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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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: 51,273,235 shares of common
stock were outstanding as of October 13, 2006.
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GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2006
INDEX
Item No. Page No.
- -------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)................... 1
Consolidated Statements of Operations (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................................ 18
Business Overview......................................... 18
Financial Summary......................................... 19
Financial Performance Measures............................ 19
Comparison of Nine Months and Three Months Results of
Operations by Business Segment......................... 21
Cash Flow and Liquidity................................... 28
New Accounting Pronouncements............................. 29
Critical Accounting Policies.............................. 29
Non-GAAP Financial Performance Measures................... 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 32
Item 4. Controls and Procedures...................................... 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 33
Item 1A. Risk Factors................................................. 33
Item 6. Exhibits..................................................... 33
SIGNATURE............................................................. 34
EXHIBIT INDEX......................................................... 35
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
SEPTEMBER 30 DECEMBER 31
2006 2005
------------ -----------
ASSETS
CASH AND CASH EQUIVALENTS ............................................ $ 90.5 $ 106.0
RESTRICTED CASH ...................................................... 57.5 53.1
RECEIVABLES
Rent and other receivables ........................................... 93.6 81.4
Finance leases ....................................................... 361.9 313.6
Loans ................................................................ 23.1 37.3
Allowance for possible losses ........................................ (11.2) (12.7)
--------- ---------
467.4 419.6
OPERATING LEASE ASSETS, FACILITIES AND OTHER
Rail ................................................................. 4,201.4 3,728.1
Specialty ............................................................ 104.0 90.8
Other ................................................................ 361.3 234.9
Allowance for depreciation ........................................... (1,781.5) (1,741.6)
--------- ---------
2,885.2 2,312.2
INVESTMENTS IN AFFILIATED COMPANIES .................................. 310.5 283.9
GOODWILL ............................................................. 91.2 86.0
OTHER ASSETS ......................................................... 271.4 276.8
ASSETS OF DISCONTINUED OPERATIONS .................................... 1,561.9 1,706.8
--------- ---------
TOTAL ASSETS ......................................................... $ 5,735.6 $ 5,244.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ................................ $ 162.5 $ 166.1
DEBT
Commercial paper and bank credit facilities .......................... 285.9 57.0
Recourse ............................................................. 2,872.4 2,715.4
Nonrecourse .......................................................... 3.8 37.7
Capital lease obligations ............................................ 52.5 62.5
--------- ---------
3,214.6 2,872.6
DEFERRED INCOME TAXES ................................................ 753.0 683.4
OTHER LIABILITIES .................................................... 345.0 373.7
LIABILITIES OF DISCONTINUED OPERATIONS ............................... 131.0 126.3
--------- ---------
TOTAL LIABILITIES .................................................... 4,606.1 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 September 30, 2006 and
December 31, 2005, respectively; aggregate liquidation preference
of $1.1 million) .................................................. * *
Common stock ($0.625 par value, 120,000,000 authorized, 59,182,825 and
58,567,724 shares issued and 51,233,315 and 50,618,214 shares
outstanding as of September 30, 2006 and December 31, 2005,
respectively) ..................................................... 36.9 36.5
Additional paid in capital ........................................... 459.0 424.6
Retained earnings .................................................... 740.1 696.0
Accumulated other comprehensive income (loss) ........................ 22.0 (6.3)
Treasury shares, at cost (7,949,510 shares at September 30, 2006 and
December 31, 2005) ................................................ (128.5) (128.5)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ........................................... 1,129.5 1,022.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 5,735.6 $ 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 OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
GROSS INCOME
Lease income ......................................................... $ 208.1 $ 191.5 $ 612.2 $ 565.7
Marine operating revenue ............................................. 76.1 46.5 139.2 92.5
Interest income on loans ............................................. 0.6 2.4 3.1 6.9
Asset remarketing income ............................................. 7.5 8.6 41.6 40.3
Fees ................................................................. 1.2 1.1 4.2 4.1
Other income ......................................................... 15.7 15.5 47.1 56.0
------- ------- ------- -------
Revenues .......................................................... 309.2 265.6 847.4 765.5
Share of affiliates' earnings ........................................ 26.8 20.3 63.2 61.6
------- ------- ------- -------
TOTAL GROSS INCOME ................................................... 336.0 285.9 910.6 827.1
OWNERSHIP COSTS
Depreciation ......................................................... 43.0 35.8 118.9 106.4
Interest expense, net ................................................ 34.5 25.2 94.6 80.0
Operating lease expense .............................................. 39.3 45.8 127.2 134.3
------- ------- ------- -------
TOTAL OWNERSHIP COSTS ................................................ 116.8 106.8 340.7 320.7
OTHER COSTS AND EXPENSES
Maintenance expense .................................................. 50.7 46.9 148.9 141.3
