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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-8319
GATX Financial Corporation
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-1661392
(State of incorporation) (I.R.S. Employee Identification No.)
500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,041,250 shares of $1 par
value common stock were outstanding (all owned by GATX Corporation) as of
October 29, 2004.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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GATX FINANCIAL CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2004
INDEX
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income....................................................... 1
Consolidated Balance Sheets............................................................. 2
Consolidated Statements of Cash Flows................................................... 3
Notes to the Consolidated Financial Statements.......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10
Risk Factors............................................................................ 10
Comparison of First Nine Months of 2004 to First Nine Months of 2003.................... 12
Cash Flow and Liquidity................................................................. 21
Comparison of Third Quarter of 2004 to Third Quarter of 2003............................ 23
New Accounting Pronouncements........................................................... 29
Critical Accounting Policies............................................................ 29
Forward Looking Statements.............................................................. 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 29
Item 4. Controls and Procedures......................................................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 30
Item 6. Exhibits........................................................................................ 32
SIGNATURE .............................................................................................. 32
EXHIBIT INDEX .......................................................................................... 33
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
GROSS INCOME
Lease income................................................... $ 200.2 $ 193.0 $ 583.9 $ 577.2
Marine operating revenue....................................... 36.2 27.3 76.2 57.0
Interest income................................................ 2.9 9.0 15.3 30.6
Asset remarketing income....................................... 5.1 6.5 32.2 23.9
Gain on sale of securities..................................... .2 5.8 3.4 6.3
Fees........................................................... 5.7 3.7 13.9 14.2
Other ......................................................... 65.0 35.2 111.1 85.7
------- --------- --------- ---------
Revenues....................................................... 315.3 280.5 836.0 794.9
Share of affiliates' earnings.................................. 17.2 16.7 51.2 55.6
------- --------- --------- ---------
TOTAL GROSS INCOME............................................. 332.5 297.2 887.2 850.5
OWNERSHIP COSTS
Depreciation .................................................. 48.0 46.1 139.8 137.2
Interest, net.................................................. 35.0 36.5 100.5 119.6
Operating lease expense........................................ 47.3 47.5 142.8 144.0
------- --------- --------- ---------
TOTAL OWNERSHIP COSTS.......................................... 130.3 130.1 383.1 400.8
OTHER COSTS AND EXPENSES
Maintenance expenses........................................... 46.3 43.3 140.4 125.3
Marine operating expenses...................................... 27.7 21.8 59.2 45.9
Other operating expenses....................................... 10.6 11.8 32.7 34.2
Selling, general and administrative expenses................... 27.8 34.3 84.1 101.6
(Reversal) provision for possible losses....................... (4.7) .3 (9.7) 10.1
Asset impairment charges....................................... .3 8.8 1.4 22.6
Fair value adjustments for derivatives......................... .8 .2 .1 2.6
------- --------- --------- ---------
TOTAL OTHER COSTS AND EXPENSES................................. 108.8 120.5 308.2 342.3
------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.......... 93.4 46.6 195.9 107.4
INCOME TAXES................................................... 32.7 17.0 66.6 39.5
------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS.............................. 60.7 29.6 129.3 67.9
DISCONTINUED OPERATIONS
Operations, net of taxes....................................... (.2) 1.4 18.5 9.6
Loss on sale of segment, net of taxes.......................... (7.3) -- (7.7) --
------- --------- --------- ---------
TOTAL DISCONTINUED OPERATIONS.................................. (7.5) 1.4 10.8 9.6
------- --------- --------- ---------
NET INCOME..................................................... $ 53.2 $ 31.0 $ 140.1 $ 77.5
======= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
SEPTEMBER 30 DECEMBER 31
2004 2003
------------ -----------
ASSETS
CASH AND CASH EQUIVALENTS........................................ $ 142.7 $ 211.1
RESTRICTED CASH.................................................. 57.9 60.9
RECEIVABLES
Rent and other receivables....................................... 122.7 86.4
Finance leases................................................... 272.8 289.2
Loans............................................................ 105.5 183.5
Less: allowance for possible losses............................. (27.8) (40.6)
--------- ---------
473.2 518.5
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities.................................. 3,456.6 3,276.6
Operating lease investments and other............................ 1,953.4 1,804.2
Less: allowance for depreciation................................ (1,812.5) (1,821.5)
--------- ---------
3,597.5 3,259.3
Progress payments for aircraft and other equipment............... 19.5 53.6
--------- ---------
3,617.0 3,312.9
DUE FROM GATX CORPORATION........................................ 402.5 340.6
INVESTMENTS IN AFFILIATED COMPANIES.............................. 800.7 847.6
RECOVERABLE INCOME TAXES......................................... -- 47.3
GOODWILL, NET.................................................... 87.0 87.2
OTHER INVESTMENTS................................................ 72.8 101.6
OTHER ASSETS..................................................... 189.0 182.3
ASSETS OF DISCONTINUED OPERATIONS................................ 58.9 560.1
--------- ---------
$ 5,901.7 $ 6,270.1
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES............................ $ 346.9 $ 326.5
DEBT
Short-term....................................................... 11.4 15.9
Long-term:
Recourse.................................................... 2,738.6 2,877.6
Nonrecourse................................................. 94.9 99.3
Capital lease obligations........................................ 96.7 122.4
--------- ---------
2,941.6 3,115.2
DEFERRED INCOME TAXES............................................ 700.6 614.7
OTHER LIABILITIES................................................ 212.1 258.5
LIABILITIES OF DISCONTINUED OPERATIONS........................... -- 346.3
--------- ---------
TOTAL LIABILITIES ............................................... 4,201.2 4,661.2
SHAREHOLDER'S EQUITY
Preferred Stock.................................................. 125.0 125.0
Common Stock..................................................... 1.0 1.0
Additional capital............................................... 521.6 521.6
Reinvested earnings.............................................. 1,058.6 988.8
Accumulated other comprehensive loss............................. (5.7) (27.5)
--------- ---------
TOTAL SHAREHOLDER'S EQUITY....................................... 1,700.5 1,608.9
--------- ---------
$ 5,901.7 $ 6,270.1
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
GATX FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------------
2004 2003 2004 2003
---- ---- ---- ----
OPERATING ACTIVITIES
Net income, including discontinued operations.............................. $ 53.2 $ 31.0 $ 140.1 $ 77.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized gains on remarketing of leased equipment..................... (4.9) (5.3) (30.8) (26.1)
Gain on sale of securities............................................ (.2) (5.8) (3.4) (6.3)
Pre-tax loss on sale of segment....................................... 12.1 -- 12.7 --
Depreciation.......................................................... 50.9 80.5 180.0 243.0
(Reversal) provision for possible losses.............................. (4.5) .4 (9.6) 8.8
Asset impairment charges.............................................. .3 9.5 3.7 25.6
Deferred income taxes................................................. 22.6 30.6 88.4 85.2
Share of affiliates' earnings, net of dividends....................... (13.6) (14.6) (34.2) (45.6)
Increase in insurance recoveries receivable........................... (45.0) -- (45.0) --
Decrease (increase) in recoverable income taxes....................... 2.1 (6.4) 57.3 50.1
Net decrease in operating lease payable............................... (15.0) (16.0) (26.5) (18.6)
Other................................................................. 13.3 (36.8) (33.8) (54.8)
------ --------- ----------- ----------
Net cash provided by operating activities............................. 71.3 67.1 298.9 338.8
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities............... (145.3) (124.8) (596.2) (463.9)
Loans extended............................................................. (.3) (10.9) (14.2) (48.6)
Investments in affiliated companies........................................ -- (4.8) (3.1) (49.0)
Progress payments.......................................................... (.4) (3.5) (2.0) (26.1)
Other investments.......................................................... (1.3) (1.0) (28.8) (25.2)
------ --------- ----------- ----------
Portfolio investments and capital additions................................ (147.3) (145.0) (644.3) (612.8)
Portfolio proceeds......................................................... 58.3 183.4 380.4 573.8
Net proceeds from sale of segment.......................................... 223.7
9.0 -- --
Transfer of assets to GATX Corporation..................................... -- -- 3.8 --
Proceeds from other asset sales............................................ 3.7 4.3 23.9 19.1
Net decrease (increase) in restricted cash................................. 2.2 1.1 3.0 (76.1)
Effect of exchange rate changes on restricted cash......................... -- -- -- 17.7
------ --------- ----------- ----------
Net cash (used in) provided by investing activities................... (74.1) 43.8 (9.5) (78.3)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt............................... 42.0 120.3 202.5 453.3
Repayment of long-term debt................................................ (65.4) (408.8) (401.4) (843.2)
Net increase (decrease) in short-term debt................................. 2.8 8.3 (2.1) 16.8
Net decrease in capital lease obligations.................................. (9.5) (5.2) (25.7) (20.0)
Net (increase) decrease in amount due from GATX Corporation................ (15.8) 117.2 (61.9) 91.5
Cash dividends paid to GATX Corporation.................................... (26.9) (15.5) (70.3) (38.7)
------ --------- ----------- ----------
Net cash used in financing activities................................. (72.8) (183.7) (358.9) (340.3)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............... 1.8 (2.1) 1.1 .6
------ --------- ----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. $(73.8) $ (74.9) $ (68.4) $ (79.2)
====== ========= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS
GATX Financial Corporation (GFC 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, GFC combines asset knowledge and
services, structuring expertise, partnering and capital to provide business
solutions to customers and partners worldwide. GFC specializes in railcar and
locomotive leasing, aircraft operating leasing and financing other large ticket
equipment.
