1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2001
Commission File Number
1-2328
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GATX CORPORATION
Incorporated in the
State of New York
IRS Employer Identification No.
36-1124040
500 West Monroe Street
Chicago, IL 60661-3676
(312) 621-6200
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 __
Registrant had 48,604,765 shares of common stock outstanding as of July 31,
2001.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ -------------------------------
2001 2000 2001 2000
------------ ------------- ------------ --------------
GROSS INCOME
Revenues $ 422.6 $ 316.4 $ 778.6 $ 605.4
Share of affiliates' earnings 15.0 26.1 29.9 46.1
------------ ------------- ------------ --------------
TOTAL GROSS INCOME 437.6 342.5 808.5 651.5
OWNERSHIP COSTS
Depreciation and amortization 109.8 79.4 212.9 158.8
Interest, net 68.0 59.4 129.0 113.4
Operating lease expense 48.4 42.9 96.7 83.1
------------ ------------- ------------ --------------
TOTAL OWNERSHIP COSTS 226.2 181.7 438.6 355.3
OTHER COSTS AND EXPENSES
Operating expenses 61.0 52.0 124.1 82.8
Selling, general and administrative 66.3 51.1 123.6 92.2
Provision for possible losses 16.2 2.0 37.5 4.0
Asset impairment charges 30.6 - 30.6 -
Fair value adjustments for derivatives (.7) - .4 -
------------ ------------- ------------ --------------
TOTAL OTHER COSTS AND EXPENSES 173.4 105.1 316.2 179.0
INCOME FROM CONTINUING OPERATIONS BEFORE 38.0 55.7 53.7 117.2
INCOME TAXES
INCOME TAXES 15.5 23.3 26.8 47.2
------------ ------------- ------------ --------------
INCOME FROM CONTINUING OPERATIONS 22.5 32.4 26.9 70.0
DISCONTINUED OPERATIONS
Operating results, net of income taxes (.9) 4.4 1.5 7.4
Gain on sale of portion of segment, net of income
taxes - 4.7 163.9 4.7
------------ ------------- ------------ --------------
TOTAL DISCONTINUED OPERATIONS (.9) 9.1 165.4 12.1
------------ ------------- ------------ --------------
NET INCOME $ 21.6 $ 41.5 $ 192.3 $ 82.1
============ ============= ============ ==============
</Table>
1
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<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------ --------------
PER SHARE DATA
Basic:
Income from continuing operations $ .46 $ .68 $ .56 $ 1.46
(Loss) income from discontinued operations (.01) .19 3.41 .25
------------- ------------- ------------ --------------
Total $ .45 $ .87 $ 3.97 $ 1.71
Average number of common shares
(in thousands) 48,495 47,583 48,378 48,012
Diluted:
Income from continuing operations $ .46 $ .67 $ .55 $ 1.43
(Loss) income from discontinued operations (.02) .19 3.35 .25
------------- ------------- ------------ --------------
Total $ .44 .86 $ 3.90 $ 1.68
Average number of common shares and
common share equivalents (in thousands) 49,287 48,606 49,314 48,892
Dividends declared per common share $ .31 $ .30 $ .62 $ .60
</Table>
(1) The consolidated balance sheet at December 31, 2000 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 and financial
position for the respective periods. Operating results for the six months
ended June 30, 2001 are not necessarily indicative of the results that may
be achieved for the entire year ending December 31, 2001.
(2) Certain amounts in the 2000 financial statements have been reclassified to
conform to the current presentation.
(3) Discontinued operations - Operating results for the former Integrated
Solutions Group segment are shown net of taxes of $.7 million, $2.3
million, $2.1million and $4.4 million, respectively, for the four periods
displayed. The 2001 gain on sale of portion of segment primarily reflects
the sale of substantially all of the company's interest in GATX Terminals
Corporation and its subsidiary companies and is stated net of income taxes
of $195.7 million. The 2000 gain on sale of portion of segment reflects the
sale of 81% of GATX Logistics, Inc. and is stated net of income tax benefit
of $5.7 million.