Marine operating expense ............................................. 58.9 37.0 107.7 72.3
Selling, general and administrative .................................. 36.2 34.7 106.7 101.9
Asset impairment charges ............................................. 0.6 0.7 3.8 4.1
Other expenses ....................................................... 8.6 10.8 21.5 37.9
------- ------- ------- -------
TOTAL OTHER COSTS AND EXPENSES ....................................... 155.0 130.1 388.6 357.5
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................ 64.2 49.0 181.3 148.9
INCOME TAXES ......................................................... 21.6 17.3 58.5 52.7
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS .................................... 42.6 31.7 122.8 96.2
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES (NOTE 12) ... (54.2) 2.6 (46.2) 1.4
------- ------- ------- -------
NET (LOSS) INCOME .................................................... $ (11.6) $ 34.3 $ 76.6 $ 97.6
======= ======= ======= =======
PER SHARE DATA
Basic:
Income from continuing operations .................................... $ 0.83 $ 0.63 $ 2.41 $ 1.92
(Loss) income from discontinued operations ........................... (1.06) 0.05 (0.91) 0.03
------- ------- ------- -------
Total ................................................................ $ (0.23) $ 0.68 $ 1.50 $ 1.95
======= ======= ======= =======
Average number of common shares (in thousands) ....................... 51,077 50,272 50,842 49,953
Diluted:
Income from continuing operations .................................... $ 0.74 $ 0.57 $ 2.14 $ 1.74
(Loss) income from discontinued operations ........................... (0.87) 0.04 (0.75) 0.02
------- ------- ------- -------
Total ................................................................ $ (0.13) $ 0.61 $ 1.39 $ 1.76
======= ======= ======= =======
Average number of common shares and common share equivalents (in
thousands) ........................................................ 62,002 61,326 61,963 60,899
Dividends declared per common share .................................. $ 0.21 $ 0.20 $ 0.63 $ 0.60
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
OPERATING ACTIVITIES
Net (loss) income .................................................... $ (11.6) $ 34.3 $ 76.6 $ 97.6
Less: (Loss) income from discontinued operations ..................... (54.2) 2.6 (46.2) 1.4
------- ------- ------- -------
Income from continuing operations .................................... 42.6 31.7 122.8 96.2
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Gain on sales of assets and securities ............................ (6.0) (8.2) (19.8) (30.2)
Depreciation ...................................................... 45.5 38.3 126.6 113.9
Asset impairment charges .......................................... 0.6 0.7 3.8 4.1
Deferred income taxes ............................................. 15.3 6.9 38.3 34.4
Share of affiliates' earnings, net of dividends ................... (26.3) (13.3) (51.5) (43.1)
Net decrease in operating lease payable ........................... (19.3) (24.4) (44.2) (43.9)
Other operating activities ........................................ 26.6 34.1 11.1 (3.8)
------- ------- ------- -------
Net cash provided by operating activities of continuing operations ... 79.0 65.8 187.1 127.6
INVESTING ACTIVITIES
Additions to equipment on lease, net of nonrecourse financing for
leveraged leases, operating lease assets and facilities ........... (166.8) (125.5) (499.9) (283.8)
Loans extended ....................................................... -- -- (4.8) --
Investments in affiliated companies .................................. -- -- (8.3) (22.6)
Other investments .................................................... (0.5) (20.2) (1.6) (24.9)
------- ------- ------- -------
Portfolio investments and capital additions .......................... (167.3) (145.7) (514.6) (331.3)
Purchase of leased in assets ......................................... -- -- (260.9) --
Proceeds from sale-leaseback ......................................... -- -- -- 201.3
Portfolio proceeds ................................................... 44.5 27.0 104.5 148.3
Proceeds from other asset sales ...................................... 6.4 20.0 19.9 30.9
Net decrease (increase) in restricted cash ........................... 8.9 (6.6) (4.2) (3.7)
------- ------- ------- -------
Net cash (used in) provided by investing activities of continuing
operations ........................................................ (107.5) (105.3) (655.3) 45.5
FINANCING ACTIVITIES
Proceeds from issuances of debt (original maturities longer than 90
days) ............................................................. 25.3 8.6 370.4 336.0
Repayments of debt (original maturities longer than 90 days) ......... (28.0) (6.6) (155.7) (481.2)
Net (decrease) increase in debt with original maturities of 90 days or
less .............................................................. (32.4) 2.3 229.2 (56.0)
Payments on capital lease obligations ................................ (4.7) (4.4) (10.0) (11.6)
Issuance of common stock and other ................................... 0.2 13.5 18.3 22.1
Cash dividends ....................................................... (10.7) (10.1) (32.2) (30.0)
------- ------- ------- -------
Net cash (used in) provided by financing activities of continuing
operations ........................................................ (50.3) 3.3 420.0 (220.7)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ......... 0.4 (0.3) 1.5 (1.2)
CASH FLOWS OF DISCONTINUED OPERATIONS (SEE NOTE 12)
Net cash provided by operating activities ............................ 20.5 30.0 74.8 62.4
Net cash provided by investing activities ............................ 69.7 14.4 59.5 91.9
Net cash used in financing activities ................................ (68.4) (16.6) (103.1) (65.4)
------- ------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE
PERIOD ............................................................ (56.6) (8.7) (15.5) 40.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 147.1 112.2 106.0 63.4
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 90.5 $ 103.5 $ 90.5 $ 103.5
======= ======= ======= =======
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 two operating segments: GATX
Rail ("Rail") and GATX Specialty ("Specialty"). GATX specializes in railcar and
locomotive 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.
