- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</Table>
COMMISSION FILE NUMBER 1-2328
---------------------
(GATX CORPORATION LOGO)
GATX CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
NEW YORK 36-1124040
(State of incorporation ) (I.R.S. Employer Identification No.)
</Table>
500 WEST MONROE STREET
CHICAGO, IL 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS OR SERIES ON WHICH REGISTERED
- ----------------------------- ---------------------
Common Stock New York Stock Exchange
Chicago Stock Exchange
$2.50 Cumulative Convertible Preferred Stock, Series A New York Stock Exchange
Chicago Stock Exchange
$2.50 Cumulative Convertible Preferred Stock, Series B New York Stock Exchange
Chicago Stock Exchange
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Act).
[X] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $1,638.9 million on June 30, 2005.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 50,766,470 common
shares were outstanding as of February 15, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
GATX's definitive Proxy Statement to be filed on or about March 23,
2006 PART III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GATX CORPORATION
2005 FORM 10-K
INDEX
<Table>
<Caption>
ITEM NO. PAGE NO.
- -------- --------
PART I
Item 1. Business.................................................... 2
General................................................... 2
Business Segments......................................... 2
GATX Rail............................................... 2
GATX Air................................................ 3
GATX Specialty.......................................... 5
GATX Other.............................................. 6
Trademarks, Patents and Research Activities............... 6
Seasonal Nature of Business............................... 6
Customer Base............................................. 6
Employees................................................. 6
Environmental Matters..................................... 6
Available Information..................................... 7
Item 1A. Risk Factors................................................ 7
Item 1B. Unresolved Staff Comments................................... 11
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Executive Officers of the Registrant........................ 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 18
Item 6. Selected Consolidated Financial Data -- Five-Year Summary... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Year ended December 31, 2005 compared to year ended
December 31, 2004 and
Year ended December 31, 2004 compared to year ended
December 31, 2003........................................... 24
Balance Sheet Discussion.................................. 35
Cash Flow Discussion...................................... 37
Liquidity and Capital Resources........................... 38
Critical Accounting Policies and Estimates................ 42
New Accounting Pronouncements............................. 44
Non-GAAP Financial Measures............................... 44
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 48
Item 8. Financial Statements and Supplementary Data................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 96
Item 9A. Controls and Procedures..................................... 96
Item 9B. Other Information........................................... 98
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 98
Item 11. Executive Compensation...................................... 98
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.................. 98
Item 13. Certain Relationships and Related Transactions.............. 99
Item 14. Principal Accounting Fees and Services...................... 99
PART IV
Item 15. Exhibits, Financial Statement Schedules..................... 99
Signatures................................................ 100
Schedules................................................. 101
Exhibits.................................................. 105
</Table>
1
PART I
ITEM 1. BUSINESS
GENERAL
GATX Corporation ("GATX" or the "Company") is headquartered in Chicago,
Illinois and provides services primarily through three operating segments: GATX
Rail ("Rail"), GATX Air ("Air"), and GATX Specialty ("Specialty"). GATX
specializes in railcar and locomotive leasing, aircraft leasing, and the
financing of other large-ticket equipment. In addition, GATX operates a fleet of
self-unloading vessels on the Great Lakes through its wholly owned subsidiary
American Steamship Company ("ASC"). GATX also invests in companies and joint
ventures that complement existing business activities. GATX partners with
financial institutions and operating companies to improve scale in certain
markets, broaden diversification within asset classes and enter new markets.
At December 31, 2005, GATX had balance sheet assets of $5.2 billion,
comprised largely of railcars and commercial aircraft. GATX also utilized
approximately $1.3 billion of assets, primarily railcars, which were leased-in
under operating leases and therefore were not recorded on the balance sheet.
In 2004, GATX completed the sale of substantially all the assets and
related nonrecourse debt of its former Technology segment consisting of GATX
Technology Services, its Canadian affiliate and interests in two joint ventures.
Financial data for the Technology segment has been segregated as discontinued
operations for all periods presented.
See discussion in Note 22 to the consolidated financial statements for
additional details regarding foreign operations and see Note 23 to the
consolidated financial statements for details regarding each segment's operating
results.
BUSINESS SEGMENTS
GATX RAIL
Rail is headquartered in Chicago, Illinois and is principally engaged in
leasing railcars (primarily tank cars and freight cars) and locomotives. At
December 31, 2005, Rail had total assets of $3.9 billion including $1.2 billion
of off balance sheet assets. Rail's customers are comprised primarily of
shippers of chemical, petroleum, and food products and railroads. Worldwide,
Rail provides more than 180 railcar types used to ship over 650 different
commodities. During 2005, approximately 31% of Rail's revenue was derived from
shipments of chemical products, 27% from shipments of petroleum products, 13%
from shipments of food products, 13% from leasing cars to railroads and 16%
attributable to other revenue sources. Rail had over 1,000 customers in 2005,
with no single customer accounting for more than 4% of total railcar revenue.
Rail primarily provides full-service leases on railcars, under which it
maintains the railcars, pays ad valorem taxes, and provides other ancillary
services. Rail also provides net leases under which the lessee is responsible
for maintenance, insurance and taxes. As of December 31, 2005, Rail's worldwide
fleet totaled approximately 127,700 railcars including wholly owned and
leased-in railcars. The cars in this fleet have depreciable lives of 30 to 38
years and an average age of approximately 17 years. Rail also had an ownership
interest in approximately 25,500 railcars worldwide through investments in
affiliated companies, including 5,800 railcars in North America and 19,700
railcars in Europe. Affiliate fleets consist primarily of freight and intermodal
railcars. In addition, Rail manages 5,700 railcars for third party owners for
which it earns a fee.
2
The following table sets forth Rail's fleet data as of December 31, 2005:
<Table>
<Caption>
TANK FREIGHT AFFILIATE
RAILCARS RAILCARS TOTAL RAILCARS TOTAL
-------- -------- ------- --------- -------
North America........................... 61,347 46,804 108,151 5,824 113,975
Europe.................................. 18,619 884 19,503 19,724 39,227
------ ------ ------- ------ -------
79,966 47,688 127,654 25,548 153,202
====== ====== ======= ====== =======
</Table>
At the end of 2005, there were approximately 282,000 tank cars and 1.4
million freight cars operating in North America. Rail's North American fleet
comprised approximately 22% of the tank cars in North America and approximately
3% of the freight cars. Rail's primary competitors in North America are Union
Tank Car Company, General Electric Railcar Services Corporation, and various
other lessors. In North America, Rail principally competes on the basis of
customer relationships, service, price and availability of railcars.
In North America, Rail leases new railcars for terms that generally range
from five to ten years. Renewals on existing leases are generally for periods
ranging from three to five years. The overall average remaining lease term of
the North American fleet is three years as of December 31, 2005. Rail purchases
new railcars from a number of manufacturers, including Trinity Industries, Union
Tank Car Company, Freight Car America, National Steel Car Ltd. and American
Railcar Industries. In November 2002, Rail entered into agreements with Trinity
Industries and Union Tank Car Company for the purchase of 5,000 and 2,500 newly
manufactured cars, respectively, which will be delivered through 2007. As of
December 31, 2005, a total of 5,430 cars have been delivered under these
agreements.
Rail operates a network of major service centers across North America that
perform significant repair and regulatory compliance work on owned and third
party railcars. The major service centers are supplemented by a number of mini
and fast track service centers and a fleet of service trucks (mobile service
units) that perform on site repairs that do not require the resources of a major
shop. Rail may also utilize third-party service centers for railcar repairs.
Rail's North American operation also includes its locomotive leasing
business. The locomotive business consists primarily of leasing four axle
locomotives to railroads and shippers in North America. The four axle, medium
horsepower locomotives that form the core of Rail's locomotive fleet have not
been manufactured in any material quantity since the mid-1980s; however, these
assets remain in demand by railroads and shippers. As a result, with periodic
maintenance and refurbishment, Rail expects these locomotives to continue to be
marketable and to yield an attractive return. Rail generally leases its
locomotives for terms that range from month-to-month up to 15 years. The
locomotives in Rail's fleet have depreciable lives of 40 years. In December
2004, Rail purchased the remaining 50% interest in its Locomotive Leasing
Partners, LLC ("LLP") joint venture, which owned 486 locomotives as of the
acquisition date. As of December 31, 2005, Rail had 504 locomotives in its North
American locomotive fleet.
As of December 31, 2005, Rail's European fleet consisted of approximately
19,500 railcars. In Europe, the railcar fleet generally has lease terms ranging
from one to five years. Rail's European operations consist of its German,
Austrian and Polish wholly owned subsidiaries. Rail also has a 37.5% ownership
interest in AAE Cargo AG, a railcar lessor headquartered in Switzerland whose
fleet consists of approximately 19,700 freight and intermodal railcars. Rail has
been integrating the operations of its European wholly owned subsidiaries to
achieve cost savings and strategic synergies. In Europe, Rail primarily operates
in the home countries of its subsidiaries and in 2005 expanded into the Romanian
market. In 2006, Rail will continue to explore other markets, particularly in
Eastern Europe. Rail's primary competitors in Europe are VTG-Lehnkering and
Ermeva. In Europe, Rail principally competes on the basis of customer
relationships, service, price and availability of railcars.
GATX AIR
Air is headquartered in San Francisco, California and is primarily engaged
in leasing widely used narrowbody aircraft to commercial airlines throughout the
world. At December 31, 2005, Air had total assets
3
of $1.8 billion, including $28.7 million of off balance sheet assets. Air owns
46 aircraft directly and has an ownership interest in an additional 104 aircraft
through joint ventures (collectively 150 "owned aircraft"). Joint ventures
("affiliates") are a significant part of Air's business model. Air uses joint
venture investments to diversify risk and to reduce required investment when
acquiring aircraft. At December 31, 2005, joint venture investments accounted
for $408.9 million of Air's assets. The aircraft owned by the joint ventures
operate primarily outside the United States. Air earns fees for providing
management services to many of its affiliates and also for managing 68 aircraft
for third parties. Air's management role generally includes such services as
marketing the aircraft, monitoring aircraft maintenance and condition, and
administering the portfolio, including billing and collecting rents and
maintenance reserves, accounting and tax compliance, reporting and regulatory
filings, purchasing insurance, and lessee credit evaluation.
The following table summarizes information on GATX owned and managed
aircraft as of December 31:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
Utilization by net book value of owned aircraft............. 99% 98% 97%
Number of owned aircraft(a)................................. 150 163 163
Number of managed aircraft. ................................ 68 56 62
</Table>
- ---------------
(a) Owned aircraft include 10, 13 and 14 aircraft, for 2005, 2004 and 2003,
respectively, owned by a Specialty affiliate that has a diverse asset mix.
Air typically enters into net leases under which the lessee is responsible
for maintenance, insurance and taxes. Air originates leases from its offices in
London, Toulouse, Singapore, and Tokyo, in addition to its headquarters in San
Francisco. Air purchases new aircraft that have depreciable lives of
approximately 25 years and also acquires aircraft in the secondary market. Air
primarily competes with GE Commercial Aviation Services, International Lease
Finance Corporation, other leasing companies and subsidiaries of commercial
banks. Air's customers consider leasing alternatives based on such factors as
pricing, the availability of aircraft, engine types, aircraft configuration and
the length of the lease term.
Air's customer base is diversified among air carriers and by geographic
location. Through its owned aircraft, Air leases to 58 airlines in 32 countries.
In 2005, no single customer accounted for more than 10% of Air's revenue or
represented more than 10% of Air's total net book value. At December 31, 2005,
Air had a significant concentration of commercial aircraft in Turkey, Brazil and
Germany with approximately 13%, 8% and 8% of Air's total assets, respectively.
The weighted average age of Air's fleet is approximately five years, based on
net book value. Aircraft on lease at December 31, 2005 have an average remaining
lease term of approximately three years, and lease terms typically range from
three to six years.
High fuel costs, intense competition, and excess capacity have caused
financial stress on the commercial aviation industry during recent years. In
December 2005, Air made a decision to dispose of certain older or less desirable
aircraft types. Air targeted 36 owned aircraft for disposition and is evaluating
disposition alternatives for its ownership interest in Pembroke Group, a 50%
owned affiliate that owns 26 aircraft. These actions resulted in the recognition
of an impairment charge of $196.4 million ($119.4 million after-tax). As Air
proceeds with the disposal of these assets, it will focus its efforts on
expanding its management fee arrangements and re-leasing its aircraft up for
renewal in 2006.
4
The following table sets forth Air's fleet by aircraft body type, with
aircraft targeted for disposition separately identified, as of December 31,
2005:
<Table>
<Caption>
AIRCRAFT RETAINED AIRCRAFT TARGETED FOR DISPOSITION
------------------------------ ---------------------------------
WHOLLY WHOLLY
BODY TYPE OWNED AFFILIATED SUBTOTAL OWNED AFFILIATED SUBTOTAL TOTAL FLEET
- --------- ------ ---------- -------- ------- ----------- --------- -----------
Boeing 717-200............... -- -- -- -- 12 12 12
Boeing 737-300............... -- 10 10 5 5 10 20
Boeing 737-400............... 2 -- 2 -- 1 1 3
Boeing 737-500............... -- -- -- -- 1 1 1
Boeing 737-700............... -- 1 1 -- 5 5 6
Boeing 737-800............... 10 22 32 -- -- -- 32
Boeing 757-200............... 1 2 3 4 2 6 9
Airbus 300B4-200F............ -- -- -- 1 -- 1 1
Airbus 319-100............... -- 1 1 1 -- 1 2
Airbus 320-200............... 17 5 22 -- 23 23 45
Airbus 321-100............... 2 -- 2 -- -- -- 2
Airbus 321-200............... 1 7 8 -- -- -- 8
ERJ-145ER.................... 1 -- 1 -- -- -- 1
Fokker 100................... -- -- -- -- 1 1 1
MD-82........................ -- 2 2 -- -- -- 2
MD-83........................ -- 4 4 1 -- 1 5
-- -- -- -- -- -- ---
34 54 88 12 50 62 150
== == == == == == ===
</Table>
GATX SPECIALTY
Specialty is headquartered in San Francisco, California. The Specialty
portfolio consists primarily of leases, loans, affiliate investments and
interests in residual values involving a variety of underlying asset types,
including marine, aircraft, rail, industrial and other equipment. The portfolio
provides recurring lease and interest income and uneven periodic income
primarily related to the remarketing of assets, both owned and managed. At
December 31, 2005, total investments in the Specialty portfolio, including off
balance sheet assets, were $438.4 million, of which approximately 42% were
marine assets. Specialty also provides equipment residual value guarantees,
which enables it to share in any asset value in excess of the guaranteed amount.
As of December 31, 2005, Specialty was party to approximately 400 such residual
value guarantees that expire between 2006 and 2012. Specialty further leverages
its equipment knowledge by managing portfolios of assets for third parties. The
majority of these managed assets are in markets in which GATX has a high level
of expertise, such as aircraft, rail equipment and marine equipment. Specialty
generates fee income through portfolio administration and asset remarketing of
these managed assets. As of December 31, 2005, the approximate net book value
equivalent of Specialty's managed portfolio was $555.8 million.
The following table sets forth information on Specialty's assets as of
December 31 (in millions):
<Table>
<Caption>
ON BALANCE OFF BALANCE MANAGED
SHEET SHEET TOTAL ASSETS
---------- ----------- ------ -------
2005......................................... $427.3 $11.1 $438.4 $555.8
2004......................................... 477.4 12.5 489.9 728.7
2003......................................... 707.6 13.7 721.3 882.2
</Table>
Prior to 2005, the former Venture Finance business unit, whose portfolio is
managed by Specialty, provided loan and lease financing to early-stage,
venture-capital backed companies. The financing was typically secured by
equipment and/or by a lien on the customer's property, including intellectual
property.
5
The Venture Finance portfolio has been substantially liquidated and as of
December 31, 2005, consists primarily of $18.5 million of investments.
The principal competitors of Specialty are captive leasing companies of
equipment manufacturers, leasing subsidiaries of commercial banks, independent
leasing companies, lease brokers and investment banks. Factors that affect
Specialty's ability to compete are GATX's relative cost of funds, size and scale
of our competitors, and the availability of many different financing
alternatives for our potential customers.
GATX OTHER
Other consists of ASC and Corporate expense. ASC operates a fleet of 12
self-unloading vessels on the Great Lakes. ASC's vessels range in length from
635 feet to 1,000 feet. The diversity of its fleet enables it to transport a
variety of dry bulk commodities including iron ore pellets, coal, and limestone
aggregates. ASC's vessels have carrying capacities that range from 24,000 to
70,000 net tons and require no onshore assistance to load and unload cargo.
TRADEMARKS, PATENTS AND RESEARCH ACTIVITIES
Patents, trademarks, licenses, and research and development activities are
not material to GATX's businesses taken as a whole.
SEASONAL NATURE OF BUSINESS
Seasonality is not considered significant to the operations of GATX and its
subsidiaries taken as a whole.
CUSTOMER BASE
Neither GATX as a whole nor any of its business segments is dependent upon
a single customer or concentration among a few customers.
EMPLOYEES
As of December 31, 2005, GATX and subsidiaries had approximately 1,870
employees, of whom 37% (primarily hourly rail service center employees) were
covered by union contracts.
ENVIRONMENTAL MATTERS
GATX's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulations. These laws cover
discharges to waters; air emissions; toxic substances; and the generation,
handling, storage, transportation and disposal of waste and hazardous materials.
This regulation has the effect of increasing the cost and liability associated
with leasing assets. Environmental risks are also inherent in rail operations,
which frequently involve transporting chemicals and other hazardous materials.
Some of GATX's current and previously owned properties have been used for
industrial or transportation-related purposes that may have resulted in the
discharge of contaminants. As a result, GATX is now subject to, and will from
time to time continue to be subject to, environmental cleanup and enforcement
actions. In particular, the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as the Superfund law,
generally imposes joint and several liability for cleanup and enforcement costs,
without regard to fault or the legality of the original conduct, on current and
former owners and operators of a site. Accordingly, GATX may be responsible
under CERCLA and other federal and state statutes for all or a portion of the
costs to clean up sites at which certain substances may have been released by
GATX, its current lessees, former owners or lessees of properties, or other
third parties. Environmental remediation and other environmental costs are
accrued when considered probable and amounts can be reasonably estimated. As of
December 31, 2005, environmental costs were not material to GATX's results of
operations, financial position or liquidity. For further discussion, see Note 15
to the consolidated financial statements.
6
AVAILABLE INFORMATION
GATX files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document GATX files at the SEC's public reference room at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information about the public reference room. The SEC
maintains a website that contains annual, quarterly and current reports, proxy
statements and other information that issuers (including GATX) file
electronically with the SEC. The SEC's website is www.sec.gov.
GATX makes available free of charge at its website, www.gatx.com, its most
recent annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to the Securities Exchange Act of 1934 as soon as reasonably
practicable after such material is electronically filed with, or furnished, to
the SEC. Charters for the Audit Committee, Compensation Committee and Governance
Committee, the Corporate Governance Guidelines, a Code of Ethics and a Code of
Ethics for Senior Officers are posted under Corporate Governance in the Investor
Relations section of the GATX website, and are available in print upon request
by any shareholder. Within the time period prescribed by the SEC and the New
York Stock Exchange, we will post on our website any amendment to the Code of
Ethics for Senior Officers and any waiver thereof. The information on GATX's
website is not incorporated by reference into this report.
ITEM 1A. RISK FACTORS
GATX's businesses are subject to a number of risks which investors should
consider.
GATX MAY NOT BE ABLE TO SECURE FINANCING TO FUND ITS OPERATIONS OR CONTRACTUAL
COMMITMENTS.
GATX is dependent, in part, upon the issuance of unsecured and secured debt
to fund its operations and contractual commitments. A number of factors could
cause GATX to incur increased borrowing costs and to have greater difficulty
accessing public and private markets for both secured and unsecured debt. These
factors include the global capital market environment and outlook, GATX's
financial performance and GATX's credit ratings and outlook as determined
primarily by rating agencies such as Standard & Poor's ("S&P") and Moody's
Investor Service ("Moody's"). In addition, based on GATX's current credit
ratings, access to the commercial paper market and uncommitted money market
lines is uncertain and cannot be relied upon. It is also possible that GATX's
other sources of funds, including available cash, bank facilities, cash flow
from operations and portfolio proceeds may not provide adequate liquidity to
fund its operations and contractual commitments.
UNITED STATES AND WORLD ECONOMIC AND POLITICAL CONDITIONS, INCLUDING ACTS OR
THREATS OF TERRORISM AND/OR WAR, COULD ADVERSELY AFFECT GATX'S BUSINESSES.
National and international political developments, instability and
uncertainties, including continuing political unrest and threats of terrorist
attacks, could result in global economic weakness in general and in the United
States in particular, and could have an adverse impact on GATX's businesses. The
effects may include legislation or regulatory action directed toward improving
the security of aircraft and railcars against acts of terrorism, which could
affect the construction and/or operation of aircraft and railcars, a decrease in
demand for air travel and rail services, consolidation and/or additional
bankruptcies in the airline industry; lower utilization of new and existing
aircraft and rail equipment, lower rail and aircraft rental rates and impairment
of rail and air portfolio assets or capital market disruption, which may raise
GATX's financing costs or limit its access to capital, and liability or losses
resulting from acts of terrorism involving GATX's assets. Depending upon the
severity, scope and duration of these effects, the impact on GATX's financial
position, results of operations and cash flows could be material.
COMPETITION COULD RESULT IN DECREASED PROFITABILITY IN GATX'S BUSINESSES.
GATX is subject to intense competition in its leasing and lending
businesses. In many cases, competitors are larger entities that have greater
financial resources, higher credit ratings and a lower cost of capital than
7
GATX. These factors may enable competitors to offer leases and loans to
customers at lower rates than GATX is able to provide, thus impacting GATX's
asset utilization or GATX's ability to lease assets or make loans on a
profitable basis.
GATX'S CORE BUSINESSES DEPEND UPON ITS CUSTOMERS LEASING ASSETS.
GATX's core businesses rely upon its customers continuing to lease rather
than purchase assets. There are a number of items that factor into the
customer's decision to lease or purchase assets, such as tax considerations,
interest rates, balance sheet considerations, and operational flexibility. GATX
has no control over these external considerations and changes in these factors
could negatively impact demand for its assets held for lease.
GATX CANNOT PREDICT WHETHER INFLATION WILL CONTINUE TO HAVE A POSITIVE IMPACT ON
ITS FINANCIAL RESULTS.
Inflation in leasing rates as well as inflation in residual values for air,
rail and other equipment has historically benefited GATX's financial results.
Effects of inflation are unpredictable as to timing and duration and depend on
market conditions and economic factors.
GATX'S ASSETS MAY BECOME OBSOLETE.
GATX's core assets may be subject to functional, regulatory, or economic
obsolescence. Although GATX believes it is adept at managing obsolescence risk,
there is no guarantee that changes in various market fundamentals or the
adoption of new regulatory requirements will not unexpectedly cause asset
obsolescence in the future.
GATX'S ALLOWANCE FOR POSSIBLE LOSSES MAY BE INADEQUATE TO PROTECT AGAINST
LOSSES.
GATX's allowance for possible losses on gross receivables may be inadequate
if unexpected adverse changes in the economy differ from the expectations of
management, or if discrete events adversely affect specific customers,
industries or markets. If the allowance for possible losses is insufficient to
cover losses related to gross receivables, then GATX's financial position or
results of operations could be negatively impacted.
THE FAIR MARKET VALUE OF ITS LONG-LIVED ASSETS MAY DIFFER FROM THE VALUE OF
THOSE ASSETS REFLECTED IN ITS FINANCIAL STATEMENTS.
GATX's assets consist primarily of long-lived assets such as railcars,
aircraft, marine vessels and industrial equipment. The carrying value of these
assets in the financial statements may at times differ from their fair market
value. These valuation differences may be positive or negative and may be
material based on market conditions and demand for certain assets. GATX
regularly reviews its long-lived assets for impairment.
GATX MAY INCUR FUTURE ASSET IMPAIRMENT CHARGES.
An asset impairment charge may result from the occurrence of unexpected
adverse events or management decisions that impact GATX's estimates of expected
cash flows generated from its long-lived assets or joint ventures. GATX
regularly reviews long-lived assets and joint ventures for impairment, including
when events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. GATX may be required to recognize asset impairment
charges in the future as a result of a weak economic environment, challenging
market conditions, events related to particular customers or asset types, or as
a result of asset or portfolio sale decisions by management.
GATX MAY NOT BE ABLE TO PROCURE INSURANCE ON A COST-EFFECTIVE BASIS IN THE
FUTURE.
The ability to insure its rail and aircraft assets and their associated
risks is an important aspect of GATX's ability to manage risk in these core
businesses. There is no guarantee that such insurance will be available on a
cost-effective basis consistently in the future.
8
GATX IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS AND ITS COSTS OF
REMEDIATION MAY BE MATERIALLY GREATER THAN THE REMEDIATION COSTS IT HAS
ESTIMATED.
GATX is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. GATX routinely assesses its environmental
exposure, including obligations and commitments for remediation of contaminated
sites and assessments of ranges and probabilities of recoveries from other
responsible parties. Due to the regulatory complexities and risk of unidentified
contaminants on its properties, the potential exists for remediation costs to be
materially different from the costs GATX has estimated.
GATX HAS BEEN, AND MAY IN THE FUTURE BE, INVOLVED IN VARIOUS TYPES OF
LITIGATION.
The nature of assets which GATX owns and leases exposes the Company to the
potential for various claims and litigation related to, among other things,
personal injury and property damage, environmental claims and other matters. The
transportation of certain commodities by GATX's railcars, particularly those
classified as hazardous materials, pose risks resulting in potential liabilities
and losses that could have a significant effect on GATX's consolidated financial
condition or results of operations.
HIGH ENERGY PRICES COULD HAVE A NEGATIVE EFFECT ON THE DEMAND FOR GATX'S
PRODUCTS AND SERVICES.
Energy prices, including the price of natural gas and oil, are significant
cost drivers for many of our customers, particularly in the chemical and airline
industries. Sustained high energy or commodity prices could negatively impact
these industries resulting in a corresponding adverse effect on the demand for
GATX's assets held for lease and related services. In addition, sustained high
steel prices could result in higher new railcar acquisition costs.
NEW REGULATORY RULINGS COULD NEGATIVELY AFFECT GATX'S PROFITABILITY.
GATX's air and rail operations are subject to the jurisdiction of a number
of federal agencies, including the Department of Transportation. State agencies
regulate some aspects of rail operations with respect to health and safety
matters not otherwise preempted by federal law. GATX's operations are also
subject to the jurisdiction of regulatory agencies of foreign countries. New
regulatory rulings may negatively impact GATX's financial results through higher
maintenance costs or reduced economic value of its assets.
EVENTS OR CONDITIONS NEGATIVELY AFFECTING CERTAIN ASSETS, CUSTOMERS OR
GEOGRAPHIC REGIONS IN WHICH GATX HAS A LARGE INVESTMENT COULD HAVE A NEGATIVE
IMPACT ON ITS RESULTS OF OPERATIONS.
GATX's revenues are generally derived from a wide range of asset types,
customers and geographic locations. However, from time to time, GATX could have
a large investment in a particular asset type, a large revenue stream associated
with a particular customer, or a large number of customers located in a
particular geographic region. Decreased demand from a discrete event impacting a
particular asset type, discrete events with a specific customer, or adverse
regional economic conditions, particularly for those assets, customers or
regions in which GATX has a concentrated exposure, could have a negative impact
on GATX's results of operations.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD HAVE A NEGATIVE IMPACT ON GATX'S
RESULTS OF OPERATIONS.
GATX's results are exposed to foreign exchange rate fluctuations as the
financial results of certain subsidiaries are translated from their local
currency into U.S. dollars upon consolidation. As exchange rates vary, the
operating results of their subsidiaries, when translated, may differ materially
from period to period. GATX is also subject to gains and losses on foreign
currency transactions, which could vary based on fluctuations in exchange rates
and the timing of the transactions and their settlement. In addition,
fluctuations in foreign exchange rates can have an effect on the demand and
relative price for services provided by GATX domestically and internationally,
and could have a negative impact on GATX's results of operations.
9
GATX MAY BE UNABLE TO MAINTAIN ASSETS ON LEASE AT SATISFACTORY LEASE RATES.
GATX's profitability is largely dependent on its ability to maintain assets
on lease (utilization) at satisfactory lease rates. A number of factors can
adversely affect utilization and lease rates, including, but not limited to: an
economic downturn causing reduced demand or oversupply in the markets in which
the Company operates, changes in customer behavior, or any other change in
supply or demand caused by factors discussed in this Risk section.
CHANGES IN ASSUMPTIONS USED TO CALCULATE POST-RETIREMENT COSTS COULD ADVERSELY
AFFECT GATX'S RESULTS OF OPERATIONS.
GATX's pension and other post-retirement costs are dependent on various
assumptions used to calculate such amounts, including discount rates, long-term
return on plan assets, salary increases, health care cost trend rates and other
factors. Changes to any of these assumptions could adversely affect GATX's
results of operations.
GATX'S EFFECTIVE TAX RATE COULD BE ADVERSELY AFFECTED BY CHANGES IN THE MIX OF
EARNINGS IN THE U.S. AND FOREIGN COUNTRIES.
GATX is subject to taxes in both the U.S. and various foreign
jurisdictions. As a result, GATX's effective tax rate could be adversely
affected by changes in the mix of earnings in the U.S. and foreign countries
with differing statutory tax rates, legislative changes impacting statutory tax
rates, including the impact on recorded deferred tax assets and liabilities,
changes in tax laws or by material audit assessments. In addition, deferred tax
balances reflect the benefit of net operating loss carryforwards, the
realization of which will be dependent upon generating future taxable income.
GATX'S INTERNAL CONTROL OVER FINANCIAL ACCOUNTING AND REPORTING MAY NOT DETECT
ALL ERRORS OR OMISSIONS IN THE FINANCIAL STATEMENTS.
Section 404 of the Sarbanes-Oxley Act requires annual management
assessments of the effectiveness of internal control over financial reporting
and a report by the Company's independent auditors addressing these assessments.
If GATX fails to maintain the adequacy of internal control over financial
accounting, the Company may not be able to ensure that GATX can conclude on an
ongoing basis that it has effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act and related regulations.
Although GATX's management has concluded that adequate internal control
procedures are in place, no system of internal control can provide absolute
assurance that the financial statements are accurate and free of error. As a
result, the risk exists that GATX's internal control may not detect all errors
or omissions in the financial statements.
10
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Information regarding the location and general character of certain
properties of GATX is included in ITEM 1, BUSINESS, of this document.
At December 31, 2005, locations of operations were as follows:
RAIL
HEADQUARTERS
Chicago, Illinois
BUSINESS OFFICES
San Francisco, California
Alpharetta, Georgia
Chicago, Illinois
Marlton, New Jersey
Raleigh, North Carolina
York, Pennsylvania
Houston, Texas
Calgary, Alberta
Cambridge, Ontario
Ennismore, Ontario
Montreal, Quebec
Vienna, Austria
Hamburg, Germany
Mexico City, Mexico
Nowa Wies Wielka, Poland
Warsaw, Poland
MAJOR SERVICE CENTERS
Colton, California
Waycross, Georgia
Hearne, Texas
Red Deer, Alberta
Sarnia, Ontario
Coteau-du-Lac, Quebec
Montreal, Quebec
Moose Jaw, Saskatchewan
Hanover, Germany
Tierra Blanca, Mexico
Ostroda, Poland
MINI SERVICE CENTERS
Donaldsonville, Louisiana
Geismar, Louisiana
Cincinnati, Ohio
Catoosa, Oklahoma
Freeport, Texas
Plantersville, Texas
Czechowice, Poland
Gdansk, Poland
Plock, Poland
Slotwiny, Poland
FAST TRACK SERVICE CENTERS
Macon, Georgia
East Chicago, Indiana
Terre Haute, Indiana
Kansas City, Missouri
Masury, Ohio
Galena Park, Texas
MOBILE SERVICE UNITS
Mobile, Alabama
Colton, California
Tampa, Florida
Sargent's Bluff, Iowa
Donaldsonville, Louisiana
Lake Charles, Louisiana
Queensbury, New York
Cooperhill, Tennessee
Galena Park, Texas
Olympia, Washington
Edmonton, Alberta
Vancouver, British Columbia
Clarkson, Ontario
Quebec City, Quebec
AIR
HEADQUARTERS
San Francisco, California
BUSINESS OFFICES
Seattle, Washington
Toulouse, France
Tokyo, Japan
Singapore
London, United Kingdom
SPECIALTY
HEADQUARTERS
San Francisco, California
BUSINESS OFFICES
Alpharetta, Georgia
CORPORATE HEADQUARTERS
Chicago, Illinois
AMERICAN STEAMSHIP COMPANY
Williamsville, New York
11
ITEM 3. LEGAL PROCEEDINGS
SCHNEIDER, ET AL. V. CSX TRANSPORTATION, INC., ET AL.
On May 25, 2001, a suit was filed in Civil District Court for the Parish of
Orleans, State of Louisiana, Schneider, et al. v. CSX Transportation, Inc.,
Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The Public Belt Railroad
Commission for The City of New Orleans, GATX Corporation, GATX Capital
Corporation, The City of New Orleans, and The Alabama Great Southern Railroad
Company, Number 2001-8924. The suit asserts that on May 25, 2000, a tank car
owned by the GATX Rail division of GATX Financial Corporation ("GFC"), a wholly
owned subsidiary of GATX, leaked the fumes of its cargo, dimethyl sulfide, in a
residential area in the western part of the city of New Orleans and that the
tank car, while still leaking, was subsequently taken by defendant, New Orleans
Public Belt Railroad, to another location in the City of New Orleans, where it
was later repaired. The plaintiffs are seeking compensation for alleged personal
injuries and property damages. The petition alleges that a class should be
certified, but plaintiffs have not yet moved to do so. The defendants have
offered to settle this suit by funding an escrow of $415,000, which will be
disbursed upon receipt of releases from the plaintiffs and the dismissal of the
uncertified class action by the Court. The settlement process has been delayed
as a result of the inability of plaintiffs' counsel to locate certain clients
following the dislocation caused by hurricane Katrina.
GRABINGER V. CANADIAN PACIFIC RAILWAY COMPANY, ET AL.
On December 29, 2003, a wrongful death action was filed in the District
Court of the State of Minnesota, County of Hennepin, Fourth Judicial District,
MeLea J. Grabinger, individually, as Personal Representative of the Estate of
John T. Grabinger, and as Representative/Trustee of the beneficiaries in the
wrongful death action, v. Canadian Pacific Railway Company, et al. The lawsuit
sought damages arising out of a derailment on January 18, 2002 of a Canadian
Pacific Railway ("CP") train containing anhydrous ammonia cars near Minot, North
Dakota. As a result of the derailment, several tank cars (including tank cars
owned by GFC) fractured, releasing anhydrous ammonia which formed a vapor cloud.
One person died, as many as 100 people received medical treatment, of whom
fifteen were admitted to the hospital, and a number of others were purportedly
affected. The plaintiffs alleged among other things that the incident (i) caused
the wrongful death of their husband/son, and (ii) caused permanent physical
injuries and emotional and physical pain. The complaint alleged that the
incident was proximately caused by the defendants who were liable under a number
of legal theories. On June 18, 2004, the plaintiff filed an amended complaint
based on the findings of the National Transportation Safety Board ("NTSB")
report released on March 9, 2004, which concluded that the catastrophic fracture
of tank cars increased the severity of the accident and added GFC and others as
defendants. Specifically, the allegations against GFC were that the steel shells
of the tank cars were defective and that GFC knew the cars were vulnerable and
nonetheless failed to warn of the extreme hazard and vulnerability.
