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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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
<Table>
For the Quarterly Period Ended Commission File Number
September 30, 2001 1-2328
</Table>
---------------------
GATX CORPORATION
<Table>
Incorporated in the IRS Employer Identification No.
State of New York 36-1124040
</Table>
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 48,673,895 shares of common stock outstanding as of October
31, 2001.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
GROSS INCOME
Revenues $ 363.9 $ 347.6 $1,142.5 $ 953.0
Share of affiliates' earnings 5.3 16.7 35.2 62.8
-------- -------- -------- --------
TOTAL GROSS INCOME 369.2 364.3 1,177.7 1,015.8
OWNERSHIP COSTS
Depreciation and amortization 103.3 81.2 316.2 240.0
Interest, net 63.5 62.7 192.5 176.1
Operating lease expense 51.8 47.6 148.5 130.7
-------- -------- -------- --------
TOTAL OWNERSHIP COSTS 218.6 191.5 657.2 546.8
OTHER COSTS AND EXPENSES
Operating expenses 54.5 52.9 178.6 135.7
Selling, general and administrative 55.1 54.6 178.7 146.8
Provision for possible losses 24.4 4.6 61.9 8.6
Asset impairment charges 39.3 - 69.9 -
Reversal of litigation provision (13.1) - (13.1) -
Fair value adjustments for derivatives 1.9 - 2.3 -
-------- -------- -------- --------
TOTAL OTHER COSTS AND EXPENSES 162.1 112.1 478.3 291.1
-------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (11.5) 60.7 42.2 177.9
INCOME TAXES (BENEFIT) (4.2) 23.1 22.6 70.3
-------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS (7.3) 37.6 19.6 107.6
DISCONTINUED OPERATIONS
Operating results, net of taxes - 7.5 1.5 14.9
Gain on sale of portion of segment, net of taxes - - 163.9 4.7
-------- -------- -------- --------
TOTAL DISCONTINUED OPERATIONS - 7.5 165.4 19.6
-------- -------- -------- --------
NET (LOSS) INCOME $ (7.3) $ 45.1 $ 185.0 $ 127.2
======== ======== ======== ========
See notes to consolidated financial statements.
1
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
PER SHARE DATA
Basic:
(Loss) income from continuing operations $ (.15) $ .79 $ .41 $ 2.24
Income from discontinued operations - .16 3.41 .41
---------- ---------- ---------- ----------
Total $ (.15) $ .95 $ 3.82 $ 2.65
========== ========== ========== ==========
Average number of common shares
(in thousands) 48,615 47,541 48,455 47,885
Diluted:
(Loss) income from continuing operations $ (.15) $ .78 $ .40 $ 2.21
Income from discontinued operations - .15 3.35 .40
---------- ---------- ---------- ----------
Total $ (.15) $ .93 $ 3.75 $ 2.61
========== ========== ========== ==========
Average number of common shares and
common share equivalents (in thousands) 48,615 48,673 49,317 48,763
Dividends declared per common share $ .31 $ .30 $ .93 $ .90
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 289.6 $ 173.6
Receivables
Trade accounts 63.9 93.7
Finance leases 988.9 878.3
Secured loans 607.9 538.0
Less - allowance for possible losses (111.0) (95.2)
-------- --------
1,549.7 1,414.8
Operating Lease Assets and Facilities
Railcars and service facilities 2,588.8 2,695.3
Operating lease investments and other 1,963.0 1,986.0
Less - allowance for depreciation (1,927.9) (2,027.2)
-------- --------
2,623.9 2,654.1
Investments in Affiliated Companies 1,030.0 951.2
Other Assets 626.3 439.1
Net Assets of Discontinued Operations - 630.9
-------- --------
$6,119.5 $6,263.7
======== ========
3
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
(Unaudited)
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDERS'
EQUITY
Accounts Payable $ 270.1 $ 317.3
Accrued Expenses 179.9 127.4
Debt
Short-term 274.7 557.2
Long-term:
Recourse 2,969.8 3,093.9
Nonrecourse 585.4 494.2
Capital lease obligations 148.1 164.2
-------- --------
3,978.0 4,309.5
Deferred Income Taxes 446.4 410.8
Other Deferred Items 329.3 309.2
-------- --------
Total Liabilities and Deferred Items 5,203.7 5,474.2
Shareholders' Equity
Preferred stock - -
Common stock 35.5 35.0
Additional capital 383.2 366.1
Reinvested earnings 692.1 552.2
Accumulated other comprehensive loss (65.6) (34.4)
-------- --------
1,045.2 918.9
Less - cost of common shares in treasury (129.4) (129.4)
-------- --------
Total Shareholders' Equity 915.8 789.5
-------- --------