On September 28, 2006, GATX signed a definitive agreement to sell the
majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited
("MALL"). Previously, GATX signed definitive agreements for the sale of 22
wholly owned and partnered aircraft along with letters of intent for an
additional five partnered aircraft and sold its interest in its Pembroke
affiliate. The combination of the pending and completed sales will result in the
disposition of substantially all of GATX's aircraft leasing operation (formerly
the "Air" segment). Accordingly, Air has been segregated and classified as
discontinued operations for all periods presented. Prior to 2006, GATX completed
the sale of substantially all the assets and related nonrecourse debt of its
former Technology segment ("Technology"). Financial data for Technology has also
been segregated and reported 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 nine months ended September 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.
The Company's investment in an aircraft engine leasing joint venture and
certain other items that historically were reported in Air will not be sold as
part of the Air disposition. For segment reporting purposes, the related balance
sheet carrying amounts, earnings and cash flows related to these items have been
transferred to Specialty. Historical financial information has been restated and
all periods presented reflect this transfer. Certain other reclassifications
have also 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 transition
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 nine month periods ended September 30,
2005, had the Company applied the fair value recognition provisions of SFAS 123
(in millions, except for per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2005 2005
------------------ -----------------
Net income, as reported .............................................. $34.3 $97.6
Add: Stock-based compensation expense, net of tax .................... 0.7 1.8
Deduct: Total stock-based employee compensation expense determined
under the fair value-based method for all awards, net of tax ...... (1.2) (3.3)
----- -----
Pro forma net income ................................................. $33.8 $96.1
===== =====
EARNINGS PER SHARE:
Basic, as reported ................................................... $0.68 $1.95
Basic, pro forma ..................................................... 0.67 1.92
Diluted, as reported ................................................. 0.61 1.76
Diluted, pro forma ................................................... 0.60 1.74
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") 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 leveraged lease is
revised, the rate of return and the allocation of income should 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
financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), 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, classification, interest and penalties, accounting in interim
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
periods and financial statement disclosure requirements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. GATX is currently evaluating the
impact of adopting this interpretation on its financial position and results of
operations.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year financial
statement misstatements should be considered in quantifying a current year
misstatement. Prior practice allowed the evaluation of materiality on the basis
of (1) the error quantified as the amount by which the current year income
statement was misstated ("rollover method") or (2) the cumulative error
quantified as the cumulative amount by which the current year balance sheet was
misstated ("iron curtain method"). Sole reliance on either method in prior years
could have resulted in misstatement of the financial statements. The guidance
provided in SAB 108 requires both methods to be used in evaluating materiality.
SAB 108 is effective as of the end of GATX's 2006 fiscal year, allowing a
one-time transitional cumulative effect adjustment to retained earnings as of
January 1, 2006, for errors that were not previously deemed material, but are
material under the guidance in SAB 108. GATX is currently evaluating the impact
of adopting SAB 108 on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
This statement defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in generally accepted
accounting principles ("GAAP") and expands disclosure requirements related to
the use of fair value measures in financial statements. SFAS No. 157 does not
modify the use of fair value measures in financial statements, but standardizes
its definition and guidance in GAAP. The statement emphasizes that fair value is
a market-based measurement and not an entity-specific measurement based on an
exchange transaction in which the entity sells an asset or transfers a liability
(exit price). SFAS No. 157 establishes a fair value hierarchy from observable
market data as the highest level to fair value based on an entity's own
assumptions as the lowest level. The statement is effective for financial
statements issued in 2008, however, earlier application is encouraged. The
application of this statement is not expected to be material to the Company's
financial position or results of operations.
Also in September 2006, the FASB released SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R). Under the new
statement, companies must report the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position and recognize any changes in that funded status in the year
in which the changes occur through comprehensive income. The recognition and
disclosure provisions of SFAS 158 are effective as of December 31, 2006. The
application of this statement will have no effect on GATX's results of
operations and the impact on GATX's financial position is not expected to be
material.
FSP AUG AIR-1, Accounting for Planned Major Maintenance Activities, was
also released by the FASB in September 2006. FSP AUG AIR-1 amends the guidance
on the accounting for planned major maintenance activities; specifically it
precludes the use of the previously acceptable "accrue in advance" method. FSP
AUG AIR-1 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
financial position or results of operations.
