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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Form 10-Q
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-2328
-------------------------------
GATX Corporation
(Exact name of registrant as specified in its charter)
NEW YORK 36-1124040
(State of incorporation) (I.R.S. Employee Identification No.)
500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 49,085,097 shares of common
stock were outstanding as of July 31, 2003.
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INDEX TO GATX CORPORATION
FORM 10-Q - JUNE 30, 2003
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income.........................................................1
Consolidated Balance Sheets...............................................................3
Consolidated Statements of Cash Flows.....................................................5
Consolidated Statements of Comprehensive Income...........................................6
Notes to the Consolidated Financial Statements............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................14
Comparison of First Six Months of 2003 to First Six Months of 2002....................14
Cash Flow and Liquidity...............................................................17
Comparison of Second Quarter 2003 to Second Quarter 2002..............................19
New Accounting Pronouncements.........................................................20
Forward Looking Statements............................................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................21
Item 4. Controls and Procedures.....................................................................21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................22
SIGNATURE .................................................................................................22
EXHIBIT INDEX .............................................................................................23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ -----------------------------
2003 2002 2003 2002
------------ ------------- ----------- ------------
GROSS INCOME
Lease income $ 238.7 $ 260.9 $ 478.4 $ 516.5
Marine operating revenue 25.5 22.8 29.7 24.7
Interest income 12.2 13.2 21.8 28.6
Asset remarketing income 13.2 18.5 23.5 29.8
Gain on sale of securities .1 .6 .5 1.1
Fees 4.3 3.8 10.9 9.4
Other 19.9 11.9 36.6 23.3
-------- ------- -------- --------
Revenues 313.9 331.7 601.4 633.4
Gain on extinguishment of debt - .6 .7 14.5
Share of affiliates' earnings 22.4 21.8 40.9 39.8
-------- ------- -------- --------
TOTAL GROSS INCOME 336.3 354.1 643.0 687.7
OWNERSHIP COSTS
Depreciation 77.5 87.9 156.5 176.5
Interest, net 50.3 56.6 104.4 109.8
Operating lease expense 46.1 46.5 92.2 88.0
-------- ------- -------- --------
TOTAL OWNERSHIP COSTS 173.9 191.0 353.1 374.3
OTHER COSTS AND EXPENSES
Maintenance expense 41.7 37.1 82.0 74.9
Marine operating expenses 20.9 17.7 24.1 19.6
Other operating expenses 8.3 8.2 20.1 17.7
Selling, general and administrative 49.9 52.9 94.0 101.5
(Reversal) provision for possible losses (10.3) 9.2 8.4 26.9
Asset impairment charges 12.5 3.8 16.1 6.4
Fair value adjustments for derivatives .3 2.4 2.4 3.7
-------- ------- -------- --------
TOTAL OTHER COSTS AND EXPENSES 123.3 131.3 247.1 250.7
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 39.1 31.8 42.8 62.7
INCOME TAXES 14.3 11.4 16.2 23.4
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 24.8 20.4 26.6 39.3
DISCONTINUED OPERATIONS
Gain on sale of portion of segment, net of taxes - - - 6.2
-------- ------- -------- --------
TOTAL DISCONTINUED OPERATIONS - - - 6.2
-------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 24.8 20.4 26.6 45.5
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - (34.9)
-------- ------- -------- --------
NET INCOME $ 24.8 $ 20.4 $ 26.6 $ 10.6
======== ======= ======== ========
1
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -----------------------------
2003 2002 2003 2002
------------- -------------- ------------ ------------
PER SHARE DATA
Basic:
Income from continuing operations before
cumulative effect of accounting change $ .51 $ .42 $ .54 $ .81
Income from discontinued operations - - - .13
------- ------- -------- --------
Income before cumulative effect of accounting
change .51 .42 .54 .94
Cumulative effect of accounting change - - - (.72)
------- ------- -------- --------
Total $ .51 $ .42 $ .54 $ .22
======= ======= ======== ========
Average number of common shares
(in thousands) 49,075 48,866 49,068 48,825
Diluted:
Income from continuing operations before
cumulative effect of accounting change $ .50 $ .42 $ .54 $ .81
Income from discontinued operations - - - .13
------- ------- -------- --------
Income before cumulative effect of accounting
change .50 .42 .54 .94
Cumulative effect of accounting change - - - (.72)
------- ------- -------- --------
Total $ .50 $ .42 $ .54 $ .22
======= ======= ======== ========
Average number of common shares and
common share equivalents (in thousands) 54,320 49,258 49,180 49,196
Dividends declared per common share $ .32 $ .32 $ .64 $ .64
The accompanying notes are an integral part of these consolidated financial
statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30 DECEMBER 31
2003 2002
------------- ------------
(Unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 226.8 $ 231.1
RESTRICTED CASH 109.7 140.9
RECEIVABLES
Rent and other receivables 91.3 97.8
Finance leases 624.5 713.0
Loans 335.1 434.2
Less: allowance for possible losses (69.3) (82.2)
-------- --------
981.6 1,162.8
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Railcars and service facilities 3,178.7 3,076.9
Operating lease investments and other 2,370.8 2,250.1
Less - allowance for depreciation (2,029.8) (2,008.1)
-------- --------
3,519.7 3,318.9
Progress payments for aircraft and other equipment 57.8 140.9
-------- --------
3,577.5 3,459.8
INVESTMENTS IN AFFILIATED COMPANIES 827.2 850.9