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GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<Table>
<Caption>
JUNE 30 DECEMBER 31
2001 2000
------------------ ------------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 362.3 $ 173.6
Receivables
Trade accounts 62.5 93.7
Finance leases 1,013.0 878.3
Secured loans 613.3 538.0
Less - allowance for possible losses (111.0) (95.2)
------------------ ------------------
1,577.8 1,414.8
Operating Lease Assets and Facilities
Railcars and service facilities 2,585.9 2,695.3
Operating lease investments and other 1,901.3 1,986.0
Less - allowance for depreciation (1,908.0) (2,027.2)
------------------ ------------------
2,579.2 2,654.1
Investments in Affiliated Companies 1,130.6 951.2
Other Assets 491.1 439.1
Net Assets of Discontinued Operations 36.6 630.9
------------------ ------------------
$ 6,177.6 $ 6,263.7
================== ==================
</Table>
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<Table>
<Caption>
JUNE 30 DECEMBER 31
2001 2000
------------------ ------------------
(Unaudited)
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDERS'
EQUITY
Accounts Payable $ 269.3 $ 317.3
Accrued Expenses 189.6 127.4
Debt
Short-term 184.9 557.2
Long-term:
Recourse 2,955.6 3,093.9
Nonrecourse 639.0 494.2
Capital lease obligations 152.9 164.2
------------------ ------------------
3,932.4 4,309.5
Deferred Income Taxes 450.0 410.8
Other Deferred Items 380.8 309.2
------------------ ------------------
Total Liabilities and Deferred Items 5,222.1 5,474.2
Shareholders' Equity
Preferred stock - -
Common stock 35.3 35.0
Additional capital 379.7 366.1
Reinvested earnings 714.4 552.2
Accumulated other comprehensive loss (44.5) (34.4)
------------------ ------------------
1,084.9 918.9
Less - cost of common shares in treasury (129.4) (129.4)
------------------ ------------------
Total Shareholders' Equity 955.5 789.5
------------------ ------------------
$ 6,177.6 $ 6,263.7
================== ==================
</Table>
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7
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- -----------------------------
2001 2000 2001 2000
------------ ----------- ------------ --------------
OPERATING ACTIVITIES
Income from continuing operations $ 22.5 $ 32.4 $ 26.9 $ 70.0
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (41.1) (10.0) (49.6) (19.7)
Depreciation and amortization 109.8 79.4 212.9 158.8
Provision for possible losses 16.2 2.0 37.5 4.0
Asset impairment charges 30.6 - 30.6 -
Deferred income taxes 5.9 6.0 110.0 35.0
Other, including working capital 22.2 (8.5) (173.5) (53.8)
------------ ----------- ------------ --------------
Net cash provided by continuing operations 166.1 101.3 194.8 194.3
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases (135.9) (158.1) (401.9) (289.3)
Additions to operating lease assets and facilities (62.7) (135.7) (101.7) (291.6)
Secured loans extended (122.9) (102.6) (203.4) (216.5)
Investments in affiliated companies (79.3) (71.6) (220.4) (121.1)
Other investments and progress payments (16.0) (96.4) (129.7) (104.2)
------------ ----------- ------------ --------------
Portfolio investments and capital additions (416.8) (564.4) (1,057.1) (1,022.7)
Portfolio proceeds 277.4 121.2 525.8 220.4
Proceeds from other asset sales 191.4 288.2 196.4 292.6
------------ ----------- ------------ --------------
Net cash provided by (used in) investing activities of
continuing operations 52.0 (155.0) (334.9) (509.7)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 330.0 659.1 392.0 780.8
Repayment of long-term debt (347.9) (551.8) (651.9) (608.7)
Net (decrease) increase in short-term debt (416.8) (121.6) (372.3) 208.8
Repayment of capital lease obligations (3.1) (3.3) (11.3) (9.4)
Issuance (repurchase) of common stock and other 2.4 (14.7) 14.1 (41.2)
Cash dividends (15.1) (14.2) (30.1) (28.7)
------------ ----------- ------------ --------------
Net cash (used in) provided by financing activities of
continuing operations (450.5) (46.5) (659.5) 301.6
NET TRANSFERS FROM (TO) DISCONTINUED OPERATIONS - 8.6 (7.6) (58.4)
------------ ----------- ------------ --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM (232.4) (91.6) (807.2) (72.2)
CONTINUING OPERATIONS
PROCEEDS FROM SALE OF PORTION OF SEGMENT 115.7 74.7 1,144.1 74.7
TAXES PAID ON GAIN FROM SALE OF SEGMENT (148.2) - (148.2) -
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS - (2.0) (12.6) (.2)
------------ ----------- ------------ --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (264.9) $ (18.9) $ 176.1 $ 2.3
============ =========== ============ ==============
</Table>
5
8
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -----------------------------
