================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-2328
GATX Corporation
(Exact name of registrant as specified in its charter)
NEW YORK 36-1124040
(State of incorporation) (I.R.S. Employee Identification No.)
500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661-3676
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is 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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 51,221,402 shares of common
stock were outstanding as of July 14, 2006.
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GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2006
INDEX
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)................... 1
Consolidated Statements of Income (Unaudited)............. 2
Consolidated Statements of Cash Flows (Unaudited)......... 3
Notes to the Consolidated Financial Statements
(Unaudited)............................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements................................ 16
Business Overview......................................... 16
Financial Summary......................................... 17
Financial Performance Measures ........................... 17
Comparison of Six Months and Three Months Results
of Operations by Business Segment......................... 19
Cash Flow and Liquidity................................... 27
New Accounting Pronouncements............................. 29
Critical Accounting Policies.............................. 29
Non-GAAP Financial Performance Measures................... 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 31
Item 4. Controls and Procedures...................................... 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 32
Item 1A. Risk Factors................................................ 32
Item 6. Exhibits..................................................... 32
SIGNATURE............................................................ 33
EXHIBIT INDEX........................................................ 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
JUNE 30 DECEMBER 31
2006 2005
------------ -----------
ASSETS
CASH AND CASH EQUIVALENTS ..................... $ 147.1 $ 106.0
RESTRICTED CASH ............................... 66.3 53.1
RECEIVABLES
Rent and other receivables .................... 83.6 87.2
Finance leases ................................ 396.3 336.5
Loans ......................................... 24.1 38.7
Allowance for possible losses ................. (10.7) (13.1)
------------ ---------
493.3 449.3
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Rail .......................................... 4,126.1 3,728.1
Air ........................................... 1,345.0 1,298.9
Specialty ..................................... 93.5 90.8
Other ......................................... 361.8 234.9
Allowance for depreciation .................... (1,969.0) (1,891.1)
------------ ---------
3,957.4 3,461.6
INVESTMENTS IN AFFILIATED COMPANIES ........... 663.9 667.3
GOODWILL ...................................... 91.8 86.0
OTHER ASSETS .................................. 413.1 421.1
------------ ---------
TOTAL ASSETS .................................. $ 5,832.9 $ 5,244.4
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ......... $ 149.7 $ 177.4
DEBT
Commercial paper and bank credit facilities ... 318.3 57.0
Recourse ...................................... 2,904.5 2,715.4
Nonrecourse ................................... 34.6 37.7
Capital lease obligations ..................... 57.1 62.5
------------ ---------
3,314.5 2,872.6
DEFERRED INCOME TAXES ......................... 718.5 683.4
OTHER LIABILITIES ............................. 501.1 488.7
------------ ---------
TOTAL LIABILITIES ............................. 4,683.8 4,222.1
SHAREHOLDERS' EQUITY
Preferred stock ($1.00 par value,
5,000,000 shares authorized, 19,108
and 19,988 shares of Series A and B
Cumulative Convertible Preferred
Stock issued and outstanding as of
June 30, 2006 and December 31, 2005,
respectively; aggregate liquidation
preference of $1.2 million) ................. * *
Common stock ($0.625 par value,
120,000,000 authorized, 59,170,912
and 58,567,724 shares issued and
51,221,402 and 50,618,214 shares
outstanding as of June 30, 2006
and December 31, 2005, respectively) ........ 36.9 36.5
Additional paid in capital .................... 456.9 424.6
Retained earnings ............................. 762.5 696.0
Accumulated other comprehensive income
(loss) ...................................... 21.3 (6.3)
Treasury shares, at cost (7,949,510
shares at June 30, 2006 and
December 31, 2005) .......................... (128.5) (128.5)
------------ ---------
TOTAL SHAREHOLDERS' EQUITY .................... 1,149.1 1,022.3
------------ ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .... $ 5,832.9 $ 5,244.4
============ =========
* Less than $0.1 million
The accompanying notes are an integral part of these consolidated financial
statements.
1
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
GROSS INCOME
Lease income ................... $ 237.6 $ 216.4 $ 468.0 $ 432.1
Marine operating revenue ....... 53.8 40.1 63.3 46.0
Interest income on loans ....... 1.8 3.0 2.7 6.4
Asset remarketing income ....... 8.4 22.4 34.1 32.8
Fees ........................... 4.5 3.5 11.0 7.1
Other income ................... 15.2 18.6 31.7 39.0
-------- -------- -------- --------
Revenues ....................... 321.3 304.0 610.8 563.4
Share of affiliates'
earnings ..................... 27.2 31.3 54.5 54.2
-------- -------- -------- --------
TOTAL GROSS INCOME ............. 348.5 335.3 665.3 617.6
OWNERSHIP COSTS
Depreciation ................... 51.6 49.4 98.1 101.2
Interest expense, net .......... 47.4 40.8 89.6 82.5
Operating lease expense ........ 42.3 50.9 89.0 94.4
-------- -------- -------- --------
TOTAL OWNERSHIP COSTS .......... 141.3 141.1 276.7 278.1
OTHER COSTS AND EXPENSES
Maintenance expense ............ 47.6 45.8 99.2 94.9
Marine operating expense ....... 41.8 30.4 48.8 35.3
Selling, general and
administrative ............... 43.9 42.3 82.8 81.0
Asset impairment charges ....... 11.7 1.3 13.9 3.4
Other expenses ................. 7.0 20.2 13.9 27.5
-------- -------- -------- --------
TOTAL OTHER COSTS AND
EXPENSES ..................... 152.0 140.0 258.6 242.1
-------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES ........................ 55.2 54.2 130.0 97.4
INCOME TAXES ................... 14.9 19.7 41.8 34.5
-------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS ................... 40.3 34.5 88.2 62.9
DISCONTINUED OPERATIONS
Operating results, net of
taxes ........................ - 0.4 - 0.4
-------- -------- -------- --------
TOTAL DISCONTINUED
OPERATIONS ................... - 0.4 - 0.4
-------- -------- -------- --------
NET INCOME ..................... $ 40.3 $ 34.9 $ 88.2 $ 63.3
======== ======== ======== ========
PER SHARE DATA
Basic:
Income from continuing
operations ................... $ 0.79 $ 0.69 $ 1.74 $ 1.26
Income from discontinued
operations .................... - 0.01 - 0.01
-------- -------- -------- --------
Total .......................... $ 0.79 $ 0.70 $ 1.74 $ 1.27
======== ======== ======== ========
Average number of common shares
(in thousands) ............... 50,891 49,931 50,740 49,778
Diluted:
Income from continuing
operations ................... $ 0.70 $ 0.62 $ 1.53 $ 1.14
Income from discontinued
operations ................... - 0.01 - 0.01
-------- -------- -------- --------
Total .......................... $ 0.70 $ 0.63 $ 1.53 $ 1.15
======== ======== ======== ========
Average number of common shares
and common share equivalents
(in thousands) ............... 62,063 61,039 61,888 60,794
Dividends declared per common
share ........................ $ 0.21 $ 0.20 $ 0.42 $ 0.40
The accompanying notes are an integral part of these consolidated
financial statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
OPERATING ACTIVITIES
Net income .................................................... $ 40.3 $ 34.9 $ 88.2 $ 63.3
Less: Income from discontinued operations ..................... - 0.4 - 0.4
-------- -------- -------- --------
Income from continuing operations ............................. 40.3 34.5 88.2 62.9
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities of continuing operations:
Gain on sales of assets and securities ................... (6.6) (10.2) (13.8) (23.1)
Depreciation ............................................. 54.2 51.8 103.2 106.2
Asset impairment charges ................................. 11.7 1.3 13.9 3.4
Deferred income taxes .................................... 9.2 15.4 28.6 26.8
Share of affiliates' earnings, net of dividends .......... (13.0) (15.4) (30.6) (32.3)
Net increase (decrease) in operating lease payable ....... 17.9 22.2 (24.9) (19.5)
Increase in aircraft maintenance reserves ................ 4.4 7.2 10.2 13.6
Other .................................................... (5.8) (1.0) (12.1) (43.0)
-------- -------- -------- --------
Net cash provided by operating activities of
continuing operations .................................... 112.3 105.8 162.7 95.0
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse
financing for leveraged leases, operating lease
assets and facilities ........................................ (277.1) (87.6) (382.4) (158.6)
Loans extended ................................................ - - (4.8) -
Investments in affiliated companies ........................... (2.7) (5.9) (8.2) (24.3)
Other investments ............................................. (0.3) (0.7) (1.0) (5.6)
-------- -------- -------- --------
Portfolio investments and capital additions ................... (280.1) (94.2) (396.4) (188.5)
Purchase of leased in assets .................................. (100.3) - (260.9) -
Proceeds from sale-leaseback .................................. - - - 201.3
Portfolio proceeds ............................................ 34.5 102.0 99.0 192.6
Proceeds from other asset sales ............................... 6.6 5.9 13.4 10.9
Net (increase) decrease in restricted cash .................... (12.4) 3.6 (13.4) 2.9
-------- -------- -------- --------
Net cash (used in) provided by investing
activities of continuing operations....................... (351.7) 17.3 (558.3) 219.2
FINANCING ACTIVITIES
Net proceeds from issuances of debt ........................... 99.7 327.4 345.1 327.4
Repayments of debt ............................................ (43.6) (381.0) (162.3) (523.4)
Net increase (decrease) in commercial paper and
bank credit facilities ....................................... 248.2 (8.3) 261.6 (58.3)
Net decrease in capital lease obligations ..................... (0.7) (0.8) (5.4) (7.2)
Issuance of common stock and other ............................ 13.2 4.4 18.0 8.6
Cash dividends ................................................ (10.8) (9.9) (21.4) (19.9)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities of continuing operations....................... 306.0 (68.2) 435.6 (272.8)
EFFECT OF EXCHANGE
RATE CHANGES ON CASH AND CASH EQUIVALENTS .................... 1.1 (0.5) 1.1 (0.9)
CASH FLOW OF DISCONTINUED OPERATIONS (SEE NOTE 12)
Operating cash flows .......................................... - (0.8) - (0.8)
Investing cash flows .......................................... - 0.1 - 9.1
Financing cash flows ............... - - - -
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... $ 67.7 $ 53.7 $ 41.1 $ 48.8
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 leasing
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.
