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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 Commission File Number
March 31, 2002 1-2328
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GATX Corporation
Incorporated in the IRS Employer Identification No.
State of New York 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 48,838,267 shares of common stock outstanding as of
April 30, 2002.
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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 DATA)
THREE MONTHS ENDED
MARCH 31
------------------
2002 2001
------- -------
GROSS INCOME
Revenues $ 302.8 $ 356.0
Gain on extinguishment of debt 13.9 --
Share of affiliates' earnings 18.0 14.5
------- -------
TOTAL GROSS INCOME 334.7 370.5
OWNERSHIP COSTS
Depreciation and amortization 92.9 102.7
Interest, net 55.4 61.0
Operating lease expense 43.9 48.3
------- -------
TOTAL OWNERSHIP COSTS 192.2 212.0
OTHER COSTS AND EXPENSES
Operating expenses 45.6 63.1
Selling, general and administrative 44.4 57.3
Provision for possible losses 17.7 21.3
Asset impairment charges 2.6 --
Fair value adjustments for derivatives 1.3 1.1
------- -------
TOTAL OTHER COSTS AND EXPENSES 111.6 142.8
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 30.9 15.7
INCOME TAXES 12.0 11.3
------- -------
INCOME FROM CONTINUING OPERATIONS 18.9 4.4
DISCONTINUED OPERATIONS
Operating results, net of taxes -- 2.4
Gain on sale of portion of segment, net of taxes 6.2 163.9
------- -------
TOTAL DISCONTINUED OPERATIONS 6.2 166.3
------- -------
NET INCOME $ 25.1 $ 170.7
======= =======
PER SHARE DATA
Basic:
Income from continuing operations $ .39 $ .09
Income from discontinued operations .12 3.44
------- -------
Total $ .51 $ 3.53
======= =======
Diluted:
Income from continuing operations $ .39 $ .09
Income from discontinued operations .12 3.36
------- -------
Total $ .51 $ 3.45
======= =======
Dividends declared per common share $ .32 $ .31
The accompanying notes are an integral part of these consolidated financial
statements.
1
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
MARCH 31 DECEMBER 31
2002 2001
-------- -----------
(Unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 185.5 $ 222.9
RESTRICTED CASH 123.3 124.4
RECEIVABLES
Rent and other receivables 138.1 144.2
Finance leases 827.0 868.3
Secured loans 503.2 557.4
Less - allowance for possible losses (93.6) (94.2)
-------- --------
1,374.7 1,475.7
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities 2,951.7 2,958.2
Operating lease investments and other 1,955.5 1,794.0
Less - allowance for depreciation (2,032.2) (2,028.3)
-------- --------
2,875.0 2,723.9
Progress payments for aircraft and other equipment 212.5 260.0
-------- --------
3,087.5 2,983.9
INVESTMENTS IN AFFILIATED COMPANIES 953.4 953.0
GOODWILL, NET OF ACCUMULATED AMORTIZATION 73.8 63.3
OTHER ASSETS 320.3 286.5
-------- --------
$6,118.5 $6,109.7
======== ========
2
MARCH 31 DECEMBER 31
2002 2001
---------- -----------
(Unaudited)
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDERS'
EQUITY
ACCOUNTS PAYABLE $ 278.9 $ 293.6
ACCRUED EXPENSES 24.1 36.8
DEBT
Short-term 85.5 328.5
Long-term:
Recourse 3,189.5 2,897.3
Nonrecourse 689.9 728.2
Capital lease obligations 151.0 163.0
-------- --------
4,115.9 4,117.0
DEFERRED INCOME TAXES 491.2 464.5
OTHER DEFERRED ITEMS 318.4 316.0
-------- --------
TOTAL LIABILITIES AND DEFERRED ITEMS 5,228.5 5,227.9
SHAREHOLDERS' EQUITY
Preferred stock -- --
Common stock 35.4 35.4
Additional capital 386.2 384.7
Reinvested earnings 674.5 664.9
Accumulated other comprehensive loss (77.0) (74.1)
-------- --------
1,019.1 1,010.9
Less - cost of common shares in treasury (129.1) (129.1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 890.0 881.8
-------- --------
$6,118.5 $6,109.7
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
------------------------------
2002 2001
------------- --------------
OPERATING ACTIVITIES
Income from continuing operations $ 18.9 $ 4.4
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (9.8) (8.5)
Gains on sales of securities (.5) (15.3)
Depreciation and amortization 92.9 102.7
Provision for possible losses 17.7 21.3
Asset impairment charges 2.6 --
Payments related to litigation settlement -- (94.0)
Deferred income taxes 12.3 104.1
Gain on extinguishment of debt (13.9) --
Other, including working capital (64.3) (86.0)
-------- --------
Net cash provided by continuing operations 55.9 28.7