2001 2000 2001 2000
--------------- ------------ -------------- ------------
Net income $ 21.6 $ 41.5 $ 192.3 $ 82.1
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 20.8 (7.5) 10.2 (20.2)
Unrealized (loss) gain on securities, net of
reclassification adjustments (a) (6.7) (6.3) (20.4) 9.4
Unrealized (loss) gain on derivatives (4.6) -- .1 --
--------------- ------------ -------------- ------------
Other comprehensive income (loss) 9.5 (13.8) (10.1) (10.8)
--------------- ------------ -------------- ------------
COMPREHENSIVE INCOME $ 31.1 $ 27.7 $ 182.2 $ 71.3
=============== ============ ============== ============
(a) Reclassification adjustments:
Unrealized gain (loss) on securities $ .8 $ (1.1) $ (3.6) $ 23.1
Less - reclassification adjustment for gains
realized included in net income (7.5) (5.2) (16.8) (13.7)
--------------- ------------ -------------- ------------
Net unrealized (loss) gain on securities $ (6.7) $ (6.3) $ (20.4) $ 9.4
=============== ============ ============== ============
</Table>
6
9
GATX CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
FINANCIAL GATX CORPORATE INTER
SERVICES RAIL AND OTHER SEGMENT TOTAL
------------- ----------- ------------- ----------- ------------
THREE MONTHS ENDED JUNE 30, 2001
PROFITABILITY
Revenues $ 271.9 $ 151.6 $ 1.2 $ (2.1) $ 422.6
Share of affiliates' earnings 13.6 1.4 - - 15.0
------------- ----------- ------------- ----------- ------------
Total gross income 285.5 153.0 1.2 (2.1) 437.6
Depreciation and amortization 83.8 25.0 .3 .7 109.8
Interest expense (income) 55.9 12.8 (.2) (.5) 68.0
Income (loss) from continuing operations
before income taxes 23.6 19.2 (4.7) (.1) 38.0
Income (loss) from continuing operations 14.3 11.5 (3.2) (.1) 22.5
FINANCIAL POSITION
Debt 3,146.2 716.1 102.3 (32.2) 3,932.4
Equity 586.6 363.8 10.5 (5.4) 955.5
Investments in affiliated companies 1,044.9 85.7 - - 1,130.6
Identifiable assets 4,318.5 1,613.8 264.2 (55.5) 6,141.0
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 127.9 17.8 20.4 -- 166.1
Portfolio proceeds 277.4 - -- -- 277.4
Portfolio investments and capital additions 349.6 67.0 .2 -- 416.8
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000
PROFITABILITY
Revenues $ 173.2 $ 144.3 $ .4 $ (1.5) $ 316.4
Share of affiliates' earnings 25.3 .8 -- -- 26.1
------------- ----------- ------------- ----------- ------------
Total gross income 198.5 145.1 .4 (1.5) 342.5
Depreciation and amortization 53.9 24.5 .4 .6 79.4
Interest expense (income) 43.6 13.8 2.5 (.5) 59.4
Income (loss) from continuing operations
before income taxes 35.4 29.0 (8.5) (.2) 55.7
Income (loss) from continuing operations 21.1 17.9 (6.5) (.1) 32.4
FINANCIAL POSITION AT DECEMBER 31, 2000
Debt 2,923.6 760.3 663.7 (38.1) 4,309.5
Equity 333.4 359.7 101.5 (5.1) 789.5
Investments in affiliated companies 866.8 83.9 .5 -- 951.2
Identifiable assets 3,974.7 1,669.6 64.0 (75.5) 5,632.8
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) continuing
operations 65.9 45.9 (10.5) -- 101.3
Portfolio proceeds 121.2 -- -- -- 121.2
Portfolio investments and capital additions 421.1 143.3 -- -- 564.4
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
7
10
GATX CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
FINANCIAL GATX CORPORATE INTER
SERVICES RAIL AND OTHER SEGMENT TOTAL
------------- ----------- ------------- ----------- ------------
SIX MONTHS ENDED JUNE 30, 2001
PROFITABILITY
Revenues $ 485.6 $ 294.4 $ 2.1 $ (3.5) $ 778.6
Share of affiliates' earnings 27.6 2.3 -- -- 29.9
------------- ----------- ------------- ----------- ------------
Total gross income 513.2 296.7 2.1 (3.5) 808.5
Depreciation and amortization 161.7 49.4 .8 1.0 212.9
Interest expense (income) 111.6 25.7 (7.2) (1.1) 129.0
Income (loss) from continuing operations
before income taxes 42.7 14.2 (3.0) (.2) 53.7
Income (loss) from continuing operations 25.8 7.4 (6.2) (.1) 26.9
FINANCIAL POSITION
Debt 3,146.2 716.1 102.3 (32.2) 3,932.4
Equity 586.6 363.8 10.5 (5.4) 955.5
Investments in affiliated companies 1,044.9 85.7 -- -- 1,130.6
Identifiable assets 4,318.5 1,613.8 264.2 (55.5) 6,141.0
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 117.8 57.4 19.6 -- 194.8
Portfolio proceeds 525.8 - -- -- 525.8
Portfolio investments and capital additions 866.8 190.0 .3 -- 1,057.1
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
PROFITABILITY
Revenues $ 323.2 $ 284.5 $ .6 $ (2.9) $ 605.4
Share of affiliates' earnings 44.2 1.9 -- -- 46.1
------------- ----------- ------------- ----------- ------------
Total gross income 367.4 286.4 .6 (2.9) 651.5
Depreciation and amortization 106.4 50.3 .8 1.3 158.8
Interest expense (income) 81.8 28.5 4.1 (1.0) 113.4
Income (loss) from continuing operations
before income taxes 72.8 58.3 (13.8) (.1) 117.2