RECOVERABLE INCOME TAXES 61.5 129.8
GOODWILL, NET 62.5 62.5
OTHER INVESTMENTS 86.0 96.1
OTHER ASSETS 240.1 294.4
-------- --------
$6,172.9 $6,428.3
======== ========
3
JUNE 30 DECEMBER 31
2003 2002
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 351.2 $ 399.5
DEBT
Short-term 22.2 13.7
Long-term:
Recourse 3,372.8 3,487.9
Nonrecourse 481.8 594.6
Capital lease obligations 128.9 143.7
-------- --------
4,005.7 4,239.9
DEFERRED INCOME TAXES 674.7 640.0
OTHER LIABILITIES 333.3 347.3
-------- --------
TOTAL LIABILITIES 5,364.9 5,626.7
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 35.6 35.6
Additional capital 393.1 392.7
Reinvested earnings 597.9 602.7
Accumulated other comprehensive loss (89.9) (100.5)
-------- --------
936.7 930.5
Less - cost of common shares in treasury (128.7) (128.9)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 808.0 801.6
-------- --------
$6,172.9 $6,428.3
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
OPERATING ACTIVITIES
Income from continuing operations, including accounting change $ 24.8 $ 20.4 $ 26.6 $ 4.4
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Realized gains on remarketing of leased equipment (11.9) (17.6) (20.8) (27.4)
Gains on sales of securities (.1) (.6) (.5) (1.1)
Depreciation 81.4 92.1 164.5 185.0
(Reversal) provision for possible losses (10.3) 9.2 8.4 26.9
Asset impairment charges 12.5 3.8 16.1 6.4
Deferred income taxes 32.8 25.8 56.8 38.1
Gain on extinguishment of debt - (.6) (.7) (14.5)
Share of affiliates' earnings, net of dividends (17.0) (10.5) (31.0) (24.0)
Cumulative effect of accounting change - - - 34.9
Federal income tax refund, net 118.0 22.5 96.6 36.4
Other, including working capital (10.2) (8.2) (39.7) (66.3)
-------- -------- --------- -----------
Net cash provided by continuing operations 220.0 136.3 276.3 198.8
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing
for leveraged leases, operating lease assets and facilities (173.2) (250.0) (339.1) (513.6)
Loans extended (8.7) (43.5) (37.7) (55.3)
Investments in affiliated companies (29.3) (12.3) (44.2) (26.6)
Progress payments (5.4) (28.4) (22.6) (58.9)
Other investments (1.2) (15.2) (24.2) (16.6)
-------- -------- --------- -----------
Portfolio investments and capital additions (217.8) (349.4) (467.8) (671.0)
Portfolio proceeds 162.5 210.7 384.8 449.9
Leveraged lease disposition, net (102.8) - (102.8) -
Proceeds from other asset sales 5.4 1.8 14.8 4.8
-------- -------- --------- -----------
Net cash used in investing activities of continuing
operations (152.7) (136.9) (171.0) (216.3)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 89.8 584.2 333.0 1,160.3
Repayment of long-term debt (137.5) (353.2) (436.7) (671.4)
Net increase (decrease) in short-term debt 7.1 (43.7) 8.5 (286.7)
Net repayments of capital lease obligations (3.4) (2.9) (14.8) (14.9)
Issuance of common stock and other .2 2.8 .6 4.3
Cash dividends (15.7) (15.6) (31.4) (31.2)
-------- -------- --------- -----------
Net cash (used in) provided by financing activities of
continuing operations (59.5) 171.6 (140.8) 160.4
NET TRANSFERS FROM (TO) DISCONTINUED OPERATIONS - 1.5 - (12.1)
-------- -------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM 7.8 172.5 (35.5) 130.8
CONTINUING OPERATIONS
PROCEEDS FROM SALE OF PORTION OF SEGMENT - - - 3.2
-------- --------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 7.8 $ 172.5 $ (35.5) $ 134.0
======== ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -----------------------------
2003 2002 2003 2002
--------------- ------------ -------------- ------------
NET INCOME $ 24.8 $ 20.4 $ 26.6 $ 10.6
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment 20.9 7.0 26.9 (2.4)
Unrealized gain (loss) on securities, net of
reclassification adjustments (A) 1.6 (.8) .2 (2.1)
Unrealized loss on derivatives (12.9) (11.2) (16.5) (3.4)
-------- -------- ------- --------
OTHER COMPREHENSIVE INCOME (LOSS) 9.6 (5.0) 10.6 (7.9)
-------- -------- ------- --------
COMPREHENSIVE INCOME $ 34.4 $ 15.4 $ 37.2 $ 2.7
======== ======== ======= ========
(A) Reclassification adjustments:
Unrealized gain (loss) on securities $ 1.7 $ (.5) $ .5 $ (1.5)
Less - reclassification adjustment for gains
realized included in net income (.1) (.3) (.3) (.6)
-------- -------- ------- --------
Unrealized gain (loss) on securities, net of
reclassification adjustments $ 1.6 $ (.8) $ .2 $ (2.1)
======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
GATX CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated balance sheet at December 31, 2002 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 six months ended June 30, 2003 are not necessarily indicative of the
results that may be achieved for the entire year ending December 31, 2003.
For further information, refer to GATX Corporation's (GATX or the Company)
annual report on Form 10-K for the year ended December 31, 2002.
(2) Certain amounts in the 2002 financial statements have been reclassified to
conform to the current presentation.
(3) Discontinued operations - The 2002 gain on sale of a portion of segment
represents the sale of GATX Corporation's interest in a bulk-storage
facility located in Mexico, and is net of taxes of $3.0 million. The
facility was included in the segment formerly known as Integrated Solutions
Group (ISG).
(4) The Company grants stock options to employees under stock-based
compensation plans. In December 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS No. 123. This statement
provides alternative methods of transition for voluntary changes to the
fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of
SFAS No.123 and APB Opinion No. 28, Interim Financial Reporting, and
requires prominent disclosure in both annual and interim financial
statements of the method of accounting for stock-based employee
compensation and the effect on reported results. As permitted under SFAS
No. 148, the Company accounts for all stock-based employee compensation
plans under the recognition and measurement provisions of APB Opinion No.
