee
related to $300.0 million of convertible debt issued by the Parent Company.
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 a lease term. Approximately 66% of the asset residual value
guarantees are related to rail equipment. Based on known and expected market
conditions, management does not believe that the asset residual value guarantees
will result in any negative financial impact to GFC. GFC believes these asset
residual value guarantees will likely generate future income in the form of fees
and residual sharing proceeds.
GFC and its subsidiaries are also parties to letters of credit and
bonds. No material claims have been made against these obligations. At December
31, 2003, GFC does not expect any material losses to result from these off
balance sheet instruments because performance is not anticipated to be required.
GFC's commercial commitments at December 31, 2003 were (in millions):
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
---------- --------- --------- --------- -------- -------- ----------
Affiliate debt guarantees -
recourse to GFC.............. $ 73.6 $ 38.9 $ 15.2 $ 1.7 $ 1.3 $ -- $ 16.5
Asset residual value
guarantees................... 579.5 24.9 27.4 157.1 7.7 32.3 330.1
Loan payment guarantee -
Parent Company convertible
debt......................... 300.0 -- -- -- 175.0 125.0 --
Lease and loan payment
guarantees................... 56.6 3.4 3.0 3.0 3.0 3.0 41.2
Other loan guarantees.......... .1 .1 -- -- -- -- --
---------- --------- --------- --------- -------- -------- ----------
1,009.8 67.3 45.6 161.8 187.0 160.3 387.8
Standby letters of
credit and bonds............. 1.6 1.6 -- -- -- -- --
---------- --------- --------- --------- -------- -------- ----------
$ 1,011.4 $ 68.9 $ 45.6 $ 161.8 $ 187.0 $ 160.3 $ 387.8
========== ========= ========= ========= ======== ======== ==========
PENSION CONTRIBUTIONS
GFC contributes to pension plans sponsored by GATX that cover
substantially all employees. Contributions to the GATX plans are allocated to
GFC on the basis of payroll costs. GFC's allocated share of contributions to
these plans was $2.1 million and $26.6 million in the years ended December 31,
2003 and 2002, respectively. In 2004, GFC expects to make payments of
approximately $2.6 million with respect to its pension plans. Allocation from
GATX of additional contributions will be dependent on a number of factors
including plans asset investment returns and actuarial experience. Subject to
the impact of these factors, GFC may make additional material plan
contributions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to use
judgment in making estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and related disclosures. The Company
regularly evaluates its estimates and judgments based on historical experience
and other relevant factors and circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
The Company considers the following as critical accounting policies:
Operating lease assets and facilities - Operating lease assets and
facilities are stated principally at cost. Assets acquired under capital leases
are included in operating lease assets and the related obligations are recorded
44
as liabilities. Provisions for depreciation include the amortization of the cost
of capital leases. Operating lease assets and facilities are depreciated using
the straight-line method to an estimated residual value. Railcars, locomotives,
aircraft, marine vessels, buildings and leasehold improvements are depreciated
over the estimated useful lives of the assets. Technology equipment is generally
depreciated to an estimated residual value over the term of the lease contract.
The Company periodically reviews the appropriateness of depreciable lives and
residual values based on physical and economic factors, as well as existing
market conditions.
Impairment of long-lived assets - A review for impairment of long-lived
assets, such as operating lease assets and facilities, is performed whenever
events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
estimated future net cash flows expected to be generated by the asset. Estimated
future cash flows are based on a number of assumptions including lease rates,
lease term, operating costs, life of the asset and disposition proceeds. If such
assets are considered to be impaired, the impairment loss to be recognized is
measured by the amount by which the carrying amount of the assets exceeds fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less selling costs. In addition, the Company periodically reviews
the residual values used in the accounting for finance leases. When conditions
indicate the residual value has declined, the Company recognizes the accounting
impact in that period.
Allowance for possible losses - The purpose of the allowance is to
provide an estimate of credit losses with respect to reservable assets inherent
in the investment portfolio. Reservable assets include gross receivables, loans
and finance leases. GFC's estimate of the amount of loss incurred in each period
requires consideration of historical loss experience, judgments about the impact
of present economic conditions, collateral values, and the state of the markets
in which GFC participates, in addition to specific losses for known troubled
accounts. GFC charges off amounts that management considers unrecoverable from
obligors or the disposition of collateral. GFC assesses the recoverability of
investments by considering several factors, including customer payment history
and financial position. The allowance for possible losses is periodically
reviewed for adequacy considering changes in economic conditions, collateral
values, credit quality indicators and customer-specific circumstances. GFC
believes that the allowance is adequate to cover losses inherent in the
portfolio as of December 31, 2003. Because the allowance is based on judgments
and estimates, it is possible that those judgments and estimates could change in
the future, causing a corresponding change in the recorded allowance.
Investments in affiliated companies - Investments in affiliated
companies represent investments in 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. Investments in 20 to 50
percent-owned companies and joint ventures are accounted for under the equity
method and are shown as investments in affiliated companies. Certain investments
in joint ventures that exceed 50% ownership are not consolidated and are also
accounted for using the equity method when GFC does not have effective or voting
control of these legal entities and is not the primary beneficiary of the
venture's activities. The investments in affiliated companies are initially
recorded at cost and are subsequently adjusted for GFC's share of the
affiliate's undistributed earnings. Distributions, which reflect both dividends
and the return of principal, reduce the carrying amount of the investment.
Pension and Post-retirement Benefits Assumptions - GFC's pension and
post-retirement benefit obligations and related costs are calculated using
actuarial assumptions. Two critical assumptions, the discount rate and the
expected return on plan assets, are important elements of plan expense and
liability measurement. GFC evaluates these critical assumptions annually. Other
assumptions involve demographic factors such as retirement, mortality, turnover
and rate of compensation increases.
The discount rate is used to calculate the present value of expected
future pension and post-retirement cash flows as of the measurement date. The
guideline for establishing this rate is a high-quality long-term bond
45
rate. A lower discount rate increases the present value of benefit obligations
and increases pension expense. The expected long-term rate of return on plan
assets is based on current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. A lower expected rate
of return on pension plan assets will increase pension expense.
Income Taxes - GFC evaluates the need for a deferred tax asset
valuation allowance by assessing the likelihood of whether deferred tax assets,
including net operating loss carryforward benefits, will be realized in the
future. The assessment of whether a valuation allowance is required involves
judgment including the forecast of future taxable income and the evaluation of
tax planning initiatives, if applicable.
Taxes have not been provided on undistributed earnings of foreign
subsidiaries as the Company has invested or will invest the undistributed
earnings indefinitely. If in the future, these earnings are repatriated to the
U.S., or if the Company expects such earnings will be remitted in the
foreseeable future, provision for additional taxes would be required.
GFC's operations are subject to taxes in the U.S., various states and
foreign countries and as result, may be subject to audit in all of these
jurisdictions. Tax audits may involve complex issues and disagreements with
taxing authorities could require several years to resolve. Accruals for tax
contingencies require management to make estimates and assessments with the
respect to the ultimate outcome of tax audit issues.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for a summary of
new accounting pronouncements that may impact GFC's business.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, GFC is exposed to interest rate and
foreign currency exchange rate risks that could impact results of operations. To
manage these risks, GFC, pursuant to established and authorized policies, enters
into certain derivative transactions, principally interest rate swaps, Treasury
note derivatives and currency swaps. These instruments and other derivatives are
entered into for hedging purposes only to manage existing underlying exposures.
GFC does not hold or issue derivative financial instruments for speculative
purposes.
GFC's interest expense is affected by changes in interest rates as a
result of its use of variable rate debt instruments. Based on GFC's variable
rate debt instruments at December 31, 2003 and giving affect to related
derivatives, if market rates were to increase hypothetically by 10% of GFC's
weighted average floating rate, after-tax interest expense would increase by
approximately $2.2 million in 2004.
GFC conducts operations in foreign countries, principally in Europe. As
a result, changes in the value of the U.S. dollar as compared to foreign
currencies would affect GFC's reported earnings. Based on 2003 reported earnings
from continuing operations, a uniform and hypothetical 10% strengthening in the
U.S. dollar versus applicable foreign currencies would decrease after-tax income
from continuing operations in 2004 by approximately $3.0 million.
The interpretation and analysis of the results from the hypothetical
changes to interest rates and currency exchange rates should not be considered
in isolation; such changes would typically have corresponding offsetting
effects. For example, offsetting effects are present to the extent that floating
rate debt is associated with floating rate assets.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of GATX Financial Corporation
We have audited the accompanying consolidated balance sheets of GATX
Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholder's equity,
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also included the financial statement
schedules listed in the index at Item 15(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of GATX
Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill and other intangible assets, and
in 2001 the Company changed its method of accounting for derivatives.
Ernst & Young LLP
Chicago, Illinois
January 29, 2004
48
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
---------------------------------
2003 2002 2001
--------- ---------- ----------
IN MILLIONS
GROSS INCOME
Lease income....................................................... $ 956.8 $ 1,020.2 $ 1,144.6
Marine operating revenue........................................... 85.0 79.7 77.7
Interest income.................................................... 41.8 55.1 71.3
Asset remarketing income........................................... 48.7 54.7 99.0
Gain on sale of securities......................................... 7.3 3.9 38.7
Fees............................................................... 18.1 17.6 19.5
Other.............................................................. 109.7 79.8 73.0
--------- ---------- ----------
Revenues........................................................... 1,267.4 1,311.0 1,523.8
Gain on extinguishment of debt..................................... 2.1 18.0 --
Share of affiliates' earnings...................................... 69.7 48.4 32.8
--------- ---------- ----------
TOTAL GROSS INCOME................................................. 1,339.2 1,377.4 1,556.6
OWNERSHIP COSTS
Depreciation and amortization...................................... 303.2 348.9 397.8
Interest, net...................................................... 178.3 209.0 249.0
Operating lease expense............................................ 191.6 185.8 184.2
--------- ---------- ----------
TOTAL OWNERSHIP COSTS.............................................. 673.1 743.7 831.0
OTHER COSTS AND EXPENSES
Maintenance expense................................................ 168.1 151.7 137.5
Marine operating expenses.......................................... 68.9 60.7 59.7
Other operating expenses........................................... 43.6 40.8 63.9
Selling, general and administrative................................ 177.0 186.3 225.3
Provision for possible losses...................................... 3.0 36.6 98.4
Asset impairment charges........................................... 36.4 43.2 85.2
Reversal for litigation charges.................................... -- -- (13.1)
Reduction in workforce charges..................................... -- 16.9 10.9
Fair value adjustments for derivatives............................. 4.1 3.5 .5
--------- ---------- ----------
TOTAL OTHER COSTS AND EXPENSES..................................... 501.1 539.7 668.3
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE........................... 165.0 94.0 57.3
INCOME TAX PROVISION............................................... 53.3 29.0 13.9
--------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.................................... 111.7 65.0 43.4
DISCONTINUED OPERATIONS
Operating results, net of taxes.................................... -- -- 2.7
Gain on sale of portion of segment, net of taxes.................. -- 6.2 173.9
--------- ---------- ----------
TOTAL DISCONTINUED OPERATIONS...................................... -- 6.2 176.6
--------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE............... 111.7 71.2 220.0
CUMULATIVE EFFECT OF ACCOUNTING CHANGE............................. -- (34.9) --
--------- ---------- ----------
NET INCOME......................................................... $ 111.7 $ 36.3 $ 220.0
========= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
49
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------
2003 2002
---------- ----------
IN MILLIONS
ASSETS
CASH AND CASH EQUIVALENTS..................................................... $ 211.1 $ 230.7
RESTRICTED CASH............................................................... 60.9 140.9
RECEIVABLES
Rent and other receivables.................................................... 90.7 92.6
Finance leases................................................................ 561.9 713.0
Loans......................................................................... 187.4 434.2
Less: allowance for possible losses........................................... (46.6) (77.2)
---------- ----------
793.4 1,162.6
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities............................................... 3,276.6 2,979.3
Operating lease investments and other......................................... 2,332.2 2,250.1
Less: allowance for depreciation.............................................. (2,099.2) (2,001.2)
---------- ----------
3,509.6 3,228.2
Progress payments for aircraft and other equipment............................ 53.6 140.9
---------- ----------
3,563.2 3,369.1
DUE FROM GATX CORPORATION..................................................... 340.6 422.5
INVESTMENTS IN AFFILIATED COMPANIES........................................... 868.2 850.9
RECOVERABLE INCOME TAXES...................................................... 47.3 86.1
GOODWILL, NET................................................................. 94.8 62.5
OTHER INVESTMENTS............................................................. 101.9 96.1
OTHER ASSETS.................................................................. 188.7 242.3
---------- ----------
$ 6,270.1 $ 6,663.7
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES......................................... $ 326.5 $ 374.9
DEBT
Short-term.................................................................... 15.9 13.7
Long-term:
Recourse.................................................................... 2,877.6 3,229.9
Nonrecourse................................................................. 445.6 594.6
Capital lease obligations..................................................... 122.4 143.7
---------- ----------
3,461.5 3,981.9
DEFERRED INCOME TAXES......................................................... 614.7 558.2
OTHER LIABILITIES............................................................. 258.5 247.0
---------- ----------
TOTAL LIABILITIES............................................................. 4,661.2 5,162.0
SHAREHOLDER'S EQUITY
Preferred stock............................................................... 125.0 125.0
Common stock.................................................................. 1.0 1.0
Additional capital............................................................ 521.6 521.6
Reinvested earnings........................................................... 988.8 933.0
Accumulated other comprehensive loss.......................................... (27.5) (78.9)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY.................................................... 1,608.9 1,501.7
---------- ----------
$ 6,270.1 $ 6,663.7
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
2003 2002 2001
--------- ---------- ----------
IN MILLIONS
OPERATING ACTIVITIES
Income from continuing operations, including
accounting change.................................................. $ 111.7 $ 30.1 $ 43.4