GFC filed a motion for summary judgment at the close of discovery. On
December 19, 2005, the court issued an order, entered on the docket on December
29, 2005, granting summary judgment in GFC's favor.
CP settled with the plaintiffs and, in January 2006, CP filed pleadings
with the trial court and the appellate court seeking reversal of the summary
judgment ruling in favor of GFC. On January 30, 2006, the trial court denied CP
the right to an interlocutory appeal and subsequently the appellate court denied
CP's petition for interlocutory appeal. On February 7, 2006, the trial court
entered final judgment and CP has 60 days in which to file a notice of appeal.
GFC will vigorously oppose any appeal by CP to reverse the summary judgment in
GFC's favor.
In addition to the Grabinger matter, a number of other individuals allege
to have been affected by the incident and initiated litigation alleging that car
owners, including GFC, are in part responsible for damage caused by the
incident. GFC was joined to nine of these suits but was subsequently dismissed
without prejudice from these actions. Several hundred lawsuits remain pending
against CP relating to the Minot derailment.
12
FLIGHTLEASE HOLDINGS (GUERNSEY) LTD. V. GATX FINANCIAL CORPORATION, ET AL.
On October 14, 2005, Flightlease Holdings (Guernsey) Ltd. ("FHG"), acting
by its liquidators (the "FHG Liquidators"), filed a complaint in the United
States District Court for the Northern District of California, purportedly as a
derivative complaint on behalf of GATX Flightlease Aircraft Company Ltd.
("GFAC"), against GATX Financial Corporation ("GFC"), a wholly owned subsidiary
of the Company, GATX Third Aircraft Corporation ("Third Aircraft"), an indirect
wholly owned subsidiary of GFC, and Mr. James H. Morris and Mr. Alan M. Reinke,
both officers of a division of GFC. The complaint alleges (1) that Messrs.
Morris and Reinke, as directors of GFAC, breached fiduciary duties to GFAC; (2)
that GFC and Third Aircraft knowingly and/or dishonestly assisted such breaches;
(3) that all defendants conspired to deprive GFAC of assets and advance the
interests of GFC and Third Aircraft at the expense of GFAC; and (4) that Third
Aircraft was unjustly enriched. The complaint seeks damages (in respect of
claims (1), (2) and (3)) in an amount including, but not necessarily limited to,
approximately $227.6 million, and (in respect of claim (4)) in an amount
including, but not necessarily limited to, approximately $77.8 million. The
complaint arises out of the circumstances surrounding the termination of a joint
venture (in respect of which GFAC was the joint venture vehicle) between Third
Aircraft and FHG, an indirect wholly owned subsidiary of the SAirGroup. In
September 1999, GFAC had entered into an agreement (the "GFAC Agreement") with
Airbus S.A.S. (formerly known as Airbus Industrie) ("Airbus") to purchase a
number of Airbus aircraft. By October 1, 2001 GFAC had ordered a total of 41
aircraft (the "GFAC Aircraft") from Airbus and had made aggregate unutilized
pre-delivery payments ("PDPs") to Airbus of approximately $227.6 million.
Pursuant to agreements entered into on October 4, 2001 between Third Aircraft
and FHG (the "Split Agreements") the parties agreed (i) to divide responsibility
for the GFAC Aircraft, (ii) to allocate the PDPs between them in the amounts of
approximately $77.8 million to Third Aircraft and approximately $149.8 million
to FHG, and (iii) that each would enter into separate agreements with Airbus to
purchase its allocated aircraft or equivalent aircraft (such aircraft allocated
to Third Aircraft being the "GATX Allocated Aircraft"). Subsequently, GFC and
AVSA S.A.R.L., an affiliate of Airbus, entered into a new purchase agreement
(the "GATX Agreement") and AVSA S.A.R.L. credited approximately $77.8 million of
the PDPs to GFC. In connection with the GATX Agreement, GFC agreed that in
certain circumstances it will pay to Airbus any amount Airbus is required to pay
to GFAC in reimbursement of PDPs paid by GFAC with respect to the GATX Allocated
Aircraft (such agreement being the "Reimbursement Agreement"). GFC's liability
under the Reimbursement Agreement is capped at approximately $77.8 million.
Under the Split Agreements, FHG was to take the benefit of the remaining PDPs
allocated to it (approximately $149.8 million) pursuant to a new contract
between FHG and Airbus but, following SAirGroup's bankruptcy, FHG and Airbus did
not enter into such a contract, and Airbus declared GFAC in default and retained
the approximately $149.8 million in PDPs then held by it as damages. The FHG
Liquidators, purportedly on behalf of GFAC, allege (1) that Airbus' termination
of the GFAC Agreement was wrongful and a breach of the agreement; (2) that
Messrs. Morris and Reinke (assisted by GFC and Third Aircraft) facilitated the
termination of the GFAC Agreement, obstructed GFAC's pursuit of a purported
claim against Airbus and, as a result, caused GFAC to suffer damages of at least
$227.6 million; and (3) that the credit AVSA granted to GFC under the GATX
Agreement in the amount of approximately $77.8 million constituted unjust
enrichment. On January 17, 2006 the defendants moved to dismiss the complaint on
the grounds that the court lacks subject matter jurisdiction over the action,
and the defendants' motion is pending. GFC has indemnified Messrs. Morris and
Reinke against any losses they may suffer or incur as a result of their
appointment as GFAC directors. The Company believes there is no valid basis for
any claim made by the FHG Liquidators in the complaint against GFC, Third
Aircraft, and/or Messrs. Morris and Reinke, and all defendants are defending the
claims vigorously.
On October 10, 2005 GFAC filed a complaint in the Supreme Court of the
State and County of New York against Airbus alleging (1) that Airbus'
termination of the GFAC Agreement was wrongful and a material breach and
repudiation by Airbus of the GFAC Agreement; (2) that Airbus, by retaining PDPs
paid by GFAC under the GFAC Agreement, unjustly enriched itself at GFAC's
expense; (3) that Airbus breached an implied duty of good faith and fair dealing
to GFAC; and (4) that the liquidated damages provision in the GFAC Agreement is
unenforceable as a penalty. The complaint seeks restitution and damages in an
unspecified amount in the "millions of dollars." On December 7, 2005 FHG, acting
by the FHG Liquidators, filed a motion seeking permission to intervene in GFAC's
action, to protect its interest in the action, and to file
13
an intervenor's complaint. The intervenor's complaint repeats the material
allegations made in GFAC's complaint and seeks restitution from Airbus of the
approximately $227.6 million in unutilized PDPs paid by GFAC prior to October 1,
2001, and damages and interest in unspecified amounts. On February 16, 2006, the
Court said it would grant FHG permission to intervene in GFAC's action and
deemed FHG's intervenor's complaint to be filed against Airbus. On December 9,
2005 Airbus filed an answer and counterclaim to GFAC's complaint which (1)
denies the material allegations of GFAC's complaint, (2) asserts affirmative
defenses, (3) seeks a declaratory judgment that Airbus validly terminated the
GFAC Agreement and is entitled to retain the approximately $227.6 million in
unutilized PDPs made by GFAC prior to October 1, 2001, and (4) in the
alternative, if the liquidated damages provision in the GFAC Agreement is deemed
to be unenforceable as a penalty, asserts a claim for breach of contract and
damages in an amount to be determined at trial but allegedly "well in excess of
$228 million." On February 10, 2006, GFAC filed a reply to Airbus' counterclaims
which (1) denies the material allegations of the counterclaims, and (2) asserts
affirmative defenses. Should GFAC succeed in recovering from Airbus PDPs
referable to the GATX Allocated Aircraft, GFC may be obligated to make a payment
to Airbus under the Reimbursement Agreement in an amount equal to the lesser of
(x) the amount so recovered and (y) approximately $77.8 million. The Company
believes it unlikely Airbus will be required to make such a payment to GFAC and,
in consequence, that it is unlikely GFC will be required to make a corresponding
payment to Airbus under the Reimbursement Agreement. Furthermore, in the
unlikely event GFC is required to make a payment to Airbus under the
Reimbursement Agreement, the Company believes that Third Aircraft should recover
at least such amount from GFAC, the 50% subsidiary of Third Aircraft.
ADKINS V. TECHSOL CHEMICAL COMPANY, ET AL.
GFC has been named in three civil actions filed in the Circuit Court of
Wayne County, West Virginia styled as John Adkins and Cynthia Adkins v. TechSol
Chemical Co., et al., Civil Action No. 04-C-261, Alissa Cremeans et al. v.
TechSol Chemical Co., et al. Civil Action No. 05-C-288 and Sean Adkins et al. v.
TechSol Chemical Co., et al., Civil Action No. 05-C-304. The suits were filed by
plaintiffs who live by a hazardous material transloading facility near
Huntington, West Virginia. On October 28, 2004, approximately 22,000 gallons of
coal tar light oil were released from a GFC tank car on lease to Marathon
Ashland Company during an unloading operation. Some of the commodity is alleged
to have escaped into a local sewer system and a nearby creek. Immediately
following the release, residents of 500 nearby homes, at least one school and
several businesses were evacuated.
The allegations in each of the three suits are essentially identical. There
are approximately 325 plaintiffs in the three suits, who generally allege to
have suffered physical and mental harm, diminished property values and increased
risk of disease for which the defendants are responsible under various theories.
In each suit, the plaintiffs seek compensatory and punitive damages and
injunctive relief.
In the case that has been pending the longest, John Adkins and Cynthia
Adkins v. TechSol Chemical Company, et al. Civil Action No. 04-C-261,
co-defendant Marathon Ashland has asserted contribution cross claims against all
defendants, including GFC. The cross claim against GFC alleges that it failed to
provide a suitable tank car and failed to adequately maintain the tank car.
Marathon Ashland claims to have spent $8 million in remedial costs related to
the release and seeks to obtain contribution for a portion of those remediation
expenses from other parties. GFC has filed cross claims against other
defendants, including Marathon Ashland. In order to preserve contribution rights
in the event the car or the valve are found to be defective, GFC has asserted
third-party claims against the company that designed and manufactured the tank
car and the company that supplied the valve.
GFC believes that it has meritorious defenses against all of the above
claims and that there is no basis for any liability to the plaintiffs or other
defendants.
POLSKIE KOLEGE PANSTWOWE S.A. V. DEC SP. Z O.O.
In December 2005, Polskie Kolege Panstwowe S.A. ("PKP") filed a complaint,
Polskie Kolege Panstwowe S.A. v. DEC sp. z o.o., in the Regional Court in
Warsaw, Poland against DEC sp. z o.o. ("DEC"),
14
an indirect wholly owned subsidiary of the Company. The complaint alleges that
DEC breached a Conditional Sales Agreement ("Agreement") to purchase shares of
Kolsped S.A. ("Kolsped") which was an indirect subsidiary of PKP. The alleged
breached condition was for DEC to obtain a release of Kolsped's ultimate parent
company, PKP, from the latter's guarantee of Kolsped's $9,800,000 bank loan.
Kolsped and DEC had subsequently amended the Agreement to permit DEC to satisfy
this condition by providing PKP with a blank promissory note (the "DEC Note")
and with an accompanying promissory note declaration which allowed PKP to fill
in the DEC Note up to $9.8 million in the event a demand was made upon it as
guarantor of the Kolsped loan and Kolsped's note to the bank ("Kolsped Note").
On November 7, 2002, the then current holder of the Kolsped Note, a bank,
secured a judgment against PKP.
In December 2005, after exhausting its appeals, PKP filed suit against DEC
alleging that DEC failed to fulfill its obligation to release PKP as a guarantor
of the Kolsped Note, and is purportedly liable to PKP, as a third party
beneficiary of the Agreement, for approximately $28,000,000, the amount,
including interest and costs, PKP allegedly paid to the bank. On February 20,
2006, DEC answered the complaint, denying the material allegations and raising
numerous defenses including, among others, that: (i) the Agreement did not
create an actionable obligation, but rather was a condition precedent to the
purchase of shares in Kolsped; (ii) DEC fulfilled that condition by issuing the
DEC Note, which was subsequently lost by PKP and declared invalid by a Polish
court; (iii) PKP was not a third party beneficiary of the Agreement; and (iv)
the action is barred by the governing limitations period. DEC believes that it
has meritorious defenses to the complaint and intends to vigorously defend this
lawsuit.
OTHER LEGAL PROCEEDINGS
GATX and its subsidiaries have been named as defendants in a number of
other legal actions and claims, various governmental proceedings and private
civil suits arising in the ordinary course of business, including those related
to environmental matters, workers' compensation claims by GATX employees and
other personal injury claims. Some of the legal proceedings include claims for
punitive as well as compensatory damages. Several of the Company's subsidiaries
have also been named as defendants or co-defendants in cases alleging injury
relating to asbestos. In these cases, the plaintiffs seek an unspecified amount
of damages based on common law, statutory or premises liability or, in the case
of ASC the Jones Act, which makes limited remedies available to certain maritime
employees. In addition, demand has been made against the Company under a limited
indemnity given in connection with the sale of a subsidiary with respect to
asbestos-related claims filed against the former subsidiary. The number of these
claims and the corresponding demands for indemnity against the Company decreased
in the aggregate in 2005. It is possible that the number of these claims could
begin to grow and that the cost of these claims, including costs to defend,
could correspondingly increase in the future.
The amounts claimed in some of the above described proceedings are
substantial and while the final outcome of these matters cannot be predicted
with certainty at this time, considering among other things meritorious legal
defenses available and reserves that have been recorded along with applicable
insurance, it is the opinion of management that none of these matters, when
ultimately resolved, will have a material adverse effect on GATX's consolidated
financial position or liquidity. However, an unexpected adverse resolution of
one or more of these matters could have a material adverse effect on the results
of operations in a particular quarter or fiscal year.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information regarding GATX's executive officers is included
in Part I in lieu of inclusion in the definitive GATX Proxy Statement:
<Table>
<Caption>
POSITION
HELD
NAME OFFICE HELD SINCE AGE
- ---- ----------- -------- ---
Brian A. Kenney................ Chairman, President and Chief Executive Officer 2005 46
Robert C. Lyons................ Vice President and Chief Financial Officer 2004 42
Deborah A. Golden.............. Vice President, General Counsel and Secretary 2006 51
Gail L. Duddy.................. Senior Vice President -- Human Resources 2004 53
Vice President, Controller and Chief Accounting
William M. Muckian............. Officer 2002 46
William J. Hasek............... Vice President and Treasurer 2002 49
S. Yvonne Scott................ Vice President and Chief Information Officer 2004 47
James F. Earl.................. Executive Vice President -- Rail 2004 49
Curt F. Glenn.................. Vice President 2003 51
</Table>
- - In 2005, Mr. Kenney was elected Chairman and Chief Executive Officer of GATX.
Prior to that, Mr. Kenney served as President of GATX from 2004 to 2005,
Senior Vice President and Chief Financial Officer of GATX from 2002 to 2004,
Vice President and Chief Financial Officer of GATX from 1999 to 2002, Vice
President, Finance from 1998 to 1999, Vice President and Treasurer from 1997
to 1998, and Treasurer from 1995 to 1996.
- - In 2004, Mr. Lyons was elected Chief Financial Officer of GATX. Prior to that,
Mr. Lyons served as Vice President, Investor Relations of GATX from 2002 to
2004, Director of Investor Relations of GATX from 1998 to 2002, and Project
Manager, Corporate Finance from 1996 to 1998.
- - In January 2006, Ms. Golden joined GATX and was elected Vice President,
General Counsel and Secretary. Prior to joining GATX, Ms. Golden served as
Vice President and General Counsel with Midwest Generation from 2004 to 2005,
Deputy General Counsel to the Governor of the State of Illinois from 2003 to
2004 and an Assistant General Counsel with Ameritech Corporation/SBC
Communications, Inc from 1997 to 2001.
- - In 2004, Ms. Duddy was elected Senior Vice President -- Human Resources of
GATX. Prior to that, Ms. Duddy served as Vice President -- Human Resources
from 1999 to 2004, Vice President, Compensation and Benefits and Corporate
Human Resources from 1997 to 1999, Director of Compensation and Benefits from
1995 to 1997, and Director of Compensation from 1992 to 1995.
- - Mr. Muckian has served as Vice President, Controller and Chief Accounting
Officer of GATX since 2002. Prior to that, Mr. Muckian served as Controller
and Chief Accounting Officer of GATX from 2000 to 2002, and Director of Taxes
of GATX from 1994 to 2000.
- - Mr. Hasek has served as Vice President and Treasurer of GATX since 2002. Prior
to that, Mr. Hasek served as Treasurer from 1999 to 2001, Director of
Financial Analysis and Budgeting from 1997 to 1999, and Manager of Corporate
Finance from 1995 to 1997.
16
- - In 2004, Ms. Scott was elected Vice President and Chief Information Officer.
Ms. Scott joined GATX in 1990 as Manager, Information Systems Audit and has
held the positions of Manager of Business Systems and Planning, Assistant
Director of Corporate Information Systems, Director of Business Development
and Information Services, Director of Information Services and Administration,
Vice President, Integrated Solutions Group, Vice President, Strategic
Initiatives and Vice President and Chief Information Officer GATX Rail.
- - In 2004, Mr. Earl was elected Executive Vice President -- Rail. Prior to that
Mr. Earl served as Executive Vice President -- Commercial at GATX Rail from
2001 to 2004 and a variety of increasingly responsible positions in the GATX
Capital Rail Group from 1988 to 2001. Mr. Earl is the senior executive of the
Rail segment.
- - Mr. Glenn has served as a GATX Corporation Vice President since 2004 and
Executive Vice President, GATX Specialty of GATX Financial Corporation since
2003. Prior to that, Mr. Glenn served as Senior Vice President and Chief
Financial Officer of the GATX Capital Division of GATX Financial Corporation
from 2000 to 2003 and a variety of increasingly responsible positions at GATX
Capital from 1980 to 2000. Mr. Glenn is the senior executive of the Specialty
segment.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
GATX common stock is listed on the New York and Chicago Stock Exchanges
under ticker symbol GMT. The approximate number of common stock holders of
record as of February 15, 2006 was 3,420. The following table shows the reported
high and low sales price of GATX common shares on the New York Stock Exchange,
which is the principal market for GATX shares, and the dividends declared per
share:
<Table>
<Caption>
2005 2004
2005 2005 2004 2004 DIVIDENDS DIVIDENDS
COMMON STOCK HIGH LOW HIGH LOW DECLARED DECLARED
- ------------ ------ ------ ------ ------ --------- ---------
First quarter.......................... $33.59 $26.29 $28.68 $20.33 $0.20 $0.20
Second quarter......................... 35.60 31.43 27.71 21.25 0.20 0.20
Third quarter.......................... 41.85 34.04 27.45 23.82 0.20 0.20
Fourth quarter......................... 40.10 35.38 30.27 25.72 0.20 0.20
</Table>
For information pertaining to issuable securities under equity compensation
plans and the related weighted average exercise price, see Note 18 to the
consolidated financial statements. For information regarding restricted net
assets, see Note 11 to the consolidated financial statements.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED OR AT DECEMBER 31
----------------------------------------------------
2005(A) 2004(B) 2003 2002 2001
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
RESULTS OF OPERATIONS
Gross income................................... $1,134.6 $1,232.1 $1,087.6 $1,023.5 $1,117.5
(Loss) income from continuing operations before
cumulative effect of accounting change....... (15.1) 158.5 61.7 24.3 (22.6)
PER SHARE DATA
Basic:
(Loss) income from continuing operations
before cumulative effect of accounting
change.................................... $ (0.30) $ 3.21 $ 1.26 $ 0.50 $ (0.47)
Income from discontinued operations.......... .01 0.23 0.31 0.22 4.03
Cumulative effect of accounting change....... -- -- -- (0.72) --
-------- -------- -------- -------- --------
Total.......................................... $ (0.29) $ 3.44 $ 1.57 $ -- $ 3.56
======== ======== ======== ======== ========
Average number of common shares (in
thousands)................................... 50,106 49,348 49,107 48,889 48,512
Diluted:
(Loss) income from continuing operations
before....................................
cumulative effect of accounting change.... $ (0.30) $ 2.86 $ 1.24 $ 0.50 $ (0.47)
Income from discontinued operations.......... 0.01 0.18 0.29 0.22 4.03
Cumulative effect of accounting change....... -- -- -- (0.72) --
-------- -------- -------- -------- --------
Total.......................................... $ (0.29) $ 3.04 $ 1.53 $ -- $ 3.56
======== ======== ======== ======== ========
Average number of common shares and common
share equivalents (in thousands)............. 50,106 60,082 51,203 49,062 48,512
Dividends declared per share of common stock... $ 0.80 $ 0.80 $ 1.28 $ 1.28 $ 1.24
======== ======== ======== ======== ========
FINANCIAL CONDITION
Assets......................................... $5,244.4 $5,612.9 $6,080.6 $6,428.3 $6,103.7
Debt and capital lease obligations............. 2,872.6 3,132.1 3,493.5 3,868.0 3,588.4
Shareholders' equity........................... 1,022.3 1,080.9 888.9 800.6 885.1
-------- -------- -------- -------- --------
</Table>
- ---------------
(a) Loss from continuing operations in 2005 includes a write-down of Air assets
targeted for sale of $196.4 million on a pretax basis, or $119.4 million on
an after-tax basis.
(b) Income from continuing operations in 2004 includes a gain on the sale of the
Company's Staten Island property of $68.1 million on a pre-tax basis, or
$37.8 million on an after-tax basis and insurance recoveries of $48.4
million on a pre-tax basis, or $31.5 million on an after-tax basis.
Note: Certain prior period amounts have been reclassified to conform to the 2005
presentation.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
Information regarding general information and characteristics of the
Company including reporting segments is included in ITEM 1, BUSINESS, of this
document.
The following discussion and analysis should be read in conjunction with
the audited financial statements included herein. Certain statements within this
document may constitute forward-looking statements made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. These
statements are identified by words such as "anticipate," "believe," "estimate,"
"expect," "intend," "predict," or "project" and similar expressions. This
information may involve risks and uncertainties that could cause actual results
to differ materially from the forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. In addition, certain factors, including Risk Factors identified in
Part I of this document may affect GATX's businesses. As a result, past
financial results may not be a reliable indicator of future performance.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain certain Non-Generally Accepted Accounting
Principles ("GAAP") financial measures. See "Non-GAAP Financial Measures" for
additional information including definitions of terms and reconciliations to
related GAAP amounts.
DISCUSSION OF OPERATING RESULTS
The following table presents net (loss) income by segment for the years
ended December 31 (in millions):
<Table>
<Caption>
2005 2004 2003
------- ------ ------
Rail...................................................... $ 81.7 $ 60.4 $ 54.9
Air....................................................... (109.2) 9.8 2.1
Specialty................................................. 49.4 40.6 38.1
Other..................................................... (37.2) 47.5 (33.6)
Intersegment.............................................. 0.2 0.2 0.2
------- ------ ------
Income from continuing operations....................... (15.1) 158.5 61.7
Discontinued operations................................... 0.8 11.1 15.2
------- ------ ------
Net (loss) income....................................... $ (14.3) $169.6 $ 76.9
======= ====== ======
</Table>
GATX provides services primarily through three operating segments: Rail,
Air, and Specialty. Other is comprised of corporate results, including selling,
general and administrative expense ("SG&A") and interest expense not allocated
to segments, and the results of American Steamship Company ("ASC"). A detailed
business description of the Company's segments is included in Item 1. Management
evaluates the performance of each segment based on several measures, including
net income. These results are used to assess performance and determine resource
allocation among the segments.
Corporate SG&A relates to administration and support functions performed at
the corporate office and include information technology, human resources, legal,
tax, financial support and executive costs. Directly attributable expenses are
generally allocated to the segments and shared costs are retained in Other.
Amounts allocated to the segments are approximated based on management's best
estimate and judgment of the direct cost of support services.
Debt balances and interest expense were allocated based upon a fixed
recourse leverage ratio for each individual operating segment across all
reporting periods, expressed as a ratio of debt (including off balance sheet
debt) to equity. Unallocated debt and interest were retained in Other. For 2004
and 2003, the recourse leverage ratios for Rail, Air and Specialty were set at
5:1, 4:1, and 4:1, respectively. For 2005, Rail's recourse
20
leverage ratio was set at 4.5:1, Air's recourse leverage ratio was set at 3:1
and Specialty's recourse leverage ratio was set at 4:1. The reductions to the
2005 leverage assumptions at Rail and Air are reflective of GATX's consolidated
leverage position. Management believes this leverage and interest expense
allocation methodology provides a reasonable approximation of each operating
segment's risk-adjusted financial return.
Taxes are recorded in each segment based on the segment's operating results
and the relative tax rates in the jurisdictions in which they operate.
GATX'S FINANCIAL PERFORMANCE MEASURES
The following table presents financial measures for the Company based on
financial data derived from the financial statements and non-GAAP components.
For additional information on the Company's use of non-GAAP components, see
Non-GAAP Financial Performance Measures on page 43. All amounts and ratios are
based on continuing operations. The 2005 return measures were negatively
affected by the impairment charges recorded in the Air segment in the fourth
quarter of 2005. The 2004 return measures were positively affected by certain
non-operating events occurring in the fourth quarter of 2004, including the gain
from the sale of a Staten Island property, insurance recoveries and certain tax
benefits:
<Table>
<Caption>
2005 2004 2003
---- ----- -----
Return on equity............................................ (1.4)% 16.1% 7.3%
Return on assets............................................ (0.2)% 2.3% 0.9%
SG&A efficiency............................................. 1.80% 1.72% 1.64%
</Table>
GATX RAIL
The North American railcar market was extremely active in 2005. Industry
wide indicators, such as railcar loadings and ton miles, were at historically
high levels. Utilization of Rail's railcar fleet remained high at 98% and lease
rates increased over 2004 levels. Rail maintained its 98% utilization throughout
the entire year of 2005 through successful renewals of leases with current
lessees, assignments of railcars (whose lease term had expired) with new
lessees, and the scrapping of older, generally inactive railcars. The current
market conditions have enabled Rail to put a greater emphasis on renewing
contracts with current customers at attractive lease rates while also extending
lease term. Rail anticipates that this strategy should help reduce future
revenue volatility. In addition, renewals of existing leases typically result in
lower maintenance and transition costs than if the railcars are assigned to new
customers. Based on current market conditions and industry forecasts of future
activity, Rail believes that the favorable North American railcar market
conditions will generally result in increased lease rates on railcars scheduled
for renewal in 2006.
In North America, Rail acquired 5,400 new and used railcars in 2005. High
demand and high steel prices have increased current market prices for both new
and used railcars. In 2002, Rail entered into committed purchase contracts
("committed purchase program") with two railcar manufacturers in order to secure
favorable pricing for new railcar purchases in exchange for specific volume
purchase commitments. The committed purchase program has enabled Rail to
purchase new railcars at a lower price than would otherwise have been available
in the spot market. Rail's purchases of new railcars in 2005 were primarily
under the committed purchase program. Rail will continue to invest in the North
American market during 2006 through the use of the committed purchase program as
well as through select portfolio purchases.
Costs for maintaining the North American fleet continued to increase in
2005, primarily due to increased maintenance activity relating to the conversion
of railcars for use in different types of services (which also increases their
marketability), increased regulatory requirements and a larger fleet. The trend
of increasing maintenance costs is expected to continue in 2006 due to the past
and planned future growth in the size of the fleet as well as price increases
for railcar components and an anticipated increase in certain types of higher
cost repairs. Additional security and safety regulations, if enacted, may
likewise increase future maintenance costs.
21
In December 2004, Rail purchased the remaining 50% interest in its
Locomotive Leasing Partners LLC ("LLP") joint venture, which was established to
refurbish and lease locomotives. In 2005, the earnings of the locomotive
business are fully consolidated in Rail's operating results, whereas in 2004,
only 50% of the earnings from the LLP were reflected. Rail expects to continue
to expand its locomotive business in 2006.
Rail's European operations also benefited from improved market conditions
during 2005. Rates on new and renewed leases increased over expiring rates,
however at a lesser increment than North American rates. Rail expects this trend
to continue in 2006 as the European Union ("EU") is encouraging the use of
railways due to its congested road system. Poland and nine other countries
joined the EU in 2004. This is expected to eventually lead to more seamless
borders, upgraded infrastructure and improved rail efficiencies in those
countries. During 2005, Rail placed new cars in its primary markets of Austria,
Germany and Poland and successfully expanded into the Romanian market. Rail
expects to make further investments in these markets during 2006 and will
evaluate other European markets for selected expansion in the future.
Utilization in Europe was up from 88% at the end of 2004 to 91% at the end
of 2005. During 2004, major steps were taken at Rail's Polish subsidiary to
transition lease contracts from a trip lease (pay as used) business model to a
term rental business model. This transition culminated with the signing of term
rental agreements in late 2004 with its two largest customers. As a result of
this effort, redundant repair centers were closed, reducing operating costs and
making additional cars available for lease in 2005. Integration of Rail's
European operations continued during 2005 and resulted in additional cost
reductions, improved fleet utilization and other process efficiencies. The
impact of these actions is expected to be fully realized in 2006. The AAE Cargo
("AAE") affiliate also experienced strong demand for its fleet, particularly
intermodal railcars, due to high seaport volumes, growth in container freight
traffic, and increased demand from private operators.
Components of Rail's income statement are summarized below (in millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
GROSS INCOME
Lease income............................................... $729.4 $659.5 $628.5
Asset remarketing income................................... 13.3 8.1 4.7
Fees....................................................... 1.7 4.0 3.6
Other...................................................... 63.8 58.3 44.5
------ ------ ------
Revenues................................................. 808.2 729.9 681.3
Share of affiliates' earnings.............................. 13.7 16.6 12.5
------ ------ ------
TOTAL GROSS INCOME....................................... 821.9 746.5 693.8
OWNERSHIP COSTS
Depreciation............................................... 132.1 124.2 117.0
Interest expense, net...................................... 81.9 77.7 64.3
Operating lease expense.................................... 176.2 166.0 167.6
------ ------ ------
TOTAL OWNERSHIP COSTS.................................... 390.2 367.9 348.9
OTHER COSTS AND EXPENSES
Maintenance expense........................................ 193.3 186.8 163.4
Selling, general and administrative........................ 73.0 70.7 69.0
Asset impairment charges................................... 3.0 1.2 --
Other expenses............................................. 37.9 31.8 31.3
------ ------ ------
TOTAL OTHER COSTS AND EXPENSES........................... 307.2 290.5 263.7
------ ------ ------
INCOME BEFORE INCOME TAXES................................. 124.5 88.1 81.2
INCOME TAXES............................................... 42.8 27.7 26.3
------ ------ ------
NET INCOME................................................. $ 81.7 $ 60.4 $ 54.9
====== ====== ======
</Table>
22
FINANCIAL PERFORMANCE MEASURES FOR RAIL ($'S IN MILLIONS)
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
Return on equity....................................... 16.2% 13.7% 13.5%
Return on assets....................................... 2.1% 1.6% 1.5%
SG&A efficiency ratio.................................. 1.84% 1.85% 1.86%
Investment volume...................................... $ 402.9 $ 489.9 $ 249.6
On balance sheet assets................................ $2,719.4 $2,721.2 $2,401.6
Off balance sheet assets............................... $1,236.0 $1,175.8 $1,205.8
Total assets........................................... $3,955.4 $3,897.0 $3,607.4
Total equity........................................... $ 512.8 $ 452.2 $ 427.2
</Table>
RAIL'S FLEET DATA
The following table summarizes fleet activity for Rail's North American
railcars as of December 31:
<Table>
<Caption>
2005 2004 2003
------- ------- -------
Beginning balance....................................... 106,819 105,248 107,150
Cars added.............................................. 5,400 6,236 2,388
Cars scrapped or sold................................... (4,068) (4,665) (4,290)
Ending balance.......................................... 108,151 106,819 105,248
Utilization rate at year end............................ 98% 98% 93%
</Table>
RAILCAR REGULATORY ISSUES
The entire railroad industry, including Rail, faces the increasing
possibility that additional security or safety legislation or regulations may be
mandated. Well publicized railroad derailments, some of which involved GATX
railcars, have focused attention on safety issues associated with the
transportation of hazardous materials. These incidents have led to calls for
increased regulation to address safety and security issues associated with the
transportation of hazardous materials. Suggested remedial measures vary, but
include rerouting hazardous material railcar movements, increasing the
inspection authority of the Federal Railroad Administration ("FRA"), addressing
the physical condition of tank cars, and revising manufacturing specifications
for high pressure tank cars which carry hazardous materials. Specific focus has
been directed at pressurized railcars built prior to 1989 that were manufactured
with non-normalized steel. The National Transportation Safety Board ("NTSB")
issued a report in 2004 recommending that the FRA conduct a comprehensive
analysis to determine the impact resistance of pressurized tank cars built prior
to 1989, use the results of that analysis to rank cars according to risk and to
implement measures to eliminate or mitigate such risks. To date, the NTSB has
not recommended that pressure cars built prior to 1989 be removed from service,
nor has the FRA issued any orders curtailing use of these cars. The FRA's
analysis is ongoing.
In addition, legislation has been introduced at the state and federal
level, which if adopted, would affect pressurized tank cars manufactured before
1989 for use in the transportation of hazardous materials. Specifically, in July
2005, federal legislation was passed which requires the FRA to (1) within one
year validate a predictive model to quantify the relevant dynamic forces acting
on railroad tank cars under accident conditions, (2) within eighteen months
initiate rulemaking to develop and implement an appropriate design standard for
pressurized tank cars and (3) within one year conduct a comprehensive analysis
to determine the impact resistance of steel shells of pre-1989 built pressurized
tank cars. The Company owns or leases approximately 5,200 pre-1989 built
pressurized tank cars in North America (5% of its North American fleet). The
Company is actively working with trade associations and others to participate in
the legislative and regulatory process affecting rail transportation of
hazardous materials. However, at this time the affect on GATX of the mandates
made on the FRA in the recently adopted legislation, the probability of adoption
of similar legislation and the resulting impact on GATX should such legislation
be adopted cannot be reasonably determined.
23
In January of 2006, the Tank Car Committee of the Association of American
Railroads ("AAR") initiated dockets to develop new performance standards for
tank cars that transport two hazardous materials, chlorine and anhydrous
ammonia. The Tank Car Committee is a standing committee within the AAR Safety
and Operations Department and develops and publishes specifications for the
design, construction, maintenance and operation of tank cars. The dockets are
pending before two task forces comprised of Tank Car Committee members. These
task forces are charged with developing performance standards for tank cars that
would substantially reduce the probability of a release of chlorine or anhydrous
ammonia in the event of a rail accident. In the event new performance standards
are adopted, the AAR has stated that within five to seven years it will seek to
replace the existing fleet of tank cars carrying these materials with tank cars
that meet the new specifications. The Company owns or leases approximately 3,600
cars that carry these materials. The adoption of new standards will require
significant technical and regulatory agency review. It is not known if or when
such standards will be adopted or the actual specifications that will be
mandated. As a consequence, the impact to GATX cannot be determined at this
time.
COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004
SUMMARY
Net income of $81.7 million in 2005 increased $21.3 million from the prior
year. The increase was driven primarily by higher lease and asset remarketing
income as the rail market continued to improve, partially offset by higher
maintenance and ownership costs.
GROSS INCOME
Rail's 2005 gross income of $821.9 million was $75.4 million higher than
2004 due primarily to a larger fleet, a favorable lease rate environment, higher
asset remarketing activity primarily related to a gain on the sale of certain
locomotives, and higher customer and railroad damage reimbursements and third
party repairs.