$6,119.5 $6,263.7
======== ========
See notes to consolidated financial statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
OPERATING ACTIVITIES
(Loss) income from continuing operations $ (7.3) $ 37.6 $ 19.6 $ 107.6
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (17.7) (19.4) (67.2) (37.8)
Gains on sales of securities (7.5) (11.8) (35.1) (34.4)
Depreciation and amortization 103.3 81.2 316.2 240.0
Provision for possible losses 24.4 4.6 61.9 8.6
Asset impairment charges 39.3 - 69.9 -
Deferred income taxes 3.5 22.1 113.5 57.1
Reversal of litigation provision (13.1) - (13.1) -
Payments related to litigation settlement (45.0) - (141.0) -
Other, including working capital (38.9) (15.7) (88.9) (70.8)
-------- -------- -------- --------
Net cash provided by continuing operations 41.0 98.6 235.8 270.3
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases (185.3) (121.0) (587.2) (412.6)
Additions to operating lease assets and facilities (43.2) (72.6) (144.9) (361.9)
Secured loans extended (50.3) (122.0) (253.7) (338.5)
Investments in affiliated companies (62.7) (39.8) (283.1) (160.9)
Other investments and progress payments (80.3) (9.3) (210.0) (113.5)
-------- -------- -------- --------
Portfolio investments and capital additions (421.8) (364.7) (1,478.9) (1,387.4)
Portfolio proceeds 254.2 183.9 780.0 426.9
Proceeds from other asset sales 6.3 5.0 202.7 297.6
-------- -------- -------- --------
Net cash used in investing activities of
continuing operations (161.3) (175.8) (496.2) (662.9)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 90.8 630.0 482.8 1,410.8
Repayment of long-term debt (135.9) (103.0) (787.8) (711.7)
Net increase (decrease) in short-term debt 89.8 (436.4) (282.5) (227.6)
Repayment of capital lease obligations (4.8) (5.3) (16.1) (14.7)
Issuance (repurchase) of common stock and other 3.5 5.4 17.6 (35.8)
Cash dividends (15.0) (14.3) (45.1) (43.0)
-------- -------- -------- --------
Net cash provided by (used in) financing activities of
continuing operations 28.4 76.4 (631.1) 378.0
NET TRANSFERS (TO) FROM DISCONTINUED OPERATIONS (21.7) 14.9 (29.3) (43.5)
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (113.6) 14.1 (920.8) (58.1)
PROCEEDS FROM SALE OF PORTION OF SEGMENT 40.9 - 1,185.0 74.7
TAXES PAID ON GAIN FROM SALE OF SEGMENT - - (148.2) -
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS - (.9) (12.6) (1.1)
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (72.7) $ 13.2 $ 103.4 $ 15.5
======== ======== ======== ========
See notes to consolidated financial statements.
5
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
Net (loss) income $ (7.3) $ 45.1 $185.0 $127.2
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment (13.5) (10.3) (3.3) (30.5)
Unrealized (loss) gain on securities, net of
reclassification adjustments (a) (5.2) 12.8 (25.6) 22.2
Unrealized loss on derivatives (2.4) - (2.3) -
------ ------ ------ ------
Other comprehensive (loss) income (21.1) 2.5 (31.2) (8.3)
------ ------ ------ ------
COMPREHENSIVE (LOSS) INCOME $(28.4) $ 47.6 $153.8 $118.9
====== ====== ====== ======
(a) Reclassification adjustments:
Unrealized (loss) gain on securities $ (.6) $ 20.0 $ (4.2) $ 43.1
Less - reclassification adjustment for gains
realized included in net income (4.6) (7.2) (21.4) (20.9)
------ ------ ------ ------
Net unrealized (loss) gain on securities $ (5.2) $ 12.8 $(25.6) $ 22.2
====== ====== ====== ======
See notes to consolidated financial statements.
6
GATX CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 three months
and nine months ended September 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 zero, $4.6 million, $2.1
million and $9.2 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 net of 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 net of a tax benefit of $5.7 million.
(4) GATX and its subsidiaries are engaged in various 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.
(5) The contractual commitments of GATX's subsidiaries consist primarily of
scheduled aircraft acquisitions. Aggregate funding needed for contractual
commitments at September 30, 2001 was approximately $1.4 billion comprised
as follows: $324.8 million in the fourth quarter of 2001, $675.8 million in
2002, $248.4 million in 2003, and $189.5 million in 2004.