On June 30, 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 Note 12 for additional information on
GATX's discontinued operations.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GATX
Corporation and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by these accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2006 are
not necessarily indicative of the results that may be achieved for the entire
year ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes set forth in the Company's Form
10-K/A for the year ended December 31, 2005. Certain reclassifications have been
made to the 2005 consolidated financial statements to conform to the 2006
presentation.
Share-Based Compensation -- In December 2004, Statement of Financial
Accounting Standard ("SFAS") No. 123(R), Share-Based Payments was issued. SFAS
No. 123(R), which is a revision of SFAS No. 123, supersedes Accounting
Principles Board ("APB") Opinion No. 25. Generally, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
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 adopted SFAS No. 123(R) using the modified-prospective method ("MPT")
as of January 1, 2006. Under the MPT, entities are required to recognize
compensation expense 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 awards that were granted prior to the
adoption date for which the requisite service period has not been provided as of
the adoption date. As a result, GATX now recognizes the estimated fair value of
employee stock options as an expense in its financial statements. The Company
previously accounted for share-based payments to employees using APB Opinion No.
25's intrinsic value method and, as such, generally recognized no compensation
costs for employee stock options. See Note 9 for details on GATX's share-based
compensation plans.
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The pro forma table below reflects net income and basic and diluted
earnings per share for the three and six month periods ended June 30, 2005, had
the Company applied the fair value recognition provisions of SFAS 123 (in
millions, except for per share data):
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- -------------
2005 2005
------------- -------------
Net income, as reported ..................... $ 34.9 $ 63.3
Add: Stock-based compensation expense,
net of tax ................................ 0.6 1.1
Deduct: Total stock-based employee
compensation expense determined under
the fair value-based method for all
awards, net of tax ........................ (1.1) (2.1)
-------- --------
Pro forma net income ........................ $ 34.4 $ 62.3
======== ========
EARNINGS PER SHARE:
Basic, as reported .......................... $ 0.70 $ 1.27
Basic, pro forma ............................ 0.69 1.25
Diluted, as reported ........................ 0.63 1.15
Diluted, pro forma .......................... 0.62 1.13
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Leveraged Leases -- Prior to 2006, 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,
Accounting for Leases. 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.
Resolution with respect to the other transaction has not concluded and may
ultimately be litigated.
Under existing accounting guidance provided in SFAS No. 13, 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. In July, 2006, the Financial
Accounting Standards Board ("FASB") issued Staff Position ("FSP") No. FAS 13-2,
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
outlined in this FSP applies to all transactions classified as leveraged leases
in accordance with SFAS No. 13 and requires 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 has occurred or is projected to occur. 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 lease. Over the
full term of these leases the cumulative accounting income would not change.
This FSP is effective for fiscal years beginning after December 15, 2006. The
application of this FSP is not expected to be material to the Company's
consolidated financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN48"), which is an interpretation of SFAS No.
109, Accounting for Income Taxes. SFAS No. 109 does not prescribe a recognition
threshold or measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. FIN 48 clarifies the
application of SFAS No. 109 by defining criteria that an individual tax position
must meet for any tax benefit to be recognized in an enterprise's financial
statements. Additionally, FIN 48 provides guidance on measurement,
derecognition,
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
classification, interest and penalties, accounting in interim periods, and
disclosure. FIN 48 is effective for fiscal years beginning after December 15,
2006. GATX is currently evaluating the impact of adopting this interpretation.
NOTE 4. 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.
For purposes of preparing the following information, GATX made adjustments
to the operating results reported by certain of its affiliates. GATX recorded
its loans to certain 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 impacts of any basis differences between GATX's carrying value and its share
of the affiliates' net assets, including 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 GATX's affiliates assuming GATX held a 100%
interest, were (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ----------------------------
2006 2005 2006 2005
------------- ------------ ------------- -------------
Revenues........ $ 215.1 $ 204.5 $ 394.7 $ 384.3
Pre-tax income
reported by
affiliates.... 47.5 57.6 118.2 103.4
NOTE 5. PENSION AND OTHER POST-RETIREMENT BENEFITS
The components of pension and other post-retirement benefit costs for the
three months ended June 30, 2006 and 2005 were as follows (in millions):
2006 RETIREE 2005 RETIREE
2006 PENSION 2005 PENSION HEALTH AND HEALTH AND
BENEFITS BENEFITS LIFE LIFE
------------- ------------ ------------- -------------
Service cost....... $ 1.5 $ 1.5 $ 0.1 $ 0.1
Interest cost...... 5.5 5.7 1.2 1.1
Expected return
on plan assets... (7.4) (7.5) -- --
Amortization of:
Unrecognized
prior service
cost.......... 0.1 0.1 -- --
Unrecognized net
loss.......... 1.1 0.6 0.1 0.1
------------- ------------ ------------- -------------
Net costs.......... $ 0.8 $ 0.4 $ 1.4 $ 1.3
============= ============ ============= =============
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The components of pension and other post-retirement benefit costs for the
six months ended June 30, 2006 and 2005 were as follows (in millions):
2006 2005
2006 2005 RETIREE RETIREE
PENSION PENSION HEALTH HEALTH
BENEFITS BENEFITS AND LIFE AND LIFE
---------- ---------- ---------- ---------
Service cost.................................... $ 3.0 $ 3.0 $ 0.2 $ 0.2
Interest cost................................... 11.0 11.4 2.2 2.2
Expected return on plan assets.................. (14.8) (15.0) -- --
Amortization of:
Unrecognized prior service cost............... 0.1 0.2 -- --
Unrecognized net loss......................... 2.2 1.2 0.3 0.2
----- ----- ----- -----
Net costs....................................... $ 1.5 $ 0.8 $ 2.7 $ 2.6
===== ===== ===== =====
The previous tables include amounts allocated to discontinued operations,
all of which are immaterial.
GATX uses a December 31 measurement date for all of its plans. The amounts
reported herein are based on estimated annual costs. Actual annual costs for the
year ending December 31, 2006 may differ from these estimates.
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. Through June 30, 2006, contributions of
$0.5 million have been made to the foreign and domestic pension plans and
contributions of $3.9 million have been made to the other post-retirement
benefit 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 plan contributions.
NOTE 6. 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 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 sets forth GATX's guarantees as of (in millions):
JUNE 30 DECEMBER 31
2006 2005
------------- -----------
Affiliate guarantees........................... $ 27.3 $ 29.5
Asset residual value guarantees................ 175.7 368.6
Lease payment guarantees....................... 25.3 27.3
Other guarantee................................ 77.8 77.8
------------- -----------
Total guarantees........................... 306.1 503.2
Standby letters of credit and bonds............ 21.3 23.6
------------- -----------
$ 327.4 $ 526.8
============= ===========
At June 30, 2006, the maximum potential amount of guarantees under which
GATX or its subsidiaries could be required to perform was $306.1 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, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, was a liability of $1.2 million. The
expirations of these guarantees, except for GATX's Other guarantee, the term of
which is uncertain, range from 2007 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
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 June 30, 2006. 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.
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 period of the guarantee) 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.
GATX's Other guarantee represents an 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 June 30, 2006, management does not expect any material losses to result from
these off balance sheet instruments because performance is not expected to be
required.
NOTE 7. VARIABLE INTEREST ENTITIES
GATX has ownership interests in certain investments that are considered
Variable Interest Entities ("VIEs") in accordance with FASB Interpretation No.
46R, Consolidation of Variable Interest Entities. 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 $243.1 million of which $217.8 million was the
aggregate carrying value of these investments recorded on the balance sheet at
June 30, 2006.
NOTE 8. COMPREHENSIVE INCOME
The components of comprehensive income were as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ---------------------
2006 2005 2006 2005
-------- --------- --------- ----------
Net income........................ $ 40.3 $ 34.9 $ 88.2 $ 63.3
Other comprehensive income,
net of tax:
Foreign currency translation
gain (loss).................... 13.5 (14.2) 16.8 (30.5)
Unrealized loss on securities... (0.3) -- (0.6) (3.5)
Unrealized gain (loss) on
derivative instruments......... 9.2 (2.0) 11.4 0.8
Minimum pension liability
adjustment..................... -- -- -- --
------- ------- --------- --------
COMPREHENSIVE INCOME.............. $ 62.7 $ 18.7 $ 115.8 $ 30.1
======= ======= ========= ========
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 9. SHARE-BASED COMPENSATION PLANS
GATX provides equity awards to its employees under the GATX Corporation
2004 Equity Incentive Compensation Plan, as amended ("the 2004 Plan"). An
aggregate of 3.5 million shares of common stock is authorized under the 2004
Plan and as of June 30, 2006, 2.7 million shares were available for issuance.
The 2004 Plan provides for the granting of nonqualified stock options, stock
appreciation rights ("SARs"), restricted stock and phantom stock awards. These
awards are more fully described below.
GATX adopted SFAS No. 123(R) using the modified prospective transition
method as of January 1, 2006. Under this transition method, share-based
compensation expense for the first six months of 2006 included expense for all
share-based awards granted prior to, but not yet vested as of, January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123. Share-based compensation expense for all awards granted
after January 1, 2006 is based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). For the three and six months
ended June 30, 2006, the total share-based compensation expense was $2.3 million
($1.4 million after tax) and $4.2 million ($2.6 million after tax),
respectively.
Stock Option/SAR Awards
Stock options/SARs provide for the purchase of common stock and may be
granted for periods not longer than seven years from the date of grant (ten
years for options granted prior to 2004). SARs entitle the holder to receive the
difference between the market price of GATX's stock at the time of exercise and
the exercise price either in shares of common stock, cash or a combination
thereof, at GATX's discretion. Options entitle the holders to purchase shares of
GATX stock at a specified exercise price. The exercise price for both options
and SARs is equal to the average of the high and low trading prices of GATX
stock on the date of grant. Options/SARs vest and become exercisable commencing
on a date no earlier than one year from the date of grant. Compensation expense
for these awards is recognized over the applicable vesting period, generally
three years. Dividend equivalents accrue on all stock options/SARs granted under
the 2004 Plan and are paid upon vesting. Dividend equivalents continue to be
paid until the options/SARs are exercised or cancelled. During 2006, only SARs
were awarded.