25, Accounting for Stock Issued to Employees. Under these guidelines, no
compensation expense is recognized because the exercise price of GATX's
employee stock options equals the market value of the underlying stock on
the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has
been determined as if GATX had accounted for its employee stock options
under the fair value method. The Black-Scholes model, one of the most
frequently referenced models to value options, was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
expected stock price volatility. Because GATX's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
7
The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation (in millions, except for per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported $ 24.8 $ 20.4 $ 26.6 $ 10.6
Deduct: Total stock-based
employee compensation expense
determined under fair value-based method for
all awards, net of related tax effects (.6) (.7) (1.2) (1.4)
------ ------ ------ ------
Pro forma net income $ 24.2 $ 19.7 $ 25.4 $ 9.2
====== ====== ====== ======
Net income per share:
Basic, as reported $ .51 $ .42 $ .54 $ .22
Basic, pro forma .49 .40 .52 .19
Diluted, as reported .50 .42 .54 .22
Diluted, pro forma .49 .40 .52 .19
(5) During the fourth quarter of 2002, GATX recorded a pre-tax charge of $16.9
million related to a reduction in workforce in 2002. The reduction was part
of GATX's announced intention to exit the venture business and curtail
investment in the specialty finance sector. The charge included costs as
well as headcount reductions related to an integration plan implemented to
rationalize the workforce and operations at Dyrekcja Eksploatacji Cystern
Sp. z.o.o. (DEC), GATX's Polish railcar subsidiary. This charge included
involuntary employee separation and benefit costs for 170 employees
company-wide, as well as legal fees, occupancy and other costs. The
employee groups terminated included professional and administrative staff.
As of June 30, 2003, 153 of the employee terminations were completed.
Employee terminations are expected to be substantially completed by the end
of 2003.
Following is the reserve activity for the quarter ending June 30, 2003:
Reserve balance at 3/31/03 $ 13.9
Benefits paid (8.1)
Occupancy and other costs paid (.8)
------
Reserve balance at 6/30/03 $ 5.0
======
During 2001, GATX recorded a pre-tax charge of $13.4 million related to a
reduction in workforce in 2001. This reduction was part of GATX's
initiative to reduce selling, general and administrative costs in response
to economic conditions and the divestiture of ISG operations. This 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, and corporate personnel. As of December 31, 2002, all of the
employee terminations were completed.
Management expects the Company's reserve balance at June 30, 2003 related
to the reductions in workforce to be adequate.
8
(6) Investments in affiliated companies represent investments in and loans to
domestic and foreign companies and joint ventures that are in businesses
similar to those of GATX, such as commercial aircraft leasing, rail
equipment leasing, technology equipment leasing and other business
activities, including ventures that provide asset residual value guarantees
in both domestic and foreign markets.
For purposes of preparing the following information, GATX made certain
adjustments to the information provided by the joint ventures. Pre-tax
income was adjusted to reverse interest expense recognized by the joint
ventures on loans from GATX.
For all affiliated companies held at the end of the quarter, operating
results, as if GATX held 100 percent interest, were (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
Gross income $ 202.4 $ 219.2 $ 400.5 $ 429.1
Pre-tax income 32.3 46.3 70.1 91.4
(7) Restricted cash of $109.7 million at June 30, 2003 is comprised of cash and
cash equivalents which are restricted as to withdrawal or use. GATX's
restricted cash primarily relates to an amount designated as collateral for
a joint venture loan and additional amounts maintained as required by
contract for three bankruptcy remote, special-purpose corporations that are
wholly owned by GATX's principal subsidiary, GATX Financial Corporation
(GFC).
(8) In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation
by a business of variable interest entities (VIE) in which it is the
primary beneficiary. FIN 46 applies immediately to VIE's created or
acquired after January 31, 2003. No VIE's were created or obtained in the
first six months of 2003. For other VIE's, FIN 46 applies in the first
quarter or interim period beginning after June 15, 2003. GATX is in the
process of completing an assessment of the impact of FIN 46. Based on this
review to date, GATX does not expect FIN 46 to have a material impact on
its financial statements.
(9) In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others. FIN 45 clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over
the term of the guarantee in the event that the specified triggering events
or conditions occur.
In connection with certain investments or transactions, GATX has entered
into various guarantees which could require performance in the event of
demands by third parties. Similar to GATX's balance sheet investments,
these guarantees expose GATX to credit and market risk; accordingly, GATX
evaluates commitment and other contingent obligations using the same
techniques used to evaluate funded transactions.
Lease and loan payment guarantees generally involve guaranteeing repayment
of the financing utilized to acquire assets being leased by an affiliate to
customers, and are in lieu of making direct equity investments in the
affiliate. GATX is not aware of any event of default which would require it
to satisfy
9
these guarantees, and expects the affiliates to generate sufficient cash
flow to satisfy their lease and loan obligations.
Asset residual value guarantees represent GATX's commitment to third
parties that an asset, or group of assets, will be worth a specified amount
at the end of the term of the lease to which the asset relates. Revenue in
the form of an initial fee and sharing in any proceeds received upon
disposition of assets in excess of the amount guaranteed is earned for
providing these asset value guarantees.
At June 30, 2003, the maximum potential amount of lease, loan or residual
value guarantees under which GATX or its subsidiaries could be required to
perform was $703.9 million. The related carrying value of the guarantees on
the balance sheet, including deferred revenue primarily associated with
residual value guarantees entered into prior to the effective date of FIN
45, was $3.7 million. The expirations of these guarantees range from 2003
to 2020. GATX's liability resulting from the performance pursuant to the
residual value guarantees may be reduced by the value realized from the
underlying asset or group of assets. Based on known and expected market
conditions, management does not believe that the asset residual value
guarantees will result in any material adverse financial impact to GATX.
10
(10) The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
NUMERATOR:
Income from continuing operations before
cumulative effect of accounting change $ 24.8 $ 20.4 $ 26.6 $ 39.3
Income from discontinued operations - - - 6.2
Cumulative effect of accounting change - - - (34.9)
Less: dividends paid and accrued on
preferred stock - - - -
-------- -------- -------- --------
NUMERATOR FOR BASIC EARNINGS PER SHARE - 24.8 20.4 26.6 10.6
INCOME AVAILABLE TO COMMON SHAREHOLDERS
Effect of dilutive securities:
Add: dividends paid and accrued on preferred
stock - - - -
After-tax interest expense on convertible
securities (a) 2.2 - - -
-------- -------- -------- --------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 27.0 $ 20.4 $ 26.6 $ 10.6
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES 49.1 48.9 49.1 48.8
Effect of dilutive securities:
Stock options - .3 - .3
Convertible preferred stock .1 .1 .1 .1
Convertible securities (a) 5.1 - - -
-------- -------- -------- --------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE - 54.3 49.3 49.2 49.2
ADJUSTED WEIGHTED AVERAGE AND ASSUMED
CONVERSION
BASIC EARNINGS PER SHARE (b):
Income from continuing operations before
cumulative effect of accounting change $ .51 $ .42 $ .54 $ .81
Income from discontinued operations - - - .13
-------- -------- -------- --------
Income before cumulative effect of accounting .51 .42 .54 .94
change
Cumulative effect of accounting change - - - (.72)
-------- -------- -------- --------
TOTAL BASIC EARNINGS PER SHARE $ .51 $ .42 $ .54 $ .22
======== ======== ======== ========
DILUTED EARNINGS PER SHARE (b):
Income from continuing operations before
cumulative effect of accounting change $ .50 $ .42 $ .54 $ .81
Income from discontinued operations - - - .13
-------- -------- -------- --------
Income before cumulative effect of accounting .50 .42 .54 .94
change
Cumulative effect of accounting change - - - (.72)
-------- -------- -------- --------
TOTAL DILUTED EARNINGS PER SHARE $ .50 $ .42 $ .54 $ .22
======== ======== ======== ========
(a) Shares underlying the convertible securities issued in first quarter of
2002 were included in the calculation of diluted earnings per share for
second quarter of 2003 because of dilutive effects.