(6) GATX and its subsidiaries are parties to letters of credit and bonds
totaling $26.7 million at September 30, 2001. In GATX's past experience,
virtually no claims have been made against these financial instruments.
(7) GATX and its subsidiaries had $317.2 million of residual and rental
guarantees outstanding at September 30, 2001. Based on known and expected
market conditions, GATX does not believe that the guarantees will result in
any adverse financial impact to GATX.
7
GATX CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
FINANCIAL GATX CORPORATE INTER
SERVICES RAIL AND OTHER SEGMENT TOTAL
--------- -------- --------- -------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2001
- -------------------------------------
PROFITABILITY
Revenues $ 218.7 $ 146.9 $ .6 $ (2.3) $ 363.9
Share of affiliates' earnings 7.0 (1.7) - - 5.3
-------- -------- -------- -------- --------
Total gross income 225.7 145.2 .6 (2.3) 369.2
Depreciation and amortization 77.8 25.3 .2 - 103.3
Interest expense (income) 49.5 9.8 4.7 (.5) 63.5
Operating lease expense 11.7 40.9 .8 (1.6) 51.8
(Loss) income from continuing operations
before income taxes (18.6) 17.6 (10.5) - (11.5)
(Loss) income from continuing operations (11.2) 11.0 (7.1) - (7.3)
FINANCIAL POSITION
Debt 3,205.3 746.7 70.3 (44.3) 3,978.0
Equity 570.6 360.2 (9.8) (5.2) 915.8
Investments in affiliated companies 943.0 87.0 - - 1,030.0
Identifiable assets 4,312.9 1,633.1 229.3 (55.8) 6,119.5
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) continuing
operations 31.8 18.6 (9.4) - 41.0
Portfolio proceeds 254.2 - - - 254.2
Portfolio investments and capital additions 381.2 40.6 - - 421.8
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000
- -------------------------------------
PROFITABILITY
Revenues $ 202.9 $ 144.5 $ .6 $ (.4) $ 347.6
Share of affiliates' earnings 16.0 .7 - - 16.7
-------- -------- -------- -------- --------
Total gross income 218.9 145.2 .6 (.4) 364.3
Depreciation and amortization 56.2 24.2 .3 .5 81.2
Interest expense 47.8 13.0 1.6 .3 62.7
Operating lease expense 12.0 35.6 3.1 (3.1) 47.6
Income (loss) from continuing operations
before income taxes 42.8 25.6 (7.7) - 60.7
Income (loss) from continuing operations 26.1 15.9 (4.4) - 37.6
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 continuing operations 64.4 25.6 8.6 - 98.6
Portfolio proceeds 183.9 - - - 183.9
Portfolio investments and capital additions 293.4 71.1 .2 - 364.7
- -----------------------------------------------------------------------------------------------------------
8
GATX CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
FINANCIAL GATX CORPORATE INTER
SERVICES RAIL AND OTHER SEGMENT TOTAL
--------- -------- --------- -------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2001
- ------------------------------------
PROFITABILITY
Revenues $ 704.3 $ 441.3 $ 2.7 $ (5.8) $1,142.5
Share of affiliates' earnings 34.6 .6 - - 35.2
-------- -------- -------- -------- --------
Total gross income 738.9 441.9 2.7 (5.8) 1,177.7
Depreciation and amortization 239.5 74.7 1.0 1.0 316.2
Interest expense (income) 161.1 35.5 (2.5) (1.6) 192.5
Operating lease expense 37.0 112.4 3.0 (3.9) 148.5
Income (loss) from continuing operations
before income taxes 24.1 31.8 (13.5) (.2) 42.2
Income (loss) from continuing operations 14.6 18.4 (13.3) (.1) 19.6
FINANCIAL POSITION
Debt 3,205.3 746.7 70.3 (44.3) 3,978.0
Equity 570.6 360.2 (9.8) (5.2) 915.8
Investments in affiliated companies 943.0 87.0 - - 1,030.0
Identifiable assets 4,312.9 1,633.1 229.3 (55.8) 6,119.5
ITEMS AFFECTING CASH FLOW
Net cash provided by continuing operations 149.6 76.0 10.2 - 235.8
Portfolio proceeds 780.0 - - - 780.0
Portfolio investments and capital additions 1,248.0 230.6 .3 - 1,478.9
- ---------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------
PROFITABILITY
Revenues $ 526.1 $ 429.0 $ 1.2 $ (3.3) $ 953.0
Share of affiliates' earnings 60.2 2.6 - - 62.8
-------- -------- -------- -------- --------
Total gross income 586.3 431.6 1.2 (3.3) 1,015.8
Depreciation and amortization 162.6 74.5 1.1 1.8 240.0
Interest expense (income) 129.6 41.5 5.7 (.7) 176.1
Operating lease expense 34.9 96.7 3.1 (4.0) 130.7
Income (loss) from continuing operations
before income taxes 115.6 83.9 (21.5) (.1) 177.9
Income (loss) from continuing operations 70.1 52.3 (14.7) (.1) 107.6
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 156.1 124.7 (10.5) - 270.3
Portfolio proceeds 426.9 - - - 426.9