GATX values its stock option/SAR awards using the Black-Scholes model. 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. The
assumptions GATX uses in valuing its option/SAR awards are expected stock price
volatility (based on the historical volatility of its stock price), the risk
free interest rate (based on the treasury yield curve) and the expected life of
the option (based on historical exercise patterns and post-vesting termination
behavior). Additionally, the value of each option reflects an estimate of the
dividend equivalents to be paid during the expected life of the option/SAR.
The assumptions GATX used to estimate the fair value of its 2006 SAR
awards and the weighted average estimated fair value are noted in the table
below:
2006 GRANT
------------
Weighted average fair value of SAR........ $ 15.82
Risk free interest rate................... 4.77%
Dividend yield............................ 2.20%
Expected stock price volatility........... 33.55%
Expected life of the option, in years..... 5.2
GATX's annual dividend.................... $ 0.84
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Certain data with respect to stock options/SARs activity for the six
months ended June 30, 2006 are set forth below:
WEIGHTED
AVERAGE
WEIGHTED REMAINING AGGREGATE
NUMBER OF AVERAGE CONTRACTUAL INTRINSIC
OPTIONS/SARS EXERCISE TERM VALUE
(IN THOUSANDS) PRICE (YEARS) (IN THOUSANDS)
-------------- ------------ ----------- --------------
Outstanding at beginning of period......... 3,097 $ 31.64
Granted ................................... 240 $ 38.63
Exercised.................................. (588) $ 30.59 $ 5,407
Forfeited/Cancelled/Expired................ (66) $ 30.12
Outstanding at end of period............... 2,683 $ 32.53 4.9 $ 26,928
Exercisable at the end of the period....... 2,019 $ 33.14 4.5 $ 19,061
As of June 30, 2006, there was $5.3 million of unrecognized compensation
expense related to nonvested stock options/SARs, which is expected to be
recognized over a weighted averaged period of 2.0 years. Cash received from
employee exercises of stock options, for the six months ended June 30, 2006, was
$18.0 million. GATX did not recognize any excess tax benefits associated with
these exercises.
Restricted Stock and Performance Share Awards
Restricted stock may be granted to key employees, entitling them to
receive a specified number of restricted shares of common stock. Restricted
shares of common stock carry all dividend and voting rights, but are not
transferable prior to the expiration of a specified restriction period,
generally three years, as determined by the Compensation Committee of the Board
of Directors ("Compensation Committee"). Compensation expense is recognized for
these awards over the applicable restriction period.
Performance shares may be granted to key employees to focus attention on
the achievement of certain strategic objectives. The shares 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 stock 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
shares that are converted to restricted stock. Performance shares do not carry
voting rights. Compensation expense is recognized for these awards over the
applicable vesting period, generally three years.
GATX values its restricted stock and performance share awards based on the
closing price of its stock on the grant date. As of June 30, 2006, there was
$6.6 million of unrecognized compensation expense related to these awards, which
is expected to be recognized over a weighted average period of 2.1 years.
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Certain data with respect to restricted stock and performance share
activity for the six months ended June 30, 2006 are set forth below:
WEIGHTED AVERAGE
NUMBER OF SHARE GRANT-DATE FAIR
UNITS OUTSTANDING VALUE
----------------- ----------------
RESTRICTED STOCK:
Nonvested at beginning of the period......... 88,246 $ 33.03
Granted...................................... 58,050 38.71
Vested....................................... -
Forfeited.................................... (7,360) (33.59)
-------
Nonvested at end of period................... 138,936 $ 35.37
=======
PERFORMANCE SHARES:
Nonvested at beginning of the period......... 150,292 $ 27.70
Granted...................................... 57,910 38.71
Vested....................................... - -
Forfeited.................................... (3,896) 28.90
-------
Nonvested at end of period................... 204,306 $ 30.80
=======
Phantom Stock Awards
Phantom stock is granted to external Directors as a portion of their
compensation for service on GATX's Board. In accordance with the terms of the
phantom stock awards, each 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. Any fractional units will be paid in cash. In 2006, GATX granted 6,097
units of phantom stock and 113,980 units were outstanding as of June 30, 2006.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of shares of common stock
outstanding during each reporting period. Shares issued during the reporting
period and shares reacquired during the reporting period, if applicable, are
weighted for the portion of the reporting period 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 awards of restricted stock, the assumed conversion of
preferred stock, convertible debt, and the assumed exercise of employee 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 included in the calculation of diluted earnings per share for
each of the 2006 and 2005 periods. As of June 30, 2006, these securities were
convertible into common stock at a price of $34.09 per share, which would have
resulted in 5,132,884 common shares issued upon conversion.
Shares underlying the 2003 issue and the related interest expense were
included in the calculation of diluted earnings per share for each of the 2006
and 2005 periods. As of June 30, 2006, these securities were convertible into
common stock at a current conversion price of $24.54 per share, which would have
resulted in 5,093,428 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. The conversion into common stock is subject to
a number of contingencies including the market price of GATX's common stock and
the trading price of the notes.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following table sets forth the computation of basic and diluted net
income per common share (in millions, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ----------------------
2006 2005 2006 2005
-------- ---------- --------- -----------
NUMERATOR:
Income from continuing operations............................... $ 40.3 $ 34.5 $ 88.2 $ 62.9
Income from discontinued operations............................. - 0.4 - 0.4
Less: Dividends paid and accrued on preferred stock......... * * * *
--------- -------- -------- ---------
NUMERATOR FOR BASIC EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS.......................... 40.3 34.9 88.2 63.3
Effect of dilutive securities:
Add: Dividends paid and accrued on preferred stock........... * * * *
After-tax interest expense on convertible securities.... 3.2 3.2 6.4 6.4
--------- -------- -------- ---------
NUMERATOR FOR DILUTED EARNINGS PER SHARE -
INCOME AVAILABLE TO COMMON SHAREHOLDERS.......................... $ 43.4 $ 38.1 $ 94.6 $ 69.7
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE -
WEIGHTED AVERAGE SHARES.......................................... 50.9 49.9 50.7 49.8
Effect of dilutive securities:
Stock based incentive plans.................................. 0.8 0.7 0.8 0.6
Convertible preferred stock.................................. 0.1 0.1 0.1 0.1
Convertible debt securities.................................. 10.2 10.3 10.3 10.3
--------- -------- -------- ---------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE -
ADJUSTED WEIGHTED AVERAGE AND ASSUMED CONVERSION (A)............. 62.1 61.0 61.9 60.8
BASIC EARNINGS PER SHARE:
Income from continuing operations................................. $ 0.79 $ 0.69 $ 1.74 1.26
Income from discontinued operations............................... - 0.01 - 0.01
--------- -------- -------- ---------
TOTAL BASIC EARNINGS PER SHARE.................................... $ 0.79 $ 0.70 $ 1.74 $ 1.27
========= ======== ======== =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations................................. $ 0.70 $ 0.62 $ 1.53 $ 1.14
Income from discontinued operations............................... - 0.01 - 0.01
--------- -------- -------- ---------
TOTAL DILUTED EARNINGS PER SHARE.................................. $ 0.70 $ 0.63 $ 1.53 $ 1.15
========= ======== ======== =========
* Less than $0.1 million.
(a) Diluted earnings per share results may not be additive due to rounding.
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 11. 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 corporate support expenses.
GATX provides services primarily through three operating segments: Rail,
Air and Specialty. In addition, GATX operates a fleet of self-unloading vessels
on the Great Lakes through its wholly owned subsidiary, American Steamship
Company.
Rail is principally engaged in leasing rail equipment, including tank
cars, freight cars and locomotives. Rail 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 airlines
throughout the world. Air typically provides net leases under which the lessee
is responsible for maintenance, insurance and taxes. Air also engages in fee
based aircraft management activities that involve remarketing and sales efforts
on behalf of clients.
Specialty is principally engaged in pursuing investment opportunities in
marine assets and long-lived industrial equipment in targeted industries.
Specialty also provides portfolio management services that generate income, some
of which is based on the residual value of the equipment under management. The
Specialty portfolio consists primarily of leases, loans, joint venture
investments and interests in residual values involving a variety of underlying
asset types, including marine, aircraft, rail, industrial and other equipment.
Other is comprised of corporate results, including SG&A expenses and
interest expense not allocated to segments, and the operating results of ASC.
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 and applicable interest expense to its
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 recourse debt (including off balance
sheet debt) to equity. Unallocated debt and interest were retained in Other.
Beginning in 2006, GATX modified its methodology for calculating the estimated
value of its off balance sheet debt, which is based on the present value of
committed future operating lease payments. GATX now uses the implicit interest
rate in each of its operating leases as the discount rate in calculating the
present value amount, whereas it previously used a fixed 10% discount rate. This
modification generally resulted in a lower discount rate and therefore a higher
calculated off balance sheet debt amount.
In connection with this methodology change, GATX also modified the
recourse leverage ratios assigned to each segment. For 2006, the recourse
leverage ratios for Rail, Air and Specialty were set at 4.75:1, 3:1 and 4:1,
respectively. For 2005, the leverage ratios were 4.5:1, 3:1 and 4:1,
respectively. In the aggregate, the amount of debt and interest expense
allocated to each segment on the basis of the 2006 method approximated the
amounts that would have been allocated under the prior method. Management
believes this leverage and interest expense allocation methodology provides a
reasonable approximation of each operating segment's risk-adjusted financial
return.