(b) Quarterly earnings per share results may not be additive, as per share
amounts are computed independently for each quarter.
11
(11) The financial data presented below conforms to SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and depicts the
profitability, identifiable assets 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 estimated applicable interest costs. Discontinued operations
and the cumulative effect of accounting change are not included in the
financial data presented below. GATX provides its services and products
through two operating segments: GATX Rail and Financial Services.
GATX FINANCIAL CORPORATE INTER-
(IN MILLIONS) RAIL SERVICES AND OTHER SEGMENT TOTAL
----------- ----------- ------------ ------------ -----------
THREE MONTHS ENDED JUNE 30, 2003
PROFITABILITY
Revenues $ 174.7 $ 139.0 $ .4 $ (.2) $ 313.9
Share of affiliates' earnings 2.6 19.8 - - 22.4
-------- --------- ---------- ------- ----------
Total gross income 177.3 158.8 .4 (.2) 336.3
Depreciation 28.9 48.6 - - 77.5
Interest, net 16.9 29.4 4.2 (.2) 50.3
Operating lease expense 43.7 2.4 - - 46.1
Income (loss) before income taxes 20.2 28.1 (9.2) - 39.1
Income (loss) 12.9 17.5 (5.6) - 24.8
SELECTED BALANCE SHEET DATA AT JUNE 30, 2003
Investments in affiliated companies 137.9 689.3 - - 827.2
Identifiable assets 2,288.8 3,653.1 252.6 (21.6) 6,172.9
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 70.1 146.2 7.9 (4.2) 220.0
Portfolio proceeds .4 162.1 - - 162.5
-------- --------- ---------- ------- ----------
Total cash provided (used) 70.5 308.3 7.9 (4.2) 382.5
Portfolio investments and capital additions 43.5 174.3 - - 217.8
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
PROFITABILITY
Revenues $ 163.7 $ 168.1 $ .3 $ (.4) $ 331.7
Gain on extinguishment of debt - .6 - - .6
Share of affiliates' earnings 2.3 19.5 - - 21.8
-------- --------- ---------- ------- ----------
Total gross income 166.0 188.2 .3 (.4) 354.1
Depreciation 26.3 61.6 - - 87.9
Interest, net 15.0 37.1 4.9 (.4) 56.6
Operating lease expense 43.2 3.3 - - 46.5
Income (loss) before income taxes 18.0 24.3 (10.5) - 31.8
Income (loss) 12.2 15.1 (6.9) - 20.4
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - - 850.9
Identifiable assets 2,385.3 3,811.9 273.1 (42.0) 6,428.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 92.9 28.8 24.6 (10.0) 136.3
Portfolio proceeds - 210.7 - - 210.7
-------- --------- ---------- ------- ----------
Total cash provided (used) 92.9 239.5 24.6 (10.0) 347.0
Portfolio investments and capital additions 25.8 323.6 - - 349.4
- ---------------------------------------------------------------------------------------------------------------------------------
12
GATX FINANCIAL CORPORATE INTER-
(IN MILLIONS) RAIL SERVICES AND OTHER SEGMENT TOTAL
----------- ----------- ------------ ------------ -----------
SIX MONTHS ENDED JUNE 30, 2003
PROFITABILITY
Revenues $ 345.6 $ 256.0 $ .3 $ (.5) $ 601.4
Gain on extinguishment of debt - .7 - - .7
Share of affiliates' earnings 4.7 36.2 - - 40.9
-------- --------- -------- ------- --------
Total gross income 350.3 292.9 .3 (.5) 643.0
Depreciation 58.0 98.5 - - 156.5
Interest, net 33.9 61.8 9.2 (.5) 104.4
Operating lease expense 87.5 4.7 - - 92.2
Income (loss) before income taxes 35.3 26.2 (18.7) - 42.8
Income (loss) 22.5 16.3 (12.2) - 26.6
SELECTED BALANCE SHEET DATA AT JUNE 30, 2003
Investments in affiliated companies 137.9 689.3 - - 827.2
Identifiable assets 2,288.8 3,653.1 252.6 (21.6) 6,172.9
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 115.5 198.0 (16.9) (20.3) 276.3
Portfolio proceeds .9 383.9 - - 384.8
-------- --------- -------- ------- --------
Total cash provided (used) 116.4 581.9 (16.9) (20.3) 661.1
Portfolio investments and capital additions 92.4 375.4 - - 467.8
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
PROFITABILITY
Revenues $ 335.4 $ 298.7 $ .1 $ (.8) $ 633.4
Gain on extinguishment of debt - 14.5 - - 14.5
Share of affiliates' earnings 6.0 33.8 - - 39.8
-------- --------- -------- ------- --------
Total gross income 341.4 347.0 .1 (.8) 687.7
Depreciation 52.4 124.1 - - 176.5
Interest, net 29.5 72.2 8.9 (.8) 109.8
Operating lease expense 86.1 1.9 - - 88.0
Income (loss) before income taxes 46.5 35.7 (19.5) - 62.7
Income (loss) 30.2 22.1 (13.0) - 39.3
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2002
Investments in affiliated companies 145.0 705.9 - - 850.9
Identifiable assets 2,385.3 3,811.9 273.1 (42.0) 6,428.3
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating activities 121.5 73.4 13.8 (9.9) 198.8
Portfolio proceeds 5.5 444.4 - - 449.9
-------- --------- -------- ------- --------
Total cash provided (used) 127.0 517.8 13.8 (9.9) 648.7
Portfolio investments and capital additions 39.4 631.6 - - 671.0
- ----------------------------------------------------------------------------------------------------------------------------------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST SIX MONTHS OF 2003
TO FIRST SIX MONTHS OF 2002
GATX Corporation's (GATX or the Company) net income for the first six months of
2003 was $26.6 million, a $16.0 million increase from the $10.6 million reported
for the same period in 2002. Earnings per share on a diluted basis increased to
$.54 in 2003 from $.22 in the 2002 period. Comparisons between periods are
affected by various items. Earnings for the first six months of 2002 included a
$6.2 million after-tax gain related to the sale of a portion of the discontinued
Integrated Solutions Group (ISG) segment, and a $34.9 million charge related to
the write-off of goodwill at the Rail segment. In the first six months of 2003,
GATX reported a net $6.0 million after-tax loss provision related to the Air
Canada bankruptcy, reflecting an $11.1 million after-tax first quarter loss
provision offset by the second quarter $5.1 million after-tax recovery. Earnings
for the first six months of 2003 also included a $2.7 million after-tax
insurance recovery on previously expensed litigation-related charges.