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment............... (42.0) (40.8) (79.9)
Gain on sales of securities..................................... (7.3) (3.9) (38.7)
Depreciation and amortization................................... 318.1 364.9 413.6
Provision for possible losses................................... 3.0 36.6 98.4
Asset impairment charges........................................ 36.4 43.2 85.2
Deferred income taxes........................................... 77.4 118.8 (55.3)
Gain on extinguishment of debt.................................. (2.1) (18.0) --
Share of affiliates' earnings, net of dividends................. (49.0) (13.1) (22.5)
Cumulative effect of accounting change.......................... -- 34.9 --
Decrease in litigation accrual.................................. -- -- (154.1)
Decrease (increase) in recoverable income taxes................. 36.4 (64.4) (4.9)
(Increase) decrease in prepaid pension.......................... (3.9) (27.0) .6
(Decrease) increase in reduction in workforce accrual........... (16.5) 11.0 8.7
Other, including working capital................................ (21.6) (8.2) (37.4)
--------- ---------- ----------
Net cash provided by continuing operations.................... 440.6 464.1 257.1
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities........ (642.2) (893.2) (840.7)
Loans extended....................................................... (49.5) (128.7) (305.5)
Investments in affiliated companies.................................. (100.8) (93.3) (246.5)
Progress payments.................................................... (32.2) (104.2) (300.1)
Investments in available-for-sale securities......................... (23.7) -- --
Other investments ................................................... (26.6) (52.4) (98.2)
--------- ---------- ----------
Portfolio investments and capital additions.......................... (875.0) (1,271.8) (1,791.0)
Portfolio proceeds .................................................. 759.5 882.8 1,026.2
Proceeds from other asset sales...................................... 23.0 110.8 199.7
Net increase in restricted cash...................................... (28.4) (6.5) (118.8)
Effect of exchange rate changes on restricted cash................... 17.7 9.9 --
--------- ---------- ----------
Net cash used in investing activities of continuing operations..... (103.2) (274.8) (683.9)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt......................... 715.7 1,262.8 788.9
Repayment of long-term debt.......................................... (1,077.3) (1,206.5) (1,018.8)
Net decrease in short-term debt...................................... (.7) (274.4) (231.9)
Net decrease in capital lease obligations............................ (21.3) (22.2) (1.1)
Equity contribution from GATX Corporation............................ -- 45.0 50.0
Net decrease in amount due from GATX Corporation..................... 81.9 17.9 92.0
Cash dividends paid to GATX Corporation.............................. (55.9) (17.9) (72.6)
--------- ---------- ----------
Net cash used in financing activities of continuing operations... (357.6) (195.3) (393.5)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS................ .6 13.7 (.3)
NET TRANSFERS TO DISCONTINUED OPERATIONS............................. -- (14.1) (11.3)
--------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS. (19.6) (6.4) (831.9)
PROCEEDS FROM SALE OF PORTION OF SEGMENT............................. -- 3.2 1,177.9
TAXES PAID ON GAIN FROM SALE OF SEGMENT.............................. -- -- (281.9)
--------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. $ (19.6) $ (3.2) $ 64.1
========= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
ACCUMULATED
OTHER
PREFERRED COMMON ADDITIONAL REINVESTED COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------- ------ ---------- ---------- ------------- ----------
(IN MILLIONS)
Balance at December 31, 2000.................. $ 125.0 $ 1.0 $ 426.6 $ 767.2 $ (34.4) $ 1,285.4
Comprehensive income:
Net income.................................. 220.0 220.0
Foreign currency translation gain........... 5.6 5.6
Unrealized loss on securities, net.......... (24.5) (24.5)
Unrealized loss on derivative instruments... (15.8) (15.8)
----------
Comprehensive income.......................... 185.3
Equity infusion............................... 50.0 50.0
Dividends declared............................ (72.6) (72.6)
--------- ------ ---------- ---------- ------------- ----------
Balance at December 31, 2001.................. $ 125.0 $ 1.0 $ 476.6 $ 914.6 $ (69.1) $ 1,448.1
Comprehensive income:
Net income.................................. 36.3 36.3
Foreign currency translation loss........... (5.3) (5.3)
Unrealized loss on securities, net.......... (2.1) (2.1)
Unrealized loss on derivative instruments... (2.4) (2.4)
----------
Comprehensive income.......................... 26.5
Equity infusion............................... 45.0 45.0
Dividends declared............................ (17.9) (17.9)
--------- ------ ---------- ---------- ------------- ----------
Balance at December 31, 2002.................. $ 125.0 $ 1.0 $ 521.6 $ 933.0 $ (78.9) $ 1,501.7
Comprehensive income:
Net income.................................. 111.7 111.7
Foreign currency translation gain........... 75.4 75.4
Unrealized gain on securities, net.......... .3 .3
Unrealized loss on derivative instruments... (24.3) (24.3)
----------
Comprehensive income.......................... 163.1
Dividends declared............................ (55.9) (55.9)
--------- ------ ---------- ---------- ------------- ----------
Balance at December 31, 2003.................. $ 125.0 $ 1.0 $ 521.6 $ 988.8 $ (27.5) $ 1,608.9
========= ====== ========== ========== ============= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
-----------------------------
2003 2002 2001
-------- ------- --------
IN MILLIONS
Net income.................................................................... $ 111.7 $ 36.3 $ 220.0
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss).................................... 75.4 (5.3) 5.6
Unrealized gain (loss) on securities, net of reclassification adjustments... .3 (2.1) (24.5)
Unrealized loss on derivative instruments................................... (24.3) (2.4) (15.8)
-------- ------- --------
Other comprehensive income (loss)............................................. 51.4 (9.8) (34.7)
-------- ------- --------
COMPREHENSIVE INCOME.......................................................... $ 163.1 $ 26.5 $ 185.3
======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
GATX Financial Corporation (GFC or the Company) is a wholly owned
subsidiary of GATX Corporation (GATX or the Parent Company). GFC is
headquartered in Chicago, Illinois and provides its services primarily through
four operating segments: GATX Rail (Rail), GATX Air (Air), GATX Technology
Services (Technology) and GATX Specialty Finance (Specialty). Through these
businesses, GFC combines asset knowledge and services, structuring expertise,
partnering and capital to provide business solutions to customers and partners
worldwide. GFC specializes in railcar and locomotive leasing, aircraft operating
leasing, information technology leasing, and financing other large ticket
equipment.
GFC invests in companies and joint ventures that complement its
existing business activities. GFC partners with financial institutions and
operating companies to improve scale in certain markets, broaden diversification
within an asset class, and enter new markets.
See Note 23 for a full description of GFC's operating segments.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the
accounts of GFC and its majority-owned subsidiaries. Investments in 20 to 50
percent-owned companies and joint ventures are accounted for under the equity
method and are shown as investments in affiliated companies, with pre-tax
operating results shown as share of affiliates' earnings. Certain investments in
joint ventures that exceed 50% ownership are not consolidated and are also
accounted for using the equity method when GFC does not have effective or voting
control of these legal entities. The consolidated financial statements reflect
the GATX Terminals segment (Terminals) as discontinued operations for all
periods presented.
Cash Equivalents - GFC considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Restricted cash - Restricted cash of $60.9 million as of December 31,
2003 is comprised of cash and cash equivalents which are restricted as to
withdrawal and usage. GFC's restricted cash primarily relates to amounts
maintained as required by contract for three bankruptcy remote, special-purpose
corporations that are wholly-owned by GFC.
Operating Lease Assets and facilities - Operating lease assets and
facilities are stated principally at cost. Assets acquired under capital leases
are included in operating lease assets and the related obligations are recorded
as liabilities. Provisions for depreciation include the amortization of capital
leases. Operating lease assets and facilities listed below are depreciated over
their respective estimated useful life to an estimated residual value using the
straight-line method. Technology equipment, machinery and related equipment are
generally depreciated over the term of the lease contract, which is
approximately three to five years, to an estimated residual value. The estimated
useful lives of depreciable new assets are as follows:
Railcars.................................................... 30 - 38 years
Locomotives................................................. 28 - 30 years
Aircraft.................................................... 25 years
Buildings................................................... 40 - 50 years
Leasehold improvements...................................... 5 - 40 years
Marine vessels.............................................. 40 - 50 years
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operating lease assets and facilities by segment are as follows
(in millions):
DECEMBER 31
-------------------------
2003 2002
----------- -----------
Rail........................................................ $ 3,276.6 $ 2,979.3
Air......................................................... 1,501.0 1,265.1
Technology.................................................. 528.0 640.3
Specialty................................................... 71.4 127.8
Other....................................................... 231.8 216.9
----------- -----------
5,608.8 5,229.4
----------- -----------
Less: Allowance for Depreciation........................... (2,099.2) (2,001.2)
----------- -----------
$ 3,509.6 $ 3,228.2
=========== ===========
Progress Payments for Aircraft and Other Equipment - GFC classifies
amounts deposited toward the construction of wholly-owned aircraft and other
equipment, including capitalized interest, as progress payments. Once GFC takes
possession of the completed asset, amounts recorded as progress payments are
reclassified to operating lease assets. Progress payments made for aircraft
owned by joint ventures in which GFC participates are classified as investments
in affiliated companies.
Investments in Affiliated Companies - GFC has investments in 20 to 50
percent-owned companies and joint ventures and other investments in which GFC
does not have effective or voting control. These investments are accounted for
using the equity method. The investments in affiliated companies are initially
recorded at cost, including goodwill at acquisition date, and are subsequently
adjusted for GFC's share of affiliates' undistributed earnings. Distributions,
which reflect both dividends and the return of principal, reduce the carrying
amount of the investment. Certain investments in joint ventures that exceed 50%
ownership are not consolidated and are also accounted for using the equity
method as GFC does not have effective or voting control of these legal entities
and is not the primary beneficiary of the venture's activities.
Inventory - GFC has inventory that consists of railcar repair
components, vessel spare parts and fuel related to its marine operations. All
inventory balances are stated at lower of cost or market. Railcar repair
components are valued using the average cost method. Vessel spare parts
inventory and vessel fuel inventory are valued using the first in first out
method. Inventory is included in other assets on the balance sheet and was $25.6
million and $20.0 million at December 31, 2003 and 2002, respectively.
Goodwill - Effective January 1, 2002, GFC adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, which changed the accounting for goodwill. Under these new rules,
goodwill is no longer amortized, but rather subject to an annual impairment test
in accordance with SFAS 142. GFC completed its annual review of all recorded
goodwill. Fair values were estimated using discounted cash flows. Prior to
January 1, 2002, the Company amortized goodwill over an estimated useful life of
10 to 40 years using the straight-line method.
Long-Lived Assets - Effective January 1, 2002, GFC adopted SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. Although the new rules
maintain many of the fundamental recognition and measurement provisions of SFAS
No. 121, they modify the criteria required to classify an asset as
held-for-sale. The adoption of this statement did not have a material impact on
the Company's consolidated financial position or results of operations.
A review for impairment of long-lived assets, such as operating lease
assets and facilities, is performed whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. In 2003,
asset impairment charges of $36.4 million include $10.2 million of impairment
charges at Air related to two commercial aircraft, which were largely offset by
the reversal of related maintenance reserves. Additional impairment charges
include $16.2 million at Specialty primarily related to the impairment of an
equity investment and a Gulfstream aircraft, $4.0 million at Technology, and
other impairment charges of $6.0 million that relate to marine operating assets.
Allowance for Possible Losses - The purpose of the allowance is to
provide an estimate of credit losses with respect to reservable assets inherent
in the investment portfolio. Reservable assets include gross receivables, loans
and finance leases. GFC's estimate of the amount of loss incurred in each period
requires consideration of historical loss experience, judgments about the impact
of present economic conditions, collateral values, and the state of the markets
in which GFC participates, in addition to specific losses for known troubled
accounts. GFC charges off amounts that management considers unrecoverable from
obligors or the disposition of collateral. GFC assesses the recoverability of
investments by considering several factors, including customer payment history
and financial position. The allowance for possible losses is periodically
reviewed for adequacy considering changes in economic conditions, collateral
values, credit quality indicators and customer-specific circumstances. GFC
believes that the allowance is adequate to cover losses inherent in the
portfolio as of December 31, 2003. Because the allowance is based on judgments
and estimates, it is possible that those judgments and estimates could change in
the future, causing a corresponding change in the recorded allowance.
Income Taxes - United States (U.S.) income taxes have not been provided
on the undistributed earnings of foreign subsidiaries and affiliates that GFC
intends to permanently reinvest in these foreign operations. The cumulative
amount of such earnings was $216.8 million at December 31, 2003.
Other Liabilities - Other liabilities include the accrual for
post-retirement benefits other than pensions; environmental, general liability,
litigation and workers' compensation reserves; and other deferred credits.
Derivatives - Effective January 1, 2001, GFC adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133.
The adoption of SFAS No. 133, as amended, in the first quarter of 2001,
resulted in $1.1 million being recognized as expense in the consolidated
statement of income and $4.7 million of unrealized gain in other comprehensive
income (loss). SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. GFC records the fair value
of all derivatives as either other assets, or other liabilities, with the offset
to other comprehensive loss, or long-term recourse debt in the balance sheet. At
December 31, 2003, GFC had not discontinued any hedges because it was probable
that the original forecasted transaction would not occur.
Instruments that meet established accounting criteria are formally
designated as qualifying hedges at the inception of the contract. These criteria
demonstrate that the derivative is expected to be highly effective at offsetting
changes in the fair value of underlying exposure both at inception of the
hedging relationship and on an ongoing basis. The change in fair value of the
ineffective portion of all hedges is immediately recognized in earnings. For the
years ended December 31, 2003, 2002 and 2001, losses of $3.1 million, $1.5
million and $.7 million, respectively, were recognized in earnings for hedge
ineffectiveness. Derivatives that are not designated as qualifying hedges are
adjusted to fair value through earnings immediately. For the years ended
December 31, 2003, 2002 and 2001, a loss of $3.8 million, a loss of $.6 million,
and income of $.2 million respectively, were recognized in earnings for
derivatives not qualifying as hedges.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
GFC uses interest rate and currency swap agreements, Treasury
derivatives, and forward sale agreements, as hedges to manage its exposure to
interest rate and currency exchange rate risk on existing and anticipated
transactions.
Fair Value Hedges
For qualifying derivatives designated as fair value hedges, changes in
both the derivative and the hedged item attributable to the risk being hedged
are recognized in earnings.
Cash Flow Hedges
For qualifying derivatives designated as cash flow hedges, the
effective portion of the derivative's gain or loss is recorded as part of other
comprehensive loss in shareholders' equity and subsequently recognized in the
income statement when the hedged forecasted transaction affects earnings. Gains
and losses resulting from the early termination of derivatives designated as
cash flow hedges are included in other comprehensive loss and recognized in
income when the original hedged transaction affects earnings.