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following tables present certain segment data for the three and six
months ended June 30, 2006 and 2005 (in millions):
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ ------- --------
THREE MONTHS ENDED JUNE 30, 2006
PROFITABILITY
Revenues...................................................... $ 213.5 $ 36.8 $ 15.6 $ 55.4 $ -- $ 321.3
Share of affiliates' earnings................................. 5.5 12.1 9.6 -- -- 27.2
-------- -------- --------- ------ ------- --------
Total gross income............................................ 219.0 48.9 25.2 55.4 -- 348.5
Depreciation ................................................. 36.3 11.2 1.5 2.6 -- 51.6
Interest expense, net......................................... 24.3 15.3 4.7 3.1 -- 47.4
Operating lease expense....................................... 40.9 0.5 1.0 -- (0.1) 42.3
Asset impairment charges...................................... 0.1 11.6 -- -- -- 11.7
Income (loss) from continuing operations
before income taxes.......................................... 44.1 4.0 15.2 (8.2) 0.1 55.2
Net income (loss) from continuing operations.................. 35.4 2.6 8.4 (6.2) 0.1 40.3
-------- -------- --------- ------ ------- --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions................... 91.4 46.0 14.9 127.8 -- 280.1
-------- -------- --------- ------ ------- --------
SELECTED BALANCE SHEET DATA AT JUNE 30, 2006
Investments in affiliated companies........................... 117.2 378.3 168.4 -- -- 663.9
Identifiable assets........................................... 3,114.6 1,722.7 451.7 598.1 (54.2) 5,832.9
-------- -------- --------- ------ ------- --------
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ ------- --------
THREE MONTHS ENDED JUNE 30, 2005
PROFITABILITY
Revenues...................................................... $ 198.5 $ 30.3 $ 35.0 $ 40.2 $ -- $ 304.0
Share of affiliates' earnings................................. 6.9 11.8 12.6 -- -- 31.3
-------- -------- --------- ------ ------- --------
Total gross income............................................ 205.4 42.1 47.6 40.2 -- 335.3
Depreciation ................................................. 31.5 14.9 1.0 2.0 -- 49.4
Interest expense, net......................................... 19.5 14.4 5.2 1.7 -- 40.8
Operating lease expense....................................... 44.7 5.4 0.9 -- (0.1) 50.9
Asset impairment charges...................................... 0.9 -- 0.4 -- -- 1.3
Income (loss) from continuing
operations before income taxes............................... 36.4 (0.1) 38.5 (20.7) 0.1 54.2
Net Income (loss) from continuing
operations................................................... 23.1 -- 23.8 (12.5) 0.1 34.5
-------- -------- --------- ------ ------- --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions................... 80.5 2.3 9.5 1.9 -- 94.2
-------- -------- --------- ------ ------- --------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2005
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
-------- -------- --------- ------ ------- --------
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ ------- --------
SIX MONTHS ENDED JUNE 30, 2006
PROFITABILITY
Revenues...................................................... $ 424.6 $ 72.4 $ 48.1 $ 65.7 $ -- $ 610.8
Share of affiliates' earnings................................. 9.1 25.9 19.5 -- -- 54.5
-------- -------- --------- ------ ------- --------
Total gross income............................................ 433.7 98.3 67.6 65.7 -- 665.3
Depreciation ................................................. 70.2 22.2 3.1 2.6 -- 98.1
Interest expense, net......................................... 45.2 29.5 9.3 5.6 -- 89.6
Operating lease expense....................................... 86.1 1.1 2.0 -- (0.2) 89.0
Asset impairment charges...................................... 0.3 10.7 2.9 -- -- 13.9
Income (loss) from continuing
operations before income taxes............................... 81.7 21.7 45.1 (18.7) 0.2 130.0
Net income (loss) from continuing operations.................. 60.2 13.9 26.8 (12.8) 0.1 88.2
-------- -------- --------- ------ ------- --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions................... 161.6 49.1 54.4 131.3 -- 396.4
-------- -------- --------- ------ ------- --------
SELECTED BALANCE SHEET DATA AT JUNE 30, 2006
Investments in affiliated companies........................... 117.2 378.3 168.4 -- -- 663.9
Identifiable assets........................................... 3,114.6 1,722.7 451.7 598.1 (54.2) 5,832.9
-------- -------- --------- ------ ------- --------
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
INTER-
RAIL AIR SPECIALTY OTHER SEGMENT TOTAL
-------- -------- --------- ------ -------- --------
SIX MONTHS ENDED JUNE 30, 2005
PROFITABILITY
Revenues........................................... $ 399.4 $ 63.6 $ 52.9 $ 47.5 $ -- $ 563.4
Share of affiliates' earnings...................... 10.0 22.2 22.0 -- -- 54.2
-------- -------- ------- ------ ------ --------
Total gross income................................. 409.4 85.8 74.9 47.5 -- 617.6
Depreciation ...................................... 66.6 30.6 2.0 2.0 -- 101.2
Interest expense, net.............................. 42.1 27.7 10.1 2.6 -- 82.5
Operating lease expense............................ 86.7 5.9 2.0 -- (0.2) 94.4
Asset impairment charges........................... 1.9 -- 1.5 -- -- 3.4
Income (loss) from continuing operations
before income taxes.............................. 66.2 6.9 54.7 (30.6) 0.2 97.4
Net Income (loss) from continuing operations....... 43.1 4.8 33.8 (18.9) 0.1 62.9
-------- -------- ------- ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions........ 150.6 2.9 31.6 3.4 -- 188.5
-------- -------- ------- ------ ------ --------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2005
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
-------- -------- ------- ------ ------ --------
NOTE 12. DISCONTINUED OPERATIONS
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 prior to December 31,
2004. Financial data for the Technology segment has been segregated as
discontinued operations for all periods presented.
The following table summarizes the operating results of the Technology
segment, for all periods presented (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2006 2005 2006 2005
-------- -------- ------- -------
Gross income............................. $ -- $ 0.8 $ -- $ 1.2
Income before taxes...................... -- 0.8 -- 0.8
Operating income, net of tax............. -- 0.4 -- 0.4
The following tables summarize the components of discontinued operations
reported on the consolidated statements of cash flows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -----------------
2006 2005 2006 2005
------- -------- -------- -------
OPERATING ACTIVITIES
Net cash used in operating activities.......... $ -- $ (0.8) $ -- $ (0.8)
INVESTING ACTIVITIES --
Net proceeds from sale of segment.............. -- 0.1 -- 9.1
------- ------- -------- -------
Net cash provided by investing activities...... -- 0.1 -- 9.1
------- ------- -------- -------
CASH (USED IN) PROVIDED BY
DISCONTINUED OPERATIONS, NET.................... $ -- $ (0.7) $ -- $ 8.3
======= ======= ======== =======
In the six month period ended June 30, 2005, Technology received final
distributions totaling $9.1 million associated with the 2004 sale of a joint
venture interest.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with
the unaudited 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. Risks and uncertainties include, but are not limited to,
general economic conditions; lease rates, utilization levels and operating costs
in GATX's primary asset segments; conditions in the capital markets; changes in
GATX's or GATX Financial Corporation's credit ratings; dynamics affecting
companies within the markets served by GATX; regulatory rulings that may impact
the economic value and operating costs of assets; competitive factors in GATX's
primary markets including lease pricing and asset availability; changes in loss
provision levels within GATX's portfolio; impaired asset charges that may result
from changing market conditions or implementation of portfolio management
initiatives by GATX; the outcome of pending or threatened litigation and general
market conditions in the rail, air, marine and other large-ticket industries.
Other factors and unanticipated events could adversely affect our business
operations and financial performance. We discuss certain of these matters more
fully, as well as certain risk factors that may affect our business operations,
financial condition and results of operations, in other of our filings with the
SEC, including our Annual Report on Form 10-K/A. These risks, uncertainties and
other factors should be carefully considered in evaluating the forward-looking
statements. The forward-looking statements included in this Quarterly Report are
made only as of the date of this report, and we undertake no obligation to
update these forward-looking statements to reflect subsequent events or
circumstances.
BUSINESS OVERVIEW
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 leasing
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.
Operating results for the six months ended June 30, 2006 are not
necessarily indicative of the results that may be achieved for the entire year
ending December 31, 2006. For further information, refer to GATX's Annual Report
on Form 10-K/A for the year ended December 31, 2005.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain non-GAAP (Generally Accepted Accounting
Principles) financial measures. See "Non-GAAP Financial Measures" for additional
information including definitions of terms and reconciliations to related GAAP
financial components.
16
FINANCIAL SUMMARY
The following table presents net income (loss) by segment for the periods
indicated (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ----------------
2006 2005 2006 2005
-------- -------- ------- ------
Rail.................................. $ 35.4 $ 23.1 $ 60.2 $ 43.1
Air................................... 2.6 -- 13.9 4.8
Specialty............................. 8.4 23.8 26.8 33.8
Other................................. (6.2) (12.5) (12.8) (18.9)
Intersegment.......................... 0.1 0.1 0.1 0.1
-------- -------- ------- ------
Income from continuing operations... 40.3 34.5 88.2 62.9
Discontinued operations............... -- 0.4 -- 0.4
-------- -------- ------- ------
Net income.......................... $ 40.3 $ 34.9 $ 88.2 $ 63.3
======== ======== ======= ======
FINANCIAL PERFORMANCE MEASURES
The following table presents financial performance 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 29. The Company
uses these financial measures to analyze and assess underlying financial
performance from period to period. All amounts and ratios are based on
continuing operations and are shown for the trailing-12-month periods ended June
30.
2006 2005
-------- --------
Return on equity (A)........................... 0.9% 17.9%
Return on assets (A)........................... 0.1% 2.6%
SG&A efficiency................................ 1.79% 1.68%
(A) The 2006 measures were negatively impacted by impairment charges recorded
in the fourth quarter of 2005 related to Air assets targeted for
disposition. The 2005 measures were positively affected by non-operating
events that occurred in the second half of 2004, including gains on the
sale of idle property, insurance recoveries and tax benefits.