GFC invests in companies and joint ventures that complement its existing
business activities. GFC partners with financial institutions and operating
companies to improve scale in certain markets, broaden diversification within an
asset class, and enter new markets.
On June 30, 2004, GFC sold substantially all of the assets and related
nonrecourse debt of GATX Technology Services (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.
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
benefits, 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. GFC adopted FSP
106-2 in the third quarter of 2004. See Note 6 to the financial statements for
information regarding the impact to GFC's results.
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 GFC, such as commercial aircraft leasing, rail
equipment leasing, and other business activities.
For purposes of preparing the following information, GFC made certain
adjustments to information provided by the joint ventures. Pre-tax income was
adjusted to exclude interest expense (or interest income) recognized by the
joint ventures on loans from (or to) GFC.
For all affiliated companies held at the end of the quarter as part of
continuing operations, operating results, as if GFC held 100 percent interest,
were (in millions):
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Gross income................................................. $ 189.0 $ 185.2 $ 521.7 $ 516.4
Pre-tax income............................................... 43.4 45.4 113.9 111.6
NOTE 5. GOODWILL
As a result of the Technology sale, the goodwill balance of $87.2 million
reported as of December 31, 2003 has been restated to exclude $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 segment. See Note 12 for further discussion on
the Technology sale.
NOTE 6. PENSION AND OTHER POST-RETIREMENT BENEFITS
GFC contributed to pension plans sponsored by GATX that cover
substantially all employees. Benefits payable under the pension plans are based
on years of services and/or final average salary. Allocation to GFC for plan
contributions, credits, and expenses are determined on the basis of payroll
costs and related actuarial assumptions. Ongoing pension credits for the three
months ended September 30, 2004 and 2003 were $.1 million for both periods.
Ongoing pension credits for the nine months ended September 30, 2004 and 2003
were $.3 million for both periods. In addition, curtailment costs and special
termination expense were $.7 million for the nine months ended September 30,
2004. These amounts resulted from the Technology sale and were allocated to
discontinued operations. The components of net periodic credits and costs for
individual subsidiaries of GATX, including GFC, are not determinable.
In addition to the pension plans, GFC's other post-retirement plans
provide health care, life insurance and other benefits for certain retired
employees who meet established criteria.
The components of pension and other post-retirement benefit costs for the
three months ended September 30, 2004 and 2003 are as follows (in millions):
2004 RETIREE 2003 RETIREE
HEALTH AND LIFE HEALTH AND LIFE
--------------- ---------------
Service cost................................................ $ .1 $ .1
Interest cost............................................... .8 .9
------- ------
Net costs................................................... $ .9 $ 1.0
======= ======
The components of pension and other post-retirement benefit costs for the
nine months ended September 30, 2004 and 2003 are as follows (in millions):
2004 RETIREE 2003 RETIREE
HEALTH AND LIFE HEALTH AND LIFE
--------------- ---------------
Service cost................................................ $ .3 $ .3
Interest cost............................................... 2.6 2.7
Amortization of:
Unrecognized net loss.................................... .1 --
------- ----------
Ongoing net costs........................................... 3.0 3.0
Recognized gain due to curtailment.......................... (.2) --
------- ----------
Net costs................................................... $ 2.8 $ 3.0
======= ==========
The previous tables include amounts allocated to discontinued operations,
including the curtailment cost (gain) and special termination expense which
resulted from the Technology sale.
In the third quarter of 2004, GFC incorporated the impact of the U.S.
Medicare Prescription Drug, Improvement and Modernization Act of 2003 in its
consolidated financial results. The effect of the federal Medicare subsidy
reduced the accumulated postretirement benefit obligation (APBO) by $5.4 million
and net periodic cost for other postretirement benefits decreased by $.2 million
for the third quarter. The full year impact is expected to be approximately $.3
million.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
GFC uses a December 31 measurement date for all of its plans. The three
month and nine month amounts reported are based on estimated annual costs.
Actual annual costs as of December 31, 2004 may differ from the estimates
provided.
GFC expects to contribute approximately $2.0 million to the GATX sponsored
pension plans in 2004. GFC also expects to contribute $9.0 million to its other
post-retirement benefit plans in 2004. Through September 30, 2004, contributions
of $1.7 million have been made to the domestic and foreign pension plans in
addition to contributions of $5.0 million to the other post-retirement benefits
plans. Additional contributions to these 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, GFC has provided
various guarantees which could require performance in the event of demands by
third parties. Similar to GFC's balance sheet investments, these guarantees
expose GFC to credit, market, and equipment risk; accordingly, GFC evaluates its
commitments and other contingent obligations using techniques similar to those
used to evaluate funded transactions.
Asset residual value guarantees represent GFC's commitment to third
parties that an asset or group of assets will be worth a specified amount at the
end of a lease term. Revenue 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 GFC's performance pursuant to the residual
value guarantees may 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. GFC 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. GFC is not aware of any event
of default which would require it to satisfy these guarantees, and expects the
affiliates to generate sufficient cash flow to satisfy their lease and loan
obligations.
At September 30, 2004, the maximum potential amount of lease, loan or
residual value guarantees under which GFC could be required to perform was
$532.5 million, including $47.6 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 September 30, 2004, GFC identified 19 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. GFC is not the primary
beneficiary of any of the identified VIEs as GFC does not receive the majority
of the entities' expected losses or residual returns. As a result, none of these
entities have been consolidated into GFC's financial statements. This
determination is based on forecasted expected losses and residual returns for
each of the 19 identified VIEs. GFC's maximum exposure to loss with respect to
these variable interest entities was $306.9 million as of September 30, 2004, of
which $273.2 million is recorded on the balance sheet as either investments in
affiliated companies or finance leases.
NOTE 9. COMPREHENSIVE INCOME
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
GFC 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 September 30, 2004 and 2003, comprehensive income was $72.9 million
and $33.8 million, respectively. For the nine months ended September 30, 2004
and 2003, comprehensive income was $161.9 million and $90.9 million,
respectively.
NOTE 10. ADVANCES TO PARENT
Interest income on advances to GATX, which is included in gross income on
the statements of income, was $6.3 million for the three months ended September
30, 2004 compared to $5.0 million in the prior year period. For the nine months
ended September 30, 2004 interest income on advances was $16.5 million compared
to $20.2 million in the prior year period. These advances have no maturity date.
Interest income on advances to GATX is based on an interest rate that is
adjusted annually in accordance with an estimate of applicable rates.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. FINANCIAL DATA OF BUSINESS SEGMENTS
The financial data presented below conforms to SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and depicts the
profitability, financial position and capital expenditures of each of GFC's
continuing business segments. Segment profitability is presented to reflect
operating results inclusive of allocated support expenses from the parent
company and estimated applicable interest costs. 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.
GFC 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 12 for further information related to the sale of
Technology.
