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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-2328
------------------------------
GATX Corporation
(Exact name of registrant as specified in its charter)
NEW YORK 36-1124040
(State of incorporation) (I.R.S. Employee Identification No.)
500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 49,325,290 shares of common
stock were outstanding as of July 31, 2004.
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GATX CORPORATION
FORM 10-Q
JUNE 30, 2004
INDEX
Item No. Page No.
- ------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income.................................... 1
Consolidated Balance Sheets.......................................... 3
Consolidated Statements of Cash Flows................................ 4
Notes to the Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 13
Comparison of First Six Months of 2004 to First Six Months of 2003... 13
Cash Flow and Liquidity.............................................. 20
Comparison of Second Quarter of 2004 to Second Quarter of 2003....... 22
New Accounting Pronouncements........................................ 28
Critical Accounting Policies......................................... 28
Forward Looking Statements........................................... 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 28
Item 4. Controls and Procedures................................................ 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 29
Item 6. Exhibits and Reports on Form 8-K.......................................... 31
SIGNATURE......................................................................... 31
EXHIBIT INDEX..................................................................... 32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -----------------------
2004 2003 2004 2003
-------- ------- --------- ---------
GROSS INCOME
Lease income.............................................. $ 194.5 $ 192.0 $ 383.7 $ 384.2
Marine operating revenue.................................. 33.3 25.5 40.0 29.7
Interest income........................................... 3.9 12.0 12.4 21.6
Asset remarketing income.................................. 8.6 10.0 27.1 17.4
Gain on sale of securities................................ 2.1 .1 3.2 .5
Fees...................................................... 4.9 4.1 8.2 10.5
Other .................................................... 21.5 19.4 36.5 35.5
-------- ------- --------- ---------
Revenues.................................................. 268.8 263.1 511.1 499.4
Share of affiliates' earnings............................. 16.4 21.4 34.0 38.9
-------- ------- --------- ---------
TOTAL GROSS INCOME........................................ 285.2 284.5 545.1 538.3
OWNERSHIP COSTS
Depreciation ............................................. 48.3 47.8 93.4 92.7
Interest, net............................................. 39.9 46.5 78.4 92.4
Operating lease expense................................... 45.3 46.1 90.8 92.2
-------- ------- --------- ---------
TOTAL OWNERSHIP COSTS..................................... 133.5 140.4 262.6 277.3
OTHER COSTS AND EXPENSES
Maintenance expense....................................... 47.5 41.7 94.1 82.0
Marine operating expenses................................. 25.9 20.9 31.5 24.1
Other operating expenses.................................. 9.5 9.4 22.1 22.4
Selling, general and administrative....................... 43.2 40.8 81.4 76.2
(Reversal) provision for possible losses.................. (3.1) (8.1) (5.0) 9.8
Asset impairment charges.................................. 1.0 10.2 1.1 13.8
Fair value adjustments for derivatives.................... .4 .3 (.7) 2.4
-------- ------- --------- ---------
TOTAL OTHER COSTS AND EXPENSES............................ 124.4 115.2 224.5 230.7
-------- ------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..... 27.3 28.9 58.0 30.3
INCOME TAXES.............................................. 7.6 10.8 18.6 11.9
-------- ------- --------- ---------
INCOME FROM CONTINUING OPERATIONS......................... 19.7 18.1 39.4 18.4
DISCONTINUED OPERATIONS
Operations, net of taxes.................................. 15.5 6.7 18.7 8.2
(.4) (.4)
Loss on sale of segment, net of taxes..................... -- --
-------- ------- --------- ---------
TOTAL DISCONTINUED OPERATIONS............................. 15.1 6.7 18.3 8.2
-------- ------- --------- ---------
NET INCOME................................................ $ 34.8 $ 24.8 $ 57.7 $ 26.6
======== ======= ========= =========
1
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ------------------
2004 2003 2004 2003
-------- ---------- -------- --------
PER SHARE DATA
Basic:
Income from continuing operations............................................... $ .40 $ .37 $ .80 $ .37
Income from discontinued operations............................................. .31 .14 .37 .17
-------- ---------- -------- --------
Total........................................................................... $ .71 $ .51 $ 1.17 $ .54
======== ========== ======== ========
Average number of common shares (in thousands).................................. 49,297 49,075 49,279 49,068
Diluted:
Income from continuing operations............................................... $ .40 $ .37 $ .80 $ .37
Income from discontinued operations............................................. .31 .13 .37 .17
-------- ---------- -------- --------
Total........................................................................... $ .71 $ .50 $ 1.17 $ .54
======== ========== ======== ========
Average number of common shares and common share equivalents (in thousands)..... 49,473 49,187 49,463 49,180
Dividends declared per common share............................................. $ .20 $ .32 $ .40 $ .64
The accompanying notes are an integral part of these consolidated financial
statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
JUNE 30 DECEMBER 31
2004 2003
--------- -----------
ASSETS
CASH AND CASH EQUIVALENTS............................................................................ $ 216.9 $ 211.5
RESTRICTED CASH...................................................................................... 60.1 60.9
RECEIVABLES
Rent and other receivables........................................................................... 80.1 91.6
Finance leases....................................................................................... 276.6 289.2
Loans................................................................................................ 124.4 183.5
Less: allowance for possible losses.................................................................. (31.3) (45.6)
--------- ---------
449.8 518.7
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities...................................................................... 3,475.7 3,374.6
Operating lease investments and other................................................................ 1,925.2 1,804.2
Less: allowance for depreciation..................................................................... (1,816.0) (1,831.5)
--------- ---------
3,584.9 3,347.3
Progress payments for aircraft and other equipment................................................... 19.1 53.6
--------- ---------
3,604.0 3,400.9
INVESTMENTS IN AFFILIATED COMPANIES.................................................................. 794.5 847.6
RECOVERABLE INCOME TAXES............................................................................. -- 53.8
GOODWILL, NET........................................................................................ 84.6 87.2
OTHER INVESTMENTS.................................................................................... 68.3 101.6
OTHER ASSETS......................................................................................... 254.9 238.3
ASSETS OF DISCONTINUED OPERATIONS.................................................................... 71.2 560.1
--------- ---------
$ 5,604.3 $ 6,080.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES................................................................ $ 370.3 $ 354.8
DEBT
Short-term........................................................................................... 7.9 15.9
Long-term:
Recourse........................................................................................ 3,123.4 3,255.9
Nonrecourse..................................................................................... 96.3 99.3
Capital lease obligations............................................................................ 106.2 122.4
--------- ---------
3,333.8 3,493.5
DEFERRED INCOME TAXES................................................................................ 682.3 671.7
OTHER LIABILITIES.................................................................................... 282.7 325.4
LIABILITIES OF DISCONTINUED OPERATIONS............................................................... 5.1 346.3
--------- ---------
TOTAL LIABILITIES ................................................................................... 4,674.2 5,191.7
SHAREHOLDERS' EQUITY
Preferred stock ($1.00 par value, 5,000,000 shares authorized, 21,774 and 21,824 shares of Series A
and B Cumulative Preferred Stock issued and outstanding as of June 30, 2004 and December 31, 2003,
respectively, aggregate liquidation preference of $1.3 million)................................... * *
Common stock ($.625 par value, 120,000,000 authorized, 57,264,059 and 57,204,550
shares issued and 49,317,228 and 49,246,388 shares outstanding as of June 30,
2004 and December 31, 2003,
respectively)..................................................................................... 35.7 35.7
Additional capital................................................................................... 397.0 396.2
Reinvested earnings.................................................................................. 658.1 620.1
Accumulated other comprehensive loss................................................................. (32.3) (34.4)
--------- ---------
1,058.5 1,017.6
Treasury shares, at cost (7,946,831 and 7,958,162 shares at June 30, 2004 and
December 31, 2003, respectively).................................................................. (128.4) (128.7)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................................................................... 930.1 888.9
--------- ---------
$ 5,604.3 $ 6,080.6
========= =========
* Less than $.1 million.
The accompanying notes are an integral part of these consolidated financial
statements.
3
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -------------------
2004 2003 2004 2003
------- -------- ------- --------
OPERATING ACTIVITIES
Net income, including discontinued operations......................................... $ 34.8 $ 24.8 $ 57.7 $ 26.6
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gains on remarketing of leased equipment................................ (3.2) (11.9) (24.7) (20.8)
Gain on sale of securities....................................................... (2.1) (.1) (3.2) (.5)
Loss on sale of segment.......................................................... (.6) -- (.6) --
Depreciation..................................................................... 56.9 81.4 132.6 164.5
(Reversal) provision for possible losses......................................... (3.9) (10.3) (5.1) 8.4
Asset impairment charges......................................................... 2.5 12.5 3.4 16.1
Deferred income taxes............................................................ 5.5 11.6 14.5 16.2
Share of affiliates' earnings, net of dividends.................................. (4.8) (17.0) (20.6) (31.0)
Net decrease in recoverable income taxes......................................... 58.5 115.9 58.0 91.3
Net increase (decrease) in operating lease payable............................... 19.7 20.6 (11.5) (2.6)
Other............................................................................ (37.2) (20.2) (37.7) (12.3)
------- ------- ------- --------
Net cash provided by operating activities........................................ 126.1 207.3 162.8 255.9
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing for leveraged leases,
operating lease assets and facilities................................................ (311.7) (173.2) (451.6) (339.1)
Loans extended........................................................................ (7.6) (8.7) (13.9) (37.7)
Investments in affiliated companies................................................... (3.1) (29.3) (3.1) (44.2)
Progress payments..................................................................... (.7) (5.4) (1.6) (22.6)
Other investments..................................................................... (1.6) (1.2) (27.5) (24.2)
------- ------- ------- --------
Portfolio investments and capital additions........................................... (324.7) (217.8) (497.7) (467.8)
Net proceeds from sale of segment..................................................... 214.7 -- 214.7 --
Portfolio proceeds.................................................................... 99.0 168.1 322.1 390.4
Proceeds from other asset sales....................................................... 8.9 5.4 20.9 14.8
Net (increase) decrease in restricted cash............................................ (1.0) (26.8) .8 (77.2)
Effect of exchange rate changes on restricted cash.................................... -- 10.3 -- 17.7
------- ------- ------- --------
Net cash (used in) provided by investing activities.............................. (3.1) (60.8) 60.8 (122.1)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt.......................................... 90.7 89.8 160.5 333.0
Repayment of long-term debt........................................................... (210.6) (137.5) (338.3) (436.7)
Net (decrease) increase in short-term debt............................................ (.1) 7.1 (4.9) 8.5
Net decrease in capital lease obligations............................................. (1.6) (3.4) (16.2) (14.8)
Issuance of common stock and other.................................................... .9 .2 1.1 .6
Cash dividends........................................................................ (9.9) (15.7) (19.7) (31.4)
------- ------- ------- --------
Net cash used in financing activities............................................ (130.6) (59.5) (217.5) (140.8)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.......................... (.3) 2.4 (.7) 2.7
------- ------- ------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. $ (7.9) $ 89.4 $ 5.4 $ (4.3)
======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
GATX Corporation (GATX or the Company) is headquartered in Chicago,
Illinois and provides its services primarily through three operating segments:
GATX Rail (Rail), GATX Air (Air) and GATX Specialty Finance (Specialty). Through
these operating segments, GATX combines asset knowledge and services,
structuring expertise, partnering and capital to provide business solutions to
customers and partners worldwide. GATX specializes in railcar and locomotive
leasing, aircraft operating leasing and financing other large ticket equipment.