Portfolio investments and capital additions 1,041.1 345.8 .5 - 1,387.4
- ---------------------------------------------------------------------------------------------------------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST NINE MONTHS OF 2001
TO FIRST NINE MONTHS OF 2000
GATX Corporation's net income for the first nine months of 2001 was $185.0
million, a $57.8 million increase from the $127.2 million reported for the same
period in 2000. Earnings for the nine-month period included a $163.9 million
after-tax gain related to the sale of substantially all of the discontinued
Integrated Solutions Group (ISG) segment, $80.4 million of after-tax asset
impairment and loss provision charges and $12.2 million of after-tax net expense
for nonrecurring items, which included an $8.0 million reversal of a litigation
reserve created in 2000. Earnings per share on a diluted basis increased to
$3.75 from $2.61 in the 2000 period.
As of September 30, 2001, the sale of the ISG segment was substantially
complete. The ISG segment was comprised of GATX Terminals Corporation
(Terminals), GATX Logistics, Inc. (Logistics), and minor business development
efforts. Financial data for the ISG segment has been segregated as discontinued
operations for all periods presented.
In August 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. The realignment did not alter the
reportable segments of GATX Corporation.
RESULTS OF CONTINUING OPERATIONS
GATX Corporation's gross income from continuing operations of $1,177.7 million
was $161.9 million higher than the prior year. Income from continuing operations
for the first nine months of 2001 was $19.6 million compared to $107.6 million
for the first nine months of 2000 with the decrease largely due to loss
provision and asset impairment charges at Financial Services and various
nonrecurring items. Diluted earnings per share from continuing operations
likewise decreased to $.40 from $2.21 in the prior year period.
FINANCIAL SERVICES
Financial Services' gross income of $738.9 million increased $152.6 million from
the prior year period principally due to an increase in interest and lease
income generated from a larger investment portfolio. The increase in lease
income was predominately driven by growth in technology assets. In the first
quarter 2001, Financial Services acquired a portfolio of technology leases from
El Camino Resources for $372.5 million (which included the assumption of $256.0
million of nonrecourse debt), which contributed $102.0 million to the increase
in lease income.
Asset remarketing income included both gains from the sale of assets from
Financial Services' owned portfolio and residual sharing fees from the sale of
managed assets. Asset remarketing income of $85.1 million increased $45.6
million from the prior year period largely due to residual sharing fees from
managed portfolios and the sale of manufacturing-related equipment, technology
and air assets. Gains from the sale of stock derived from warrants received as
part of financing and leasing transactions with non-public companies was $35.1
million, up slightly from $34.4 million in the prior year. Asset remarketing
income and gains from the sale of stock do not occur evenly from period to
period.
Share of affiliates' earnings of $34.6 million decreased $25.6 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. Current period earnings from telecommunications affiliates were
negatively impacted by $22.8 million in loss provision and asset impairment
charges.
Ownership costs of $437.6 million increased $110.5 million compared with the
prior year due to higher
10
depreciation and interest expense. Depreciation and amortization expense of
$239.5 million increased $76.9 million from 2000 reflecting the higher level of
investment in operating lease assets, specifically technology and rail assets.
Higher average debt balances associated with funding new investment activity
drove interest expense higher by $31.5 million in 2001. Selling, general and
administrative (SG&A) expenses increased $22.4 million over the prior year due
to higher human resource and administrative expenses associated with an overall
increase in business activity and increased legal expenses associated with the
Airlog litigation. This increase was partially offset by a reduction in
incentive compensation. The reversal of litigation provision of $13.1 million
relates to the Airlog litigation, which was settled in the 2001 third quarter.