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse
financing for leveraged leases (250.6) (266.0)
Additions to operating lease assets and facilities (13.0) (39.0)
Secured loans extended (11.8) (80.5)
Investments in affiliated companies (14.3) (116.5)
Progress payments (30.5) (34.1)
Other investments (1.4) (104.2)
-------- --------
Portfolio investments and capital additions (321.6) (640.3)
Portfolio proceeds 245.8 248.4
Proceeds from other asset sales 3.0 5.0
-------- --------
Net cash used in investing activities of continuing operations (72.8) (386.9)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 576.1 62.0
Repayment of long-term debt (318.2) (304.0)
Net (decrease) increase in short-term debt (243.0) 44.5
Net decrease in capital lease obligations (12.0) (8.2)
Issuance of common stock and other 1.5 11.7
Cash dividends (15.6) (15.0)
-------- --------
Net cash used in financing activities of continuing operations (11.2) (209.0)
NET TRANSFERS TO DISCONTINUED OPERATIONS (13.6) (7.6)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (41.7) (574.8)
PROCEEDS FROM SALE OF PORTION OF SEGMENT 3.2 1,028.4
-------- --------
(38.5) 453.6
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS -- (12.6)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (38.5) $ 441.0
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
------------------
2002 2001
-------- --------
NET INCOME $ 25.1 $170.7
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Foreign currency translation adjustment (9.4) (10.6)
Unrealized loss on securities, net of
reclassification adjustments (a) (1.3) (13.7)
Unrealized gain on derivatives 7.8 4.7
------ ------
OTHER COMPREHENSIVE LOSS (2.9) (19.6)
------ ------
COMPREHENSIVE INCOME $ 22.2 $151.1
====== ======
(a) Reclassification adjustments:
Unrealized loss on securities $ (1.0) $ (4.4)
Less - reclassification adjustment for gains
realized included in net income (.3) (9.3)
------ ------
Net unrealized loss on securities $ (1.3) $(13.7)
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
GATX CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated balance sheet at December 31, 2001 has been derived from
the audited financial statements at that date. All other consolidated
financial statements are unaudited but include all adjustments,
consisting only of normal recurring items, which management considers
necessary for a fair statement of the consolidated results of operations,
financial position and cash flow for the respective periods. Operating
results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2002.
(2) Certain amounts in the 2001 financial statements have been reclassified
to conform to the current presentation.
(3) Discontinued operations - Operating results for the former Integrated
Solutions Group (ISG) segment are shown net of taxes of zero and $1.4
million, respectively, for the two periods displayed. The 2002 gain on
sale of a portion of segment represents the sale of GATX Corporation's
(GATX or the Company) interest in a terminals facility located in Mexico
and is net of taxes of $3.0 million. 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.
(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) Effective January 1, 2002, GATX adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. Under these new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer
amortized, but rather are subject to an annual impairment test in
accordance with the Statements. During 2002, GATX will perform the
required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002. GATX has not yet determined the impact, if
any, such review will have on GATX's consolidated financial position or
results of operations.
Changes in the carrying amount of goodwill by segment during the first
quarter of 2002 are as follows (in millions):
FINANCIAL GATX
SERVICES RAIL TOTAL
------------- ------------ -----------
BALANCE AT DECEMBER 31, 2001 $ 21.4 $ 41.9 $63.3
Purchase accounting adjustments - 10.5 10.5
------------- ------------ -----------
BALANCE AT MARCH 31, 2002 $ 21.4 $ 52.4 $73.8
============= ============ ===========
Application of the non-amortization provisions of the Statement resulted
in an increase in net income from continuing operations of $1.4 million
in the first quarter of 2002, compared to the prior year period, and is
expected to result in an increase in net income from continuing
operations of approximately $6.8 million for the full year 2002, compared
to the full year 2001.