Environmental Liabilities - Expenditures that relate to current or
future operations are expensed or capitalized as appropriate. Expenditures that
relate to an existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are charged to environmental
reserves. Reserves are recorded in accordance with accounting guidelines to
cover work at identified sites when GFC's liability for environmental cleanup is
both probable and a reasonable estimate of associated costs can be made;
adjustments to initial estimates are recorded as required.
Revenue Recognition - Gross income includes rents on operating leases,
accretion of income on finance leases, interest on loans, marine operating
revenue, fees, asset remarketing gains (losses), gains (losses) on the sale of
the portfolio investments and equity securities and share of affiliates'
earnings. Operating lease income is recognized on a straight-line basis over the
term of the underlying leases. Finance lease income is recognized on the basis
of the interest method, which produces a constant yield over the term of the
lease. Marine operating revenue is recognized as shipping services are performed
and revenue is allocated among reporting periods based on the relative transit
time in each reporting period for shipments in process at any month end. Asset
remarketing income includes gains from the sale of assets from GFC's portfolio
as well as residual sharing fees from the sale of managed assets. Asset
remarketing income is recognized upon completion of the sale of assets. Fee
income, including management fees received from joint ventures, is recognized as
services are performed, which may be over the period of a management contract or
as contractual obligations are met.
Lease and Loan Origination Costs - Initial direct costs of leases are
deferred and amortized over the lease term, either as an adjustment to the yield
for direct finance and leveraged leases (collectively, finance leases), or on a
straight-line basis for operating leases. Loan origination fees and related
direct loan origination costs for a given loan are offset, and the net amount is
deferred and amortized over the term of the loan as an adjustment to interest
income.
Residual Values - GFC has investments in the residual values of its
leasing portfolio. The residual values represent the estimate of the values of
the assets at the end of the lease contracts. GFC initially records these based
on appraisals and estimates. Realization of the residual values is dependent on
GFC's future ability to market the assets under existing market conditions. GFC
reviews residual values periodically to determine that recorded amounts are
appropriate. For finance lease investments, GFC reviews the estimated residual
values of leased equipment at least annually, and any other-than-temporary
declines in value are immediately charged to income. For operating lease assets,
GFC reviews the estimated salvage values of leased equipment at least annually,
and declines in estimated residual values are recorded as adjustments to
depreciation expense over the remaining useful life of the asset to the extent
the net book value is not otherwise impaired. In addition to a periodic review,
if events or changes in circumstances trigger a review of operating lease assets
for impairment, any such impairment is immediately charged to income as an
impairment loss.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investments in Equity Securities - GFC's venture portfolio includes
stock warrants received from investee companies and common stock resulting from
exercising the warrants. Under the provisions of SFAS No. 133, as amended, the
warrants are accounted for as derivatives, with prospective changes in fair
value recorded in current earnings. All other investments are classified as
available-for-sale in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The securities are carried at fair
value and unrealized gains and losses arising from marking securities to fair
value are included on a net-of-tax basis as a separate component of accumulated
other comprehensive loss.
Foreign Currency Translation - The assets and liabilities of GFC's
operations located outside the U.S. are translated at exchange rates in effect
at year end, and income statements and the statements of cash flows are
translated at the average exchange rates for the year. Adjustments resulting
from the translation of foreign currency financial statements are deferred and
recorded as a separate component of accumulated other comprehensive loss in the
shareholder's equity section of the balance sheet.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as revenues and expenses during the
reporting period. The Company regularly evaluates estimates and judgments based
on historical experience and other relevant facts and circumstances. Actual
amounts when ultimately realized could differ from those estimates.
Reclassification - Certain amounts in the 2002 and 2001 financial
statements have been reclassified to conform to the 2003 presentation.
New Accounting Pronouncements - In January 2003, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation by
business enterprises of variable interest entities (VIEs) in which it is the
primary beneficiary. FIN 46 applied immediately to VIEs created or acquired
after January 31, 2003. No VIEs were created or obtained by GFC during 2003. For
other VIEs, FIN 46 initially applied in the first fiscal quarter or interim
period 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. In
December 2003, the FASB reissued FIN 46 (Revised Interpretations) with certain
modifications and clarifications. Application of this guidance was effective for
interests in certain VIEs commonly referred to as special-purpose entities
(SPEs) as of December 31, 2003. Application for all other types of VIEs is
required for periods ending after March 15, 2004, unless previously applied. GFC
did not have an interest in any SPEs subject to the December 31, 2003
implementation date. The Company is in the process of completing an assessment
of the impact of FIN 46 for all other types of entities. Based on this review to
date, the Company believes certain of its investments will be considered VIEs
pursuant to the guidance provided in FIN 46. However, GFC is not a primary
beneficiary with respect to any of the VIEs and does not expect to consolidate
or otherwise adjust recorded amounts for assets, liabilities, income or expense.
GFC's maximum exposure to loss with respect to these VIEs is approximately
$311.4 million, of which $277.7 million was the aggregate carrying value of
these investments recorded on the balance sheet at December 31, 2003.
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 new statement should be applied
prospectively. The provisions of this statement that relate to SFAS 133
implementation issues that have been effective for fiscal periods beginning
prior to June 15, 2003 should continue to be applied in accordance with their
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respective effective dates. The adoption of this statement does not have a
material impact on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits. The
provisions of FASB No. 132 (Revised 2003) does not change the measurement and
recognition provisions of SFAS No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. SFAS No. 132 (Revised 2003)
replaces SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. The requirements of SFAS 132 (Revised 2003) have been
incorporated into the notes to the financial statements included herein.
NOTE 3. ACQUISITIONS
The Company completed acquisitions of $56.8 million in 2002 and $95.8
million in 2001 for cash and other consideration. The results of operations of
these acquisitions have been included in the consolidated statements of income
since their respective dates of acquisition. Neither of these acquisitions were
material to the Company's consolidated financial statements.
In December 2002, Rail acquired the remaining 50.5% interest in KVG
Kesselwagen Vermietgesellschaft mbH and KVG Kesselwagen Vermietgesellschaft
m.b.h. (collectively KVG), a leading European railcar lessor for $56.8 million
and assumed $56.0 million of debt. $22.5 million of the purchase price was
funded in 2003. Prior to the transaction, which resulted in 100% ownership, Rail
held a 49.5% interest in KVG. At date of acquisition, KVG added approximately
9,000 tank and specialized railcars to Rail's wholly-owned worldwide fleet.
In March 2001, Rail purchased Dyrekcja Eksploatacji Cystern Sp. z.o.o
(DEC), Poland's national tank car fleet and fuel distribution company, for $95.8
million. DEC's assets included 11,000 tank cars at the acquisition date and a
railcar maintenance network.
NOTE 4. ACCOUNTING FOR LEASES
The following information pertains to GFC as a lessor:
Finance Leases - GFC's finance leases are comprised of direct financing
leases and leveraged leases. Investment in direct finance leases consists of
lease receivables, plus the estimated residual value of the equipment at the
lease termination dates, less unearned income. Lease receivables represent the
total rent to be received over the term of the lease reduced by rent already
collected. Initial unearned income is the amount by which the original sum of
the lease receivable and the estimated residual value exceeds the original cost
of the leased equipment. Unearned income is amortized to lease income over the
lease term in a manner that produces a constant rate of return on the net
investment in the lease.
Finance leases that are financed principally with nonrecourse
borrowings at lease inception and that meet certain criteria are accounted for
as leveraged leases. Leveraged lease receivables are stated net of the related
nonrecourse debt. Initial unearned income represents the excess of anticipated
cash flows (including estimated residual values, net of the related debt
service) over the original investment in the lease.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of the investment in finance leases were (in millions):
DECEMBER 31
---------------------
2003 2002
--------- ---------
Net minimum future lease receivables.............................. $ 607.8 $ 741.0
Estimated residual values......................................... 177.4 240.5
--------- ---------
785.2 981.5
Less: unearned income............................................. (223.3) (268.5)
--------- ---------
Investment in finance leases...................................... $ 561.9 $ 713.0
========= =========
Operating Leases - The majority of railcar assets, air assets and
certain other equipment leases included in operating lease assets are accounted
for as operating leases. Rental income from operating leases is generally
reported on a straight-line basis over the term of the lease.
Rental income on certain leases is based on equipment usage. Usage
rents for the years ended December 31, 2003, 2002 and 2001 were $33.4 million,
$7.1 million, and $3.3 million, respectively.
Minimum Future Receipts - Minimum future lease receipts from finance
leases, net of debt payments for leveraged leases, and minimum future rental
receipts from noncancelable operating leases by year at December 31, 2003 were
(in millions):
FINANCE OPERATING
LEASES LEASES TOTAL
-------- ---------- ----------
2004................................................... $ 191.4 $ 718.0 $ 909.4
2005................................................... 113.6 531.3 644.9
2006................................................... 65.6 358.0 423.6
2007................................................... 25.8 249.7 275.5
2008................................................... 21.4 169.9 191.3
Years thereafter....................................... 190.0 318.3 508.3
-------- ---------- ----------
$ 607.8 $ 2,345.2 $ 2,953.0
======== ========== ==========
The following information pertains to GFC as a lessee:
Capital Leases - Assets that have been leased to customers under
operating lease assets and finance leases and were financed under capital leases
were (in millions):
DECEMBER 31
----------------------
2003 2002
---------- ----------
Railcars.......................................................... $ 155.6 $ 160.8
Marine vessels.................................................... 134.0 147.7
Aircraft.......................................................... 15.7 15.3
---------- ----------
305.3 323.8
Less: allowance for depreciation................................. (210.6) (214.2)
---------- ----------
94.7 109.6
Finance leases.................................................... 9.4 8.7
---------- ----------
$ 104.1 $ 118.3
========== ==========
Depreciation of capital lease assets is classified as depreciation and
amortization in the statements of income.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operating Leases - GFC has financed railcars, aircraft, and other
assets through sale-leasebacks that are accounted for as operating leases. GFC
has provided a guarantee for a portion of the residual value related to two
operating leases. Operating lease expense for the years ended December 31, 2003,
2002, and 2001 was $191.6 million, $185.8 million, and $184.2 million,
respectively. Certain operating leases provide options for GFC to renew the
leases or purchase the assets at the end of the lease term. The specific terms
of the renewal and purchase options vary.
Future Minimum Rental Payments - Future minimum rental payments due
under noncancelable leases at December 31, 2003 were (in millions):
RECOURSE NONRECOURSE
CAPITAL OPERATING OPERATING
LEASES LEASES LEASES
------- ---------- -----------
2004............................................... $ 31.2 $ 143.2 $ 39.9
2005............................................... 20.4 154.7 41.5
2006............................................... 17.4 148.2 40.0
2007............................................... 16.7 137.5 38.8
2008............................................... 14.8 139.9 39.0
Years thereafter................................... 74.4 1,094.9 440.9
------- ---------- -----------
174.9 $ 1,818.4 $ 640.1
========== ===========
Less: amounts representing interest............... (52.5)
-------
Present value of future minimum capital
Lease payments................................ $ 122.4
=======
The payments for these leases and certain operating leases do not
include the costs of licenses, taxes, insurance, and maintenance that GFC is
required to pay. Interest expense on the above capital leases was $12.0 million
in 2003, $14.1 million in 2002, and $15.0 million in 2001.
The amounts shown for nonrecourse operating leases primarily reflect
rental payments of three bankruptcy remote, special-purpose corporations that
are wholly-owned by GFC. These rentals are consolidated for accounting purposes,
but do not represent legal obligations of GFC.
NOTE 5. LOANS
Loans are recorded at the principal amount outstanding plus accrued
interest. The loan portfolio is reviewed regularly, and a loan is classified as
impaired when it is probable that GFC will be unable to collect all amounts due
under the loan agreement. Since most loans are collateralized, impairment is
generally measured as the amount by which the recorded investment in the loan
exceeds expected payments plus the fair value of the collateral, and any
adjustment is considered in determining the provision for possible losses.
Generally, interest income is not recognized on impaired loans until the
outstanding principal is recovered. In 2003, GFC recognized $3.6 million in
interest income from loans classified as impaired.
The types of loans in GFC's portfolio are as follows (in millions):
DECEMBER 31
-------------------
2003 2002
-------- --------
Equipment......................................................... $ 101.1 $ 196.0
Venture........................................................... 86.3 238.2
-------- --------
Total investments................................................. $ 187.4 $ 434.2
======== ========
Impaired loans (included in total)................................ $ 28.9 $ 54.2
-------- --------
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has recorded allowances for possible losses of $14.7
million and $22.0 million on impaired loans at December 31, 2003 and 2002,
respectively. The average balance of impaired loans was $41.6 million, $48.6
million and $53.0 million during 2003, 2002 and 2001, respectively.
At December 31, 2003, scheduled loan principal due by year was as
follows (in millions):
LOAN PRINCIPAL
--------------
2004............................................ $ 69.5
2005............................................ 41.5
2006............................................ 19.5
2007............................................ 15.1
2008............................................ 26.2
Years thereafter................................ 15.6
--------------
$ 187.4
==============
NOTE 6. ALLOWANCE FOR POSSIBLE LOSSES
The purpose of the allowance is to provide an estimate of credit losses
with respect to reservable assets inherent in the investment portfolio.
Reservable assets include gross receivables, loans and finance leases. GFC's
estimate of the amount of loss incurred in each period requires consideration of
historical loss experience, judgments about the impact of present economic
conditions, collateral values, and the state of the markets in which GFC
participates, in addition to specific losses for known troubled accounts. GFC
charges off amounts that management considers unrecoverable from obligors or
through the disposition of collateral. GFC assesses the recoverability of
investments by considering factors such as a customer's payment history and
financial position.