Lease income was higher in both North American and European markets. The
North American railcar operations contributed approximately $38.7 million in
additional lease income during 2005. North American renewal and assignment
activity was strong in 2005 and utilization remained at 98%. Rail's secondary
market acquisitions and new railcar investments increased the average size of
the active fleet by approximately 4,000 railcars over 2004, leading to a
corresponding increase in lease income. In 2005, lease rates continued to
improve as the average renewal rate on a basket of common railcar types
increased 9.7% versus the expiring rate. The full impact of these higher rate
leases will be reflected in Rail's 2006 financial results. GATX expects lease
rate increases to continue in 2006 as 18% of the North American fleet is
scheduled for renewal. Lease income also increased $22.3 million from 2004 as a
result of the locomotive business. No lease income from locomotives was reported
in 2004 as Rail's 50% share of LLP's results was reported in share of
affiliates' earnings. Rail's European leasing operations also improved during
2005, where an increase in the average active fleet of 1,100 railcars along with
rising lease rates and stronger foreign currency exchange rates contributed an
additional $8.9 million in lease income over 2004. These results reflect Rail's
success in new markets, expanded investment in current markets, and the
transition of its Polish subsidiary leasing model.
Asset remarketing income in 2005 increased compared to 2004, primarily due
to a gain from the sale of certain six axle locomotives. Other income of $63.8
million increased $5.5 million from 2004 due primarily to higher revenue from
customer and railroad damage reimbursements and third party repairs. Costs
associated with this repair work are included in maintenance expense. This
increase was partially offset by lower scrapping gains resulting from the
combination of higher net book values of scrapped cars and fewer railcars
scrapped in 2005. Rail expects its volume of railcar scrappings to continue to
decline in 2006.
Share of affiliates' 2005 earnings of $13.7 million was $2.9 million lower
than the prior year. 2004 included the results of the LLP joint venture, which
contributed $2.7 million. Additionally 2005 included the write-off of a non-core
logistics investment. Excluding these factors, share of affiliates' earnings
increased $2.4 million due to improved results at Rail's AAE affiliate.
24
OWNERSHIP COSTS
The increase in ownership costs of $22.3 million in 2005 was primarily due
to the impact of significant investment volume throughout 2004 and 2005, and the
consolidation of LLP. This increase was partially offset by lower interest rates
resulting from improved credit spreads. The mix of ownership costs was affected
by the combined effects of the increase in the size of GATX's worldwide fleet
over 2004 and 2005 and the sale and leaseback of railcars with a net book value
of $170.0 million in 2005.
OTHER COSTS AND EXPENSES
Maintenance expense in 2005 increased $6.5 million from 2004 as a result of
the combination of several factors. Comparability between years is impacted by
repairs mandated by AAR regulatory actions in North America in each year.
Maintenance expense in 2004 included $3.0 million to inspect or replace certain
bolsters, while 2005 included an incremental $3.0 million of expense related to
wheel set replacements. Maintenance expense also increased in 2005 due to a
larger fleet, higher railcar conversion costs and third party repair expenses.
Repairs of railcars damaged by railroads or customers, the reimbursement of
which is included in other income, also contributed to the increase. In Europe,
favorable maintenance costs were partially offset by the effect of stronger
foreign currency exchange rates. As previously discussed herein, Rail expects
maintenance costs in 2006 to increase from 2005 levels.
Other costs and expenses of $37.9 million in 2005 increased $6.1 million
from 2004. The increase is primarily due to $5.0 million of debt extinguishment
costs related to the termination of a structured financing in Canada, which was
an important component of a company-wide initiative to repatriate foreign
earnings in 2005.
Asset impairment charges of $3.0 million were $1.8 million higher than
2004. This increase is primarily due to the additional write down taken on a
North American repair facility held for sale and the write down of certain
locomotives in Europe also held for sale.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated tax
expense.
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
SUMMARY
Net income of $60.4 million in 2004 increased $5.5 million from the prior
year. The increase in 2004 was driven primarily by higher lease income and
higher asset remarketing income for both Rail and its affiliates, as the rail
market continued to improve, and larger gains on scrapping of railcars as a
result of higher steel prices, partially offset by higher maintenance and
ownership costs.
GROSS INCOME
Rail's 2004 gross income of $746.5 million was $52.7 million higher than
2003 due primarily to favorable North American market conditions and higher
scrapping gains resulting from higher scrap metal prices. North American renewal
and assignment activity was strong in 2004 and the active fleet increased by
approximately 5,900 railcars. Rail's secondary market acquisitions and new
railcar investments significantly contributed to the increase in active cars and
the corresponding increase in lease income. North American utilization improved
to 98% at December 31, 2004 representing approximately 104,200 railcars on lease
compared to 93% at December 31, 2003. In 2004, the average renewal rate on a
basket of common railcar types increased 2.7% versus the expiring rate, with
this improvement largely attributable to activity in the second half of the
year. Also favorably impacting Rail's gross income was the impact of foreign
exchange rates. Rail's European rail operations improved during the course of
the year. Utilization rates remained high and operations were positively
impacted by success in new markets and the placement of new car deliveries.
25
Asset remarketing income in 2004 primarily included a gain on the sale of
railcars, residual sharing fees from a managed portfolio and other residual
sharing fees. Asset remarketing income in 2003 included the gain on disposition
of a leveraged lease commitment on passenger rail equipment. Other income of
$58.3 million increased $13.8 million from 2003 due primarily to higher
scrapping gains as the price of steel increased significantly from 2003. Share
of affiliates' 2004 earnings of $16.6 million were higher than the prior year.
The increase was the result of significant asset remarketing gains at domestic
and foreign affiliates.
OWNERSHIP COSTS
Ownership costs were $367.9 million in 2004 compared to $348.9 million in
2003. The increase was primarily the result of significant investment volume in
2004. Through new car and secondary market acquisitions, Rail purchased
approximately 6,200 railcars and 1,000 railcars in North America and Europe,
respectively.
OTHER COSTS AND EXPENSES
Maintenance expense of $186.8 million in 2004 increased $23.4 million from
2003. Maintenance costs increased sharply for a variety of reasons, including
costs associated with assignments, moving cars from idle to active service and
continuing regulatory compliance. As railcars move from idle to active service,
repairs and improvements, such as replacement of tank car linings and valves,
are often required. Although fewer cars were repaired, the cost per car
increased due to the nature of the repairs.
During 2003, the AAR issued an early warning letter that required all
owners of railcars in the United States, Canada and Mexico to inspect or replace
certain bolsters manufactured from the mid-1990s to 2001 by a now-bankrupt
supplier. Rail owned approximately 3,500 railcars equipped with bolsters that
were required to be inspected or replaced. Approximately 2,200 of Rail's
affected railcars are on full-service leases in which case Rail is responsible
for the costs of inspection or replacement. As of December 31, 2004, bolsters on
2,100 cars have been replaced. The cost attributable to the inspection and
replacement of bolsters was $3.0 million in 2004, a decrease of $0.9 million
from the prior year period.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated tax
expense.
GATX AIR
Airline industry market conditions improved in 2005. According to airline
industry data, worldwide revenue passenger miles increased in 2005. Aircraft
lease rates are recovering from the low levels of recent years. While airlines
remained under financial pressure due to intense competition and rising fuel
costs, there were relatively fewer credit defaults, bankruptcies and
liquidations. Additionally, new airlines were able to raise capital to support
entry into the industry, particularly in foreign markets. Air plans to
capitalize on the strengthening market by extending the average lease term on
its remaining fleet and improving other conditions of its leases, such as
maintenance reserve levels and security deposits, and shifting more transition
costs to aircraft operators. Aircraft on lease comprise nearly 100% of the
fleet, and remarketing pressures have eased as many customers are choosing to
extend existing leases at higher rates.
In 2005, Air was able to leverage its industry expertise by identifying
aircraft management opportunities with various financial institutions. These
management engagements involve remarketing, repossession, and sale efforts on
behalf of clients. Fee income in 2005 was $12.6 million, a 35% improvement over
the prior year. Fees from current partnership activities will decrease in the
future as a result of the previously discussed aircraft sales. However, in 2006
Air expects to more than offset this decrease with other fees as it focuses
resources toward pursuing additional aircraft management engagements.
During 2005, Air completed a comprehensive evaluation of its aircraft and
aircraft investments and as a result identified 36 aircraft, comprised of 12
wholly owned and 24 held by affiliates, for disposition and is evaluating
disposition alternatives for its investment in Pembroke Group, a 50% owned
affiliate that owns 26 aircraft. Aircraft and/or affiliate dispositions are
largely expected to be completed during 2006. Air recognized impairment losses
of $196.4 million ($119.4 million after-tax) in 2005 associated with these
actions. The
26
assets identified for disposition primarily consist of older or less desirable
aircraft. The details and results of GATX's impairment review are more
completely discussed in Note 7 to the consolidated financial statements. After
completion of the disposition process, Air's remaining portfolio will consist of
newer, more desirable aircraft. The improved asset mix, coupled with the ability
to focus greater resources on expanding aircraft management opportunities, is
expected to improve Air's profitability and financial returns.
Components of Air's income statement are summarized below (in millions):
<Table>
<Caption>
2005 2004 2003
------- ------ ------
GROSS INCOME
Lease income.............................................. $ 117.6 $101.0 $ 90.8
Interest income on loans.................................. 0.6 0.3 0.1
Asset remarketing income.................................. 2.3 5.5 0.8
Fees...................................................... 12.6 9.3 7.4
Other..................................................... 0.5 2.6 3.3
------- ------ ------
Revenues................................................ 133.6 118.7 102.4
Share of affiliates' (losses) earnings.................... (85.8) 26.2 31.6
------- ------ ------
TOTAL GROSS INCOME...................................... 47.8 144.9 134.0
OWNERSHIP COSTS
Depreciation.............................................. 59.8 59.5 55.1
Interest expense, net..................................... 59.0 42.0 41.2
Operating lease expense................................... 7.0 3.8 3.9
------- ------ ------
TOTAL OWNERSHIP COSTS................................... 125.8 105.3 100.2
OTHER COSTS AND EXPENSES
Maintenance expense....................................... 0.8 1.6 1.5
Selling, general and administrative....................... 25.9 21.5 18.1
Asset impairment charges.................................. 77.2 0.4 2.4
Other..................................................... 1.0 1.8 8.8
------- ------ ------
TOTAL OTHER COSTS AND EXPENSES.......................... 104.9 25.3 30.8
------- ------ ------
(LOSS) INCOME BEFORE INCOME TAXES......................... (182.9) 14.3 3.0
INCOME TAX (BENEFIT) PROVISION............................ (73.7) 4.5 0.9
------- ------ ------
NET (LOSS) INCOME......................................... $(109.2) $ 9.8 $ 2.1
======= ====== ======
</Table>
FINANCIAL PERFORMANCE MEASURES FOR AIR ($'S IN MILLIONS)
<Table>
<Caption>
2005(A) 2004 2003
-------- -------- --------
Return on equity...................................... (27.0)% 2.8% 0.6%
Return on assets...................................... (5.6)% 0.5% 0.1%
SG&A efficiency ratio................................. 0.67% 0.60% 0.51%
Investment volume..................................... $ 17.3 $ 225.2 $ 227.9
On balance sheet assets............................... $1,746.6 $2,086.4 $1,977.0
Off balance sheet assets.............................. $ 28.7 $ 29.1 $ 29.0
Total assets.......................................... $1,775.3 $2,115.5 $2,006.0
Total equity.......................................... $ 361.4 $ 357.9 $ 340.3
</Table>
- ---------------
(a) Negative return measures for 2005 are reflective of the impact of the
aircraft related impairment charges.
27
COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004
SUMMARY
Net loss was $109.2 million in 2005 compared to net income of $9.8 million
in the prior year. The decrease in 2005 was primarily attributable to impairment
losses recorded on twelve wholly owned aircraft and on the Company's investments
in five joint ventures.
GROSS INCOME
Air's 2005 gross income of $47.8 million was $97.1 million lower than 2004.
The decrease was primarily driven by lower earnings from affiliates due to
impairments. Excluding the effects of the impairments, gross income was $170.3
million, an increase of $25.4 million primarily driven by higher lease income
and the significant increase in fee income.
Lease income increased primarily due to the impact of higher rents on
variable rate leases, which are indexed to market interest rates. Lease income
also increased due to the full year recognition of lease income on three new
aircraft, which were delivered at various times during 2004, and higher rates on
certain renewed lease contracts. The increase in lease income was offset
partially by a lower rental rate for a restructured lease with bankrupt carrier
ATA Holdings and lower rates on lease extensions of certain older aircraft that
were subsequently targeted for disposition. Air expects lease income to increase
next year as a result of the full year effect of variable rate leases that
repriced in 2005. In addition, based on current market conditions, aircraft
scheduled for renewal in 2006 are expected to renew or re-lease at higher rental
rates. The timing of the dispositions of the 12 held for sale aircraft may also
impact lease income in 2006.
Asset remarketing income decreased in 2005 due to lower realized gains on
the sale of aircraft in 2005. During 2005, Air was able to leverage its
expertise in managing and remarketing aircraft on behalf of its affiliates as
well as other third parties. These efforts resulted in fee income of $12.6
million in 2005. Air expects its fee income to increase in 2006 as it allocates
resources toward expanding aircraft management opportunities.
Share of affiliates' earnings decreased from the prior year primarily due
to asset impairment charges of $122.5 million relating to affiliate aircraft and
affiliate investments targeted for disposition in 2005. Excluding these
impairment losses, share of affiliates' earnings increased $10.5 million from
the prior year primarily due to stronger earnings from several of Air's other
affiliates, particularly the Rolls-Royce engine leasing affiliate and the new
Alster and Thames Partners affiliate. The increase was partially offset by a
$10.0 million impairment loss at the Pembroke Group affiliate that was
recognized on its three aircraft on lease to Delta related to the airline's
bankruptcy proceedings. Earnings from affiliates will continue to be affected in
2006 by the timing of aircraft and/or affiliate dispositions and the absence of
depreciation for certain aircraft held for sale, as well as by the resulting
final disposition gains and/or losses.
OWNERSHIP COSTS
Ownership costs of $125.8 million in 2005 were $20.5 million higher than in
2004. The increase was primarily due to a $17.0 million increase in interest
expense, which was primarily due to higher interest rates on debt associated
with variable rate leases and was partially offset by lower average outstanding
debt. Operating lease expense increased $3.2 million primarily due to a $4.8
million loss on a restructured sublease to ATA Holdings. Ownership costs in 2006
are expected to decrease principally as a result of the absence of depreciation
on held for sale aircraft and the absence of the 2005 ATA loss. Depreciation
expense in 2005 on the aircraft held for sale was $14.4 million. Interest
expense is also expected to decrease as a result of lower debt levels as
proceeds associated with aircraft and/or affiliate dispositions will be used to
reduce debt.
OTHER COSTS AND EXPENSES
Total other costs and expenses of $104.9 million in 2005 were $79.6 million
higher than in 2004 primarily due to asset impairment charges of $73.9 million
related to the write down of the aircraft held for sale. Impairment charges in
2005 also included a write down of $3.3 million related to aircraft spare parts.
Asset
28
impairment charges in 2006 may reflect gains or losses as held for sale aircraft
fair value reassessments and/or final disposition results are recognized. SG&A
expenses in 2005 increased by $4.4 million primarily due to higher employee
costs and lower capitalized initial direct costs in 2005. Lower capitalized
initial direct costs were the result of an absence of aircraft deliveries in
2005 compared to three new deliveries in 2004.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated tax
expense.
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
SUMMARY
Net income of $9.8 million in 2004 increased $7.7 million from the prior
year primarily due to gains on the sale of aircraft and the negative effect in
2003 of a loss on an unsecured Air Canada note. 2004 profit was also driven by
strong joint venture performance, particularly at the Rolls-Royce engine leasing
affiliate.
GROSS INCOME
Air's 2004 gross income of $144.9 million was $10.9 million higher than
2003. The increase was primarily driven by higher lease and asset remarketing
income.
Lease income increased primarily due to the full year revenue recognition
on six new aircraft that were delivered at various times during 2003 and the
purchase and lease of three new aircraft along with the purchase of four
aircraft subject to existing leases in 2004. Lease income in 2004 on the new
aircraft purchases in 2004 and 2003 was approximately $12 million. The impact in
2004 of higher rents on variable rates leases, which are indexed to market
interest rates, was $2.9 million. These increases were offset by early lease
terminations and lower lease rates on certain renewed lease contracts. Asset
remarketing income increased as the result of gains from the sale of four
aircraft in 2004. Share of affiliates' earnings decreased from the prior year
primarily due to asset impairments at the Pembroke Group in 2004, more than
offsetting continued strong performance at the Rolls-Royce engine leasing joint
venture.
OWNERSHIP COSTS
Ownership costs of $105.3 million in 2004 were $5.1 million higher than in
2003. The increase was primarily due to the $4.4 million increase in
depreciation resulting from a full year of depreciation on six new aircraft
deliveries in 2003, three new deliveries in 2004, and four aircraft purchased in
2004.
OTHER COSTS AND EXPENSES
Total other costs and expenses of $25.3 million in 2004 were $5.5 million
lower than in 2003 primarily due to decreases in the provision for possible
losses and asset impairment charges, partially offset by higher SG&A expenses.
The provision for possible losses decreased $8.8 million from 2003 primarily due
to a net $9.6 million loss provision in 2003 on the disposal of an unsecured Air
Canada note. SG&A expenses increased by $3.4 million primarily due to higher
employee costs in 2004.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated tax
expense.
GATX SPECIALTY
In aggregate, the Specialty portfolio declined in 2005 as the run-off of
Venture Finance and other portfolio investments exceeded new investment.
Specialty's total asset base, including off balance sheet assets, was $438.4
million at December 31, 2005 compared to $489.9 million and $721.3 million at
December 31, 2004 and 2003, respectively. The Venture Finance portfolio has been
substantially liquidated and as of December 31, 2005, consists primarily of
$18.5 million of investments.
29
Specialty is pursuing new investment opportunities, focusing on marine
assets and other long-lived industrial equipment in targeted mature industries.
During 2005, Specialty invested approximately $64.8 million in these asset
types. Prospectively, it is expected that Specialty's asset levels will grow
based on anticipated new investment volume. Such investments may be originated
through direct or indirect channels. Future revenues may continue to be uneven
due to the uncertain timing of asset remarketing income, fees and gains from the
sales of securities. However, over time, Specialty expects loan, lease, and
affiliate income to comprise a greater proportion of its gross income.
Components of Specialty's income statement are summarized below (in
millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
GROSS INCOME
Lease income............................................... $ 31.4 $ 29.8 $ 42.9
Interest income on loans................................... 7.5 17.4 41.1
Asset remarketing income................................... 28.1 22.8 33.1
Gain on sale of securities................................. 6.8 4.1 6.7
Fees....................................................... 3.4 7.6 7.0
Other...................................................... 2.9 2.7 5.7
------ ------ ------
Revenues................................................. 80.1 84.4 136.5
Share of affiliates' earnings.............................. 43.3 22.4 22.7
------ ------ ------
TOTAL GROSS INCOME....................................... 123.4 106.8 159.2
OWNERSHIP COSTS
Depreciation............................................... 4.2 4.2 10.3
Interest expense, net...................................... 18.0 26.2 43.5
Operating lease expense.................................... 4.1 4.1 4.4
------ ------ ------
TOTAL OWNERSHIP COSTS.................................... 26.3 34.5 58.2
OTHER COSTS AND EXPENSES
Maintenance expense........................................ 0.8 0.8 1.1
Selling, general and administrative........................ 7.7 8.7 17.3
Asset impairment charges................................... 3.2 1.6 16.2
Other...................................................... 5.1 (4.2) 4.2
------ ------ ------
TOTAL OTHER COSTS AND EXPENSES........................... 16.8 6.9 38.8
------ ------ ------
INCOME BEFORE INCOME TAXES................................. 80.3 65.4 62.2
INCOME TAXES............................................... 30.9 24.8 24.1
------ ------ ------
NET INCOME................................................. $ 49.4 $ 40.6 $ 38.1
====== ====== ======
</Table>
FINANCIAL PERFORMANCE MEASURES FOR SPECIALTY ($'S IN MILLIONS)
<Table>
<Caption>
2005 2004 2003
------ ------ ------
Return on equity........................................... 92.1% 48.5% 18.8%
Return on assets........................................... 10.6% 6.7% 4.2%
SG&A efficiency ratio...................................... 0.73% 0.63% 0.96%
Investment volume.......................................... $ 92.6 $ 22.7 $130.9
On balance sheet assets.................................... $427.3 $477.4 $707.6
Off balance sheet assets................................... $ 11.1 $ 12.5 $ 13.7
Total assets............................................... $438.4 $489.9 $721.3
Total equity............................................... $ 57.6 $ 49.7 $117.8
</Table>
30
COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004
SUMMARY
Specialty's net income increased from the prior year primarily as a result
of the strong performance of its marine affiliates and significant remarketing
gains, including a large residual sharing fee from a managed portfolio. While
Specialty expects anticipated investment volume in 2006 to fuel growth in its
loan, lease and affiliate income, net income in 2006 is expected to be lower
than 2005 primarily due to an expected decline in asset remarketing gains.
GROSS INCOME
Specialty's 2005 gross income of $123.4 million was $16.6 million higher
than 2004. The increase was primarily the result of higher asset remarketing
income and share of affiliates' earnings, offset by lower interest and fee
income. Asset remarketing income increased $5.3 million from 2004 and was
comprised of both gains from the sale of assets from Specialty's owned portfolio
as well as residual sharing fees from the sale of managed assets. Because the
timing of such sales is dependent on market conditions, asset remarketing income
does not occur evenly from period to period. The increase of $20.9 million in
share of affiliates' earnings is primarily attributable to high freight rates
and utilization of vessels in the marine joint ventures. Lower anticipated
shipping activity in 2006, compared to the historical highs achieved in 2005, is
expected to lead to reduced marine affiliate income for the year. The decrease
of $9.9 million in interest income was primarily the result of lower loan
balances due to repayments in 2004 and 2005. Fee income decreased $4.2 million
due to large asset management fees received in 2004.
OWNERSHIP COSTS
Ownership costs of $26.3 million in 2005 were $8.2 million lower than 2004
due to lower interest expense resulting from a smaller investment portfolio and
lower debt balances.
OTHER COSTS AND EXPENSES
Other costs and expenses of $16.8 million in 2005 were $9.9 million higher
than 2004 primarily as a result of a decrease in the reversal of provision for
possible losses. Specialty reversed $7.1 million less in provision for possible
losses in 2005 versus 2004. The reversals in both years were primarily due to
favorable credit experience during the run-off of the Venture Finance portfolio
and improvements in overall portfolio quality. No further reversals of the
provision for losses are expected in 2006. Additionally, other operating costs
increased in 2005 related to a marine operation that experienced higher
utilization levels.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
SUMMARY
Net income of $40.6 million increased $2.5 million from the prior year
primarily due to improved credit quality of the portfolio and lower SG&A
expenses. The continued strong performance of marine joint ventures and
remarketing gains also contributed to the 2004 results. Specialty's new marine
investments were $13.9 million and $26.6 million in 2004 and 2003, respectively.
As expected, overall asset levels continued to decline as asset run-off exceeded
new investment volume.
GROSS INCOME
Specialty's 2004 gross income of $106.8 million was $52.4 million lower
than 2003. The decrease was primarily the result of lower lease, interest and
asset remarketing income. The decreases of $13.1 million in lease income and
$23.7 million in interest income were the result of lower lease and loan
balances due to the
31
run-off of portfolio assets. Asset remarketing income decreased $10.3 million
from 2003 and was comprised of both gains from the sale of assets from
Specialty's own portfolio as well as residual sharing fees from the sale of
managed assets. Share of affiliates' earnings were relatively unchanged from
2003 to 2004. However, 2004 income from marine joint ventures increased by $8.9
million compared to 2003, which offset the absence of income realized in 2003
from other joint venture investments that have been dissolved.
OWNERSHIP COSTS
Ownership costs of $34.5 million in 2004 were $23.7 million lower than 2003
consistent with the decrease in the portfolio. The $17.3 million decrease in
interest expense was due to lower debt balances as a result of a smaller
portfolio, and the $6.1 million decrease in depreciation was due to lower
operating lease assets.
OTHER COSTS AND EXPENSES
Other costs and expenses of $6.9 million in 2004 were $31.9 million lower
than 2003 primarily as a result of decreased asset impairment charges, and an
increase in the reversal of provision for possible losses, and lower SG&A
expenses consistent with the decline in total assets. The 2003 asset impairment
charges were primarily related to an investment in a corporate aircraft and
various cost method equity investments. SG&A expenses decreased $8.6 million
from 2003 reflecting lower personnel and other costs related to the exit from
the venture business. Specialty reversed $6.5 million more in provision for
possible losses in 2004 versus 2003 due to a better than expected performance
within the portfolio.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
GATX OTHER
Other is comprised of corporate results, including SG&A and interest
expense not allocated to the segments, and the results of American Steamship
Company ("ASC"), a Great Lakes shipping company.
Components of the income statement are summarized below (in millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
GROSS INCOME
Marine operating revenue................................... $138.3 $111.8 $ 85.0
Asset remarketing income................................... -- 0.1 (0.7)
Other...................................................... 3.2 122.0 17.2
------ ------ ------
TOTAL GROSS INCOME....................................... 141.5 233.9 101.5
OWNERSHIP COSTS
Depreciation............................................... 6.6 6.7 5.6
Interest expense, net...................................... 5.8 16.5 27.3
Operating lease expense.................................... -- -- 0.4
------ ------ ------
TOTAL OWNERSHIP COSTS.................................... 12.4 23.2 33.3
OTHER COSTS AND EXPENSES
Marine operating expenses.................................. 108.9 87.7 68.9
Selling, general and administrative........................ 60.9 62.4 59.2
Other...................................................... 9.3 2.0 8.9
------ ------ ------
TOTAL OTHER COSTS AND EXPENSES........................... 179.1 152.1 137.0
------ ------ ------
(LOSS) INCOME BEFORE INCOME TAXES.......................... (50.0) 58.6 (68.8)
INCOME TAX (BENEFIT) PROVISION............................. (12.8) 11.1 (35.2)
------ ------ ------
NET (LOSS) INCOME.......................................... $(37.2) $ 47.5 $(33.6)
====== ====== ======
</Table>
32
COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004
SUMMARY
Other reported a net loss of $37.2 million for 2005 compared to net income
of $47.5 million in 2004. Net income in 2004 benefited from a $37.8 million
after-tax gain from the sale of a former Terminals facility in Staten Island,
after-tax insurance recoveries of $31.5 million, and $14.5 million of tax
benefits realized during the year. Excluding these items, lower interest expense
and stronger earnings from ASC in 2005 were more than offset by debt
extinguishment and foreign earnings repatriation costs also incurred in 2005.
GROSS INCOME
Gross income of $141.5 million in 2005 decreased $92.4 million from 2004.
The decrease was primarily due to gains of $68.1 million from the sale of the
Company's Staten Island property and $48.4 million from the receipt of
settlement proceeds associated with litigation GATX had initiated against
various insurers. The litigation was related to coverage issues in the 2000-2001
Airlog matter. Marine operating revenue increased in 2005 primarily due to
higher freight rates, the revenue contribution from a new vessel, and revenues
related to fuel surcharges. The fuel surcharges were largely offset by higher
fuel costs in marine operating expenses.
OWNERSHIP COSTS
Ownership costs of $12.4 million in 2005 were $10.8 million lower than the
prior year, primarily due to a decrease in interest expense. The decrease was
the result of carrying less excess liquidity in 2005 compared to 2004.
OTHER COSTS AND EXPENSES
Marine operating expenses in 2005 were $21.2 million higher than prior year
primarily due to higher fuel costs. These increased costs were largely recovered
through fuel surcharges included in marine operating income.
Other operating expenses of $9.3 million were $7.3 million higher than
prior year. 2005 costs were primarily attributable to $11.9 million of debt
extinguishment costs related to liability management activities partially offset
by a reversal of provision for possible losses.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
SUMMARY
Other net income in 2004 benefited from a $37.8 million after-tax gain from
the sale of a former terminals facility in Staten Island, incremental after-tax
insurance recoveries of $20.7 million, and $14.5 million of tax benefits
realized during the year. 2003 net income benefited from $10.0 million of tax
benefits realized during the year.
GROSS INCOME
Gross income of $233.9 million in 2004 increased $132.4 million from 2003
primarily due to a $68.1 million gain from the sale of the Staten Island
property and a $31.9 million incremental gain from settlement proceeds
associated with the Airlog litigation. Higher marine operating revenue driven by
increased demand, a larger fleet, and favorable operating conditions also
contributed to the increase.
33
OWNERSHIP COSTS
Ownership costs of $23.2 million were $10.1 million lower compared to 2003,
primarily due to a decrease in interest expense. Lower average debt balances and
lower average interest rates contributed to the favorable variance compared to
2003.
OTHER COSTS AND EXPENSES
SG&A expenses of $62.4 million were $3.2 million higher than the prior
year. The variance is largely due to higher consulting fees associated with the
implementation of Section 404 of the Sarbanes-Oxley Act, fees associated with a
bond exchange completed in 2004, and lower intercompany allocations impacted by
the sale of the of GATX Technology Services and its Canadian affiliate
(collectively "Technology") segment. Other expenses for 2003 were primarily
attributable to a $6.0 million impairment charge taken on an ASC off-lakes barge
that ceased operations during the year.
GATX CONSOLIDATED
CONSOLIDATED INCOME TAXES
GATX recognized a consolidated income tax benefit from continuing
operations of $12.7 million in 2005, compared to income tax expense of $68.2
million in 2004. The effective tax rate in 2005 was 45.7% compared to 30.1% in
2004. Comparability of the tax benefit or expense as well as the effective tax
rates in 2005 and 2004 is impacted by the pre-tax loss due to the aircraft
impairment costs recognized in 2005, and by other non-recurring items in each
year. In 2005, a tax benefit of $6.6 million was recognized in connection with
costs related to the termination of a structured financing. This benefit was
offset by $9.9 million of tax expense recognized on the repatriation of certain
foreign earnings. In accordance with the special one-time dividends received
deduction in the American Jobs Creation Act of 2004, GATX repatriated foreign
earnings of $94.5 million in the fourth quarter of 2005. The 2004 tax expense
provision was favorably impacted by the recognition of income tax refunds of
$14.5 million and deferred tax reductions of $2.4 million due to lower rates
enacted in foreign jurisdictions. Excluding the impact of non-recurring items in
each year, GATX's consolidated income tax rate would be 35% and 37.5% in 2005
and 2004, respectively. The decrease in the rate in 2005 from 2004 was primarily
due to differences in the mix of domestic and foreign sourced income.
See Note 13 to the consolidated financial statements for additional
information about income taxes.
DISCONTINUED OPERATIONS
The following table summarizes the gross income, income before taxes and
the loss on sale of segment, net of taxes, for GATX's discontinued operations
for all periods presented (in millions):
<Table>
<Caption>
2005 2004 2003
---- ------ ------
Gross Income................................................ $2.0 $104.0 $205.6
Income before taxes......................................... 1.2 30.1 25.0
Operating income, net of taxes.............................. 0.8 18.3 15.2
Loss on sale of segment, net of taxes....................... -- (7.2) --
---- ------ ------
Total discontinued operations............................... $0.8 $ 11.1 $ 15.2
==== ====== ======
</Table>
On June 30, 2004, GATX completed the sale of substantially all the assets
and related nonrecourse debt of its Technology segment to CIT Group, Inc. for
net proceeds of $234.1 million. Subsequently, the remaining assets consisting
primarily of interests in two joint ventures were sold by December 31, 2004.
Financial data for the Technology segment has been segregated as discontinued
operations for all periods presented.
See Note 19 to the consolidated financial statements for additional
information about discontinued operations.
34
BALANCE SHEET DISCUSSION
ASSETS
Total assets of continuing operations were $5.2 billion at December 31,
2005 compared to $5.6 billion at December 31, 2004. Decreases in operating lease
assets and investments in affiliated companies were partially offset by
increases in cash, receivables and other assets.
In addition to its assets recorded on the balance sheet, GATX utilizes
approximately $1.3 billion of other assets, such as railcars and aircraft, which
were financed with operating leases and therefore are not recorded on the
balance sheet. The off balance sheet assets represent the present value of
GATX's committed future operating lease payments using a 10% discount rate.
The following table presents assets of continuing operations by segment as
of December 31 (in millions):
<Table>
<Caption>
2005 2004
------------------------------ ------------------------------
ON OFF ON OFF
BALANCE BALANCE BALANCE BALANCE
SHEET SHEET TOTAL SHEET SHEET TOTAL
-------- -------- -------- -------- -------- --------
Rail..................... $2,719.4 $1,236.0 $3,955.4 $2,721.2 $1,175.8 $3,897.0
Air...................... 1,746.6 28.7 1,775.3 2,086.4 29.1 2,115.5
Specialty................ 427.3 11.1 438.4 477.4 12.5 489.9
Other.................... 351.1 10.4 361.5 316.5 31.3 347.8
-------- -------- -------- -------- -------- --------
$5,244.4 $1,286.2 $6,530.6 $5,601.5 $1,248.7 $6,850.2
======== ======== ======== ======== ======== ========
</Table>
GROSS RECEIVABLES
Receivables of $462.4 million in 2005, including leveraged leases net of
nonrecourse debt, increased $10.3 million over 2004. The increase was primarily
attributable to an increase in finance leases partially offset by run-off of the
Venture Finance loan portfolio.
ALLOWANCE FOR POSSIBLE LOSSES
The purpose of the allowance is to provide an estimate of credit losses on
gross receivables. In addition to establishing loss estimates for known troubled
accounts, this estimate involves consideration of historical loss experience,
judgments about the impact of present economic conditions, collateral values,
and the state of the markets in which GATX operates. This overall allowance for
possible losses is measured and reported as a percentage of gross receivables.
The following summarizes changes in GATX's consolidated allowance for
possible losses as of December 31 (in millions):
<Table>
<Caption>
2005 2004
----- ------
Balance at the beginning of the year........................ $22.1 $ 45.6
Reversal of provision for possible losses................... (6.3) (13.7)
Charges to allowance........................................ (4.7) (13.7)
Recoveries and other........................................ 2.0 3.9
----- ------
Balance at end of the year.................................. $13.1 $ 22.1
===== ======
</Table>
35
The following table presents the allowance for possible losses by segment
as of December 31 (in millions):
<Table>
<Caption>
2005 2004
----- -----
Rail........................................................ $ 3.3 $ 4.1
Air......................................................... 0.4 1.1
Specialty................................................... 8.7 13.5
Other....................................................... 0.7 3.4
----- -----
$13.1 $22.1
===== =====
</Table>
The allowance for possible losses is reviewed regularly for adequacy by
considering changes in economic conditions and credit quality indicators. GATX
believes that the allowance is adequate to cover losses inherent in the
receivables portfolio as of December 31, 2005. The allowance is based on
judgments and estimates, which could change in the future, causing a
corresponding change in the recorded allowance.
The allowance for possible losses of $13.1 million at December 31, 2005
decreased $9.0 million from 2004 and represented 2.8% of gross receivables,
compared to 4.9% in the prior year. The decrease of allowance for possible
losses as a percentage of gross receivables in 2005 reflects the general
improvement in the credit quality of GATX's portfolio as well as the
better-than-expected performance and run-off of Venture Finance assets, which
were reserved at a relatively higher rate than the rest of the portfolio. Net
charge-offs, which is calculated as charge-offs less recoveries (excluding
other), totaled $2.6 million for the year, an improvement of $8.6 million from
2004. The charge-offs to the allowance in 2005 were substantially related to
Specialty's Venture Finance portfolio.