GATX invests in companies and joint ventures that complement its existing
business activities. GATX partners with financial institutions and operating
companies to improve scale in certain markets, broaden diversification within an
asset class, and enter new markets.
On June 30, 2004, GATX sold the majority of the assets of GATX Technology
Services (Technology). As a result, the Technology segment is classified as a
discontinued operation in all periods presented.
NOTE 2. BASIS OF PRESENTATION
The consolidated balance sheet at December 31, 2003 has been derived from
the audited financial statements at that date. All other consolidated financial
statements are unaudited but include all adjustments, consisting only of normal
recurring items which management considers necessary for a fair statement of the
consolidated results of operations, financial position and cash flow for the
respective periods.
Certain amounts in the 2003 financial statements have been reclassified to
conform to the current presentation, including the separate presentation and
reporting of discontinued operations.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
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 programs that may
potentially reduce employer costs.
In June 2004, FSP 106-2, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
issued providing guidance on the accounting for the effects of the Act for
employers that sponsor post-retirement health care plans that provide
prescription drug benefits. FSP 106-2 supercedes FSP 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003. FSP 106-2 is effective for the first interim or
annual period beginning after June 15, 2004.
GATX is in the process of reviewing the impact of the Act and the guidance
of FSP 106-2 with respect to existing post-retirement benefit plans. As a
result, the accumulated projected benefit obligation and net periodic
postretirement benefit cost as of June 30, 2004, do not reflect any amount
associated with the subsidy.
In April 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) 129-1, Disclosure of Information about Capital Structure
Relating to Contingently Convertible Securities. This standard requires the
disclosure of the rights and privileges of various convertible securities
including the conversion price, rates, dates and significant terms of contracts
to issue additional shares. The purpose is to enable users of financial
statements to understand the contingency and the potential impact of conversion
and possible dilution of earnings per share. The requirements of FSP 129-1 have
been incorporated into Note 11 to the financial statements.
NOTE 4. 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 GATX, such as commercial aircraft leasing, rail
equipment leasing, and other business activities.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
For purposes of preparing the following information, GATX made certain
adjustments to information provided by the joint ventures. Pre-tax income was
adjusted to reverse interest expense (or interest income) recognized by the
joint ventures on loans from (or to) GATX.
For all affiliated companies held at the end of the quarter as part of
continuing operations, operating results, as if GATX held 100 percent interest,
were (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ------------------------
2004 2003 2004 2003
------- -------- --------- ---------
Gross income....................................... $ 166.5 $ 166.7 $ 332.7 $ 331.2
Pre-tax income..................................... 37.4 30.4 70.5 66.2
NOTE 5. GOODWILL
As a result of the Technology sale, the goodwill balance of $87.2 million
reported as of December 31, 2003 excludes $7.6 million related to the Technology
segment which was reclassified to assets of discontinued operations. In 2004,
the sale of the Technology segment resulted in the write-off of $7.6 million
related to the Technology goodwill, which was included in the loss on sale of
Technology. See Note 13 for further discussion on the sale of Technology.
NOTE 6. PENSION AND OTHER POST-RETIREMENT BENEFITS
The components of pension and other post-retirement benefit costs for the
three months ended June 30, 2004 and 2003 are as follows (in millions):
2004 PENSION 2003 PENSION 2004 RETIREE 2003 RETIREE
BENEFITS BENEFITS HEALTH AND LIFE HEALTH AND LIFE
------------ ------------ --------------- ---------------
Service cost........................................ $ 1.8 $ 1.5 $ .2 $ .1
Interest cost....................................... 5.8 6.0 1.2 1.2
Expected return on plan assets...................... (7.7) (7.6) -- --
Amortization of:
Unrecognized prior service cost.................. .1 .2 -- --
Unrecognized net loss............................ .4 .1 .3 .1
----------- ---------- ------------- -------------
Ongoing net costs................................... .4 .2 1.7 1.4
----------- ---------- ------------- -------------
Recognized cost (gain) due to curtailment........... .7 -- (.2) --
Recognized special termination benefits expense..... .7 -- -- --
----------- ---------- ------------- -------------
Net costs........................................... $ 1.8 $ .2 $ 1.5 $ 1.4
=========== ========== ============= =============
The components of pension and other post-retirement benefit costs for the
six months ended June 30, 2004 and 2003 are as follows (in millions):
2004 PENSION 2003 PENSION 2004 RETIREE 2003 RETIREE
BENEFITS BENEFITS HEALTH AND LIFE HEALTH AND LIFE
------------ ------------ --------------- ---------------
Service cost........................................ $ 3.6 $ 3.1 $ .3 $ .2
Interest cost....................................... 11.6 12.0 2.4 2.4
Expected return on plan assets...................... (15.4) (15.2) -- --
Amortization of:
Unrecognized prior service cost.................. .2 .3 -- --
Unrecognized net loss............................ .8 .2 .5 .2
----------- -------- ------------- ------------
Ongoing net costs................................... .8 .4 3.2 2.8
----------- -------- ------------- ------------
Recognized cost (gain) due to curtailment........... .7 -- (.2) --
Recognized special termination benefits expense..... .7 -- -- --
----------- -------- ------------- ------------
Net costs........................................... $ 2.2 $ .4 $ 3.0 $ 2.8
=========== ======== ============= ============
The previous tables include amounts allocated to discontinued operations,
including the curtailment cost (gain) and special termination expense which
resulted from the Technology sale.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
GATX uses a December 31 measurement date for all of its plans. The three
month and six month amounts reported are based on estimated annual costs. Actual
annual costs as of December 31, 2004 may differ from the estimates provided.
GATX expects to contribute approximately $14.0 million to its domestic and
foreign pension plans in 2004, which includes a $10.9 million contribution to
the funded domestic plan made in July 2004. GATX also expects to contribute $9.0
million to its other post-retirement benefit plans in 2004. Through June 30,
2004, contributions of $1.2 million have been made to the unfunded pension plans
and the foreign pension plan in addition to contributions of $4.2 million to the
other post-retirement benefits plans. Additional contributions to these plans as
well as contributions to GATX's domestic funded pension plans, will be dependent
on several factors including investment returns on plan assets and actuarial
experience.
NOTE 7. GUARANTEES
In connection with certain investments or transactions, GATX's
subsidiaries have entered into various guarantees which could require
performance in the event of demands by third parties. Similar to GATX's balance
sheet investments, these guarantees expose GATX to credit and market risk;
accordingly, GATX evaluates its commitments and other contingent obligations
using techniques similar to those used to evaluate funded transactions.
Asset residual value guarantees represent GATX's commitment to third
parties that an asset or group of assets will be worth a specified amount at the
end of a lease term. Revenue in the form of an initial fee and sharing in any
proceeds received upon disposition of assets in excess of the amount guaranteed
is earned for providing such asset value guarantees.
Any liability resulting from GATX's performance pursuant to the residual
value guarantees will be reduced by the value realized from the underlying asset
or group of assets. Historically, gains associated with the residual value
guarantees have exceeded any losses incurred and have been recorded in asset
remarketing income in the consolidated statements of income. Based on known
facts and current market conditions, management does not believe that its
exposure under asset residual value guarantees will result in any significant
adverse financial impact to the Company. GATX believes these asset residual
value guarantees will likely generate future income in the form of fees and
residual sharing proceeds.
Lease and loan payment guarantees generally involve guaranteeing repayment
of the financing utilized by affiliates to acquire assets, and are in lieu of
making direct equity investments in the affiliate. GATX is not aware of any
event of default which would require it to satisfy these guarantees, and expects
the affiliates to generate sufficient cash flow to satisfy their lease and loan
obligations.
At June 30, 2004, the maximum potential amount of lease, loan or residual
value guarantees under which GATX's subsidiaries could be required to perform
was $572.3 million, including $69.6 million of guarantees associated with
discontinued operations. The related carrying value of the guarantees recorded
on the balance sheet, including deferred revenue primarily associated with
residual value guarantees 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 of
Others, was a liability of $4.1 million. The expiration dates of these
guarantees range from 2004 to 2017.
NOTE 8. VARIABLE INTEREST ENTITIES
In January 2003, the 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. 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.