The following tables present certain segment data for the three months and
nine months ended September 30, 2004 and 2003 (in millions):
RAIL AIR SPECIALTY OTHER TOTAL
---- --- --------- ----- -----
THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenues....................................................... $ 181.0 $ 31.6 $ 15.2 $ 87.5 $ 315.3
Share of affiliates' earnings.................................. 3.1 8.3 5.8 -- 17.2
-------- --------- --------- ------- ----------
Total gross income............................................. 184.1 39.9 21.0 87.5 332.5
Depreciation .................................................. 29.3 15.1 1.1 2.5 48.0
Interest, net.................................................. 19.2 10.6 6.2 (1.0) 35.0
Operating lease expense........................................ 45.7 .9 1.0 (.3) 47.3
Income from continuing operations before income taxes......... 18.7 7.2 10.9 56.6 93.4
Income from continuing operations.............................. 13.0 5.0 6.4 36.3 60.7
-------- --------- --------- ------- ----------
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2004
Investments in affiliated companies............................ 153.0 484.0 163.7 -- 800.7
Identifiable assets from continuing operations................. 2,556.0 2,063.3 522.9 700.6 5,842.8
-------- --------- --------- ------- ----------
CASH FLOW
Portfolio investments and capital additions.................... 78.6 66.2 2.5 -- 147.3
-------- --------- --------- ------- ----------
RAIL AIR SPECIALTY OTHER TOTAL
---- --- --------- ----- -----
THREE MONTHS ENDED SEPTEMBER 30, 2003
Revenues....................................................... $ 172.4 $ 30.6 $ 32.8 $ 44.7 $ 280.5
Share of affiliates' earnings.................................. 4.0 7.5 5.2 -- 16.7
-------- --------- --------- ------- ---------
Total gross income............................................. 176.4 38.1 38.0 44.7 297.2
Depreciation .................................................. 27.7 14.0 2.5 1.9 46.1
Interest, net.................................................. 13.9 10.0 10.6 2.0 36.5
Operating lease expense........................................ 45.5 .9 1.1 -- 47.5
Income from continuing operations before income taxes.......... 22.9 3.7 15.8 4.2 46.6
Income from continuing operations.............................. 15.0 3.4 9.0 2.2 29.6
-------- --------- --------- ------- ---------
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................. 2,308.8 1,977.0 707.6 716.6 5,710.0
-------- --------- --------- ------- ---------
CASH FLOW
Portfolio investments and capital additions.................... 30.6 32.9 17.4 1.0 81.9
-------- --------- --------- ------- ---------
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
RAIL AIR SPECIALTY OTHER TOTAL
---- --- --------- ----- -----
NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues....................................................... $ 542.8 $ 83.9 $ 68.8 $ 140.5 $ 836.0
Share of affiliates' earnings.................................. 12.9 23.9 14.4 -- 51.2
-------- --------- --------- ------- ----------
Total gross income............................................. 555.7 107.8 83.2 140.5 887.2
Depreciation .................................................. 88.7 43.4 3.2 4.5 139.8
Interest, net.................................................. 51.5 28.9 20.3 (.2) 100.5
Operating lease expense........................................ 137.1 2.9 3.1 (.3) 142.8
Income from continuing operations before income taxes.......... 62.7 14.3 51.2 67.7 195.9
Income from continuing operations.............................. 44.1 9.6 31.4 44.2 129.3
-------- --------- --------- ------- ---------
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2004
Investments in affiliated companies............................ 153.0 484.0 163.7 -- 800.7
Identifiable assets from continuing operations................. 2,556.0 2,063.3 522.9 700.6 5,842.8
-------- --------- --------- ------- ---------
CASH FLOW
Portfolio investments and capital additions.................... 329.6 164.6 20.6 .9 515.7
-------- --------- --------- ------- ---------
RAIL AIR SPECIALTY OTHER TOTAL
---- --- --------- ----- -----
NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenues....................................................... $ 518.0 $ 81.4 $ 101.7 $ 93.8 $ 794.9
Share of affiliates' earnings.................................. 8.7 26.1 20.8 -- 55.6
-------- --------- -------- ------ --------
Total gross income............................................. 526.7 107.5 122.5 93.8 850.5
Depreciation .................................................. 84.1 41.0 7.9 4.2 137.2
Interest, net.................................................. 45.6 31.0 34.3 8.7 119.6
Operating lease expense........................................ 137.3 2.9 3.4 .4 144.0
Income (loss) from continuing operations before income taxes... 63.0 1.6 44.3 (1.5) 107.4
Income (loss) from continuing operations....................... 40.5 1.0 26.7 (.3) 67.9
-------- --------- -------- ------ --------
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................. 2,308.8 1,977.0 707.6 716.6 5,710.0
-------- --------- -------- ------ --------
CASH FLOW
Portfolio investments and capital additions.................... 123.0 221.6 76.7 18.0 439.3
-------- --------- -------- ------ --------
NOTE 12. DISCONTINUED OPERATIONS
On June 30, 2004, GFC 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 for
estimated net proceeds of $246.0 million of which $31.3 million was yet to be
received at September 30, 2004. During the quarter ended September 30, 2004,
certain remaining Technology assets, including a 50% interest in a joint venture
were sold for proceeds of $9.0 million, which approximated book value. The loss
on sale of segment for the quarter ended September 30, 2004 was attributable to
expenses related to the sale recognized in accordance with applicable accounting
rules. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Gross income................................................... $ 4.9 $ 49.6 $ 103.0 $ 156.6
(Loss) income before taxes..................................... (.4) 2.8 29.9 15.3
Operating (loss) income, net of tax............................ (.2) 1.4 18.5 9.6
Loss on sale of segment, net of taxes of $4.8 million for
the three months ended and $5.0 million for nine months ended.. (7.3) -- (7.7) --
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GATX Financial Corporation (GFC 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, GFC combines asset knowledge and
services, structuring expertise, partnering and capital to provide business
solutions to customers and partners worldwide. GFC specializes in railcar and
locomotive leasing, aircraft operating leasing, and financing other large ticket
equipment.
On June 30, 2004, GFC sold substantially all of the assets and related
nonrecourse debt of GATX Technology Services (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 nine months ended September 30, 2004 are not
necessarily indicative of the results that may be achieved for the entire year
ending December 31, 2004.
RISK FACTORS
GFC's businesses are subject to a number of risks which investors should
consider.
- Liquidity and Capital Resources. GFC is dependent in part upon the
issuance of unsecured and secured debt to fund its operations and
contractual commitments. A number of factors could cause GFC to
incur increased borrowing costs and to have greater difficulty
accessing public and private markets for both secured and unsecured
debt. These factors include the global capital market environment
and outlook, financial performance and outlook, and credit ratings
as determined primarily by rating agencies such as Standard & Poor's
(S&P) and Moody's Investor Service (Moody's). In addition, based on
GFC's current credit ratings, access to the commercial paper market
and uncommitted money market lines is uncertain and cannot be relied
upon. It is possible that GFC's other sources of funds, including
available cash, bank facilities, cash flow from operations and
portfolio proceeds may not provide adequate liquidity to fund its
operations and contractual commitments.
- Terrorism/International Conflict. National and international
political developments, instability and uncertainties, including
continuing political unrest and threats of terrorists' attacks,
could result in continued global economic weakness in general and in
the United States in particular, and could have an adverse impact on
GATX's businesses. The effects may include, among other things,
legislation directed toward improving the security of railcars
against acts of terrorism which affects the construction or
operation of railcars, a decrease in demand for air travel and rail
services, consolidation and/or additional bankruptcies in the rail
and airline industries, lower utilization of new and existing
aircraft and rail equipment, lower rail and aircraft rental rates or
a slower recovery of such rates, impairment of rail and air
portfolio assets and fewer partners for joint ventures. Depending
upon the severity, scope and duration of these effects, the impact
on GATX's financial position, results of operations and cash flows
could be material.
- Competition. GFC is subject to intense competition in its rail and
aircraft leasing businesses. In many cases, these competitors are
larger entities that have greater financial resources, higher credit
ratings and access to lower cost capital than GFC. These factors may
enable competitors to offer leases and loans to customers at lower
rates than GFC is able to provide, thus impacting GFC's asset
utilization or GFC's ability to lease assets on a profitable basis.
- Lease versus Purchase Decision. GFC's core businesses rely upon its
customers continuing to lease rather than purchase assets. There are
a number of items that factor into the customer's decision to lease
or purchase assets, such as tax considerations, interest rates,
balance sheet considerations, and operational flexibility. GFC has
no control over these external considerations and changes in these
factors could negatively impact demand for its leasing products.
- Effects of Inflation. Inflation in railcar rental rates as well as
inflation in residual values for air and rail equipment have
historically benefited GFC's financial results. Effects of inflation
are unpredictable as to timing and duration, depending on market
conditions and economic factors.
- Asset Obsolescence. GFC's core assets may be subject to functional,
regulatory, or economic obsolescence. Although GFC believes it is
adept at managing obsolescence risk, there is no guarantee that
changes in various market fundamentals or the adoption of new
regulatory requirements will not cause unexpected asset obsolescence
in the future.
10
- Allowance for Possible Losses. GFC's allowance for possible losses
may be inadequate if unexpected adverse changes in the economy
exceed the expectations of management, or if discrete events
adversely affect specific customers, industries or markets. If the
allowance for possible losses is insufficient to cover losses
related to reservable assets, including gross receivables, finance
leases, and loans, then GFC's financial position or results of
operations could be negatively impacted.