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Net operating lease assets and facilities decreased $464.0 million from
2004. The decrease was primarily related to the following activities during the
2005: Air reclassed aircraft with a pre-impairment net book value of $207.9
million to assets held for sale and transferred $123.6 million of aircraft to an
affiliate in which GATX has a 50% interest; Rail completed a sale-leaseback for
$170.0 million of railcars and sold $79.6 million of railcars and locomotives;
depreciation contributed $203.9 million. Partially offsetting the decrease were
investments by Rail and Specialty of $292.3 million and $30.5 million,
respectively.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies decreased $51.3 million in 2005
primarily due to the $122.5 million impairment charge taken on aircraft assets
targeted for disposition. GATX invested $92.9 million in joint ventures in 2005,
including non-cash additions of $62.7 million related to the transfer of four
aircraft to an affiliate in which GATX has a 50% interest. Distributions from
affiliates were $105.4 million in 2005.
The following table shows GATX's investment in affiliated companies by
segment as of December 31 (in millions):
<Table>
<Caption>
2005 2004
------ ------
Rail........................................................ $ 99.7 $102.5
Air......................................................... 408.9 473.8
Specialty................................................... 158.7 142.3
------ ------
$667.3 $718.6
====== ======
</Table>
See Note 6 to the consolidated financial statements for additional
information about investments in affiliated companies.
36
DEBT
For details on debt activity in 2005, see Net Cash Used In Financing
Activities for Continuing Operations under Cash Flow Discussion.
OTHER ASSETS
The increase in other assets in 2005 was primarily due to the
reclassification of held for sale aircraft from Operating Lease Assets.
CASH FLOW DISCUSSION
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.
NET CASH PROVIDED BY CONTINUING OPERATIONS
Net cash provided by continuing operations of $284.8 million decreased
$16.7 million compared to 2004. Excluding the impact of insurance proceeds of
$48.4 million and income tax refunds of $51.0 million received in 2004,
operating cash flow increased by $82.7 million, benefiting from higher lease
income, partially offset by debt management costs and higher operating lease
payments.
PORTFOLIO INVESTMENTS AND CAPITAL ADDITIONS
Portfolio investments and capital additions primarily consist of purchases
of operating lease assets, investments in joint ventures, loans and capitalized
asset improvements. Portfolio investments and capital additions of $520.5
million decreased $239.5 million from 2004. Rail invested $402.9 million in
2005, a decrease of $87.0 million from the prior year. High steel prices and
intense competition for railcar acquisitions in the secondary markets have made
it challenging to find attractive new investments. Portfolio investments and
capital additions at Air of $17.3 million were $207.9 million lower than the
prior year. Lower investment volume in 2005 was due to limited available
aircraft investment opportunities at an acceptable risk adjusted rate of return.
GATX did not acquire any aircraft in 2005 compared to seven deliveries (three of
which were new aircraft) in 2004. Specialty invested $92.6 million in 2005, an
increase of $69.9 million from the prior year. Significant 2005 activity at
Specialty included the funding of an interest in a new marine joint venture and
investments in select long-lived industrial equipment.
The following table presents portfolio investments and capital additions by
segment (in millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
Rail....................................................... $402.9 $489.9 $249.6
Air........................................................ 17.3 225.2 227.9
Specialty.................................................. 92.6 22.7 130.9
Other...................................................... 7.7 22.2 20.2
------ ------ ------
$520.5 $760.0 $628.6
====== ====== ======
</Table>
Future portfolio investments and capital additions (excluding contractual
commitments) will depend on market conditions and opportunities to acquire
desirable assets.
PORTFOLIO PROCEEDS
Portfolio proceeds primarily consist of loan and finance lease receipts,
proceeds from asset remarketing and sales of securities, and capital
distributions from affiliates. Portfolio proceeds of $249.5 million decreased
$106.0 million from 2004. The decrease was primarily due to a decline in loan
payments received, related to a reduction in the loan portfolio, and lower
distributions from affiliates. The decrease was partially offset by an
37
increase in proceeds from asset remarketing. 2005 asset remarketing proceeds
included $62.7 million related to the transfer of four aircraft to a newly
formed joint venture in which the Company has a 50% interest.
Portfolio proceeds were as follows for the years ended December 31 (in
millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
Finance lease rents received, net of earned income and
leveraged lease nonrecourse debt service................. $ 14.9 $ 26.0 $ 20.5
Loan principal received.................................... 48.5 110.8 281.7
Proceeds from asset remarketing............................ 119.2 77.3 104.7
Proceeds from sales and maturities of investment
securities............................................... 29.9 28.1 7.3
Capital distributions from affiliates...................... 37.0 113.3 126.4
------ ------ ------
$249.5 $355.5 $540.6
====== ====== ======
</Table>
PROCEEDS FROM SALE-LEASEBACK TRANSACTIONS AND OTHER ASSET SALES
In 2005, the Company completed a sale-leaseback transaction for
approximately 2,900 of its railcars (net book value of $170.0 million) for net
proceeds of $201.3 million. The transaction produced a gain of $31.3 million,
which was deferred and is being amortized as a component of operating lease
expense over the 21 year term of the resulting operating lease.
Proceeds from other asset sales primarily consist of scrapping of railcars,
sales of assets held for sale, and dispositions of other assets. Proceeds in
2004 primarily included $98.8 million received from the sale of the Company's
Staten Island property.
NET CASH USED IN FINANCING ACTIVITIES FOR CONTINUING OPERATIONS
Net cash used in financing activities of continuing operations was $232.9
million in 2005 compared to $375.9 million in 2004.
Net proceeds from issuance of long-term debt were $549.5 million in 2005.
New debt issuances included $230.0 million of five-year and $100.0 million of
ten-year senior unsecured notes. In addition, Rail's Canadian subsidiary
executed a private placement for $170.0 million of unsecured debt with a ten
year term and scheduled amortization, guaranteed by GATX's wholly owned
subsidiary, GATX Financial Corporation ("GFC"). The proceeds from the debt
issuances were primarily used to repay existing debt and to fund a dividend from
its Canadian subsidiary.
Repayments of debt were $736.4 million in 2005. The majority of the debt
repaid consisted of scheduled maturities. Additionally, as part of a debt
management strategy to reduce interest costs and to realign future maturities,
the Company completed a bond tender for an aggregate principal amount of $188.4
million for certain notes scheduled to mature in 2006 and prepaid $129.1 million
of certain other debt scheduled to mature after 2005.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
GATX's operating subsidiaries fund investments and meet debt, lease and
dividend obligations through cash from operating activities, portfolio proceeds
(including proceeds from asset sales), commercial paper issuances, uncommitted
money market lines, committed revolving credit facilities and the issuance of
secured and unsecured debt. GATX utilizes both domestic and international
capital markets and banks.
38
Principal sources and uses of cash were as follows for the years ended
December 31 (in millions):
<Table>
<Caption>
2005 2004 2003
--------- --------- ---------
PRINCIPAL SOURCES OF CASH
Net cash provided by operating activities........... $ 284.8 $ 301.5 $ 267.4
Portfolio proceeds.................................. 249.5 355.5 540.6
Proceeds from sale-leaseback........................ 201.3 -- --
Proceeds from other asset sales..................... 46.0 130.3 23.0
Net proceeds from issuance of debt.................. 549.5 127.8 616.7
--------- --------- ---------
$ 1,331.1 $ 915.1 $ 1,447.7
========= ========= =========
PRINCIPAL USES OF CASH
Portfolio investments and capital additions......... $ (520.5) $ (760.0) $ (628.6)
Repayments of debt.................................. (736.4) (500.5) (796.0)
Repayments of capital lease obligations............. (16.8) (27.4) (21.3)
Cash dividends...................................... (40.0) (39.4) (62.8)
--------- --------- ---------
$(1,313.7) $(1,327.3) $(1,508.7)
========= ========= =========
</Table>
CREDIT FACILITIES
In 2005, GFC entered into a new $525.0 million credit facility. This new
five-year senior unsecured revolving facility expires in June 2010 and replaced
the $445.0 million three-year revolving credit facility previously in place. At
December 31, 2005, availability of the credit facility was $503.3 million, with
$21.7 million of letters of credit issued and backed by the facility. These
sources of cash are typically used to fund daily operations, and accumulate
until they are paid down using cash flow or proceeds of long-term debt issuance.
RESTRICTIVE COVENANTS
GFC is subject to various restrictive covenants, including requirements to
maintain a defined net worth and a fixed charge coverage ratio. In addition,
there are certain negative pledge provisions, including an asset coverage test.
GFC does not anticipate any covenant violation in the credit facility, bank
financings, or indenture, or other financings, nor does GFC anticipate that any
of these covenants will restrict its operations or its ability to procure
additional financing.
DEBT FINANCING
During 2005, all of GATX's debt issuance was at GFC and its subsidiaries.
Secured financings are comprised of the sale-leaseback of railcars and loans
secured by railcars and aircraft. The railcar sale-leasebacks qualify as
operating leases and the assets or liabilities associated with this equipment
are not recorded on the balance sheet. As of December 31, 2005, GFC had a shelf
registration for $1.0 billion of debt securities and pass through certificates,
of which $496.5 million of senior unsecured notes had been issued.
See Note 11 to the consolidated financial statements for detailed
information on GATX's credit facilities, debt obligations and related
restrictive covenants.
Subsequent to December 31, 2005, GFC issued $200.0 million of senior
unsecured debt with a 5.8% coupon and a ten year term.
CREDIT RATINGS
The availability of GATX's funding options may be affected by certain
factors including the global capital market environment and outlook as well as
GFC's financial performance. Access to capital markets at competitive rates is
dependent on GFC's credit rating and rating outlook, as determined by rating
agencies
39
such as Standard & Poor's (S&P) and Moody's Investor Service (Moody's).
Subsequent to December 31, 2005, S&P upgraded its credit rating on GFC's
long-term unsecured debt to BBB from BBB- and changed GFC's rating outlook to
stable. Also, S&P's credit rating for short-term unsecured debt was upgraded to
A-2 from A-3. During the year, Moody's modified GFC's rating outlook from stable
to positive, while its credit rating on GFC's long-term unsecured debt remained
unchanged at Baa3. Throughout 2005, GFC's commercial paper credit ratings of A-3
(S&P) and P-3 (Moody's) restricted GFC's ability to utilize the commercial paper
market as a source of funding. Despite these restrictions, at various times
during 2005, GFC had in excess of $150 million of commercial paper outstanding.
The upgraded S&P rating on GFC's short-term, unsecured debt is positive; however
GFC's access to the commercial paper market may continue to be restricted as a
result of Moody's P-3 rating.
2006 LIQUIDITY POSITION
GFC expects that it will be able to meet its contractual obligations for
2006 through a combination of projected cash from operating activities,
portfolio proceeds and its revolving credit facilities.
OFF BALANCE SHEET ARRANGEMENTS AND OTHER CONTINGENCIES
Contractual Commitments
At December 31, 2005, GATX's contractual commitments, including debt
maturities, lease payments, and unconditional purchase obligations were (in
millions):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
-------- -------- ------ ------ ------ ------ ----------
Debt(a)........................ $2,750.9 $ 376.4 $326.8 $409.3 $472.2 $344.6 $ 821.6
Commercial paper and credit
facilities................... 57.0 57.0 -- -- -- -- --
Capital lease obligations...... 89.1 11.8 11.1 11.0 10.7 8.1 36.4
Operating leases -- recourse... 3,289.8 312.2 280.7 280.7 279.1 274.9 1,862.2
Operating
leases -- nonrecourse........ 559.5 42.1 38.7 38.9 41.0 42.2 356.6
Unconditional purchase
obligations.................. 412.0 220.6 155.7 35.7 -- -- --
-------- -------- ------ ------ ------ ------ --------
$7,158.3 $1,020.1 $813.0 $775.6 $803.0 $669.8 $3,076.8
======== ======== ====== ====== ====== ====== ========
</Table>
- ---------------
(a) Excludes fair value of debt derivatives of $2.2 million which does not
represent a contractual commitment with a fixed amount or maturity date.
Convertible Securities
In August 2003, GATX completed a private offering of $125.0 million
long-term, 5.0% senior unsecured notes which are convertible into GATX
Corporation common stock. As of December 31, 2005, the notes were convertible at
a conversion price of $24.23 per share. The conversion price is subject to
adjustment based on various factors, including changes in the dividend on GATX's
common stock. Holders of the notes have the right to require all or a portion of
the notes to be purchased at a price equal to 100% of the principal amount of
the notes plus accrued and unpaid interest in August 2008, August 2013, and
August 2018. Any required purchases in August 2008, will be payable in cash,
whereas any purchases in August 2013 or August 2018 may be paid in cash or
shares of GATX common stock or any combination thereof, at GATX's option. GATX
also has the right, beginning in August 2008, to redeem the notes at 100% of the
principal amount plus accrued and unpaid interest. If GATX provides notice of
redemption, the holders of the notes may elect to exercise their conversion
privilege. Upon conversion; GATX may elect, at its option; to deliver cash,
shares of GATX common stock or any combination thereof.
In February 2002, GATX completed a private offering of $175.0 million of
long-term, 7.5% senior unsecured convertible notes. The five-year notes are
convertible at any time prior to maturity into GATX Corporation common stock at
a price of $34.09 per share.
40
Unconditional Purchase Obligations
At December 31, 2005, GATX's unconditional purchase obligations of $412.0
million consisted primarily of commitments to purchase railcars and aircraft.
GATX had commitments of $234.4 million related to the committed railcar purchase
program entered into in 2002. GATX also had commitments of $96.0 million for
orders on three new aircraft to be delivered in 2006 and 2007. Additional
unconditional purchase obligations include $68.4 million of other rail related
commitments.
At December 31, 2005, GATX's unconditional purchase obligations by segment
were (in millions):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
------ ------ ------ ----- ---- ---- ----------
Rail......................... $302.8 $166.5 $100.6 $35.7 $-- $-- $--
Air.......................... 96.0 41.4 54.6 -- -- -- --
Specialty.................... 13.2 12.7 0.5 -- -- -- --
------ ------ ------ ----- --- --- ---
$412.0 $220.6 $155.7 $35.7 $-- $-- $--
====== ====== ====== ===== === === ===
</Table>
Future cash inflows
The Company's primary projected cash inflow commitments arising from
minimum future lease receipts from finance leases, net of debt payments for
leveraged leases, and minimum future rental receipts from noncancelable
operating leases as of December 31, 2005 were as follows (in millions):
<Table>
<Caption>
PROJECTED CASH INFLOW COMMITMENTS BY PERIOD
------------------------------------------------------------------
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
-------- ------ ------ ------ ------ ------ ----------
Finance leases........ $ 460.3 $ 43.5 $ 34.3 $ 31.8 $ 32.5 $ 31.7 $286.5
Operating leases...... 2,736.5 826.7 600.0 441.7 318.9 197.7 351.5
-------- ------ ------ ------ ------ ------ ------
Total................. $3,196.8 $870.2 $634.3 $473.5 $351.4 $229.4 $638.0
======== ====== ====== ====== ====== ====== ======
</Table>
Guarantees
In connection with certain investments or transactions, GATX has entered
into various commercial commitments, such as guarantees and standby letters of
credit, 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, market and equipment risk; accordingly, GATX evaluates its
commitments and other contingent obligations using techniques similar to those
used to evaluate funded transactions.
Affiliate guarantees generally involve guaranteeing repayment of the
financing utilized to acquire or lease in 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
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 a lease term. Approximately 64% of the Company's asset residual value
guarantees are related to rail equipment. Based on known facts and current
market conditions, management does not believe that the asset residual value
guarantees will result in any negative financial impact to GATX. Historically,
gains associated with the residual value guarantees have exceeded any losses
incurred. GATX believes these asset residual value guarantees will likely
generate future income in the form of fees and residual sharing proceeds.
Lease payment guarantees represent GATX's guarantees to financial
institutions of finance and operating lease payments of an unrelated party in
exchange for a fee.
Other guarantees consists of GATX's indemnification of Airbus Industrie
("Airbus") related to the dissolution of Flightlease Holdings Limited ("FHG")
and the allocation by Airbus of $77.8 million of pre-
41
delivery payments to GATX towards the purchase of aircraft in 2001. These
pre-delivery payments are also the subject of active litigation as discussed in
Item 3. Legal Proceedings. No liability has been recorded with respect to this
indemnification as GATX believes that the likelihood of having to perform under
the indemnity is remote.
GATX and its subsidiaries are also parties to standing letters of credit
and bonds primarily related to workers' compensation and general liability
insurance coverages. No material claims have been made against these
obligations. At December 31, 2005, GATX does not expect any material losses to
result from these off balance sheet instruments because performance is not
anticipated to be required.
GATX's commercial commitments at December 31, 2005 were (in millions):
<Table>
<Caption>
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
------------------------------------------------------------
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
------ ------ ----- ----- ----- ----- ----------
Affiliate guarantees.............. $ 29.5 $ -- $ -- $ -- $ -- $ -- $ 29.5
Asset residual value guarantees... 368.6 150.1 18.3 20.1 28.1 60.6 91.4
Lease payment guarantees.......... 27.3 3.1 3.0 3.0 2.2 2.2 13.8
Other guarantees(a)............... 77.8 -- -- -- -- -- --
------ ------ ----- ----- ----- ----- ------
Guarantees........................ 503.2 153.2 21.3 23.1 30.3 62.8 134.7
Standby letters of credit and
bonds........................... 23.6 23.6 -- -- -- -- --
------ ------ ----- ----- ----- ----- ------
$526.8 $176.8 $21.3 $23.1 $30.3 $62.8 $134.7
====== ====== ===== ===== ===== ===== ======
</Table>
--------------------
(a) No specific maturity date.
PENSION CONTRIBUTIONS
In 2005, GATX contributed $7.6 million to its funded and unfunded pension
plans. In 2006, the Company expects to make contributions of approximately $3.0
million with respect to its pension plans. Additional contributions will be
dependent on a number of factors including plan asset investment returns and
actuarial experience. Subject to the impact of these factors, the Company may
make additional material plan contributions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to use
judgment in making estimates and assumptions that affect reported amounts of
assets, liabilities, revenues, expenses and related disclosures. The Company
regularly evaluates its estimates and judgments based on historical experience
and other relevant factors and circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
The Company considers the following as critical accounting policies:
- Operating lease assets and facilities -- Operating lease assets and
facilities are stated principally at cost. Assets acquired under capital
leases are included in operating lease assets and the related obligations
are recorded as liabilities. Provisions for depreciation include the
amortization of the cost of capital leases. Certain operating lease
assets and facilities are depreciated using the straight-line method to
an estimated residual value. Railcars, locomotives, aircraft, marine
vessels, buildings and leasehold improvements are depreciated over the
estimated useful lives of the assets. The Company periodically reviews
the appropriateness of depreciable lives and residual values based on
physical and economic factors, as well as existing market conditions.
- Impairment of long-lived assets -- In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, GATX performs a review for
impairment of long-lived assets, such as operating lease assets and
facilities, whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be
42
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated future net cash flows
expected to be generated by the asset. Estimated future cash flows are based on
a number of assumptions including lease rates, lease term, operating
costs, life of the asset and disposition proceeds. If such assets are
considered to be impaired, the impairment loss to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
fair value. Fair value is based on internal estimates supplemented with
independent appraisals and/or market comparables when available and
appropriate. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs.
- Impairment of investments in affiliated companies -- In accordance with
Accounting Principles Board Opinion ("APB") No. 18, The Equity Method of
Accounting for Investments in Common Stock, GATX reviews the carrying
amount of its investments in affiliates annually, or whenever events or
changes in circumstances indicate that a decline in value may have
occurred.
If management determines that indicators of impairment are present, an
analysis is performed to estimate the fair value of the investment.
Management defines fair value, for purposes of this policy, as the price
that would be received for an investment in a current transaction between
a willing buyer and seller. While quoted prices in active markets provide
the best evidence of fair value, an active market does not exist for the
majority of our joint venture investments. Thus an estimate of their fair
value must be made. Some examples of acceptable valuation techniques that
GATX may use to estimate fair value are discounted cash flows at the
investee level, capitalized earnings or the present value of expected
distributable cash from the investee. Additionally, price/earnings ratios
based on comparable businesses may also be acceptable in certain
circumstances. Other valuation techniques that are appropriate for the
particular circumstances of a joint venture and for which sufficient data
are available may also be used.
Once an estimate of fair value is obtained it is compared to the
investment's carrying value. If the investment's estimated fair value is
less than its carrying value, then the investment is impaired. If an
investment is impaired, then a determination is made as to whether the
impairment is other-than-temporary. Factors that management considers in
making this determination include: expected operating results for the near
future, the length of the economic life cycle of the underlying assets of
the business and the ability of the company to hold the investment through
the end of the underlying assets' useful life. Anticipated management
actions that are probable of being taken that may improve the business
prospects of the investee are also considered.
If management reasonably determines an investment to be temporarily
impaired, no impairment loss would be recorded. Alternatively, if
management determines that an investment is impaired on an
other-than-temporary basis, a loss equal to the difference between the
fair value of the investment and its carrying value is recorded in the
period of identification.
- Impairment of goodwill -- In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, GATX reviews the carrying amount of its recorded
goodwill annually or in interim periods if circumstances indicate a
potential impairment. The impairment review is performed at the reporting
unit level, which is one level below an operating segment. The goodwill
impairment test is a two-step process and requires management to make
certain judgments in determining what assumptions to use in the
calculation. The first step of the process consists of estimating the
fair value of each reporting unit based on a discounted cash flow model
using revenue and profit forecasts. Management then compares its estimate
of the fair value of the reporting unit with the reporting unit's
carrying amount, which includes goodwill. If the estimated fair value is
less than the carrying amount, an additional step is performed that
compares the implied fair value of the reporting unit's goodwill with the
carrying amount of the goodwill. The determination of a reporting unit's
implied fair value of the goodwill requires management to allocate the
estimated fair value of the reporting unit to the assets and liabilities
of the reporting unit. Any unallocated fair value represents the implied
fair value of the goodwill. To the extent that the carrying amount of the
goodwill exceeds its implied fair value, an impairment loss is recorded
in the period of identification.
43
- Pension and Post-retirement Benefits Assumptions -- GATX's pension and
post-retirement benefit obligations and related costs are calculated
using actuarial assumptions. Two critical assumptions, the discount rate
and the expected return on plan assets, are important elements of plan
expense and liability measurement. GATX evaluates these critical
assumptions annually. Other assumptions involve demographic factors such
as retirement, mortality, turnover, health care cost trends and rate of
compensation increases.
The discount rate is used to calculate the present value of expected
future pension and post-retirement cash flows as of the measurement date.
The guideline for establishing this rate is high-quality, long-term bond
rates. A lower discount rate increases the present value of benefit
obligations and increases pension expense. The expected long-term rate of
return on plan assets is based on current and expected asset allocations,
as well as historical and expected returns on various categories of plan
assets. A lower-than-expected rate of return on pension plan assets will
increase pension expense. See Note 14 to the consolidated financial
statements for additional information regarding these assumptions.
- Income Taxes -- GATX evaluates the need for a deferred tax asset
valuation allowance by assessing the likelihood of whether deferred tax
assets, including net operating loss carryforward benefits, will be
realized in the future. The assessment of whether a valuation allowance
is required involves judgment including the forecast of future taxable
income and the evaluation of tax planning initiatives, if applicable.
Taxes have not been provided on undistributed earnings of foreign
subsidiaries as the Company has historically maintained that undistributed
earnings of its foreign subsidiaries and affiliates were intended to be
permanently reinvested in those foreign operations. If in the future,
these earnings are repatriated to the U.S., or if the Company expects such
earnings will be remitted in the foreseeable future, provision for
additional taxes would be required.
GATX's operations are subject to taxes in the U.S., various states and
foreign countries and as result, may be subject to audit in all of these
jurisdictions. Tax audits may involve complex issues and disagreements
with taxing authorities could require several years to resolve. Accruals
for tax contingencies require management to make estimates and assessments
with respect to the ultimate outcome of tax audit issues.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for a summary of new
accounting pronouncements that may impact GATX's business.
NON-GAAP FINANCIAL MEASURES
This report includes certain financial performance measures computed using
non-Generally Accepted Accounting Principles ("GAAP") components as defined by
the Securities and Exchange Commission ("SEC"). These measures are: return on
equity; return on assets; and SG&A efficiency. As required under SEC rules, GATX
has provided a reconciliation of those non-GAAP components to the most directly
comparable GAAP components. Financial performance measures disclosed in this
report are meant to provide additional information and insight into the
historical operating results and financial position of the business. Management
uses these performance measures to assist in analyzing GATX's underlying
financial performance from period to period and to establish criteria for
compensation decisions. These measures are not in accordance with, or a
substitute for, GAAP and may be different from, or inconsistent with, non-GAAP
financial measures used by other companies.
GLOSSARY OF KEY TERMS
- Initial Direct Costs -- SG&A expenses incurred by GATX to originate new
loans and leases. Identified initial direct costs are deferred and
amortized over the term of the lease or loan.
44
- Managed Assets -- Assets that GATX manages, but that are not included in
on balance sheet or off balance sheet assets. An asset is considered
managed if GATX performs the same activities relative to the asset as
performed for similar owned assets. Managed assets include assets wholly
owned by third parties and assets owned by joint ventures in which GATX
is both an investor and manager. Managed assets are shown net of GATX's
investment in a joint venture (if applicable), to the extent the
investment is already included in on balance sheet or off balance sheet
assets.
- Non-GAAP Financial Measures -- Numerical or percentage based measures of
a company's historical performance, financial position or liquidity
calculated using a component different from that presented in the
financial statements as prepared in accordance with GAAP.
- Off Balance Sheet Assets -- Assets, primarily railcars, which are
financed with operating leases and therefore not recorded on the balance
sheet. GATX estimates the off balance sheet asset amount by calculating
the present value of committed future operating lease payments using a
10% discount rate.
- On Balance Sheet Assets -- Total assets as reported on the balance sheet
excluding assets of discontinued operations.
- Return on Assets -- Income from continuing operations divided by average
total on and off balance sheet assets.
- Return on Equity -- Income from continuing operations divided by average
total shareholders' equity.
- SG&A -- Selling, general and administrative expenses.
- SG&A Efficiency -- SG&A before capitalized initial direct costs divided
by average total owned and managed assets.
- Total Owned and Managed Assets -- The sum of on and off balance sheet
assets and managed assets.
45
Reconciliation of the Non-GAAP components used in the computation of
certain Financial Performance Measures (in millions):
ASSETS
<Table>
<Caption>
2005 2004 2003 2002
-------- -------- -------- ---------
BALANCE SHEET ASSETS AS REPORTED...................... $5,244.4 $5,612.9 $6,080.6 $ 6,428.3
LESS: DISCONTINUED OPERATIONS......................... -- 11.4 560.1 642.4
-------- -------- -------- ---------
CONSOLIDATED ON BALANCE SHEET ASSETS.................. $5,244.4 $5,601.5 $5,520.5 $ 5,785.9
ON BALANCE SHEET ASSETS
Rail.................................................. $2,719.4 $2,721.2 $2,401.6 $ 2,385.3
Air................................................... 1,746.6 2,086.4 1,977.0 1,885.6
Specialty............................................. 427.3 477.4 707.6 1,088.0
Other................................................. 351.1 316.5 434.3 427.0
-------- -------- -------- ---------
Consolidated........................................ $5,244.4 $5,601.5 $5,520.5 $ 5,785.9
OFF BALANCE SHEET ASSETS
Rail.................................................. $1,236.0 $1,175.8 $1,205.8 $ 1,230.9
Air................................................... 28.7 29.1 29.0 55.1
Specialty............................................. 11.1 12.5 13.7 14.9
Other................................................. 10.4 31.3 34.7 61.6
-------- -------- -------- ---------
Consolidated........................................ $1,286.2 $1,248.7 $1,283.2 $ 1,362.5
TOTAL ON AND OFF BALANCE SHEET ASSETS(1)
Rail.................................................. $3,955.4 $3,897.0 $3,607.4 $ 3,616.2
Air................................................... 1,775.3 2,115.5 2,006.0 1,940.7
Specialty............................................. 438.4 489.9 721.3 1,102.9
Other................................................. 361.5 347.8 469.0 488.6
-------- -------- -------- ---------
Consolidated........................................ $6,530.6 $6,850.2 $6,803.7 $ 7,148.4
MANAGED ASSETS
Rail.................................................. $ 36.2 $ 37.7 $ 100.8 $ 111.5
Air................................................... 1,936.1 1,977.7 2,045.4 2,275.3
Specialty............................................. 555.8 728.7 882.2 960.4
-------- -------- -------- ---------
Consolidated........................................ $2,528.1 $2,744.1 $3,028.4 $ 3,347.2
TOTAL OWNED AND MANAGED ASSETS(2)
Rail.................................................. $3,991.6 $3,934.7 $3,708.2 $ 3,727.7
Air................................................... 3,711.4 4,093.2 4,051.4 4,216.0
Specialty............................................. 994.2 1,218.6 1,603.5 2,063.3
Other................................................. 361.5 347.8 469.0 488.6
-------- -------- -------- ---------
Consolidated........................................ $9,058.7 $9,594.3 $9,832.1 $10,495.6
======== ======== ======== =========
</Table>
<Table>
<Caption>
2005 2004 2003
------- ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS AS REPORTED
Rail........................................................ $ 81.7 $ 60.4 $ 54.9
Air......................................................... (109.2) 9.8 2.1
Specialty................................................... 49.4 40.6 38.1
Other....................................................... (37.0) 47.7 (33.4)
------- ------ ------
Consolidated.............................................. $ (15.1) $158.5 $ 61.7
SG&A AS REPORTED
Rail........................................................ $ 73.0 $ 70.7 $ 69.0
Air......................................................... 25.9 21.5 18.1
Specialty................................................... 7.7 8.7 17.3
Other....................................................... 60.9 62.4 59.2
------- ------ ------
Consolidated.............................................. $ 167.5 $163.3 $163.6
INITIAL DIRECT COSTS
Air......................................................... $ 0.4 $ 3.1 $ 2.9
Specialty................................................... 0.4 0.2 0.4
------- ------ ------
Consolidated.............................................. $ 0.8 $ 3.3 $ 3.3
</Table>
46
SG&A BEFORE CAPITALIZED INITIAL DIRECT COSTS(3)
<Table>
Rail........................................................ $ 73.0 $ 70.7 $ 69.0
Air......................................................... 26.3 24.6 21.0
Specialty................................................... 8.1 8.9 17.7
Other....................................................... 60.9 62.4 59.2
------- ------ ------
Consolidated.............................................. $ 168.3 $166.6 $166.9
======= ====== ======
</Table>
- ---------------
(1) Total on and off balance sheet assets are used in the calculation of return
on assets which is (loss) income from continuing operations divided by
average total on and off balance sheet assets.
(2) Total owned and managed assets are used in the calculation of the SG&A
efficiency ratio which is SG&A before capitalized initial direct costs
divided by average total owned and managed assets.
(3) SG&A before capitalized initial direct costs is used in the calculation of
the SG&A efficiency ratio which is SG&A before capitalized initial direct
costs divided by average total owned and managed assets.\
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, GATX is exposed to interest rate, foreign
currency exchange rate, and equity price risks that could impact results of
operations. To manage these risks, GATX, pursuant to authorized policies, may
enter into certain derivative transactions, principally interest rate swaps,
Treasury note derivatives and currency swaps. These instruments and other
derivatives are entered into for hedging purposes only to manage existing
underlying exposures. GATX does not hold or issue derivative financial
instruments for speculative purposes.
Interest Rate Exposure -- GATX's interest expense is affected by changes in
interest rates as a result of its use of variable rate debt instruments. Based
on GATX's variable rate debt instruments at December 31, 2005 and giving affect
to related derivatives, if market rates were to increase hypothetically by 100
basis points, after-tax interest expense would increase by approximately $10.4
million in 2006.
Functional Currency/Reporting Currency Exchange Rate Exposure -- GATX
conducts operations in foreign countries, principally Europe and Canada. As a
result, changes in the value of the U.S. dollar as compared to foreign
currencies would affect GATX's reported earnings. Based on 2005 reported
earnings from continuing operations, a uniform and hypothetical 10%
strengthening in the U.S. dollar versus applicable foreign currencies would
decrease after-tax income from continuing operations in 2006 by approximately
$4.0 million.
The interpretation and analysis of the results from the hypothetical
changes to interest rates and currency exchange rates should not be considered
in isolation; such changes would typically have corresponding offsetting
effects. For example, offsetting effects are present to the extent that floating
rate debt is associated with floating rate assets.
Equity Price Exposure -- GATX also has equity price risk inherent in stock
and warrants of companies in which it has investments. At December 31, 2005, the
fair value of the stock and warrants was $3.6 million and $1.1 million,
respectively. The hypothetical change in value from a 10% sensitivity test would
not be material to GATX operations.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of GATX Corporation
We have audited the accompanying consolidated balance sheets of GATX
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in shareholders' equity, cash
flows, and comprehensive (loss) income for each of the three years in the period
ended December 31, 2005. Our audits also included the financial statement
schedule listed in the index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GATX
Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of GATX
Corporation's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2006 expressed an unqualified opinion thereon.
-s- Ernst & Young LLP
Chicago, Illinois
March 9, 2006
49
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
---------------------
2005 2004
--------- ---------
IN MILLIONS
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 106.0 $ 63.4
RESTRICTED CASH............................................. 53.1 60.0
RECEIVABLES
Rent and other receivables.................................. 87.2 77.0
Finance leases.............................................. 336.5 285.9
Loans....................................................... 38.7 89.2
Less: allowance for possible losses......................... (13.1) (22.1)
--------- ---------
449.3 430.0
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Rail........................................................ 3,728.1 3,847.9
Air......................................................... 1,298.9 1,724.1
Specialty................................................... 90.8 65.4
Other....................................................... 234.9 212.3
Less: allowance for depreciation............................ (1,891.1) (1,924.1)
--------- ---------
3,461.6 3,925.6
INVESTMENTS IN AFFILIATED COMPANIES......................... 667.3 718.6
GOODWILL.................................................... 86.0 93.9
OTHER ASSETS................................................ 421.1 321.4
--------- ---------
TOTAL ASSETS................................................ $ 5,244.4 $ 5,612.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... $ 177.4 $ 171.1
DEBT
Commercial paper and bank credit facilities................. 57.0 72.1
Recourse.................................................... 2,715.4 2,887.1
Nonrecourse................................................. 37.7 93.5
Capital lease obligations................................... 62.5 79.4
--------- ---------
2,872.6 3,132.1
DEFERRED INCOME TAXES....................................... 683.4 721.0
OTHER LIABILITIES........................................... 488.7 507.8
--------- ---------
TOTAL LIABILITIES........................................... 4,222.1 4,532.0
SHAREHOLDERS' EQUITY
Preferred stock ($1.00 par value, 5,000,000 shares
authorized, 19,988 and 21,468 shares of Series A and B
Cumulative Convertible Preferred Stock issued and
outstanding as of December 31, 2005 and 2004,
respectively, aggregate liquidation preference of $1.2
million).................................................. * *
Common stock (.625 par value, 120,000,000 authorized,
58,567,724 and 57,477,201 shares issued and 50,618,214 and
49,530,370 shares outstanding as of December 31, 2005 and
2004, respectively)....................................... 36.5 35.9
Additional paid in capital.................................. 424.6 401.7
Retained earnings........................................... 696.0 750.3
Accumulated other comprehensive (loss) income............... (6.3) 21.6
Treasury shares, at cost (7,949,510 and 7,946,831 shares at
December 31, 2005 and 2004, respectively)................. (128.5) (128.6)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................................. 1,022.3 1,080.9
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 5,244.4 $ 5,612.9
========= =========
</Table>
- ---------------
* Less than $0.1 million.
The accompanying notes are an integral part of these consolidated financial
statements.