Income (loss) from continuing operations 44.0 36.4 (10.3) (.1) 70.0
FINANCIAL POSITION AT DECEMBER 31, 2000
Debt 2,923.6 760.3 663.7 (38.1) 4,309.5
Equity 333.4 359.7 101.5 (5.1) 789.5
Investments in affiliated companies 866.8 83.9 .5 - 951.2
Identifiable assets 3,974.7 1,669.6 64.0 (75.5) 5,632.8
ITEMS AFFECTING CASH FLOW
Net cash provided (used in) continuing
operations 114.3 99.2 (19.2) -- 194.3
Portfolio proceeds 220.4 - -- -- 220.4
Portfolio investments and capital additions 747.7 274.7 .3 -- 1,022.7
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
8
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FIRST SIX MONTHS OF 2001
TO FIRST SIX MONTHS OF 2000
GATX Corporation's net income for the first six months of 2001 was $192.3
million, a $110.2 million increase from the $82.1 million reported for the same
period in 2000. Earnings for the six-month period included a $163.9 million
after-tax gain related to the partial sale of the discontinued Integrated
Solutions Group (ISG) segment, $18.3 million of after-tax asset impairment
charges and $20.2 million of after-tax expense for nonrecurring items. Earnings
per share on a diluted basis increased to $3.90 from $1.68 in the 2000 period.
The ISG segment was comprised of GATX Terminals Corporation (Terminals), GATX
Logistics, Inc. (Logistics), and minor business development efforts. The ISG
segment is no longer considered to be a continuing operation, and its financial
data has been segregated as discontinued operations for all periods presented.
During the first six months of 2001, GATX completed the sale of the majority of
Terminals' domestic operations to Kinder Morgan Energy Partners, L.P. The sale
included substantially all of the domestic terminaling operations, Central
Florida Pipeline Company, and Calnev Pipeline Company. During the six-month
period, GATX also sold substantially all of Terminals' European operations, part
of its Asian operations and its distillate and blending distribution affiliate.
GATX also recognized an additional $4.6 million after-tax gain related to the
sale of Logistics.
Subsequent to June 30, 2001, GATX Corporation completed a realignment of the
legal structure of its subsidiary companies. The new structure combined GATX's
two principal subsidiaries, GATX Rail Corporation and GATX Capital Corporation,
into a single legal entity, GATX Financial Corporation. GATX Rail and GATX
Capital now operate as divisions of GATX Financial Corporation. GATX expects
that this new single entity structure will result in greater scale and liquidity
in the capital markets and lower relative funding costs. The realignment has not
altered the reportable segments of GATX Corporation.
RESULTS OF CONTINUING OPERATIONS
GATX Corporation's gross income from continuing operations of $808.5 million was
$157.0 million higher than the prior year. Income from continuing operations for
the first six months of 2001 was $26.9 million compared to $70.0 million for the
first six months of 2000 with the decrease largely due to the nonrecurring items
and asset impairment charges. Diluted earnings per share from continuing
operations likewise decreased to $.55 from $1.43 for the prior year period.
FINANCIAL SERVICES
Financial Services' gross income of $513.2 million increased $145.8 million from
the prior year period principally due to an increase in lease income generated
from a larger lease portfolio. The increase in lease income was predominately
driven by growth in technology and air assets. During the first six months of
2001, Financial Services acquired a portfolio of technology leases from El
Camino Resources for $372.5 million (which included the assumption of $243.1 of
nonrecourse debt), which contributed significantly to the increase in lease
income. Share of affiliates' earnings of $27.6 million decreased $16.6 million
from last year as higher income from certain air and diversified finance joint
ventures was more than offset by decreases in the telecommunications and rail
joint ventures.
Asset remarketing income includes both gains from the sale of assets from
Financial Services' own portfolio and residual sharing fees from the sale of
managed assets. Asset remarketing income of $64.7 million increased $46.0
million from the prior year period largely due to residual sharing fees from
managed portfolios and the sale of manufacturing-related equipment and air
assets. Gains from the sale of stock derived from warrants received as part of
financing and leasing transactions with non-public start-up companies of $27.6
million grew by $5.0
9
12
million over the prior year. Asset remarketing income and gains from the sale of
stock do not occur evenly from period to period.