6
As required by SFAS No. 142, the results of operations for periods prior
to adoption have not been restated. Following is a reconciliation of net
income and earnings per share, as reported, to net income and earnings
per share, as adjusted, for the three month period ended March 31, 2001,
computed as if SFAS No. 142 had been adopted effective January 1, 2001
(in millions, except for per share data):
THREE MONTHS
ENDED
MARCH 31, 2001
------------------
NET INCOME, AS REPORTED $ 170.7
Adjusted for:
Goodwill amortization, net of tax .6
Amortization of equity method goodwill, net of tax .8
-------
NET INCOME, AS ADJUSTED $ 172.1
=======
BASIC EARNINGS PER SHARE, AS REPORTED $ 3.53
=======
BASIC EARNINGS PER SHARE, AS ADJUSTED $ 3.56
=======
DILUTED EARNINGS PER SHARE, AS REPORTED $ 3.45
=======
DILUTED EARNINGS PER SHARE, AS ADJUSTED $ 3.48
=======
(6) In the fourth quarter of 2001, GATX recorded a pre-tax charge of $13.4
million related to a reduction in workforce. This action was part of
GATX's previously announced initiative to reduce selling, general and
administrative costs in response to economic conditions and the
divestiture of the ISG operations. The reduction in workforce charge
included involuntary employee separation and benefit costs for 147
employees company wide, as well as legal fees, occupancy and other costs.
The employee groups terminated included professional and administrative
staff, including corporate personnel.
As of March 31, 2002, 146 of the employee terminations were completed.
The amount of termination benefits paid in the first quarter of 2002
totaled $2.8 million. Remaining cash payments of $6.9 million will be
funded from ongoing operations and are not expected to have a material
impact on GATX's liquidity.
(7) In April 2002, the Federal Railroad Administration (FRA) issued a
Railworthiness Directive (Directive) relating to a certain class of tank
cars that were built or modified with reinforcing bars by GATX Rail
(Rail) prior to 1974. In its Directive, the FRA indicated that cars
within this class must be inspected, and repaired if necessary, according
to an FRA approved maintenance plan. Approximately 4,200 of Rail's owned
railcars with a net book value of approximately $4.0 million, or 3% of
Rail's North American fleet, are affected by this Directive. The impact
of this Directive on Rail's operating results will likely include
increased costs with respect to inspection, maintenance and storage, in
addition to potential impaired asset charges. The Company is diligently
working with the FRA and customers to efficiently address this issue.
Upon inspection, a determination will be made as to the extent of
mandatory repairs. If, based on the age of the cars and required repairs,
it is not economical to continue the cars in service, the Company may
substitute similar cars if feasible. However, suitable substitutes may
not be available for all customers, resulting in possible reductions in
revenue this year. In addition, this Directive applies to the affected
cars manufactured by GATX Rail that are currently owned by third parties.
GATX Rail is making efforts to contact current third-party car owners to
inform them of this Directive. While the total amount cannot be
quantified with certainty, the Company expects the impact not to exceed
$10.0 million after-tax in 2002, and is not expected to have any material
effect in years thereafter.
7
(8) The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
THREE MONTHS ENDED
MARCH 31
--------------------
2002 2001
-------- --------
NUMERATOR:
Income from continuing operations $ 18.9 $ 4.4
Income from discontinued operations 6.2 166.3
Less: dividends paid and accrued on preferred
stock -- --
------- -------
NUMERATOR FOR BASIC EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 25.1 $ 170.7
Effect of dilutive securities:
Add: dividends paid and accrued on preferred
stock -- --
after-tax interest expense on convertible
securities(a) -- --
------- -------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 25.1 $ 170.7
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES 48.8 48.3
Effect of dilutive securities:
Stock options .3 1.0
Convertible preferred stock .1 .1
Convertible securities(a) -- --
------- -------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -
ADJUSTED WEIGHTED AVERAGE AND ASSUMED
CONVERSION 49.2 49.4
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .39 $ .09
Income from discontinued operations .12 3.44
------- -------
TOTAL BASIC EARNINGS PER SHARE $ .51 $ 3.53
======= =======
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .39 $ .09
Income from discontinued operations .12 3.36
------- -------
TOTAL DILUTED EARNINGS PER SHARE $ .51 $ 3.45
======= =======
(a) Conversion of convertible securities, issued in February 2002,
was excluded from the first quarter of 2002 calculation of
diluted earnings because of antidilutive effects.
(9) The financial data presented below conforms to SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and depicts the
profitability, financial position and cash flow of each of GATX's
continuing business segments. Segment profitability is presented to reflect
operating results inclusive of allocated support expenses from the parent
company, and interest costs based upon the debt levels shown below.