The following summarizes changes in the allowance for possible losses
(in millions):
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
Balance at the beginning of the year............ $ 77.2 $ 89.2 $ 95.2
Provision for possible losses................... 3.0 36.6 98.4
Charges to allowance............................ (36.1) (56.0) (105.2)
Recoveries and other............................ 2.5 7.4 .8
-------- -------- --------
Balance at end of the year...................... $ 46.6 $ 77.2 $ 89.2
======== ======== ========
The charges to the allowance in 2003 were primarily due to write-offs
related to Air, Technology and Specialty investments. The charges to the
allowance in 2002 were primarily due to write-offs related to Technology and
Specialty investments. 2001 charges to the allowance primarily related to
write-offs at Specialty,
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
including telecom and steel investments. Other activity in 2003 included a $7.3
million reduction in the allowance related to the sales of Specialty's U.K. and
Canadian venture-related loan portfolios completed in December 2003.
There were no material changes in estimation methods or assumptions for
the allowances during 2003. GFC believes that the allowance is adequate to cover
losses inherent in the portfolio as of December 31, 2003. Because the allowance
is based on judgments and estimates, it is possible that those judgments and
estimates could change in the future, causing a corresponding change in the
recorded allowance.
NOTE 7. INVESTMENTS IN AFFILIATED COMPANIES
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 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.
The investments in affiliated companies are initially recorded at cost,
including goodwill at the acquisition date, and are subsequently adjusted for
GFC's share of affiliates' undistributed earnings (losses). These investments
include net loans to affiliated companies of $299.6 million and $301.2 million
at December 31, 2003 and 2002, respectively. Share of affiliates' earnings
includes GFC's share of interest income on these loans, which offsets the
proportional share of the affiliated companies' interest expense on the loans.
Share of affiliates' earnings in 2001 also includes the amortization of
goodwill. Distributions reflect both dividends and the return of principal and
reduce the carrying amount of the investment. Distributions received from such
affiliates were $148.1 million, $148.8 million, and $225.6 million in 2003, 2002
and 2001, respectively.
The following table shows GFC's investments in affiliated companies by
segment (in millions):
DECEMBER 31
-------------------
2003 2002
-------- --------
Rail....................................................... $ 140.9 $ 145.0
Air........................................................ 484.9 470.5
Technology................................................. 20.6 15.2
Specialty.................................................. 221.8 220.2
-------- --------
$ 868.2 $ 850.9
======== ========
The following table shows GFC's pre-tax share of affiliates' earnings
(loss) by segment (in millions):
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
Rail............................................ $ 12.5 $ 13.1 $ 7.4
Air............................................. 31.6 14.8 33.1
Technology...................................... 2.9 2.3 2.3
Specialty....................................... 22.7 18.2 (10.0)
-------- -------- --------
$ 69.7 $ 48.4 $ 32.8
======== ======== ========
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. In addition, GFC recorded its loans to the joint ventures as
equity contributions, therefore, those loan balances were reclassified from
liabilities to equity.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operating results for all affiliated companies held at the end of the
year, assuming GFC held 100 percent interest, would be (in millions):
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
(UNAUDITED)
Revenues........................................ $ 827.1 $ 854.9 $ 865.1
Pre-tax income.................................. 122.6 91.8 32.6
For 2001, pre-tax income as if GFC held a 100 percent interest was less
than GFC's pre-tax share of affiliates' earnings due to telecom losses recorded
at affiliates of Specialty of $131.9 million. GFC's share of these losses was
$35.6 million.
Summarized balance sheet data for all affiliated companies held at the
end of the year, assuming GFC held a 100% interest, would be (in millions):
DECEMBER 31
-----------------------
2003 2002
---------- ----------
(UNAUDITED)
Total assets............................................... $ 6,397.5 $ 6,131.8
Long-term liabilities...................................... 3,864.6 3,604.7
Other liabilities.......................................... 581.6 516.8
Shareholders' equity....................................... 1,951.3 2,010.3
At December 31, 2003 and 2002, GFC provided $73.6 million and $89.2
million, respectively, in debt guarantees and $125.0 million and $123.2 million,
respectively, in residual value guarantees related to affiliated companies.
NOTE 8. GOODWILL
Goodwill, net of accumulated amortization, was $94.8 million and $62.5
million as of December 31, 2003 and 2002, respectively. There was no
amortization expense recorded in 2003 and 2002. Amortization expense totaled
$4.6 million for the year ended December 31, 2001.
Following reflects the changes in the carrying value of goodwill for
the year ended December 31, 2003 (in millions):
RAIL TECHNOLOGY SPECIALTY TOTAL
------- ---------- --------- -------
Balance at December 31, 2001............................... $ 41.9 $ 7.6 $ 13.8 $ 63.3
Goodwill acquired.......................................... 8.2 -- .6 8.8
Purchase accounting adjustment............................. 10.5 -- -- 10.5
Reclassification from investments in affiliated companies.. 29.2 -- -- 29.2
Impairment charges......................................... (34.9) -- (14.4) (49.3)
------- ---------- --------- -------
Balance at December 31, 2002............................... $ 54.9 $ 7.6 -- $ 62.5
Purchase accounting adjustment............................. 16.4 -- -- 16.4
Foreign currency translation adjustment.................... 15.9 -- -- 15.9
------- ---------- --------- -------
Balance at December 31, 2003............................... $ 87.2 $ 7.6 $ -- $ 94.8
======= ========== ========= =======
Rail - In 2002, GFC acquired the remaining interest in KVG. As a result
of this transaction, GFC recorded $8.2 million of goodwill. Additionally, the
net book value of the goodwill that related to GFC's previous acquisitions of
interest in KVG was $29.2 million. GFC reclassified the $29.2 million goodwill
balance related to the previous investments on the Company's balance sheet from
investment in affiliated companies to goodwill as of December 31, 2002.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 2002, the purchase accounting adjustment of $10.5 million was
related to the finalization of the allocation of the 2001 purchase price of DEC
among the amounts assigned to assets and liabilities. GFC relied on the
conclusions of an independent appraisal for purposes of assigning value to DEC's
tangible and intangible assets (excluding goodwill). In addition, GFC finalized
its plans to integrate and restructure certain functions of DEC's operations,
and in accordance with EITF 95-3 recognized the associated costs of the plan as
a liability assumed in a purchase business combination and included the amount
in the allocation of acquisition cost.
In accordance with SFAS 142, the Company completed its review of the
goodwill recorded from the DEC acquisition by the third quarter of 2002. Based
on that review, the Company determined that all of the goodwill related to DEC
was in excess of its fair market value. As a result, the Company recorded a
one-time, non-cash impairment charge of $34.9 million in 2002. Such a charge is
non-operational in nature and recognized as a cumulative effect of accounting
change in the 2002 consolidated statement of income. The impairment charge was
due primarily to lessened expectations of projected cash flows based on the then
current market conditions and a lower long-term growth rate projected for DEC.
In 2003, the purchase accounting adjustment of $16.4 million was
attributable to the finalization of the allocation of the 2002 purchase price of
KVG among the amounts assigned to assets and liabilities. GFC relied on the
conclusions of an independent appraisal for purposes of assigning value to KVG's
tangible and intangible assets (excluding goodwill). The adjustment reflects a
lower allocation of purchase price to fixed assets as remaining lives were lower
than preliminary estimates.
In 2003, the carrying amount of goodwill at Rail increased $15.9
million as a result of a foreign currency translation adjustment due to the
strengthening of the Canadian dollar and the Euro.
Specialty - GFC recorded a $14.4 million impairment charge in 2002 for
the write-down of goodwill associated with the Company's plan to exit the former
venture finance business.
The following is the pro forma effect of the adoption of SFAS 142 (in
millions, except per share data):
YEAR ENDED DECEMBER 31
2003 2002 2001
-------- ------- --------
Net Income, as reported.................................... $ 111.7 $ 36.3 $ 220.0
Adjusted for:
Goodwill amortization, net of tax........................ -- -- 3.5
Amortization of equity method goodwill, net of tax....... -- -- 3.3
-------- ------- --------
Adjusted net income...................................... $ 111.7 $ 36.3 $ 226.8
======== ======= ========
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. INVESTMENT SECURITIES
Investments classified as available-for-sale and recorded at fair value
in accordance with SFAS No. 115, are included with other investments in the
consolidated balance sheet. Unrealized gains representing the difference between
carrying amount and estimated current fair value, are recorded in the
accumulated other comprehensive loss component of shareholder's equity, net of
related tax effects, and totaled $1.7 million and $1.4 million as of December
31, 2003 and 2002, respectively. The Company did not have any unrealized losses
on available-for-sale securities as of December 31, 2003 and 2002. The Company
did not have any investments classified as held-to-maturity or trading as of
December 31, 2003 or 2002. Information regarding the Company's
available-for-sale securities is provided in the table below (in millions):
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------------------
ESTIMATED ESTIMATED
FAIR VALUE UNREALIZED FAIR VALUE UNREALIZED
GROSS GAINS GROSS GAINS
---------- ---------- ---------- ----------
Equity...................................... $ 2.4 $ 2.4 $ .8 $ .3
Debt........................................ 24.0 -- -- --
---------- ---------- ---------- ----------
$ 26.4 $ 2.4 $ .8 $ .3
========== ========== ========== ==========
Debt securities at December 31, 2003 mature as follows (in millions):
TOTAL
-------
2004........................................ $ --
2005........................................ 1.0
2006........................................ 8.0
2007........................................ 15.0
2008........................................ --
-------
$ 24.0
=======
Proceeds and realized gains from sales of available-for-sale
securities, generally related to common stock received upon the exercise of
warrants received in connection with financing of non-public venture backed
companies, totaled $7.3 million in 2003, $3.9 million in 2002 and $35.2 million
in 2001.
Upon the adoption of SFAS No. 133, as amended, warrants are accounted
for as derivatives, with prospective changes in fair value recorded in current
earnings. Accordingly, upon the conversion of warrants and subsequent sale of
stock, any amounts previously recorded in fair value adjustments for derivatives
related to the warrants are reclassified to gain on sale of securities in the
income statement. Refer to Note 13 to the Company's financial statements for
further information regarding the Company's warrants.
During the years ended December 31, 2003, 2002 and 2001, $4.4 million,
$2.4 million and $23.5 million, net of tax, respectively, were reclassified from
accumulated other comprehensive loss for gains realized and included in net
income. The Company used specific identification as the basis to determine the
amount reclassified from accumulated other comprehensive loss to earnings.
In 2001, the Company sold securities classified as
held-to-maturity. The debt securities were part of Specialty's telecom portfolio
and initially had maturity dates ranging from 2005 to 2010. Due to the poor
performance of the telecom market, the Company concluded that the decline in the
value of the telecom-related debt securities was other than temporary in
accordance with SFAS No. 115, and the carrying amount of the bonds was written
down to fair value, resulting in a loss on asset impairment charge of $47.4
million during 2001. Subsequently, the securities were sold for proceeds of
$12.2 million and a gain of $3.5 million was recognized.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. OTHER ASSETS
The following table summarizes the components of other assets reported
on the consolidated balance sheets (in millions):
DECEMBER 31
-------------------
2003 2002
-------- --------
Fair value of derivatives....................................................... $ 48.0 $ 62.3
Deferred financing costs........................................................ 35.2 39.3
Prepaid items .................................................................. 59.1 63.2
Furniture, fixtures and other equipment, net of accumulated depreciation........ 15.8 21.7
Inventory....................................................................... 25.6 20.0
Other........................................................................... 5.0 35.8
-------- --------
$ 188.7 $ 242.3
======== ========
NOTE 11. SHORT-TERM DEBT AND LINES OF CREDIT
Short-term debt (in millions) and weighted average interest rates as of
year end were:
DECEMBER 31
-----------------
2003 2002
------- -------
Short-term debt amount.......................................................... $ 15.9 $ 13.7
Short-term debt rate............................................................ 2.73% 3.50%
Short-term debt was principally foreign denominated loans.
GFC has commitments under credit agreements with a group of financial
institutions for revolving credit loans totaling $539.3 million. GFC's revolving
credit agreements are for $254.3 million, $145.0 million and $140.0 million
expiring in 2004, 2005 and 2006, respectively. At December 31, 2003,
availability under all credit facilities was $512.5 million with $26.8 million
of letters of credit issued and backed by the most recent facility. The annual
commitment fees for the revolving credit agreements are based on a percentage of
the commitment and totaled approximately $1.4 million, $1.2 million, and $.7
million for 2003, 2002, and 2001, respectively.
All revolving credit facilities contain various restrictive covenants,
including requirements to maintain a defined net worth and a fixed charge
coverage ratio. In addition, the credit facilities contain certain negative
pledge provisions, including an asset coverage test. Terms of the $140.0 million
credit facility also include a limitation on liens condition for borrowings on
this facility.
As defined in the credit facilities, the net worth of GFC at December
31, 2003 was $1.6 billion, which was in excess of the most restrictive minimum
net worth requirement of $1.1 billion. Additionally, the ratio of earnings to
fixed charges as defined by the credit facilities was 1.9x for the period ended
December 31, 2003, in excess of the most restrictive covenant of 1.3x.
The indentures for GFC's public debt also contain restrictive
covenants, including limitations on loans, advances, or investments in related
parties (including GATX) and dividends it may distribute to GATX. Certain of the
indentures also contain limitation on liens provisions that limit the amount of
secured indebtedness that GFC may incur, subject to several exceptions,
including those permitting an unlimited amount of purchase money indebtedness
and non-recourse indebtedness. In addition to the other specified exceptions,
GFC would be able to incur liens securing a maximum of $781.4 million of
additional indebtedness as of December 31, 2003 based on the most restrictive
limitation on liens provision.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The covenants in the credit facilities and indentures effectively limit
the ability of GFC to transfer funds to GATX in the form of loans, advances or
dividends. At December 31, 2003, the maximum amount that GFC could transfer to
GATX without violating its financial covenants was $674.2 million, implying that
$594.0 million of subsidiary net assets were restricted. Restricted assets are
defined as the subsidiary's equity, less intercompany receivables from the
parent company, less the amount that could be transferred to the parent company.
In addition to the credit facilities and indentures, GFC and its
subsidiaries are subject to financial covenants related to certain bank
financings. GFC does not anticipate any covenant in its credit facilities, bank
financings, or indentures will be violated, nor does GFC anticipate that any of
these covenants will restrict its operations.
As December 31, 2003, GFC was in compliance with all covenants and
conditions of its credit facilities.