RESULTS OF CONTINUING OPERATIONS
GATX's gross income from continuing operations for the first six months of 2003
of $643.0 million was $44.7 million lower than the prior year period. Income
from continuing operations before cumulative effect of accounting change for the
first six months of 2003 was $26.6 million compared to $39.3 million in the
prior year period. Diluted earnings per share from continuing operations before
cumulative effect of accounting change decreased to $.54 from $.81 in the prior
year period.
GATX RAIL (RAIL)
In December 2002, Rail acquired the remaining interests in KVG Kesselwagen
Vermietgesellschaft mbH and KVG Kesselwagen Vermietgesellschaft m.b.h.
(collectively KVG), a leading European railcar lessor. Prior to the December
acquisition, Rail held a 49.5% interest in KVG. As a result of the acquisition,
KVG's results are now included in Rail's consolidated financial results.
Rail's gross income of $350.3 million for the first six months of 2003 increased
$8.9 million over the prior year period. Excluding KVG, gross income of $327.7
million was $13.7 million lower than the prior year period.
Lease income of $315.7 million was $3.8 million higher than the prior year
period. Excluding KVG, lease income of $290.8 million was $21.1 million lower
than the prior year period. The North American rail market continues to be
negatively impacted by the economic downturn and aggressive competition
continues to negatively impact lease rates. However, Rail has experienced
improvement in renewals and assignments of railcars in the first half of 2003.
Rail's North American fleet totaled 105,100 cars at the end of the second
quarter compared to 110,500 at the end of the prior year period. Approximately
97,500 railcars were on lease throughout North America at the end of the second
quarter, compared to 100,400 a year ago and 97,200 at December 31, 2002. Rail's
North American utilization was 93% at June 30, 2003, compared to 91% at June 30,
2002 and 91% at December 31, 2002. The increase in utilization from year end was
due to both additional railcars on lease and the scrapping of railcars.
Asset remarketing income includes gains from the sale of assets from Rail's own
portfolio as well as residual sharing fees from the sale of managed assets.
Asset remarketing income of $4.6 million was comparable with the prior year
period. Asset remarketing income in 2003 includes a gain of $4.3 million
resulting from the disposition of a leveraged lease commitment on passenger rail
equipment. The gain is partially offset by certain costs, the net result of
which is an increase to net income of $1.0 million. Share of affiliates'
earnings of $4.7 million were $1.3 million lower than the prior year period.
Excluding KVG's earnings of $2.5 million in 2002, share of affiliates' earnings
increased $1.2 million over the prior year period. Domestic share of affiliates'
earnings include the
14
reversal of a maintenance reserve of $.6 million in the current year and a loss
on a sale leaseback transaction of $.5 million in the prior year period.
Ownership costs of $179.4 million were $11.4 million higher than the prior year
period. Excluding KVG, ownership costs of $169.3 million increased $1.3 million,
driven primarily by higher interest expense due to lower capitalized interest
and higher average debt balances. Increased interest expense was partially
offset by a decrease in operating lease expense of $1.9 million due to lower
variable rates on certain leases in the 2003 period.
Maintenance expense increased $5.7 million from the prior year period to $80.2
million. Excluding KVG, maintenance expense of $76.3 million was up $1.8 million
from the prior year period due to an increase in the number of cars repaired, at
a higher cost per car, resulting from increased customer activity. Additionally,
certain railroad mandated repairs undertaken in 2003 contributed to the
increase. In the first quarter of 2003, the American Association of Railroads
(AAR) issued an early warning letter that required all owners of railcars in the
U.S. to inspect or replace certain bolsters manufactured by National Castings
Inc. from the mid to late 1990s. Rail owns approximately 3,200 railcars that
will be required to have the bolsters inspected or replaced by December 2003.
Approximately 60% of the affected railcars are on full service leases under
which Rail is responsible for the associated costs of inspection or replacement.
The remainder are on net leases, under which Rail expects the lessees to pay for
all or a portion of such costs. The increase in maintenance expense due to the
replacement of bolsters is $1.1 million. Management expects the cost of bolster
inspections and replacements to total up to $6.0 million pre-tax over the
2003-2004 period.
Selling, general and administrative (SG&A) expenses of $37.5 million were $.4
million lower than the prior year period. Excluding KVG, SG&A expenses of $32.5
million decreased $5.4 million due to lower incentive compensation expense,
timing, and cost savings.
Provision for possible losses was $.8 million lower than the prior year period
due to recoveries on previously written-off accounts.
In 2002, Rail recognized a cumulative effect of accounting change of $34.9
million. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
Rail completed a review of all recorded goodwill in 2002 and established fair
values using discounted cash flows. Based on this review, Rail recorded a
one-time, non-cash impairment charge related to DEC. The impairment charge was
due primarily to lower expectations of projected cash flows based on current
market conditions and a lower long-term growth rate projected for DEC.