GATX provides its services and products through two operating segments:
Financial Services and GATX Rail.
8
In prior years, the Financial Services segment included a rail business
unit, which leased freight cars and locomotives under operating and finance
leases. In 2001, GATX combined the rail business unit of Financial Services
with GATX Rail, a full service lessor of specialized railcars, primarily
tank cars into one rail segment. The financial data for Financial Services
and GATX Rail has been restated for all periods presented to reflect the
change in the composition of each operating segment.
FINANCIAL GATX CORPORATE INTER-
(IN MILLIONS) SERVICES RAIL AND OTHER SEGMENT TOTAL
------------- ----------- ------------- ----------- -----------
THREE MONTHS ENDED MARCH 31, 2002
PROFITABILITY
Revenues $ 130.6 $ 172.8 $ (.6) $ - $ 302.8
Gain on extinguishment of debt 13.9 - - - 13.9
Share of affiliates' earnings 14.3 3.7 - - 18.0
------------- ----------- ------------- ----------- -----------
Total gross income 158.8 176.5 (.6) - 334.7
Depreciation 63.7 28.9 .3 - 92.9
Interest, net 35.1 16.7 3.6 - 55.4
Operating lease expense .7 43.1 .1 - 43.9
Income (loss) from continuing operations
before income taxes 11.4 28.5 (9.0) - 30.9
Income (loss) from continuing operations 7.0 18.0 (6.1) - 18.9
FINANCIAL POSITION
Debt 2,910.0 1,180.8 82.4 (57.3) 4,115.9
Equity 424.1 504.4 (39.2) .7 890.0
Investments in affiliated companies 752.6 200.8 - - 953.4
Identifiable assets 3,758.7 2,294.8 121.8 (56.8) 6,118.5
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) continuing
operations 38.0 28.6 (10.7) - 55.9
Portfolio proceeds 240.3 5.5 - - 245.8
------------- ----------- ------------- ----------- -----------
Total cash provided 278.3 34.1 (10.7) - 301.7
Portfolio investments and capital additions 308.0 13.6 - - 321.6
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2001
PROFITABILITY
Revenues $ 193.4 $ 162.7 $ (.1) $ - $ 356.0
Share of affiliates' earnings 12.5 2.0 - - 14.5
------------- ----------- ------------- ----------- -----------
Total gross income 205.9 164.7 (.1) - 370.5
Depreciation and amortization 73.8 28.3 .5 .1 102.7
Interest, net 50.0 18.0 (7.0) - 61.0
Operating lease expense 8.3 39.2 1.0 (.2) 48.3
Income (loss) from continuing operations
before income taxes 17.8 (3.7) 1.7 (.1) 15.7
Income (loss) from continuing operations 10.7 (3.3) (3.0) - 4.4
FINANCIAL POSITION AT DECEMBER 31, 2001
Debt 2,856.7 1,185.7 131.5 (56.9) 4,117.0
Equity 409.8 504.2 (32.4) .2 881.8
Investments in affiliated companies 752.4 200.6 - - 953.0
Identifiable assets 3,701.6 2,280.9 183.9 (56.7) 6,109.7
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) continuing
operations 1.8 27.7 (.8) - 28.7
Portfolio proceeds 218.3 30.1 - - 248.4
------------- ----------- ------------- ----------- -----------
Total cash provided 220.1 57.8 (.8) - 277.1
Portfolio investments and capital additions 487.4 152.8 .1 - 640.3
- -----------------------------------------------------------------------------------------------------------------------------------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST THREE MONTHS OF 2002
TO FIRST THREE MONTHS OF 2001
GATX Corporation's (GATX or the Company) net income for the first three months
of 2002 was $25.1 million, a $145.6 million decrease from the $170.7 million
reported for the same period in 2001. Comparisons between periods are affected
by various non-comparable items including gains on the sale of discontinued
operations in both periods. Earnings for the 2002 first quarter included a $6.2
million after-tax gain related to the sale of a portion of the discontinued
Integrated Solutions Group (ISG) segment. Earnings for the 2001 first quarter
included $20.2 million of after-tax expense for non-comparable items, primarily
related to the closure of a GATX Rail service facility, and a $163.9 million
after-tax gain related to the sale of substantially all of the discontinued ISG
segment. Earnings per share on a diluted basis decreased to $.51 from $3.45 in
the 2001 period.