Ownership costs of $298.6 million increased $87.5 million compared with the
prior year due to higher depreciation and interest expense. Depreciation and
amortization expense of $161.7 million increased $55.3 million from 2000 and
reflected the higher level of investment in operating lease assets, specifically
technology and air assets. Higher average debt balances associated with funding
the investment activity drove interest expense higher by $29.8 million in 2001.
Selling, general and administrative expenses increased $24.2 million over the
prior year due to higher human resource and administrative expenses associated
with an overall increase in business activity, including the expansion of the
venture finance platform and increased legal expenses.
The provision for possible losses was derived from Financial Services' estimate
of losses based on an assessment of credit, collateral and market risks. The
provision for possible losses of $37.4 million increased $33.4 million from 2000
reflecting the deterioration of certain steel, venture and telecommunications
investments. The allowance for possible losses increased $11.9 million to $102.5
million and was approximately 6.2% of reservable assets, up slightly from 5.9%
at year-end. Reservable assets are defined as direct financing leases, leveraged
leases and secured loans.
Write-offs totaled $25.1 million for the six-month period and included
write-offs of steel, venture and telecommunications investments. Non-performing
assets of $116.3 million increased $24.2 million from year-end primarily due to
telecommunication and venture finance related assets.
Deterioration in the telecommunications portfolio accounted for $30.6 million in
asset impairment charges in the first six months of 2001. During the second
quarter Financial Services' exposure in telecommunications was reduced to
approximately $125 million, down $50 million from the first quarter. The $50
million reduction was comprised of the $30.6 million write-down and
approximately $20 million of principal repayments and amortization. Financial
Services will continue to aggressively reduce the remaining telecommunications
exposure through the end of 2001.
Net income of $25.8 million decreased $18.2 million from last year principally
as a result of an increase to the loss provision, asset impairment charges and
higher interest and SG&A expenses associated with increased investment and
overall business activity.
GATX RAIL (RAIL)
Rail's gross income of $296.7 million for the first six months of 2001 increased
$10.3 million over the prior year period primarily due to the current year
acquisition of Dyrekcja Eksploatacji Cystern (DEC), a Polish tank car fleet and
fuel distribution company. Excluding DEC, rental revenue was down slightly
compared to last year due to a weaker rail market caused in part by the
continued economic downturn. Several industries serviced by Rail, most notably
the chemical industry, are experiencing adverse market conditions that have in
turn reduced railcar demand. Higher natural gas prices, which increased raw
material costs and decreased production expectations for certain chemical
companies, negatively impacted railcar demand in the first quarter. Although
natural gas prices have decreased from the first quarter, demand for chemical
products remains soft, which in turn continues to adversely impact railcar
demand. These factors as well as the impact of increased railroad and shipper
efficiency are expected to continue affecting car demand and lease rates.
Approximately 83,300 railcars were on lease throughout North America at the end
of the second quarter, compared to 85,200 a year ago. Rail's North American
utilization decreased to 91% as of June 30, 2001 from 93% at the end of the
prior year period. Demand for new and used railcars remains soft.
Correspondingly, Rail's new car orders and fleet additions have been scaled
back. Rail's new car order activity was limited to specific customer orders.
Rail's North American fleet totaled 91,600 cars at the end of the second
quarter, up slightly from
10
13
91,500 at the end of the prior year period.
Ownership costs of $146.6 million increased $6.7 million from last year and
include approximately $2 million related to DEC. Although Rail's North American
fleet increased slightly from 2000, depreciation and interest expense decreased
from last year due to Rail's use of sale-leaseback financing. As a result,
operating lease expense increased $10.4 million over the prior year period.
Rail's operating costs included $24.4 million of nonrecurring items, $19.7
million of which related to the closing of its East Chicago repair facility.
Excluding these nonrecurring charges, operating expenses increased $16.2 million
due to higher repair and maintenance expenses attributable to the increased use
of third party contract repair shops as a result of a previously reported labor
dispute at Rail's domestic service centers and repairs of DEC railcars. SG&A
expense increased $7.2 million from the prior year period to $37.0 million due
partly to international business development costs.
Rail's net income of $7.4 million was $29.0 million lower than the prior year
primarily due to closure costs related to its East Chicago repair facility,
unfavorable market conditions and other nonrecurring expenses.