17
GATX RAIL
Components of Rail's income statements are summarized below (in
millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
GROSS INCOME
Lease income ...................... $ 192.7 $ 180.5 $ 383.1 $ 358.8
Asset remarketing income .......... 5.7 1.3 11.7 8.2
Fees .............................. 0.4 0.4 0.8 0.9
Other income ...................... 14.7 16.3 29.0 31.5
-------- -------- -------- --------
Revenues ........................ 213.5 198.5 424.6 399.4
Share of affiliates' earnings ..... 5.5 6.9 9.1 10.0
-------- -------- -------- --------
TOTAL GROSS INCOME ................ 219.0 205.4 433.7 409.4
OWNERSHIP COSTS
Depreciation ...................... 36.3 31.5 70.2 66.6
Interest expense, net ............. 24.3 19.5 45.2 42.1
Operating lease expense ........... 40.9 44.7 86.1 86.7
-------- -------- -------- --------
TOTAL OWNERSHIP COSTS ............. 101.5 95.7 201.5 195.4
OTHER COSTS AND EXPENSES
Maintenance expense ............... 47.1 45.5 98.2 93.7
Selling, general and
administrative .................. 20.3 17.3 39.9 35.3
Asset impairment charges .......... 0.1 0.9 0.3 1.9
Other expenses .................... 5.9 9.6 12.1 16.9
-------- -------- -------- --------
TOTAL OTHER COSTS AND EXPENSES .... 73.4 73.3 150.5 147.8
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ........ 44.1 36.4 81.7 66.2
INCOME TAXES ...................... 8.7 13.3 21.5 23.1
-------- -------- -------- --------
NET INCOME ........................ $ 35.4 $ 23.1 $ 60.2 $ 43.1
======== ======== ======== ========
FINANCIAL PERFORMANCE MEASURES FOR RAIL
The following table summarizes the financial performance measures for the
trailing-12-month periods ended June 30:
2006 2005
-------- --------
Return on assets................... 2.3% 1.8%
SG&A efficiency.................... 1.82% 1.80%
For additional information see Non-GAAP Financial Performance Measures on
page 29.
RAIL'S FLEET DATA
The following table summarizes the railcar activity for Rail's North
American fleet for the six months ended June 30:
2006 2005
-------- --------
Beginning balance.................. 108,151 106,819
Cars added......................... 2,058 2,120
Cars scrapped or sold.............. (2,268) (2,386)
-------- --------
Ending balance..................... 107,941 106,553
Utilization rate................... 98.6% 97.9%
18
COMPARISON OF THE FIRST SIX MONTHS OF 2006 TO THE FIRST SIX MONTHS OF 2005.
SUMMARY
Rail continued to benefit from favorable conditions in its markets during
the first six months of 2006. In both North America and Europe, strong demand
contributed to high lease renewal success, increased lease rates and
historically high levels of fleet utilization. In the second quarter of 2006,
the average North American renewal lease rate on a basket of common car types
increased 15.4% on average over the expiring rate. Additionally, Rail is
extending term on certain renewals, an action that is expected to temper future
earnings volatility. Utilization is expected to remain high throughout the
remainder of 2006 and with over 11,000 railcars up for renewal in North America
over the balance of the year, GATX expects lease income in 2006 to continue to
increase as expiring leases are expected to be renegotiated at higher rates.
During the first six months of 2006, Rail invested $161.6 million, acquiring
approximately 2,100 railcars and 46 locomotives. Investment volume for the
comparable period of 2005 totaled $150.6 million for approximately 2,300
railcars and 11 locomotives. In the first six months of 2006, Rail also
exercised two purchase options on approximately 4,700 railcars leased in under
operating leases for an aggregate cost of $260.9 million.
Rail's net income of $60.2 million for the first six months of 2006 was
$17.1 million higher than the prior year period. The increase was driven
primarily by an average of 3,100 more railcars on lease than the comparable
period of 2005, an increase in lease rates over the last 18 months on lease
renewals and assignments and a $5.9 million deferred tax benefit, recorded in
the second quarter of 2006, from a reduction in Canadian statutory tax rates.
GROSS INCOME
Rail's 2006 gross income of $433.7 million for the first six months was
$24.3 million higher than the prior year period. In North America, lease income
increased $22.8 million, due primarily to higher lease rates and, on average,
2,300 more cars on lease compared to the first six months of 2005. Locomotive
leasing contributed $1.1 million to the increase due to higher lease rates and
higher utilization. In Europe, 2006 lease income was $1.5 million higher than
the prior year as the impact of, on average, 800 additional railcars on lease
was partially offset by the effect of foreign currency exchange differences.
Asset remarketing income increased $3.5 million versus the prior year
period. Rail capitalized on the stronger 2006 market conditions by selling
certain less desirable railcar types resulting in a $5.7 million remarketing
gain.
Lower other income in 2006 primarily reflects lower repair revenues on
third party railcars and the absence of an insurance recovery received in the
prior year period, partially offset by higher gains in 2006 on the scrapping of
railcars. Repair revenues were lower in 2006 due to increased focus at GATX's
major service centers on maintaining GATX's growing North American fleet over
third party railcars. Scrapping gains were higher in 2006 due to an increase in
the price of steel.
The decrease in share of affiliates' earnings versus the prior year period
primarily reflects a $4.0 million asset remarketing gain recognized at a
domestic joint venture in 2005. The decrease was partially offset by improved
results and favorable market value adjustments on certain derivative financial
instruments at the AAE Cargo affiliate.
OWNERSHIP COSTS
Ownership costs of $201.5 million were $6.1 million higher than the prior
year, reflective of increased interest costs and depreciation associated with
Rail's asset acquisitions. Higher interest rates in 2006 also impacted interest
expense. Over the past 18 months, Rail has invested approximately $560 million
in railcar acquisitions and existing railcar improvements. The comparative mix
among the ownership cost components of depreciation, interest and operating
lease expense was impacted by sale leaseback activity and the purchase of
railcars leased in under operating leases. In 2005, Rail completed a sale
leaseback transaction for 2,900 railcars with a net book value of $170.0
million. In 2006, Rail exercised purchase options on two operating leases for
2,700 and 2,000 railcars respectively, for an aggregate cost of $260.9 million.
19
OTHER COSTS AND EXPENSES
Maintenance expense increased $4.5 million from the prior year period to
$98.2 million. The increase primarily reflects a larger fleet and increased
repairs performed by North American railroads in 2006. The current year also
includes added expense associated with the conversion and reconfiguration of
certain railcars for use in difference types of services. Rail continues to face
the possibility of newly mandated security or safety legislation or regulations
that, if enacted, may increase future maintenance costs or negatively impact
asset valuations.
Selling, general and administrative costs were $4.6 higher than the prior
year period. The increase was primarily related to increased employee and
information technology costs in North America, partially offset by lower
employee costs in Europe related to integration activities executed in 2005.
Other expenses were $4.8 million lower than the prior year period. The
decrease was primarily due to lower claims related expenses and favorable
foreign currency exchange rates. Asset impairment charges in the prior year
period included the write down of a repair facility that was held for sale and
the writedown of certain European locomotives. The repair facility was sold
during the current year period at its adjusted book value.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
COMPARISON OF SECOND QUARTER 2006 TO SECOND QUARTER 2005
SUMMARY
Rail's net income of $35.4 million for the second quarter of 2006 was
$12.3 million higher than the prior year period. The increase was driven
primarily by an average of 2,800 more railcars on lease than the prior period,
an increase in lease rates over the last 18 months on lease renewals and
assignments and a $5.9 million deferred tax benefit, recorded in the second
quarter of 2006, from a reduction in Canadian statutory tax rates. Partially
offsetting the increase were higher ownership and maintenance costs on the
larger active fleet.
GROSS INCOME
Rail's 2006 gross income of $219.0 million for the second quarter of 2006
was $13.6 million higher than the prior year period. In North America, lease
income increased $11.2 million, reflecting the effects of higher lease rates
and, on average, 2,300 more cars on lease compared to the second quarter of
2005. In Europe, lease income was $1.0 million higher than the prior year period
as the impact of an average of 500 additional railcars on lease contributed
favorably to results.
Asset remarketing income increased $4.4 million versus the prior year
period. Rail capitalized on the stronger 2006 market conditions by selling
certain less desirable railcar types, resulting in a $5.7 million remarketing
gain.
Lower other income in 2006 primarily reflects lower repair revenues on
third party railcars and the absence of an insurance recovery received in the
prior year period, partially offset by higher gains on the scrapping of
railcars. Repair revenues were lower in 2006 due to increased focus at GATX's
major service centers on maintaining GATX's growing North American fleet over
third party railcars. Scrapping gains were higher in 2006 due to an increase in
the price of steel.
The decrease in share of affiliates' earnings versus the prior year period
reflects a large asset remarketing gain recognized by an affiliate in 2005. The
decrease was partially offset by improved results and favorable market value
adjustments on certain derivative financial instruments at the AAE Cargo
affiliate.
OWNERSHIP COSTS
Ownership costs of $101.5 million were $5.8 million higher than the prior
year period, reflective of increased interest costs and depreciation associated
with Rail's asset acquisition activity. Higher interest rates in 2006 also
impacted interest expense. The comparison of depreciation, interest and
operating lease expense was impacted by Rail's exercise of a purchase
20
option at the end of the first quarter of 2006 on 2,700 railcars leased in under
an operating lease for an aggregate cost of $160.6 million. A second purchase
option for $100.3 million, covering 2,000 railcars, was exercised at the end of
the second quarter of 2006.
OTHER COSTS AND EXPENSES
Maintenance expense increased $1.6 million from the prior year period to
$47.1 million. The increase reflects the costs associated with maintaining a
larger fleet, increased repairs performed by North American railroads and
greater compliance work in 2006. The current year period also includes added
expense associated with the conversion and reconfiguration of certain railcars
for use in different types of services. Rail continues to face the possibility
of newly mandated security or safety legislation or regulations that, if
enacted, may increase future maintenance costs or negatively impact asset
valuations.
Selling, general and administrative costs were $3.0 higher than the prior
year period. The increase was primarily related to increased employee costs and
increased information technology costs in North America, partially offset by
lower employee costs in Europe related to integration activities executed in
2005.
Other expenses were $3.7 million lower than the prior year period. The
decrease was primarily due to lower claims related expenses and favorable
foreign currency exchange gains.