50
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2005 2004 2003
-------- -------- --------
IN MILLIONS, EXCEPT PER
SHARE DATA
GROSS INCOME
Lease income................................................ $ 878.4 $ 790.3 $ 762.2
Marine operating revenue.................................... 138.3 111.8 85.0
Interest income on loans.................................... 10.0 17.8 41.4
Asset remarketing income.................................... 43.7 36.5 37.9
Fees........................................................ 17.7 20.9 18.0
Other....................................................... 75.3 189.6 76.3
-------- -------- --------
Revenues.................................................. 1,163.4 1,166.9 1,020.8
Share of affiliates' (losses) earnings...................... (28.8) 65.2 66.8
-------- -------- --------
TOTAL GROSS INCOME.......................................... 1,134.6 1,232.1 1,087.6
OWNERSHIP COSTS
Depreciation................................................ 202.7 194.6 188.0
Interest expense, net....................................... 164.7 162.4 175.4
Operating lease expense..................................... 187.0 173.6 176.0
-------- -------- --------
TOTAL OWNERSHIP COSTS....................................... 554.4 530.6 539.4
OTHER COSTS AND EXPENSES
Maintenance expense......................................... 194.9 189.2 166.0
Marine operating expenses................................... 108.9 87.7 68.9
Selling, general and administrative......................... 167.5 163.3 163.6
Asset impairment charges.................................... 83.4 3.4 24.6
Other....................................................... 53.3 31.2 47.2
-------- -------- --------
TOTAL OTHER COSTS AND EXPENSES.............................. 608.0 474.8 470.3
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES..................................................... (27.8) 226.7 77.9
INCOME TAX (BENEFIT) PROVISION.............................. (12.7) 68.2 16.2
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (15.1) 158.5 61.7
DISCONTINUED OPERATIONS, NET OF TAXES....................... 0.8 11.1 15.2
-------- -------- --------
NET (LOSS) INCOME........................................... $ (14.3) $ 169.6 $ 76.9
======== ======== ========
PER SHARE DATA
Basic:
(Loss) income from continuing operations.................. $ (0.30) $ 3.21 $ 1.26
Income from discontinued operations....................... 0.01 0.23 0.31
-------- -------- --------
Total..................................................... $ (0.29) $ 3.44 $ 1.57
======== ======== ========
Average number of common shares (in thousands)............ 50,106 49,348 49,107
Diluted:
(Loss) income from continuing operations.................. $ (0.30) $ 2.86 $ 1.24
Income from discontinued operations....................... 0.01 0.18 0.29
-------- -------- --------
Total..................................................... $ (0.29) $ 3.04 $ 1.53
======== ======== ========
Average number of common shares and common share
equivalents (in thousands)............................. 50,106 60,082 51,203
-------- -------- --------
Dividends declared per common share......................... $ 0.80 $ 0.80 $ 1.28
-------- -------- --------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
51
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
IN MILLIONS
OPERATING ACTIVITIES
Net (loss) income........................................... $ (14.3) $ 169.6 $ 76.9
Less: Income from discontinued operations................... 0.8 11.1 15.2
------- ------- -------
(Loss) income from continuing operations.................... (15.1) 158.5 61.7
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities of
continuing operations:
Gains on sales of assets and securities................... (43.3) (112.0) (42.2)
Depreciation.............................................. 212.7 207.8 202.6
(Reversal) provision for possible losses.................. (6.3) (13.7) 4.7
Asset impairment charges.................................. 83.4 3.4 24.6
Deferred income tax (benefit) provision................... (36.5) 39.8 (6.9)
Share of affiliates' losses (earnings), net of
dividends.............................................. 97.2 (32.4) (47.4)
Decrease in recoverable income taxes...................... 7.3 63.8 107.2
(Decrease) increase in operating lease payable............ (17.2) (2.8) 3.9
Increase in aircraft maintenance reserves................. 33.8 27.5 20.8
Increase in prepaid pension............................... (5.2) (12.9) (11.9)
Decrease in reduction in workforce accrual................ (1.2) (2.5) (15.0)
Other..................................................... (24.8) (23.0) (34.7)
------- ------- -------
Net cash provided by operating activities of continuing
operations............................................. 284.8 301.5 267.4
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse
financing for leveraged leases, and facilities............ (416.6) (705.1) (397.0)
Loans extended.............................................. -- (14.2) (49.5)
Investments in affiliated companies......................... (29.9) (7.8) (99.6)
Other....................................................... (74.0) (32.9) (82.5)
------- ------- -------
Portfolio investments and capital additions............... (520.5) (760.0) (628.6)
Portfolio proceeds.......................................... 249.5 355.5 540.6
Proceeds from sale-leaseback................................ 201.3 -- --
Proceeds from sale of other assets.......................... 46.0 130.3 23.0
Net decrease (increase) in restricted cash.................. 6.9 0.9 (28.4)
Effect of exchange rate changes on restricted cash.......... -- -- 17.7
------- ------- -------
Net cash used in investing activities of continuing
operations............................................. (16.8) (273.3) (75.7)
FINANCING ACTIVITIES
Net proceeds from issuance of debt.......................... 549.5 127.8 616.7
Repayment of debt........................................... (736.4) (500.5) (796.0)
Net (decrease) increase in commercial paper and bank credit
facilities................................................ (12.8) 57.8 (0.7)
Net decrease in capital lease obligations................... (16.8) (27.4) (21.3)
Issuance of common stock and other.......................... 23.6 5.8 3.8
Cash dividends.............................................. (40.0) (39.4) (62.8)
------- ------- -------
Net cash used in financing activities of continuing
operations............................................. (232.9) (375.9) (260.3)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... (1.4) 2.9 1.4
CASH FLOWS OF DISCONTINUED OPERATIONS (SEE NOTE 19)
Operating cash flows...................................... (0.2) 35.0 140.9
Investing cash flows...................................... 9.1 222.7 (27.5)
Financing cash flows...................................... -- (61.0) (65.8)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ 42.6 $(148.1) $ (19.6)
======= ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
52
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<Table>
<Caption>
DECEMBER 31
--------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
DOLLARS DOLLARS DOLLARS SHARES SHARES SHARES
-------- -------- ------- ---------- ---------- ----------
IN MILLIONS, EXCEPT NUMBER OF SHARES
PREFERRED STOCK
Balance at beginning of
period................... $ * $ * $ * 21,468 21,824 21,911
Conversion of preferred
stock into common
stock.................... * * * (1,480) (356) (87)
-------- -------- ------- ---------- ---------- ----------
Balance at end of period... * * * 19,988 21,468 21,824
COMMON STOCK
Balance at beginning of
period................... 35.9 35.7 35.6 57,477,201 57,204,550 57,016,920
Issuance of common stock... 0.6 0.2 0.1 1,083,123 270,871 187,195
Conversion of preferred
stock into common
stock.................... * * * 7,400 1,780 435
-------- -------- ------- ---------- ---------- ----------
Balance at end of period... 36.5 35.9 35.7 58,567,724 57,477,201 57,204,550
TREASURY STOCK
Balance at beginning of
period................... (128.6) (128.7) (128.9) (7,946,831) (7,958,162) (7,968,627)
Issuance (acquisition) of
common stock............. 0.1 0.1 0.2 (2,679) 11,331 10,465
-------- -------- ------- ---------- ---------- ----------
Balance at end of period... (128.5) (128.6) (128.7) (7,949,510) (7,946,831) (7,958,162)
ADDITIONAL CAPITAL
Balance at beginning of
period................... 401.7 396.2 392.7
Issuance of common stock... 22.9 5.5 3.5
-------- -------- -------
Balance at end of period... 424.6 401.7 396.2
RETAINED EARNINGS
Balance at beginning of
period................... 750.3 620.1 606.0
Net (loss) income.......... (14.3) 169.6 76.9
Dividends paid............. (40.0) (39.4) (62.8)
-------- -------- -------
Balance at end of period... 696.0 750.3 620.1
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
Balance at beginning of
period................... 21.6 (34.4) (104.8)
Foreign currency
translation (loss)
gain..................... (37.3) 55.5 75.4
Unrealized (loss) gain on
securities............... (3.1) 2.2 0.3
Unrealized gain (loss) on
derivative instruments... 13.8 (1.6) (24.3)
Minimum pension liability
adjustment............... (1.3) (0.1) 19.0
-------- -------- -------
Balance at end of period... (6.3) 21.6 (34.4)
-------- -------- -------
TOTAL SHAREHOLDERS'
EQUITY................... $1,022.3 $1,080.9 $ 888.9
======== ======== =======
</Table>
- ---------------
* Less than $0.1 million.
The accompanying notes are an integral part of these consolidated financial
statements.
53
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
IN MILLIONS
Net (loss) income........................................... $(14.3) $169.6 $ 76.9
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain.................. (37.3) 55.5 75.4
Unrealized (loss) gain on securities...................... (3.1) 2.2 0.3
Unrealized gain (loss) on derivative instruments.......... 13.8 (1.6) (24.3)
Minimum pension liability adjustment...................... (1.3) (0.1) 19.0
------ ------ ------
Other comprehensive (loss) income........................... (27.9) 56.0 70.4
------ ------ ------
COMPREHENSIVE (LOSS) INCOME................................. $(42.2) $225.6 $147.3
====== ====== ======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
GATX Corporation ("GATX" or the "Company") is headquartered in Chicago,
Illinois and provides services primarily through three operating segments: GATX
Rail ("Rail"), GATX Air ("Air"), and GATX Specialty ("Specialty"). GATX
specializes in railcar and locomotive leasing, aircraft leasing, and the
financing of other large-ticket equipment. In addition, GATX owns and operates a
fleet of self-unloading vessels on the Great Lakes through its wholly owned
subsidiary American Steamship Company ("ASC"). GATX also invests in companies
and joint ventures that complement its existing business activities. GATX
partners with financial institutions and operating companies to improve its
scale in certain markets, broaden its diversification within asset classes and
enter new markets. See discussion in Note 23 for additional details regarding
each segment's operating results.
In 2004, GATX completed the sale of substantially all the assets and
related nonrecourse debt of its former Technology segment consisting of GATX
Technology Services, its Canadian affiliate and interests in two joint ventures.
Financial data for the Technology segment has been segregated as discontinued
operations for all periods presented.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of GATX and its wholly owned subsidiaries. Investments in affiliated companies
(discussed herein) are not consolidated. The consolidated financial statements
reflect the operations of the Technology segment as discontinued operations for
all periods presented.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States ("GAAP")
necessarily requires management to make estimates and assumptions that affect
the amounts reported in the financial statements. The Company regularly
evaluates estimates and judgments based on historical experience and other
relevant facts and circumstances. Actual amounts could differ from those
estimates.
Reclassification -- Certain amounts in the 2004 and 2003 financial
statements have been reclassified to conform to the 2005 presentation.
Cash and Cash Equivalents -- GATX considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Restricted cash -- Cash and cash equivalents which are restricted as to
withdrawal and usage. GATX's restricted cash primarily relates to 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").
Loans -- GATX records loans at the principal amount outstanding plus
accrued interest. The loan portfolio is reviewed regularly and a loan is
classified as impaired when it is probable that GATX will be unable to collect
all amounts due under the loan agreement. Since most loans are collateralized,
impairment is generally measured as the amount by which the recorded investment
in the loan exceeds expected payments plus the fair value of the underlying
collateral. Generally, interest income is not recognized on impaired loans until
the loan has been paid up to contractually current status or as conditions
warrant.
Operating Lease Assets and Facilities -- Operating lease assets and
facilities are stated principally at cost. Assets acquired under capital leases
are included in operating lease assets and the related obligations are recorded
as liabilities. Provisions for depreciation include the amortization of capital
lease assets. Operating lease assets and facilities listed below are depreciated
over their respective estimated useful life to an
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated residual value using the straight-line method. The estimated useful
lives of depreciable new assets are as follows:
<Table>
Railcars.................................................... 30 - 38 years
Locomotives................................................. 40 years
Aircraft. .................................................. 25 years
Buildings................................................... 40 - 50 years
Leasehold improvements...................................... 5 - 40 years
Marine vessels.............................................. 40 - 50 years
</Table>
Progress Payments -- GATX classifies amounts deposited toward the
construction of wholly owned aircraft and other assets, including capitalized
interest, as progress payments. Once GATX takes possession of the completed
asset, amounts recorded as progress payments are reclassified to operating lease
assets. Progress payments made for aircraft owned by joint ventures in which
GATX participates are classified as investments in affiliated companies. As of
December 31, 2005 and 2004, progress payments that were included with operating
lease assets, were $30.0 million and $20.0 million, respectively.
Investments in Affiliated Companies -- GATX has investments in 20 to 50
percent-owned companies and joint ventures and other investments (collectively
"affiliates") in which GATX does not have effective or voting control. These
affiliates are accounted for using the equity method. Investments in affiliated
companies are initially recorded at cost, including goodwill at the acquisition
date. In certain instances, GATX's cost basis may be different than its share of
the affiliates' net assets. These differences are primarily attributable to
deferred gains on sales of assets to affiliates, loans to affiliates, and
impairment losses recognized at the investor level. GATX defers the portion of
any gains that relate to its proportional interest in an affiliate and
recognizes them ratably, using the straight line method, over the useful life of
the underlying asset. GATX makes loans to some of its affiliates, which GATX
treats as equity contributions. Income on these loans offsets the proportional
share of the affiliates' interest expense. GATX accounts for differences created
by impairment losses recognized at the investor level as a basis difference so
that GATX's share of future operating results from the affiliates will be
reflective of the impairment charge taken. Pre-tax operating results from
affiliates and impairment losses recognized at the investor level are reflected
as share of affiliates' earnings (losses) in the statement of operations. The
carrying amount of GATX's investments in affiliated companies is affected by
GATX's share of the affiliates' undistributed earnings and losses, distributions
of dividends, principal and loan payments from the affiliate, and impairment
losses recognized at the investor level. See Note 6 for additional details on
affiliates and Note 7 for impairment charges relating to affiliates.
Inventory -- GATX has inventory that consists of railcar and locomotive
repair components, vessel spare parts and fuel related to its marine operations.
All inventory balances are stated at lower of cost or market. Railcar repair
components are valued using the average cost method. Vessel spare parts
inventory and vessel fuel inventory are valued using the first-in, first-out
method. Inventory is included in other assets on the balance.
Goodwill -- Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, established accounting and reporting
standards for goodwill. Under these standards, goodwill is no longer amortized,
but rather subject to an annual impairment test. GATX's impairment review is
performed at the reporting unit level, which is one level below the operating
segment level. GATX recognizes an impairment charge for any amount by which the
carrying amount of a reporting unit's goodwill exceeds its fair value. The
impairment test is performed annually in the fourth quarter or in interim
periods if events or circumstances indicate a potential impairment. Fair values
are estimated using a discounted cash flow model. For further information on the
Company's goodwill, see Note 8.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets -- A review for impairment of long-lived
assets, such as operating lease assets and facilities, is performed whenever
events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the asset. If an
asset is determined to be impaired, the impairment loss to be recognized is the
amount by which the carrying amount of the asset exceeds its fair value. Assets
to be disposed of are classified as held for sale and reported at the lower of
their carrying amount or fair value less costs to sell. See Note 7 for details
on aircraft impairments recorded in 2005.
Maintenance and Repair Costs -- Maintenance and repair costs are expensed
as incurred. Costs incurred by GATX in connection with planned major maintenance
activities such as rubber linings and conversions that improve or extend the
useful life of an asset are capitalized and depreciated over their estimated
useful life.
Allowance for Possible Losses -- The purpose of the allowance is to provide
an estimate of credit losses with respect to gross receivables. Gross
receivables include rent, direct finance (including leveraged leases net of
nonrecourse debt), and loan receivables and direct finance lease residual
values. GATX's estimate of the amount of provision (reversal) for losses
incurred in each period requires consideration of historical loss experience,
judgments about the impact of present economic conditions, collateral values,
and the state of the markets in which GATX participates. GATX may also record
specific provisions for known troubled accounts. GATX charges off amounts that
management considers unrecoverable from obligors or the disposition of
collateral. GATX assesses the recoverability of its receivables by considering
several factors, including customer payment history and financial position. The
allowance for possible losses is periodically reviewed for adequacy, taking into
consideration changes in economic conditions, collateral values, credit quality
indicators and customer-specific circumstances. GATX believes that the allowance
is adequate to cover losses inherent in the receivables portfolio as of December
31, 2005.
Income Taxes -- United States ("U.S.") income taxes have not been provided
on the undistributed earnings of foreign subsidiaries and affiliates that GATX
intends to permanently reinvest in these foreign operations. The cumulative
amount of such earnings was $243.8 million at December 31, 2005. The American
Jobs Creation Act of 2004 introduced a special one-time dividends received
deduction on the repatriation of certain foreign earnings to U.S. taxpayers
("repatriation provision") provided certain criteria are met. During the fourth
quarter of 2005, GATX completed its evaluation of this opportunity and
repatriated foreign earnings of $94.5 million at a tax cost of $9.9 million
under the repatriation provision. See Note 13 for additional information on
income taxes.
Aircraft Maintenance Reserves -- GATX's aircraft are typically subject to
net leases under which the lessee is responsible for maintenance, insurance and
taxes. Under the provisions of many of these leases, deposits are collected from
lessees for future maintenance of the aircraft for which GATX establishes
reserves. The reserves are attributable to specific aircraft and are classified
as other liabilities. Upon occurrence of qualified maintenance events, which may
range from routine maintenance to major airframe and engine overhauls, funds are
disbursed and the reserve is relieved. Additionally, reserve amounts are
reversed upon the sale of a related aircraft and included as a component of the
disposition gain or loss.
Derivatives -- SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts. The statement requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those derivatives at fair value. GATX records the fair value of all
derivatives as either other assets or other liabilities in the balance sheet.
Instruments that meet established accounting criteria are formally
designated as qualifying hedges at the inception of the contract. These criteria
demonstrate that the derivative is expected to be highly effective at offsetting
changes in the fair value of the underlying exposure both at the inception of
the hedging relationship
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and on an ongoing basis. GATX primarily uses derivatives, such as interest rate
and currency swap agreements, Treasury rate locks, and forward sale agreements,
as hedges to manage its exposure to interest rate and foreign currency exchange
rate risk on existing and anticipated transactions. For qualifying derivatives
designated as fair value hedges, changes in both the derivative and the hedged
item attributable to the risk being hedged are recognized in earnings. For
qualifying derivatives designated as cash flow hedges, the effective portion of
the derivative's gain or loss is recorded as part of other comprehensive income
(loss) in shareholders' equity and subsequently recognized in the income
statement when the hedged transaction affects earnings. The change in fair value
of the ineffective portion of all hedges is immediately recognized in earnings.
For the years ended December 31, 2005, 2004, and 2003, no amounts were
recognized in earnings for hedge ineffectiveness. Gains and losses resulting
from the early termination of derivatives designated as cash flow hedges are
included in other comprehensive income (loss) and recognized in income when the
original hedged transaction affects earnings. Although GATX does not hold or
issue derivative financial instruments for purposes other than hedging, certain
derivatives may not meet the established criteria to qualify as hedges. These
derivatives are adjusted to fair value through earnings immediately. See Note 12
for further discussion of GATX's derivative instruments.
Environmental Liabilities -- Expenditures that relate to current or future
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are charged to environmental reserves.
Reserves are recorded in accordance with accounting guidelines to cover work at
identified sites when GATX's liability for environmental cleanup is probable and
a reasonable estimate of associated costs can be made. Adjustments to initial
estimates are recorded as required. See Note 15 for a discussion of
environmental contingencies.
Revenue Recognition -- Gross income includes rents on operating leases,
accretion of income on finance leases, interest on loans, marine operating
revenue, fees, asset remarketing gains and losses, gains and losses on the sale
of the portfolio investments and equity securities and share of affiliates'
earnings. Operating lease income is recognized on a straight-line basis over the
term of the underlying leases. Finance lease income is recognized on the basis
of the interest method, which produces a constant yield over the term of the
lease. Marine operating revenue is recognized as shipping services are performed
and revenue is allocated among reporting periods based on the relative transit
time in each reporting period for shipments in process at any month end. Asset
remarketing income includes gains and losses from the sale of assets from GATX's
portfolio as well as residual sharing fees from the sale of managed assets.
Asset remarketing income is recognized upon completion of the sale of assets.
Fee income, including management fees received from joint ventures, is
recognized as services are performed, which may be over the period of a
management contract or as contractual obligations are met.
Lease and Loan Origination Costs -- Initial direct costs of leases are
deferred and amortized over the lease term, either as an adjustment to the yield
for direct finance and leveraged leases (collectively, finance leases), or on a
straight-line basis for operating leases. Loan origination fees and related
direct loan origination costs for a given loan are offset, and the net amount is
deferred and amortized over the term of the loan as an adjustment to interest
income.
Residual Values -- GATX has investments in the residual values of its
leasing portfolio. The residual values represent the estimate of the values of
the assets at the end of the lease contracts. GATX initially records these based
on appraisals and estimates. Realization of the residual values is dependent on
GATX's ability to market the assets under future market conditions. GATX reviews
residual values periodically to determine that recorded amounts are appropriate.
For finance lease investments, GATX reviews the estimated residual values of
leased equipment at least annually, and any other-than-temporary declines in
value are immediately charged to income. In addition to a periodic review,
events or changes in circumstances may trigger an earlier review of residual
values.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment Securities -- GATX's portfolio includes warrants received in
connection with financing of non-public, venture-backed companies, common stock
received upon the exercise of these warrants and debt securities. Equity
securities are classified as available-for-sale in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The securities
are carried at fair value and unrealized gains and losses arising from
re-measuring securities to fair value are included on a net-of-tax basis as a
separate component of accumulated other comprehensive income (loss). Under the
provision of SFAS No. 133, warrants are accounted for as derivatives, with
changes in fair value recorded in current earnings. Upon conversion of the
warrants to shares of common stock, the warrants are reclassified in the balance
sheet as equity securities. Debt securities which management has the intent and
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost. Interest on debt securities, including amortization of premiums
and accretion of discounts, are included in interest expense, net. Debt
securities are written down to fair value when a decline in fair value below the
security's amortized cost basis is determined to be other-than-temporary.
Foreign Currency Translation -- The assets and liabilities of GATX's
operations having non-U.S functional currencies are translated at exchange rates
in effect at year end, and income statements and the statements of cash flows
are translated at weighted average exchange rates for the year. In accordance
with SFAS No. 52, Foreign Currency Translation, gains and losses resulting from
the translation of foreign currency financial statements are deferred and
recorded as a separate component of accumulated other comprehensive income or
loss in the shareholders' equity section of the balance sheet.
Variable Interest Entities -- GATX has ownership interests in certain
investments that are considered Variable Interest Entities ("VIEs") in
accordance with Financial Accounting Standards Board ("FASB") Interpretation No.
46R, Consolidation of Variable Interest Entities ("FIN 46R"). GATX does not
believe it is the primary beneficiary with respect to any of the VIEs. As a
result, GATX does not consolidate these entities. GATX's maximum exposure to
loss with respect to these VIEs is approximately $235.8 million of which $208.5
million was the aggregate carrying value of these investments recorded on the
balance sheet at December 31, 2005.
Stock-Based Compensation -- The Company grants stock options and restricted
stock to employees under stock-based award plans. As permitted under SFAS No.
148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
amendment of SFAS No. 123, Accounting for Stock-Based Compensation, the Company
accounts for all stock-based employee compensation plans under the recognition
and measurement provisions of Accounting Principles Board Opinion ("APB") 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. See Note 18 for further information on GATX's stock-based awards. See
information relating to new accounting pronouncements disclosed later in this
section.
Pro forma information regarding net income and earnings per share is
required to be disclosed as if GATX had accounted for its stock-based
compensation, including employee stock options, using the fair value method
under SFAS No. 123. GATX uses the Black-Scholes model to estimate the fair value
of its employee stock option awards. The Black-Scholes model is one of the most
frequently referenced models used to value options and was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including, but not limited to, expected stock price
volatility, risk free interest rate during the expected term of the option, and
the expected life of the option.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table illustrates the effect on net income (loss) and related
per share amounts if the Company had applied the fair value provisions of SFAS
No. 123 to stock-based employee compensation plans (in millions except for per
share data):
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-------------------------
2005 2004 2003
------ ------ -----
Net (loss) income, as reported.............................. $(14.3) $169.6 $76.9
Add: Stock-based compensation expense, net of tax........... 1.5 1.1 0.1
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax................................................ (4.0) (3.2) (3.1)
------ ------ -----
Pro forma net (loss) income................................. $(16.8) $167.5 $73.9
====== ====== =====
Net (loss) income per share:
Basic, as reported.......................................... $(0.29) $ 3.44 $1.57
Basic, pro forma............................................ (0.33) 3.39 1.50
Diluted, as reported........................................ (0.29) 3.04 1.53
Diluted, pro forma.......................................... (0.33) 3.01 1.47
</Table>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
Expected volatility......................................... 34.1% 35.4% 35.4%
Risk-free interest rate..................................... 4.3% 3.6% 3.2%
Expected life (years)....................................... 5.3 5.0 5.0
Dividend yield.............................................. 3.8% 3.9% 3.9%
Forfeitures................................................. 2.5% 2.2% 2.1%
</Table>
NEW ACCOUNTING PRONOUNCEMENTS
Stock-based Compensation -- In December 2004, SFAS No. 123(R) (revised
2004), Share-Based Payments was issued. SFAS No. 123(R), which is a revision of
SFAS No. 123, supersedes APB No. 25. Generally, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement, establishes fair value as the
measurement objective and requires entities to apply a fair value-based
measurement method in accounting for share-based payment transactions. The
statement originally applied to all awards granted, modified, repurchased or
cancelled after July 1, 2005, and unvested portions of previously issued and
outstanding awards. In April 2005, the Securities and Exchange Commission
("SEC") issued Release No. 33-8568, which deferred the effective date of SFAS
No. 123(R) to the first interim or annual reporting period of fiscal years
beginning on or after June 15, 2005. GATX expects to implement SFAS No. 123(R)
in the first quarter of 2006.
GATX plans to adopt SFAS No. 123(R) using the modified-prospective method
("MPT"). Under the MPT, entities are required to recognize compensation cost in
financial statements issued subsequent to the date of adoption for all
share-based payments granted, modified, or settled after the date of adoption as
well as for any rewards that were granted prior to the adoption date for which
the requisite service period has not been provided as of the adoption date.
As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
Had GATX adopted SFAS No. 123(R) in prior periods, the impact on pro forma net
income and related per share amounts would have approximated the result of SFAS
No. 123 as described above.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Leveraged Leases -- Prior to 2005, GATX entered into two
structured leasing investments that are accounted for in the consolidated
financial statements as leveraged leases in accordance with SFAS No. 13. SFAS
No. 13 requires total income over the term of a leveraged lease to be recognized
on a proportionate basis in those years in which the net investment in a lease
is positive. The net investment is based on net cash flows earned from the
lease, including the effect of related income taxes. During 2004, the Internal
Revenue Service ("IRS") challenged the timing of certain tax deductions claimed
with respect to these leveraged leases. GATX believes that its tax position
related to these leveraged leases was proper, based upon applicable statutes,
regulations and case law in effect at the time the leveraged leases were entered
into. GATX and the IRS have entered into a confidential closing agreement with
respect to one of the leveraged leases and are conducting settlement discussions
with respect to the second. Resolution of this matter has not concluded and may
ultimately be litigated.
Under existing accounting guidance provided in SFAS No. 13, Accounting for
Leases changes in estimates or assumptions not affecting estimated total net
income from a leveraged lease, including the timing of income tax cash flows, do
not change the timing of leveraged lease income recognition. On July 14, 2005,
the FASB issued proposed FASB Staff Position ("FSP") No. FAS 13-a, Accounting
for a Change or Projected Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction. The guidance in this proposal
would apply to all transactions classified as leveraged leases in accordance
with SFAS No. 13, and would require that the expected timing of income tax cash
flows generated by a leveraged lease transaction be reviewed annually or more
frequently if events or changes in circumstances indicate that a change in
timing is probable of occurring. If, during the lease term, the expected timing
of income tax cash flows generated by a leverage lease is revised, the rate of
return and the allocation of income would be recalculated from the inception of
the lease following the methodology provided in SFAS No. 13, which may result in
a one-time, non-cash charge to earnings in the period of changed expectations.
An equivalent amount of any such adjustment would then be recognized as income
over the remaining term of the applicable leases; over the full term of these
leases, cumulative accounting income would not change. This FSP is anticipated
to be effective beginning in 2007 and is not expected to be material to the
Company's consolidated financial position or results of operations.
NOTE 3. LEASES
The following information pertains to GATX as a lessor:
Finance Leases -- GATX's finance leases are comprised of direct financing
leases and leveraged leases. Investment in direct finance leases consists of
lease receivables, plus the estimated residual value of the equipment at the
lease termination dates, less unearned income. Lease receivables represent the
total rent to be received over the term of the lease reduced by rent already
collected. Initial unearned income is the amount by which the original sum of
the lease receivable and the estimated residual value exceeds the original cost
of the leased equipment. Unearned income is amortized to lease income over the
lease term in a manner that produces a constant rate of return on the net
investment in the lease.
Finance leases that are financed principally with nonrecourse borrowings at
lease inception and that meet certain criteria are accounted for as leveraged
leases. Leveraged lease receivables are stated net of the related nonrecourse
debt. Initial unearned income represents the excess of anticipated cash flows
(including estimated residual values, net of the related debt service) over the
original investment in the lease. The Company recognized income from leveraged
leases (net of taxes) of $4.3 million, $6.1 million and $10.7 million in 2005,
2004 and 2003, respectively.
In 2003, GATX disposed of a leveraged lease commitment on passenger rail
equipment. $184.9 million of assets were sold, including $108.4 million of
restricted cash and $48.0 million of progress payments. In addition, $183.4
million of liabilities, primarily nonrecourse debt, were assumed by the
acquirer.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the investment in finance leases at December 31 were (in
millions):
<Table>
<Caption>
LEVERAGE DIRECT TOTAL
LEASES FINANCING FINANCE LEASES
------------------- ---------------- -------------------
2005 2004 2005 2004 2005 2004
-------- -------- ------- ------ -------- --------
Total minimum lease
payments receivable...... $1,031.4 $1,146.4 $ 318.0 $171.1 $1,349.4 $1,317.5
Principal and interest on
third-party nonrecourse
debt..................... (889.1) (965.5) -- -- (889.1) (965.5)
-------- -------- ------- ------ -------- --------
Net minimum future lease
receivable............... 142.3 180.9 318.0 171.1 460.3 352.0
Estimated non-guaranteed
residual value of leased
assets................... 93.0 108.2 62.6 31.0 155.6 139.2
Unearned income............ (84.5) (114.9) (194.9) (90.4) (279.4) (205.3)
-------- -------- ------- ------ -------- --------
Investment in finance
leases................... 150.8 174.2 185.7 111.7 336.5 285.9
Deferred taxes............. (111.4) (91.4) -- -- (111.4) (91.4)
-------- -------- ------- ------ -------- --------
Net investment............. $ 39.4 $ 82.8 $ 185.7 $111.7 $ 225.1 $ 194.5
======== ======== ======= ====== ======== ========
</Table>
Operating Leases -- Rental income from operating leases is generally
reported on a straight-line basis over the term of the lease. Rental income on
certain leases is based on equipment usage. Rental income from usage rents was
$22.3 million, $31.7 million and $33.4 million, in 2005, 2004 and 2003,
respectively.
Minimum Future Receipts -- Minimum future lease receipts from finance
leases, net of debt payments for leveraged leases, and minimum future rental
receipts from noncancelable operating leases at December 31, 2005 were (in
millions):
<Table>
<Caption>
FINANCE OPERATING
LEASES LEASES TOTAL
------- --------- --------
2006.................................................... $ 43.5 $ 826.7 $ 870.2
2007.................................................... 34.3 600.0 634.3
2008.................................................... 31.8 441.7 473.5
2009.................................................... 32.5 318.9 351.4
2010.................................................... 31.7 197.7 229.4
Years thereafter........................................ 286.5 351.5 638.0
------ -------- --------
$460.3 $2,736.5 $3,196.8
====== ======== ========
</Table>
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information pertains to GATX as a lessee:
Capital Leases -- GATX assets that are financed with capital lease
obligations and subsequently leased to customers under either operating or
finance leases, or otherwise utilized in operations at December 31 were (in
millions):
<Table>
<Caption>
2005 2004
------- -------
Railcars and locomotives.................................... $ 82.6 $ 116.4
Marine vessels.............................................. 98.0 98.0
------- -------
180.6 214.4
Less: allowance for depreciation............................ (138.3) (158.1)
------- -------
42.3 56.3
Finance leases.............................................. 6.2 7.5
------- -------
$ 48.5 $ 63.8
======= =======
</Table>
Depreciation of capital lease assets is classified as depreciation in the
consolidated statement of operations. Interest expense on the above capital
leases was $5.3 million, $8.4 million and $12.0 million, in 2005, 2004 and 2003,
respectively.
Operating Leases -- GATX has financed railcars, aircraft, and other assets
through sale-leasebacks that are accounted for as operating leases. A subsidiary
of GATX has provided a guarantee for a portion of the residual value related to
two operating leases. Operating lease expense was $187.0 million, $173.6 million
and $176.0 million, in 2005, 2004 and 2003, respectively. Certain operating
leases provide options for GATX to renew the leases or purchase the assets at
the end of the lease term. The specific terms of the renewal and purchase
options vary.
In 2005, GATX completed a sale leaseback transaction for approximately
2,900 of its railcars (net book value of $170.0 million) for net proceeds of
$201.3 million. The transaction resulted in a gain of $31.3 million, which was
deferred and is being amortized as a component of operating lease expense over
the 21 year term of the resulting operating lease.
Future Minimum Rental Payments -- Future minimum rental payments due under
noncancelable leases at December 31, 2005 were (in millions):
<Table>
<Caption>
RECOURSE NONRECOURSE
CAPITAL OPERATING OPERATING
LEASES LEASES LEASES
------- --------- -----------
2006................................................... $ 11.8 $ 312.2 $ 42.1
2007................................................... 11.1 280.7 38.7
2008................................................... 11.0 280.7 38.9
2009................................................... 10.7 279.1 41.0
2010................................................... 8.1 274.9 42.2
Years thereafter....................................... 36.4 1,862.2 356.6
------ -------- ------
89.1 $3,289.8 $559.5
======== ======
Less: amounts representing interest.................... (26.6)
------
Present value of future minimum capital lease
payments............................................. $ 62.5
======
</Table>
The payments for these leases and certain operating leases do not include
the costs of licenses, taxes, insurance, and maintenance that GATX is required
to pay.
The amounts shown for nonrecourse operating leases primarily reflect rental
payments of three bankruptcy remote, special-purpose corporations that are
wholly owned by GATX. These rentals are consolidated for accounting purposes,
but do not represent legal obligations of GATX.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LOANS
Loans are recorded at the principal amount outstanding plus accrued
interest. The loan portfolio is reviewed regularly and a loan is classified as
impaired when it is probable that GATX will be unable to collect all amounts due
under the loan agreement. Since most loans are collateralized, impairment is
generally measured as the amount by which the recorded investment in the loan
exceeds expected payments plus the fair value of the underlying collateral.
Generally, interest income is not recognized on impaired loans until the loan
has been paid up to contractually current status or as conditions warrant.
The types of loans in GATX's portfolio are as follows at December 31 (in
millions):
<Table>
<Caption>
2005 2004
----- -----
Equipment and other......................................... $36.3 $62.8
Venture Finance............................................. 2.4 26.4
----- -----
Total loans................................................. $38.7 $89.2
===== =====
Impaired loans (included in total).......................... $ 9.3 $13.8
----- -----
</Table>
The Company has recorded an allowance for possible losses of $2.7 million
and $5.7 million on impaired loans at December 31, 2005 and 2004, respectively.
The average balance of impaired loans was $11.6 million, $21.4 million and $38.9
million during 2005, 2004 and 2003, respectively.