CORPORATE AND OTHER
Corporate and Other net expense was $6.2 million for the first six months of
2001 compared to $10.3 million for the prior year period. The decrease in net
expense was largely due to lower sg&a and net interest expenses partially offset
by a $4.0 million tax charge related to the company's corporate-owned life
insurance program. This incremental tax charge contributed significantly to the
increase in the effective tax rate as compared to the prior year. The decrease
in net interest expense reflected the utilization of the proceeds from the sale
of ISG. The six-month period in 2000 included a favorable settlement of an
environmental claim.
RESULTS OF DISCONTINUED OPERATIONS
The ISG segment was comprised of Terminals, Logistics, and minor business
development efforts. The ISG segment is no longer considered to be a continuing
operation, and its financial data has been segregated as discontinued operations
for all periods presented.
GATX sold 81% of Logistics in May 2000 and the remaining 19% in December 2000.
In March 2001, GATX sold the majority of Terminals' domestic operations to
Kinder Morgan Energy Partners, L.P. The sale included substantially all of
Terminals' domestic terminaling operations, the Central Florida Pipeline Company
and Calnev Pipeline Company. In the first quarter of 2001, GATX sold
substantially all of Terminals' European operations. In the second quarter,
Terminals sold part of its Asian operations and its distillate and blending
distribution affiliate. Additionally, in the first quarter GATX divested various
smaller supply chain businesses. A net after-tax gain of $163.9 million was
recognized on the sales of ISG assets in the first six months of 2001. GATX
expects to complete the divestiture of Terminals' remaining assets in 2001.
Operating results for the first six months of 2001 were $1.5 million, down $5.9
million from the prior year period. Comparisons between periods were affected by
the timing of the sale of various ISG assets. Terminals' operations generated
income of $2.7 million in the first half of 2001, compared to income of $13.5
million in the first six months of 2000. All other ISG operations generated a
combined loss of $1.2 million in the first six months of 2001, compared to a
loss of $6.1 million in the comparable prior year period.
Terminals owned 25.1% of the common stock of Olympic Pipeline Company (Olympic).
On June 10, 1999, a pipeline rupture and explosion occurred on one of the
pipelines owned by Olympic. Several lawsuits have been filed against Olympic and
its operator. On September 20, 2000, Terminals sold its entire 25.1% ownership
of Olympic's common stock to the Pipelines Business Unit of BP Amoco PLC.
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CASH FLOW AND LIQUIDITY
Net cash provided by continuing operations for the first six months of 2001 was
$194.8 million and was comparable to the prior year period. Income adjusted for
non-cash items generated $368.3 million of cash in the first six months of 2001,
an increase of $120.2 million over the 2000 period, primarily due to increased
deferred taxes, provision for losses and asset impairment charges. The decrease
in other is primarily due to litigation settlements at Financial Services. All
cash received from asset dispositions (excluding the proceeds from the sale of
the ISG segment), including gain and return of principal, is included in
investing activities as portfolio proceeds or other asset sales.
Portfolio proceeds of $525.8 million increased $305.4 million from the
comparable 2000 period primarily due to an increase in the remarketing of
manufacturing-related equipment and air assets, loan principal received and
return of capital distributions from air and telecommunications joint venture
investments. Proceeds from other asset sales include $189.2 million from the
sale-leaseback of railcars at Rail. Proceeds of $1,144.1 million from the sale
of a portion of a and the $148.2 million taxes paid were related to the sale of
various ISG assets.
Portfolio investments and capital additions for the first six months of 2001
totaled $1,057.1 million, an increase of $34.4 million from the first six months
of 2000. Portfolio investments and capital additions at Financial Services of
$866.8 million were $119.1 million higher than the prior year and primarily
reflect investments in technology, venture and air assets and joint ventures.
During the first six months of 2001, Financial Services acquired a portfolio of
technology leases from El Camino Resources for $372.5 million (which included
the assumption of $243.1 of nonrecourse debt). Rail invested $190.0 million in
the first six months of 2001, which included approximately $95.8 million for the
acquisition of DEC, a Polish tank car fleet and fuel distribution company.
Reflective of current market conditions, Rail's investment in its railcar fleet
was $177.6 million lower than the prior year period. Railcar additions are not
anticipated to exceed prior year activity. Future portfolio investments and
capital additions will be dependent on market conditions and opportunities to
acquire desirable assets. Internally generated cash flows, proceeds from asset
sales, including the sale of ISG assets, and GATX's external financing sources
will be used to fund portfolio investments and capital additions.
GATX used $659.5 million in cash from financing activities of continuing
operations in the first six months of 2001 primarily to pay down debt. A portion
of the proceeds from the sale of Terminals was utilized to repay both short-term
and long-term obligations. Through its subsidiaries, GATX issued $392.0 million
of long-term debt.