- Impaired Assets. An asset impairment charge may result from the
occurrence of unexpected adverse changes that impact GFC's estimates
of expected cash flows generated from our long-term assets. GFC
regularly reviews long-term assets for impairments, including when
events or changes in circumstances indicate the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
the carrying amount of an asset is not recoverable. GFC may be
required to recognize asset impairment charges in the future as a
result of the weak economic environment, challenging market
conditions in the air, rail or technology markets or events related
to particular customers or asset types.
- Insurance. The ability to insure its rail and aircraft assets and
their associated risks is an important aspect of GFC's ability to
manage risk in these core businesses. There is no guarantee that
such insurance will be available on a cost-effective basis
consistently in the future.
- Environmental. GFC is subject to federal and state requirements for
protection of the environment, including those for discharge of
hazardous materials and remediation of contaminated sites. GFC
routinely assesses its environmental exposure, including obligations
and commitments for remediation of contaminated sites and
assessments of ranges and probabilities of recoveries from other
responsible parties. Because of the regulatory complexities and risk
of unidentified contaminants on its properties, the potential exists
for remediation costs to be materially different from the costs GFC
has estimated.
- Potential for Claims and Lawsuits. The nature of assets which GFC
owns and leases exposes the Company to the potential for various
claims and litigation related to, among other things, personal
injury and property damage, environmental claims and other matters.
Some of the commodities transported by GFC's railcars, particularly
those classified as hazardous materials, can pose risks that GFC and
its subsidiaries work with its customers to minimize. The potential
liabilities could have a significant effect on GFC's consolidated
financial condition or results of operations.
- Commodity/Energy Prices. Energy prices, including the price of
natural gas and oil, are significant cost drivers for many of our
customers, particularly in the chemical and airline industries. In
addition, commodity prices such as the price of steel are a large
component of railcar manufacturing. Sustained high energy or
commodity prices could negatively impact these industries resulting
in a corresponding adverse effect on the cost and demand for our
products and services.
- Regulation. GFC's air and rail operations are subject to the
jurisdiction of a number of federal agencies, including the
Department of Transportation. State agencies regulate some aspects
of rail operations with respect to health and safety matters not
otherwise preempted by federal law. New regulatory rulings may
negatively impact GFC's financial results and economic value of its
assets.
- Risk Concentrations. GFC's revenues are generally derived from a
wide range of asset types, customers and geographic locations.
However, from time to time, GFC could have a large investment in a
particular asset type, a large revenue stream associated with a
particular customer, or a large number of customers located in a
particular geographic region. Decreased demand from a discrete event
impacting a particular asset type, discrete events with a specific
customer, or adverse regional economic conditions, particularly for
those assets, customers or regions in which GFC has a concentrated
exposure, could have a negative impact on GFC's results of
operations.
- Foreign Currency. GFC's results are exposed to foreign exchange rate
fluctuations as the financial results of certain subsidiaries are
translated from the local currency into U.S. dollars upon
consolidation. As exchange rates vary, revenue and other operating
results, when translated, may differ materially from expectations.
GFC is also subject to gains and losses on foreign currency
transactions, which could vary based on fluctuations in exchange
rates and the timing of the transactions and their settlement. In
addition, fluctuations in foreign exchange rates can have an effect
on the demand and relative price for services provided by GFC
domestically and internationally, and could have a negative impact
on GFC's results of operations.
- Asset Utilization and Lease Rates. GFC's profitability is largely
dependent on its ability to maintain assets on lease (utilization)
at satisfactory lease rates. A number of factors can adversely
affect utilization and lease rates, including, but
11
not limited to: an economic downturn causing reduced demand or
oversupply in the markets in which the company operates, changes in
customer behavior, or any other change in supply or demand caused by
factors discussed in this Risk section.
- Retirement Benefits. GFC's pension and other post-retirement costs
are dependent on various assumptions used to calculate such amounts,
including discount rates, long-term return on plan assets, salary
increases, health care cost trend rates and other factors. Changes
to any of these assumptions could adversely affect GFC's results of
operations.
- Income Taxes. GFC is subject to taxes in both the U.S. and various
foreign jurisdictions. As a result, GFC's effective tax rate could
be adversely affected by changes in the mix of earnings in the U.S.
and foreign countries with differing statutory tax rates,
legislative changes impacting statutory tax rates, including the
impact on recorded deferred tax assets and liabilities, changes in
tax laws or by material audit assessments. In addition, deferred tax
balances reflect the benefit of net operating loss carryforwards,
the realization of which will be dependent upon generating future
taxable income.
- Internal controls and requirements of Section 404 of the
Sarbanes-Oxley Act. GFC is in the process of documenting and testing
internal control procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires annual
management assessments of the effectiveness of internal controls
over financial reporting and a report by the Company's Independent
Auditors addressing these assessments. During the course of testing,
GFC , or the Independent Auditor, may identify deficiencies which
the Company may not be able to remediate and test in time to meet
the deadline imposed by the requirements of Section 404. In
addition, if GFC fails to maintain the adequacy of internal
controls, the Company may not be able to ensure that GFC can
conclude on an ongoing basis that it has effective internal controls
over financial reporting in accordance with Section 404 of
Sarbanes-Oxley. Even if GFC concludes that adequate internal control
procedures are in place, no system of internal controls can provide
absolute assurance that the financial statements are accurate and
free of error. As a result, the risk exists that GFC's internal
controls may not detect all errors or omissions in the financial
statements.
- Additional risks and uncertainties not presently known, or that GFC
currently deems immaterial, may also adversely affect GFC's business
operations.
STATEMENT OF INCOME DISCUSSION
The following table presents net income (loss) by segment for the three
and nine months ended September 30, 2004 and 2003 (in millions):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Rail................................................. $ 13.0 $ 15.0 $ 44.1 $40.5
Air.................................................. 5.0 3.4 9.6 1.0
Specialty............................................ 6.4 9.0 31.4 26.7
Other................................................ 36.3 2.2 44.2 (.3)
--------- -------- ------ -----
Net income from continuing operations.............. 60.7 29.6 129.3 67.9
Discontinued operations............................ (7.5) 1.4 10.8 9.6
--------- -------- ------ -----
Net income......................................... $ 53.2 $ 31.0 $140.1 $77.5
========= ======== ====== =====
Following is management's discussion and analysis of GFC's comparative
results of its reporting segments, Other and discontinued operations.
COMPARISON OF FIRST NINE MONTHS OF 2004 TO FIRST NINE 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. Lease rates are
increasing 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
12
movement of railcars from idle to active, and the scrapping of railcars. Renewal
and assignment activity remained strong 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. Lease rates are improving and current
average renewal rates for most car types now 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 stable. Utilization remains
high and operations have been positively impacted by success in Eastern European
markets and the placement of new car deliveries.
Railcar investments totaled $305.6 million during the first nine months of
2004, compared to $123.0 million in the prior year period. As a result of this
new investment volume, 4,778 cars were added to the North American
fleet. The prior period's portfolio investments and capital expenditures
included $22.5 million for 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 nine months ended September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income........................................................................ $ 491.2 $ 475.6
Asset remarketing income............................................................ 6.8 4.4
Fees................................................................................ 2.2 2.7
Other............................................................................... 42.6 35.3
--------- ----------
Revenues.......................................................................... 542.8 518.0
Share of affiliates' earnings....................................................... 12.9 8.7
--------- ----------
Total gross income............................................................... $ 555.7 $ 526.7
========= ==========
Lease income of $491.2 million increased $15.6 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 active North American cars. The
increase was partially offset by the effect of lower average North American
lease rates. Although lease rates are increasing, average North American lease
rates were in aggregate lower than the prior year period.
Rail's North American fleet totaled 106,994 cars at September 30, 2004
compared to 104,493 at the end of the prior year period and 105,248 cars at
December 31, 2003. In North America 103,327 railcars were active at September
30, 2004, compared to 97,018 a year ago and 98,294 at December 31, 2003. Rail's
North American utilization of 97% at September 30, 2004, improved from 93% at
September 30, 2003 and 93% at December 31, 2003.
Asset remarketing income of $6.8 million in 2004 includes a $1.3 million
residual sharing fee from a managed portfolio, $.6 million in other residual
sharing fees and a $4.6 million gain on the sale of 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 $42.6 million was $7.3 million higher than the 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.
These favorable items were offset by lower repair revenue. Share of affiliates'
earnings of $12.9 million was $4.2 million higher than the prior year period
primarily due to asset remarketing gains at an affiliate. Share of affiliates'
earnings in 2003 included a maintenance reserve reversal.
13
Ownership Costs
Components of Rail's ownership costs for the nine months ended September
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation.......................................................................... $ 88.7 $ 84.1
Interest, net......................................................................... 51.5 45.6
Operating lease expense............................................................... 137.1 137.3
--------- --------
Total ownership costs............................................................... $ 277.3 $ 267.0
========= ========
Ownership costs of $277.3 million were $10.3 million higher than the prior
year period. Depreciation of $88.7 million was $4.6 million higher than prior
year period due to a larger railcar fleet. Interest expense of $51.5 million was
$5.9 million higher than prior year period due to higher average interest rates
and related debt balances resulting increased investment volume.