At December 31, 2005, scheduled loan principal due by year was as follows
(in millions):
<Table>
<Caption>
LOAN PRINCIPAL
--------------
2006........................................................ $ 7.2
2007........................................................ 1.3
2008........................................................ 15.4
2009........................................................ 3.6
2010........................................................ 3.6
Years thereafter............................................ 7.6
-----
$38.7
=====
</Table>
NOTE 5. ALLOWANCE FOR POSSIBLE LOSSES
The purpose of the allowance is to provide an estimate of credit losses
with respect to gross receivables inherent in the investment portfolio. Gross
receivables include rent and other receivables, loans and finance leases. GATX's
estimate of the amount of loss incurred in each period requires consideration of
historical loss experience, judgments about the impact of present economic
conditions, collateral values, and the state of the markets in which GATX
participates, in addition to specific losses for known troubled accounts. GATX
charges off amounts that management considers unrecoverable either from obligors
or through the disposition of collateral. GATX assesses the recoverability of
investments by considering factors such as a customer's payment history,
financial position and the value of the related collateral.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes changes in the allowance for possible losses at
December 31 (in millions):
<Table>
<Caption>
2005 2004 2003
----- ------ ------
Balance at the beginning of the year........................ $22.1 $ 45.6 $ 66.7
(Reversal) provision for losses............................. (6.3) (13.7) 4.7
Charges to allowance........................................ (4.7) (13.7) (26.7)
Recoveries and other........................................ 2.0 3.9 0.9
----- ------ ------
Balance at the end of the year.............................. $13.1 $ 22.1 $ 45.6
===== ====== ======
</Table>
The reversals of provision for losses for 2005 and 2004 were primarily due
to favorable credit experience achieved during the run-off of the Venture
Finance portfolio and improvements in overall portfolio quality. The charges to
the allowance in 2005 were primarily due to charge-offs related to Venture
Finance investments. The charges to the allowance in 2004 were primarily due to
charge-offs related to Rail and Specialty investments, as well as a fully
reserved corporate charge-off of $5.0 million. The charges to the allowance in
2003 were primarily due to write-offs related to Air and Specialty investments.
There were no material changes in estimation methods or assumptions for the
allowances during 2005. GATX believes that the allowance is adequate to cover
losses inherent in the gross receivables portfolio as of December 31, 2005.
Since the allowance is based on judgments and estimates, it is possible that
those judgments and estimates could change in the future, causing a
corresponding change in the recorded allowance.
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies represent investments in, and loans to
and from, domestic and foreign companies and joint ventures that are in
businesses similar to those of GATX, such as lease financing and related
services for customers operating commercial aircraft, rail, marine and
industrial equipment assets, as well as other business activities, including
ventures that provide asset residual value guarantees in both domestic and
foreign markets. These investments include net loans to affiliated companies of
$276.3 million and $279.1 million at December 31, 2005 and 2004, respectively.
Distributions received from affiliates were $105.4 million, $146.2 million and
$145.8 million in 2005, 2004 and 2003, respectively.
In the fourth quarter of 2005, GATX targeted five of its affiliates for
disposition of either its ownership interest or the underlying aircraft in the
affiliate. As a result, the Company recorded impairment charges of $122.5
million (74.5 million after tax) to write those affiliates down to fair value.
Certain of these charges were recorded at the affiliate level and the remaining
charges were recorded at the investor level. See Note 7 for details relating to
these impairment charges.
The following table shows GATX's investments in affiliated companies by
segment at December 31 (in millions):
<Table>
<Caption>
2005 2004
------ ------
Rail........................................................ $ 99.7 $102.5
Air......................................................... 408.9 473.8
Specialty................................................... 158.7 142.3
------ ------
$667.3 $718.6
====== ======
</Table>
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below provides detail on the ten largest investments in
affiliates at December 31, 2005 ($'s in millions):
<Table>
<Caption>
GATX'S
GATX'S PERCENTAGE
NAME SEGMENT INVESTMENT OWNERSHIP
- ---- --------- ---------- ----------
AAE Cargo............................................ Rail $71.9 37.5%
GATX/CL Air Leasing Cooperative Association.......... Air 62.8 30.0%
GATX 737-800 Partners................................ Air 60.9 25.1%
Alster and Thames Partners Ltd....................... Air 60.3 50.0%
Cardinal Marine...................................... Specialty 42.9 50.0%
Javelin Leasing Limited.............................. Air 42.6 50.0%
Blue Dragon.......................................... Air 38.5 50.0%
GATX 737-800 Partners III............................ Air 34.0 26.0%
GATX 737NG Partners.................................. Air 30.5 30.0%
PBG Capital Partners................................. Specialty 28.9 50.0%
</Table>
The following table shows GATX's pre-tax share of affiliates' earnings
(losses) by segment as of December 31 (in millions):
<Table>
<Caption>
2005 2004 2003
------ ----- -----
Rail........................................................ $ 16.3 $16.6 $12.5
Air......................................................... 1.3 26.2 31.6
Specialty................................................... 43.3 22.4 22.7
------ ----- -----
60.9 65.2 66.8
Equity method impairments................................... (89.7) -- --
------ ----- -----
$(28.8) $65.2 $66.8
====== ===== =====
</Table>
For purposes of preparing the following information, GATX made certain
adjustments to the operating results reported by the affiliates. GATX recorded
its loans to the affiliates as equity contributions. As a result, the
affiliates' loan balances were reclassified from liabilities to equity and
pre-tax income was adjusted to reverse related interest expense. Additionally,
the effects of impairment losses recorded by GATX at the investor level are not
reflected in the operating results of the affiliates.
Operating results for all affiliated companies held at December 31,
assuming GATX held a 100% interest, would be (in millions):
<Table>
<Caption>
2005 2004 2003
------ ------ ------
Revenues................................................... $798.8 $685.1 $688.1
Pre-tax income reported by affiliates...................... 110.8 131.6 117.1
</Table>
Summarized balance sheet data for all affiliated companies held at December
31, assuming GATX held a 100% interest, would be (in millions):
<Table>
<Caption>
2005 2004
-------- --------
Total assets................................................ $5,510.5 $5,539.4
Long-term liabilities....................................... 3,007.2 3,225.6
Other liabilities........................................... 651.1 536.7
Shareholders' equity........................................ 1,852.2 1,777.1
</Table>
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2005 and 2004, GATX provided $35.2 million and $42.7
million, respectively, in lease and loan payment guarantees and $117.4 million
and $122.0 million, respectively, in residual value guarantees related to
affiliated companies.
NOTE 7. IMPAIRMENT CHARGES RELATED TO AIR ASSETS TARGETED FOR DISPOSITION
In the fourth quarter of 2005, GATX performed a comprehensive evaluation of
the Air segment's aircraft related investments. As a result of this evaluation,
management identified certain assets from both its wholly owned aircraft fleet
and its affiliate investments that were not yielding an acceptable level of
return and targeted these assets for disposition. In connection with this
evaluation, impairment charges of $196.4 million ($119.4 million after tax) were
recognized to write these assets down to their estimated fair values. Fair
values for individual aircraft, including aircraft held by affiliates, were
estimated using published appraised values for aircraft of similar make and age
and adjusted for configuration differences and relative condition of the
aircraft. Terms of underlying leases were also considered, as applicable.
Affiliate investment fair values were estimated using discounted net cash flows
anticipated to be realized by GATX either through the expected sale of
underlying aircraft by the affiliate or disposition proceeds from the sale of
GATX's ownership interest in the affiliate. Details of the assets identified for
disposition are as follows:
Wholly Owned Aircraft -- The wholly owned aircraft consist primarily of 12
older aircraft and meet the criteria under SFAS No. 144 for held for sale
classification. In connection with the classification as held for sale, an
impairment charge of $73.9 million ($44.9 million after tax) was recognized to
write down the carrying value of the aircraft to their estimated fair values
less costs to sell. The aircraft are expected to be substantially sold by the
end of 2006. In accordance with SFAS No. 144, aircraft classified as held for
sale are no longer depreciated; however, their fair values must be re-assessed
through the date of sale and any adjustments must be recognized. A gain may be
recognized for a subsequent increase in fair value, however not in excess of the
cumulative loss previously recognized. All fair value adjustments and
disposition gains and/or losses are recognized as asset impairment charges.
Affiliate Investments -- Five of GATX's Air related investments in
affiliates were targeted for disposition of either the affiliate or the
underlying aircraft in the affiliate. As a result, impairment charges of $122.5
million ($74.5 million after tax) were recorded to write these investments down
to their estimated fair values. Of this amount, $35.4 million (GATX's pro rata
share) was recorded at the affiliates' level in accordance with SFAS No. 144.
The remaining charges of $87.1 million were the result of other-than-temporary
impairment determinations made by GATX and were recorded in accordance with APB
18. Both affiliate and investor level impairment charges were reported in share
of affiliates' earnings (losses). The APB 18 impairment charges created a basis
difference between GATX's carrying value and the underlying net assets recorded
at the impacted affiliate. As a result, GATX's proportional share of future
earnings from these affiliates will be reflective of the impairment charge
taken.
NOTE 8. GOODWILL
Goodwill was $86.0 million and $93.9 million as of December 31, 2005 and
2004, respectively. In accordance with SFAS No. 142, an annual review for
impairment of goodwill was performed in the fourth quarter of 2005 and 2004.
GATX's impairment review consists of two steps and is performed at the reporting
unit level, which is one level below an operating segment. The first step
compares the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its carrying
amount, the goodwill of the reporting unit is considered not impaired. If the
carrying amount of the reporting unit exceeds its fair value, an additional step
is performed that compares the implied fair value of the reporting unit's
goodwill (as defined in SFAS No. 142) with the carrying amount of the goodwill.
An impairment loss is recorded to the extent that the carrying amount of
goodwill exceeds its implied fair value.
Reporting units were determined based on the composition of GATX's
operating segments, taking into consideration whether the operating segments
consisted of more than one business and, if so, whether the
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
businesses operated in different economic environments. Goodwill resulting from
each business combination was assigned to the same reporting unit that the
assets and liabilities of the acquired businesses were assigned to. Fair values
of the reporting units were estimated using discounted cash flow models. The key
assumptions used in the discounted cash flow models included projected cash flow
periods ranging from five to ten years; estimated terminal values; growth rates
ranging from 2% to 8%; and discount rates ranging from 5% to 11%, which were
based on the Company's cost of capital adjusted for the risk associated with the
operations. GATX's reviews for 2005 and 2004 indicated there was no impairment
of goodwill.
The following reflects the changes in the carrying value of goodwill for
the periods of December 31, 2003 to December 31, 2005 (in millions):
<Table>
<Caption>
RAIL TOTAL
----- -----
Balance at December 31, 2003................................ $87.2 $87.2
Foreign currency translation adjustment..................... 6.7 6.7
----- -----
Balance at December 31, 2004................................ 93.9 93.9
Foreign currency translation adjustment..................... (7.9) (7.9)
----- -----
Balance at December 31, 2005................................ $86.0 $86.0
===== =====
</Table>
NOTE 9. INVESTMENT SECURITIES
The following table summarizes GATX's investment securities as of December
31 (in millions):
<Table>
<Caption>
2005 2004
----- -----
Available-for-sale securities............................... $ 3.6 $ 8.9
Held-to-maturity securities................................. 37.6 24.0
Warrants.................................................... 1.1 3.0
----- -----
$42.3 $35.9
===== =====
</Table>
Proceeds from sales of available-for-sale securities totaled $9.3 million
in 2005, $7.1 million in 2004 and $7.3 million in 2003. The held-to-maturity
securities at December 31, 2005 are scheduled to mature in January 2007.
NOTE 10. OTHER ASSETS AND OTHER LIABILITIES
The following table summarizes the components of other assets reported on
the consolidated balance sheets (in millions):
<Table>
<Caption>
DECEMBER 31
---------------
2005 2004
------ ------
Assets held-for-sale........................................ $138.7 $ 10.2
Investment securities....................................... 42.3 35.9
Other investments........................................... 31.8 32.9
Fair value of derivatives................................... 7.2 26.0
Deferred financing costs.................................... 42.0 49.5
Prepaid items, including pension............................ 89.8 90.6
SG&A furniture, fixtures and other equipment, net of
accumulated depreciation.................................. 13.4 12.6
Inventory................................................... 25.2 25.8
Other....................................................... 30.7 37.9
------ ------
$421.1 $321.4
====== ======
</Table>
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the components of other liabilities reported
on the consolidated balance sheets (in millions):
<Table>
<Caption>
DECEMBER 31
---------------
2005 2004
------ ------
Accrued operating lease expense............................. $129.8 $147.0
Pension and OPEB liabilities................................ 80.8 83.7
Aircraft maintenance reserves............................... 100.5 73.9
Environmental reserves...................................... 34.8 37.7
Deferred gain on sale-leaseback............................. 32.7 4.6
Fair value of derivatives................................... 12.5 38.0
Other....................................................... 97.6 122.9
------ ------
$488.7 $507.8
====== ======
</Table>
NOTE 11. DEBT
COMMERCIAL PAPER AND BANK CREDIT FACILITIES
<Table>
<Caption>
DECEMBER 31
-------------
2005 2004
----- -----
IN MILLIONS
Balance..................................................... $57.0 $72.1
Weighted average interest rate.............................. 4.42% 3.03%
</Table>
RECOURSE AND NONRECOURSE DEBT OBLIGATIONS
Debt obligations and the range of interest rates as of year end were ($ in
millions):
<Table>
<Caption>
DECEMBER 31
-------------------
VARIABLE RATE INTEREST RATES FINAL MATURITY 2005 2004
- ------------- -------------- -------------- -------- --------
Term notes and other obligations.... 2.41% - 5.15% 2007 - 2016 $ 900.8 $1,115.6
Nonrecourse obligations............. 2.71% - 5.32% 2007 - 2015 35.4 90.0
-------- --------
936.2 1,205.6
FIXED RATE
Term notes and other obligations.... 4.05% - 8.88% 2006 - 2015 1,814.6 1,771.5
Nonrecourse obligations............. 8.30% 2007 2.3 3.5
-------- --------
1,816.9 1,775.0
-------- --------
$2,753.1 $2,980.6
======== ========
</Table>
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of GATX's recourse and nonrecourse debt obligations as of
December 31, 2005, were as follows (in millions):
<Table>
<Caption>
TERM NOTES
AND OTHER NONRECOURSE TOTAL
---------- ----------- --------
2006................................................ $ 370.5 $ 5.9 $ 376.4
2007................................................ 321.7 5.1 326.8
2008................................................ 407.0 2.3 409.3
2009................................................ 469.7 2.5 472.2
2010................................................ 342.0 2.6 344.6
Thereafter.......................................... 802.3 19.3 821.6
-------- ----- --------
Sub-total......................................... 2,713.2 37.7 2,750.9
Fair value of debt derivatives...................... 2.2 -- 2.2
-------- ----- --------
Total debt........................................ $2,715.4 $37.7 $2,753.1
======== ===== ========
</Table>
Cash paid for interest consists of interest on debt obligations, interest
rate swaps (net of interest received) and capital lease interest was $162.9
million $172.1 million and $169.7 million for 2005, 2004 and 2003, respectively.
Capital lease obligations, which are detailed in Note 3, were $62.5 million
and $79.4 million for 2005 and 2004, respectively.
At December 31, 2005, certain aircraft, railcars, and other equipment with
a net carrying value of $1,081.3 million were pledged as collateral for $841.3
million of notes and obligations.
Interest expense capitalized as part of the cost of construction of major
assets was $1.5 million, $1.9 million and $4.2 million in 2005, 2004 and 2003,
respectively.
GATX Financial Corporation ("GFC") a wholly owned subsidiary of GATX, has a
shelf registration for $1.0 billion of debt securities and pass through
certificates. At December 31, 2005, a total of $496.5 million of senior
unsecured notes had been issued. GFC also has a $525.0 million five-year senior
unsecured revolving facility which matures in June 2010. At December 31, 2005,
availability under the revolving credit facility was $503.3 million, with $21.7
million of letters of credit issued and backed by the facility. The revolving
credit facility contains various restrictive covenants, including requirements
to maintain a defined net worth, an asset coverage test, and a fixed charge
coverage ratio.
The net worth of GFC at December 31, 2005 was $1.8 billion, which was in
excess of the minimum net worth requirement of $1.3 billion, as defined in the
credit facility. Additionally, the ratio of earnings to fixed charges, as
defined in the credit facility, was 2.0x for the period ended December 31, 2005,
in excess of the minimum covenant ratio of 1.3x. At December 31, 2005, GFC was
in compliance with all covenants and conditions of the credit facility. Annual
commitment fees for the revolving credit agreements are based on a percentage of
the commitment and were approximately $1.0 million, $1.2 million and $1.4
million for 2005, 2004 and 2003, respectively.
The indentures for GFC's public debt also contain restrictive covenants,
including limitations on loans, advances or investments in related parties
(including GATX), and dividends it may distribute to GATX. Some of the
indentures also contain limitation on lien provisions that limit the amount of
secured indebtedness that GFC may incur, subject to several exceptions,
including those permitting an unlimited amount of purchase money indebtedness
and nonrecourse indebtedness. In addition to the other specified exceptions, GFC
would be able to incur liens securing a maximum of $677.1 million of additional
indebtedness as of December 31, 2005 based on the most restrictive limitation on
liens provision. At December 31, 2005, GFC was in compliance with all covenants
and conditions of the indentures.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The covenants in the credit facility and indentures effectively limit the
ability of GFC to transfer funds to GATX in the form of loans, advances or
dividends. At December 31, 2005, the maximum amount that GFC could transfer to
GATX without violating its financial covenants was $728.2 million, implying that
$647.5 million of subsidiary net assets were restricted. Restricted net assets
are defined as the subsidiary's equity, less intercompany receivables from the
parent company, less the amount that could be transferred to the parent company.
A subsidiary's bank financing contains leverage and cash flow covenants
that are specific to that subsidiary. Another subsidiary financing, guaranteed
by GFC, contains various restrictive covenants, including requirements to
maintain a defined net worth and a fixed charge coverage ratio, both of which
are less restrictive than the requirements of the credit facility.
GFC does not anticipate any covenant violation in the credit facility, bank
financings, indenture, or other financings, nor does GFC anticipate that any of
these covenants will restrict its operations or its ability to procure
additional financing.
In August 2003, GATX completed a private offering of $125.0 million
long-term, 5.0% senior unsecured notes which are convertible into GATX
Corporation common stock. As of December 31, 2005, the notes were convertible at
a conversion price of $24.23 per share. The conversion price is subject to
adjustment based on various factors, including changes in the dividend on GATX's
common stock. Holders of the notes alternatively have the right to require all
or a portion of the notes to be purchased at a price equal to 100% of the
principal amount of the notes plus accrued and unpaid interest in August 2008,
August 2013, and August 2018. Any required purchases in August 2008 will be
payable in cash, whereas any purchases in August 2013 or August 2018 may be paid
in cash or shares of GATX common stock or any combination thereof, at GATX's
option. GATX also has the right, beginning in August 2008, to redeem the notes
at 100% of the principal amount plus accrued and unpaid interest. If GATX
provides notice of redemption, the holders of the notes may elect to exercise
their conversion privilege. Upon conversion, GATX may elect, at its option, to
deliver cash, shares of GATX common stock or any combination thereof.
In February 2002, GATX completed a private offering of $175.0 million of
long-term, 7.5% senior unsecured convertible notes. The five-year notes are
convertible at any time prior to maturity into GATX Corporation common stock at
a price of $34.09 per share.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
GATX may enter into derivative transactions for purposes of reducing
earnings volatility and hedging specific financial exposures, including
movements in foreign currency exchange rates and changes in interest rates on
debt securities. These instruments are entered into only for hedging underlying
exposures. GATX does not hold or issue derivative financial instruments for
purposes other than hedging, except for warrants, which are not accounting
hedges under SFAS No. 133. Certain derivatives may not meet the established
criteria to be designated qualifying hedges, even though GATX believes they are
effective economic hedges.
Fair Value Hedges -- GATX uses interest rate swaps to convert fixed rate
debt to floating rate debt and to manage the fixed to floating rate mix of its
debt obligations. The fair value of interest rate swap agreements is determined
based on the differences between the contractual rate of interest and the rates
currently quoted for agreements of similar terms and maturities. As of December
31, 2005, maturities for fair value hedges range from 2006-2015.
Cash Flow Hedges -- GATX's interest expense is affected by changes in
interest rates as a result of its use of variable rate debt instruments,
including commercial paper and other floating rate debt. GATX uses interest rate
swaps and forward starting interest rate swaps to convert floating rate debt to
fixed rate debt and to manage the floating to fixed rate ratio of the debt
portfolio. The fair value of interest rate swap agreements is determined based
on the differences between the contractual rate of interest and the rates
currently quoted for agreements of similar terms and maturities. GATX enters
into cross currency and interest rate swaps,
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currency and interest rate forwards, and Treasury rate locks as hedges to manage
its exposure to interest rate and foreign currency exchange rate risk on
existing and anticipated transactions. The fair values of these derivatives are
based on interest rate swap rates, LIBOR futures, currency rates, and current
forward foreign exchange rates. As of December 31, 2005, maturities for
qualifying cash flow hedges range from 2006-2015.
As of December 31, 2005, GATX expects to reclassify $1.4 million of net
losses on derivative instruments from accumulated other comprehensive income
(loss) to earnings within the next twelve months related to various hedging
transactions.
Other Financial Instruments -- The fair value of other financial
instruments represents the amount at which the instrument could be exchanged in
a current transaction between willing parties. The carrying amounts of cash and
cash equivalents, restricted cash, rent receivables, accounts payable,
commercial paper and bank credit facilities approximate fair value due to the
short maturity of those instruments. The carrying amounts of held-to-maturity
securities and variable rate loans also approximate their fair values.
Available-for-sale securities and warrants are carried at fair value. The fair
value of fixed rate loans was estimated using discounted cash flow analyses, at
interest rates currently offered for loans with similar terms to borrowers of
similar credit quality. The fair value of variable and fixed rate debt was
estimated by performing a discounted cash flow calculation using the term and
market interest rate for each note based on GATX's current incremental borrowing
rates for similar borrowing arrangements.
Portions of variable rate debt have effectively been converted to fixed
rate debt by utilizing interest rate swaps (GATX pays fixed rate interest,
receives floating rate interest). Portions of fixed rate debt have effectively
been converted to floating rate debt by utilizing interest rate swaps (GATX pays
floating rate interest, receives fixed rate interest). In such instances, the
increase (decrease) in the fair value of the variable or fixed rate debt would
be offset in part by the increase (decrease) in the fair value of the interest
rate swap.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the carrying amounts and fair values of
GATX's financial instruments (in millions):
<Table>
<Caption>
DECEMBER 31
-----------------------------------------
2005 2005 2004 2004
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
ASSETS
Loans -- fixed............................... $ 16.2 $ 13.9 $ 65.8 $ 61.2
Investment securities........................ 42.3 42.3 35.9 35.9
Derivative instruments:
Cash flow hedges........................... 3.5 3.5 2.1 2.1
Fair value hedges.......................... 3.3 3.3 23.7 23.7
Non-qualifying............................. 0.4 0.4 0.2 0.2
-------- -------- -------- --------
Total derivative instruments................. 7.2 7.2 26.0 26.0
-------- -------- -------- --------
$ 65.7 $ 63.4 $ 127.7 $ 123.1
======== ======== ======== ========
LIABILITIES
Commercial paper and bank credit
facilities................................. $ 57.0 $ 57.0 $ 72.1 $ 72.1
Debt -- fixed................................ 1,816.9 1,964.6 1,775.0 1,958.1
Debt -- variable............................. 936.2 935.7 1,205.6 1,206.6
Derivative instruments:
Cash flow hedges........................... 9.4 9.4 33.7 33.7
Fair value hedges.......................... 1.6 1.6 0.2 0.2
Non-qualifying............................. 1.5 1.5 4.1 4.1
-------- -------- -------- --------
Total derivative instruments................. 12.5 12.5 38.0 38.0
-------- -------- -------- --------
$2,822.6 $2,969.8 $3,090.7 $3,274.8
======== ======== ======== ========
</Table>
In the event that a counterparty fails to meet the terms of the interest
rate swap agreement or a foreign exchange contract, GATX's exposure is limited
to the market value of the swap if in GATX's favor. GATX manages the credit risk
of counterparties by dealing only with institutions that the Company considers
financially sound and by avoiding concentrations of risk with a single
counterparty. GATX considers the risk of non-performance by a counterparty to be
remote.
For the years ended December 31, 2005, 2004 and 2003, gain (losses) of $2.1
million, $(3.8) million and $(3.8) million, respectively, were recognized in
earnings for derivatives not qualifying as hedges.
NOTE 13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. U.S. income taxes have
not been provided on the undistributed earnings of foreign subsidiaries and
affiliates that GATX intends to permanently reinvest in these foreign
operations. The cumulative amount of such earnings was $243.8 million at
December 31, 2005.
The American Jobs Creation Act of 2004 introduced a special, one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer provided certain criteria are met. During the fourth quarter of
2005, GATX completed its evaluation of this opportunity and repatriated earnings
of $94.5 million at a tax cost of $9.9 million.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of GATX's deferred tax liabilities and assets were
(in millions):
<Table>
<Caption>
DECEMBER 31
---------------
2005 2004
------ ------
DEFERRED TAX LIABILITIES
Book/tax basis difference due to depreciation............... $368.8 $398.4
Leveraged leases............................................ 111.4 91.4
Investments in affiliated companies......................... 107.2 173.6
Lease accounting (other than leveraged)..................... 197.4 195.3
Other....................................................... 60.6 48.7
------ ------
Total deferred tax liabilities.............................. 845.4 907.4
DEFERRED TAX ASSETS
Alternative minimum tax credit.............................. 23.7 29.3
Net operating loss carryforward............................. 11.3 46.0
Accruals not currently deductible for tax purposes.......... 52.6 59.0
Allowance for possible losses............................... 5.0 8.4
Post-retirement benefits other than pensions................ 19.4 20.0
Other....................................................... 50.0 23.7
------ ------
Total deferred tax assets................................... 162.0 186.4
------ ------
Net deferred tax liabilities................................ $683.4 $721.0
====== ======
</Table>
At December 31, 2005, GATX had a U.S. income tax net operating loss
carryforward of approximately $32.2 million, of which $7.6 million expires after
2023 and $24.6 million expires after 2024. The alternative minimum tax credit of
$23.7 million has an unlimited carryforward period. A valuation allowance for
recorded deferred tax assets has not been provided as management expects such
benefits to be fully realized.
The components of (loss) income from continuing operations before income
taxes consisted of (in millions):
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------- ------ -----
Domestic................................................... $(126.8) $160.1 $32.2
Foreign.................................................... 99.0 66.6 45.7
------- ------ -----
$ (27.8) $226.7 $77.9
======= ====== =====
</Table>
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATX and its U.S. subsidiaries file a consolidated federal income tax
return. Income taxes for continuing operations consisted of (in millions):
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
CURRENT
Domestic:
Federal.................................................. $ (1.6) $ 6.4 $ 15.7
State and local.......................................... 0.3 5.2 (2.7)
------ ------ ------
(1.3) 11.6 13.0
Foreign.................................................... 24.2 16.8 10.1
------ ------ ------
22.9 28.4 23.1
DEFERRED
Domestic:
Federal.................................................. (41.6) 28.6 (22.1)
State and local.......................................... (6.8) 10.0 9.2
------ ------ ------
(48.4) 38.6 (12.9)
Foreign.................................................... 2.9 1.2 6.0
------ ------ ------
(45.5) 39.8 (6.9)
Repatriated foreign earnings............................... 9.9 -- --
------ ------ ------
Income tax (benefit) provision............................. $(12.7) $ 68.2 $ 16.2
====== ====== ======
Income taxes paid (recovered).............................. $ 15.6 $(35.4) $(84.1)
====== ====== ======
</Table>
The tax amount recovered in 2003 is net of $21.4 million paid to the
Internal Revenue Service ("IRS") to settle all disputed tax issues related to
the audits for the years 1992 to 1997.
The reasons for the difference between GATX's effective income tax rate and
the federal statutory income tax rate were (in millions):
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
Income taxes at federal statutory rate..................... $ (9.7) $ 79.3 $ 27.3
Adjust for effect of:
Tax on repatriated foreign earnings...................... 9.9 -- --
Extraterritorial income exclusion........................ (0.9) (1.4) (1.7)
Tax rate decrease on deferred taxes...................... -- (2.4) (1.8)
State income taxes....................................... (4.3) 9.9 2.4
Corporate owned life insurance........................... (1.1) (1.3) (0.7)
Tax refund claim & audit recovery........................ -- (14.5) (10.0)
Foreign income tax rates................................. (6.8) (2.4) 0.1
Other.................................................... 0.2 1.0 0.6
------ ------ ------
Income tax (benefit) provision............................. $(12.7) $ 68.2 $ 16.2
====== ====== ======
Effective income tax rate.................................. 45.7% 30.1% 20.8%
====== ====== ======
</Table>
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the fourth quarter of 2005, GATX repatriated $94.5 million of
foreign earnings, pursuant to the special one-time dividends received deduction
provided by the American Jobs Creation Act of 2004, at a tax cost of $9.9
million. The tax cost includes federal and state income taxes on the taxable
portion of the dividends and related non-deductible costs, and foreign
withholding taxes.
The extraterritorial income exclusion ("ETI") is an exemption from U.S.
federal income tax for the lease of U.S. manufactured equipment to foreign
lessees. ETI was repealed for years after 2004 with a reduced benefit allowable
in 2005 and 2006 under transition rules.
The tax rate decrease on deferred taxes recorded in 2004 and 2003 is the
result of changes in foreign income tax rates enacted in those years.
State income taxes are provided on domestic pre-tax income or loss. The
effect of state income tax on the overall income tax rate is impacted by the
amount of domestic income subject to state taxes relative to total income from
all sources.
During 2004, the IRS agreed to certain refunds claimed for 1999 and 2000
that related to the disposition of businesses in those years and to additional
Foreign Sales Corporation and ETI benefits.
The recovery of tax audit reserve in 2003 was the reversal of prior year
tax audit accruals as a result of the favorable resolution and settlement with
the IRS of issues in the 1995 to 1997 audit.
The effective income tax rate is impacted by foreign taxes on the earnings
of foreign subsidiaries and affiliates which are imposed at rates that are
different than the U.S. federal statutory rate. Foreign taxes are also withheld
on certain payments received by the Company from foreign sources. The net amount
of foreign tax that exceeds or is less than the U.S. statutory rate of tax on
foreign earnings is shown above. The foreign income tax rate effects exclude the
impact on deferred taxes of enacted changes in foreign rates, which are
identified separately.
The Company's U.S. income tax returns have been audited through 1997 and
all issues for that period have been settled with the IRS. An audit by the IRS
of the Company's U.S. tax returns for the period 1998 through 2002 is expected
to be completed in the first quarter of 2006. During 2004, the IRS challenged
certain deductions claimed by the Company with respect to two structured leasing
investments. During 2005, GATX concluded a confidential settlement agreement
with the IRS Appeals Division for one of the transactions on a basis consistent
with existing reserves. GATX believes that its tax position related to the other
disputed transaction was proper based upon applicable statutes, regulations and
case law in effect at the time the transaction was entered into. GATX expects
this issue will be appealed and may ultimately be litigated. Certain of the
Company's subsidiaries are under audits for various periods in various state and
foreign jurisdictions. The Company believes its reserves established for
potential assessments, including interest and penalties with respect to the
leasing transaction, and other open tax issues are reasonable. Once established,
reserves are adjusted only when circumstances, including final resolution of an
issue, require.
NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFITS
GATX maintains both funded and unfunded noncontributory defined benefit
pension plans covering its domestic employees and the employees of certain of
its subsidiaries. GATX also has a funded noncontributory defined benefit pension
plan related to a closed subsidiary in the United Kingdom ("U.K."). The U.K.
pension plan no longer has any active members and is closed to new entrants.
Benefits payable under the pension plans are based on years of service and/or
final average salary. The funding policy for the pension plans is based on
actuarially determined cost methods allowable under IRS regulations and
statutory regulations in the U.K.
In addition to the pension plans, GATX has other post-retirement plans
providing health care, life insurance and other benefits for certain retired
domestic employees who meet established criteria. Most domestic employees are
eligible for health care and life insurance benefits if they retire from GATX
with immediate benefits under the GATX pension plan. The plans are either
contributory or noncontributory, depending on various factors.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATX uses a December 31, 2005 measurement date for all of its plans.
The following tables set forth pension obligations and plan assets and
other post-retirement obligations as of December 31 (in millions):
<Table>
<Caption>
2005 2004
2005 2004 RETIREE RETIREE
PENSION PENSION HEALTH HEALTH
BENEFITS BENEFITS AND LIFE AND LIFE
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year........... $397.5 $390.8 $ 74.8 $ 80.6
Service cost...................................... 5.3 6.1 0.4 0.5
Interest cost..................................... 22.2 23.1 4.0 4.6
Plan amendments................................... -- 0.2 -- --
Actuarial loss.................................... 14.2 2.6 2.9 5.3
Curtailments...................................... -- (2.7) -- (0.4)
Benefits paid..................................... (30.7) (26.0) (7.1) (7.4)
Medicare impact................................... -- -- -- (8.4)
Special termination benefits...................... -- 0.6 -- --
Effect of exchange rate changes................... (4.2) 2.8 -- --
------ ------ ------ ------
Benefit obligation at end of year................. $404.3 $397.5 $ 75.0 $ 74.8
====== ====== ====== ======
CHANGE IN FAIR VALUE OF PLAN ASSETS
Plan assets at beginning of year.................. $371.8 $342.2 $ -- $ --
Actual return on plan assets...................... 31.7 39.7 -- --
Effect of exchange rate changes................... (3.5) 2.2 -- --
Company contributions............................. 7.6 13.7 7.1 7.4
Benefits paid..................................... (30.7) (26.0) (7.1) (7.4)
------ ------ ------ ------
Plan assets at end of year........................ $376.9 $371.8 $ -- $ --
====== ====== ====== ======
FUNDED STATUS
Funded status of the plan......................... $(27.4) $(25.7) $(75.0) $(74.8)
Unrecognized net loss............................. 89.5 82.4 19.6 17.7
Unrecognized prior service cost................... 0.3 0.5 -- --
Unrecognized net transition obligation............ 0.1 0.2 -- --
------ ------ ------ ------
Prepaid (accrued) cost............................ $ 62.5 $ 57.4 $(55.4) $(57.1)
====== ====== ====== ======
AMOUNT RECOGNIZED
Prepaid benefit cost.............................. $ 74.4 $ 72.5 $ -- $ --
Accrued benefit liability......................... (25.4) (26.6) (55.4) (57.1)
Intangible asset.................................. 0.1 0.2 -- --
Accumulated other comprehensive Income............ 13.4 11.3 -- --
------ ------ ------ ------
Total recognized.................................. $ 62.5 $ 57.4 $(55.4) $(57.1)
====== ====== ====== ======
</Table>
The aggregate accumulated benefit obligation for the defined benefit
pension plans was $381.8 million and $366.4 million at December 31, 2005 and
2004, respectively.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for pension plans with a projected benefit obligation in excess
of plan assets is as follows as of December 31 (in millions):
<Table>
<Caption>
2005 2004
------ -----
Projected benefit obligation................................ $309.0 $66.7
Fair value of plan assets................................... 279.6 34.3
</Table>
Information for pension plans with an accumulated benefit obligation in
excess of plan assets is as follows as of December 31 (in millions):
<Table>
<Caption>
2005 2004
----- -----
Accumulated benefit obligations............................. $60.1 $60.9
Fair value of plan assets................................... 34.6 34.3
</Table>
The components of pension and other post-retirement benefit costs are as
follows (in millions):
<Table>
<Caption>
2005 2004 2003
RETIREE RETIREE RETIREE
2005 2004 2003 HEALTH HEALTH HEALTH
PENSION PENSION PENSION AND AND AND
BENEFITS BENEFITS BENEFITS LIFE LIFE LIFE
-------- -------- -------- ------- ------- -------
Service cost....................... $ 5.3 $ 6.1 $ 5.8 $0.4 $ 0.5 $0.4
Interest cost...................... 22.2 23.1 23.6 4.0 4.6 5.2
Expected return on plan assets..... (30.1) (31.3) (30.6) -- -- --
Amortization of:
Unrecognized prior service
cost.......................... 0.2 0.2 0.3 -- -- --
Unrecognized net obligation...... -- 0.1 0.1 -- -- --
Unrecognized net loss............ 3.0 1.3 0.5 1.0 0.8 0.7
Plan settlement cost............... 1.8 -- -- -- -- --
------ ------ ------ ---- ----- ----
Ongoing net cost (benefit)......... 2.4 (0.5) (0.3) 5.4 5.9 6.3
------ ------ ------ ---- ----- ----
Recognized loss (gain) due to
curtailment...................... -- 0.7 -- -- (0.2) --
Recognized special termination
benefits expense................. -- 0.6 -- -- -- --
------ ------ ------ ---- ----- ----
Net periodic cost (benefit)........ $ 2.4 $ 0.8 $ (0.3) $5.4 $ 5.7 $6.3
====== ====== ====== ==== ===== ====
</Table>
The previous tables include amounts allocated each year to discontinued
operations, all of which were immaterial. The amount reported for plan
settlement cost in 2005 relates to a lump sum payment election made for the
non-qualified portion of a pension benefit. Amounts shown for curtailment loss
(gain) and special termination expense in 2004 relate to the sale of GATX's
former Technology segment.