GATX, through its subsidiaries, had available unused committed lines of credit
amounting to $810.0 million at June 30, 2001. Additionally, GATX, through its
subsidiaries has a shelf registration for $1.0 billion of which $600 million had
been issued through June 30, 2001.
OTHER MATTERS
Effective January 1, 2001, GATX adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. The statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the qualified nature of the hedge, changes in fair value of the derivative
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive loss. The change in fair value of the ineffective portion of a
hedge will be immediately recognized in earnings.
Financial Services frequently obtains stock and warrants from non-public,
venture capital-backed companies in
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connection with its financing activities. Under previous accounting guidance,
both the stock and warrants were generally accounted for as available-for-sale
securities in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, with changes in fair value recorded as unrealized
gain or loss in other comprehensive loss in the equity section of the balance
sheet. Upon adoption of SFAS No. 133, as amended, these warrants are to be
accounted for as derivatives, with prospective changes in fair value recorded in
current earnings. Stock will continue to be accounted for in accordance with
SFAS No. 115.
Apart from warrants, GATX uses interest rate and currency swap agreements, and
forward sale agreements, as hedges to manage its exposure to interest rate and
currency exchange rate risk on existing and anticipated transactions. To qualify
for hedge accounting under previous accounting guidance, the derivative
instrument must be identified with and reduce the risk arising from a specific
transaction. Interest income or expense on interest rate swaps was accrued and
recorded as an adjustment to the interest income or expense related to the
hedged item. Realized and unrealized gains on currency swaps were deferred and
included in the measurement of the hedged investment over the term of the
contract. Fair value changes arising from forward sale agreements were deferred
in the investment section of the balance sheet and recognized as part of other
comprehensive loss in stockholder's equity. The adoption of SFAS No. 133
resulted in $.4 million being recognized as expense in the consolidated
statement of income and $.1 million of unrealized gain in other comprehensive
loss.
In June 2001, the Financial Accounting Standards Board issues SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment testing in
accordance with the statements. Other intangible assets will continue to be
amortized over their useful lives.
GATX will apply the new rules on accounting for goodwill and other intangible
assets beginning the first quarter of 2002. Application of the nonamortization
provisions of the statement is expected to result in an increase in pretax
income from continuing operations of approximately $9.0 million per year. During
2002, GATX will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002, and has not yet
determined what the impact, if any, such tests will have on the earnings and
financial position of the company.
Certain statements in Management's Discussion and Analysis constitute
forward-looking statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. This information may involve
risks and uncertainties that could cause actual results to differ materially
from those suggested in 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. These risks and uncertainties include, but are not limited to general
economic conditions, strength of the railcar market, railcar lease rate and
utilization levels, dynamics (including natural gas prices) affecting customers
within the chemical, petroleum and food industries and general market conditions
in the air, telecommunications, venture and technology industries.
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COMPARISON OF SECOND QUARTER 2001
TO SECOND QUARTER 2000
Second quarter net income was $21.6 million or $.44 per share on a diluted per
share basis compared to $41.5 million or $.86 per share on a diluted basis in
the prior year period. For the second quarter 2001 income from continuing
operations was $22.5 million or $.46 per share on a diluted basis as compared to
$32.4 million or $.67 per share on a diluted basis in the prior year period.
Except for the nonrecurring charges at Rail and the acquisition of the El Camino
Resources portfolio, changes in gross income, expenses and net income between
second quarter 2001 and second quarter 2000 for both continuing and discontinued
operations, were principally due to the reasons described above in relation to
the six-month period.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 25, 2001 a suit was filed in Civil District Court for the Parish of
Orleans, State of Louisiana, in the matter styled Joseph A. Schnieder, et al.
vs. CSX Transportation, Inc., Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The
Public Belt Railroad Commission For The City Of New Orleans, GATX Corporation,
GATX Capital Corporation, The City of New Orleans, and The Alabama Great
Southern Railroad Company, Number 2001-8924. The suit asserts that on May 25,
2000 tank car GATX 16770 leaked the fumes of its cargo, Dimethyl Sulfide, in a
residential area in the western part of the City of New Orleans and that the
tank car was subsequently taken by defendant New Orleans Public Belt Railroad to
another location in the City of New Orleans, where it was later repaired. The
plaintiffs are seeking compensation for alleged personal injuries and property
damages.
During the period from May, 2000 through April, 2001 twenty-two (22) law suits
were filed seeking damages in connection with a May 3, 2000 incident in which a
Burlington Northern Santa Fe Railway Company (Burlington Northern) train,
proceeding through the Louisiana town of New Iberia, derailed several of its
cars. One of the derailed cars was a tank car owned by the GATX Rail division
(Rail) of GATX Financial Corporation, with a cargo of Xylene, which overturned
in the derailment and ruptured when it was struck by an adjacent car. There was
no fire or explosion. Some five hours later, after approximately 500 to 700
gallons of the Xylene had escaped, the rupture in the tank car was plugged.