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 $61.7 million increased $53.1 million from 2000
and reflects the current weakness in the economy and the deterioration of
certain venture, steel and telecommunications investments. The allowance for
possible losses increased $12.8 million from December 31, 2000 to $103.4 million
and was approximately 6.2% of reservable assets, up from 5.9% at year-end.
Reservable assets are defined as direct financing leases, leveraged leases and
secured loans.
Write-offs of reservable assets totaled $48.9 million for the nine-month period
and included write-offs of steel, venture, telecommunications and other
diversified finance investments.
Deterioration in the nonreservable portion of the telecommunications portfolio
accounted for $67.3 million in asset impairment charges in the first nine months
of 2001. During the third quarter, Financial Services' exposure in
telecommunications was reduced to approximately $70.0 million, or approximately
1% of GATX total assets, a decrease of $55.0 million from the second quarter.
Non-performing assets of $139.7 million increased $47.6 million from year-end
primarily due to weakness in the telecommunications, venture and diversified
finance markets.
Net income of $14.6 million decreased $55.5 million from last year principally
as a result of an increase to the loss provision and asset impairment charges.
GATX RAIL (RAIL)
Rail's gross income of $441.9 million for the first nine months of 2001
increased $10.3 million over the prior year period, of which $18.8 million was
due to the current year acquisition of Dyrekcja Eksploatacji Cystern (DEC), a
Polish tank car fleet and fuel distribution company. Excluding DEC, rental
revenue of $396.2 million was down $7.9 million compared to last year due to a
weaker rail market caused 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 and lease rate
pricing. Share of affiliates' earnings of $0.6 million decreased $2.0 million
from the same period in the prior year primarily due to nonrecurring accounting
adjustments.
Rail's North American fleet totaled 91,700 cars at the end of the third quarter,
down slightly from 92,000 at the end of the prior year period. Approximately
83,000 railcars were on lease throughout North America at the end of the third
quarter, compared to 85,400 a year ago. Rail's North American utilization
decreased to 91% as of September 30, 2001 compared to 93% at the end of the
prior year period. Railcar demand remains soft and this trend is expected to
continue into 2002. New car orders have been limited to specific customer
requests.
Ownership costs, including interest, depreciation, and operating lease expense,
of $222.6 million increased $9.9 million from last year and include
approximately $8.0 million of costs related to DEC. Excluding the impact of DEC,
the $1.9 million increase in ownership costs from the prior year period
primarily reflects Rail's use of sale-leaseback financing and lower investment
volume.
11
Rail's operating costs included $24.4 million of nonrecurring items, of which
$19.7 million related to the closing of its East Chicago repair facility.
Excluding these nonrecurring charges, operating expenses increased $18.8 million
due to higher repair and maintenance expenses attributable to repairs of DEC
railcars and the increased use of third party contract repair shops as a result
of a labor dispute at Rail's domestic service centers. The labor dispute was
resolved in the first quarter of 2001. SG&A expenses increased $8.5 million from
the prior year period to $54.3 million due to the addition of DEC and
international business development costs.
Rail's net income of $18.4 million was $33.9 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 $13.3 million for the first nine months of
2001 compared to $14.7 million for the prior year period. The decrease in net
expense was largely due to lower SG&A and net interest expense which in turn was
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 nine-month period in 2000 included a $2.0
million reversal of a reserve resulting from a favorable settlement of an
environmental claim.
RESULTS OF DISCONTINUED OPERATIONS
As of September 30, 2001, GATX has substantially completed the divestiture of
its ISG segment. The ISG segment was comprised of Terminals, Logistics, and
minor business development efforts. Financial data for the ISG segment 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 the first quarter of 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 Pipe Line Company. In the first quarter of
2001, GATX also sold substantially all of Terminals' European operations. In the
second and third quarters of 2001, Terminals sold its Asian operations and its
interest in a distillate and blending distribution affiliate. Additionally, in
the first quarter GATX sold 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 nine months of 2001.
Operating results for the first nine months of 2001 were $1.5 million, down
$13.4 million from the prior year period. Comparisons between periods were
affected by the timing of the sale of ISG assets.
OTHER INFORMATION
On September 11, 2001, terrorists highjacked and crashed four United States
commercial aircraft resulting in a significant loss of life and a substantial
loss of property. These events have caused significant disruption to the United
States' economy as a whole, and in particular have significantly impacted the
airline industry. The terrorist attacks resulted in a precipitous decline in
airline travel, which in turn has significantly and adversely affected the
financial health of the airline industry.