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 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.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Operating results from continuing operations for GATX's affiliates assuming
GATX held a 100% interest, were (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- ------- ------ --------
Revenues.............................................................. $157.2 $141.4 $419.0 $400.1
Pre-tax income reported by affiliates................................. 65.6 48.9 158.7 135.7
NOTE 5. PENSION AND OTHER POST-RETIREMENT BENEFITS
The components of pension and other post-retirement benefit costs for the
three months ended September 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 $1.6 $0.1 $0.1
Interest cost ........................................................ 5.5 5.6 1.0 1.0
Expected return on plan assets ....................................... (7.4) (7.6) -- --
Amortization of:
Unrecognized prior service cost ................................... -- -- -- --
Unrecognized net loss ............................................. 1.1 0.8 0.1 0.3
---- ---- ---- ----
Net costs ............................................................ $0.7 $0.4 $1.2 $1.4
==== ==== ==== ====
The components of pension and other post-retirement benefit costs for the
nine months ended September 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 ......................................................... $ 4.5 $ 4.6 $0.3 $0.3
Interest cost ........................................................ 16.5 17.0 3.2 3.2
Expected return on plan assets ....................................... (22.2) (22.6) -- --
Amortization of:
Unrecognized prior service cost ................................... 3.3 0.2 -- --
Unrecognized net loss ............................................. 0.1 2.0 0.4 0.5
----- ----- ---- ----
Net costs ............................................................ $ 2.2 $ 1.2 $3.9 $4.0
===== ===== ==== ====
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 September 30, 2006, contributions
of $0.8 million have been made to the foreign and domestic pension plans and
contributions of $5.7 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.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 6. COMMERCIAL COMMITMENTS
In connection with certain investments or transactions, GATX has entered
into various commercial commitments, such as guarantees and standby letters of
credit, which could potentially require performance in the event of demands by
third parties. Similar to GATX's balance sheet investments, these commitments
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 commercial commitments of continuing
operations as of (in millions):
SEPTEMBER 30 DECEMBER 31
2006 2005
------------ -----------
Affiliate guarantees ................................................. $ 21.0 $ 21.6
Asset residual value guarantees ...................................... 140.9 368.6
Lease payment guarantees ............................................. 25.3 27.3
Other guarantee ...................................................... 77.8 77.8
------ ------
Total guarantees .................................................. 265.0 495.3
Standby letters of credit and bonds .................................. 21.2 23.6
------ ------
$286.2 $518.9
====== ======
At September 30, 2006, the maximum potential amount of guarantees under
which GATX or its subsidiaries could be required to perform was $265.0 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 or share of affiliates' earnings in the
consolidated statements of operations. Based on known facts and current market
conditions, management does not believe that the asset residual value guarantees
will result in any significant adverse financial impact to the Company.
Accordingly, the Company has not recorded any accrual for contingent losses with
respect to the residual value guarantees as of September 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 are 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 September 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.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
46(R), Consolidation of Variable Interest Entities ("FIN 46(R)"). 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. These entities are generally
involved in railcar and equipment leasing activities. The nature of GATX's
involvement with these entities primarily consists of equity investments and
leveraged leases. GATX continues to evaluate new investments for the application
of FIN 46(R) and regularly reviews all existing VIE's in connection with any
reconsideration events as defined in FIN 46(R) that may result in GATX becoming
the primary beneficiary. For continuing operations, GATX's maximum exposure to
loss with respect to these VIEs is approximately $208.7 million of which $183.4
million was the aggregate carrying value of these investments recorded on the
balance sheet at September 30, 2006.
NOTE 8. COMPREHENSIVE INCOME
The components of comprehensive income were as follows (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- ------- ------ --------
Net (loss) income .................................................... $(11.6) $ 34.3 $ 76.6 $ 97.6
Other comprehensive income, net of tax:
Foreign currency translation gain (loss) .......................... 5.7 (7.4) 22.5 (37.9)
Unrealized gain (loss) on securities .............................. 1.6 (0.2) 1.0 (3.7)
Unrealized (loss) gain on derivative instruments .................. (6.6) 11.2 4.8 12.0
Minimum pension liability adjustment .............................. -- -- -- --
------ ------ ------ ------
COMPREHENSIVE (LOSS) INCOME .......................................... $(10.9) $ 37.9 $104.9 $ 68.0
====== ====== ====== ======
9
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 September 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 nine 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 No. 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 No. 123(R). For the three and nine months
ended September 30, 2006, the total share-based compensation expense was $2.1
million ($1.3 million after tax) and $6.3 million ($3.8 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, cancelled, or expired. 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 used in valuing its option/SAR awards were: 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/SAR (based on historical exercise patterns and post-vesting
termination behavior). Additionally, since GATX's options/SARs are dividend
participating, the value of each option/SAR also reflects the present value of
the expected dividend equivalents to be paid during the estimated 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
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Certain data with respect to stock options/SARs activity for the nine
months ended September 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 ............................................................ (641) $30.46 $ 642
Forfeited/Cancelled/Expired .......................................... (83) $30.45
Outstanding at end of period ......................................... 2,613 $32.61 4.7 $23,144
Exercisable at the end of the period ................................. 2,165 $32.32 4.4 $19,842
As of September 30, 2006, there was $4.4 million of unrecognized
compensation expense related to nonvested options/SARs, which is expected to be
recognized over a weighted averaged period of 1.9 years. Cash received from
employee exercises of options, for the nine months ended September 30, 2006, was
$18.3 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. Performance shares do not carry voting rights. Recipients of
performance shares are credited with dividend equivalents on the number of
shares that are converted to restricted stock. 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 September 30, 2006, there
was $5.6 million of unrecognized compensation expense related to these awards,
which is expected to be recognized over a weighted average period of 1.9 years.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Certain data with respect to restricted stock and performance share
activity for the nine months ended September 30, 2006 are set forth below:
NUMBER OF SHARE UNITS WEIGHTED AVERAGE
OUTSTANDING GRANT-DATE FAIR VALUE
--------------------- ---------------------
RESTRICTED STOCK:
Nonvested at beginning of the period ................................. 88,246 $33.03
Granted .............................................................. 58,050 38.71
Vested ............................................................... -- --
Forfeited ............................................................ (10,450) 34.23
-------
Nonvested at end of period ........................................... 135,846 $35.36
=======
PERFORMANCE SHARES:
Nonvested at beginning of the period ................................. 150,292 $27.70
Granted .............................................................. 57,910 38.71
Vested ............................................................... -- --
Forfeited ............................................................ (11,885) 29.29
-------
Nonvested at end of period ........................................... 196,317 $30.85
=======
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, common shares in the Company. Phantom stock awards are
dividend participating with all dividends reinvested in additional phantom
shares at the average of the high and low trading prices of GATX stock on the
dividend declaration date. At the expiration of each director's service on the
Board, settlement of whole units of phantom stock will be made in shares of
common stock and fractional units will be paid in cash. In 2006, GATX granted
10,003 units of phantom stock and 118,479 units were outstanding as of September
30, 2006.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share was 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, were
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 was 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 September 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 also
included in the calculation of diluted earnings per share for each of the 2006
and 2005 periods. As of September 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.