As of June 30, 2004, GATX identified 20 VIEs in which it holds a
significant variable interest, primarily through equity investments in common
stock accounted for under the equity method of accounting and beneficial equity
interests in trusts used in leveraged lease investments. GATX is not the primary
beneficiary of any of the identified VIEs as GATX does not receive the majority
of the entities' expected losses or residual returns. As a result, none of these
entities have been consolidated into GATX's financial statements. This
determination is based on forecasted expected losses and residual returns for
each of the 20 identified VIEs. GATX's maximum exposure to loss with respect to
these variable interest entities was $308.8 million as of June 30, 2004, of
which $275.1 million is recorded on the balance sheet as either investments in
affiliated companies or finance leases.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9. COMPREHENSIVE INCOME
GATX includes foreign currency translation gains (losses), unrealized
gains (losses) on available-for-sale securities and unrealized gains (losses) on
certain qualified derivative instruments in comprehensive income. For the three
months ended June 30, 2004 and 2003, comprehensive income was $39.3 million and
$34.4 million, respectively. For the six months ended June 30, 2004 and 2003,
comprehensive income was $59.8 million and $37.2 million, respectively.
NOTE 10. INCENTIVE COMPENSATION PLANS
GATX grants stock options to employees under stock-based compensation
plans, as described more fully in its Annual Report on Form 10-K for the year
ended December 31, 2003. As permitted under Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of SFAS No. 123, the Company accounts for all
stock-based employee compensation plans under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Under these guidelines, no compensation expense is
recognized because the exercise price of GATX's employee stock options equals
the market value of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been
determined as if GATX had accounted for its employee stock options under the
fair value method.
The Black-Scholes model, one of the most widely used option valuation
models, was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including expected stock price volatility. Because GATX's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value provisions of SFAS No. 123 to
stock-based employee compensation (in millions, except for per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------
2004 2003 2004 2003
--------- -------- ------- -------
Net income, as reported.................................... $ 34.8 $ 24.8 $ 57.7 $ 26.6
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all
awards, net of related tax effects..................... (.5) (.6) (1.0) (1.2)
--------- -------- ------- -------
Pro forma net income....................................... $ 34.3 $ 24.2 $ 56.7 $ 25.4
========= ======== ======= =======
Net income per share:
Basic, as reported......................................... $ .71 $ .51 $ 1.17 $ .54
Basic, pro forma........................................... .70 .49 1.15 .52
Diluted, as reported....................................... .71 .50 1.17 .54
Diluted, pro forma......................................... .69 .49 1.15 .52
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2004 2003 2004 2003
--------- ------ -------- -------
NUMERATOR:
Income from continuing operations $ 19.7 $ 18.1 $ 39.4 $ 18.4
Income from discontinued operations 15.1 6.7 18.3 8.2
Less: dividends paid and accrued on preferred
stock * * * *
--------- ------ -------- -------
NUMERATOR FOR BASIC EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS 34.8 24.8 57.7 26.6
Effect of dilutive securities:
Add: dividends paid and accrued on preferred
stock * * * *
After-tax interest expense on convertible
securities (a) -- -- -- --
--------- ------ -------- -------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 34.8 $ 24.8 $ 57.7 $ 26.6
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES 49.3 49.1 49.3 49.1
Effect of dilutive securities:
Stock options -- -- -- --
Convertible preferred stock .1 .1 .1 .1
Convertible securities (a) -- -- -- --
--------- ------ -------- -------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -
ADJUSTED WEIGHTED AVERAGE AND ASSUMED
CONVERSION 49.4 49.2 49.4 49.2
BASIC EARNINGS PER SHARE :
Income from continuing operations $ .40 $ .37 $ .80 $ .37
Income from discontinued operations .31 .14 .37 .17
--------- ------ -------- -------
TOTAL BASIC EARNINGS PER SHARE $ .71 $ .51 $ 1.17 $ .54
--------- ------ -------- -------
DILUTED EARNINGS PER SHARE :
Income from continuing operations $ .40 $ .37 $ .80 $ .37
Income from discontinued operations .31 .13 .37 .17
--------- ------ -------- -------
TOTAL DILUTED EARNINGS PER SHARE $ .71 $ .50 $ 1.17 $ .54
========= ====== ======== =======
* Less than $.1 million.
(a) Shares underlying $175.0 million of convertible securities issued in 2002
and the related interest expense adjustment were excluded from the calculation
of diluted earnings per share for all periods presented because of antidilutive
effects. These securities are convertible into common stock at a price of $34.09
per share, which would result in 5,133,471 common shares issued upon conversion.
Shares underlying $125.0 million of convertible securities issued in 2003 and
the related interest expense were excluded from the calculations of diluted
earnings per share for all periods presented. These securities are convertible
into common stock with a current conversion price of $23.93 per share, which
would result in 5,223,460 common shares issued upon conversion. The conversion
price is subject to adjustment based on various factors, including changes in
the dividend on GATX's common stock. The conversion into common stock is subject
to a number of contingencies including the market price of GATX's common stock
and the trading price of the notes. These shares were excluded from the
calculation of diluted earnings per share for all periods presented because the
conditions required to satisfy the contingencies were not met.
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 12. 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 GATX's
continuing business segments. Segment profitability is presented to reflect
operating results inclusive of allocated support expenses from the parent
company and estimated applicable interest costs. Management, including the Chief
Executive Officer, 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.
GATX provides its services primarily through three operating segments:
Rail, Air, and Specialty. Other is comprised of corporate results (including
selling, general and administrative (SG&A) expense and interest expense not
allocated to segments), and the results of American Steamship Company, a Great
Lakes shipping company. Technology's results and the associated loss on sale of
the segment are classified as discontinued operations and not included in the
financial data below. See Note 13 for further information related to the sale of
Technology.
The following tables present certain segment data for the three months and
six months ended June 30, 2004 and 2003 (in millions):
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- -------- -------- ---------
THREE MONTHS ENDED JUNE 30, 2004
Revenues.............................................. $ 181.8 $ 29.0 $ 22.1 $ 35.9 $ -- $ 268.8
Share of affiliates' earnings......................... 6.0 6.4 4.0 -- -- 16.4
-------- -------- --------- -------- -------- ---------
Total gross income.................................... 187.8 35.4 26.1 35.9 -- 285.2
Depreciation ......................................... 30.8 14.5 1.0 2.0 -- 48.3
Interest, net......................................... 18.1 9.0 6.6 6.2 -- 39.9
Operating lease expense............................... 43.2 1.0 1.1 -- -- 45.3
Income (loss) from continuing operations before income
taxes.............................................. 25.1 4.3 15.4 (17.5) -- 27.3
Income (loss) from continuing operations.............. 18.7 2.6 9.1 (10.7) -- 19.7
-------- -------- --------- -------- -------- ---------
SELECTED BALANCE SHEET DATA AT JUNE 30, 2004
Investments in affiliated companies................... 145.2 484.7 164.6 -- -- 794.5
Identifiable assets from continuing operations........ 2,565.1 2,032.6 552.2 382.4 .8 5,533.1
-------- -------- --------- -------- -------- ---------
CASH FLOW
Portfolio investments and capital additions........... 156.9 97.4 9.2 1.0 -- 264.5
-------- -------- --------- -------- -------- ---------
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- -------- -------- ---------
THREE MONTHS ENDED JUNE 30, 2003
Revenues.............................................. $ 174.7 $ 26.0 $ 32.2 $ 30.4 $ (.2) $ 263.1
Share of affiliates' earnings......................... 2.6 12.6 6.2 -- -- 21.4
-------- -------- -------- -------- -------- ---------
Total gross income.................................... 177.3 38.6 38.4 30.4 (.2) 284.5
Depreciation ......................................... 28.9 14.1 2.7 2.1 -- 47.8
Interest, net......................................... 16.9 10.7 11.3 7.8 (.2) 46.5
Operating lease expense............................... 43.7 1.0 1.2 .2 -- 46.1
Income (loss) from continuing operations before income
taxes.............................................. 22.8 14.0 13.7 (21.6) -- 28.9
Income (loss) from continuing operations.............. 14.5 7.8 8.7 (12.9) -- 18.1
-------- -------- -------- -------- -------- ---------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2003
Investments in affiliated companies................... 140.9 484.9 221.8 -- -- 847.6
Identifiable assets from continuing operations........ 2,401.6 1,977.0 707.6 440.8 (6.5) 5,520.5
-------- -------- -------- -------- -------- ---------
CASH FLOW
Portfolio investments and capital additions........... 43.5 88.1 17.0 16.2 -- 164.8
-------- -------- -------- -------- -------- ---------
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- -------- -------- ---------
SIX MONTHS ENDED JUNE 30, 2004
Revenues.............................................. $ 361.8 $ 52.3 $ 53.6 $ 43.4 $ -- $ 511.1
Share of affiliates' earnings......................... 9.8 15.6 8.6 -- -- 34.0
-------- -------- ------- -------- -------- ---------
Total gross income.................................... 371.6 67.9 62.2 43.4 -- 545.1
Depreciation ......................................... 61.0 28.3 2.1 2.0 -- 93.4
Interest, net......................................... 34.9 18.3 14.1 11.1 -- 78.4
Operating lease expense............................... 86.7 2.0 2.1 -- -- 90.8
Income (loss) from continuing operations before income
taxes.............................................. 44.5 7.1 40.3 (33.9) -- 58.0
Income (loss) from continuing operations.............. 31.4 4.6 25.0 (21.6) -- 39.4
-------- -------- ------- -------- -------- ---------
SELECTED BALANCE SHEET DATA AT JUNE 30, 2004
Investments in affiliated companies................... 145.2 484.7 164.6 -- -- 794.5
Identifiable assets from continuing operations........ 2,565.1 2,032.6 552.2 382.4 .8 5,533.1
-------- -------- ------- -------- -------- ---------
CASH FLOW
Portfolio investments and capital additions........... 251.0 98.4 18.1 1.6 -- 369.1
-------- -------- ------- -------- -------- ---------
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- -------- -------- ---------
SIX MONTHS ENDED JUNE 30, 2003
Revenues.............................................. $ 345.6 $ 50.8 $ 68.9 $ 34.6 $ (.5) $ 499.4
Share of affiliates' earnings......................... 4.7 18.6 15.6 -- -- 38.9
-------- -------- --------- -------- -------- ---------
Total gross income.................................... 350.3 69.4 84.5 34.6 (.5) 538.3
Depreciation ......................................... 58.0 27.0 5.4 2.3 -- 92.7
Interest, net......................................... 33.9 21.0 23.7 14.3 (.5) 92.4
Operating lease expense............................... 87.5 2.0 2.3 .4 -- 92.2
Income (loss) from continuing operations before income
taxes.............................................. 40.6 (2.1) 28.5 (36.7) -- 30.3
Income (loss) from continuing operations.............. 25.8 (2.4) 17.7 (22.7) -- 18.4
-------- -------- --------- -------- -------- ---------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2003
Investments in affiliated companies................... 140.9 484.9 221.8 -- -- 847.6
Identifiable assets from continuing operations........ 2,401.6 1,977.0 707.6 440.8 (6.5) 5,520.5
-------- -------- --------- -------- -------- ---------
CASH FLOW
Portfolio investments and capital additions........... 92.4 188.7 59.3 17.0 -- 357.4
-------- -------- --------- -------- -------- ---------
NOTE 13. DISCONTINUED OPERATIONS
On June 30, 2004, GATX sold substantially all of the assets and related
nonrecourse debt of GATX Technology Services Corporation and its Canadian
affiliate to CIT Technologies Corporation and CIT Financial Limited. As a result
of the sale, GATX received estimated net proceeds of $247.4 million, of which
$32.7 million will be received in the third quarter. The following table
summarizes the revenues, income before taxes and the loss on disposal, net of
tax, of Technology, which has been reclassified to discontinued operations for
all periods presented.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ --------------------
2004 2003 2004 2003
------ --------- ------- ----------
Gross income.................................................. $ 47.9 $ 52.9 $ 98.1 $ 107.0
Income before taxes........................................... 25.2 10.2 30.3 12.5
Operating income, net of tax.................................. 15.5 6.7 18.7 8.2
Loss on sale of segment, net of taxes of $.2 million.......... (.4) -- (.4) --
Operating results for the three months ended June 30, 2004 were favorably
impacted by the suspension of depreciation on operating lease assets associated
with the Technology assets classified as held for sale during the quarter. The
total effect of suspending depreciation was $14.0 million after-tax.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The loss on sale of Technology of $.4 million included the following
pre-tax charges: direct sale-related expenses of $9.0 million, a write-off of
related to goodwill of $7.6 million and impairment charges associated with a
joint venture and other assets of $2.8 million. An additional $8 million to $10
million of pre-tax severance costs and other expenses related to the disposal of
Technology are anticipated to be incurred and recognized during the remainder of
2004.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GATX Corporation (GATX or the Company) is headquartered in Chicago,
Illinois and provides its services primarily through three operating segments:
GATX Rail (Rail), GATX Air (Air), and GATX Specialty Finance (Specialty).