Rail's net income of $22.5 million was $27.2 million higher than the prior year
period. Income before cumulative effect of accounting change of $22.5 million
was $7.7 million lower than the prior year period primarily due to fewer active
cars in the North American fleet combined with lower rates on renewals and
assignments.
FINANCIAL SERVICES
Financial Services is comprised of four business units: Air, Technology, Venture
Finance (Venture) and Specialty Finance (Specialty). In December 2002, GATX
announced its intention to sell or otherwise run-off Venture and curtail
investment at Specialty. During the second quarter of 2003, GATX determined that
Venture would not be sold. Venture represents $202.6 million of GATX's total
assets (including $2.0 million of off balance sheet assets) at June 30, 2003.
Specialty represents $871.4 million of GATX's total assets (including $18.2
million of off balance sheet assets) at June 30, 2003.
Financial Services continues to be negatively affected by the current economic
environment and challenging market conditions. In addition, despite showing
better operating performance than in the first quarter of 2003, volatility
continues in the airline industry, and GATX may experience unscheduled returns
of aircraft, lease restructurings and continued pressure on lease rates in its
Air business unit.
15
With respect to Air's delivery and renewal schedule, there are currently leases
in place for all of the six new aircraft scheduled for delivery in 2003.
Financial Services has eight aircraft leases scheduled for renewal in 2003, with
respect to which five leases are in place and one letter of intent has been
signed.
Financial Services' gross income of $292.9 million decreased $54.1 million from
the prior year period. The prior year period included $14.5 million attributable
to a gain on extinguishment of debt primarily associated with one Technology
investment, which was largely offset by a related loss provision and asset
impairment charge. Excluding gains on extinguishment of debt in both periods,
gross income decreased $40.3 million principally due to decreases in lease and
interest income and lower gains with respect to asset remarketing.
Lease income of $162.7 million declined $41.9 million from the prior year period
due to lower Technology and Specialty lease assets, slightly offset by an
increase in operating lease income from new aircraft deliveries at Air. Interest
income of $21.8 million decreased $6.8 million due to lower average loan
balances at Venture and Specialty compared to the prior year period, consistent
with GATX's plan to exit or curtail investment in these businesses.
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 $18.9 million decreased $7.0 million
from the prior year period primarily due to a decrease in remarketing activity
at Technology. Fee income of $9.1 million increased $1.2 million from the prior
year period due to a guarantee fee received at Specialty during the first
quarter of 2003. Other income of $13.3 million increased $7.4 million from the
prior year period due in part to the receipt of insurance proceeds of $4.5
million related to previously expensed litigation as well as higher foreign
currency translation gains which were largely offset in fair value adjustments
for derivatives.
Share of affiliates' earnings of $36.2 million was $2.4 million higher than
2002. The increase is due primarily to slightly higher income from certain Air,
Technology and Venture affiliates offset in part by lower income at Specialty
affiliates.
Ownership costs of $165.0 million decreased $33.2 million compared to the prior
year. Depreciation expense of $98.5 million decreased $25.6 million from 2002,
reflecting lower average operating lease assets at Technology, partially offset
by higher depreciation expense at Air due to new aircraft deliveries. Operating
lease expense of $4.7 million was $2.8 million higher than the prior year
period, which included the reversal of a previously recorded sublease liability.
Interest expense of $61.8 million decreased $10.4 million from 2002 due to a
decrease in average debt balances and lower interest rates.
SG&A expenses of $46.7 million decreased $6.2 million compared to the prior year
due to lower human resource and administrative expenses as a result of the
fourth quarter 2002 reduction in workforce, lower incentive compensation expense
and reduced commission expense at Technology due to a decrease in asset
remarketing activity.
The provision for possible losses is Financial Services' estimate of possible
credit losses inherent in the investment portfolio based on a review of credit,
collateral and market risks. The provision for possible losses of $8.6 million
decreased $17.7 million from the prior year period. A provision of $18.1 million
was made in the first quarter of 2003 to fully reserve for an unsecured Air
Canada note as a result of the bankruptcy filing. During the second quarter of
2003 the Air Canada note was sold and $8.5 million of the provision was
reversed. The prior year period included a $10.0 million provision related to
one Technology leasing investment which was largely offset by a $13.1 million
gain on extinguishment of nonrecourse debt related to the same investment. Asset
impairment charges of $16.1 million increased $9.7 million from the prior year
and primarily relate to Specialty assets.
16
The allowance for possible losses of $55.4 million decreased $13.2 million from
December 31, 2002 and was approximately 6.1% of reservable assets, moderately
lower than 6.3% at year end. Reservable assets are defined as gross receivables,
finance leases and loans. Net charge-offs of reservable assets totaled $23.6
million for the current six-month period and included a $12.8 million write-off
related to the Air Canada note as well as write-offs related to Venture and
Technology investments.
Non-performing assets of $144.2 million increased $49.3 million from year end
primarily due to higher Air investments on non-accrual status.
Net income of $16.3 million decreased $5.8 million from last year. The
combination of provision for losses and asset impairment charges (net of gains
on extinguishment of debt), had a $3.5 million unfavorable income impact
compared to the prior year and was principally driven by the net loss provision
related to the Air Canada note. The addition of lower yielding aircraft and
technology assets also contributed to the decrease in net income, partially
offset by lower SG&A expenses and a $2.7 million after-tax insurance recovery of
litigation expenses.
CORPORATE AND OTHER
Corporate and other net expense was $12.2 million for the first six months of
2003 compared to $13.0 million for the prior year period. The slight decrease is
due to lower incentive compensation expense.
TAXES
GATX's effective tax rate from continuing operations was 38% for the six months
ended June 30, 2003 compared to 37% for the six months ended June 30, 2002. The
Company expects the full year effective tax rate to be approximately 37%.
In January 2003, the Company concluded federal income tax audits of years 1992
through 1996 and paid tax deficiencies, including interest, of $21.4 million.
The tax deficiencies were primarily due to the previously reported IRS
settlement requirements related to disallowed interest expense on loans in the
Company's corporate owned life insurance (COLI) programs and were accrued for in
previous years.