RESULTS OF CONTINUING OPERATIONS
GATX's gross income from continuing operations of $334.7 million was $35.8
million lower than the prior year. Income from continuing operations for the
first three months of 2002 was $18.9 million compared to $4.4 million in the
prior year period, with the increase largely due to costs attributable to the
closure of a GATX Rail service facility recorded in the 2001 period. Diluted
earnings per share from continuing operations increased to $.39 from $.09 in the
prior year period.
FINANCIAL SERVICES
Financial Services' gross income of $158.8 million included $13.9 million
attributable to a gain on extinguishment of debt, as discussed below. Excluding
this gain, gross income decreased $61.0 million from the prior year period
principally due to decreases in lease and interest income, and lower gains with
respect to asset remarketing and sales of securities. Lease income of $98.7
million declined $38.1 million from the prior year period due to lower average
finance lease balances and operating lease assets combined with lower lease
rates. Interest income of $15.4 million decreased $4.1 million due to lower
average secured loan balances compared to the prior year period.
Financial Services continues to be negatively impacted by the current economic
environment and challenging market conditions. Air travel is steadily increasing
as the industry recovers from the impact of September 11, 2001, however,
competition in the aircraft leasing industry has negatively affected lease rates
as most lessors have aggressively attempted to maintain high utilization. As a
result, lease rates remain under pressure. Currently, there are leases in place
or signed letters of intent with respect to 15 of the 16 new aircraft scheduled
for delivery in 2002. The Company has signed letters of intent with respect to
four of the seven existing aircraft scheduled for renewal in 2002.
Asset remarketing income includes gains from the sale of assets from Financial
Services' own portfolio as well as residual sharing fees from the sale of
managed assets. Asset remarketing income of $7.6 million decreased $6.2 million
from the prior year period primarily due to decreased residual sharing fees on
air assets, partially offset by an increase in technology asset remarketing
activity. The prior year period included remarketing gains on the sale of two
aircraft and residual sharing fees on the sale of three managed aircraft. Gains
on the sale of securities, which are derived from warrants received as part of
financing and leasing transactions with non-public companies, were $0.5 million,
down significantly from $15.3 million in the prior year. Decreases in gains from
the sale of securities are indicative of limited initial public offering
activity compared to 2001. Because the timing of such sales is dependent on
changing market conditions, gains from the sale of securities and asset
remarketing income do not occur evenly from period to period.
Share of affiliates' earnings was $14.3 million, an increase of $1.8 million
over 2001. The increase is due primarily to higher income from certain specialty
finance affiliates and the absence of losses from telecommunications (telecom)
affiliates compared to the prior year period.
Ownership costs of $99.5 million decreased $32.6 million compared to the prior
year. Depreciation expense of
10
$63.7 million decreased $10.1 million from 2001, reflecting lower operating
lease assets. Operating lease expense of $0.7 million decreased $7.6 million
from the prior year period primarily due to the reversal of a previously
recorded sublease liability. Interest expense of $35.1 million decreased $14.9
million from 2001 primarily due to lower borrowing rates. Selling, general and
administrative (SG&A) expenses of $21.7 million decreased $10.6 million compared
to the prior year due to lower human resource and administrative expenses as a
result of the fourth quarter 2001 reduction in workforce and reduced legal
expenses attributable to litigation in 2001.
The provision for possible losses is Financial Services' estimate of future
losses based on a review of credit, collateral and market risks. The provision
for possible losses of $17.4 million decreased $3.8 million from the prior year
quarter. The current quarter's loss provision included $10.0 million related to
one technology leasing investment. Asset impairment charges also increased $2.6
million in the current quarter largely attributable to the same investment.
Offsetting these charges was a gain of $13.9 million on the extinguishment of
nonrecourse debt of which $13.1 million was associated with this technology
investment. Financial Services frequently utilizes nonrecourse debt to finance
its technology portfolio.
The allowance for possible losses decreased $2.3 million from December 31, 2001
to $84.2 million and was approximately 6.4% of reservable assets, up from 6.0%
at year end. Reservable assets are defined as rent receivables, direct financing
leases, leveraged leases and secured loans. Net charge-offs of reservable assets
totaled $19.6 million for the three-month period primarily related to venture
and technology investments, including $12.0 million related to the technology
investment discussed above.