GATX amortizes the unrecognized prior service cost and the unrecognized net
obligation using a straight-line method over the average remaining service
period of employees expected to receive benefits under the plan. The excess of
recognized net gains or losses (excluding asset gains and losses not yet
reflected in the market-related value of assets) above the greater of 10% of the
projected benefit obligation or 10% of the market-related value of the assets
are amortized by dividing this excess, if any, by the average remaining service
period of active employees.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATX used the following assumptions to measure the benefit obligation,
compute the expected long-term return on assets and to measure the periodic cost
for GATX's defined benefit pension plans and other post-retirement benefit plans
for the years ended December 31, 2005 and 2004:
<Table>
<Caption>
2005 2004
---- ----
DOMESTIC DEFINED BENEFIT PENSION PLANS:
BENEFIT OBLIGATION AT DECEMBER 31:
Discount rate -- salaried funded and unfunded plans.... 5.75% 6.00%
Discount rate -- hourly funded plans................... 5.65% 5.75%
Rate of compensation increases -- salaried funded and
unfunded plan......................................... 4.50% 4.50%
Rate of compensation increases -- hourly funded plan... N/A N/A
NET PERIODIC COST (BENEFIT) FOR THE YEARS ENDED DECEMBER
31:
Discount rate -- salaried funded and unfunded plans.... 6.00% 6.25%
Discount rate -- hourly funded plans................... 5.75% 6.25%
Expected return on plan assets -- salaried funded
plan.................................................. 8.80% 9.00%
Expected return on plan assets -- hourly funded plan... 8.00% 8.25%
Rate of compensation increases -- salaried funded and
unfunded plan......................................... 4.50% 5.00%
Rate of compensation increases -- hourly funded plan... N/A N/A
FOREIGN DEFINED BENEFIT PENSION PLAN:
BENEFIT OBLIGATION AT DECEMBER 31:
Discount rate.......................................... 4.70% 5.30%
Rate of pension-in-payment increases................... 2.80% 2.70%
NET PERIODIC COST (BENEFIT) FOR THE YEARS ENDED DECEMBER
31:
Discount rate.......................................... 5.30% 5.40%
Expected return on plan assets......................... 6.30% 6.40%
Rate of pension-in-payment increases................... 2.70% 2.70%
OTHER POST-RETIREMENT BENEFIT PLANS:
BENEFIT OBLIGATION AT DECEMBER 31:
Discount rate.......................................... 5.60% 5.75%
Rate of compensation increases......................... 4.50% 4.50%
NET PERIODIC COST FOR THE YEARS ENDED DECEMBER 31:
Discount rate.......................................... 5.75% 6.25%
Rate of compensation increases......................... 4.50% 5.00%
</Table>
GATX determines a long-term rate of return assumption on plan assets for
its funded pension plans based on current and expected asset allocations, as
well as historical and expected returns on various categories of plan assets.
GATX reviews historical markets as well as peer group data to determine its
expected long-term rate of return for each of the plans. GATX routinely reviews
its historical returns along with current market conditions to ensure its
long-term rate of return assumption on plan assets is reasonable and
appropriate.
The health care cost trend, which is comprised of medical and prescription
drugs claims has a significant effect on the other post-retirement benefit cost
and obligation. The assumed medical claims and prescription drug claims rates
for 2005 were 8.50% and 14.00%, respectively. The assumed medical and
prescription drugs claims cost rates anticipated for 2006 will be 8.00% and
13.00%, respectively. Over the following five-year period, medical claims are
expected to gradually decline to 5.00% and remain at that level thereafter. Over
the following ten-year period, the prescription drug claims rates are expected
to gradually decline to 5.00% and remain at that level thereafter.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A one-percentage-point change in the trend rate would have the following
effects (in millions):
<Table>
<Caption>
ONE-PERCENTAGE-POINT ONE-PERCENTAGE-POINT
INCREASE DECREASE
-------------------- --------------------
Effect on total of service and interest cost.... $0.3 $(0.2)
Effect on post-retirement benefit obligation.... 4.2 (3.9)
</Table>
GATX's investment policies require that asset allocations of domestic and
foreign funded pension plans be maintained at certain targets. GATX's
weighted-average asset allocations of its domestic funded pension plans at
December 31, 2005 and 2004, and current target asset allocation for 2006, by
asset category, are as follows:
<Table>
<Caption>
PLAN ASSETS AT
DECEMBER 31
---------------
ASSET CATEGORY TARGET 2005 2004
- -------------- ------ ------ ------
Equity securities........................................... 65.0% 64.7% 66.5%
Debt securities............................................. 30.0% 29.3% 28.6%
Real estate................................................. 5.0% 5.9% 4.8%
Cash........................................................ -- 0.1% 0.1%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</Table>
GATX's weighted-average asset allocations of its foreign funded pension
plan at December 31, 2005 and 2004, and current target asset allocation for
2006, by asset category, are as follows:
<Table>
<Caption>
PLAN ASSETS AT
DECEMBER 31
---------------
ASSET CATEGORY TARGET 2005 2004
- -------------- ------ ------ ------
Equity securities and real estate........................... 36.8% 36.8% 37.6%
Debt securities............................................. 63.2% 63.2% 62.4%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</Table>
The primary objective of the domestic funded pension plans is to fully fund
benefit payments to plan participants. A secondary objective is to minimize
GATX's pension expense and plan contributions. To reach these goals, GATX's
philosophy is a diversified approach using a mix of equities, debt and real
estate investments to maximize the long-term return of plan assets. Its equity
investments are diversified across U.S. and non-U.S. stocks as well as growth,
value, and small to large capitalizations. Its debt securities are also
diversified across U.S. investments and include the following: governments,
agencies, investment grade and high-yield corporates, mortgage-backed
securities, and other collateralized investments. GATX's real estate investments
include investments in funds that hold various property types throughout the
U.S.
On a timely basis, but not less than twice a year, GATX formally reviews
actual results to ensure adherence to investment guidelines and the Company's
stated investment approach. This review also evaluates reasonableness of
investment decisions and risk positions. The performance of investments is
compared to indices and peers to determine if performance has been acceptable.
GATX expects to contribute approximately $3.0 million to its pension plans
(domestic and foreign) and approximately $7.8 million to its other
post-retirement benefit plans in 2006. Additional contributions to the domestic
funded pension plans will be dependent on several factors including investment
returns on plan assets and actuarial experience.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in millions):
<Table>
<Caption>
PENSION OTHER
BENEFITS BENEFITS
-------- --------
2006........................................................ $ 23.6 $ 7.8
2007........................................................ 23.4 7.8
2008........................................................ 23.2 7.7
2009........................................................ 22.3 7.7
2010........................................................ 23.4 7.7
Years 2011-2015............................................. 119.2 32.6
------ -----
$235.1 $71.3
====== =====
</Table>
In December 2004, the Company adopted FASB Staff Position No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" which resulted in a reduction
in the accumulated post-retirement benefit obligation of $8.4 million.
The following are estimated Medicare Part D Subsidy Receipts from the Act
(in millions):
<Table>
2006........................................................ $0.9
2007........................................................ 0.9
2008........................................................ 1.0
2009........................................................ 1.0
2010........................................................ 1.0
Years 2011-2015............................................. 4.8
----
$9.6
====
</Table>
In addition to its defined benefit plans, GATX maintains two 401(k)
retirement plans that are available to substantially all salaried and certain
other employee groups. GATX may contribute to the plans as specified by their
respective terms, and as determined by the Board of Directors. Contributions to
such plans were $1.6 million, $1.6 million, and $1.7 million for 2005, 2004, and
2003, respectively. Contributions to discontinued operations were immaterial in
each year.
NOTE 15. CONCENTRATIONS, COMMITMENTS AND OTHER CONTINGENCIES
CONCENTRATIONS
Concentration of Revenues -- GATX's revenues are derived from a wide range
of industries and companies. Approximately 21% of total revenues are generated
from customers in the chemical industry; for similar services, 19% of revenues
are derived from the petroleum industry, 11% are derived from the transportation
industry and 11% of revenues are derived from the commercial airline industry.
GATX's foreign identifiable revenues include fully consolidated railcar
operations in Canada, Mexico, Poland, Austria and Germany. The Company did not
derive revenues in excess of 10% of consolidated revenues from any one foreign
country for any of the years ended December 31, 2005, 2004 and 2003.
Concentration of Credit Risk -- Under its lease agreements with lessees,
GATX retains legal ownership of the asset except where such assets have been
financed by sale-leasebacks. For most loan financings to customers, the loan is
collateralized by specifically related equipment. GATX performs credit
evaluations prior to approval of a lease or loan contract. Subsequently, the
creditworthiness of the customer and the value of the collateral are monitored
on an ongoing basis. GATX maintains an allowance for possible losses to provide
for potential losses that could arise should customers become unable to
discharge their obligations to
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATX. The Company did not derive revenues in excess of 10% of consolidated
revenues from any one customer for any of the years ended December 31, 2005,
2004 and 2003.
COMMITMENTS
Unconditional Purchase Obligations -- At December 31, 2005, GATX's
unconditional purchase obligations of $412.0 million consisted primarily of
railcar and aircraft acquisitions over the period of 2006 through 2008. GATX had
commitments of $234.4 million related to the rail committed purchase program,
entered into in 2002. GATX also had commitments of $96.0 million for orders on
three new aircraft to be delivered in 2006 and 2007. Unconditional purchase
obligations also include $68.4 million of other rail related commitments.
Commercial Commitments -- In connection with certain investments or
transactions, GATX has entered into various commercial commitments, such as
guarantees and standby letters of credit, which could potentially require
performance in the event of demands by third parties. Similar to GATX's balance
sheet investments, these guarantees expose GATX to credit, market and equipment
risk; accordingly, GATX evaluates its commitments and other contingent
obligations using techniques similar to those used to evaluate funded
transactions.
The following table shows GATX's commercial commitments for continuing
operations (in millions):
<Table>
<Caption>
DECEMBER 31
---------------
2005 2004
------ ------
Affiliate guarantees........................................ $ 29.5 $ 34.7
Asset residual value guarantees............................. 368.6 437.6
Lease payment guarantees.................................... 27.3 30.3
Other guarantees............................................ 77.8 77.8
------ ------
Total guarantees.......................................... 503.2 580.4
Standby letters of credit and bonds......................... 23.6 28.9
------ ------
$526.8 $609.3
====== ======
</Table>
At December 31, 2005, the maximum potential amount of lease, loan or
residual value guarantees under which GATX or its subsidiaries could be required
to perform was $503.2 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 FASB Interpretation
No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, was a
liability of $2.1 million. The expirations of these guarantees range from 2006
to 2017. Any liability resulting from GATX's performance pursuant to the
residual value guarantees will be reduced by the value realized from the
underlying asset or group of assets. Historically, gains associated with the
residual value guarantees have exceeded any losses and were recorded in asset
remarketing income in the consolidated statements of operations. Based on known
facts and current market conditions, management does not believe that the asset
residual value guarantees will result in any significant adverse financial
impact to the Company. Accordingly, the Company has not recorded any accrual for
contingent losses with respect to the residual value guarantees as of December
31, 2005. GATX believes these asset residual value guarantees will likely
generate future income in the form of fees and residual sharing proceeds.
Affiliate guarantees generally involve guaranteeing an affiliate's
repayment of the financing it utilized to acquire or lease in assets that it
leases 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 these guarantees, and expects the affiliates to generate sufficient cash
flow to satisfy their lease and loan obligations.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 a lease term. Revenue is earned for providing these asset value
guarantees in the form of an initial fee (which is amortized into income over
the guaranteed period) and by sharing in any proceeds received upon disposition
of the assets to the extent such proceeds are in excess of the amount guaranteed
(which is recorded when realized).
Lease payment guarantees represent GATX's guarantees to financial
institutions of finance and operating lease payments of an unrelated party in
exchange for a fee.
Other guarantees consists of GATX's indemnification of Airbus Industrie
("Airbus") related to the dissolution of Flightlease Holdings Limited ("FHG")
and the allocation by Airbus of $77.8 million of pre-delivery payments to GATX
towards the purchase of aircraft in 2001. These pre-delivery payments are also
the subject of active litigation. No liability has been recorded with respect to
this indemnification as GATX believes that the likelihood of having to perform
under the indemnity is remote.
GATX and its subsidiaries are also parties to standing letters of credit
and bonds primarily related to workers' compensation and general liability
insurance overages. No material claims have been made against these obligations.
At December 31, 2005, management does not expect any material losses to result
from these off balance sheet instruments since performance is not expected to be
required.
OTHER CONTINGENCIES
Environmental -- The Company's operations are subject to extensive federal,
state and local environmental regulations. GATX's operating procedures include
practices to protect the environment from the risks inherent in railcar leasing,
which frequently involve transporting chemicals and other hazardous materials.
Additionally, some of GATX's land holdings, including previously owned
properties, are and have been used for industrial or transportation-related
purposes or leased to commercial or industrial companies whose activities may
have resulted in discharges onto the property. As a result, GATX is subject to
environmental cleanup and enforcement actions. In particular, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), also known as the Superfund law, as well as similar state laws
generally impose joint and several liability for cleanup and enforcement costs
on current and former owners and operators of a site without regard to fault or
the legality of the original conduct. GATX has been notified that it is a
potentially responsible party ("PRP") for study and cleanup costs at three
Superfund sites for which investigation and remediation payments are or will be
made or are yet to be determined (the Superfund sites) and, in two instances, is
one of many PRPs. In addition, GATX may be considered a PRP under certain other
laws. Accordingly, under CERCLA and other federal and state statutes, GATX may
be held jointly and severally liable for all environmental costs associated with
a particular site. If there are other PRPs, GATX generally participates in the
cleanup of these sites through cost-sharing agreements with terms that vary from
site to site. Costs are typically allocated based on relative volumetric
contribution of material, the amount of time the site was owned or operated,
and/or the portion of the total site owned or operated by each PRP.
At the time a potential environmental issue is identified, initial reserves
for environmental liability are established when such liability is probable and
a reasonable estimate of associated costs can be made. Environmental costs are
based on the estimated costs associated with the type and level of investigation
and/or remediation activities that our internal environmental staff (and where
appropriate, independent consultants) have determined to be necessary to comply
with applicable laws and regulations and include initial site surveys and
environmental studies of potentially contaminated sites as well as costs for
remediation and restoration of sites determined to be contaminated. In addition,
GATX has provided indemnities for potential environmental liabilities to buyers
of divested companies. In these instances, reserves are based on the scope and
duration of the respective indemnities together with the extent of known
contamination. Estimates are periodically reviewed and adjusted as required to
reflect additional information about facility or site characteristics or changes
in regulatory requirements. GATX conducts an ongoing environmental
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contingency analysis, which considers a combination of factors including
independent consulting reports, site visits, legal reviews, analysis of the
likelihood of participation in and the ability of other PRPs to pay for cleanup,
and historical trend analyses. GATX does not believe that a liability exists for
known environmental risks beyond what has been provided for in the environmental
reserve.
GATX is involved in a number of administrative and judicial proceedings and
other mandatory cleanup efforts at 14 sites, including the Superfund sites, at
which it is participating in the study or cleanup, or both, of alleged
environmental contamination. GATX did not recognize an environmental expense in
2005 or 2003. The Company recognized environmental expense of $13.3 million in
2004 which consisted of $15.5 million for the sold Staten Island property offset
by a Rail reserve reduction as a result of favorable resolution of certain other
environmental matters. GATX paid $2.3 million, $1.4 million and $3.4 million
during 2005, 2004 and 2003, respectively, for mandatory and unasserted claims
cleanup efforts, including amounts expended under federal and state voluntary
cleanup programs. GATX has recorded liabilities for remediation and restoration
of all known sites of $34.8 million at December 31, 2005, compared with $37.7
million at December 31, 2004. These amounts are included in other liabilities on
GATX's balance sheet. GATX's environmental liabilities are not discounted. GATX
anticipates that the majority of the accrued costs at December 31, 2005, will be
paid over the next five years and no individual site is considered to be
material.
The Company did not materially change its methodology for identifying and
calculating environmental liabilities in the three years presented. There are
currently no known trends, demands, commitments, events or uncertainties that
are reasonably likely to occur and materially affect the methodology or
assumptions described above.
Recorded liabilities include GATX's best estimates of all costs for
remediation and restoration of affected sites, without reduction for anticipated
recoveries from third parties, and include both asserted and unasserted claims.
However, GATX's total cleanup costs at these sites cannot be predicted with
certainty due to various factors such as the extent of corrective actions that
may be required; evolving environmental laws and regulations; advances in
environmental technology, the extent of other parties' participation in cleanup
efforts; developments in ongoing environmental analyses related to sites
determined to be contaminated, and developments in environmental surveys and
studies of potentially contaminated sites. As a result, future charges to income
for environmental liabilities could have a significant effect on results of
operations in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
management believes it is unlikely any identified matters, either individually
or in the aggregate, will have a material adverse effect on GATX's financial
position or liquidity.
Legal -- GATX and its subsidiaries have been named as defendants in a
number of other legal actions and claims, various governmental proceedings and
private civil suits arising in the ordinary course of business, including those
related to environmental matters, workers' compensation claims by GATX employees
and other personal injury claims. Some of the legal proceedings include claims
for punitive as well as compensatory damages. Several of the Company's
subsidiaries have also been named as defendants or co-defendants in cases
alleging injury relating to asbestos. In these cases, the plaintiffs seek an
unspecified amount of damages based on common law, statutory or premises
liability or, in the case of ASC, the Jones Act, which makes limited remedies
available to certain maritime employees. In addition, demand for indemnity with
respect to asbestos-related claims filed against a former subsidiary has been
made against the Company under a limited indemnity given in connection with the
sale of such subsidiary. The number of these claims and the corresponding
demands for indemnity against the Company decreased in the aggregate in 2005. It
is possible that the number of these claims could begin to grow and that the
cost of these claims, including costs to defend, could correspondingly increase
in the future.
The amounts claimed in some of the above described proceedings are
substantial and while the final outcome of these matters cannot be predicted
with certainty at this time, considering among other things meritorious legal
defenses available and reserves that have been recorded along with applicable
insurance, it is the opinion of management that none of these matters, when
ultimately resolved, will have a material adverse
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effect on GATX's consolidated financial position or liquidity. However, an
unexpected adverse resolution of one or more of these matters could have a
material adverse effect on the results of operations in a particular quarter or
fiscal year.
NOTE 16. SHAREHOLDERS' EQUITY
In accordance with GATX's amended certificate of incorporation, 120 million
shares of common stock are authorized, at a par value of $0.625 per share. As of
December 31, 2005, 58,567,724 shares were issued and 50,618,214 shares were
outstanding.
A total of 21,075,772 shares of common stock were reserved at December 31,
2005, for the following:
<Table>
<Caption>
SHARES
----------
Conversion of outstanding preferred stock................... 100,483
Conversion of convertible notes............................. 11,596,174
Incentive compensation programs............................. 5,973,042
Employee service awards..................................... 36,100
Employee stock purchase plan................................ 3,369,973
----------
21,075,772
==========
</Table>
GATX's certificate of incorporation also authorizes five million shares of
preferred stock at a par value of $1.00 per share. At December 31, 2005 and
2004, 19,988 and 21,468 shares of preferred stock were outstanding,
respectively. Shares of preferred stock issued and outstanding consist of Series
A and B $2.50 cumulative convertible preferred stock, which entitle holders to a
cumulative annual cash dividend of $2.50 per share. Each share is convertible at
the option of the holder at any time into five shares of common stock. Each
share of such preferred stock may be called for redemption by GATX at any time
at $63.00 per share. In the event of GATX's liquidation, dissolution or winding
up, the holders of such preferred stock will be entitled to receive $60.00 per
share plus accrued and unpaid dividends to the date of payment. At December 31,
2005 and 2004, the aggregated liquidated preference of both series of preferred
stock was $1.2 million and $1.3 million, respectively.
Holders of both series of $2.50 convertible preferred stock and common
stock are entitled to one vote for each share held. Except in certain instances,
all such classes vote together as a single class.
For information regarding the convertible notes, see Note 11.
To ensure the fair value to all shareholders in the event of an unsolicited
takeover offer for the Company, GATX adopted a Shareholders' Rights Plan in
August 1998. Shareholders received a distribution of one right for each share of
the Company's common stock held. Initially the rights are represented by GATX's
common stock certificates and are not exercisable. The rights will be
exercisable only if a person acquires or announces a tender offer that would
result in beneficial ownership of 20 percent or more of the Company's common
stock. If a person acquires beneficial ownership of 20 percent or more of the
Company's common stock, all holders of rights other than the acquiring person
will be entitled to purchase the Company's common stock at a reduced price. The
rights are scheduled to expire on August 14, 2008.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The change in components for accumulated other comprehensive income (loss)
are as follows (in millions):
<Table>
<Caption>
FOREIGN UNREALIZED
CURRENCY UNREALIZED LOSS ON MINIMUM
TRANSLATION GAIN (LOSS) DERIVATIVE PENSION
GAIN (LOSS) ON SECURITIES INSTRUMENTS LIABILITY TOTAL
----------- ------------- ----------- --------- -------
Balance at December 31, 2002... $(62.1) $ 1.4 $(18.2) $(25.9) $(104.8)
Change in component.......... 78.2 7.7 (38.4) 30.6 78.1
Reclassification adjustments
into earnings............. (2.8) (7.2) (0.3) -- (10.3)
Income tax effect............ -- (0.2) 14.4 (11.6) 2.6
------ ----- ------ ------ -------
Balance at December 31, 2003... 13.3 1.7 (42.5) (6.9) (34.4)
Change in component.......... 55.5 1.1 (1.9) (0.1) 54.6
Reclassification adjustments
into earnings............. -- 2.5 (0.2) -- 2.3
Income tax effect............ -- (1.4) 0.5 -- (0.9)
------ ----- ------ ------ -------
Balance at December 31, 2004... 68.8 3.9 (44.1) (7.0) 21.6
Change in component.......... (38.0) (0.6) 18.7 (2.1) (22.0)
Reclassification adjustments
into earnings............. 0.7 (4.4) 3.2 -- (0.5)
Income tax effect............ -- 1.9 (8.1) 0.8 (5.4)
------ ----- ------ ------ -------
Balance at December 31, 2005... $ 31.5 $ 0.8 $(30.3) $ (8.3) $ (6.3)
====== ===== ====== ====== =======
</Table>
NOTE 18. STOCK-BASED COMPENSATION
The GATX Corporation 2004 Equity Incentive Compensation Plan as amended
("the 2004 Plan"), provides for the granting of nonqualified stock options,
stock appreciation rights ("SARs"), and full value awards. An aggregate of
3,493,349 shares of common stock was authorized under the 2004 Plan. As of
December 31, 2005, 2,889,624 shares were available for issuance.
Nonqualified stock options for the purchase of common stock may be granted
for periods not longer than seven years from the date of grant, ten years for
options granted prior to 2004. The exercise price may not be less than the
higher of market value at date of grant or par value of the common stock.
Options vest and become exercisable commencing on a date no earlier than one
year from the date of grant and vesting is generally over a three-year period.
Dividend equivalents accrue on all stock options granted under the 2004 Plan and
are paid when the options vest. Dividend equivalents continue to be paid until
the options are exercised or cancelled.
SARs may be granted in tandem with a nonqualified stock option and entitle
the holder to receive the difference between the exercise price and the fair
market value at the time of exercise, either in shares of common stock, cash or
a combination thereof, at GATX's discretion. Exercise of SARs result in the
cancellation of the underlying options. During 2005, no SARs were issued and
none were outstanding.
Restricted stock rights may be granted to key employees entitling them to
receive a specified number of shares of restricted common stock. The recipients
of restricted common stock are entitled to all dividend and voting rights, but
the shares are not transferable prior to the expiration of a "restriction
period" as determined at the discretion of the Compensation Committee of the
Board of Directors ("Compensation Committee").
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2005, 85,776 shares of restricted stock were granted. Compensation
expense is recognized for these awards over the vesting period.
Performance-based restricted stock units ("RSUs") may be granted to key
employees to focus attention on the achievement of certain strategic objectives.
The units are converted to restricted common stock based on the achievement of
predetermined performance goals at the end of a specified performance period as
determined by the Compensation Committee. Full vesting of the restricted shares
may then be subject to an additional service period, ending no later than the
third anniversary of the grant, absent the occurrence of certain events such as
retirement, death or disability. Recipients are credited with dividend
equivalents on the number of RSUs that are converted to restricted shares. RSUs
do not carry voting rights. In 2005, a total of 102,760 RSUs were granted.
Compensation expense is recognized for these awards over the vesting period.
Phantom stock is granted to external Directors as a portion of their
compensation for service on GATX's Board. Phantom stock is a form of
compensation in which the Director is credited with a quantity of units that
equate to, but are not, shares in the company. At the expiration of each
Director's service on the Board, settlement of the units of phantom common stock
will be made in shares of common stock equal to the numbers of units of phantom
stock in accordance with each Director's deferral election. Any fractional units
will be paid in cash. In 2005, GATX granted 17,102 units of phantom stock.
The GATX Employee Stock Purchase Plan ("ESPP") and the Exchange Stock
Option Program, both implemented in 1999, were terminated effective January 1,
2005.
GATX has elected to follow APB No. 25, in accounting for its employee stock
options. Under these guidelines, no compensation expense is recognized, because
the exercise price of GATX's employee stock options equals the market price of
the underlying stock on the measurement date. See further disclosure information
in Note 2.
Certain data with respect to stock options activity are set forth below:
<Table>
<Caption>
2005 2004 2003
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year.... 3,849,911 $29.97 3,805,562 $30.31 3,600,939 $31.58
Granted............................. 282,100 32.66 536,744 24.36 597,222 21.52
Exercised........................... (913,781) 25.26 (208,328) 21.55 (120,050) 19.84
Forfeited........................... (70,680) 25.41 (75,868) 23.83 (64,725) 29.15
Cancelled........................... (51,012) 29.62 (208,199) 29.96 (207,824) 32.43
--------- --------- ---------
Outstanding at end of year.......... 3,096,538 31.64 3,849,911 29.97 3,805,562 30.31
========= ========= =========
Exercisable at the end of the
year.............................. 2,495,324 $32.61 2,978,920 $31.72 2,905,268 $31.87
Weighted average fair value of
Options granted during the year... $ 8.40 $ 6.08 $ 5.24
</Table>
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain data with respect to stock options as of December 31, 2005 are set
forth below:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGES OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE OUTSTANDING PRICE
- ------------------------- ----------- --------- -------- ----------- --------
$13.52 - $18.02.......................... 19,972 7.1 $16.92 14,972 $17.50
$18.03 - $22.53.......................... 280,408 7.6 21.85 170,094 21.85
$22.54 - $27.03.......................... 640,344 5.4 24.28 428,644 24.25
$27.04 - $31.54.......................... 426,521 4.0 30.20 426,521 30.20
$31.55 - $36.05.......................... 789,512 4.7 32.56 516,012 32.51
$36.06 - $40.55.......................... 871,125 3.9 39.35 870,425 39.35
$40.56 - $45.06.......................... 68,656 5.1 45.06 68,656 45.06
--------- ---------
$13.52 - $45.06.......................... 3,096,538 4.8 31.64 2,495,324 32.61
========= =========
</Table>
NOTE 19. DISCONTINUED OPERATIONS
During 2004, consistent with GATX's strategy of focusing on the Company's
core businesses, GATX sold its Technology segment. On June 30, 2004,
substantially all of the assets of GATX Technology Services and its Canadian
affiliate were sold with $291.5 million of related nonrecourse debt assumed by
the acquirer. The remaining assets, consisting primarily of interests in two
joint ventures, were sold by December 31, 2004. Financial data for the
Technology segment has been segregated as discontinued operations for all
periods presented.
The following table summarizes the gross income, income before taxes and
operating results of the Technology segment, for all periods presented (in
millions):
<Table>
<Caption>
2005 2004 2003
---- ------ ------
Gross income................................................ $2.0 $104.0 $205.6
Income before taxes......................................... 1.2 30.1 25.0
Operating income, net of taxes.............................. 0.8 18.3 15.2
Loss on sale of segment, net of taxes....................... -- (7.2) --
---- ------ ------
Total discontinued operations............................. $0.8 $ 11.1 $ 15.2
==== ====== ======
</Table>
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize the components of discontinued operations
reported on the consolidated statements of cash flows (in millions):
<Table>
<Caption>
2005 2004 2003
----- ------- -------
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities..... $(0.2) $ 35.0 $ 140.9
INVESTING ACTIVITIES
Portfolio investments and capital additions............... -- (128.6) (246.4)
Portfolio proceeds........................................ -- 95.1 218.9
Net proceeds from sale of segment......................... 9.1 256.2 --
----- ------- -------
Net cash provided by (used in) investing activities....... 9.1 222.7 (27.5)
FINANCING ACTIVITIES
Net proceeds from issuance of debt........................ -- 76.5 220.2
Repayments of debt........................................ -- (137.5) (286.0)
----- ------- -------
Net cash used in financing activities................... -- (61.0) (65.8)
----- ------- -------
CASH PROVIDED BY DISCONTINUED OPERATIONS, NET............. $ 8.9 $ 196.7 $ 47.6
===== ======= =======
</Table>
During 2005, GATX received final distributions totaling $9.1 million
associated with the 2004 sale of a joint venture interest.
NOTE 20. REDUCTION IN WORKFORCE
During 2002, GATX recorded a pre-tax charge of $16.9 million related to its
2002 reduction in workforce. This action was part of GATX's announced intention
to exit the Venture Finance business and curtail investment at Specialty. The
charge also included costs incurred as part of headcount reductions related to
an integration plan implemented to rationalize the workforce and operations at
GATX's Polish subsidiary. The total charge included involuntary employee
separation and benefit costs of $14.7 million for 170 employees company-wide, as
well as occupancy costs of $2.2 million. The employee groups terminated included
professional and administrative staff. As of December 31, 2004, all of the
employee terminations were completed.
The following is the reserve activity for the years ended December 31 (in
millions):
<Table>
<Caption>
2005 2004 2003
----- ----- ------
Balance at beginning of period.............................. $ 1.2 $ 2.6 $ 16.6
Benefits paid............................................... (0.9) (1.3) (10.9)
Occupancy costs paid........................................ (0.3) (0.4) (3.2)
Other adjustments........................................... -- 0.3 0.1
----- ----- ------
Balance at end of period.................................... $ -- $ 1.2 $ 2.6
===== ===== ======
</Table>
During 2001, GATX recorded a pre-tax charge of $13.4 million related to its
2001 reduction in workforce. This reduction was part of GATX's initiative to
reduce selling, general and administrative ("SG&A") expenses in response to
economic conditions and the divestiture of its Integrated Solutions Group
operations. This charge included involuntary employee separation costs of $6.8
million for 147 employees company-wide, as well as legal fees of $0.5 million,
occupancy costs of $5.1 million and other costs of $1.0 million. The employee
groups terminated included professional and administrative staff, including
corporate personnel. As of December 31, 2002, all of the employee terminations
were completed.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is the reserve activity for the year ended December 31, 2005
(in millions):
<Table>
<Caption>
2005 2004 2003
----- ----- -----
Balance at beginning of period.............................. $ 1.8 $ 2.9 $ 3.9
Benefits paid............................................... -- -- --
Occupancy costs paid........................................ (0.8) (0.8) (1.0)
Other adjustments........................................... (0.7) (0.3) --
----- ----- -----
Balance at end of period.................................... $ 0.3 $ 1.8 $ 2.9
===== ===== =====
</Table>
NOTE 21. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of shares of
common stock outstanding during each year. Shares issued during the year and
shares reacquired during the year, if applicable, are weighted for the portion
of the year that they were outstanding. Diluted earnings per share is computed
in a manner consistent with that of basic earnings per share except that the
weighted average shares outstanding are increased to include additional shares
from the assumed conversion of preferred stock, convertible debt, and the
assumed exercise of stock options, if dilutive. The number of additional shares
is calculated by assuming that outstanding options were exercised and that the
proceeds from such exercises were used to acquire shares of common stock at the
average market price during the reporting period.
GATX has two convertible debt securities, one issued in 2002 for $175.0
million and the other, which is contingently convertible, issued in 2003 for
$125.0 million.
Shares underlying the 2002 issue and the related interest expense
adjustment were excluded from the calculation of diluted earnings per share for
2005 and 2003 due to antidilutive effects and included in the calculation of
diluted earnings per share for 2004. These securities are convertible into
common stock at a price of $34.09 per share, which would result in 5,133,471
common shares issued upon conversion.
Shares underlying the 2003 issue and the related interest expense were
excluded from the calculation of diluted earnings per share for 2005 as a result
of the reported net loss and its antidilutive effects and included in the
calculation of diluted earnings per share for 2004 and 2003. At December 31,
2005, these securities are convertible into common stock at a price of $24.23
per share, which would result in 5,158,042 common shares issued upon conversion.