Through these businesses, GATX combines asset knowledge and services,
structuring expertise, partnering and capital to provide business solutions to
customers and partners worldwide. GATX specializes in railcar and locomotive
leasing, aircraft operating leasing, and financing other large ticket equipment.
On June 30, 2004, GATX sold substantially all of the assets and related
nonrecourse debt of Technology and its Canadian affiliate to CIT Technologies
Corporation and CIT Financial Limited. Financial data for the Technology segment
has been segregated as discontinued operations for all periods presented.
Operating results for the six months ended June 30, 2004 are not
necessarily indicative of the results that may be achieved for the entire year
ending December 31, 2004. For further information and a summary of risks that
investors should consider, refer to GATX's Annual Report on Form 10-K for the
year ended December 31, 2003.
STATEMENT OF INCOME DISCUSSION
The following table presents net income (loss) by segment for the three
and six months ended June 30, 2004 and 2003 (in millions):
For the Three Months Ended For the Six Months Ended
June 30 June 30
-------------------------- -------------------------
2004 2003 2004 2003
--------- ------------ ------- -----------
Rail.......................................... $ 18.7 $ 14.5 $ 31.4 $ 25.8
Air........................................... 2.6 7.8 4.6 (2.4)
Specialty..................................... 9.1 8.7 25.0 17.7
Other......................................... (10.7) (12.9) (21.6) (22.7)
--------- ---------- ------- -------
Net income from continuing operations....... 19.7 18.1 39.4 18.4
Discontinued operations..................... 15.1 6.7 18.3 8.2
--------- ---------- ------- -------
Net income.................................. $ 34.8 $ 24.8 $ 57.7 $ 26.6
========= ========== ======= =======
Following is management's discussion and analysis of GATX's comparative
results of its segments and Other.
COMPARISON OF FIRST SIX MONTHS OF 2004 TO FIRST SIX MONTHS OF 2003
GATX RAIL
Improving market conditions in the North American rail industry have
favorably impacted Rail's North American operations. Market indicators, such as
carloadings and ton miles, were up from the comparable prior year period. Market
improvements resulted in an increase in railcar manufacturing backlog and a more
balanced supply/demand relationship for most car types. Pressure on lease rates
has moderated as economic conditions and railcar demand have improved.
Rail's North American utilization increased from year end due to a
combination of placement of new railcars, the movement of railcars from idle to
active, and the scrapping of railcars. Renewal and assignment activity
strengthened in the current period, reflective of more favorable conditions in
the North American rail market. However, maintenance costs associated with
preparing previously idle cars for service have adversely impacted current
period results and this trend is anticipated to continue for the remainder of
the year. As lease rates continue to improve, Rail is near the point at which
average renewal rates will equal or exceed the average expiring rate. The impact
of this improvement on earnings will manifest gradually as rate changes move
slowly through the fleet due to the term nature of the business.
European market conditions continued to be favorable. Utilization remains
high and operations have been positively impacted by success in new markets and
the placement of new car deliveries.
Secondary market acquisitions and new railcar investments totaled $227.0
million during the first six months of 2004, compared to $69.9 million in the
prior year period. As a result of this new investment volume, approximately
3,800 cars were added to the North American fleet. The prior period's portfolio
investments and capital expenditures included $22.5 million for
13
the December 2002 acquisition of the remainder of KVG Kesselwagen
Vermietgesellschaft mbH, and KVG Kesselwagen Vermietgesellschaft m.b.h.
(collectively KVG), a portion of which was funded in 2003.
Gross Income
Components of Rail's gross income for the six months ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
--------- ---------
Lease income.............................. $ 323.7 $ 315.7
Asset remarketing income.................. 6.1 4.6
Fees...................................... 1.4 1.8
Other..................................... 30.6 23.5
--------- ---------
Revenues................................ 361.8 345.6
Share of affiliates' earnings............. 9.8 4.7
--------- ---------
Total gross income...................... $ 371.6 $ 350.3
========= =========
Lease income of $323.7 million increased $8.0 million from the prior year
period due to the impact of foreign exchange rates, favorable European fleet
activity, and an increase in the number of North American active cars. The
increase was partially offset by the effect of lower average North American
lease rates.
Rail's North American fleet totaled 106,000 cars at June 30, 2004 compared
to 105,100 at the end of the prior year period and 105,000 cars at December 31,
2003. Approximately 102,000 railcars were active in North America at June 30,
2004, compared to 97,500 a year ago and 98,300 at December 31, 2003. Rail's
North American utilization of 96% at June 30, 2004, improved from 93% at June
30, 2003 and 93% at December 31, 2003.
Asset remarketing income of $6.1 million includes a $1.3 million residual
sharing fee from a managed portfolio and a $4.7 million gain on the sale of 520
railcars. Asset remarketing income in 2003 included the gain on disposition of a
leveraged lease commitment on passenger rail equipment for $4.3 million.
Other income of $30.6 million was $7.1 million higher than prior year
quarter due to higher scrapping gains resulting from higher scrap metal prices
and a $2.1 million gain on the restructuring of a residual value guarantee.
Share of affiliates' earnings of $9.8 million was $5.1 million higher than the
prior year period primarily due to gains resulting from two locomotive sale
transactions. Share of affiliates' earnings in 2003 included a maintenance
reserve reversal.
Ownership Costs
Components of Rail's ownership costs for the six months ended June 30,
2004 and 2003 are summarized below (in millions):
2004 2003
-------- ----------
Depreciation....................................... $ 61.0 $ 58.0
Interest, net...................................... 34.9 33.9
Operating lease expense............................ 86.7 87.5
-------- --------
Total ownership costs............................ $ 182.6 $ 179.4
======== ========
Ownership costs of $182.6 million were $3.2 million higher than the prior
year period. Depreciation of $61.0 million was $3.0 million higher than prior
year period due to a larger railcar fleet.
14
Other Costs and Expenses
Components of Rail's other costs and expenses for the six months ended
June 30, 2004 and 2003 are summarized below (in millions):
2004 2003
-------- --------
Maintenance expense .............................. $ 92.2 $ 80.2
Other operating expenses ......................... 18.7 18.0
Selling, general and administrative .............. 33.4 32.2
Provision (reversal) for possible losses ......... .2 (.2)
Fair value adjustment for derivatives ............ - .1
-------- --------
Total other costs and expenses .................. $ 144.5 $ 130.3
======== ========
Maintenance expense increased $12.0 million from the prior year period to
$92.2 million. Maintenance costs increased sharply for a variety of reasons,
including an increase in the number of car assignments and continuing activity
associated with the bolster program discussed below. As railcars are assigned
from idle to active service, they often need repairs and improvements, such as
replacement of tank car linings and valves. Although fewer cars were repaired,
the cost per car increased due to the nature of the repairs. The impact of
foreign exchange rates and the reversal of a maintenance reserve in the prior
year period due to a change in accounting policy also contributed to the
increase.
During 2003, the American Association of Railroads (AAR) issued an early
warning letter that required all owners of railcars in the United States, 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.
As of June 30, 2004, bolsters on approximately 1,900 cars have been replaced.