NOTE 12. LONG-TERM DEBT
Long-term debt (in millions) and the range of interest rates as of year
end were:
INTEREST FINAL DECEMBER 31
-----------------------
RATES MATURITY 2003 2002
--------------- --------- ---------- ----------
VARIABLE RATE
Term notes and other obligations.... 1.15% - 4.14% 2004-2015 $ 1,126.0 $ 1,059.8
Nonrecourse obligations............. 1.80% - 2.22% 2007-2015 94.6 62.8
---------- ----------
1,220.6 1,122.6
FIXED RATE
Term notes and other obligations.... 4.05% - 8.88% 2004-2023 1,751.6 2,170.1
Nonrecourse obligations............. 2.75% - 12.25% 2004-2007 351.0 531.8
---------- ----------
2,102.6 2,701.9
---------- ----------
$ 3,323.2 $ 3,824.5
========== ==========
Maturities of GFC's long-term debt as of December 31, 2003, for the
next five years were (in millions):
TERM NOTES
AND OTHER NONRECOURSE TOTAL
---------- ----------- --------
2004.................................................. $ 371.6 $ 183.0 $ 554.6
2005.................................................. 381.5 119.4 500.9
2006.................................................. 819.4 55.0 874.4
2007.................................................. 90.4 10.8 101.2
2008.................................................. 251.4 2.9 254.3
At December 31, 2003, certain technology assets, aircraft, railcars,
and other equipment with a net carrying value of $1,560.2 million were pledged
as collateral for $1,291.7 million of notes and obligations.
GFC classifies certain debt as nonrecourse on the consolidated balance
sheets. The classification is based on the terms of the debt which provide that
in the event of default, the lender may only look to the collateral for
repayment. GFC's nonrecourse debt is collateralized primarily by assigned lease
cash flows and a security interest in the underlying leased asset. The
counterparties to GFC's nonrecourse debt arrangements are banks and other
lending institutions.
Nonrecourse debt of $15.0 million and $28.1 million was borrowed by
SPE's which were wholly-owned and consolidated by GFC in 2003 and 2002,
respectively. The creditors of the SPE's have no recourse to the
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
general credit of GFC. Nonrecourse debt of $346.3 million and $371.9 million was
in place to finance information technology assets on lease to customers at
December 31, 2003 and 2002, respectively.
Interest expense capitalized as part of the cost of construction of
major assets was $4.2 million in 2003, $15.8 million in 2002 and $14.4 million
in 2001. Interest allocated to discontinued operations was $5.0 million in 2001.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
GFC may enter into derivative transactions in accordance with its
policy for the purposes of reducing earnings volatility and hedging specific
financial exposures, including movements in foreign currency exchange rates and
changing interest rates on debt securities. These instruments are entered into
for hedging purposes only to manage underlying exposures. GFC does not hold or
issue derivative financial instruments for purposes other than hedging, except
for warrants, which are not designated as accounting hedges under SFAS No. 133,
as amended.
FAIR VALUE HEDGES
GFC uses interest rate swaps to convert fixed rate debt to floating
rate debt and to manage the fixed to floating rate mix of the debt portfolio.
The fair value of interest rate swap agreements is determined based on the
differences between the contractual rate of interest and the rates currently
quoted for agreements of similar terms and maturities. As of December 31, 2003,
maturities for interest rate swaps designated as fair value hedges range from
2005-2009.
CASH FLOW HEDGES
GFC's interest expense is affected by changes in interest rates as a
result of its use of variable rate debt instruments, including commercial paper
and other floating rate debt. GFC uses interest rate swaps and forward starting
interest rate swaps to convert floating rate debt to fixed rate debt and to
manage the floating to fixed rate ratio of the debt portfolio. The fair value of
interest rate swap agreements is determined based on the differences between the
contractual rate of interest and the rates currently quoted for agreements of
similar terms and maturities. As of December 31, 2003, maturities for interest
rate swaps qualifying as cash flow hedges range from 2004-2012.
GFC enters into currency swaps, currency and interest rate forwards,
and Treasury note derivatives as hedges to manage its exposure to interest rate
and currency exchange rate risk on existing and anticipated transactions. The
fair values of currency swaps, currency and interest rate forwards, and Treasury
note derivatives are based on interest rate swap rates, LIBOR futures, currency
rates, and current forward foreign exchange rates. As of December 31, 2003,
maturities for these hedges range from 2004-2013.
As of December 31, 2003, GFC expects to reclassify $1.0 million of net
losses on derivative instruments from accumulated other comprehensive loss to
earnings within the next twelve months related to various hedging transactions.
OTHER DERIVATIVES
GFC obtains warrants from non-public, venture backed companies in
connection with its financing activities. Upon adoption of SFAS No. 133, as
amended, these warrants were accounted for as derivatives. Upon receipt, fair
value is generally not ascertainable due to the early stage nature of the
investee companies. Accordingly, assigned values are nominal. Prior to an
initial public offering (IPO) of these companies, the fair value of pre-IPO
warrants is deemed to be zero. Accordingly, no amounts were recognized in
earnings for changes in fair value of pre-IPO warrants. The fair value of
warrants subsequent to the IPO is based on currently quoted prices of the
underlying stock.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER FINANCIAL INSTRUMENTS
The fair value of other financial instruments represents the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The following methods and assumptions were used to estimate the fair
value of other financial instruments:
The carrying amount of cash and cash equivalents, restricted cash, rent
receivables, accounts payable, and short-term debt approximates fair value
because of the short maturity of those instruments. Also, the carrying amount of
variable rate loans approximates fair value.
The fair value of fixed rate loans was estimated using discounted cash
flow analyses, at interest rates currently offered for loans with similar terms
to borrowers of similar credit quality.
The fair value of variable and fixed rate long-term debt was estimated
by performing a discounted cash flow calculation using the term and market
interest rate for each note based on GFC's current incremental borrowing rates
for similar borrowing arrangements. Portions of variable rate long-term debt
have effectively been converted to fixed rate debt by utilizing interest rate
swaps (GFC pays fixed rate interest, receives floating rate interest). Portions
of fixed rate long-term debt have effectively been converted to floating rate
debt by utilizing interest rate swaps (GFC pays floating rate interest, receives
fixed rate interest). In such instances, the increase (decrease) in the fair
value of the variable or fixed rate long-term debt would be offset in part by
the increase (decrease) in the fair value of the interest rate swap.
The following table sets forth the carrying amounts and fair values of
GFC's financial instruments (in millions):
DECEMBER 31
-------------------------------------------------
2003 2002
CARRYING 2003 FAIR CARRYING 2002 FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
ASSETS
Loans - fixed....................... $ 162.9 $ 150.5 $ 411.8 $ 461.8
Derivative instruments:
Cash flow hedges.................. 14.6 14.6 45.4 45.4
Fair value hedges................. 41.3 41.3 56.2 56.2
---------- ---------- ---------- ----------
Total derivative instruments........ 55.9 55.9 101.6 101.6
---------- ---------- ---------- ----------
$ 218.8 $ 206.4 $ 513.4 $ 563.4
========== ========== ========== ==========
LIABILITIES
Long-term debt - fixed.............. $ 2,102.6 $ 2,215.7 $ 2,701.9 $ 2,613.5
Long-term debt - variable........... 1,220.6 1,222.6 1,122.6 1,087.0
Derivative instruments:
Cash flow hedges.................. 36.8 36.8 39.3 39.3
---------- ---------- ---------- ----------
$ 3,360.0 $ 3,475.1 $ 3,863.8 $ 3,739.8
========== ========== ========== ==========
In the event that a counterparty fails to meet the terms of the
interest rate swap agreement or a foreign exchange contract, GFC's exposure is
limited to the market value of the swap if in GFC's favor. GFC manages the
credit risk of counterparties by dealing only with institutions that the Company
considers financially sound and by avoiding concentrations of risk with a single
counterparty. GFC considers the risk of non-performance to be remote.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. U.S. income
taxes have not been provided on the undistributed earnings of foreign
subsidiaries and affiliates that GFC intends to permanently reinvest in these
foreign operations. The cumulative amount of such earnings was $216.8 million at
December 31, 2003.
In prior years, GATX assumed a portion of GFC's deferred tax liability
in exchange for cash payments received from GFC. GATX contributed an amount
equal to the aggregate of cash received to GFC in exchange for shares of
preferred stock which are currently outstanding. Subsequently, GFC reacquired a
portion of these deferred taxes and at December 31, 2003 the remaining balance
assumed by GATX was $78.9 million, which is shown as a deferred tax adjustment
in the table below.
Significant components of GFC's deferred tax liabilities and assets
were (in millions):
DECEMBER 31
-------------------
2003 2002
-------- --------
DEFERRED TAX LIABILITIES
Book/tax basis difference due to depreciation................ $ 307.2 $ 302.2
Leveraged leases............................................. 85.7 105.5
Investments in affiliated companies.......................... 135.9 151.1
Lease accounting (other than leveraged)...................... 254.5 139.2
Other........................................................ 48.0 67.4
-------- --------
Total deferred tax liabilities............................. 831.3 765.4
DEFERRED TAX ASSETS
Net operating loss carryforward.............................. 21.7 --
Accruals not currently deductible for tax purposes........... 62.9 35.1
Allowance for possible losses................................ 18.3 32.5
Post-retirement benefits other than pensions................. 15.5 15.4
Other........................................................ 19.3 45.3
-------- --------
Total deferred tax assets.................................. 137.7 128.3
Deferred tax adjustment...................................... 78.9 78.9
-------- --------
Net deferred tax liabilities............................... $ 614.7 $ 558.2
======== ========
At December 31, 2003, GATX had a consolidated U.S. federal net
operating loss carryforward which expires in 2023 of which approximately $62.0
was attributable to GFC. A valuation allowance for recorded deferred tax assets
has not been provided as management expects such benefits to be fully realized.
The domestic and foreign components of income before income tax
provision from continuing operations consisted of (in millions):
YEAR ENDED DECEMBER 31
----------------------------
2003 2002 2001
-------- ------- -------
Domestic......................................... $ 114.9 $ 46.5 $ 21.9
Foreign.......................................... 50.1 47.5 35.4
-------- ------- -------
$ 165.0 $ 94.0 $ 57.3
======== ======= =======
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
GFC and its U.S. subsidiaries are included in the consolidated federal
income tax return of GATX. Income taxes for continuing operations consisted of
(in millions):
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
CURRENT
Domestic:
Federal........................................ $ (33.3) $ (97.7) $ 51.3
State and local................................ (1.6) (4.6) 6.0
-------- -------- --------
(34.9) (102.3) 57.3
Foreign.......................................... 10.8 12.5 11.9
-------- -------- --------
(24.1) (89.8) 69.2
DEFERRED
Domestic:
Federal........................................ 64.7 107.4 (41.4)
State and local................................ 6.7 4.7 (7.3)
-------- -------- --------
71.4 112.1 (48.7)
Foreign.......................................... 6.0 6.7 (6.6)
-------- -------- --------
77.4 118.8 (55.3)
-------- -------- --------
Income tax provision............................. $ 53.3 $ 29.0 $ 13.9
======== ======== ========
Income taxes (recovered) paid.................... $ (60.5) $ (25.5) $ 365.9
======== ======== ========
Taxes (recovered) paid reflect allocations from GATX and include
amounts allocable to discontinued operations of $1.2 million, $(8.4) million and
$292.0 million in 2003, 2002 and 2001 respectively. The tax amount recovered in
2003 is net of $28.7 million paid to the Internal Revenue Service (IRS) and
allocable to GFC to settle all disputed tax issues related to the audits for the
years 1992 to 1997.
The reasons for the difference between GFC's effective income tax rate
and the federal statutory income tax rate were (in millions):
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
Income taxes at federal statutory rate........... $ 57.8 $ 33.0 $ 20.0
Adjust for effect of:
Extraterritorial income exclusion.............. (1.7) (5.7) --
Tax rate decrease on deferred taxes............ (1.8) -- (6.1)
State income taxes............................. 3.3 .1 (.8)
Tax audit recovery............................. (4.6) -- --
Foreign income................................. .2 1.6 .3
Other.......................................... .1 -- .5
-------- -------- --------
Income tax provision............................. $ 53.3 $ 29.0 $ 13.9
======== ======== ========
Effective income tax rate........................ 32.3% 30.8% 24.2%
======== ======== ========
The extraterritorial income exclusion (ETI) is an exemption from U.S.
federal income tax for the lease of U.S. manufactured equipment to foreign
lessees. The benefit recorded in 2002 included both the 2001 and 2002 amounts.
Congress is currently evaluating the potential repeal of the ETI. Accordingly,
the availability of this exemption in future years is uncertain.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax rate decrease on deferred taxes recorded in 2003 and 2001 is
the result of changes in foreign income tax rates enacted in those years.
State income taxes are provided on domestic pre-tax income or loss. The
effect of state income tax on the overall income tax rate is impacted by the
amount of domestic income subject to state taxes relative to total income from
all sources.
The recovery of tax audit reserve in 2003 is the reversal of prior year
tax audit accruals as a result of the favorable resolution and settlement with
the IRS of issues in the 1995 to 1997 audit.
GFC's U.S. income tax returns have been audited through 1997 and all
issues have been settled with the IRS. Audits by the IRS of the years 1998 to
2002 are currently in progress. GFC believes that adequate accruals have been
provided for all years.
NOTE 15. PENSION AND OTHER POST-RETIREMENT BENEFITS
GFC contributed to pension plans sponsored by GATX that cover
substantially all employees. Benefits payable under the pension plans are based
on years of services and/or final average salary. The funding policy for the
pension plans is based on an actuarially determined cost method allowable under
Internal Revenue Service regulations.
Contributions to the GATX plans are allocated to GFC on the basis of
payroll costs. GFC's allocated share of the contributions to these plans was
$2.1 million and $26.6 million in 2003 and 2002, respectively. There were no
contributions made in 2001.
Costs pertaining to the GATX plans are allocated to GFC on the basis of
payroll costs with respect to normal cost and on the basis of actuarial
determinations for prior service cost. Ongoing pension (credits) costs for
continuing operations for 2003, 2002 and 2001 were $(1.8) million, $(.4) million
and $.6 million, respectively. Ongoing pension costs include a credit of $.1
million related to discontinued operations for 2001. Plan benefit obligations,
plan assets, and the components of net periodic costs for individual
subsidiaries of GATX, including GFC, have not been determined.