14
Other Costs and Expenses
Components of Rail's other costs and expenses for the nine months ended
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense................................................................. $ 138.0 $ 123.0
Other operating expenses............................................................ 27.4 26.6
Selling, general and administrative................................................. 51.1 48.7
Reversal of provision for possible losses........................................... (.8) (1.7)
Fair value adjustment for derivatives............................................... .1
--
---------- ----------
Total other costs and expenses.................................................... $ 215.7 $ 196.7
========== ==========
Maintenance expense increased $15.0 million from the prior year period to
$138.0 million. Maintenance costs increased sharply for a variety of reasons,
including an increase in assignment costs, foreign exchange rates, higher per
car costs and lower capitalized repairs. 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.
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.
Approximately 2,200 of Rail's affected railcars are on full service leases in
which case Rail is responsible for the costs of inspection or replacement. As of
September 30, 2004, bolsters on approximately 2,000 cars have been replaced. The
cost attributable to the inspection and replacement of bolsters was $2.7 million
in the first nine months of 2004, a decrease of $.3 million from the prior year
period.
Net Income
Rail's net income of $44.1 million for the nine months ended September 30,
2004 was $3.6 million higher than the prior year period. The increase in 2004
was driven primarily by 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 $2.1 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, where the combination of high fuel prices and
revenue pressure from low-cost carriers has increased operating losses and
highlighted the vulnerabilities of many of the major U.S. carriers. Some
European airlines are also showing signs of weakness, as the industry enters the
traditionally difficult winter season. Notwithstanding these factors, Air
continued to benefit in the third quarter from an improved operating environment
relative to recent years, with increased demand for aircraft and a continuation
of this year's trend toward higher lease rates. This improvement was evidenced
at Air during the nine month period ending September 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 100% of the owned fleet
on lease or under letter of intent. Three wholly owned aircraft were sold in
third quarter of 2004.
As noted above, the commercial airline industry continues to be exposed to
volatility and uncertainty. In particular, ATA Holdings Corp., the parent
company of ATA Airlines (ATA) filed for bankruptcy subsequent to September 30.
GFC has one Boeing 757 on lease to ATA. GFC's interest in the airplane is held
through a long term operating lease; as of September 30, future lease payments
on the operating lease were approximately $36.1 million on a net present value
basis. In addition, Delta Airlines Inc. (Delta) has publicly disclosed that
difficult operating conditions have raised concerns about its future liquidity
position and the company is attempting to implement a cost restructuring plan to
avoid bankruptcy, the outcome of which is uncertain. Pembroke Group (Pembroke),
GFC's 50% owned Dublin-based aircraft leasing and management business, has three
Boeing 737 aircraft on lease to Delta. As of September 30, the net book value of
GFC's pro rata share of these aircraft is approximately $19.9 million or
15
$6.0 million net of related nonrecourse debt. GFC expects both ATA and Delta may
attempt to negotiate modification to the terms of current leases with GFC and
Pembroke, respectively as part of their restructuring plans. Restructuring or
termination of these leases could have a negative impact on GFC's future
financial results through lower income and possible impairment charges if
applicable.
Gross Income
Components of Air's gross income for the nine months ended September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income........................................................................ $ 71.1 $ 67.5
Interest income..................................................................... .2 (.1)
Asset remarketing income............................................................ 3.6 .6
Fees................................................................................ 7.3 5.7
Other............................................................................... 1.7 7.7
-------- -------
Revenues.......................................................................... 83.9 81.4
Share of affiliates' earnings....................................................... 23.9 26.1
-------- -------
Total gross income................................................................ $ 107.8 $ 107.5
======== =======
Air's gross income of $107.8 million was $.3 million higher than the prior
year nine month period. The increase was primarily driven by higher lease income
and asset remarketing income, partially offset by lower share of affiliates'
earnings and other income in the 2004 period.
Lease income of $71.1 million was $3.6 million higher than the prior year
period. Lease income increased primarily as a result of rents from new aircraft
deliveries after September 30, 2003, partially offset by the absence of rent on
aircraft sold subsequent to September 30, 2003. Asset remarketing income of $3.6
million was $3.0 million higher than the 2003 period primarily due to the gain
on sale of three aircraft. Fee income was $1.6 million higher than the 2003
period due to increased transaction activity in the 2004 period.
Share of affiliates' earnings of $23.9 million was $2.2 million lower than
the prior year. The decrease is primarily due to fees earned by the Pembroke
joint venture on facilitating the sale of Fokker aircraft in the 2003 period.
Other income of $1.7 million was $6.0 million lower than the 2003 period
primarily attributable to the recognition of previously collected maintenance
deposits in 2003.
Ownership Costs
Components of Air's ownership costs for the nine months ended September
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation....................................................................... $ 43.4 $ 41.0
Interest, net...................................................................... 28.9 31.0
Operating lease expense............................................................ 2.9 2.9
------- -------
Total ownership costs............................................................ $ 75.2 $ 74.9
======= =======
Ownership costs of $75.2 million were $.3 million higher than the prior
year period, primarily due to higher depreciation expense associated with new
aircraft deliveries subsequent to the 2003 period, partially offset by lower
interest expense in the 2004 period resulting from lower average debt balances.
Depreciation expense of $43.4 million increased by $2.4 million in the 2004
period compared to the 2003 period and interest expense of $28.9 million
decreased $2.1 million from the 2003 period.
Other Costs and Expenses
16
Components of Air's other costs and expenses for the nine months ended
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense.................................................................. $ 1.6 $ 1.5
Other operating expenses............................................................. 1.4 .5
Selling, general and administrative.................................................. 15.8 12.2
(Reversal) provision for possible losses............................................. (.5) 9.7
Asset impairment charges............................................................. -- 7.1
------- --------
Total other costs and expenses..................................................... $ 18.3 $ 31.0
======= ========
Total other costs and expenses of $18.3 million decreased by $12.7 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.
Impairment charges of $1.9 million and $5.2 million were taken on an MD-83
aircraft and an Airbus A310-300 aircraft, respectively, in the 2003 period. The
(reversal) 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 $3.6 million due to higher
employee costs in the 2004 period compared to the 2003 period.
Net Income
Air's net income of $9.6 million for the nine months ended September 30,
2004 was $8.6 million higher than the prior year period. The increase from the
prior year period reflected the 2003 loss provision associated with the Air
Canada note and 2003 asset impairment charges on two aircraft.
GATX SPECIALTY FINANCE
Specialty's portfolio continued to decline during the first nine months of
2004. The venture finance assets are expected to substantially run-off by the
end of 2005. As of September 30, 2004, Specialty's balance sheet assets were
$522.9 million compared to $707.6 million at December 31, 2003.
GFC is selectively pursuing new investments in Specialty, primarily in the
marine area. However, the portfolio may continue to decline or asset run-off may
exceed new investment volume as a result, future earnings will be unpredictable
and could decline due to the uncertain timing of asset remarketing from the
specialty finance portfolio and gains from the sale of securities associated
with the venture finance warrant portfolio. GFC 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 nine months ended September
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income................................................................... $ 21.6 $ 34.1
Interest income................................................................ 15.1 30.7
Asset remarketing income....................................................... 21.8 18.9
Gain on sale of securities..................................................... 3.4 6.3
Fees........................................................................... 4.4 5.8
Other.......................................................................... 2.5 5.9
-------- --------
Revenues..................................................................... 68.8 101.7
Share of affiliates' earnings.................................................. 14.4 20.8
-------- --------
Total gross income........................................................... $ 83.2 $ 122.5
======== ========
Gross income of $83.2 million was $39.3 million lower than the prior year
period. Lease income of $21.6 million was $12.5 million lower than the prior
year period. The decrease is primarily due to a decrease in operating lease
assets and finance
17
leases and as a result of the portfolio run-off. Interest income of $15.1
million was $15.6 million lower than prior year period 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 $21.8 million was $2.9 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 $3.4 million was $2.9 million lower than the
prior year period, which included a $3.3 million gain from one transaction. Fees
of $4.4 million decreased $1.4 million from the prior year period, which
included a $2.2 million guarantee fee. Other income of $2.5 million was $3.4
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 $14.4 million were $6.4 million lower than the prior year period.
The prior year period included a $3.1 million favorable non-recurring adjustment
at a certain affiliate and income from affiliates that have since been
dissolved, the impact of which was partially offset by higher current year
income from marine affiliates.