One of GATX's primary lines of business is aircraft leasing. The company owns
directly or, through various partnerships, has an ownership interest in 167
aircraft. Of these, 26 aircraft are wholly owned by GATX. All of the 167
aircraft are stage III compliant, mostly narrow-body aircraft, with an average
age of approximately nine years. These planes have an estimated useful life of
approximately 25 years.
At September 30, 2001, the air portfolio consisted of assets with a net book
value of $1.5 billion. In total, the air portfolio accounted for approximately
19% of GATX's total assets (including both on and off balance sheet assets). For
the nine months ended September 30, 2001, approximately 9% of GATX's gross
income was derived
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from its air portfolio investments. This included lease and interest income,
income generated by joint ventures, remarketing gains, and management fees.
GATX's customer base is diverse in carrier type and geographic location. GATX
leases to over 55 airlines in 31 countries. GATX is not highly dependent on any
one airline; no single customer exposure exceeds 7% of the net book value of the
total air portfolio. For aircraft currently on lease, the average remaining
lease term is approximately four years. Currently, 11 aircraft are not on lease,
seven of these aircraft are owned by Pembroke Group, a Dublin based aircraft
lessor in which GATX owns a 50% equity interest. Pembroke Group will remarket
these seven aircraft and the remaining four aircraft will be remarketed by GATX.
The four GATX aircraft represent approximately 3.0% of the net book value of
GATX's owned aircraft portfolio. The seven Pembroke aircraft represent
approximately 3.1% of the net book value of Pembroke's aircraft portfolio.
GATX Financial Corporation (GFC) has reached an agreement with Flightlease, a
Swissair Group Company, for the division of an order for 38 Airbus aircraft
originally placed by GATX Flightlease Aircraft Company, Ltd, a joint venture
between Flightlease and GFC. GATX previously announced that the GATX Flightlease
joint venture was being terminated. GFC also reached agreement with Airbus
Industrie (Airbus) whereby in consideration for its agreement to purchase 19
A320 family aircraft from Airbus over the next four years, Airbus agreed to
release GFC from any further obligations with respect to the original GATX
Flightlease order. Further, GFC does not have any aircraft on lease to Swissair
or Crossair. GFC therefore expects no material impact from the reorganization of
Swissair.
GFC has 30 planes on order, including the 19 aircraft on order from Airbus. The
delivery schedule for the aircraft is as follows: three aircraft in the fourth
quarter 2001, 16 in 2002, six in 2003 and five in 2004. Currently, two of the
three aircraft to be delivered in 2001 and seven of the 16 aircraft to be
delivered in 2002 have signed letters of intent to place these aircraft with
lessees. Additionally, the renewal schedule for existing aircraft leases is as
follows: two in 2001, seven in 2002, 15 in 2003, 11 in 2004 and 19 in 2005.
Leases for the remaining aircraft will expire subsequent to 2005. The two leases
scheduled for renewal in 2001 have already been renewed.
Pembroke Group has 21 B717-200 aircraft on order from Boeing Co. (Boeing), of
which four will deliver in 2001, eight will deliver in 2002 and nine will
deliver in 2003. The four aircraft delivering in 2001 are subject to lease
commitments. None of the 2002 or 2003 aircraft have been placed. On October 18,
2001 Boeing announced that it was considering cancellation of the B717 program.
This announcement has had an adverse impact on Pembroke Group's B717 marketing
efforts, and, if implemented, would have an adverse effect on the values of B717
aircraft in the Pembroke portfolio. Pembroke Group is in active discussions with
Boeing regarding mitigation of the adverse effects of the Boeing announcement of
the potential cancellation of the B717 program. Pembroke Group has lease
expirations as follows: one in the fourth quarter of 2001, seven in 2002, 11 in
2003, and 5 in 2004. Pembroke Group has letters of intent with customers to
lease three of the 2002 aircraft.
The economic effects of the terrorist attacks in the United States cannot be
reasonably estimated at this time. These effects may include, among other
things, a permanent decrease in demand for air travel, consolidation in the
airline industry, lower utilization of new and existing aircraft, lower aircraft
rental rates, impairment of air portfolio assets and fewer available partners
for joint ventures. The company is currently reviewing its air portfolio for
potential asset impairment. Depending upon the severity, scope and duration of
these effects, the effect on GATX's financial position, results of operations,
and cash flows could be material.
CASH FLOW AND LIQUIDITY
Net cash provided by operating activities of continuing operations for the first
nine months of 2001 was $235.8 million, a decrease of $34.5 million from the
prior year period. Payments related to the settlement of the Airlog litigation
decreased cash flow from operations by $141.0 million. All cash received from
asset dispositions (excluding the proceeds from the sale of the ISG segment),
including gain and return of principal, was included in investing activities as
portfolio proceeds or other asset sales.