The Company reported a net operating loss on its 2002 U.S. consolidated income
tax return and anticipates a loss on its 2003 return, largely due to bonus tax
depreciation on new assets. In accordance with IRS rules and subject to certain
limitations, these losses may be carried back to offset taxable income in prior
years, resulting in tax refunds. GATX received a $118.0 million refund for the
2002 federal return in May of 2003. Recoverable income taxes as of June 30, 2003
were $61.5 million.
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 bulk-liquid storage
facility in Mexico and recognized a $6.2 million after-tax gain.
CASH FLOW AND LIQUIDITY
GATX generates a significant amount of cash from its operating activities and
proceeds from its investment portfolio, which is used to service debt, pay
dividends, and fund portfolio investments and capital additions. 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.
17
Net cash provided by operating activities of continuing operations for the first
six months of 2003 was $276.3 million, $77.5 million higher than the prior year
period. The 2003 period includes a federal income tax refund of $118.0 million
and a federal income tax payment of $21.4 million related to previous audits.
Comparison of cash from operations between periods is also affected by other
changes in working capital, including timing of lease payments.
Portfolio proceeds of $384.8 million were down $65.1 million from $449.9 million
in the 2002 period due to lower proceeds from disposals of leased equipment and
a decrease in finance lease payments received, partially offset by increases in
cash distributions from joint venture investments and loan principal payments
received.
Portfolio investments and capital additions for the first six months of 2003
totaled $467.8 million, a decrease of $203.2 million from the first six months
of 2002. Portfolio investments and capital additions at Financial Services of
$375.4 million were $256.2 million lower than the prior year period, primarily
due to fewer aircraft progress payments and deliveries, lower volume at
Technology and curtailed investment at Specialty and Venture. Rail invested
$92.4 million in the first six months of 2003, an increase of $53.0 million from
the prior year. The increase was primarily attributable to Rail's December 2002
acquisition of the remaining interest in KVG, a portion of which was funded in
2003, as well as additional KVG railcar investments. Future portfolio
investments and capital additions (excluding contractual commitments) will
depend on market conditions and opportunities to acquire desirable assets.
Net leveraged lease disposition of $102.8 million represents asset remarketing
proceeds of $5.6 million from the sale of a commitment to lease passenger rail
equipment, offset by restricted cash transferred to the acquirer. Related
balances also transferred include nonrecourse debt, progress payments, and other
assets.
GATX's operating subsidiaries fund investments and meet debt, lease and dividend
obligations through cash flow from operations, portfolio proceeds (including
proceeds from asset sales), commercial paper borrowings, uncommitted money
market lines, committed revolving credit facilities, the issuance of unsecured
debt, and a variety of secured borrowings. GATX utilizes both the domestic and
international bank and capital markets.
In the current six-month period GFC issued $333.0 million and repaid $436.7
million of long-term debt. Significant financings in the first half of 2003
included $103.6 million of aircraft financing guaranteed by the European Export
Credit Agencies, $100.0 million from a commercial paper conduit securitization
facility, $79.8 million of technology nonrecourse financing and $37.1 million of
aircraft financing guaranteed by the U.S. Export-Import Bank.
GFC has revolving credit facilities totaling $539.3 million, consisting of three
agreements for $254.3 million, $145.0 million and $140.0 million, expiring in
2004, 2005 and 2006, respectively. In June 2003, GFC replaced an expiring $350.0
million facility with the $140.0 million credit facility. The new agreement is a
three-year unsecured revolving credit facility maturing in June 2006, and will
be used for short-term funding requirements. At June 30, 2003, availability
under all credit facilities was $513.9 million, with $25.4 million of letters of
credit backed by the most recent facility. The revolving credit facilities
contain various restrictive covenants, including an asset coverage test,
requirements to maintain a defined minimum net worth and a fixed charges
coverage ratio. At June 30, 2003, GFC was in compliance with the covenants and
conditions of the credit facilities.
In the second quarter 2003, GFC registered $1.0 billion of unsecured debt
securities and pass through certificates under a shelf registration statement
filed with the Securities and Exchange Commission. Pass through certificates are
securities that evidence an ownership interest in a pass through trust. The
property held by each pass through trust may include promissory notes secured by
railcars or aircraft that are owned or leased by GFC. No amounts were issued
pursuant to the shelf registration as of June 30, 2003.
18
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 April 15, 2003, S&P downgraded GFC's
long-term unsecured debt from BBB to BBB- and removed its ratings from credit
watch. GFC's current outlook from S&P is stable. On March 27, 2003, Moody's
affirmed the credit rating on GFC's long-term unsecured debt at Baa3 but revised
the rating outlook to negative from stable. GFC's existing credit rating has
increased the cost of borrowing from prior years and constrained GFC's access to
the commercial paper market. As a result, GFC may have more difficulty accessing
the long-term capital market on a cost efficient basis.
Unconditional purchase obligations of GATX's subsidiaries consist primarily of
committed aircraft deliveries and railcar orders. Unconditional purchase
obligations at June 30, 2003 were $800.8 million, comprised as follows: $206.9
million in the remainder of 2003, $392.4 million in 2004-2005, $181.4 million in
2006-2007, and $20.1 million thereafter.
COMPARISON OF SECOND QUARTER 2003
TO SECOND QUARTER 2002
In the second quarter 2003, GATX reported net income of $24.8 million or $.50
per diluted share compared to $20.4 million or $.42 per share on a diluted basis
in the prior year period.
GATX RAIL
Rail's gross income of $177.3 million for the second quarter of 2003 increased
$11.3 million over the prior year period. Excluding KVG, gross income was $1.2
million lower than the prior year period. Fewer active cars in the North
American fleet combined with lower rates on renewals and assignments contributed
to an $11.1 million decline in lease income.
Asset remarketing income of $4.5 million was $4.3 million higher than the prior
year period. Second quarter 2003 asset remarketing income includes a $4.3
million gain on the disposition of a leveraged lease commitment on passenger
rail equipment. The gain is partially offset by certain costs, the net result of
which is an increase to net income of $1.9 million. Share of affiliates'
earnings of $2.6 million were $.3 million higher than the prior year period.