12
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------ ----- ------ ------
NUMERATOR:
Income from continuing operations ................................. $ 42.6 $31.7 $122.8 $ 96.2
(Loss) income from discontinued operations ........................ (54.2) 2.6 (46.2) 1.4
Less: Dividends paid and accrued on preferred stock ............ * * * *
------ ----- ------ ------
NUMERATOR FOR BASIC EARNINGS PER SHARE - INCOME AVAILABLE TO COMMON
SHAREHOLDERS) ..................................................... (11.6) 34.3 76.6 97.6
Effect of dilutive securities:
Add: Dividends paid and accrued on preferred stock ............. * * * *
After-tax interest expense on convertible securities ...... 3.2 3.2 9.7 9.7
------ ----- ------ ------
NUMERATOR FOR DILUTED EARNINGS PER SHARE - INCOME AVAILABLE TO COMMON
SHAREHOLDERS (a) .................................................. $ (8.4) $37.5 $ 86.2 $107.3
DENOMINATOR:
DENOMINATOR FOR BASIC EARNINGS PER SHARE - WEIGHTED AVERAGE SHARES ... 51.1 50.3 50.8 50.0
Effect of dilutive securities:
Stock based incentive plans ....................................... 0.6 0.7 0.7 0.5
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) ........................................ 62.0 61.3 62.0 60.9
BASIC EARNINGS PER SHARE:
Income from continuing operations .................................... $ 0.83 $0.63 $ 2.41 $ 1.92
(Loss) income from discontinued operations ........................... (1.06) 0.05 (0.91) 0.03
------ ----- ------ ------
TOTAL BASIC EARNINGS PER SHARE ....................................... $(0.23) $0.68 $ 1.50 $ 1.95
====== ===== ====== ======
DILUTED EARNINGS PER SHARE:
Income from continuing operations .................................... $ 0.74 $0.57 $ 2.14 $ 1.74
(Loss) income from discontinued operations ........................... (0.87) 0.04 (0.75) 0.02
------ ----- ------ ------
TOTAL DILUTED EARNINGS PER SHARE ..................................... $(0.13) $0.61 $ 1.39 $ 1.76
====== ===== ====== ======
* Less than $0.1 million.
(a) Diluted earnings per share results may not be additive due to rounding.
13
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 two operating segments: Rail and
Specialty. In addition, GATX operates a fleet of self-unloading vessels on the
Great Lakes through its wholly owned subsidiary, American Steamship Company.
Previously, as discussed in Note 1, GATX also operated a Technology and an Air
segment. The sale of Technology was substantially completed in 2004 while the
sale of Air is pending. As a result of these actions, the Technology and Air
segments have been segregated and reported as discontinued operations for all
periods presented.
The Company's investment in an aircraft engine leasing joint venture and
certain other items that historically were reported in the Air segment will not
be sold as part of the Air disposition. The related balance sheet carrying
amounts, earnings and cash flows related to these items have been transferred to
Specialty. Historical financial information has been restated and all periods
presented reflect this transfer. Certain other reclassifications have also been
made to the 2005 consolidated financial statements to conform to the 2006
presentation.
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.