The cost attributable to the inspection and replacement of bolsters was $2.1
million in the first six months of 2004, an increase of $1.0 million from the
prior year period. Management expects the remaining costs of bolster
replacements to be approximately $1.1 million and to be completed by the end of
the third quarter of 2004.
Net Income
Rail's net income of $31.4 million for the six months ended June 30, 2004
was $5.6 million higher than the prior year period. The increase in 2004 was
driven primarily by higher lease income, higher asset remarketing income for
both Rail and its affiliates and larger gains on the scrapping of railcars,
offset partially by higher maintenance costs. Current period results were also
favorably impacted by a $2.0 million deferred tax benefit at KVG attributable to
a reduction in the Austrian tax rates.
GATX AIR
The aviation industry continues to operate in challenging conditions,
particularly in North America; however, industry indicators such as improving
passenger traffic and load factors suggest that 2004 may continue to build on
the late 2003 stabilization in operating conditions and increase in lease rates.
This improvement was evidenced at Air during the six month period ending June
30, 2004 by a decrease in non-performing assets from year-end, a decrease in the
provision for possible losses from the prior year period, and an upward trend in
rentals for many aircraft in Air's core owned and managed portfolios.
Aircraft utilization continues to be strong with almost 100% of the owned
fleet on lease or under letter of intent. Air has entered into 14 leases and one
letter of intent for the 15 owned aircraft with leases that expired or are
scheduled to expire during 2004. Three new aircraft were delivered in the 2004
period, all of which are currently on lease.
15
Gross Income
Components of Air's gross income for the six months ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income .................................... $ 45.3 $ 44.6
Interest income ................................. .2 (.2)
Asset remarketing income ........................ .4 .4
Fees ............................................ 5.1 3.7
Other ........................................... 1.3 2.3
------- -------
Revenues ....................................... 52.3 50.8
Share of affiliates' earnings ................... 15.6 18.6
------- -------
Total gross income ............................. $ 67.9 $ 69.4
======= =======
Air's gross income of $67.9 million was $1.5 million lower than the prior
year six month period. The decrease was primarily driven by lower share of
affiliates' earnings, partially offset by higher fee income and lease income.
Share of affiliates' earnings of $15.6 million was $3.0 million lower than the
prior year period. The decrease is primarily due to fees earned by Pembroke on
facilitating the sale of Fokker aircraft in the 2003 period. Lease income of
$45.3 million was $.7 million higher than the prior year period.
Lease income increased primarily as a result of rents from new aircraft
deliveries after June 30, 2003, partially offset by the absence of rent on
aircraft sold subsequent to June 30, 2003. Fee income increased $1.4 million due
to increased transaction activity in the 2004 period. Other income decreased
$1.0 million as a result of the translation gain recognized in the prior year
period associated with the Air Canada note.
Ownership Costs
Components of Air's ownership costs for the six months ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
------- -------
Depreciation ................................... $ 28.3 $ 27.0
Interest, net .................................. 18.3 21.0
Operating lease expense ........................ 2.0 2.0
------- -------
Total ownership costs ......................... $ 48.6 $ 50.0
======= =======
Ownership costs of $48.6 million were $1.4 million lower than the prior
year period, primarily due to lower interest expense of $2.7 million resulting
from lower average debt balances. The decrease was partially offset by higher
depreciation expense of $1.3 million related to new aircraft delivered
subsequent to the 2003 period.
Other Costs and Expenses
Components of Air's other costs and expenses for the six months ended June
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense .............................. $ 1.3 $ 1.3
Other operating expenses ......................... .8 .2
Selling, general and administrative .............. 10.5 8.3
(Reversal) provision for possible losses ......... (.4) 9.8
Asset impairment charges ......................... - 1.9
------- -------
Total other costs and expenses .................. $ 12.2 $ 21.5
======= =======
Total other costs and expenses decreased by $9.3 million from the prior
year period primarily due to the decrease in the provision for possible losses
and the absence of impairment charges in the 2004 period, partially offset by an
increase in SG&A expenses.
16
An impairment charge of $1.9 million was taken on one MD-83 aircraft in
the 2003 period. The provision for possible losses decreased $10.2 million from
the prior year period. The prior year period included a $9.7 million provision
(net of a subsequent recovery) related to an unsecured Air Canada note as a
result of Air Canada's bankruptcy filing. SG&A expense increased by $2.2 million
due to higher employee costs in the 2004 period compared to the 2003 period.
Net Income
Air's net income of $4.6 million for the six months ended June 30, 2004
was $7.0 million higher than the prior year period loss. The increase from the
prior year period reflected the 2003 loss provision associated with the Air
Canada note.
GATX SPECIALTY FINANCE
The assets of Specialty's portfolio continued to decline during the first
six months of 2004 consistent with GATX's decision in late 2002 to curtail
investment in the specialty finance segment and to sell or otherwise run-off the
venture finance assets included in this portfolio. As of June 30, 2004,
Specialty's balance sheet assets were $552.2 million compared to $707.6 million
at December 31, 2003. Management expects Specialty's assets will continue to
decline over the next several years, as new investment is not expected to exceed
the continued run-off of the portfolio. The venture finance assets are expected
to run-off by the end of 2005.
As the asset base continues to decline, future earnings will decline and
will be unpredictable due to the uncertain timing of gains on the sale of assets
from the specialty finance portfolio in addition to gains from the sale of
securities associated with the venture finance warrant portfolio. GATX expects
to achieve SG&A expense reductions as efficiencies are realized on the declining
portfolio.
Gross Income
Components of Specialty's gross income for the six months ended June 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income ..................................... $ 14.7 $ 23.9
Interest income .................................. 12.2 21.7
Asset remarketing income ......................... 20.6 12.4
Gain on sale of securities ....................... 3.2 .5
Fees ............................................. 1.7 5.0
Other ............................................ 1.2 5.4
------- -------
Revenues ........................................ 53.6 68.9
Share of affiliates' earnings .................... 8.6 15.6
------- -------
Total gross income .............................. $ 62.2 $ 84.5
======= =======
Gross income of $62.2 million was $22.3 million lower than the prior year
period. Decreases in lease income, interest income, fees, other income, and
share of affiliates' earnings were partially offset by higher asset remarketing
income and gain on sale of securities.
Lease income of $14.7 million was $9.2 million lower than the prior year
period. The decrease resulted from a decline in operating lease assets and
finance leases as a result of the portfolio run-off. Interest income of $12.2
million was $9.5 million lower than prior year quarter primarily due to
declining venture loan balances, partially offset by the receipt of loan
prepayment penalties in the current year.
Asset remarketing income includes gains from the sale of assets from
Specialty's own portfolio as well as residual sharing fees from the sale of
managed assets. Asset remarketing income of $20.6 million was $8.2 million
higher than the prior year period. The most significant gain related to the
receipt of the final distribution and dissolution of a partnership in the first
quarter of 2004.
Gain on sale of securities of $3.2 million was $2.7 million higher than
the prior year period due to favorable security dispositions in the current
year. Fees of $1.7 million decreased $3.3 million from the prior year period,
which included a $2.2 million guarantee fee. Other income of $1.2 million was
$4.2 million lower than prior year period due to foreign currency translation
adjustments associated with certain transactions. These adjustments are largely
offset by the fair value adjustments for derivatives. Share of affiliates'
earnings of $8.6 million were $7.0 million lower than the prior year period. The
prior year period
17
included a $3.1 million favorable non-recurring adjustment at a certain
affiliate and income from affiliates that have since been dissolved. The
decrease from the prior year was partially offset by igher current year income
from marine affiliates.
Ownership Costs
Components of Specialty's ownership costs for the six months ended June
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation ..................................... $ 2.1 $ 5.4
Interest, net .................................... 14.1 23.7
Operating lease expense .......................... 2.1 2.3
------- -------
Total ownership costs ........................... $ 18.3 $ 31.4
======= =======
Ownership costs of $18.3 million were $13.1 million lower than the prior
year period due to decreases in depreciation and interest expense. Depreciation
of $2.1 million was $3.3 million lower than prior year period due to declining
operating lease assets.
Interest expense of $14.1 million was $9.6 million lower than prior year period
due to lower debt balances related to the declining asset base.
Other Costs and Expenses
Components of Specialty's other costs and expenses for the six months
ended June 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense .............................. $ .6 $ .5
Other operating expenses ......................... 2.6 4.2
Selling, general and administrative .............. 5.1 10.1
Reversal of provision for possible losses ........ (4.8) (1.6)
Asset impairment charges ......................... .8 9.1
Fair value adjustments for derivatives ........... (.7) 2.3
------ -------
Total other costs and expenses .................. $ 3.6 $ 24.6
====== =======
Other costs and expenses of $3.6 million were $21.0 million lower than
prior year period primarily due to decreases in SG&A expense, asset impairment
charges, and fair value adjustments for derivatives, in addition to a higher
reversal of provision for possible losses.
SG&A expense of $5.1 million was $5.0 million lower than the prior year
period due to lower personnel costs resulting from a reduction in workforce. In
the first six months of 2004, Specialty reversed $4.8 million of its allowance
for possible losses, compared to a reversal of provision for possible losses of
$1.6 million in the prior year period. The reversal resulted from the portfolio
run-off and improved credit quality of the portfolio. The allowance for possible
losses was $18.5 million as of June 30, 2004 or 6.3% of reservable assets,
slightly down from 7.2% at December 31, 2003. Asset impairment charges of $.8
million were $8.3 million lower than prior year period. The prior year period
included several charges, including the write-off of a $5.0 million equity
investment. Fair value adjustments for derivatives of $(.7) million were $3.0
million lower than prior year period due to market changes in the value of
derivatives. This amount is largely offset by foreign currency translation
adjustments, classified as other income related to the underlying transactions.
Net Income
Specialty's net income of $25.0 million for the six months ended June 30,
2004 was $7.3 million higher than the prior year period. Higher remarketing
gains in the current year period combined with lower asset impairment charges,
lower SG&A expense and a lower provision for possible losses exceeded the
negative impact of the smaller portfolio.