Portfolio proceeds of $780.0 million increased $353.1 million from the
comparable 2000 period primarily due to
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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
included $189.2 million from the sale-leaseback of railcars at Rail. Proceeds of
$1,185.0 million from the sale of a portion of a segment and $148.2 million of
taxes paid were related to the sale of various ISG assets.
Portfolio investments and capital additions for the first nine months of 2001
totaled $1,478.9 million, an increase of $91.5 million from the first nine
months of 2000. Portfolio investments and capital additions at Financial
Services of $1,248.0 million were $206.9 million higher than in prior year
period and primarily reflect investments in technology, air and venture assets
and joint ventures. In the first quarter of 2001, Financial Services acquired a
portfolio of technology leases from El Camino Resources for $372.5 million
(which included the assumption of $256.0 million of nonrecourse debt). Rail
invested $230.6 million in the first nine months of 2001, which included
approximately $95.8 million for the acquisition of DEC. Reflective of current
market conditions, Rail's capital spending for its railcar fleet was $207.9
million lower than the prior year period. Railcar additions are not anticipated
to exceed prior year activity. Future portfolio investments and capital
additions (excluding contractual commitments) will be dependent on market
conditions and opportunities to acquire desirable assets.
In the current nine-month period, GATX repaid $787.8 million of long-term debt.
A portion of the proceeds from the sale of ISG was utilized to repay both
short-term and long-term obligations. Through its GFC subsidiary, GATX issued
$482.8 million of long-term debt.
The contractual commitments of GATX's subsidiaries consist primarily of
scheduled aircraft acquisitions. Aggregate funding needed for contractual
commitments at September 30, 2001 was approximately $1.4 billion comprised as
follows: $324.8 million in the fourth quarter of 2001, $675.8 million in 2002,
$248.4 million in 2003, and $189.5 million in 2004.
In addition to committed lines of credit, unrestricted cash of $270.3 million,
internally generated cash flows, and proceeds from asset sales, GATX regularly
pursues additional financing options, including secured borrowings. Although the
availability of these additional financing alternatives is not guaranteed, GATX
has historically utilized secured borrowing on a regular basis.
Subsequent to the September 11, 2001 events, Standard & Poor's and Moody's
Investor Service affirmed their credit ratings of BBB+ and Baa2, respectively,
for GFC's long term debt but revised their outlook to negative due to the
company's exposure to the airline industry. The current borrowing spreads over
Treasuries for GFC's unsecured debt has significantly increased.
GFC, a subsidiary of GATX, has revolving credit facilities totaling $775.0
million. At September 30, 2001, availability under the credit lines was reduced
by $81.0 million of commercial paper outstanding. The revolving credit
facilities contain various restrictive covenants, including dividend
restrictions and requirements to maintain a defined minimum net worth and
certain financial ratios. At September 30, 2001, GFC was in compliance with all
of the covenants and conditions of the credit agreements. GFC, has a shelf
registration for $1.0 billion of debt securities of which $600.0 million had
been issued through September 30, 2001.
COMPARISON OF THIRD QUARTER 2001
TO THIRD QUARTER 2000
In the third quarter 2001, GATX reported a net loss of $7.3 million or ($.15)
per diluted share compared to income of $45.1 million or $.93 per share on a
diluted basis in the prior year period. For the third quarter 2001, continuing
operations generated a loss of $7.3 million or ($.15) per share on a diluted
basis as compared to income from continuing operations of $37.6 million or $.78
per share on a diluted basis in the prior year period.
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FINANCIAL SERVICES
Financial Services gross income of $225.7 million increased $6.8 million from
the prior year period principally due to an increase in lease income generated
from a larger investment portfolio, predominately technology assets. Asset
remarketing income of $20.4 million was comparable to the prior year period.
Gains from the sale of stock derived from warrants received as part of financing
and leasing transactions with non-public companies was $7.5 million, down from
$11.8 million in the prior year period. Asset remarketing income and gains from
the sale of stock do not occur evenly from period to period.
Share of affiliates' earnings of $7.0 million decreased $9.0 million from last
year primarily due to decreases in the telecommunications joint ventures.
Current period earnings from telecommunications affiliates were negatively
impacted by $14.7 million in loss provision and asset impairment charges.