GATX AIR
Components of Air's income statements are summarized below (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2006 2005 2006 2005
----- ------ ------ -------
GROSS INCOME
Lease income.................................. $33.2 $28.1 $ 64.0 $ 57.9
Interest income on loans...................... 0.1 0.2 0.2 0.3
Asset remarketing income...................... -- 0.1 -- 1.1
Fees.......................................... 3.4 1.9 7.9 4.1
Other income ................................. 0.1 -- 0.3 0.2
----- ------ ------ -------
Revenues.................................... 36.8 30.3 72.4 63.6
Share of affiliates' earnings................. 12.1 11.8 25.9 22.2
----- ------ ------ -------
TOTAL GROSS INCOME............................ 48.9 42.1 98.3 85.8
OWNERSHIP COSTS
Depreciation ................................. 11.2 14.9 22.2 30.6
Interest expense, net......................... 15.3 14.4 29.5 27.7
Operating lease expense....................... 0.5 5.4 1.1 5.9
----- ------ ------ -------
TOTAL OWNERSHIP COSTS......................... 27.0 34.7 52.8 64.2
OTHER COSTS AND EXPENSES
Maintenance expense........................... 0.5 0.1 1.0 0.5
Selling, general and administrative........... 5.4 7.1 11.3 13.8
Asset impairment charges ..................... 11.6 -- 10.7 --
Other expenses................................ 0.4 0.3 0.8 0.4
----- ------ ------ -------
TOTAL OTHER COSTS AND EXPENSES................ 17.9 7.5 23.8 14.7
----- ------ ------ -------
INCOME (LOSS) BEFORE INCOME TAXES............. 4.0 (0.1) 21.7 6.9
INCOME TAX (BENEFIT) PROVISION................ 1.4 (0.1) 7.8 2.1
----- ------ ------ -------
NET INCOME.................................... $ 2.6 $ -- $ 13.9 $ 4.8
===== ====== ====== =======
21
FINANCIAL PERFORMANCE MEASURES FOR AIR
The following table summarizes the financial performance measures for the
trailing 12-month periods ended June 30:
2006 2005
---- ----
Return on assets (A).......................... (5.3)% 0.5%
SG&A efficiency............................... 0.66% 0.63%
(A) The 2006 return on assets is reflective of impairment losses on air
assets targeted for disposition recorded in the fourth quarter of 2005.
For additional information see Non-GAAP Financial Performance Measures on
page 29.
AIR'S FLEET DATA
The following table summarizes information on GATX owned and managed
aircraft as of June 30:
2006 2005
---- ----
Utilization by net book value of owned aircraft.............. 100% 99.9%
Number of owned aircraft (A)................................. 146 155
Number of managed aircraft................................... 59 66
(A) Includes wholly owned and partnered aircraft
COMPARISON OF THE FIRST SIX MONTHS OF 2006 TO THE FIRST SIX MONTHS OF 2005.
SUMMARY
The airline industry continues to benefit from improved worldwide airline
traffic while continuing to be sensitive to higher fuel prices and other global
political, economic and health-related events. Lease rates have remained firm as
demand for narrowbody aircraft continues to be strong. Air is focused on
improving financial returns through increasing aircraft management engagements
and by optimizing its existing fleet. In the first six months of 2006, Air was
successful in expanding its aircraft management activities, resulting in fee
income of $7.9 million, a 92.7% increase over the prior year. Air continues to
pursue aircraft management opportunities, which include remarketing and sales
efforts on behalf of clients. The timing of income from these activities will
depend on transactional opportunities and is expected to be uneven in nature. In
December 2005, Air targeted 36 aircraft, comprised of 12 wholly owned and 24
held by affiliates, for disposition and began reviewing alternatives for its 50%
owned affiliate, Pembroke. Air expects that the disposition of the targeted
aircraft will be substantially completed by year end. In the first six months of
2006, two of the targeted aircraft were placed on short term direct finance
leases and the sale of Air's interest in Pembroke was completed in July 2006.
Additionally, Air took delivery of one new aircraft in June 2006, which was
immediately placed on lease.
Air's net income of $13.9 million for the first six months of 2006 was
$9.1 million higher than the prior year period. Comparability between periods
was affected by lower depreciation expense of $7.0 million (after tax) and asset
impairment charges of $6.8 million (after tax) recorded in 2006 on aircraft
targeted for disposition and an operating lease charge of $3.0 million (after
tax) recorded in 2005. Excluding the effects of these events, the 2006 increase
in income was primarily attributable to higher lease and fee income and lower
SG&A expense.
GROSS INCOME
Gross income of $98.3 million was $12.5 million higher than the prior year
period primarily due to increased lease income, fees and share of affiliates'
earnings. Lease income was $6.1 million higher than the prior year due to the
impact of higher interest rates on variable rate leases partially offset by the
absence of income from four aircraft transferred to a newly formed partnership
in 2005 and from two aircraft that were off-lease while transitioning between
lessees in 2006. Fee income of $7.9 million was $3.8 million higher than the
prior year primarily due to fees earned for managing the sale of aircraft on
behalf of third parties. Share of affiliates' earnings increased $3.7 million
over the comparable 2005 period primarily due to current year earnings from the
new partnership formed in 2005, the impact of higher interest rates on variable
rate leases, and lower depreciation
22
expense in the current year on certain joint venture aircraft held
for sale or whose book values were written down in December 2005. The increase
was partially offset by lower asset remarketing gains in the Rolls-Royce engine
leasing affiliate.
OWNERSHIP COSTS
Ownership costs of $52.8 million were $11.4 million lower than the prior
year. Depreciation expense decreased $8.4 million primarily due to the absence
of depreciation in 2006 on aircraft classified as held for sale. Interest
expense increased $1.8 million due to higher interest rates on variable rate
debt, largely offset by the impact of lower average debt balances. Operating
lease expense in 2006 was lower due to a charge of $4.8 million related to the
restructuring of a lease with a bankrupt carrier recorded in the prior year.
OTHER COSTS AND EXPENSES
Other costs and expenses of $23.8 million were $9.1 million higher than
the prior year. The asset impairment charges in the current period resulted
primarily from the net change in estimated fair value of the remaining held for
sale aircraft, partially offset by the reversal of maintenance reserves related
to two held for sale aircraft that were placed on direct finance leases. Air
expects that results for the remainder of 2006 will continue to include gains
and losses as additional fair value remeasurements and/or final disposition
results for held for sale aircraft are recognized. SG&A expense was lower
primarily due to the capitalization of initial direct costs related to the new
aircraft placed on lease.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
COMPARISON OF SECOND QUARTER 2006 TO SECOND QUARTER 2005
Air's net income of $2.6 million for the three months ended June 30, 2006
was $2.6 million higher than the prior year period. Comparability between
periods was affected by lower depreciation expense of $3.6 million (after tax)
and additional net impairment charges of $7.3 million (after tax) recorded in
2006, and an operating lease charge of $3.0 million (after tax) recorded in
2005. Excluding these events, the increase was primarily attributable to higher
lease income and fees and lower SG&A expense.
GROSS INCOME
Gross income of $48.9 million was $6.8 million higher than the prior year
period primarily due to increased lease income, fees and share of affiliates'
earnings. Lease income was $5.1 million higher than the prior year due to the
impact in 2006 of higher interest rates on variable rate leases. Fee income of
$3.4 million was $1.5 million higher than the prior year primarily due to fees
earned for managing the sale of aircraft on behalf of third parties. Share of
affiliates' earnings increased $0.3 million over the comparable 2005 period
primarily due to the impact in 2006 of higher interest rates on variable rate
leases and lower depreciation expense in the current year on certain joint
venture aircraft held for sale or whose book values were written down in
December 2005. The impact of these items more than offset the absence of the
gains on sale recorded at Air's engine leasing joint venture and the reversal of
repossession expense accruals, which were recorded in the prior 2005 period.
OWNERSHIP COSTS
Ownership costs of $27.0 million were $7.7 million lower than the prior
year. Depreciation expense decreased $3.7 million primarily due to the absence
of depreciation in 2006 on aircraft classified as held for sale. Interest
expense increased $0.9 million due to higher interest rates on variable rate
debt, largely offset by the impact of lower average debt balances. Operating
lease expense in the second quarter of 2006 was lower due to a one-time charge
of $4.8 million related to the restructuring of a lease with a bankrupt carrier
recorded in the prior year.
OTHER COSTS AND EXPENSES
Other costs and expenses of $17.9 million were $10.4 million higher than
the prior year. The asset impairment charges in the current period resulted
primarily from the net change in estimated fair value of the remaining held for
sale aircraft, partially offset by the reversal of maintenance reserves related
to one held for sale aircraft that was placed on a six month direct finance
23
lease. Air expects that results for the remainder of 2006 will continue to
include gains and losses as additional fair value remeasurements and/or final
disposition results for held for sale aircraft are recognized. SG&A expense was
lower primarily due to the capitalization of initial direct costs related to the
new aircraft placed on lease.
GATX SPECIALTY
Components of Specialty's income statements are summarized below (in
millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2006 2005 2006 2005
------- ------- ------ ------
GROSS INCOME
Lease income.......................... $ 9.6 $ 7.8 $ 18.8 $ 15.4
Interest income on loans.............. 1.7 2.6 2.5 4.4
Asset remarketing income.............. 2.7 21.0 22.4 23.5
Fees.................................. 0.6 1.2 2.2 2.1
Other income ......................... 1.0 2.4 2.2 7.5
------- ------- ------ ------
Revenues............................ 15.6 35.0 48.1 52.9
Share of affiliates' earnings......... 9.6 12.6 19.5 22.0
------- ------- ------ ------
TOTAL GROSS INCOME.................... 25.2 47.6 67.6 74.9
OWNERSHIP COSTS
Depreciation ......................... 1.5 1.0 3.1 2.0
Interest expense, net................. 4.7 5.2 9.3 10.1
Operating lease expense............... 1.0 0.9 2.0 2.0
------- ------- ------ ------
TOTAL OWNERSHIP COSTS................. 7.2 7.1 14.4 14.1
OTHER COSTS AND EXPENSES
Maintenance expense................... - 0.2 - 0.7
Asset impairment charges.............. - 0.4 2.9 1.5
Selling, general and administrative... 2.1 1.6 4.3 3.5
Other expenses........................ 0.7 (0.2) 0.9 0.4
------- ------- ------ ------
TOTAL OTHER COSTS AND EXPENSES........ 2.8 2.0 8.1 6.1
------- ------- ------ ------
INCOME BEFORE INCOME TAXES............ 15.2 38.5 45.1 54.7
INCOME TAXES.......................... 6.8 14.7 18.3 20.9
------- ------- ------ ------
NET INCOME............................ $ 8.4 $ 23.8 $ 26.8 $ 33.8
======= ======= ====== ======
FINANCIAL PERFORMANCE MEASURES FOR SPECIALTY
The following table summarizes the financial performance measures for the
trailing-12-month periods ended June 30:
2006 2005
---- ----
Return on assets................................... 9.3% 9.8%
SG&A efficiency.................................... 0.87% 0.57%
For additional information see Non-GAAP Financial Performance Measures on
page 29.