18
OTHER
Other is comprised of corporate results, including SG&A expense and
interest expense not allocated to the segments, and the results of American
Steamship Company (ASC), a Great Lakes shipping company.
Gross Income
Components of gross income for the six months ended June 30, 2004 and 2003
are summarized below (in millions):
2004 2003
---- ----
Marine operating revenue ......................... $ 40.0 $ 29.7
Interest income .................................. - .1
Other ............................................ 3.4 4.8
------- -------
Total gross income .............................. $ 43.4 $ 34.6
======= =======
Gross income of $43.4 million increased $8.8 million over the prior year
period primarily due to higher marine operating revenue at ASC due to additional
operating days resulting from increased demand, a larger fleet, and more
favorable operating conditions in the first six months of 2004 compared to the
prior year period.
Ownership Costs
Components of ownership costs for the six months ended June 30, 2004 and
2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation ..................................... $ 2.0 $ 2.3
Interest, net .................................... 11.1 14.3
Operating lease expense .......................... - .4
------- -------
Total ownership costs ........................... $ 13.1 $ 17.0
======= =======
Ownership costs of $13.1 million were $3.9 million lower than the prior
year period primarily due to decreased interest expense resulting from lower
average interest rates and debt balances.
Other Costs and Expenses
Components of other costs and expenses for the six months ended June 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Marine operating expenses ........................ $ 31.5 $ 24.1
Selling, general and administrative .............. 32.4 25.6
Provision for possible losses .................... - 1.8
Asset impairment charges ......................... .3 2.8
------- -------
Total other costs and expenses .................. $ 64.2 $ 54.3
======= =======
Other costs and expenses of $64.2 million were $9.9 million higher than
the prior year period due to increases in marine operating expenses and SG&A
expense, partially offset by a lower provision for possible losses and asset
impairment charges.
Marine operating expenses increased $7.4 million from the prior year
period to $31.5 million due to additional operating days resulting from
increased demand, a larger fleet, and more favorable operating conditions
compared to the prior year period. SG&A expense of $32.4 million was $6.8
million higher than the prior year period due to higher consulting expenses
associated with the implementation of Section 404 of the Sarbanes Oxley Act,
fees associated with a bond exchange in the second quarter, and timing of
certain expenses.
Asset impairment charges of $.3 million decreased $2.5 million from the
prior year. The 2003 charge primarily relates to ASC's off-lakes barge which
ceased operations last year.
19
Net Loss
Net loss at Other of $21.6 million for the first six months of 2004 was
$1.1 million favorable to the prior year period, primarily due to improved
results at ASC and lower interest expense, partially offset by higher SG&A
expense.
CONSOLIDATED INCOME TAXES
GATX's effective tax rate for continuing operations was 32% for the six
months ended June 30, 2004 compared to 39% for the six months ended June 30,
2003. The lower tax rate in 2004 reflects a $2.0 million benefit attributable to
the impact of an Austrian tax rate reduction recognized in the second quarter of
2004 and lower foreign taxes in other countries. The difference in the tax rate
for the six months ended June 30, 2004 compared to the federal tax statutory
rate of 35% is primarily attributable to the effect of lower taxes on foreign
income, including the Austrian tax adjustment, partially offset by higher state
taxes on domestic income.
GATX recovered income taxes of $51.0 million in the second quarter of 2004
as a direct result of a carryback of the 2003 tax loss to prior years. $104.5
million of the 2003 tax loss will be carried forward to offset taxable income in
2004 and later years.
RESULTS OF DISCONTINUED OPERATIONS
On June 30, 2004, GATX sold substantially all of the assets and related
nonrecourse debt of Technology and its Canadian affiliate to CIT Technologies
Corporation and CIT Financial Limited. As a result of the sale, GATX will
receive estimated net proceeds of $247.4 million, of which $32.7 million will be
received in the third quarter. Financial data for the Technology segment has
been segregated as discontinued operations for all periods presented.
In the second quarter of 2004, GATX recognized a net after-tax loss on
sale of $.4 million. Operating results for the first six months of 2004 were
$18.7 million, net of tax, up from $8.2 million in the prior year period.
Operating results were favorably impacted by the suspension of depreciation on
operating lease assets associated with the Technology assets classified as held
for sale during the quarter. The total effect of suspending depreciation was
$14.0 million after-tax.
CASH FLOW AND LIQUIDITY
GATX generates a significant amount of cash from its operating activities
and its investment portfolio proceeds, which is used to service debt, pay
dividends, and fund portfolio investments and capital additions. A weak economic
environment could decrease demand for GATX's services, which could impact the
Company's ability to generate cash flow from operations and portfolio proceeds.
Net cash provided by operating activities, including discontinued operations,
for the first six months of 2004 was $162.8 million, a decrease of $93.1 million
from the prior year period. Comparison of cash operations between periods is
affected by changes in working capital, including the timing of operating lease
payments and income taxes. The 2003 period includes a federal income tax refund
of $118.0 million and a federal income tax payment of $21.4 million as compared
to a $51.0 million federal income tax refund in the 2004 period.
The following discussion of cash flow activity is presented excluding the
impact of discontinued operations. Portfolio investments and capital additions
for the first six months of 2004 totaled $369.1 million, an increase of $11.7
million from the first six months of 2003. Rail invested $251.0 million during
the first six months of 2004, an increase of $158.6 million from the prior year
period as approximately 3,800 cars were added to the North American fleet. The
prior year period included $22.5 million for the December 2002 acquisition of
the remainder of KVG, a portion of which was funded in 2003. Air invested $98.4
million during the first six months of 2004, a decrease of $90.3 million from
the prior year period due to the timing of progress payments and fewer new
aircraft deliveries. Specialty invested $18.1 million during the first six
months of 2004, a decrease of $41.2 million from the prior year period due to
lower committed spending.
Portfolio proceeds for the first six months of 2004 were $228.6 million, a
decrease of $55.7 million from the prior year period. Higher proceeds from asset
remarketing and the sale of securities were offset by lower loan principal
payments received and cash distributions from joint venture investments.
Net proceeds from the sale of a segment of $214.7 million relates to the
sale of substantially all the assets and related nonrecourse debt of Technology.
GATX expects to receive an additional $32.7 million in sale proceeds subsequent
to June 30, 2004.
20
GATX's operating subsidiaries fund investment and meet debt, lease and
dividend obligations through cash flow from operations, portfolio proceeds
(including proceeds from asset sales) , uncommitted money market lines,
committed revolving credit facilities, the issuance of unsecured debt, and a
variety of secured borrowings. GATX utilizes both the domestic and international
bank and capital markets.
In the first six months of 2004, GATX, primarily through its principal
subsidiary, GATX Financial Corporation (GFC), issued $84.1 million and repaid
$206.0 million of long-term debt. Significant financings in the period included
$72.1 million of Air financing guaranteed by the European Export Credit
Agencies. Repayments included an $80.0 million prepayment of a portion of a term
loan. This portion was originally due in 2006.
In June 2004, GFC completed a debt exchange transaction for portions of
three series of Notes due in 2006 ("Old Notes") for a new series of 6.273% Notes
due in 2011 ("New Notes"). The Old Notes, which represented an aggregate $638.0
million of indebtedness, are comprised of the 6 3/4% Notes due March 1, 2006,
the 7 3/4% Notes due December 1, 2006, and the 6 7/8% Notes due December 15,
2006. A total of $165.3 million of Old Notes were tendered in the transaction.
As part of the exchange, a premium to par value of $13.5 million was paid to
noteholders that participated in the transaction. The premium included an amount
reflective of the current market value of the notes above par at the date of
exchange plus an inducement fee for entering into the exchange.
On May 18, 2004, GFC entered into a credit agreement for $545.0 million
comprised of a $445.0 three-year senior unsecured revolving credit facility
maturing in May 2007, and a $100.0 million five-year senior unsecured term loan,
with a delayed draw feature effective for one year, maturing in May 2009. The
new agreement replaces the three separate revolving credit facilities previously
in place at GFC. At June 30, 2004, availability under all credit facilities was
$418.2 million with $26.8 million of letters of credit issued and backed by the
facility. All $100.0 million of the unsecured term loan was available. The
revolving credit facility and term loan contain various restrictive covenants,
including an asset coverage test, requirements to maintain a defined minimum net
worth and a fixed charge coverage ratio. At June 30, 2004, GFC was in compliance
with the covenants and conditions of the credit facility.
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 contain limitation on liens provisions that limit the amount of
secured indebtedness that GFC may incur. At June 30, 2004, GFC was in compliance
with the covenants and conditions of the indentures.
In addition to the credit facility and indentures, GFC and its
subsidiaries are subject to financial covenants related to certain bank
financings. GATX does not anticipate any covenant violation in the credit
facility, bank financings, or indenture, nor does GATX anticipate that any of
these covenants will restrict its operations or its ability to procure
additional financing.
As of June 30, 2004, GFC had a shelf registration for $1.0 billion of debt
securities and pass through certificates of which $150.0 million of senior
unsecured notes had been issued.
The availability of these 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 rates is dependent on GFC's credit rating as determined by rating
agencies such as Standard & Poor's (S&P) and Moody's Investors Service
(Moody's). GFC's current credit rating from S&P is BBB-, with a stable outlook,
unchanged from December 31, 2003. On May 10, 2004, Moody's affirmed the credit
rating on GFC's long-term unsecured debt at Baa3, but revised the rating outlook
to stable from negative. GFC's existing credit ratings restricts GFC's access to
the commercial paper market and GFC may have more difficulty accessing the
long-term debt market on a cost efficient basis.
Unconditional purchase obligations of GATX's subsidiaries consist
primarily of committed aircraft deliveries and railcar orders. Unconditional
purchase obligations at June 30, 2004 were $565.7 million, comprised as follows:
$101.8 million in the remainder of 2004, $343.5 million in 2005-2006, $120.4
million in 2007-2008.