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 primarily consists 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 measures 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, employee benefits, risk management, legal and tax. 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 and to the
discontinued Air segment across all reporting periods, expressed as a ratio of
recourse debt (including off balance sheet debt) to equity. Unallocated debt and
related interest expense 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 and Specialty were set at 4.75:1 and 4:1, respectively. For 2005, the
leverage ratios were 4.5:1 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.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following tables present certain segment data from continuing
operations for the three and nine months ended September 30, 2006 and 2005 (in
millions):
INTER-
RAIL SPECIALTY OTHER SEGMENT TOTAL
-------- --------- ------ ------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2006
PROFITABILITY
Revenues ............................................................. $ 214.8 $ 17.7 $ 76.7 $ -- $ 309.2
Share of affiliates' earnings ........................................ 8.4 18.4 -- -- 26.8
-------- ------ ------ ------ --------
Total gross income ................................................... 223.2 36.1 76.7 -- 336.0
Depreciation ......................................................... 37.2 1.8 4.0 -- 43.0
Interest expense, net ................................................ 24.8 4.5 5.2 -- 34.5
Operating lease expense .............................................. 38.4 0.9 -- -- 39.3
Income (loss) from continuing operations before income taxes ......... 44.1 25.5 (5.2) (0.2) 64.2
Income (loss) from continuing operations ............................. 29.3 16.0 (2.5) (0.2) 42.6
-------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions .......................... 154.7 10.9 1.7 -- 167.3
-------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2006
Investments in affiliated companies .................................. 114.9 195.6 -- -- 310.5
Identifiable assets .................................................. 3,197.2 478.1 508.0 (9.6) 4,173.7
-------- ------ ------ ------ --------
INTER-
RAIL SPECIALTY OTHER SEGMENT TOTAL
-------- --------- ------ ------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2005
PROFITABILITY
Revenues ............................................................. $ 202.6 $ 14.9 $ 48.1 $ -- $ 265.6
Share of affiliates' earnings ........................................ 0.4 19.9 -- -- 20.3
-------- ------ ------ ------ --------
Total gross income ................................................... 203.0 34.8 48.1 -- 285.9
Depreciation ......................................................... 32.4 1.1 2.3 -- 35.8
Interest expense, net ................................................ 19.4 3.9 1.9 -- 25.2
Operating lease expense .............................................. 44.7 1.1 -- -- 45.8
Income (loss) from continuing operations before income taxes ......... 30.6 25.8 (7.4) -- 49.0
Income (loss) from continuing operations ............................. 20.7 15.9 (4.9) -- 31.7
-------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions .......................... 111.7 32.6 1.4 -- 145.7
-------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2005
Investments in affiliated companies .................................. 99.7 184.2 -- -- 283.9
Identifiable assets .................................................. 2,719.4 455.5 413.7 (51.0) 3,537.6
-------- ------ ------ ------ --------
INTER-
RAIL SPECIALTY OTHER SEGMENT TOTAL
-------- --------- ------ ------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2006
PROFITABILITY
Revenues ............................................................. $ 639.4 $ 65.9 $142.1 $ -- $ 847.4
Share of affiliates' earnings ........................................ 17.5 45.7 -- -- 63.2
-------- ------ ------ ------ --------
Total gross income ................................................... 656.9 111.6 142.1 -- 910.6
Depreciation ......................................................... 107.4 4.9 6.6 -- 118.9
Interest expense, net ................................................ 70.0 13.8 10.8 -- 94.6
Operating lease expense .............................................. 124.5 2.9 -- (0.2) 127.2
Income (loss) from continuing operations before income taxes ......... 125.8 78.5 (23.0) -- 181.3
Income (loss) from continuing operations ............................. 89.5 48.1 (14.7) (0.1) 122.8
-------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions .......................... 316.3 65.3 133.0 -- 514.6
-------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA AT SEPTEMBER 30, 2006
Investments in affiliated companies .................................. 114.9 195.6 -- -- 310.5
Identifiable assets .................................................. 3,197.2 478.1 508.0 (9.6) 4,173.7
-------- ------ ------ ------ --------
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
INTER-
RAIL SPECIALTY OTHER SEGMENT TOTAL
-------- --------- ------ ------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2005
PROFITABILITY
Revenues ............................................................. $ 602.0 $ 67.9 $ 95.6 $ -- $ 765.5
Share of affiliates' earnings ........................................ 10.4 51.2 -- -- 61.6
-------- ------ ------ ------ --------
Total gross income ................................................... 612.4 119.1 95.6 -- 827.1
Depreciation ......................................................... 99.0 3.1 4.3 -- 106.4
Interest expense, net ................................................ 61.5 14.0 4.5 -- 80.0
Operating lease expense .............................................. 131.4 3.1 -- (0.2) 134.3
Income (loss) from continuing operations before income taxes ......... 96.8 89.9 (38.0) 0.2 148.9
Income (loss) from continuing operations ............................. 63.8 56.1 (23.8) 0.1 96.2
-------- ------ ------ ------ --------
CAPITAL EXPENDITURES
Portfolio investments and capital additions .......................... 262.3 64.2 4.8 -- 331.3
-------- ------ ------ ------ --------
SELECTED BALANCE SHEET DATA AT DECEMBER 31, 2005
Investments in affiliated companies .................................. 99.7 184.2 -- -- 283.9
Identifiable assets .................................................. 2,719.4 455.5 413.7 (51.0) 3,537.6
-------- ------ ------ ------ --------
NOTE 12. DISCONTINUED OPERATIONS
On September 28, 2006, GATX signed a definitive agreement to sell the
majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited
("MALL"). Previously, GATX signed definitive agreements for the sale of 22
wholly owned and partnered aircraft along with letters of intent for an
additional five partnered aircraft and sold its interest in its Pembroke
affiliate. The combination of the pending and completed sales will result in the
disposition of substantially all of Air's operations. Accordingly, the Air
segment has been segregated and reported as discontinued operations for all
periods presented. GATX believes that the sale of its Air business will enable
it to realize greater value for its shareholders than could be realized from
continuing to own the business. Additionally, the sale will enable GATX to
pursue additional opportunities in its higher return Rail and Specialty
businesses.