In addition to ongoing costs, special termination pension benefit
expenses of $.2 million and $12.4 million were incurred in 2002 and 2001,
respectively, for certain extra benefits paid to terminated or retired
employees. $8.7 million of the 2001 expense related to discontinued operations.
Offsetting the 2001 expense was a $13.8 million curtailment credit resulting
from the elimination of future service costs for covered employee groups, of
which $13.2 million related to discontinued operations.
In addition to the pension plans, GFC's other post-retirement plans
provide health care, life insurance and other benefits for certain retired
employees who meet established criteria. Most domestic employees are eligible
for health care and life insurance benefits if they retire from GFC with
immediate benefits under the GATX pension plan. The plans are either
contributory or noncontributory, depending on various factors.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables set forth other post-retirement obligations as of
December 31 (in millions):
2003 2002
RETIREE RETIREE
HEALTH HEALTH
AND LIFE AND LIFE
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 56.9 $ 53.2
Service cost................................................ .3 .3
Interest cost............................................... 3.8 3.9
Actuarial loss.............................................. 4.3 7.6
Benefits paid............................................... (8.0) (8.1)
-------- --------
Benefit obligation at end of year........................... $ 57.3 $ 56.9
======== ========
CHANGE IN FAIR VALUE OF PLAN ASSETS
Plan assets at beginning of year............................ $ - $ -
Company contributions....................................... 8.0 8.1
Benefits paid............................................... (8.0) (8.1)
-------- --------
Plan assets at end of year.................................. $ - $ -
======== ========
FUNDED STATUS
Funded status of the plan................................... $ (57.3) $ (56.9)
Unrecognized net loss....................................... 13.3 9.5
-------- --------
Accrued cost................................................ $ (44.0) $ (47.4)
======== ========
AMOUNT RECOGNIZED
Prepaid benefit cost........................................ $ - $ -
Accrued benefit liability................................... (44.0) (47.4)
-------- --------
Total recognized............................................ $ (44.0) $ (47.4)
======== ========
The components of other post-retirement benefit costs are as follows
(in millions):
2003 RETIREE HEALTH 2002 RETIREE HEALTH 2001 RETIREE HEALTH
AND LIFE AND LIFE AND LIFE
------------------- ------------------- -------------------
Service cost ....................................... $ .3 $ .3 $ .3
Interest cost ...................................... 3.8 3.9 3.5
Amortization of:
Unrecognized net loss (gain) ..................... .5 .1 (.8)
------------------- ------------------- -------------------
Ongoing net costs .................................. 4.6 4.3 3.0
Recognized gain due to curtailment ................. -- -- (1.1)
Recognized special termination benefit expense ..... -- -- .2
------------------- ------------------- -------------------
Net costs .......................................... $ 4.6 $ 4.3 $ 2.1
=================== =================== ===================
A special termination benefit expense of $.2 million was incurred in
2001 for certain extra benefits paid to terminated or retired employees.
Offsetting this expense was a $1.1 million curtailment credit resulting from the
elimination of future service costs for covered employee groups.
Ongoing other post-retirement benefit costs were $.9 million for 2001
related to discontinued operations.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Assumptions as of December 31:
2003 2002
---- ----
POST-RETIREMENT BENEFIT PLANS:
Discount rate..................................................... 6.25% 7.00%
Rate of compensation increases.................................... 5.00% 5.00%
The health care cost trend rate has a significant effect on the other
post-retirement benefit cost and obligation. The assumed health care cost trend
rate for 2003 was 11.0% for participants over the age of 65 and 9.0% for
participants under the age of 65. The assumed health care cost trend rate
anticipated for 2004 will be 10.0% for participants over the age of 65 and 8.5%
for participants under the age of 65. Over a six-year period the trend rates
will decline gradually to 6.0% and remain at that level thereafter.
A one-percentage-point change in the trend rate would have the
following effects (in millions):
ONE-PERCENTAGE-POINT ONE-PERCENTAGE-POINT
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost $ .2 $ (.2)
Effect on postretirement benefit obligation 3.4 (3.1)
GFC expects to contribute approximately $2.6 million to its pension
plans and $8.1 million to its other post-retirement benefit plans in 2004.
Allocation from GATX of additional contributions will be dependent on a number
of factors including plans asset investment returns and actuarial experience.
Subject to the impact of these factors, GFC may make additional material plan
contributions.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the ACT) was enacted. The Act expands Medicare,
primarily by adding a prescription drug benefit for Medicare-eligible
individuals starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligible individuals with a range of
options for coordinating with the new government-sponsored program that would
potentially reduce plan costs.
Pursuant to guidance from the FASB under the FASB Staff Position SFAS
106-1, GFC has chosen to defer recognition of the potential effects of the Act
in the 2003 financial statements. Therefore, the retiree health obligations and
costs reported in this financial statement do not yet reflect any potential
impact of the Act. Guidance on the accounting for the government subsidy is
pending and, when issued, could require GFC to modify previously reported
information.
GFC intends to review its retiree health care strategy in light of the
Act and may amend its retiree health program to coordinate with the new Medicare
prescription drug program or to receive the direct subsidy from the government.
As a result, GFC anticipates that its retiree health obligations and costs could
be reduced once those amendments are adopted and or the government subsidies are
considered.
NOTE 16. CONCENTRATIONS, OFF BALANCE SHEET ITEMS AND OTHER CONTINGENCIES
CONCENTRATIONS
CONCENTRATION OF REVENUES
GFC's revenues are derived from a wide range of industries and
companies. Approximately 20% of total revenues are generated from customers in
the chemical industry; for similar services, 15% of revenues are derived from
the petroleum industry. Air's assets of $2.0 billion, including off balance
sheet assets of $29.0 million, are approximately 26% of GFC's total assets and
consist primarily of commercial aircraft operated by various
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
domestic and international airlines. At December 31, 2003, the countries with
the largest concentrations of Air's commercial aircraft were Turkey, with
approximately $262.9 million or 13% of Air's total assets, including off balance
sheet assets, and Italy with approximately $238.8 million or 12% of Air's total
assets, including off balance sheet assets.
CONCENTRATION OF CREDIT RISK
Under its lease agreements with lessees, GFC retains legal ownership of
the asset except where such assets have been financed by sale-leasebacks. With
most loan financings to customers, the loan is collateralized by the equipment.
GFC performs credit evaluations prior to approval of a lease or loan contract.
Subsequently, the creditworthiness of the customer and the value of the
collateral are monitored on an ongoing basis. GFC maintains an allowance for
possible losses to provide for potential losses that could arise should
customers become unable to discharge their obligations to GFC.
OFF BALANCE SHEET ITEMS
UNCONDITIONAL PURCHASE OBLIGATIONS
At December 31, 2003, GFC's unconditional purchase obligations of
$673.5 million consisted primarily of railcar commitments and scheduled aircraft
acquisitions. GFC had commitments of $401.1 related to the committed railcar
purchase program, entered into in 2002. GFC also had commitments of $169.8
million for orders and options for interests in five new aircraft to be
delivered in 2004 and 2006. Unconditional purchase obligations also include
$73.1 million of other rail related commitments. GFC has an obligation under the
terms of the DEC acquisition agreement to cause DEC to make qualified
investments of $36.2 million by December 31, 2005. To the extent there are not
satisfactory investment opportunities during 2005, DEC may invest in long term
securities for purposes of future investment.
COMMERCIAL COMMITMENTS
In connection with certain investments or transactions, GFC has entered
into various commercial commitments, such as guarantees and standby letters of
credit, which could potentially 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.
The following table shows GFC's commercial commitments (in millions):
DECEMBER 31
----------------------------------
2003 2002
------------- -------------
Affiliate debt guarantees-- recourse to GFC................... $ 73.6 $ 89.2
Asset residual value guarantees............................... 579.5 602.9
Loan payment guarantee-
Parent Company Convertible Debt............................. 300.0 175.0
Lease and loan payment guarantees............................. 56.6 60.2
Other loan guarantees......................................... .1 14.7
------------- -------------
Total guarantees.......................................... 1,009.8 942.0
Standby letters of credit and bonds........................... 1.6 1.6
------------- -------------
$ 1,011.4 $ 943.6
============= =============
At December 31, 2003, the maximum potential amount of lease, loan or
residual value guarantees under which GFC or its subsidiaries could be required
to perform was $1,009.8 million, which includes $300.0 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
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
entered into prior to the effective date of FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, was a liability of $3.6 million.
The expirations of these guarantees range from 2004 to 2017. Any liability
resulting from GFC'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 asset residual value guarantees
will result in any significant adverse financial impact to the Company.
Accordingly, the Company has not recorded any accrual for contingent losses with
respect to the residual value guarantees as of December 31, 2003. GFC believes
these asset residual value guarantees will likely generate future income in the
form of fees and residual sharing proceeds.
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 a lease term. Revenue is earned for providing these asset value
guarantees in the form of an initial fee (which is amortized into income over
the guaranteed period) and by sharing in any proceeds received upon disposition
of the assets to the extent such proceeds are in excess of the amount guaranteed
(which is recorded when realized).
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 these guarantees, and expects the affiliates to generate sufficient
cash flow to satisfy their lease and loan obligations.
GFC and its subsidiaries are also parties to letters of credit and
bonds. In GFC's past experience, virtually no claims have been made against
these financial instruments. At December 31, 2003, management does not expect
any material losses to result from these off balance sheet instruments because
performance is not expected to be required, and, therefore, is of the opinion
that the fair value of these instruments is zero.
OTHER CONTINGENCIES
ENVIRONMENTAL
The Company's operations are subject to extensive federal, state and
local environmental regulation. GFC's operating procedures include practices to
protect the environment from the risks inherent in railcar leasing, which
frequently involve transporting chemicals and other hazardous materials.
Additionally, some of GFC's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property. As
a result, GFC is subject to environmental cleanup and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the Superfund law, as well as
similar state laws generally impose joint and several liability for cleanup and
enforcement costs on current and former owners and operators of a site without
regard to fault or the legality of the original conduct. In addition, GFC may be
considered a potentially responsible party (PRP) under certain other laws.
Accordingly, under CERCLA and other federal and state statutes, GFC may be held
jointly and severally liable for all environmental costs associated with a
particular site. If there are other PRPs, GFC generally participates in the
cleanup of these sites through cost-sharing agreements with terms that vary from
site to site. Costs are typically allocated based on relative volumetric
contribution of material, the amount of time the site was owned or operated,
and/or the portion of the total site owned or operated by each PRP.
At the time a potential environmental issue is identified, initial
reserves for environmental liability are established when such liability is
probable and a reasonable estimate of associated costs can be made.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Environmental costs are based on the estimated costs associated with the type
and level of investigation and/or remediation activities that our internal
environmental staff (and where appropriate, independent consultants) have
determined to be necessary to comply with applicable laws and regulations and
include initial site surveys and environmental studies of potentially
contaminated sites as well as costs for remediation and restoration of sites
determined to be contaminated. In addition, GFC has provided indemnities for
potential environmental liabilities to buyers of divested companies. In these
instances, reserves are based on the scope and duration of the respective
indemnities together with the extent of known contamination. Estimates are
periodically reviewed and adjusted as required to reflect additional information
about facility or site characteristics or changes in regulatory requirements.
GFC conducts an ongoing environmental contingency analysis, which considers a
combination of factors including independent consulting reports, site visits,
legal reviews, analysis of the likelihood of participation in and the ability of
other PRPs to pay for cleanup, and historical trend analyses. GFC does not
believe that a liability exists for known environmental risks beyond what has
been provided for in the environmental reserve.
GFC is involved in a number of administrative and judicial proceedings
and other mandatory cleanup efforts at approximately three (3) sites at which it
is participating in the study or cleanup, or both, of alleged environmental
contamination. The Company did not recognize an environmental expense in 2003 or
2002. GFC did recognize an environmental expense of $1.7 million in 2001. GFC
paid $1.4 million, $1.0 million and $13.7 million during 2003, 2002 and 2001,
respectively, for mandatory and unasserted claims cleanup efforts, including
amounts expended under federal and state voluntary cleanup programs. GFC has
recorded liabilities for remediation and restoration of all known sites of $26.0
million at December 31, 2003, compared with $27.0 million at December 31, 2002.
These amounts are included in other liabilities on GFC's balance sheet. GFC's
environmental liabilities are not discounted. GFC anticipates that the majority
of the accrued costs at December 31, 2003, will be paid over the next five years
and no individual site is considered to be material.
Liabilities recorded for environmental costs represent GFC's best
estimates for remediation and restoration of these sites and include both
asserted and unasserted claims. Unasserted claims are not considered to be a
material component of the liability.
The Company did not materially change its methodology for identifying
and calculating environmental liabilities in the three years presented. There
are currently no known trends, demands, commitments, events or uncertainties
that are reasonably likely to occur and materially affect the methodology or
assumptions described above.
Recorded liabilities include GFC's best estimates of all costs, without
reduction for anticipated recoveries from third parties, and include both
asserted and unasserted claims. However, GFC's total cleanup costs at these
sites cannot be predicted with certainty due to various factors such as the
extent of corrective actions that may be required, evolving environmental laws
and regulations, advances in environmental technology, the extent of other
parties' participation in cleanup efforts, developments in ongoing environmental
analyses related to sites determined to be contaminated, and developments in
environmental surveys and studies of potentially contaminated sites. As a
result, future charges to income for environmental liabilities could have a
significant effect on results of operations in a particular quarter or fiscal
year as individual site studies and remediation and restoration efforts proceed
or as new sites arise. However, management believes it is unlikely any
identified matters, either individually or in the aggregate, will have a
material adverse effect on GFC's results of operations, financial position or
liquidity.
LEGAL
GFC and its subsidiaries are parties to a number of legal actions and
claims, various governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to environmental matters,
workers' compensation claims by GFC employees and other personal injury claims.
Some
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of the legal proceedings include claims for punitive as well as compensatory
damages. While the final outcome of these matters cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available and liabilities that have been recorded, it is the opinion of GFC's
management that none of these items, when finally resolved, will have a material
adverse effect on the results of operations or the financial position of GFC.
NOTE 17. ADVANCES TO PARENT
Interest income on advances to GATX, which is included in gross
income on the income statement, was $24.7 million in 2003, $26.2 million in
2002, and $29.7 million in 2001. These advances have no fixed maturity date.
Interest income on advances to GATX was based on an interest rate that is
adjusted annually in accordance with an estimate of applicable rates.