SPECIALTY'S PORTFOLIO DATA
The following table summarizes information on the owned and managed
Specialty portfolio as of June 30 ($ in millions):
2006 2005
---- ----
Net book value of owned assets (A)................. $ 462.8 $444.4
Net book value of managed portfolio................ 524.4 675.4
(A) Includes off balance sheet assets
24
COMPARISON OF THE FIRST SIX MONTHS OF 2006 TO THE FIRST SIX MONTHS OF 2005.
SUMMARY
During the first six months of 2006, Specialty's net book value of owned
assets increased $24.4 million to $462.8 million, reflecting GATX's renewed
efforts to grow this segment by following a disciplined approach that focuses on
marine and select industrial equipment assets. In 2006, Specialty invested $54.4
million, including $40.3 million for industrial equipment assets and $13.0
million in marine assets.
Specialty's net income of $26.8 million for the first six months of 2006
was $7.0 million lower than the prior year period. The decrease was primarily
due to lower gains from the sale of securities and lower share of affiliates'
earnings in the current year.
GROSS INCOME
Gross income of $67.6 million was $7.3 million lower than the prior year.
The decrease was primarily due to lower gains on the sale of securities and
share of affiliates' earnings, partially offset by higher lease income. The
increase of $3.4 million in lease income was primarily due to new investments in
operating lease assets. Interest income decreased $1.9 million as a result of
the run-off of Venture Finance and other portfolio loans during 2005. Asset
remarketing, for both 2006 and 2005, primarily reflects gains and fees received
in each period from sales of assets and related transactions in the managed
portfolios. Significant residual sharing fees of $14.0 million and $12.8 million
were received in 2006 and 2005, respectively, related to one transaction. The
timing of asset remarketing income is dependant on transactional opportunities
and market conditions and is expected to be uneven in nature. Other income
decreased $4.4 million primarily due to a $3.7 million gain from the sale of
securities recorded in the prior year.
Share of affiliates' earnings of $19.5 million decreased $2.5 million
primarily as a result of decreased operating earnings from the marine joint
ventures. These joint ventures continue to post strong earnings in 2006,
however, not at the historically high levels experienced in 2005.
OWNERSHIP COSTS
Ownership costs of $14.4 million increased $0.3 million primarily as a
result of increased depreciation expense related to new portfolio investments.
OTHER COSTS AND EXPENSES
Other costs and expenses of $8.1 million increased $2.0 million primarily
due to asset impairment charges recorded in the current year on certain cost
method investments.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
25
COMPARISON OF SECOND QUARTER 2006 TO SECOND QUARTER 2005
Specialty's net income of $8.4 million for the three months ended June 30,
2006 was $15.4 million lower than the prior year period. The decrease was
primarily due to lower asset remarketing income and share of affiliates'
earnings in the current year.
GROSS INCOME
Gross income of $25.2 million was $22.4 million lower than the prior year.
The decrease was primarily due to lower asset remarketing, and share of
affiliates' earnings, partially offset by higher lease income. The increase of
$1.8 million in lease income was primarily due to new investments in operating
lease assets. Asset remarketing was $2.7 million in the second quarter of 2006
compared to $21.0 million in the prior year, which included a residual sharing
fee of $12.8 million on one transaction. The timing of asset remarketing income
is dependant on transactional opportunities and market conditions and is
expected to be uneven in nature. Interest income decreased $0.9 million as
result of the run-off of Venture Finance and other portfolio loans during 2005.
Other income includes gains on the sale of securities, which decreased by $0.6
million from the prior year.
Share of affiliates' earnings of $9.6 million decreased $3.0 million
primarily as a result of decreased earnings from the marine joint ventures.
These joint ventures continue to post strong earnings in 2006, however, not at
the historically high levels experienced in 2005.
OWNERSHIP COSTS
Ownership costs of $7.2 million increased $0.1 million primarily as a
result of increased depreciation expense related to new portfolio investments.
OTHER COSTS AND EXPENSES
Other costs and expenses of $2.8 million increased $0.8 million primarily
due to currency fluctuations, partially offset by a larger reversal of provision
for losses in the current year.
OTHER
Components of the income statements are summarized below (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2006 2005 2006 2005
------ ------- ------ ------
GROSS INCOME
Marine operating revenue............. $ 53.8 $ 40.3 $ 63.3 $ 46.0
Lease income ........................ 2.1 -- 2.1 --
Other income ........................ (0.5) (0.1) 0.3 1.5
------ ------- ------ ------
TOTAL GROSS INCOME................... 55.4 40.2 65.7 47.5
OWNERSHIP COSTS
Depreciation ........................ 2.6 2.0 2.6 2.0
Interest expense, net................ 3.1 1.7 5.6 2.6
------ ------- ------ ------
TOTAL OWNERSHIP COSTS................ 5.7 3.7 8.2 4.6
OTHER COSTS AND EXPENSES
Marine operating expense............. 41.8 30.4 48.8 35.3
Selling, general and administrative.. 16.1 16.3 27.3 28.4
Other expenses....................... -- 10.5 0.1 9.8
------ ------- ------ ------
TOTAL OTHER COSTS AND EXPENSES....... 57.9 57.2 76.2 73.5
------ ------- ------ ------
LOSS BEFORE INCOME TAXES............. (8.2) (20.7) (18.7) (30.6)
INCOME TAX BENEFIT................... (2.0) (8.2) (5.9) (11.7)
------ ------- ------ ------
NET LOSS............................. $ (6.2) $ (12.5) $(12.8) $(18.9)
====== ======= ====== ======
26
COMPARISON OF THE FIRST SIX MONTHS OF 2006 TO THE FIRST SIX MONTHS OF 2005.
SUMMARY
Other is comprised of corporate results, including selling, general and
administrative expenses ("SG&A") and interest expense net of amounts allocated
to the segments, and the results of ASC. Other reported a net loss of $12.8
million in 2006, compared to a net loss of $18.9 million reported in 2005. The
prior year results included $11.9 million ($7.4 million after-tax) of debt
extinguishment costs primarily related to fees associated with liability
management activities. Specifically, during the second quarter of 2005, GATX
Financial Corporation ("GFC"), a wholly owned subsidiary of GATX, completed a
bond tender for an aggregate principal amount of $188.4 million of debt
scheduled to mature in 2006 and prepaid in excess of $110.0 million of higher
cost secured borrowings. Excluding the impact of the debt extinguishment costs,
2006 results were comparable to 2005. An increase in interest expense in 2006
was largely offset by higher income at ASC. The increased interest expense was
due to finance costs resulting from ASC's fleet acquisitions and higher
unallocated interest. The higher ASC net income was driven primarily by new
vessels added to ASC's fleet, which led to significantly higher marine operating
revenues and expenses. One vessel was added at the end of the second quarter of
2005 and six additional vessels were acquired from Oglebay Norton Marine
Services in June of 2006.
COMPARISON OF SECOND QUARTER 2006 TO SECOND QUARTER 2005
SUMMARY
Other reported a net loss of 6.2 million in 2006, compared to the net loss
of $12.5 million reported in 2005. The prior year results included $11.9 million
($7.4 million after-tax) of debt extinguishment costs primarily related to fees
associated with liability management activities. Excluding the impact of the
debt extinguishment costs, 2006 results were comparable to 2005. An increase in
interest expense in 2006 was largely offset by higher income at ASC. The
increased interest expense was due to finance costs resulting from ASC's fleet
acquisitions and higher unallocated interest. The higher ASC net income was
driven by the new vessels added to ASC's fleet.
GATX CONSOLIDATED
CONSOLIDATED INCOME TAXES
GATX's effective tax rate was 32% for the six months ended June 30, 2006
compared to 35% for the six months ended June 30, 2005. The decrease in 2006 was
primarily driven by a deferred tax benefit of $5.9 million resulting from a
Canadian statutory rate change enacted in the second quarter of 2006. Excluding
the deferred tax benefit, GATX's 2006 year to date tax rate approximated 37%,
which reflects the impact of state income taxes, partially offset by lower tax
rates on foreign source income.
CASH FLOW AND LIQUIDITY
Over the course of a full year, GATX expects to generate significant cash
flow from a combination of operating activities and investment portfolio
proceeds. This cash flow is used to satisfy GATX's cash needs for investing and
financing activities, such as servicing debt, paying dividends, and funding
portfolio investments and capital additions. Cash flow from operations and
portfolio proceeds are impacted by changes in working capital and the timing of
asset dispositions. As a result, cash flow components will vary across reporting
periods. The following discussion of cash flow activity is presented excluding
the impact of discontinued operations.
Net cash provided by continuing operations for the first six months of
2006 was $162.7 million, an increase of $67.7 million from the prior year
period. Higher lease income and the absence of debt extinguishment costs were
partially offset by higher finance costs and other changes in working capital.
Portfolio investments and capital additions for the six months of 2006
totaled $396.4 million, an increase of $207.9 million from the comparable 2005
period. Rail's investments of $161.6 million were $11.0 million higher than the
prior year period and included the addition of approximately 2,100 railcars to
its fleet. Air's investments of $49.1 million in 2006 consisted primarily of the
final payment for delivery of one new Airbus 320-200 aircraft. Air had only
nominal investing activity in the prior year period. Specialty invested $54.4
million in 2006, an increase of $22.8 million from the prior year period.