Prior to 2006, GATX completed the sale of substantially all the assets and
related nonrecourse debt of its former Technology segment ("Technology").
Financial data for Technology has also been segregated and reported as
discontinued operations for all periods presented.
The following table summarizes certain operating data for Air and
Technology (in millions).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------ ----- ------ ------
Gross Income ......................................................... $ 54.3 $40.4 $144.9 $116.8
Pre-tax:
Income from operations ............................................ 13.5 3.5 37.0 1.7
Loss on disposal of Air ........................................... (42.0) -- (52.6) --
------ ----- ------ ------
(Loss) income before taxes ........................................... (28.5) 3.5 (15.6) 1.7
Income from operations, net of taxes ................................. 8.5 2.6 22.9 1.4
Loss on disposal of Air, net of taxes ................................ (62.7) -- (69.1) --
------ ----- ------ ------
Net (loss) income from discontinued operations ....................... $(54.2) $ 2.6 $(46.2) $ 1.4
====== ===== ====== ======
For the three months ended September 30, 2006, GATX's loss on disposal of
Air was comprised of aircraft related impairment charges of $47.8 million,
consisting of a $44.7 million charge to write down the value of the majority of
the aircraft leasing business to fair value (based on the contract purchase
price) less costs to sell, $3.1 million of losses (net of recoveries) on sales
of aircraft previously identified as held for sale and $5.8 million of net
recoveries from the completed sales of GATX's interest in its Pembroke affiliate
and aircraft held in other joint ventures. Taxes associated with the disposal
include an estimated expense of $36.5 million related to the recapture of
previously deducted foreign losses related to GATX's interests in certain
foreign affiliates.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
For the nine months ended September 30, 2006, GATX's loss on disposal of
Air was comprised of aircraft related impairment charges of $58.4 million,
consisting of the previously mentioned $44.7 million impairment charge, $13.7
million of losses (net of recoveries) on sales of aircraft previously identified
as held for sale and $5.8 million of net recoveries from the completed sales of
GATX's interest in its Pembroke affiliate and aircraft held in other joint
ventures. Taxes associated with the disposal include an estimated expense of
$36.5 million related to the recapture of previously deducted foreign losses
related to GATX's interests in certain foreign affiliates.
Results of operations for discontinued operations include a corporate
allocation for interest expense. Interest expense was allocated based on a fixed
recourse leverage ratio of 3:1. Interest expense allocated was $4.5 million and
$6.9 million for the three months ended September 30, 2006 and 2005,
respectively, and $13.7 million and $20.1 million for the nine months ended
September 30, 2006 and 2005, respectively.
The following table summarizes the components of discontinued operations
reported on the Consolidated Statements of Cash Flows (in millions). The
majority of the cash flows relate to Air, however, Technology proceeds of $0.9
million received in the third quarter of 2006 from the sale of an asset and $9.1
million received in the first nine months of 2005 from the sale of joint venture
interests are also included.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- -------- ------ --------
OPERATING ACTIVITIES
Net cash provided by operating activities ......................... $ 20.5 $ 30.0 $ 74.8 $ 62.4
INVESTING ACTIVITIES
Portfolio investments and capital additions ....................... (2.0) (1.1) (51.2) (3.9)
Proceeds from sales of joint venture interests .................... 1.9 -- 32.5 9.1
Proceeds from sale of aircraft .................................... 58.9 9.9 58.9 73.7
Proceeds from other investing activities .......................... 10.9 5.6 19.3 13.0
------ ------ ------ ------
Net cash provided by investing activities ......................... 69.7 14.4 59.5 91.9
FINANCING ACTIVITIES
Repayments of debt (original maturities longer than 90 days) ...... (68.4) (16.6) (103.1) (65.4)
------ ------ ------ ------
CASH PROVIDED BY DISCONTINUED OPERATIONS, NET ........................ $ 21.8 $ 27.8 $ 31.2 $ 88.9
====== ====== ====== ======
17
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,
completion of the disposition of substantially all of GATX's aircraft leasing
operations, 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 two operating segments: GATX
Rail ("Rail") and GATX Specialty ("Specialty"). GATX specializes in railcar and
locomotive 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.