21
COMPARISON OF SECOND QUARTER 2004 TO SECOND QUARTER 2003
GATX RAIL
Gross Income
Components of Rail's gross income for the quarter ended June 30, 2004 and
2003 are summarized below (in millions):
2004 2003
---- ----
Lease income ..................................... $ 162.2 $ 157.7
Asset remarketing income ......................... 1.7 4.5
Fees ............................................. .7 .9
Other ............................................ 17.2 11.6
-------- --------
Revenues ........................................ 181.8 174.7
Share of affiliates' earnings .................... 6.0 2.6
-------- --------
Total gross income .............................. $ 187.8 $ 177.3
======== ========
Lease income of $162.2 million increased $4.5 million from the prior year
quarter due to the impact of foreign exchange rates, favorable European fleet
activity, and an increase in North American active cars. The increase was
partially offset by the effect of lower average North American lease rates.
Asset remarketing income of $1.7 million included a $1.3 million residual
sharing fee from a managed portfolio and a $.4 million gain on the sale of 40
railcars. Asset remarketing income in 2003 included the gain on disposition of a
leveraged lease commitment on passenger rail equipment for $4.3 million.
Other income of $17.2 million was $5.6 million higher than prior year
quarter due to higher scrapping gains resulting from higher scrap metal prices
and a $2.1 million gain on the restructuring of a residual value guarantee.
Share of affiliates' earnings of $6.0 million were $3.4 million higher than the
prior year quarter primarily due to a gain on sale of locomotives at a domestic
joint venture. Share of affiliates' earnings in 2003 included a maintenance
reserve reversal.
Ownership Costs
Components of Rail's ownership costs for the quarter ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation ..................................... $ 30.8 $ 28.9
Interest, net .................................... 18.1 16.9
Operating lease expense .......................... 43.2 43.7
------- -------
Total ownership costs ........................... $ 92.1 $ 89.5
======= =======
Ownership costs of $92.1 million were $2.6 million higher than the prior
year quarter. Depreciation of $30.8 million was $1.9 million higher than prior
year quarter due to a larger railcar fleet. Interest expense increased quarter
over quarter mostly due to increased investment volume.
22
Other Costs and Expenses
Components of Rail's other costs and expenses for the quarter ended June
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense .............................. $ 46.0 $ 40.8
Other operating expenses ......................... 7.7 7.3
Selling, general and administrative .............. 16.9 16.6
Provision for possible losses .................... - .2
Fair value adjustment for derivatives ............ - .1
------- -------
Total other costs and expenses .................. $ 70.6 $ 65.0
======= =======
Maintenance expense increased $5.2 million from the prior year quarter to
$46.0 million for a variety of reasons, including an increase in the number of
car assignments and regulatory compliance activity. As railcars are assigned
from idle to active service, they often need repairs and improvements, such as
replacement of tank car linings and valves. Although fewer cars were repaired,
the cost per car increased due to the nature of the repairs. The reversal of a
maintenance reserve in the prior year period due to a change in accounting
policy also contributed to the increase.
Net Income
Rail's net income of $18.7 million for the three months ended June 30,
2004 was $4.2 million higher than the prior year period. The increase in 2004
was driven primarily by higher lease income and affiliates' earnings, higher
asset remarketing income for both Rail and its affiliates, larger gains on
scrapping of railcars and a $2.0 million deferred tax benefit at KVG
attributable to a reduction in the Austrian tax rates, offset partially by
higher maintenance costs.
GATX AIR
Gross Income
Components of Air's gross income for the quarter ended June 30, 2004 and
2003 are summarized below (in millions):
2004 2003
------- -------
Lease income ..................................... $ 24.7 $ 23.3
Interest income .................................. .1 .1
Asset remarketing income ......................... .2 .1
Fees ............................................. 3.4 1.9
Other ............................................ .6 .6
------- -------
Revenues ........................................ 29.0 26.0
Share of affiliates' earnings .................... 6.4 12.6
------- -------
Total gross income .............................. $ 35.4 $ 38.6
======= =======
Air's gross income of $35.4 million was $3.2 million lower than the prior
year quarter. The decrease was primarily driven by a lower share of affiliates'
earnings, partially offset by higher fee income and lease income. Share of
affiliates' earnings of $6.4 million was $6.2 million lower than the prior year
quarter. The decrease is primarily due to fees earned by Pembroke on
facilitating the sale of Fokker aircraft in the 2003 quarter and a gain on the
sale of an aircraft engine at the Rolls Royce affiliate in the 2003 quarter.
Lease income of $24.7 million was $1.4 million higher than the prior year
quarter as a result of rents from new aircraft deliveries after June 30, 2003
partially offset by the absence of rent on aircraft sold subsequent to June 30,
2003. Fee income of $3.4 million for the 2004 quarter increased $1.5 million
from the prior year quarter due to increased transaction activity in the 2004
quarter.
23
Ownership Costs
Components of Air's ownership costs for the quarter ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
------- -------
Depreciation ..................................... $ 14.5 $ 14.1
Interest, net .................................... 9.0 10.7
Operating lease expense .......................... 1.0 1.0
------- -------
Total ownership costs ........................... $ 24.5 $ 25.8
======= =======
Ownership costs of $24.5 million were $1.3 million lower than the prior
year quarter, driven by lower interest expense due to lower average debt
balances.
Other Costs and Expenses
Components of Air's other costs and expenses for the quarter ended June
30, 2004 and 2003 are summarized below (in millions):
2004 2003
------ ------
Maintenance expense .............................. $ 1.1 $ .5
Other operating expenses ......................... .4 .1
Selling, general and administrative .............. 5.1 4.7
Reversal of provision for possible losses ........ - (8.4)
Asset impairment charges ......................... - 1.9
------ ------
Total other costs and expenses .................. $ 6.6 $ (1.2)
====== ======
Total other costs and expenses of $6.6 million increased by $7.8 million
from the prior year quarter. The 2003 quarter included a reversal of the
provision for possible losses of $8.4 million resulting from the partial
recovery of an unsecured Air Canada note originally written off as a result of
Air Canada's bankruptcy filing. Offsetting this increase was an impairment
charge of $1.9 million taken on one MD-83 aircraft in the second quarter of
2003.
Net Income
Air's net income of $2.6 million for the quarter ended June 30, 2004 was
$5.2 million lower than the prior year quarter reflecting the 2003 loss
provision associated with the Air Canada note.
GATX SPECIALTY FINANCE
Gross Income
Components of Specialty's gross income for the quarter ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
------- -------
Lease income ..................................... $ 7.6 $ 11.0
Interest income .................................. 3.8 11.9
Asset remarketing income ......................... 6.7 5.4
Gain on sale of securities ....................... 2.1 .1
Fees ............................................. .8 1.3
Other ............................................ 1.1 2.5
------- -------
Revenues ........................................ 22.1 32.2
Share of affiliates' earnings .................... 4.0 6.2
------- -------
Total gross income .............................. $ 26.1 $ 38.4
======= =======
Gross income of $26.1 million was $12.3 million lower than the prior year
quarter. The decrease was due to lower lease income, interest income, fees,
other income, and share of affiliates' earnings, partially offset by higher
asset remarketing income and gains on sale of securities.
24
Lease income of $7.6 million was $3.4 million lower than the prior year
quarter due to a decrease in operating lease assets and finance leases as a
result of the portfolio run-off. Interest income of $3.8 million was $8.1
million lower than prior year quarter primarily due to declining venture loan
balances.
Asset remarketing income includes gains from the sale of assets from
Specialty's own portfolio as well as residual sharing fees from the sale of
managed assets. Asset remarketing income of $6.7 million was $1.3 million higher
than the prior year quarter.
Gain on sale of securities of $2.1 million was $2.0 million higher than
the prior year quarter due to favorable security dispositions in the current
year quarter. Fees of $.8 million decreased $.5 million from the prior year
quarter. Other income of $1.1 million was $1.4 million lower than prior year
quarter due to foreign currency translation adjustments associated with certain
transactions. These adjustments are largely offset by the fair value adjustments
for derivatives. Share of affiliates earnings of $4.0 million were $2.2 million
lower than the prior year quarter. The prior year included income from
affiliates that have since been dissolved.
Ownership Costs
Components of Specialty's ownership costs for the quarter ended June 30,
2004 and 2003 are summarized below (in millions):
2004 2003
------ -------
Depreciation ..................................... $ 1.0 $ 2.7
Interest, net .................................... 6.6 11.3
Operating lease expense .......................... 1.1 1.2
------ -------
Total ownership costs ........................... $ 8.7 $ 15.2
====== =======
Ownership costs of $8.7 million were $6.5 million lower than the prior
year quarter due to decreases in depreciation and interest expense. Depreciation
of $1.0 million was $1.7 million lower than prior year quarter due to declining
operating lease assets.
Interest expense of $6.6 million was $4.7 million lower than prior year
quarter due to lower debt balances related to the declining asset base.
Other Costs and Expenses
Components of Specialty's other costs and expenses for the quarter ended
June 30, 2004 and 2003 are summarized below (in millions):
2004 2003
------ ------
Maintenance expense .............................. $ .4 $ .4
Other operating expenses ......................... 1.4 2.0
Selling, general and administrative .............. 2.2 4.7
Reversal of provision for possible losses ........ (3.1) (3.3)
Asset impairment charges ......................... .7 5.5
Fair value adjustments for derivatives ........... .4 .2
------ ------
Total other costs and expenses .................. $ 2.0 $ 9.5
====== ======
Other costs and expenses of $2.0 million were $7.5 million lower than
prior year quarter due to decreases in SG&A expense and asset impairment
charges.
SG&A expense of $2.2 million was $2.5 million lower than prior year
quarter due to lower personnel costs from a reduction in workforce. Asset
impairment charges of $.7 million were $4.8 million lower than prior year
quarter. The prior year quarter included the write-off of a $5.0 million equity
investment.