Ownership Costs
Components of Specialty's ownership costs for the nine months ended
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation..................................................................... $ 3.2 $ 7.9
Interest, net.................................................................... 20.3 34.3
Operating lease expense.......................................................... 3.1 3.4
-------- --------
Total ownership costs.......................................................... $ 26.6 $ 45.6
======== ========
Ownership costs of $26.6 million were $19.0 million lower than the prior
year period due to decreases in depreciation and interest expense. Depreciation
of $3.2 million was $4.7 million lower than prior year period due to declining
operating lease assets. Interest expense of $20.3 million was $14.0 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 nine months
ended September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense............................................................ $ .8 $ .8
Other operating expenses....................................................... 3.9 6.0
Selling, general and administrative............................................ 7.2 13.8
(Reversal) provision for possible losses....................................... (7.7) .4
Asset impairment charges....................................................... 1.1 9.1
Fair value adjustments for derivatives......................................... .1 2.5
-------- -------
Total other costs and expenses............................................... $ 5.4 $ 32.6
======== =======
Other costs and expenses of $5.4 million were $27.2 million lower than
prior year period primarily due to decreases in SG&A expense, (reversal)
provision for possible losses, asset impairment charges and fair value
adjustments for derivatives.
SG&A expense of $7.2 million was $6.6 million lower than the prior year
period due to lower personnel costs resulting from a prior reduction in
workforce. In the first nine months of 2004, Specialty reversed $7.7 million of
its allowance for possible losses, compared to a provision for possible losses
of $.4 million in the prior year period. The reversal was primarily the result
of strong credit performance, recoveries, and the declining reservable asset
base. The allowance for possible losses was $15.3 million as of September 30,
2004 or 5.7% of reservable assets, down from 7.2% at December 31, 2003. Asset
impairment charges of $1.1 million were $8.0 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
$.1 million was $2.4 million lower than prior year period due to market changes
in the value of derivatives. This amount is largely offset by foreign currency
translation
18
adjustments, classified as other income related to the underlying transactions.
Net Income
Specialty's net income of $31.4 million for the nine months ended
September 30, 2004 was $4.7 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 loss provision exceeded the
negative impact of the smaller portfolio.
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 nine months ended September 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Marine operating revenue............................................................ $ 76.2 $ 57.0
Other............................................................................... 64.3 36.8
-------- -------
Total gross income................................................................ $ 140.5 $ 93.8
======== =======
Gross income of $140.5 million increased $46.7 million over the prior year
period primarily due to higher proceeds from insurance recoveries and higher
marine operating revenue at ASC. In 2004, GFC recognized income of $48.2 million
in settlement of litigation initiated against various insurers; $16.5 million
was received in the 2003 period. No further recoveries are expected. The
improvement in marine operating revenue was due to additional operating days
resulting from increased demand, a larger fleet, and more favorable operating
conditions in the first nine months of 2004 compared to the prior year period.
Other income includes interest income on advances to GATX of $16.5 million in
the first nine months of 2004 compared to $20.5 million in the prior year
period.
Ownership Costs
Components of ownership costs for the nine months ended September 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation.......................................................................... $ 4.5 $ 4.2
Interest, net......................................................................... (.2) 8.7
Operating lease expense............................................................... (.3) .4
------ -------
Total ownership costs............................................................... $ 4.0 $ 13.3
====== =======
Ownership costs of $4.0 million were $9.3 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 nine months ended September
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Marine operating expenses............................................................ $ 59.2 $ 45.9
Other operating expenses............................................................. -- 1.1
Selling, general and administrative.................................................. 10.0 26.9
(Reversal) provision for possible losses............................................. (.7) 1.7
Asset impairment charges............................................................. .3 6.4
--------- --------
Total other costs and expenses..................................................... $ 68.8 $ 82.0
========= ========
19
Other costs and expenses of $68.8 million were $13.2 million lower than
the prior year period due to decreases in SG&A expense, provision for possible
losses and asset impairment charges, partially offset by higher marine operating
expenses.
Marine operating expenses increased $13.3 million from the prior year
period to $59.2 million due to an increase in the number of operating days. SG&A
expense of $10.0 million was $16.9 million lower than the prior year period
primarily due to reduced personnel costs, net of allocations to the segments,
resulting from the transfer of approximately 200 employees to the Parent Company
despite consulting expenses associated with the implementation of Section 404 of
the Sarbanes Oxley Act and fees associated with a bond exchange completed in the
second quarter.
The $.7 million reversal of provision for possible losses recorded in 2004
and the $1.7 million provision for possible losses recorded in 2003 are
consistent with GFC'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 $6.1 million from the prior
year. The 2003 charge relates to ASC's off-lakes barge which ceased operations
last year.
Net Income
Net income at Other of $44.2 million for the first nine months of 2004 was
$44.5 million favorable to the prior year period, primarily due to higher
insurance proceeds recognized in 2004.
20
CONSOLIDATED INCOME TAXES
GFC's effective tax rate for continuing operations was 34% for the nine
months ended September 30, 2004 compared to 37% for the nine months ended
September 30, 2003. The lower tax rate in 2004 reflects a $2.1 million benefit
attributable to the impact of an Austrian tax rate reduction recognized in the
second quarter of 2004 and lower taxes in foreign jurisdictions. The difference
in the tax rate for the nine months ended September 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 state taxes on domestic income.
GFC and its U.S. subsidiaries are included in the consolidated federal
income tax return of GATX Corporation. GFC was allocated a refund of $83.3
million in the second quarter of 2004 as a result of a carryback of the 2003
GATX consolidated tax loss to prior years. $25.6 million of the 2003 GATX
Consolidated tax loss was allocated to GFC and is available to offset taxable
income in 2004 and later years.
RESULTS OF DISCONTINUED OPERATIONS
On June 30, 2004, GFC sold substantially all of the assets and related
nonrecourse debt of Technology and its Canadian affiliate to CIT for proceeds
of $246.0 million, of which $31.3 million was yet to be received at September
30, 2004. During the quarter ended September 30, 2004 certain remaining
technology assets, including a 50% interest in a joint venture were sold for
proceeds of $9.0 million, which approximated book value. Financial data for the
Technology segment has been segregated as discontinued operations for all
periods presented.
Operating results for the first nine months of 2004 were $18.5 million,
net of tax, up from $9.6 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 second quarter of 2004. The total effect of suspending depreciation was
approximately $14.0 million after-tax. The loss on sale of segment of $7.7
million as of September 30, 2004 reflected a write-off of $7.6 million of
goodwill and sale-related expenses including severance costs and losses on
terminated leases.
CASH FLOW AND LIQUIDITY
GFC 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 GFC's equipment and 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 nine months of 2004 was $298.9 million, a decrease of
$39.9 million from the prior year period. The decrease is attributable to a
declining portfolio at Specialty and reflects the impact of six months of
Technology activity compared to nine months in the prior year. Comparison of
cash from operations between periods is also affected by changes in working
capital, including the timing of operating lease payments and income taxes. The
2003 period included a federal income tax refund allocable to GFC of $101.7
million and federal income tax payment allocable to GFC of $28.4 million.
The following discussion of cash flow activity is presented excluding the
impact of discontinued operations. Portfolio investments and capital additions
for the first nine months of 2004 totaled $515.7 million, an increase of $76.4
million from the first nine months of 2003. Rail invested $329.6 million during
the first nine months of 2004, an increase of $206.6 million from the prior year
period as 4,778 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 $164.6 million
during the first nine months of 2004, a decrease of $57.0 million from the prior
year period due to the timing of progress payments and fewer new aircraft
deliveries. Specialty invested $20.6 million during the first nine months of
2004, a decrease of $56.1 million from the prior year period due to lower
committed spending.
Portfolio proceeds for the first nine months of 2004 were $286.1 million,
a decrease of $118.0 million from the prior year period. Higher proceeds from
asset remarketing were offset by lower sales of securities, loan principal
payments received and cash distributions from joint venture investments.
Net proceeds from the sale of a segment of $223.7 million represent
year-to-date cash received on sale of assets and related nonrecourse debt of
Technology.
21
GFC'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,
commercial paper, committed revolving credit facilities, the issuance of
unsecured debt, and a variety of secured borrowings. GFC utilizes both the
domestic and international bank and capital markets.
In the first nine months of 2004, GFC issued $126.0 million and repaid
$263.9 million of long-term debt. Significant financings in the period included
$107.8 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 which was originally due in 2006.