The conversion price is subject to adjustment based on various factors,
including changes in the dividend on GATX's common stock.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted net
(loss) income per common share (in millions, except per share amounts):
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------
2005 2004 2003
------ ------ -----
NUMERATOR:
(Loss) income from continuing operations.................... $(15.1) $158.5 $61.7
Income from discontinued operations......................... 0.8 11.1 15.2
Less: Dividends paid and accrued on preferred stock....... 0.1 0.1 0.1
------ ------ -----
NUMERATOR FOR BASIC EARNINGS PER SHARE -- (LOSS) INCOME
AVAILABLE TO COMMON SHAREHOLDERS.......................... $(14.4) $169.5 $76.8
Effect of dilutive securities:
Add: Dividends paid and accrued on preferred stock........ -- 0.1 0.1
After-tax interest expense on convertible securities... -- 12.9 1.5
------ ------ -----
NUMERATOR FOR DILUTED EARNINGS PER SHARE -- (LOSS) INCOME
AVAILABLE TO COMMON SHAREHOLDERS.......................... $(14.4) $182.5 $78.4
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -- WEIGHTED AVERAGE
SHARES.................................................... 50.1 49.3 49.1
Effect of dilutive securities:
Stock options............................................. -- 0.3 0.1
Convertible preferred stock............................... -- 0.1 --
Convertible securities.................................... -- 10.4 2.0
------ ------ -----
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -- ADJUSTED
WEIGHTED AVERAGE AND ASSUMED CONVERSION................... 50.1 60.1 51.2
BASIC EARNINGS PER SHARE:
(Loss) income from continuing operations.................. $(0.30) $ 3.21 $1.26
Income from discontinued operations....................... 0.01 0.23 0.31
------ ------ -----
TOTAL BASIC EARNINGS PER SHARE.............................. $(0.29) $ 3.44 $1.57
====== ====== =====
DILUTED EARNINGS PER SHARE
(Loss) income from continuing operations.................. $(0.30) $ 2.86 $1.24
Income from discontinued operations....................... 0.01 0.18 0.29
------ ------ -----
TOTAL DILUTED EARNINGS PER SHARE............................ $(0.29) $ 3.04 $1.53
====== ====== =====
</Table>
NOTE 22. FOREIGN OPERATIONS
GATX has a number of investments in subsidiaries and affiliated companies
that are located in or derive revenues from various foreign countries. GATX's
foreign identifiable assets include investments in affiliated companies as well
as fully consolidated railcar operations in Canada, Mexico, Poland, Austria and
Germany, and foreign leases, loans and other investments. Foreign entities
contribute significantly to GATX's share of affiliates' earnings. Revenues and
identifiable assets are determined to be foreign or U.S.-based depending upon
the location of the customer; classification of affiliates' earnings as foreign
or domestic is made based upon the office location of the affiliate. The Company
did not derive revenues in excess of 10% of consolidated revenues from any one
foreign country for the years ended December 31, 2005, 2004 and 2003. In
addition, no foreign country represented more than 10% of GATX's identifiable
assets for continuing operations in 2005, 2004 or 2003.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below is a summary GATX's continuing operations including
subsidiaries and affiliated companies (in millions):
<Table>
<Caption>
YEAR ENDED OR AT DECEMBER 31
------------------------------
2005 2004 2003
-------- -------- --------
REVENUES
Foreign................................................ $ 332.6 $ 298.6 $ 278.5
United States.......................................... 830.8 868.3 742.3
-------- -------- --------
$1,163.4 $1,166.9 $1,020.8
======== ======== ========
SHARE OF AFFILIATES' (LOSSES) EARNINGS
Foreign................................................ $ (42.2) $ 51.2 $ 41.3
United States.......................................... 13.4 14.0 25.5
-------- -------- --------
$ (28.8) $ 65.2 $ 66.8
======== ======== ========
IDENTIFIABLE BALANCE SHEET ASSETS FOR CONTINUING
OPERATIONS
Foreign................................................ $2,966.6 $2,886.9 $2,545.1
United States.......................................... $2,277.8 2,714.6 2,975.4
-------- -------- --------
$5,244.4 $5,601.5 $5,520.5
======== ======== ========
</Table>
Foreign generated cash flows are used to meet local operating needs and for
reinvestment. For non-U.S. functional currency entities, the translation of the
financial statements into U.S. dollars results in an unrealized foreign currency
translation adjustment, a component of accumulated other comprehensive income
(loss).
NOTE 23. FINANCIAL DATA OF BUSINESS SEGMENTS
The financial data presented below conforms to SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, and depicts the
profitability, financial position and capital expenditures of each of GATX's
continuing business segments. Segment profitability is presented to reflect
operating results inclusive of allocated support expenses from the parent
company.
GATX provides services primarily through three operating segments: Rail,
Air and Specialty. Other is comprised of corporate results and the operating
results of American Steamship Company ("ASC"), a Great Lakes shipping company.
Rail is principally engaged in leasing rail equipment, including tank cars,
freight cars and locomotives. Rail primarily provides full-service leases under
which Rail maintains and services the railcars, pays ad valorem taxes, and
provides other ancillary services. Rail also provides net leases, under which
the lessee is responsible for maintenance, insurance and taxes.
Air is principally engaged in leasing narrowbody aircraft to commercial
airlines and others throughout the world. Air typically provides net leases
under which the lessee is responsible for maintenance, insurance and taxes.
Specialty is comprised of the former Specialty and Venture Finance business
units, which are now managed as one operating segment. Specialty's portfolio
consists primarily of leases and loans, frequently including interests in an
asset's residual value, and joint venture investments involving a variety of
underlying asset types, including marine, aircraft and other diversified
investments. The Venture Finance business is in runoff and was substantially
liquidated as of the end of 2005.
Other is comprised of corporate results, including SG&A expenses and
interest expense not allocated to segments, and the operating results of ASC, an
operator of a fleet of self-unloading vessels on the Great Lakes.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management evaluates the performance of each segment based on several
measures, including net income. These results are used to assess performance and
determine resource allocation among the segments.
GATX allocates corporate SG&A expenses to the segments. Corporate SG&A
expenses relate to administration and support functions performed at the
corporate office. Such expenses include information technology, human resources,
legal, tax, financial support and executive costs. Directly attributable
expenses are generally allocated to the segments and shared costs are retained
in Other. Amounts allocated to the segments are approximated based on
management's best estimate and judgment of direct support services.
Debt balances and interest expense were allocated based upon a fixed
recourse leverage ratio for each individual operating segment across all
reporting periods, expressed as a ratio of debt (including off balance sheet
debt) to equity. Unallocated debt and interest were retained in Other. For 2004
and 2003, the recourse leverage ratios for Rail, Air and Specialty were set at
5:1, 4:1, and 4:1, respectively. For 2005, Rail's recourse leverage ratio was
set at 4.5:1, Air's recourse leverage ratio was set at 3:1 and Specialty's
recourse leverage ratio was set at 4:1. The 2005 leverage ratios are reflective
of GATX's lower consolidated leverage position. Management believes this
leverage and interest expense allocation methodology provides a reasonable
approximation of each operating segment's risk-adjusted financial return.
The following tables present certain segment data for the years ended
December 31, 2005, 2004 and 2003 (in millions):
<Table>
<Caption>
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ ------- --------
2005 PROFITABILITY
Revenues............................ $ 808.2 $ 133.6 $ 80.1 $141.5 $ -- $1,163.4
Share of affiliates' earnings
(losses).......................... 13.7 (85.8) 43.3 -- -- (28.8)
-------- -------- ------ ------ ------ --------
Total gross income.................. 821.9 47.8 123.4 141.5 -- 1,134.6
Depreciation........................ 132.1 59.8 4.2 6.6 -- 202.7
Interest, net....................... 81.9 59.0 18.0 5.8 -- 164.7
Operating lease expense............. 176.2 7.0 4.1 -- (0.3) 187.0
Asset impairment charges............ 3.0 77.2 3.2 -- -- 83.4
Income (loss) from continuing
operations before taxes........... 124.5 (182.9) 80.3 (50.0) 0.3 (27.8)
Income (loss) from continuing
operations........................ 81.7 (109.2) 49.4 (37.2) 0.2 (15.1)
-------- -------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA
Investments in affiliated
companies......................... 99.7 408.9 158.7 -- -- 667.3
Identifiable assets................. 2,719.4 1,746.6 427.3 402.1 (51.0) 5,244.4
-------- -------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital
additions......................... 402.9 17.3 92.6 7.7 -- 520.5
-------- -------- ------ ------ ------ --------
</Table>
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ ------- --------
2004 PROFITABILITY
Revenues............................ $ 729.9 $ 118.7 $ 84.4 $233.9 $ -- $1,166.9
Share of affiliates' earnings....... 16.6 26.2 22.4 -- -- 65.2
-------- -------- ------ ------ ------ --------
Total gross income.................. 746.5 144.9 106.8 233.9 -- 1,232.1
Depreciation........................ 124.2 59.5 4.2 6.7 -- 194.6
Interest, net....................... 77.7 42.0 26.2 16.5 -- 162.4
Operating lease expense............. 166.0 3.8 4.1 -- (0.3) 173.6
Asset impairment charges............ 1.2 0.4 1.6 0.2 -- 3.4
Income from continuing operations
before taxes...................... 88.1 14.3 65.4 58.6 0.3 226.7
Income from continuing operations... 60.4 9.8 40.6 47.5 0.2 158.5
-------- -------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA
Investments in affiliated
companies......................... 102.5 473.8 142.3 -- -- 718.6
Identifiable assets................. 2,721.2 2,086.4 477.4 372.9 (56.4) 5,601.5
-------- -------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital
additions......................... 489.9 225.2 22.7 22.2 -- 760.0
-------- -------- ------ ------ ------ --------
2003 PROFITABILITY
Revenues............................ $ 681.3 $ 102.4 $136.5 $101.5 $ (0.9) $1,020.8
Share of affiliates' earnings....... 12.5 31.6 22.7 -- -- 66.8
-------- -------- ------ ------ ------ --------
Total gross income.................. 693.8 134.0 159.2 101.5 (0.9) 1,087.6
Depreciation........................ 117.0 55.1 10.3 5.6 -- 188.0
Interest, net....................... 64.3 41.2 43.5 27.3 (0.9) 175.4
Operating lease expense............. 167.6 3.9 4.4 0.4 (0.3) 176.0
Asset impairment charges............ -- 2.4 16.2 6.0 -- 24.6
Income (loss) from continuing
operations before taxes........... 81.2 3.0 62.2 (68.8) 0.3 77.9
Income (loss) from continuing
operations........................ 54.9 2.1 38.1 (33.6) 0.2 61.7
-------- -------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA
Investments in affiliated
companies......................... 140.9 484.9 221.8 -- -- 847.6
Identifiable assets................. 2,401.6 1,977.0 707.6 440.8 (6.5) 5,520.5
-------- -------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital
additions......................... 249.6 227.9 130.9 20.2 -- 628.6
-------- -------- ------ ------ ------ --------
</Table>
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
2005
Gross Income............................................. $282.3 $335.3 $326.3 $ 190.7 $1,134.6
Aircraft related impairment charges(a)................... -- -- -- (196.4) (196.4)
Income (loss) from continuing operations................. 28.4 34.5 34.3 (112.3) (15.1)
Income from discontinued operations...................... -- 0.4 -- 0.4 0.8
------ ------ ------ ------- --------
Net income (loss)........................................ $ 28.4 $ 34.9 $ 34.3 $(111.9) $ (14.3)
====== ====== ====== ======= ========
PER SHARE DATA:(b)
Basic:
Income (loss) from continuing operations............... $ 0.57 $ 0.69 $ 0.68 $ (2.22) $ (0.30)
Income from discontinued operations.................... -- 0.01 -- 0.01 0.01
------ ------ ------ ------- --------
Total................................................ $ 0.57 $ 0.70 $ 0.68 $ (2.21) $ (0.29)
====== ====== ====== ======= ========
Diluted:
Income (loss) from continuing operations............... $ 0.52 $ 0.62 $ 0.61 $ (2.22) $ (0.30)
Income from discontinued operations.................... -- 0.01 -- 0.01 0.01
------ ------ ------ ------- --------
Total................................................ $ 0.52 $ 0.63 $ 0.61 $ (2.21) $ (0.29)
====== ====== ====== ======= ========
2004
Gross Income............................................. $258.1 $285.2 $324.3 $ 364.5 $1,232.1
Insurance recoveries(c).................................. -- 3.2 45.0 0.2 48.4
Gain on sale from Staten Island property(d).............. -- -- -- 68.1 68.1
Income from continuing operations........................ 19.7 19.7 48.2 70.9 158.5
Income (loss) from discontinued operations............... 3.2 15.1 (7.5) 0.3 11.1
------ ------ ------ ------- --------
Net income............................................... $ 22.9 $ 34.8 $ 40.7 $ 71.2 $ 169.6
====== ====== ====== ======= ========
PER SHARE DATA:(b)
Basic:
Income from continuing operations...................... $ 0.40 $ 0.40 $ 0.98 $ 1.43 $ 3.21
Income (loss) from discontinued operations............. 0.06 0.31 (0.16) 0.01 0.23
------ ------ ------ ------- --------
Total................................................ $ 0.46 $ 0.71 $ 0.82 $ 1.44 $ 3.44
====== ====== ====== ======= ========
Diluted:
Income from continuing operations...................... $ 0.38 $ 0.38 $ 0.85 $ 1.23 $ 2.86
Income (loss) from discontinued operations............. 0.06 0.28 (0.12) 0.01 0.18
------ ------ ------ ------- --------
Total................................................ $ 0.44 $ 0.66 $ 0.73 $ 1.24 $ 3.04
====== ====== ====== ======= ========
</Table>
- ---------------
(a) Represents the total pre-tax loss (including affiliate charges) related to
aircraft related assets targeted for sale.
(b) Quarterly earnings per share results may not be additive, as per share
amounts are computed independently for each quarter and the full year is
based on the respective weighted average common shares and common stock
equivalents outstanding.
(c) Insurance settlement proceeds associated with litigation GATX had initiated
against various insurers.
(d) Gain on the sale of the Company's former Terminals' facility in Staten
Island.
Note: Certain amounts have been reclassified to conform to the current
presentation.
95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT'S REPORT REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES
The Company's management, with the participation of its Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of the period covered by this annual
report, the Company's disclosure controls and procedures were effective.
MANAGEMENT'S REPORT REGARDING THE EFFECTIVENESS OF INTERNAL CONTROL AND
PROCEDURES
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) of the Exchange Act for the Company. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition, projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate as a result of changes in conditions, or that the
degree of compliance with the applicable policies and procedures may
deteriorate.
The Company's management, with the participation of its Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation of the
Company's internal control over financial reporting as of the end of the period
covered by this annual report based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Such evaluation included reviewing the documentation
of the Company's internal controls, evaluating the design effectiveness of the
internal controls and testing their operating effectiveness.
Based on such evaluation, the Company's management has concluded that as of
the end of the period covered by this annual report, the Company's internal
control over financial reporting was effective.
Ernst & Young LLP, the independent registered public accounting firm that
audited the financial statements included in this annual report has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting. That report appears below.
96
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of GATX Corporation
We have audited management's assessment, included in the accompanying
Management's Report Regarding the Effectiveness of Internal Control and
Procedures, that GATX Corporation maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). GATX Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that GATX Corporation maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, GATX Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets as of December 31, 2005 and 2004, and the related consolidated statements
of operations, changes in shareholders' equity, cash flows, and comprehensive
(loss) income for each of the three years in the period ended December 31, 2005
and the financial statement schedule listed in the index at Item 15(a) of GATX
Corporation and our report dated March 9, 2006 expressed an unqualified opinion
thereon.
-s- Earnst & Young LLP
Chicago, Illinois
March 9, 2006
97
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) occurred during the
fiscal quarter ended December 31, 2005 that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item regarding directors, the Company's Code
of Ethics, the Audit Committee Financial Expert and compliance with Section
16(a) of the Exchange Act is contained in sections entitled "Nominees For Board
of Directors", "Additional Information Concerning Nominees", "Board of
Directors", "Audit Committee Report" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the GATX Proxy Statement dated March 23, 2006, which
sections are incorporated herein by reference.
Information regarding executive officers is included in Part I of this
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item regarding compensation of directors and
executive officers of GATX is contained in sections entitled "Compensation of
Directors" and "Compensation of Executive Officers" in the GATX Proxy Statement
dated March 23, 2006, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item regarding security ownership of certain
beneficial owners and management is contained in sections entitled "Security
Ownership of Management" and "Beneficial Ownership of Common Stock" in the GATX
Proxy Statement dated March 23, 2006, which sections are incorporated herein by
reference.
EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2005):
<Table>
<Caption>
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------- -------------------- -------------------- ------------------------------
Equity Compensation
Plans Approved by
Shareholders.......... 3,290,045 $31.64 2,889,624
Equity Compensation
Plans Not Approved by
Shareholders.......... -- --
--------- ---------
Total................... 3,290,045 2,889,624
========= =========
</Table>
See Note 18 to the Consolidated Financial Statements for further details
regarding the Company's stock-based Compensation plans.
98
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item regarding fees paid to Ernst & Young is
contained in sections entitled "Audit Fees", "Audit Related Fees", "Tax Fees",
"All Other Fees" and "Pre-Approval Policy" in the GATX Proxy Statement dated
March 23, 2006, which sections are incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
<Table>
<Caption>
PAGE
----
Documents Filed as Part of this Report:
Report of Independent Registered Public Accounting
Firm -- Ernst & Young LLP................................... 49
Consolidated Balance Sheets -- December 31, 2005 and 2004... 50
Consolidated Statements of Operations -- Years Ended
December 31, 2005, 2004, and 2003........................... 51
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2005, 2004, and 2003........................... 52
Consolidated Statements of Changes in Shareholders'
Equity -- December 31, 2005, 2004 and 2003.................. 53
Consolidated Statements of Comprehensive (Loss)
Income -- Years Ended December 31, 2005, 2004, and 2003..... 54
Notes to Consolidated Financial Statements.................. 55
</Table>
2. Financial Statement Schedules:
<Table>
Schedule I Condensed Financial Information of Registrant.... 101
</Table>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and,
therefore, have been omitted.
3. Exhibits. See the Exhibit Index included herewith and incorporated by
reference hereto.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Chairman, President and
Chief Executive Officer
March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<Table>
/s/ BRIAN A. KENNEY Chairman, President and
------------------------------------------------------ Chief Executive Officer
Brian A. Kenney (Principal Executive
March 10, 2006 Officer)
/s/ ROBERT C. LYONS Vice President
------------------------------------------------------ and Chief Financial Officer
Robert C. Lyons (Principal Financial
March 10, 2006 Officer)
/s/ WILLIAM M. MUCKIAN Vice President, Controller
------------------------------------------------------ and Chief Accounting Officer
William M. Muckian (Principal Accounting
March 10, 2006 Officer)
Rod F. Dammeyer Director
James M. Denny Director
Richard Fairbanks Director
Deborah M. Fretz Director
Miles L. Marsh Director
Mark G. McGrath Director
Michael E. Murphy Director
Casey J. Sylla Director
By /s/ DEBORAH A. GOLDEN
------------------------------------------------
Deborah A. Golden
(Attorney in Fact)
March 10, 2006
</Table>
100
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GATX CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
-------------------
2005 2004
-------- --------
IN MILLIONS
ASSETS
CASH AND CASH EQUIVALENTS................................... $ -- $ 0.1
ALLOWANCE FOR POSSIBLE LOSSES............................... -- (2.7)
OTHER ASSETS................................................ 111.5 107.0
INVESTMENT IN SUBSIDIARIES.................................. 1,765.4 1,770.5
-------- --------
TOTAL ASSETS................................................ $1,876.9 $1,874.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable and Accrued Expenses....................... $ 31.6 $ 34.4
Debt........................................................ 300.0 300.0
Due to Subsidiaries......................................... 387.6 386.3
Other Liabilities........................................... 135.4 73.3
-------- --------
TOTAL LIABILITIES........................................... 854.6 794.0
SHAREHOLDERS' EQUITY
Preferred stock............................................. -- --
Common stock................................................ 36.5 35.9
Additional paid in capital.................................. 424.6 401.7
Retained earnings........................................... 696.0 750.3
Accumulated other comprehensive (loss) income............... (6.3) 21.6
-------- --------
1,150.8 1,209.5
Less: cost of common shares in treasury..................... (128.5) (128.6)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 1,022.3 1,080.9
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,876.9 $1,874.9
======== ========
</Table>
101
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT'D)
GATX CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
IN MILLIONS
GROSS INCOME (LOSS)......................................... $ 2.1 $ 2.3 $ (0.1)
COSTS AND EXPENSES
Interest expense, net....................................... 46.4 44.1 41.5
Reversal of provision for possible losses................... (2.7) -- --
Selling, general and administrative......................... 53.1 51.2 21.8
------ ------ ------
TOTAL COSTS AND EXPENSES.................................... 96.8 95.3 63.3
LOSS BEFORE INCOME TAX BENEFIT AND SHARE OF NET INCOME FROM
CONTINUING OPERATIONS..................................... (94.7) (93.0) (63.4)
INCOME TAX BENEFIT.......................................... (33.8) (47.6) (27.8)
------ ------ ------
LOSS BEFORE SHARE OF NET INCOME FROM CONTINUING
OPERATIONS................................................ (60.9) (45.4) (35.6)
SHARE OF NET INCOME FROM CONTINUING OPERATIONS(A)........... 45.8 203.9 97.3
------ ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (15.1) 158.5 61.7
SHARE OF NET INCOME FROM DISCONTINUED OPERATIONS, NET OF
TAXES..................................................... 0.8 11.1 15.2
------ ------ ------
NET (LOSS) INCOME........................................... $(14.3) $169.6 $ 76.9
====== ====== ======
</Table>
- ---------------
(a) Dividends from continuing operations were $73.3 million, $106.9 million and
$55.9 million for the years ended 2005, 2004 and 2003, respectively.
102
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT'D)
GATX CORPORATION
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
IN MILLIONS
OPERATING ACTIVITIES
Net (loss) income........................................... $(14.3) $169.6 $ 76.9
Less: income from discontinued operations................... 0.8 11.1 15.2
------ ------ ------
(Loss) income from continuing operations.................... (15.1) 158.5 61.7
Adjustments to reconcile (loss) income from continuing
operations to net cash (used in) provided by continuing
operations:
Depreciation........................................... -- -- 0.5
Reversal of provision for possible losses.............. (2.7) -- --
Deferred income taxes.................................. (33.8) (84.5) (18.5)
Share of net income from continuing operations in
excess of dividends received.......................... 27.5 (97.1) (41.3)
Other....................................................... (5.8) 1.8 7.3
------ ------ ------
Net cash (used in) provided by operating activities of
continuing operations................................. (29.9) (21.3) 9.7
INVESTING ACTIVITIES
Investments in subsidiaries................................. (47.6) -- --
Additions to property and equipment......................... (4.6) (1.5) --
Proceeds from other asset sales............................. -- 0.8 --
------ ------ ------
Net cash used in investing operations of continuing
operations............................................ (52.2) (0.7) --
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt................ -- -- 121.3
Advances from (to) continuing operations.................... 98.4 55.6 (72.0)
Net cash proceeds from employee stock options............... 23.6 5.8 3.8
Cash dividends.............................................. (40.0) (39.4) (62.8)
------ ------ ------
Net cash provided by (used in) financing activities of
continuing operations................................. 82.0 22.0 (9.7)
------ ------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... $ (0.1) $ -- $ --
====== ====== ======
</Table>
103
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT'D)
GATX CORPORATION
(PARENT COMPANY)
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
IN MILLIONS
Net (loss) income........................................... $(14.3) $169.6 $ 76.9
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain.................. (37.3) 55.5 75.4
Unrealized (loss) gain on securities...................... (3.1) 2.2 0.3
Unrealized gain (loss) on derivative instruments.......... 13.8 (1.6) (24.3)
Minimum pension liability adjustment...................... (1.3) (0.1) 19.0
------ ------ ------
Other comprehensive (loss) income........................... (27.9) 56.0 70.4
------ ------ ------
COMPREHENSIVE (LOSS) INCOME................................. $(42.2) $225.6 $147.3
====== ====== ======
</Table>
104
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
FILED WITH THIS REPORT:
3A. Restated Certificate of Incorporation of GATX Corporation.
12. Statement regarding computation of ratios of earnings to 103
combined fixed charges and preferred stock dividends.
21. Subsidiaries of the Registrant. 104
23. Consent of Ernst & Young LLP, Independent Registered Public 105
Accounting Firm.
24. Powers of Attorney with respect to the Annual Report on Form
10-K for the fiscal year ended December 31, 2005.
31A. Certification Pursuant to Exchange Act Rule 13a-14(a) and 106
Rule 15d-14(a) (CEO Certification).
31B. Certification Pursuant to Exchange Act Rule 13a-14(a) and 107
Rule 15d-14(a) (CFO Certification).
32. Certification Pursuant to 18 U.S.C. Section 1350 (CEO and 108
CFO Certification).
INCORPORATED BY REFERENCE:
3B. By-Laws of GATX Corporation, as amended are incorporated
herein by reference to Exhibit 3A to GATX's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
2005, file number 1-2328.
4A. Indenture dated July 31, 1989 between GATX Capital
Corporation and The Chase Manhattan Bank is incorporated
herein by reference to Exhibit 4(a) to GATX Capital
Corporation's Form S-3, file number 33-30300.
4B. Supplemental Indenture dated as of December 18, 1991 between
GATX Capital Corporation and The Chase Manhattan Bank is
incorporated herein by reference to Exhibit 4(b) to GATX
Capital Corporation's Form S-3, file number 33-64474.
4C. Second Supplemental Indenture dated as of January 2, 1996
between GATX Capital Corporation and The Chase Manhattan
Bank is incorporated herein by reference to Exhibit 4.3 to
GATX Capital Corporation's Form 8-K dated October 15, 1997,
file number 1-8319.
4D. Third Supplemental Indenture dated as of October 14, 1997
between GATX Capital Corporation and The Chase Manhattan
Bank is incorporated herein by reference to Exhibit 4.4 to
GATX Capital Corporation's Form 8-K dated October 15, 1997,
file number 1-8319.
4E. Indenture dated as of October 1, 1987 between General
American Transportation Corporation and The Chase Manhattan
Bank (National Association) is incorporated herein by
reference to General American Transportation Corporation's
Form S-3, file number 33-17692.
4F. First Supplemental Indenture dated as of May 15, 1988
between General American Transportation Corporation and The
Chase Manhattan Bank is incorporated herein by reference to
General American Transportation Corporation's Form 10-Q for
the quarterly period ended June 30, 1988, file number
2-54754.
4G. Second Supplemental Indenture dated as of March 15, 1990
between General American Transportation Corporation and The
Chase Manhattan Bank is incorporated herein by reference to
General American Transportation Corporation's Form 8-K dated
March 15, 1990, file number 2-54754.
4H. Third Supplemental Indenture dated as of June 15, 1990
between General American Transportation Corporation and The
Chase Manhattan Bank is incorporated herein by reference to
General American Transportation Corporation's Form 8-K dated
June 29, 1990, file number 2-54754.
</Table>
105
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
4I. Fourth Supplemental Indenture dated as of June 15, 1996
between General American Transportation Corporation and the
Chase Manhattan Bank is incorporated herein by reference to
Exhibit 4.1 to General American Transportation's Form 8-K
dated January 26, 1996, file number 2-54754.
4J. Indenture dated as of November 1, 2003 between GATX
Financial Corporation and JP Morgan Chase Bank is
incorporated herein by reference to Exhibit 4Q to GATX
Financial Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, file number 1-8319.
4K. Indenture dated February 1, 2002 between GATX Corporation,
GATX Financial Corporation and JP Morgan Chase Bank is
incorporated herein by reference to Exhibit 4.3 to Form
S-3/A dated June 18, 2002, file number 333-86212-01.
4L. Indenture dated as of August 15, 2003 between GATX
Corporation, GATX Financial Corporation and JP Morgan Chase
Bank, is incorporated herein by reference to Exhibit 4.3 to
Form S-3 dated November 13, 2003, file number 33-110451.
10A. Amended and Restated Five Year Credit Agreement dated as of
June 27, 2005 between GATX Financial Corporation, the
lenders listed therein, and Citicorp USA, Inc., as
Administrative Agent is incorporated herein by reference to
GATX Financial Corporation's Form 8-K dated June 27, 2005,
file number 1-8319.
10B. Participation Agreement, dated as of April 30, 2002, among
USEB Aircraft Limited, Geary Leasing Limited, Jackson
Leasing Limited, Jackson Leasing Corporation, Jackson
Leasing (Ireland) Limited, Jackson Leasing (Cyprus) Limited,
Kearny Leasing Limited, Walkers SPV Limited, Barclays Bank
PLC, Wells Fargo Bank Northwest, N.A., GATX Financial
Corporation and Export-Import Bank of the Untied States.
10C. GATX Guarantee, dated as of April 30, 2002, by GATX
Corporation and GATX Financial Corporation in favor of Wells
Fargo Bank Northwest, N.A.
10D. Aircraft Facility Agreement, dated as of December 20, 2001,
among the lenders named therein, Halifax plc, Credit
Lyonnais, Bayerische Landesbank Girozentrale, Kreditanstalt
Fur Wiederaufbau, EFG Aircraft Limited, EFG Aircraft
(Ireland) Limited, O'Farrell Leasing Limited, O'Farrell
Leasing (Ireland) Limited and GATX Financial Corporation.
10E. ECA Facility Agreement Side Letter, dated December 20, 2001,
among Credit Lyonnais, Halifax plc, Bayerische Landesbank
Girozentrale, Kreditanstalt Fur Wiederaufbau and GATX
Financial Corporation.
10F. Deed of Amendment, dated as of December 22, 2003 between EFG
Aircraft (Holdings) Limited, EFGA Aircraft Limited, EFGB
Aircraft Limited, EFG Aircraft Limited, EFG Aircraft
(Ireland) Limited, O'Farrell Leasing Limited, O'Farrell
Leasing (Ireland) Limited, O'Farrell Leasing Corporation,
GATX Financial Corporation and Credit Lyonnais.
10G. Guarantee, dated as of December 2001, among GATX Financial
Corporation, Credit Lyonnais, EFG Aircraft Limited and EFG
Aircraft (Ireland) Limited.
10H. GATX Corporation 1995 Long-Term Incentive Compensation Plan
is incorporated herein by reference to Exhibit 10A to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1995, file number 1-2328.*
i. Amendment of said Plan effective as of January 31, 1997
is incorporated herein by reference to Exhibit 10B to GATX's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, file number 1-2328.
ii. Amendment of said Plan effective as of December 5, 1997
is incorporated herein by reference to Exhibit 10B to GATX's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, file number 1-2328.
iii. Amendment of said Plan effective as of April 24, 1998,
Amendment of said Plan effective June 9, 2000, and Amendment
of said Plan effective January 26, 2001, is
incorporated herein by reference to Exhibit 10B to
GATX's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, file number 1-2328.
</Table>
106
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
10I. GATX Corporation Deferred Fee Plan for Directors, as amended
and restated July 1, 1998 is incorporated herein by
reference to Exhibit 10C to GATX's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, file
number 1-2328.*
10J. 1984 Executive Deferred Income Plan Participation Agreement
between GATX Corporation and participating directors and
executive officers dated September 1, 1984, as amended, is
incorporated herein by reference to Exhibit 10F to GATX's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, file number 1-2328.*
10K. 1985 Executive Deferred Income Plan Participation Agreement
between GATX Corporation and participating directors and
executive officers dated July 1, 1985, as amended, is
incorporated herein by reference to Exhibit 10G to GATX's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, file number 1-2328.*
10L. 1987 Executive Deferred Income Plan Participation Agreement
between GATX Corporation and participating directors and
executive officers dated December 31, 1986, as amended, is
incorporated herein by reference to Exhibit 10H to GATX's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, file number 1-2328.*
10M. Amendment to Executive Deferred Income Plan Participation
Agreements between GATX and certain participating directors
and participating executive officers entered into as of
January 1, 1990, is incorporated herein by reference to
Exhibit 10J to GATX's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, file number 1-2328.*
10N. Retirement Supplement to Executive Deferred Income Plan
Participation Agreements entered into as of January 23,
1990, between GATX and certain participating directors to
GATX's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, file number 1-2328 and between GATX and
certain other participating directors is incorporated herein
by reference to Exhibit 10K to GATX's Annual Report on Form
10-K for the fiscal year ended December 31, 1990, file
number 1-2328.*
10O. Amendment to Executive Deferred Income Plan Participation
Agreements between GATX and participating executive officers
entered into as of April 23, 1993 is incorporated herein by
reference to Exhibit 10J to GATX's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, file
number 1-2328.*
10P. Summary of the Directors' Deferred Stock Plan approved on
July 26, 1996, effective as of April 26, 1996 is
incorporated herein by reference to Exhibit 10 to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996, file number 1-2328.*
10Q. Employment Agreement between GATX Corporation and Ronald H.
Zech dated as of October 11, 2002 is incorporated herein by
reference to Exhibit 10 (iii) (A) to GATX's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
2002, file number 1-2328.*
10R. Amendment of Employment Agreement between GATX Corporation
and Ronald H. Zech dated as of October 19, 2004 is
incorporated herein by reference to Exhibit 10.1 to GATX's
Form 8-K dated October 19, 2004, file number 1-2328.*
10S. Amended and Restated Agreements for Continued Employment
Following a Change of Control between GATX Corporation and
Messrs. Kenney, Ciancio and Earl and Ms. Duddy dated as of
August 6, 2004 is incorporated herein by reference to
Exhibit 10A to GATX's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004, file number
1-2328.*
10T. Amended and Restated Agreement for Continued Employment
Following a Change of Control between GATX Corporation and
Mr. Coe dated as of August 6, 2004 is incorporated herein by
reference to Exhibit 10B to GATX's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2004, file
number 1-2328.*
</Table>
107
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
10U. Agreement for Continued Employment Following a Change of
Control between GATX Corporation and Mr. Lyons dated as of
October 18, 2005 is incorporated herein by reference to
Exhibit 10A to GATX's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2005, file number
1-2328.*
10V. Restricted Stock Agreements for the 2004 Equity Incentive
Compensation Plan between GATX Corporation and certain
executive officers entered into as of January 1, 2004 which
provide for vesting based upon achievement of performance
goals that qualify the award as performance based
compensation under 162(m) of the Internal Revenue Code is
incorporated herein by reference to Exhibit 10C to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004, file number 1-2328.*
10W. Restricted Stock Agreements for the 2004 Equity Incentive
Compensation Plan between GATX Corporation and certain
executive officers entered into as of January 1, 2004 which
provide for vesting based upon achievement of performance
goals is incorporated herein by reference to Exhibit 10D to
GATX's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2004, file number 1-2328.*
10X. Restricted Stock Agreements for the 2004 Equity Incentive
Compensation Plan between GATX Corporation and certain
executive officers which provide for time based vesting is
incorporated herein by reference to Exhibit 10E to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004, file number 1-2328.*
10Y. Non Qualified Stock Option Agreement for awards made under
the 2004 Equity Incentive Compensation Plan is incorporated
herein by reference to Exhibit 10F to GATX's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2004, file number 1-2328.*
10Z. GATX Corporation 2004 Equity Incentive Compensation Plan is
incorporated herein by reference to Exhibit C to the
Definitive Proxy Statement filed on March 18, 2004 in
connection with GATX's 2004 Annual Meeting of Shareholders,
file number 1-2328.*
10AA. GATX Corporation Cash Incentive Compensation Plan is
incorporated herein by reference to Exhibit D to the
Definitive Proxy Statement filed on March 18, 2004 in
connection with GATX's 2004 Annual Meeting of Shareholders,
file number 1-2328.*
10AB. Summary of GATX Corporation Non-Employee Directors' Meeting
Fees is incorporated by reference to Exhibit 10A to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2005, file number 1-2328.*
10AC. Performance Stock Agreements for the 2004 Equity Incentive
Compensation Plan between GATX Corporation and certain
executive officers entered into as of January 1, 2005 which
provide for vesting based upon achievement of performance
goals is incorporated by reference to Exhibit 10A to GATX's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2005.*
99A. Undertakings to the GATX Corporation Salaried Employees'
Retirement Savings Plan is incorporated herein by reference
to GATX's Annual Report on Form 10-K for the fiscal year
ended December 31, 1982, file number 1-2328.*
99B. Certain instruments evidencing long-term indebtedness of
GATX Financial Corporation are not being filed as exhibits
to this Report because the total amount of securities
authorized under any such instrument does not exceed 10% of
GATX Corporation's total assets. GATX Corporation will
furnish copies of any such instruments upon request of the
Securities and Exchange Commission.
</Table>
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* Compensatory Plans or Arrangements
108