Financial Services has exited the business of financing telecom companies and
its exposure in the telecom sector has been reduced to approximately $10.0
million, or approximately 0.3% of Financial Services' total assets at March 31,
2002, a decrease of $10.3 million from December 31, 2001. The decrease from year
end is due to collection of a note received in full.
Non-performing assets of $121.9 million increased $25.5 million from year end
primarily due to the placement of two A310 aircraft on non-accrual, partially
offset by charge-offs of technology and venture investments.
Net income of $7.0 million decreased $3.7 million from last year principally as
a result of the decline in lease income from the 2001 period, partially offset
by reduced ownership costs and SG&A expenses.
GATX RAIL (RAIL)
Rail's gross income of $176.5 million for the first three months of 2002
increased $11.8 million over the prior year period. Rental revenue of $156.9
million increased $4.9 million from the prior year period. In March 2001, Rail
acquired Dyrekcja Eksploatacji Cystern (DEC), Poland's national tank car fleet.
Excluding DEC, rental revenue of $149.1 million was down $2.9 million compared
to last year due to a weaker rail market, as demand continues to be affected by
the recession. A number of industries serviced by Rail, most notably the
chemical industry, are experiencing consolidation and adverse market conditions.
These factors, coupled with aggressive competition and increased railroad
efficiency, have resulted in reduced railcar demand and pressure on lease rates.
Asset remarketing income of $3.7 million increased $3.1 million from the prior
year period due to the sale of a portfolio of residual sharing investments in
the first quarter of 2002. Share of affiliates' earnings of $3.7 million
increased $1.7 million primarily due to non-comparable accounting adjustments in
the 2001 period.
Rail's North American fleet totaled 128,000 cars at the end of the first quarter
compared to 132,000 at the end of the prior year period. Approximately 117,000
railcars were on lease throughout North America at the end of the first quarter,
compared to 122,000 a year ago. Rail's North American utilization was 91% at
March 31, 2002. Railcar demand remains soft, negatively impacting utilization;
this condition is expected to continue through the remainder of 2002. In
response to current rail market conditions, Rail has retired excess cars and
limited orders of new railcars to specific customer lease commitments.
Ownership costs of $88.7 million increased $3.2 million from last year
reflecting the acquisition of DEC.
11
Operating costs were $40.8 million, including $5.5 million related to DEC. In
the prior year period, Rail's operating costs included $24.5 million of
non-comparable items. Of this amount, $19.7 million related to the closing of
its East Chicago repair facility. The 2001 period also included higher
maintenance costs due to 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 decreased $2.8 million
from the prior year period to $18.3 million. Excluding DEC, SG&A expenses
decreased $4.7 million from the prior year period primarily due to the fourth
quarter 2001 reduction in workforce.
Rail's net income of $18.0 million was $21.3 million higher than the prior year
primarily due to the absence of 2001 closure costs related to its East Chicago
repair facility and other non-comparable items. Excluding these non-comparable
items, net income increased $5.1 million primarily due to higher asset
remarketing income, increased share of affiliates' earnings and lower SG&A
expenses.
In April 2002, the Federal Railroad Administration (FRA) issued a Railworthiness
Directive (Directive) relating to a certain class of tank cars that were built
or modified with reinforcing bars by GATX Rail (Rail) prior to 1974. In its
Directive, the FRA indicated that cars within this class must be inspected, and
repaired if necessary, according to an FRA approved maintenance plan.
Approximately 4,200 of Rail's owned railcars with a net book value of
approximately $4.0 million, or 3% of Rail's North American fleet, are affected
by this Directive. The impact of this Directive on Rail's operating results will
likely include increased costs with respect to inspection, maintenance and
storage, in addition to potential impaired asset charges. The Company is
diligently working with the FRA and customers to efficiently address this issue.
Upon inspection, a determination will be made as to the extent of mandatory
repairs. If, based on the age of the cars and required repairs, it is not
economical to continue the cars in service, the Company may substitute similar
cars if feasible. However, suitable substitutes may not be available for all
customers, resulting in possible reductions in revenue this year. In addition,
this Directive applies to the affected cars manufactured by GATX Rail that are
currently owned by third parties. GATX Rail is making efforts to contact current
third-party car owners to inform them of this Directive. While the total amount
cannot be quantified with certainty, the Company expects the impact not to
exceed $10.0 million after-tax in 2002, and is not expected to have any material
effect in years thereafter.