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE LOSS
The change in components for accumulated other comprehensive loss are
as follows (in millions):
FOREIGN UNREALIZED
CURRENCY UNREALIZED LOSS ON
TRANSLATION GAIN (LOSS) ON DERIVATIVE
GAIN (LOSS) SECURITIES INSTRUMENTS TOTAL
----------- ---------- ----------- -----
Balance at December 31, 2000.......... $ (62.4) $ 28.0 $ -- $ (34.4)
Change in component.................. 5.6 (1.6) (24.9) (20.9)
Reclassification adjustments into
earnings............................ -- (38.7) (.5) (39.2)
Income tax effect.................... -- 15.8 9.6 25.4
------------- ------------- ----------- -------
Balance at December 31, 2001.......... (56.8) 3.5 (15.8) (69.1)
Change in component.................. (5.3) .5 (3.6) (8.4)
Reclassification adjustments into
earnings............................ -- (3.9) (.2) (4.1)
Income tax effect.................... -- 1.3 1.4 2.7
------------- ------------- ----------- -------
Balance at December 31, 2002.......... (62.1) 1.4 (18.2) (78.9)
Change in component.................. 78.2 7.7 (38.4) 47.5
Reclassification adjustments into
earnings............................ (2.8) (7.2) (.3) (10.3)
Income tax effect.................... -- (.2) 14.4 14.2
------------- ------------- ----------- -------
Balance at December 31, 2003.......... $ 13.3 $ 1.7 $ (42.5) $ (27.5)
============= ============= =========== =======
NOTE 19. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the components of portfolio proceeds
reported on the consolidated statement of cash flows (in millions):
YEAR ENDED DECEMBER 31
2003 2002 2001
------- --------- -------
Finance lease rents received, net of earned income and
leveraged lease nonrecourse debt service......................... $ 176.0 $ 245.8 $ 247.1
Loan principal received............................................ 288.5 262.3 216.0
Proceeds from asset remarketing.................................... 160.3 257.3 314.8
Proceeds from sale of securities................................... 7.3 3.9 38.7
Investment recovery from investments in affiliated companies....... 127.4 113.5 209.6
------- --------- ---------
$ 759.5 $ 882.8 $ 1,026.2
======= ========= =========
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Cash paid for interest and (recovered) paid for taxes were as follows
(in millions):
YEAR ENDED DECEMBER 31
--------------------------------
2003 2002 2001
------- ------- -------
Interest......................................................... $ 201.1 $ 247.3 $ 295.0
Taxes (recovered) paid........................................... (60.5) (25.5) 365.9
Significant items resulting from investing or financing activities of
the Company that did not impact cash flows were (in millions):
YEAR ENDED DECEMBER 31
--------------------------
2003 2002 2001
------- ----- ----
Asset disposition-leveraged lease commitment......... $ 184.9 $ -- $ --
Liability disposition-leveraged lease commitment..... 183.4 -- --
Debt acquired........................................ -- 56.0 --
Extinguished debt.................................... -- 14.0 --
Debt assumed......................................... -- -- 255.6
In 2003, GFC disposed of a leveraged lease commitment on passenger rail
equipment. $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.
In 2002, the Company acquired KVG and assumed $56.0 million of debt.
Also during the year, Technology extinguished $14.0 million of nonrecourse debt
and recorded gain on extinguishment of debt of $15.8 million, $13.0 million of
which was associated with one lease investment.
In 2001, GFC acquired a portfolio of technology leases from El Camino
Resources for $129.8 million, net of the assumption of $255.6 million of
nonrecourse debt.
NOTE 20. DISCONTINUED OPERATIONS
In 2002, GFC completed the divestiture of Terminals. Financial data for
Terminals has been segregated as discontinued operations for all periods
presented.
The 2001 gain on sale of portion of segment of $173.9 million, net of
taxes of $185.6 million primarily reflects the sale of substantially all of
GFC's interest in GATX Terminals Corporation and its subsidiary companies. In
the first quarter of 2001, GFC sold the majority of Terminals' domestic
operations. The sale included substantially all of Terminals' domestic
terminaling operations, the Central Florida Pipeline Company and Calnev Pipe
Line Company. Also in the first quarter of 2001, GFC sold substantially all of
Terminals' European operations. In the second and third quarters of 2001, GFC
sold Terminals' Asian operations and its U.S. interest in a distillate and
blending distribution affiliate.
In the first quarter of 2002, GFC sold its interest in a bulk-liquid
storage facility located in Mexico and recognized a $6.2 million gain, net of
taxes of $3.0 million.
During 2003 and 2002, there was no operating activity at Terminals. In
2001, gross income and net income were $34.7 million and $2.7 million (net of
tax of $4.4 million), respectively.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 21. REDUCTION IN WORKFORCE
During 2002, GFC recorded a pre-tax charge of $16.9 million related to
its 2002 reduction in workforce. This action was part of GATX's announced
intention to exit the venture finance business and curtail investment at
specialty finance. The charge also included costs incurred as part of headcount
reductions related to an integration plan implemented to rationalize the
workforce and operations at DEC. 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 December 31, 2003, 162 of the
terminations were completed. The remainder of the originally anticipated
employee terminations are expected to be completed by the end of 2004.
The following is the reserve activity for the year ended December 31,
2003 (in millions):
Reserve balance at 12/31/02................................... $ 16.6
Benefits paid................................................. (10.9)
Occupancy costs paid.......................................... (3.2)
Other adjustments............................................. .1
--------
Reserve balance at 12/31/03................................... $ 2.6
========
During 2001, GFC recorded a pre-tax charge of $10.9 million related to
its 2001 reduction in workforce. This reduction was part of GFC's initiative to
reduce selling, general and administrative costs in response to current economic
conditions and the divestiture of Terminals' operations. This charge included
involuntary employee separation costs of $5.2 million for 135 employees
company-wide, as well as legal fees of $.1 million, occupancy costs of $5.1
million and other costs of $.5 million. The employee groups terminated included
professional and administrative staff, including corporate personnel. As of
December 31, 2002, all of the employee terminations were completed.
The following is the reserve activity for the year ended December 31, 2003 (in
millions):
Reserve balance at 12/31/02................................ $ 3.1
Benefits paid.............................................. --
Occupancy costs paid....................................... (.3)
Other adjustments.......................................... (2.2)
------
Reserve balance at 12/31/03................................ $ .6
======
The $2.2 million adjustment represents a transfer of a portion of the liability
to the Parent Company.
Management expects the Company's reserve balance at December 31, 2003 related to
the reductions in workforce to be adequate. Remaining cash payments of $3.2
million will be funded from ongoing operations and are not expected to have a
material impact on GFC's liquidity.
NOTE 22. FOREIGN OPERATIONS
GFC has a number of investments in subsidiaries and affiliated
companies that are located in or derive revenues from foreign countries. GFC's
foreign identifiable assets include investments in affiliated companies as well
as fully consolidated railcar operations in Canada, Mexico, Poland, Austria and
Germany, and foreign leases, loans and other investments. Foreign entities
contribute significantly to GFC's share of affiliates' earnings. Revenues and
identifiable assets are determined to be foreign or U.S. based depending upon
the location of the customer; classification of affiliates' earnings as foreign
or domestic is made depending upon the office location of the affiliate. The
Company did not derive revenues in excess of 10% of consolidated revenues from
any one foreign country for any of the three years ended December 31, 2003. In
addition, no foreign country represents more than 10% to GFC's identifiable
assets for continuing operations.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The table below is a summary GFC's operations including subsidiaries
and affiliated companies (in millions):
YEAR ENDED OR AT DECEMBER 31
-------------------------------------------
2003 2002 2001
---------- ----------- -----------
REVENUES
Foreign......................................... $ 278.5 $ 300.1 $ 266.3
United States................................... 988.9 1,010.9 1,257.5
---------- ----------- -----------
$ 1,267.4 $ 1,311.0 $ 1,523.8
========== =========== ===========
SHARE OF AFFILIATES' EARNINGS
Foreign......................................... $ 41.3 $ 29.1 $ 47.6
United States................................... 28.4 19.3 (14.8)
---------- ----------- -----------
$ 69.7 $ 48.4 $ 32.8
========== =========== ===========
IDENTIFIABLE BALANCE SHEET ASSETS FOR
CONTINUING OPERATIONS
Foreign......................................... $ 2,565.8 $ 2,300.4 $ 1,690.3
United States................................... 3,704.3 4,363.3 4,807.6
---------- ----------- -----------
$ 6,270.1 $ 6,663.7 $ 6,497.9
========== =========== ===========
Foreign cash flows generated are used to meet local operating needs and
for reinvestment. For foreign functional currency entities, the translation of
the financial statements into U.S. dollars results in an unrealized foreign
currency translation adjustment, a component of accumulated other comprehensive
loss.
NOTE 23. FINANCIAL DATA OF BUSINESS SEGMENTS
The financial data presented below conforms to SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, and depicts
the profitability, financial position and capital expenditures 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.
At the end of 2003, GFC completed a reorganization which resulted in
changes in management structure and reporting. As a result, GFC now provides its
services and products primarily through four operating segments: Rail, Air,
Technology and Specialty. Through these businesses, GFC combines asset knowledge
and services, structuring expertise, partnering and capital to serve customers
and partners worldwide. Previously, GFC reported its operating segments as GATX
Rail and Financial Services, which included the results of its business units,
air, technology, specialty finance (including American Steamship Company (ASC)),
and venture finance. All reported amounts have been restated to conform to the
revised segment presentation.
Rail is principally engaged in leasing rail equipment, including tank
cars, freight cars and locomotives. Rail provides both full service leases and
net leases. Under a net lease, the lessee is responsible for maintenance,
insurance and taxes. Under a full service lease, Rail maintains and services the
railcars, pays ad valorem taxes, and provides other ancillary services.
Air is primarily engaged in leasing newer, narrow-body aircraft widely
used by commercial airlines throughout the world. Air typically provides net
leases under which the lessee is responsible for maintenance, insurance and
taxes.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Technology is an information technology (IT) equipment lessor. In
conjunction with the leasing of technology equipment, Technology also provides
life cycle asset management services to help its customers acquire, manage,
remarket and dispose of IT assets.
Specialty is comprised of the former specialty finance and venture
finance business units, which are now managed as one operating segment. At the
end of 2002, GFC announced its intention to curtail investment in specialty
finance and to sell or otherwise run-off venture finance. Specialty's portfolio
consists primarily of leases and loans, frequently including interests in an
asset's residual value, and joint venture investments involving a variety of
underlying asset types, including marine, aircraft and other diversified
investments. The venture-related portfolio consists primarily of loans, warrants
and investments in venture capital funds.
Other is comprised of corporate results, including selling, general and
administrative expense (SG&A) and interest expense not allocated to segments,
and the results of ASC, a Great Lakes shipping company.
Management, including the CEO, evaluates the performance of each
segment based on several measures, including net income. These results are used
to assess performance and determine resource allocation among the segments.
Along with the change to reporting segments, GFC revised its
methodology for allocating corporate SG&A expenses to the segments. Corporate
SG&A expenses relate to administration and support functions performed at the
corporate office. Such expenses include information technology, human resources,
legal, financial support and executive costs. Under the revised allocation
methodology, directly attributable expenses are generally allocated to the
segments. Indirect, shared corporate SG&A costs are retained in Other. Amounts
allocated to the segments are approximated based on management's best estimate
and judgment of direct support services. Rail's reported segment net income for
2002 and 2001 has been restated to incorporate the revised methodology for SG&A
allocations as follows:
YEAR ENDED DECEMBER 31
-----------------------------
2002 2001
----------- ------------
Rail income before cumulative effect of accounting change
as previously reported........................................................ $ 50.6 $ 44.1
After tax effect of reduced SG&A due to change in allocation methodology........ 9.5 13.2
----------- ------------
Rail income before cumulative effect of accounting change....................... $ 60.1 $ 57.3
=========== ============
As noted above, results of Air, Technology and Specialty were included
as part of the Financial Services segment in prior years. Accordingly, the
presentation of segment results incorporates the revised SG&A allocation
methodology.