Excluding KVG's earnings of $1.3 million in 2002, share of affiliates' earnings
were $1.6 million higher than the prior year period. The increase was due to
improved earnings at domestic affiliates as well as AAE Cargo. Domestic share of
affiliates' earnings include the reversal of a maintenance reserve of $.6
million in the current year quarter and a loss on a sale leaseback transaction
of $.5 million in the prior year period.
Ownership costs of $89.5 million were $5.0 million higher than the prior year
period. Excluding KVG, ownership costs of $84.1 million were essentially flat.
Maintenance expense increased $3.9 million from the prior year period to $40.8
million. Excluding KVG, maintenance expense of $38.6 million was $1.7 million
higher than the prior year period. The increase of $1.7 million was due to
higher repair and severance costs at DEC.
SG&A expenses of $19.2 million were comparable to the prior year period.
Excluding KVG, SG&A expenses of $16.5 million decreased $2.6 million due to
lower incentive compensation expense, timing, and cost savings.
Rail's net income of $12.9 million was $.7 million higher than the prior year
period. Excluding KVG, net income of $12.4 million was comparable with the prior
year period. The net impact of the gain on disposition of the leveraged lease
commitment of $1.9 million, in addition to lower SG&A expenses, were largely
offset by lower North American lease income.
19
FINANCIAL SERVICES
Financial Services' gross income of $158.8 million decreased $29.4 million from
the prior year period due to lower lease and asset remarketing income. Lease
income of $81.0 million was down $24.9 million primarily due to a decline in
Technology and Specialty lease assets offset by an increase in operating lease
income from new aircraft deliveries at Air. Asset remarketing income of $8.7
million was lower than the prior year period by $9.6 million primarily due to a
decrease in remarketing activity at Technology and losses at Specialty during
the quarter related to the sale of its interest in an affiliate. Other income of
$8.1 million increased $4.1 million from the prior year due to a $4.5 million
insurance recovery on previously expensed litigation related charges.
Share of affiliates' earnings of $19.8 million is comparable to the prior year
period earnings of $19.5 million. The current period earnings included higher
income at Air as a result of a gain from the sale of certain assets, which
largely offset an impairment loss on these assets recorded in the first quarter
2003. Lower income at Specialty due to the absence of income from a dissolved
real estate joint venture offset the increase in income at Air.
Ownership costs of $80.4 million decreased $21.6 million compared to the prior
year period due to lower depreciation and interest expense. Depreciation expense
of $48.6 million decreased $13.0 million from 2002 reflecting the lower level of
investment in Technology operating lease assets offset slightly by an increase
in operating lease assets at Air. Interest expense of $29.4 million decreased
$7.7 million due to a decrease in average debt at Technology and lower interest
rates slightly offset by an increase in recourse debt at Air.
SG&A expenses of $25.3 million decreased $2.6 million from the prior year period
due to lower human resource and administrative expenses as a result of the
fourth quarter 2002 reduction in workforce, lower incentive compensation expense
and lower commission expense at Technology due to a decrease in asset
remarketing activity.
The (reversal) provision for possible losses of $(10.5) million was $19.4
million lower than the prior year quarter. The current quarter provision
includes an $8.5 million reversal of the loss provision related to an unsecured
Air Canada note which had been fully reserved for during the first quarter of
2003.
Net income for the current three-month period was $17.5 million, compared to
$15.1 million in the prior year period. The increase from the prior year period
was principally the result of a $5.1 million after-tax recovery on the Air
Canada note that had been reserved for during the first quarter 2003, insurance
proceeds of $2.7 million after-tax related to previously expensed
litigation-related charges, and lower ownership costs, partially offset by lower
lease and asset remarketing income and higher asset impairment charges.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement is in effect for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. In addition, all provisions of this statement should be applied
prospectively. The provisions of this statement that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
freestanding financial instruments with characteristics of both liabilities and
equity and requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstances). This
20
statement is effective as of July 1, 2003. The adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
statements.
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 "may", "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; regulatory rulings that may impact the economic value of assets;
competitors in the rail and air markets who may have access to capital at lower
costs than GATX; additional potential write-downs and/or provisions within
GATX's portfolio; impaired asset charges; and general market conditions in the
rail, air, technology, venture, and other large-ticket industries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GATX and its subsidiaries are exposed to certain market risks, including changes
in interest rates and currency exchange rates. To manage these risks, pursuant
to established and authorized policies, such subsidiaries enter into derivative
transactions, principally interest rate swaps, Treasury derivatives and currency
swaps. These instruments and other derivatives are entered into for hedging
purposes only. Neither GATX nor its subsidiaries hold or issue derivative
financial instruments for speculative purposes.
Since December 31, 2002, there have been no material changes in GATX's interest
rate and foreign currency exposures or types of derivative instruments used to
hedge these exposures, and no significant changes in underlying market
conditions.
ITEM 4. CONTROLS AND PROCEDURES
GATX management, with the participation of the Chief Executive Officer (the
"CEO") and Chief Financial Officer (the "CFO"), have conducted an evaluation of
the effectiveness of disclosure controls and procedures in accordance with Rule
13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based on
such evaluation, the Company's CEO and CFO have concluded as of the end of the
period covered by this report, that GATX's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to
ensure that information required to be disclosed by GATX in this Quarterly
Report on Form 10-Q has been recorded, processed, summarized, and reported to
them in a timely manner. There have been no significant changes in the company's
internal controls over financial reporting that occurred during the period
covered by this report that has materially affected or is reasonably likely to
materially affect these controls.
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PART II - OTHER INFORMATION
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 July 29, 2003 reporting second quarter
2003 results.
Form 8-K filed on August 11, 2003 for the transcript of
the July 29, 2003 earnings conference call.
Form 8-K filed on August 11, 2003 reporting plans to offer
contingent convertible senior unsecured notes.
Form 8-K filed on August 11, 2003 for slide presentation
made in connection with a private placement of securities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATX CORPORATION
(Registrant)
/s/ Brian A. Kenney
-------------------------------
Brian A. Kenney
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: August 13, 2003
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EXHIBIT INDEX
The following exhibits are furnished as part of this quarterly report:
EXHIBIT
- -------
31a Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CEO Certification)
31b Certification Pursuant to Exchange Act Rule 13(a)-15(e) and Rule
15(d)-15(e) (CFO Certification)
32 Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO
Certification)
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