CORPORATE AND OTHER
Corporate and other net expense was $6.1 million for the first three months of
2002 compared to $3.0 million for the prior year period, primarily due to an
increase in net interest expense. The 2001 period reflected the utilization of
the proceeds from the sale of ISG. The 2001 period also included a $4.0 million
tax charge related to the Company's corporate-owned life insurance program.
RESULTS OF DISCONTINUED OPERATIONS
As of March 31, 2002, GATX completed the divestiture of the ISG segment. 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 the first quarter of 2002, GATX sold its interest in a terminals facility
located in Mexico and recognized a $6.2 million after-tax gain. In the first
quarter of 2001, GATX sold the majority of Terminals' domestic operations. In
the first quarter of 2001, GATX also sold substantially all of Terminals'
European operations and exited various smaller supply chain businesses. A net
after-tax gain of $163.9 million was recognized on the sale of ISG assets in the
first three months of 2001.
Operating results for the first three months of 2002 were zero, down $2.4
million from the prior year period. Comparisons between periods were affected by
the timing of the sale of ISG assets.
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CASH FLOW AND LIQUIDITY
Net cash provided by operating activities of continuing operations for the first
three months of 2002 was $55.9 million, an increase of $27.2 million from the
prior year period, which included payments in the amount of $94.0 million
related to a litigation settlement.
Portfolio proceeds of $245.8 million were comparable to the 2001 period and
include an increase in loan principle payments received, offset by lower
proceeds from stock sales and lower cash distributions from joint venture
investments.
Portfolio investments and capital additions for the first three months of 2002
totaled $321.6 million, a decrease of $318.7 million from the first three months
of 2001. Portfolio investments and capital additions at Financial Services of
$308.0 million were $179.4 million lower than the prior year period, primarily
due to a decrease in technology investments. In the first quarter of 2001,
Financial Services acquired a portfolio of technology leases from El Camino
Resources for $116.5 million (net of the assumption of $243.0 million of
nonrecourse debt). Rail invested $13.6 million in the first three months of
2002, a decrease of $139.2 million from the prior year which included
approximately $90.0 million for the acquisition of DEC. Indicative of current
market conditions, Rail's capital spending for its railcar fleet was $49.2
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 depend on market conditions
and opportunities to acquire desirable assets.
In the current three-month period, GATX issued $175.0 million of long-term
convertible debt, including debt issuance costs of $5.5 million. Including
financing activity of its principle subsidiary, GATX Financial Corporation
(GFC), GATX repaid $318.2 million and issued $406.6 million of long-term debt.
Significant financings in the 2002 first quarter included a $142.2 million
aircraft warehouse facility, a $75.0 million aircraft bridge loan, $35.1 million
from the European Credit Agency financing program and a $79.6 million secured
railcar financing. Subsequent to March 31, 2002, GFC completed a financing
facility with the Export-Import Bank of the United States that provided $139.5
million in aircraft financing.
GATX funds asset growth and meets debt and lease obligations through cash flow
from operations, portfolio proceeds (including proceeds from asset sales),
uncommitted money market lines, committed revolving credit facilities, the
issuance of unsecured debt, and a variety of secured borrowings. GATX utilizes
both the domestic and international bank and capital markets. The availability
of these funding options may be adversely impacted by certain factors. Access to
capital markets at competitive rates is dependent on GFC's credit rating as
determined by rating agencies such as Standard & Poor's (S&P) and Moody's
Investors Service (Moody's).
On March 13, 2002, Moody's downgraded GFC's long-term unsecured debt to Baa3
from Baa2 and GFC's commercial paper to Prime-3 from Prime-2. Moody's now
maintains a stable outlook on GFC's ratings. On March 14, 2002, S&P downgraded
GFC's long-term unsecured debt from BBB+ to BBB and GFC's commercial paper from
A-2 to A-3. S&P also placed GFC's long-term unsecured debt on credit watch with
negative implications. Due to these rating agency actions, GFC's access to the
commercial paper market has been seriously constrained and GFC may have more
difficulty accessing the long-term capital market on a cost efficient basis. A
continued weak economic environment could decrease demand for GATX's services,
which could impact the Company's ability to generate cash flow from operations
and portfolio proceeds.
GFC has revolving credit facilities totaling $775.0 million, consisting of a
364-day agreement for $141.7 million expiring in June, which GFC intends to
replace, and two other agreements for $350.0 million and $283.3 million expiring
in 2003 and 2004, respectively. At March 31, 2002, availability under the credit
lines was reduced by $10.0 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 March 31, 2002, 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 March 31, 2002.