Debt balances and interest expense were allocated based upon a fixed
leverage ratio for each individual operating segment across all reporting
periods, expressed as a ratio of debt to equity. Rail's leverage ratio was set
at 5:1, Air's leverage ratio was set at 4:1, Technology's leverage ratio was set
at 1:1 (excluding nonrecourse debt), and Specialty's leverage ratio was set at
4:1. Any GFC debt and related interest expense that remained after this
allocation methodology was assigned to Other in each period. Management believes
this leverage and interest expense allocation methodology gives an accurate
indication of each operating segment's risk-adjusted financial return.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables present certain segment data for the years ended
December 31, 2003, 2002 and 2001 (in millions):
RAIL AIR TECHNOLOGY SPECIALTY OTHER TOTAL
---------- ---------- ------------ --------- ---------- -----------
2003 PROFITABILITY
Revenues............................. $ 689.8 $ 110.2 $ 202.0 $ 139.6 $ 125.8 $ 1,267.4
Gain on extinguishment of debt....... - - .7 1.8 (.4) 2.1
Share of affiliates' earnings........ 12.5 31.6 2.9 22.7 - 69.7
---------- ---------- ------------ --------- ---------- -----------
Total gross income................... 702.3 141.8 205.6 164.1 125.4 1,339.2
Depreciation ........................ 113.7 55.1 118.5 10.3 5.6 303.2
Interest, net........................ 59.6 41.2 24.5 43.5 9.5 178.3
Operating lease expense.............. 183.2 3.9 - 4.4 .1 191.6
Income (loss) from continuing
operations before taxes............ 80.0 3.0 25.0 62.2 (5.2) 165.0
Income from continuing operations.. 54.2 2.1 15.2 38.1 2.1 111.7
---------- ---------- ------------ --------- ---------- -----------
SELECTED BALANCE SHEET DATA
Investments in affiliated companies.. 140.9 484.9 20.6 221.8 - 868.2
Identifiable assets.................. 2,308.8 1,977.0 604.3 707.6 672.4 6,270.1
---------- ---------- ------------ --------- ---------- -----------
CASH FLOW
Portfolio investments and capital
additions.......................... 249.6 227.9 246.4 130.9 20.2 875.0
---------- ---------- ------------ --------- ---------- -----------
RAIL AIR TECHNOLOGY SPECIALTY OTHER TOTAL
---------- ---------- ------------ --------- ---------- ----------
2002 PROFITABILITY
Revenues............................. $ 659.1 $ 89.0 $ 304.6 $ 153.0 $ 105.3 $ 1,311.0
Gain on extinguishment of debt....... - - 15.8 - 2.2 18.0
Share of affiliates' earnings........ 13.1 14.8 2.3 18.2 - 48.4
---------- ---------- ------------ --------- ---------- ----------
Total gross income................... 672.2 103.8 322.7 171.2 107.5 1,377.4
Depreciation ........................ 102.3 37.1 188.4 14.6 6.5 348.9
Interest, net........................ 53.8 35.1 40.7 53.9 25.5 209.0
Operating lease expense.............. 177.6 3.5 - 4.4 .3 185.8
Income (loss) from continuing
operations before taxes............ 93.4 7.6 7.3 7.5 (21.8) 94.0
Income (loss) from continuing
operations ........................ 60.1 8.1 4.7 4.9 (12.8) 65.0
---------- ---------- ------------ --------- ---------- ----------
SELECTED BALANCE SHEET DATA
Investments in affiliated companies.. 145.0 470.5 15.2 220.2 - 850.9
Identifiable assets.................. 2,289.9 1,885.6 684.5 1,088.0 715.7 6,663.7
---------- ---------- ------------ --------- ---------- ----------
CASH FLOW
Portfolio investments and capital
additions.......................... 117.5 571.5 253.8 327.3 1.7 1,271.8
---------- ---------- ------------ --------- ---------- ----------
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RAIL AIR TECHNOLOGY SPECIALTY OTHER TOTAL
------- ------- ---------- ---------- -------- ---------
2001 PROFITABILITY
Revenues............................... $ 674.1 $ 87.1 $ 409.1 $ 244.5 $ 109.0 $ 1,523.8
Share of affiliates' earnings (loss)... 7.4 33.1 2.3 (10.0) - 32.8
------- ------- ---------- --------- -------- ---------
Total gross income..................... 681.5 120.2 411.4 234.5 109.0 1,556.6
Depreciation and amortization.......... 106.4 20.4 241.5 22.9 6.6 397.8
Interest, net.......................... 67.1 32.9 55.0 78.7 15.3 249.0
Operating lease expense................ 163.8 12.9 - 6.5 1.0 184.2
Income (loss) from continuing
operations before taxes............. 83.7 28.1 49.2 (69.8) (33.9) 57.3
Income (loss) from continuing
operations.......................... 57.3 16.8 30.1 (41.3) (19.5) 43.4
------- ------- ---------- --------- -------- ---------
SELECTED BALANCE SHEET DATA
Investments in affiliated companies.... 200.6 483.4 14.2 214.7 - 912.9
Identifiable assets.................... 2,280.9 1,335.6 918.5 1,288.5 674.4 6,497.9
------- ------- ---------- --------- -------- ---------
CASH FLOW
Portfolio investments and capital
additions............................ 370.1 574.2 431.3 407.2 8.2 1,791.0
------- ------- ---------- --------- -------- ---------
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Annual Report on Form 10-K 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not required.
ITEM 11. EXECUTIVE COMPENSATION
Not required.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Not required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not required.
86
PART IV
ITEM 15. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
Page
----
(a) 1. Financial Statements
Documents Filed as Part of this Report:
Report of Independent Public Auditors - Ernst & Young 48
Consolidated Statements of Income - Years Ended December
31, 2003, 2002, and 2001. 49
Consolidated Balance Sheets - December 31, 2003 and 2002. 50
Consolidated Statements of Cash Flows - Years Ended
December 31, 2003, 2002, and 2001. 51
Consolidated Statements of Changes in Shareholder's
Equity - December 31, 2003, 2002 and 2001. 52
Consolidated Statements of Comprehensive Income
- Years Ended December 31, 2003, 2002, and 2001. 53
Notes to Consolidated Financial Statements 54
2. Financial Statement Schedules:
Schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and, therefore, have been omitted.
3. Exhibits. See the Exhibit Index included herewith and
incorporated by reference hereto.
(b) Report on Form 8-K.
None.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Ronald H. Zech
-------------------------------------
Ronald H. Zech
Chairman, President,
Chief Executive Officer and Director
March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Ronald H. Zech Chairman, President,
- -------------------------------------
Ronald H. Zech Chief Executive Officer and Director
March 15, 2004
/s/ Brian A. Kenney Senior Vice President and
- -------------------------------------
Brian A. Kenney Chief Financial Officer, Director, and
March 15, 2004 Assistant Secretary
/s/ William M. Muckian Vice President, Controller
- -------------------------------------
William M. Muckian and Chief Accounting Officer
March 15, 2004
/s/ David M. Edwards Director
- -------------------------------------
David M. Edwards
March 15, 2004
88
(c) Exhibit Index
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ -------------------------------------------------------------- ----
3A. Certificate of Ownership and Merger merging GATX Rail
Corporation (a New York corporation) into GATX Capital
Corporation (a Delaware corporation) dated July 31, 2001
incorporated by reference to the GATX Financial Corporation's
quarterly report on Form 10-Q for period ended June 30, 2001.
3B. By-Laws of GATX Financial Corporation, as amended and restated
as of August 7, 2001, incorporated by reference to the GATX
Financial Corporation's quarterly report on Form 10-Q for
period ended June 30, 2001.
4A. Indenture dated October 1, 1987 between General American
Transportation Corporation and The Chase Manhattan Bank
(National Association), incorporated by reference to General
American Transportation Corporation's Form S-3 Registration
Statement filed October 8, 1987, file number 33-17692;
Indenture Supplement dated as of May 15, 1988 between General
American Transportation and The Chase Manhattan Bank
incorporated by reference to the General American
Transportation Corporation's Form 10-Q for the quarter ended
June 30, 1988, file number 2-54754. Second Supplemental
Indenture dated as of March 15, 1990 between General American
Transportation Corporation and The Chase Manhattan Bank
incorporated by reference to General American Transportation
Corporation's Form 8-K dated March 15, 1990, file number
2-54754; Third Supplemental Indenture dated as of June 15,
1990 between General American Transportation Corporation and
The Chase Manhattan Bank incorporated by reference to General
American Transportation Corporation's Form 8-K dated June 29,
1990, file number 2-54754; Fourth Supplemental Indenture dated
as of January 15, 1996 between General American Transportation
and The Chase Manhattan Bank incorporated by reference to
General American Transportation Corporation's Form 8-K dated
January 26, 1996, file number 2-54754.
4B. GATX Financial Corporation Notices 5 and 6 dated March 28,
1988 and April 12, 1988 defining the rights of holders of GATX
Rail's Medium-Term Notes Series A issued during that period,
incorporated by reference to the GATX Financial Corporation
Quarterly Report on Form 10-Q for the quarter ended June 30,
1988, file number 2-54754.
4C. GATX Financial Corporation Notices 3 through 5 dated from
April 4, 1989 through May 16, 1989, Notice 7 dated June 19,
1989 and Notice 12 dated July 21, 1989 defining the rights of
the holders of GATX Rail Corporation's Medium-Term Notes
Series C issued during those periods. Notices 3 through 5 and
Notice 7 is incorporated by reference to the GATX Financial
Corporation Quarterly Reports on Form 10-Q for the quarter
ended June 30, 1989 and Notice 12 incorporated by reference to
the GATX Financial Corporation Quarterly Report on Form 10-Q
for the quarter ended September 30, 1989, file number 2-54754.
89
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ -------------------------------------------------------------- ----
4D. GATX Financial Corporation Notice 1 dated February 27, 1992,
and Notices 7 and 10 dated May 18, 1993 and May 25, 1993
defining the rights of the holders of GATX Financial
Corporation's Medium-Term Notes Series D issued during those
periods. Notice 1 is incorporated by reference to the GATX
Financial Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992, Notices 7 and 10 are
incorporated by reference to the GATX Financial Corporation
Quarterly Report on Form 10-Q for the quarter ending June 30,
1993, file number 2-54754.
4E. Term Loan Agreement between the GATX Financial Corporation and
a Bank, incorporated by reference on Form 10-K for the period
ended December 31, 1990.
4F. GATX Financial Corporation Notices 1 and 2 dated June 8, 1994
and Notices 3 dated June 17, 1994, and Notices 7 through 11
dated July 18, 1994, defining the rights of the holders of
GATX Financial Corporation's Medium-Term Notes Series E issued
during those periods. Notices 1 through 3 are incorporated by
reference to the GATX Financial Corporation Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994, and Notices
7 through 11 are incorporated herein by reference to the Form
424(b)(5) dated July 18, 1994, file number 2-54754.
4G. GATX Financial Corporation Notices 12 through 14 dated
February 24, 1995, Notices 15 through 20 dated May 11, 1995,
amended May 24, 1995, and Notices 21 through 30 dated from
November 8, 1995 through November 13, 1995, defining the
rights of the holders of GATX Financial Corporation's
Medium-Term Notes Series E issued during those periods.
Notices 12 through 14 are incorporated by reference to the
Form 424(b)(5) dated February 24, 1995, Notices 15 through 20
are incorporated by reference to the Form 424(b)(5) dated May
11, 1995, and Notices 21 through 30 are incorporated by
reference to the Form 424(b)(5) dated from November 8, 1995
through November 13, 1995, file number 2-54754.
4H. GATX Financial Corporation Notices 1 and 2 both dated May 11,
2000 defining the rights of holders of GATX Rail Corporation's
Medium-Term Notes Series F issued during the period. Notice 1
is incorporated by reference to the Form 424(b)(5) dated May
11, 2000, and Notice 2 is incorporated by reference to the
Form 424(b)(5) dated May 11, 2000, file number 2-54754.
4I. Form of 8-5/8% Note due December 1, 2004 filed with the SEC on
Current Report on Form 8-K on December 7, 1994, file number
2-54754.
4J. Form of 6 3/4% Note due March 1, 2006 filed with the SEC on
Current Report on Form 8-K on March 4, 1996, file number
2-54754.
90
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ -------------------------------------------------------------- ----
4K. Indenture dated July 31, 1989 between GATX Capital Corporation
(formerly named GATX Leasing Corporation) and The Chase
Manhattan Bank, incorporated by reference to Exhibit 4(a) GATX
Capital's Form S-3 Registration Statement No.33-30300;
Supplemental Indenture dated as of December 18, 1991 between
GATX Capital Corporation and The Chase Manhattan Bank
incorporated by reference to Exhibit 4(b) to the GATX
Capital's Form S-3 Registration Statement No. 33-64474; Second
Supplemental Indenture dated as of January 2, 1996 between
GATX Capital Corporation and The Chase Manhattan Bank
incorporated by reference to Exhibit 4.3 to GATX's Capital's
Form 8-K dated October 15, 1997; Third Supplemental Indenture
dated as of October 14, 1997 between GATX Capital Corporation
and The Chase Manhattan Bank incorporated by reference to
Exhibit 4.4 to the GATX Capital's Form 8-K dated October 15,
1997; Form of Subordinated Indenture incorporated by reference
to Exhibit 4.3 to GATX Capital's Form S-3 Registration
Statement No. 333-34879.
4L. Registration of 7.5% Convertible Senior Notes due 2007 issued
in the amount of $175,000,000 by GATX Corporation Fully and
Unconditionally Guaranteed by GATX Financial Corporation and
Shares of Common Stock issuable upon conversion of the Senior
Notes, incorporated by reference to Form S-3, file number
333-86212, filed April 12, 2002.
i. Amendment No. 1 to Form S-3, prospectus of 7.5%
Convertible Senior Notes due 2007 issued in the
amount of $175,000,000 by GATX Corporation,
incorporated by reference to Form S-3/A, file
number 333-86212-01, dated June 18, 2002.
4M. $350,000,000 Credit Agreement dated as of May 14, 1998 among
GATX Financial Corporation, the banks listed therein, The
First National Bank of Chicago as Administrative Agent and
Morgan Guaranty Trust Company of New York as Documentation
Agent, incorporated by reference to GATX Rail Corporation's
Quarterly Report on Form 10-Q for the period ended June 30,
1998, file number 2-54754.
i. Amendment and Consent dated June 30, 2001 of GATX
Financial Corporation. $350,000,000 Credit Agreement
incorporated by reference to GATX Financial
Corporation's Form 8-K, dated October 12, 2001, file
number 1-8319.
4N. Form of 6 3/4% Note due May 1, 2009 filed in connection with
and incorporated by reference into, the Registration Statement
on Form S-3 (File No. 33-64697) of GATX Financial Corporation,
declared effective on December 7, 1995. Submitted to the SEC
on GATX Financial Corporation's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, file number 2-54754.
91
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ -------------------------------------------------------------- ----
4O. $425,000,000 Credit Agreement dated June 22, 2001 among GATX
Financial Corporation, the banks listed therein, Chase
Manhattan Bank as Administrative Agent, Citibank N.A. as
Syndication Agent, incorporated by reference to GATX Financial
Corporation's Form 8-K dated October 12, 2001, file number
1-8319.
4P. Credit Agreement dated July 2, 2002 between GATX Financial
Corporation, the lenders listed therein, JPMorgan Chase Bank
as Administrative Agent, Citibank, N.A. as Syndication Agent,
incorporated by reference to GATX Financial Corporation's Form
8-K dated December 10, 2002, file number 1-8319.
4Q. Indenture dated as of November 1, 2003 between GATX Financial
Corporation and JP Morgan Chase Bank.
4R. Indenture dated February 1, 2002 between GATX Corporation,
GATX Financial Corporation and JP Morgan Chase Bank,
incorporated by reference to Form S-3/A, file number
333-86212-01, filed June 18, 2002.
4S. Indenture dated as of August 15, 2003 between GATX
Corporation, GATX Financial Corporation and JP Morgan Chase
Bank, incorporated by reference to Form S-3, file number
33-110451, filed November 13, 2003.
10A. Tax Operating Agreement dated January 1, 1983 between GATX
Corporation and GATX Financial Corporation, incorporated by
reference to Form 10-K for the period ended December 31, 1983,
file number 2-75467.
12 Statement regarding computation of ratios of earnings to fixed
charges.
23 Consent of Independent Auditors.
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)
92