GFC has a $445.0 million 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 until May 2005 and maturing in
May 2009. At September 30, 2004, availability of the credit facility 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 September 30, 2004, GFC was in
compliance with the covenants and all 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 September 30, 2004, GFC was in
compliance with the covenants and all 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. Some bank financings include coverage and net worth financial
covenants as well as negative pledges. One financing contains a leverage
covenant. Another financing contains leverage and cash flow covenants that are
specific to a subsidiary. GFC does not anticipate any covenant violation in the
credit facility, bank financings, or indenture, nor does GFC anticipate that any
of these covenants will restrict its operations or its ability to procure
additional financing.
As of September 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 affected 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 GFC's subsidiaries consist primarily
of committed aircraft deliveries and railcar orders. Unconditional purchase
obligations at September 30, 2004 were $656.0 million, comprised as follows (in
millions):
TOTAL REMAINDER 2004 2005 -2006 2007 -2008
----- -------------- ---------- ----------
Rail................................................. $ 506.6 $ 88.5 $ 293.9 $ 124.2
Air.................................................. 135.0 61.1 73.9 --
Specialty............................................ 14.4 9.1 4.8 .5
-------- -------- ------- ---------
Total unconditional purchase obligations $ 656.0 $ 158.7 $ 372.6 $ 124.7
======== ======== ======= =========
22
COMPARISON OF THIRD QUARTER 2004 TO THIRD QUARTER 2003
GATX RAIL
Gross Income
Components of Rail's gross income for the quarter ended September 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income....................................................................... $ 167.5 $ 159.9
Asset remarketing income........................................................... 0.7 (.2)
Fees............................................................................... 0.8 .9
Other.............................................................................. 12.0 11.8
-------- ---------
Revenues......................................................................... 181.0 172.4
Share of affiliates' earnings...................................................... 3.1 4.0
-------- ---------
Total gross income............................................................... $ 184.1 $ 176.4
======== =========
Lease income of $167.5 million increased $7.6 million from the prior year
quarter due to the impact of foreign exchange rates, favorable European fleet
activity, and an increase in the number of active North American. Although lease
rates are increasing, average North American lease rates were in aggregate
lower than the prior year quarter.
Other income of $12.0 million was $.2 million higher than prior year
quarter due to higher scrapping gains resulting from higher scrap metal prices
offset by lower repair revenue. Share of affiliates' earnings of $3.1 million
were $.9 million lower than the prior year quarter primarily due to lower asset
sales 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 September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation...................................................................... $ 29.3 $ 27.7
Interest, net..................................................................... 19.2 13.9
Operating lease expense........................................................... 45.7 45.5
-------- --------
Total ownership costs........................................................... $ 94.2 $ 87.1
======== =======
Ownership costs of $94.2 million were $7.1 million higher than the prior
year quarter. Depreciation of $29.3 million was $1.6 million higher than prior
year quarter due to a larger railcar fleet. Interest expense increased quarter
over quarter due to increased investment volume, higher interest rates and
higher related debt balances.
23
Other Costs and Expenses
Components of Rail's other costs and expenses for the quarter ended
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense............................................................... $ 45.8 $ 42.8
Other operating expenses.......................................................... 8.7 8.6
Selling, general and administrative............................................... 17.7 16.5
Reversal of provision for possible losses......................................... (1.0) (1.5)
--------- --------
Total other costs and expenses.................................................. $ 71.2 $ 66.4
========= ========
Maintenance expense increased $3.0 million from the prior year quarter to
$45.8 million for a variety of reasons, including an increase in the number of
car assignments and regulatory compliance activity as well as foreign exchange
rates.
Net Income
Rail's net income of $13.0 million for the three months ended September
30, 2004 was $2.0 million lower than the prior year period. The decrease in 2004
was driven primarily by higher maintenance and ownership costs.
GATX AIR
Gross Income
Components of Air's gross income for the quarter ended September 30, 2004
and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income...................................................................... $ 25.8 $ 22.9
Interest income................................................................... -- .1
Asset remarketing income.......................................................... 3.2 .2
Fees.............................................................................. 2.2 2.0
Other............................................................................. .4 5.4
--------- --------
Revenues........................................................................ 31.6 30.6
Share of affiliates' earnings..................................................... 8.3 7.5
--------- --------
Total gross income.............................................................. $ 39.9 $ 38.1
========= ========
Air's gross income of $39.9 million was $1.8 million higher than the prior
year quarter. The increase was primarily driven by higher asset remarketing
income and lease income, partially offset by lower other income in the 2004
period.
Lease income increased by $2.9 million from the 2003 quarter due to rents
from new deliveries subsequent to the 2003 quarter and higher interest rates on
variable rate leases in the 2004 quarter. Asset remarketing income of $3.2
million increased $3.0 million from the 2003 quarter to the 2004 quarter due to
the gain on sale of three aircraft in the 2004 quarter. Other income decreased
$5.0 million primarily attributable to the recognition of previously collected
maintenance deposits in 2003.
Ownership Costs
Components of Air's ownership costs for the quarter ended September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation.................................................................. $ 15.1 $ 14.0
Interest, net................................................................. 10.6 10.0
Operating lease expense....................................................... .9 .9
-------- ---------
Total ownership costs....................................................... $ 26.6 $ 24.9
======== =========
Ownership costs of $26.6 million were $1.7 million higher than the prior
year quarter primarily driven by higher depreciation expense due to new
deliveries of aircraft subsequent to the 2003 quarter and higher
24
interest costs due to higher interest rates in the 2004 quarter.
Other Costs and Expenses
Components of Air's other costs and expenses for the quarter ended
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense............................................................ $ .3 $ .2
Other operating expenses....................................................... .6 .3
Selling, general and administrative............................................ 5.3 3.9
Reversal of provision for possible losses...................................... (.1) (.1)
Asset impairment charges....................................................... -- 5.2
--------- ------
Total other costs and expenses............................................... $ 6.1 $ 9.5
========= ======
Total other costs and expenses of $6.1 million decreased by $3.4 million
from the prior year quarter. The decrease was primarily driven by the absence of
impairment charges in 2004. The impairment charge of $5.2 million in the prior
year quarter was related to an Airbus A310-300 aircraft. SG&A costs were
$1.4 million higher from the 2003 quarter due to higher personnel costs in the
2004 quarter.
Net Income
Air's net income of $5.0 million for the quarter ended September 30, 2004
was $1.6 million higher than the prior year quarter reflecting higher operating
lease income and gains on the sale of three aircraft in the 2004 quarter,
partially offset by higher depreciation and interest expense in the 2004
quarter.
GATX SPECIALTY FINANCE
Gross Income
Components of Specialty's gross income for the quarter ended September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Lease income.............................................................. $ 6.9 $ 10.2
Interest income........................................................... 2.9 9.0
Asset remarketing income.................................................. 1.2 6.5
Gain on sale of securities................................................ .2 5.8
Fees...................................................................... 2.7 .8
Other..................................................................... 1.3 .5
------- -------
Revenues................................................................ 15.2 32.8
Share of affiliates' earnings............................................. 5.8 5.2
------- -------
Total gross income...................................................... $ 21.0 $ 38.0
======= =======
Gross income of $21.0 million was $17.0 million lower than the prior year
quarter. Lease income of $6.9 million was $3.3 million lower than the prior year
quarter primarily due to a decrease in operating lease assets and finance leases
and as a result of the portfolio run-off. Interest income of $2.9 million was
$6.1 million lower than prior year period due to declining venture loan
balances and other loan repayments.
Asset remarketing income of $1.2 million was $5.3 million lower than the
prior year quarter and includes gains from the sale of assets from Specialty's
own portfolio as well as residual sharing fees from the sale of managed assets.
The prior year quarter included a $3.9 million residual sharing fee from the
sale of two managed aircraft.
Gain on sale of securities of $.2 million was $5.6 million lower than the
prior year quarter, which included a $3.3 million gain from one transaction.
Fees of $2.7 million were $1.9 million higher than the prior year quarter due to
higher fees earned from managed portfolios. Other income of $1.3 million was $.8
million higher than the prior year quarter due to foreign currency translation
adjustments associated with certain transactions. These adjustments are largely
offset by the fair value adjustments for
25
derivatives. Share of affiliates' earnings of $5.8 million was $.6 million
higher than the prior year quarter. Higher income from marine affiliates in the
current year is partially offset by prior year income from affiliates that have
since been dissolved.