13
The unconditional purchase obligations of GATX's subsidiaries consist primarily
of scheduled aircraft acquisitions. Unconditional purchase obligations at March
31, 2002 were $915.3 million, comprised as follows: $460.4 million in the
remainder of 2002, $266.0 million in 2003 and $188.9 million in 2004.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, GATX adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. Under these new rules, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but rather are subject
to an annual impairment test in accordance with the Statements. During 2002,
GATX will perform the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. GATX has not yet determined the impact,
if any, such review will have on GATX's consolidated financial position or
results of operations.
Application of the non-amortization provisions of the Statement resulted in an
increase in net income from continuing operations of $1.4 million in the first
quarter of 2002, compared to the prior year period, and is expected to result in
an increase in net income from continuing operations of approximately $6.8
million for the full year 2002, compared to the full year 2001.
Also effective January 1, 2002, GATX adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. Although the new rules retain many of the fundamental
recognition and measurement provisions of SFAS No. 121, they modify the criteria
required to classify an asset as held-for-sale. SFAS No. 144 also supersedes
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 measurement date as presently required by APB 30). GATX does not expect this
Statement to have a material impact on GATX's consolidated financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
effective for fiscal years beginning after May 15, 2002, with early application
encouraged. The provisions of this Statement update, clarify and simplify
certain existing accounting pronouncements. For the period ended March 31, 2002,
GATX applied the provisions of SFAS No. 145. SFAS No. 145 rescinds SFAS No. 4,
which previously required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effects. In accordance with the Statement, GATX's gain on
extinguishment of nonrecourse debt of $13.9 million recognized in the first
quarter 2002 is not considered an extraordinary item, and was therefore included
in results of operations.
14
FORWARD LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis may constitute
forward-looking statements made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. These statements are
identified by words such as "anticipate," "believe," "estimate," "expects,"
"intend," "predict," or "project" and similar expressions. This information may
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are based on
reasonable assumptions, such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. Risks
and uncertainties include, but are not limited to, general economic conditions;
aircraft and railcar lease rate and utilization levels; conditions in the
capital markets and the potential for a downgrade in our credit rating, either
of which could have an effect on our borrowing costs or our ability to access
the markets for commercial paper or secured and unsecured debt; dynamics
affecting customers within the chemical, petroleum and food industries;
unanticipated costs or issues arising from the Federal Railroad Administration's
Railworthiness Directive HM-04; competitors in the rail and air markets who may
have access to capital at lower costs than GATX; additional potential
write-downs and/or provisions within GATX's portfolio; and general market
conditions in the rail, air, technology, venture, and other large-ticket
industries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) GATX's Annual Meeting of Stockholders was held on April 26, 2002.
(b) Matters voted upon at the meeting were:
Number of Shares Voted
----------------------
For Withheld
--- --------
1. Election of Directors.
Rod F. Dammeyer 43,941,950 232,160
James M. Denny 43,939,333 234,777
Richard Fairbanks 43,539,696 634,414
William C. Foote 43,539,251 634,859
Deborah M. Fretz 43,582,700 591,410
Miles L. Marsh 43,946,544 227,566
Michael E. Murphy 43,945,677 228,433
John W. Rogers, Jr. 43,537,081 637,029
Ronald H. Zech 43,936,799 237,311
2. Ratification of appointment of Ernst & 43,065,159 For
Young LLP as independent auditors 1,034,205 Against
for fiscal 2002. 74,746 Abstentions
There were no broker non-votes with respect to the election of the directors or
the ratification of the appointment of independent auditors.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Reference is made to the exhibit index which is included
herewith and is incorporated by reference hereto.
(b) Reports on Form 8-K:
Form 8-K filed on April 23, 2002 reporting first quarter
2002 results.
Form 8-K filed on April 16, 2002 for slide presentation
prepared for fixed income investors.
Form 8-K filed on May 6, 2002 reporting on Railworthiness
Directive issued by the Federal Railroad Administration.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATX CORPORATION
(Registrant)
/s/ Brian A. Kenney
---------------------------
Brian A. Kenney
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: May 15, 2002
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EXHIBIT LISTING
The following exhibits are filed as part of this quarterly report:
Exhibit
- -------
3A. Restated Certificates of Incorporation, as amended.
17