Significant 2006
27
activity at Specialty included $40.3 million of investments in select long-lived
industrial equipment and $13.0 in marine assets. ASC invested $123.9 million in
2006, adding six vessels acquired from Oglebay Norton Marine Services to its
fleet. Additionally, in 2006, Rail exercised purchase options on two operating
leases covering 4,700 railcars for an aggregate cost of $260.9 million.
Portfolio proceeds were $99.0 million for the first six months of 2006
compared to $192.6 million for the prior year period. Proceeds for the first six
months of 2005 included $62.7 million related to the transfer of four aircraft
to a newly formed joint venture in which the Company had a 50% interest. In
2006, GATX sold half of its 50% interest in this joint venture for $30.6
million. Additionally, in 2005, a sale-leaseback transaction was executed on
approximately 2,900 railcars for total proceeds of $201.3 million.
GATX also expects to satisfy its cash needs for investing and financing
activities through the use of uncommitted money market lines, commercial paper,
committed revolving credit facilities, the issuance of unsecured debt, and a
variety of secured borrowings. GATX utilizes both domestic and international
banks and capital markets.
In the first six months of 2006, GATX, through its principal subsidiary,
GATX Financial Corporation ("GFC"), issued long-term debt for net proceeds of
$345.1 million, primarily consisting of $200.0 million of ten-year senior
unsecured notes and a $100.0 million seven-year unsecured term loan. GFC also
issued a net amount of $304.7 million of commercial paper. Debt repaid in 2006
consisted primarily of scheduled maturities and certain bank credit facilities.
Subsequent to June 30, 2006, the proceeds from the term loan were used to reduce
commercial paper outstanding.
GFC has a $525.0 million five-year senior unsecured revolving facility
which matures in June 2010. At June 30, 2006, availability under the credit
facility was $201.0 million, with $19.3 million of letters of credit issued and
$304.7 million of commercial paper outstanding, both 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. At June 30, 2006, GFC was in compliance with all
covenants and conditions of the credit facility.
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. Certain of the
indentures contain limitation on liens provisions that limit the amount of
secured indebtedness GFC may incur. At June 30, 2006, GFC was in compliance with
the covenants and all conditions of the indentures. A subsidiary financing
contains leverage and cash flow covenants that are specific to the subsidiary.
GATX does not anticipate any covenant violations in either the credit facility,
bank financing, or indentures, nor does GATX anticipate that any of these
covenants will restrict its operations or its ability to procure additional
financing.
As of June 30, 2006, GFC had a shelf registration for $1.0 billion of debt
securities and pass through certificates from which $496.5 million of senior
unsecured notes had been issued.
The availability of these 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 such as Standard & Poor's ("S&P") and Moody's Investors Service
("Moody's"). In January of 2006, 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. Moody's credit rating and outlook on GFC's long-term unsecured
debt remained unchanged at Baa3 and positive, respectively. Moody's short-term
unsecured debt rating is P-3. GFC continued to successfully utilize the
commercial paper market as a source of liquidity during the second quarter.
However, the Moody's short-term unsecured debt rating of P-3 may restrict GFC's
future ability to utilize this market.
Unconditional purchase obligations at June 30, 2006, consisting primarily
of railcar orders and committed aircraft deliveries, were comprised as follows
(in millions):
TOTAL REMAINDER 2006 2007 2008
------ ----------------- ------ -----
Rail........................... $375.8 $214.0 $126.1 $35.7
Air............................ 136.2 44.0 92.2 --
Specialty...................... 17.8 15.3 2.5 --
------ ------ ------ -----
Total unconditional purchase
obligations $529.8 $273.3 $220.8 $35.7
====== ====== ====== =====
28
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 to the consolidated financial statements for a summary of new
accounting pronouncements that may impact GATX's businesses.
CRITICAL ACCOUNTING POLICIES
There have been no changes to GATX's critical accounting policies during
the six month period ending June 30, 2006; refer to GATX's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2005 for a summary of GATX's
policies.
NON-GAAP FINANCIAL PERFORMANCE 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 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.
- 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 the 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 the interest rate implicit in each lease.
- 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.
29
RECONCILIATION OF THE NON-GAAP COMPONENTS USED IN THE COMPUTATION OF
CERTAIN FINANCIAL PERFORMANCE MEASURES (IN MILLIONS):
JUNE 30
-------------------------------------
2006 2005 2004
---------- ---------- -----------
BALANCE SHEET ASSETS AS REPORTED.............. $ 5,832.9 $ 5,364.0 $ 5,604.3
LESS: DISCONTINUED OPERATIONS................. -- -- 71.2
---------- ---------- -----------
CONSOLIDATED ON BALANCE SHEET ASSETS.......... $ 5,832.9 $ 5,364.0 $ 5,533.1
ON BALANCE SHEET ASSETS BY SEGMENT
Rail.......................................... $ 3,114.6 $ 2,531.0 $ 2,555.5
Air........................................... 1,722.7 1,995.7 2,032.6
Specialty..................................... 451.7 432.2 552.2
Other......................................... 543.9 405.1 392.8
---------- ---------- -----------
Consolidated................................ $ 5,832.9 $ 5,364.0 $ 5,533.1
OFF BALANCE SHEET ASSETS(1)
Rail.......................................... $ 1,334.1 $ 1,472.2 $ 1,368.8
Air........................................... 34.8 35.7 36.8
Specialty..................................... 11.1 12.2 13.3
---------- ---------- -----------
Consolidated................................ $ 1,380.0 $ 1,520.1 $ 1,418.9
TOTAL ON AND OFF BALANCE SHEET ASSETS (2)
Rail.......................................... $ 4,448.7 $ 4,003.2 $ 3,924.3
Air........................................... 1,757.5 2,031.4 2,069.4
Specialty..................................... 462.8 444.4 565.5
Other......................................... 543.9 405.1 392.8
---------- ---------- -----------
Consolidated................................ $ 7,212.9 $ 6,884.1 $ 6,952.0
MANAGED ASSETS
Rail.......................................... $ 35.5 $ 36.4 $ 96.3
Air........................................... 1,845.0 2,010.7 2,014.0
Specialty..................................... 524.4 675.4 803.5
---------- ---------- -----------
Consolidated................................ $ 2,404.9 $ 2,722.5 $ 2,913.8
TOTAL OWNED AND MANAGED ASSETS(3)
Rail.......................................... $ 4,484.2 $ 4,039.6 $ 4,020.6
Air........................................... 3,602.5 4,042.1 4,083.4
Specialty..................................... 987.2 1,119.8 1,369.0
Other......................................... 543.9 405.1 392.8
---------- ---------- -----------
Consolidated................................ $ 9,617.8 $ 9,606.6 $ 9,865.8
========== ========== ===========
30
The following information is based on continuing operations for the
trailing-12-months ended June 30 (in millions):
2006 2005
--------- ---------
INCOME FROM CONTINUING OPERATIONS AS REPORTED
Rail........................................... $ 98.8 $ 72.1
Air............................................ (100.1) 10.0
Specialty...................................... 42.4 49.4
Other.......................................... (30.9) 50.5
--------- ---------
Consolidated................................. $ 10.2 $ 182.0
SG&A AS REPORTED
Rail........................................... $ 77.6 $ 72.6
Air............................................ 23.3 24.8
Specialty...................................... 8.6 7.1
Other.......................................... 59.8 58.4
--------- ---------
Consolidated................................. $ 169.3 $ 162.9
INITIAL DIRECT COSTS
Air............................................ $ 2.0 $ 0.9
Specialty...................................... 0.6 --
--------- ---------
Consolidated................................. $ 2.6 $ 0.9
SG&A BEFORE CAPITALIZED INITIAL DIRECT COSTS(4)
Rail........................................... $ 77.6 $ 72.6
Air............................................ 25.3 25.7
Specialty...................................... 9.2 7.1
Other.......................................... 59.8 58.4
--------- ---------
Consolidated................................. $ 171.9 $ 163.8
========= =========
____________________
(1) Beginning in 2006, GATX modified its methodology for calculating the
present value of its off balance sheet assets. GATX now uses the implicit
interest rate in each of its operating leases as the discount rate,
whereas it previously used a fixed 10% discount rate. All off balance
sheet asset amounts and resulting performance measures have been restated
to reflect this change.
(2) Total on and off balance sheet assets are used in the calculation of
return on assets, which is income from continuing operations divided by
average total on and off balance sheet assets.
(3) Total owned and managed assets are used in the calculation of SG&A
efficiency ratio, which is SG&A before capitalized initial direct costs
divided by average total owned and managed assets.
(4) SG&A before capitalized initial direct costs is used in the calculation of
SG&A efficiency ratio, which is SG&A before capitalized initial direct
costs divided by average total owned and managed assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 2005, there have been no material changes in GATX's
interest rate and foreign currency exposures or types of derivative instruments
used to hedge these exposures, and no significant changes in underlying market
conditions. For a discussion of the Company's exposure to market risk refer to
Part II: Item 7A, Quantitative and Qualitative Disclosure about Market Risk
reported in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2005.
ITEM 4. 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
quarterly report, the Company's disclosure controls and procedures were
effective.
No change in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and
31
15d-15(f)) occurred during the quarter ended June 30, 2006 that materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since December 31, 2005, there have been no material changes or new
developments in GATX's legal proceedings. For a discussion of these proceedings,
refer to Part I: Item 3, Legal Proceedings reported in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2005.
ITEM 1A. RISK FACTORS
Since December 31, 2005, there have been no material changes in GATX's
Risk Factors. For a discussion of GATX's risk factors refer to Part 1: Item 1A,
Risk Factors, reported in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 2005.
ITEM 6. EXHIBITS
Exhibits:
Reference is made to the exhibit index which is included herewith
and is incorporated by reference hereto.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATX CORPORATION
(Registrant)
/s/ Robert C. Lyons
-------------------------------------
Robert C. Lyons
Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: August 1, 2006
33
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
Filed with this Report:
31A. Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule
15d-14(a) (CEO Certification).
31B. Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule
15d-14(a) (CFO Certification).
32. Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO
Certification).
34