Additionally, hopper cars, not owned by Rail, were overturned and the material
they contained, Polyvinyl Chloride, was released. The following cases have been
filed in the United States District Court for the Western District of Louisiana:
David Theriot, et al v. The Burlington Northern and Santa Fe Railway Co., et al
(No. CV00-1097), David Theriot, et al v. The Burlington Northern and Santa Fe
Railway Co., et al (No. CV01-0861), Janice Olivier, et al v. The Burlington
Northern and Santa Fe Railway Co., et al (No. CV00-1561), Ethel Taylor, et al v.
The Burlington Northern and Santa Fe Railway Co., et al (No. CV00-1436), Arthur
Gregoire, III, et al v. The Burlington Northern and Santa Fe Railway Co., et al
(No. CV00-1188), Peggy Jerac, et al v. The Burlington Northern and Santa Fe
Railway Co., et al (No. CV00-1155), Kenneth Estilette, et al v. The Burlington
Northern and Santa Fe Railway Co., et al (No. CV00-1170), Gloria Berry, et al v.
The Burlington Northern and Santa Fe Railway Co., et al (No. CV00-1141), Mary
Viltz, et al v. The Burlington Northern and Santa Fe Railway Co., et al (No.
CV00-1140), The Burlington Northern and Santa Fe Railway Co. v. General American
Transportation Co., et al (No. CV01-0797), Nelson J. Badeaux, et al v. The
Burlington Northern and Santa Fe Railway Co., et al (No. CV01-0794), Joseph
Rochelle, et al v. The Burlington Northern and Santa Fe Railway Co., et al (No.
CV01-0877), Walter Thompson, et al v. The Burlington Northern and Santa Fe
Railway Co., et al (No. CV01-0878), John H. Bell, et al v. The Burlington
Northern and Santa Fe Railway Co., et al (No. CV01-0876). The remainder of the
cases are filed in the 16th Judicial District Court for the Parish of Iberia,
State of Louisiana as follows: Rebecca Hammons v. The Burlington Northern and
Santa Fe Railway Co., et al, (No. 95710), Phillip Walker v. The Burlington
Northern and Santa Fe Railway Co., et al (No. 95712), Serella M. Adams, et al v.
The Burlington Northern and Santa Fe Railway Co., et al (No. 95711), Barry
Bennett v. The Burlington Northern and Santa Fe Railway Co., et al (No. 95718),
Tiny Vallian, et al v. The Burlington Northern and Santa Fe Railway Co., et al
(No. 95861), Edward Martin v. The Burlington Northern and Santa Fe Railway Co.,
et al (No. 95665), Janelle Allen, et al v. The Burlington Northern and Santa Fe
Railway Co., et al (No. 95723), Vernice Johnson, et al v. The Burlington
Northern and Santa Fe Railway Co., et al (No. 95617). The
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suits collectively name about 112 plaintiffs and some assert that a class should
be certified. The Company and certain of the predecessor companies of GATX
Financial Corporation were not added as defendants until May of 2001; however,
discovery and motions with regard to both class certification and remand have
been stayed since August of 2000. The federal court has been supervising a
mediation process that is ongoing at present. No date is presently set for the
next mediation session, but it is anticipated to occur during September or
October, 2002. If the mediation is unsuccessful, it is anticipated that
litigation will actively proceed and that discovery, the litigating of motions
to remand and for class certification and other such activities will commence
GATX and its subsidiaries are engaged in various other matters of litigation and
have a number of unresolved claims pending, including proceedings under
governmental laws and regulations related to environmental matters. While the
amounts claimed are substantial and the ultimate liability with respect to such
litigation and claims cannot be determined at this time, it is the opinion of
management that amounts, if any, required to be paid by GATX and its
subsidiaries in the discharge of such liabilities are not likely to be material
to GATX's consolidated financial position or results of operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PAGE
(a) 11A Computation of Basic Net Income Per Share of Common Stock. 17
11B Computation of Diluted Net Income Per Share of Common Stock. 18
(b) Form 8-K filed on May 16, 2001 reporting GATX Corporation's plan to
realign the legal structure of its subsidiary companies, GATX Capital
Corporations and GATX Rail Corporation.
Form 8-K filed on July 27, 2001 reporting second quarter 2001 results.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATX CORPORATION
(Registrant)
/s/ Brian A. Kenney
-------------------------------------
Brian A. Kenney
Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: August 10, 2001
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