25
Net Income
Specialty's net income of $9.1 million for the quarter ended June 30, 2004
was $.4 million higher than the prior year quarter. Lower asset impairment
charges and lower SG&A expense in the current year exceeded the negative impact
of the smaller portfolio.
OTHER
Gross Income
Components of gross income for the quarter ended June 30, 2004 and 2003
are summarized below (in millions):
2004 2003
------- -------
Marine operating revenue ......................... $ 33.3 $ 25.5
Other ............................................ 2.6 4.9
------- -------
Total gross income .............................. $ 35.9 $ 30.4
======= =======
Gross income of $35.9 million increased $5.5 million over the prior year
quarter primarily due to higher marine operating revenue due to additional
operating days resulting from increased demand, a larger fleet, and more
favorable operating conditions in the second quarter compared to the prior year
period.
Ownership Costs
Components of ownership costs for the quarter ended June 30, 2004 and 2003
are summarized below (in millions):
2004 2003
------ -------
Depreciation ..................................... $ 2.0 $ 2.1
Interest, net .................................... 6.2 7.8
Operating lease expense .......................... - .2
------ -------
Total ownership costs ........................... $ 8.2 $ 10.1
====== =======
Ownership costs of $8.2 million were $1.9 million lower than the prior
year quarter primarily due to decreased interest expense resulting from lower
average interest rates and debt balances.
Other Costs and Expenses
Components of other costs and expenses for the quarter ended June 30, 2004
and 2003 are summarized below (in millions):
2004 2003
------- -------
Marine operating expenses ........................ $ 25.9 $ 20.9
Selling, general and administrative .............. 19.0 14.8
Provision for possible losses .................... - 3.4
Asset impairment charges ......................... .3 2.8
------- -------
Total other costs and expenses .................. $ 45.2 $ 41.9
======= =======
Other costs and expenses of $45.2 million were $3.3 million higher than
the prior year quarter due to increases in marine operating expenses and SG&A
expense, partially offset by a lower provision for possible losses and asset
impairment charges.
Marine operating expenses increased $5.0 million from the prior year
quarter to $25.9 million due to additional operating days of operations compared
to the prior year period. SG&A expense of $19.0 million was $4.2 million higher
than the prior year period due to higher consulting expenses associated with the
implementation of Section 404 of the Sarbanes Oxley Act, fees associated with a
bond exchange in the second quarter, and timing of certain expenses.
The $3.4 million provision for possible losses recorded in 2003 is
consistent with GATX's policy of targeting an overall allowance for possible
losses. The amount not specifically allocated to the segments remains at Other.
Asset impairment charges of $.3 million decreased $2.5 million from the prior
year. The 2003 charge primarily relates to ASC's off-lakes barge which ceased
operations last year.
26
Net Loss
Net loss at Other of $10.7 million for the second quarter of 2004 was $2.2
million favorable to the prior year quarter, primarily due to improved results
at ASC and lower interest expense, partially offset by higher SG&A expense.
27
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for a summary of new
accounting pronouncements that may impact GATX's business.
CRITICAL ACCOUNTING POLICIES
There have been no changes to GATX's critical accounting policies during
the six month period ending June 30, 2004; refer to GATX's Annual Report on Form
10-K for the fiscal year ended December 31, 2003 for a summary of GATX's
policies.
FORWARD LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis may constitute
forward-looking statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. These statements are
identified by words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," or "project" and similar expressions. This information may
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. Risks
and uncertainties include, but are not limited to, general economic conditions;
aircraft and railcar lease rate and utilization levels; conditions in the
capital markets and the potential for a downgrade in GATX's or GFC's credit
rating, either of which could have an effect on the Company's borrowing costs or
the ability to access the markets for commercial paper or secured and unsecured
debt; dynamics affecting customers within the chemical, petroleum and food
industries; regulatory actions that may impact the economic value of assets;
competitors in the rail and air markets who may have access to capital at lower
costs than GATX; additional potential write-downs and/or provisions within
GATX's portfolio; impaired asset charges; and general market conditions in the
rail, air, technology, venture, and other large-ticket industries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 2003, there have been no material changes in GATX's
interest rate and foreign currency exposures or types of derivative instruments
used to hedge these exposures, and no significant changes in underlying market
conditions.
ITEM 4. CONTROLS AND PROCEDURES
GATX management, with the participation of the Chief Executive Officer
(the "CEO") and Chief Financial Officer (the "CFO"), have conducted an
evaluation of the effectiveness of disclosure controls and procedures in
accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based on such evaluation, the Company's CEO and CFO have
concluded as of the end of the period covered by this report, that GATX's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) are effective to ensure that information required to be disclosed
by GATX in this Quarterly Report on Form 10-Q has been recorded, processed,
summarized, and reported to them in a timely manner. There have been no
significant changes in the Company's internal controls over financial reporting
that occurred during the period covered by this report that have materially
affected or are reasonably likely to materially affect these controls.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 29, 2003, a wrongful death action 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. The lawsuit
seeks damages for a derailment on January 18, 2002 of a Canadian Pacific train
containing anhydrous ammonia cars 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 whom fifteen were admitted to the hospital, and a number of others
were purportedly affected. The plaintiffs allege among other things that the
incident (i) caused the wrongful death of their husband/son, and (ii) caused
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. On March 9, 2004, the National
Transportation Safety Board (NTSB) released a synopsis of its anticipated report
and issued its final report shortly thereafter. The report 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. On June 18, 2004, the plaintiff filed an amended complaint based on
the NTSB findings which added GFC and others as defendants. Specifically, the
allegations against GFC are that the steel shells of the tank cars were
defective and that GATX knew the cars were vulnerable and nonetheless failed to
warn of the extreme hazard and vulnerability. GFC intends to defend this suit
vigorously. On July 12, 2004, GFC filed a motion to dismiss this action on the
basis that plaintiffs' claims are preempted by federal law and that the
plaintiffs have failed to state a claim with respect to certain causes of
action.
On January 9, 2004, the plaintiffs filed an almost identical action in
United States District Court, District of North Dakota, Northwest Division. GFC
was served on June 29, 2004. The plaintiffs have moved to dismiss this action
without prejudice. In the motion to dismiss, the plaintiff alleges that the
North Dakota action was brought because the two year statute of limitations was
running and some claims would be barred in North Dakota if the Hennepin County
action were dismissed based upon jurisdiction or venue challenges of the
defendants.
GFC has been named as a defendant in eight other actions all filed in the
District Court of the State of Minnesota, County of Hennepin, Fourth Judicial
District, in May 2004. The plaintiffs are all Minot residents who are alleged to
have suffered personal injury and property damage as a consequence of the
derailment. The complaints allege that the plaintiffs sustained damages
including personal injury, emotional and mental damages, evacuation, shelter in
place, property damage, property value diminution, inconvenience and insecurity
in their property and that the defendants are responsible under the theories of
negligence, nuisance, trespass, strict liability and negligent and intentional
infliction of emotional distress for the alleged injuries. The plaintiffs have
reserved the right to seek punitive damages. On July 21, 2004, GFC filed a
motion to dismiss these actions on the basis that plaintiffs' claims are
preempted by federal law and that the plaintiffs have failed to state a claim
with respect to certain causes of action.
On July 1, 2004, GFC was served in, Mehl et al. v. Canadian Pacific
Railroad, et al. filed in the United States District Court, District of North
Dakota, Northwest Division. The complaint alleges that the named plaintiffs are
part of a class that numbers in the hundreds. This complaint alleges that the
plaintiffs sustained damages including personal injury, emotional and mental
damages, evacuation, shelter in place, property damage, property value
diminution, inconvenience and insecurity in their property and that the
defendants are responsible under the theories of negligence, nuisance, trespass,
strict liability and negligent and intentional infliction of emotional distress.
The class has not been certified. GFC is scheduled to respond to the complaint
on August 16, 2004.
GFC has been served only in the cases described above. There are over 40
other cases arising out of this derailment pending in the Fourth District Court
of the State of Minnesota, Hennepin County. Thirty-one additional cases were
filed in the same court and then removed to federal court by the Canadian
Pacific in July.
GATX 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 GATX 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
29
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 have increased over the past several years. 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 GATX and its subsidiaries in the discharge of such liabilities are not
likely to be material to GATX's consolidated financial position or results of
operations. Adverse court rulings or changes in applicable law could affect
claims made against GATX and its subsidiaries, and increase the number, and
change the nature, of such claims.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Reference is made to the exhibit index which is included
herewith and is incorporated by reference hereto.
(b) Reports on Form 8-K:
Form 8-K filed on May 12, 2004 reporting the presentation
made at the American Financial Services Association's
(AFSA) U.S. Finance Industry Conference for Fixed Income
Investors in Washington D.C. on May 12, 2004.
Form 8-K filed on May 25, 2004 reporting that GATX
Financial Corporation, a subsidiary of GATX Corporation,
entered into a Credit Agreement for $545 million comprised
of a $445 million 3-year senior unsecured revolving credit
facility maturing in May 2007, and a $100 million 5-year
unsecured term loan, with a delayed draw feature, maturing
in May 2009.
Form 8-K filed on July 1, 2004 reporting that GATX
Corporation completed the sale of substantially all the
assets and associated nonrecourse debt of its information
technology leasing business, GATX Technology Services, to
CIT Group. Inc.
Form 8-K filed on July 30, 2004 reporting that GATX
Corporation reached a settlement agreement with an insurer
which will result in the receipt of $45 million.
Form 8-K filed on August 4, 2004 reporting GATX
Corporation's second quarter 2004 results, including a
copy of the press release and a transcript of the
analysts' conference call conducted on July 29, 2004.
Form 8-K/A filed on August 5, 2004 reporting pro-forma
financial statements associated with the sale of
substantially all of the assets and associated nonrecourse
debt of GATX Technology Services.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATX CORPORATION
(Registrant)
/s/ Brian A. Kenney
-------------------
Brian A. Kenney
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: August 6, 2004
31
EXHIBIT INDEX
The following exhibits are furnished as part of this quarterly report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
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).
32