Ownership costs of $139.0 million increased $23.0 million compared with the
prior year period primarily due to higher depreciation. Depreciation and
amortization expense of $77.8 million increased $21.6 million from 2000
reflecting the higher level of investment in operating lease assets,
specifically technology and rail assets. SG&A expenses decreased $1.8 million
over the prior year. Higher human resource and administrative expenses
associated with an overall increase in business activity were offset by a
reduction in incentive compensation. The reversal of litigation provision of
$13.1 million relates to the Airlog litigation, which was settled in the 2001
third quarter.
The provision for possible losses of $24.4 million increased $19.8 million from
2000 and reflects the current weakness in the economy and the deterioration of
certain venture and telecommunications investments. Write-offs of reservable
assets totaled $23.8 million for the three-month period and included write-offs
of venture, telecommunications and other diversified finance investments.
Deterioration in the nonreservable portion of the telecommunications portfolio
accounted for $36.8 million in asset impairment charges in the third quarter of
2001.
Net loss for the three-month period was $11.2 million, compared to net income of
$26.1 million in the prior year period. The decrease from last year was
principally the result of an increase to the loss provision and asset impairment
charges.
GATX RAIL
Rail's gross income of $145.2 million for the third quarter of 2001 was flat
with the prior year. Excluding DEC, gross income decreased $6.8 million over the
prior year. The decrease in gross income was due to a weaker rail market caused
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 and lease rate pricing. Share of affiliates'
earnings of $(1.7) million decreased $2.4 million from the same period in the
prior year primarily due to nonrecurring accounting adjustments.
Ownership costs of $76.0 million increased $3.2 million from last year and
include approximately $2.3 million related to DEC. Rail's operating costs of
$33.6 million included $3.4 million of costs associated with DEC. SG&A expenses
of $17.9 million increased $2.0 million from the prior year period due to the
addition of DEC.
Rail's net income of $11.0 million was $4.9 million lower than the prior year
primarily due to unfavorable market conditions and other nonrecurring expenses.
NEW ACCOUNTING PRONOUNCEMENTS
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
15
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) income.
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 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)
income in the equity section of the balance sheet. Upon adoption of SFAS No.
133, as amended, these warrants will 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) income in shareholders' equity. The adoption of SFAS No.
133 in the first quarter 2001 resulted in $0.4 million being recognized as
expense in the consolidated statement of income and $0.1 million of unrealized
gain in other comprehensive (loss) income.
In June 2001, the Financial Accounting Standards Board issued 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 in 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 review will have on the
earnings and financial position of the company.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001. This statement supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. Although retaining many of the fundamental recognition
and measurement provisions of SFAS No. 121, the new rules significantly change
the criteria required to classify an asset as held-for-sale. SFAS No. 144 will
also supersede certain provisions of APB Opinion 30 with regard to reporting the
effects of a disposal of a segment of a business and will require expected
future operating losses from discontinued operations to be separately reported
in discontinued operations during the period in which the losses are incurred
(rather than as of the
16
measurement date as presently required by APB 30). GATX is currently assessing
the impact, if any, of this statement on the company.
FORWARD LOOKING STATEMENTS
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. These statements are
identified by words such as "anticipate," "believe," "estimate," "expects,"
"intend," "predict," or "project" and similar expressions. 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 and/or market changes resulting from the events
of September 11, 2001, railcar lease rate and utilization levels, dynamics
affecting customers within the chemical, petroleum and food industries,
additional potential write-downs and/or provisions related to GATX's
telecommunications and air portfolios, availability of financing on acceptable
terms and general market conditions in the rail, air, telecommunications,
venture and other large-ticket industries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GATX has previously reported that the GATX Capital Corporation, a subsidiary of
GATX, now a division of GATX Financial Corporation, was a party to actions
arising from the issuance by the Federal Aviation Administration in January 1996
of Airworthiness Directive 96-01-03 (the AD). GATX Capital settled the claims of
Elsinore Aerospace Services LP on May 29, 2001 and Kalitta Air on August 29,
2001 for amounts within the previously established reserve. These two
settlements conclude all remaining claims arising from the issuance of the AD.
GATX and its subsidiaries are engaged in various 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10B. Sixth Amendment of the GATX Corporation 1995 Long Term
Incentive Compensation Plan effective July 27, 2001, submitted
to the SEC with the electronic submission of this report on
Form 10-Q.
11A. Computation of Basic Net (Loss) Income Per Share of Common
Stock.
11B. Computation of Diluted Net (Loss) Income Per Share of Common
Stock.
(b) No reports on Form 8-K were filed during the reporting period.
17
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: November 14, 2001
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