Ownership Costs
Components of Specialty's ownership costs for the quarter ended September
30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation............................................................. $ 1.1 $ 2.5
Interest, net............................................................ 6.2 10.6
Operating lease expense.................................................. 1.0 1.1
-------- -------
Total ownership costs.................................................. $ 8.3 $ 14.2
======== =======
Ownership costs of $8.3 million were $5.9 million lower than the prior
year quarter due to decreases in depreciation and interest expense. Depreciation
of $1.1 million was $1.4 million lower than prior year quarter due to declining
operating lease assets. Interest expense of $6.2 million was $4.4 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
September 30, 2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Maintenance expense........................................................... $ .2 $ .3
Other operating expenses...................................................... 1.3 1.8
Selling, general and administrative........................................... 2.1 3.7
Reversal of provision for possible losses..................................... (2.9) 2.0
Asset impairment charges...................................................... .3 --
Fair value adjustments for derivatives........................................ .8 .2
-------- -------
Total other costs and expenses.............................................. $ 1.8 $ 8.0
======== =======
Other costs and expenses of $1.8 million were $6.2 million lower than
prior year quarter due to decreases in SG&A expense and provision for losses.
SG&A expense of $2.1 million was $1.6 million lower than prior year
quarter due to lower personnel costs from a reduction in workforce. Specialty
reversed $2.9 million of its allowance for possible losses in the current year
quarter as compared to a provision of $2.0 million in the prior year quarter as
a result of strong credit performance, recoveries, and the declining reservable
asset base.
Net Income
Specialty's net income of $6.4 million for the quarter ended September 30,
2004 was $2.6 million lower than the prior year quarter. Lower asset remarketing
income and a gain on sale of securities combined with the impact of the smaller
portfolio in the current year quarter were partially offset by lower SG&A, a
lower provision for possible losses and higher fees.
OTHER
26
Gross Income
Components of gross income for the quarter ended September 30, 2004 and
2003 are summarized below (in millions):
2004 2003
---- ----
Marine operating revenue......................................................... $ 36.2 $ 27.3
Other............................................................................ 51.3 17.4
-------- -------
Total gross income............................................................. $ 87.5 $ 44.7
======== =======
Gross income of $87.5 million increased $42.8 million over the prior year
quarter primarily due to higher other income related to insurance recoveries and
higher marine operating revenue. In the third quarter of 2004, GFC recognized
income of $45.0 million in settlement of litigation initiated against various
insurers, compared to $12.0 million received in the 2003 period. The improvement
in marine operating revenue was due to additional operating days resulting from
increased demand, a larger fleet, and more favorable operating conditions in the
third quarter compared to the prior year period. Other income includes interest
income on advances to GATX of $6.3 million in the third quarter 2004 compared
to $5.0 million in the prior year period.
Ownership Costs
Components of ownership costs for the quarter ended September 30, 2004 and
2003 are summarized below (in millions):
2004 2003
---- ----
Depreciation................................................................ $ 2.5 $ 1.9
Interest, net............................................................... (1.0) 2.0
Operating lease expense..................................................... (.3) --
------- -------
Total ownership costs..................................................... $ 1.2 $ 3.9
======= =======
Ownership costs of $1.2 million were $2.7 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 September 30,
2004 and 2003 are summarized below (in millions):
2004 2003
---- ----
Marine operating expenses...................................................... $ 27.7 $ 21.8
Other operating expenses....................................................... -- 1.1
Selling, general and administrative............................................ 2.7 10.2
Provision for possible losses.................................................. (.7) (.1)
Asset impairment charges....................................................... -- 3.6
-------- --------
Total other costs and expenses............................................... $ 29.7 $ 36.6
======== ========
Other costs and expenses of $29.7 million were $6.9 million lower than the
prior year quarter primarily due to lower SG&A expense and asset impairment
charges, partially offset by higher marine operating expenses.
Marine operating expenses increased $5.9 million from the prior year
quarter to $27.7 million due to additional operating days of operations compared
to the prior year period. SG&A expense of $2.7 million was $7.5 million lower
than the prior year period due to timing of certain expenses partially offset by
higher consulting expenses associated with the implementation of Section 404 of
the Sarbanes Oxley Act.
The $.7 million and $.1 million reversal of provision for possible losses
recorded in 2004 and 2003 respectively, is consistent with GFC's policy of
targeting an overall allowance for possible losses. The amount not specifically
allocated to the segments remains at Other. Asset impairment charges decreased
$3.6 million from the prior year. The 2003 charge primarily relates to ASC's
off-lakes barge which ceased operations last year.
27
Net Income
Net income at Other of $36.3 million for the third quarter of 2004 was
$34.1 million favorable to the prior year quarter, primarily due to higher
insurance recoveries recognized in the current year quarter.
28
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 to the consolidated financial statements for a summary of new
accounting pronouncements that may impact GFC's business.
CRITICAL ACCOUNTING POLICIES
There have been no changes to GFC's critical accounting policies during
the nine month period ending September 30, 2004; refer to GFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 for a summary of GFC'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 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 rulings that may impact the economic value of assets; competitors in
the rail and air markets who may have access to capital at lower costs than GFC;
additional potential write-downs and/or provisions within GFC's portfolio;
impaired asset charges; and general market conditions in the rail, air,
technology, venture, and other large-ticket industries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 2003, there have been no material changes in GFC's
interest rate and foreign currency exposures or types of derivative instruments
used to hedge these exposures, and no significant changes in underlying market
conditions. For a discussion of the Company's exposure to market risk refer to
Item 7A Quantitative and Qualitative Disclosure about Market Risk contained in
the Company's annual report on Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
GFC management, with the participation of the Chief Executive Officer (the
"CEO") and Chief Financial Officer (the "CFO"), have conducted an evaluation of
the effectiveness of disclosure controls and procedures in accordance with Rule
13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based on
such evaluation, the Company's CEO and CFO have concluded as of the end of the
period covered by this report, that GFC's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure
that information required to be disclosed by GFC in this Quarterly Report on
Form 10-Q has been recorded, processed, summarized, and reported to them in a
timely manner. There have been no significant changes in the Company's internal
controls over financial reporting that occurred during the period covered by
this report that have materially affected or are reasonably likely to materially
affect these controls.
29
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. On September 10, 2004, the court granted the plaintiffs' motion.
GFC had 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 were all Minot residents who are alleged
to have suffered personal injury and property damage as a consequence of the
derailment. The complaints alleged that the plaintiffs sustained damages
including personal injury, emotional and mental damages, evacuation, shelter in
place, property damage, property value diminution, inconvenience and in security
in their property and that the defendants are responsible under various theories
for the alleged injuries. On September 1, 2004, plaintiffs in these eight cases
dismissed GFC without prejudice.
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 alleged that the named plaintiffs were
part of a class that numbers in the hundreds. This complaint alleged that the
plaintiffs sustained damages including personal injury, emotional and mental
damages, property damage, property value diminution, and that the defendants are
responsible under the theories of negligence, nuisance, trespass, strict
liability and negligent and intentional infliction of emotional distress. On
September 1, 2004, the plaintiffs voluntarily dismissed GFC without prejudice
from this case.
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. GFC has not been named in any of theses cases.
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 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.
30
The amounts claimed in some of the above described proceedings are
substantial and the ultimate liability cannot be determined at this time.
However, it is the opinion of management that amounts, if any, required to be
paid by GFC and its subsidiaries in the discharge of such liabilities are not
likely to be material to GFC's consolidated financial position or results of
operations. Adverse court rulings or changes in applicable law could affect
claims made against GFC and its subsidiaries, and increase the number, and
change the nature, of such claims.
31
ITEM 6. EXHIBITS
Exhibits:
Reference is made to the exhibit index which is included herewith
and is incorporated by reference hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATX FINANCIAL CORPORATION
(Registrant)
/s/ Brian A. Kenney
-----------------------------------
Brian A. Kenney
President and
Chief Financial Officer
(Duly Authorized Officer)
Date: November 9, 2004
32
EXHIBIT INDEX
The following exhibits are furnished as part of this quarterly report:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
4A Credit Agreement dated May 18, 2004 between GATX Financial Corporation,
the lenders listed therein, and Citicorp USA, Inc., as Administrative
Agent, incorporated by reference to GATX Corporation's Form 8-K, file
number 001-02328, filed May 25, 2004.
10A Confidential Settlement Agreement and Release dated July 22, 2004 between
GATX Capital Corporation, GATX Aircraft Corporation, GATX New Aircraft
Corporation, GATX/Airlog Company, GATX Airlog Partners I, Frederick L.
Hatton, Sanford P. Burnstein, Airlog Management Corporation, and DMC
Holdings, Ltd., and certain Underwriters at Lloyd's London, and certain
London Market Insurance Companies, incorporated by reference to GATX
Corporation's Form 8-K, file number 001-02328, filed July 30, 2004.
31A Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CEO Certification).
31B Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CFO Certification).
32 Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO
Certification).
99 Certain instruments evidencing long-term indebtedness of GATX Financial
Corporation are not being filed as exhibits to this Report because the
total amount of securities authorized under any such instrument does not
exceed 10% of GATX Financial Corporation's total assets. GATX Financial
Corporation will furnish copies of any such instruments upon request of
the Securities and Exchange Commission.
33