On September 28, 2006, GATX signed a definitive agreement to sell the
majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited
("MALL"). Previously, GATX signed definitive agreements for the sale of 22
wholly owned and partnered aircraft along with letters of intent for an
additional five partnered aircraft and sold its interest in its Pembroke
affiliate. The combination of the pending and completed sales will result in the
disposition of substantially all of GATX's aircraft leasing operation (formerly
the "Air" segment). Accordingly, Air has been segregated and classified as
discontinued operations for all periods presented. Prior to 2006, GATX completed
the sale of substantially all the assets and related nonrecourse debt of its
former Technology segment ("Technology"). Financial data for Technology has also
been segregated and reported as discontinued operations for all periods
presented.
The Company's investment in an aircraft engine leasing joint venture and
certain other items that historically were reported in Air will not be sold as
part of the Air disposition. For segment reporting purposes, the related balance
sheet carrying amounts, earnings and cash flows related to these items have been
transferred to Specialty. Historical financial information has been restated and
all periods presented reflect this transfer. Certain other reclassifications
have also been made to the 2005 consolidated financial statements to conform to
the 2006 presentation.
18
Operating results for the nine months ended September 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.
FINANCIAL SUMMARY
The following table presents net (loss) income by segment for the periods
indicated (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- -------- ------- -------
Rail ................................................................. $ 29.3 $ 20.7 $ 89.5 $ 63.8
Specialty ............................................................ 16.0 15.9 48.1 56.1
Other ................................................................ (2.5) (4.9) (14.7) (23.8)
Intersegment ......................................................... (0.2) -- (0.1) 0.1
------ ------ ------ ------
Income from continuing operations ................................. 42.6 31.7 122.8 96.2
Discontinued operations .............................................. (54.2) 2.6 (46.2) 1.4
------ ------ ------ ------
Net (loss) income ................................................. $(11.6) $ 34.3 $ 76.6 $ 97.6
====== ====== ====== ======
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
September 30.
2006 2005
------ ------
Return on equity (A) ................................................. 11.64% 15.93%
Return on assets (A) ................................................. 2.5% 3.4%
SG&A efficiency ...................................................... 2.56% 2.48%
(A) The 2005 measures were positively affected by non-operating events that
occurred in the fourth quarter of 2004, including gains on the sale of idle
property and tax benefits.
19
GATX RAIL
Components of Rail's statements of income are summarized below (in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------- -------- ------- -------
GROSS INCOME
Lease income ......................................................... $195.9 $183.5 $579.0 $542.3
Asset remarketing income ............................................. 4.1 4.9 15.8 13.1
Fees ................................................................. 0.5 0.4 1.3 1.3
Other income ......................................................... 14.3 13.8 43.3 45.3
------ ------ ------ ------
Revenues .......................................................... 214.8 202.6 639.4 602.0
Share of affiliates' earnings ........................................ 8.4 0.4 17.5 10.4
------ ------ ------ ------
TOTAL GROSS INCOME ................................................... 223.2 203.0 656.9 612.4
OWNERSHIP COSTS
Depreciation ......................................................... 37.2 32.4 107.4 99.0
Interest expense, net ................................................ 24.8 19.4 70.0 61.5
Operating lease expense .............................................. 38.4 44.7 124.5 131.4
------ ------ ------ ------
TOTAL OWNERSHIP COSTS ................................................ 100.4 96.5 301.9 291.9
OTHER COSTS AND EXPENSES
Maintenance expense .................................................. 50.7 46.9 148.9 140.6
Selling, general and administrative .................................. 19.8 18.3 59.7 53.6
Asset impairment charges ............................................. 0.6 0.7 0.9 2.6
Other expenses ....................................................... 7.6 10.0 19.7 26.9
------ ------ ------ ------
TOTAL OTHER COSTS AND EXPENSES ....................................... 78.7 75.9 229.2 223.7
------ ------ ------ ------
INCOME BEFORE INCOME TAXES ........................................... 44.1 30.6 125.8 96.8
INCOME TAXES ......................................................... 14.8 9.9 36.3 33.0
------ ------ ------ ------
NET INCOME ........................................................... $ 29.3 $ 20.7 $ 89.5 $ 63.8
====== ====== ====== ======
FINANCIAL PERFORMANCE MEASURES FOR RAIL
The following table summarizes the financial performance measures for the
trailing-12-month periods ended September 30:
2006 2005
----- -----
Return on assets ..................................................... 2.5% 2.0%
SG&A efficiency ...................................................... 1.83% 1.79%
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 nine months ended September 30:
2006 2005
------- -------
Beginning balance .................................................... 108,151 106,819
Cars added ........................................................... 4,008 3,798
Cars scrapped or sold ................................................ (3,055) (3,015)
------- -------
Ending balance ....................................................... 109,104 107,602
Utilization rate ..................................................... 98.5% 97.9%
20
RAIL REGULATORY UPDATE
On October 18, 2006, the Tank Car Committee of the Association of American
Railroads ("AAR") approved rules relating to new performance standards for tank
railcars that transport two hazardous materials, chlorine and anhydrous ammonia.
Pursuant to these rules, which are subject to appeal, 100% of existing railcars
transporting chlorine and anhydrous ammonia must comply with the new standards
by December 31, 2017 and railcar owners are required to submit implementation
plans to the AAR by December 31, 2007. GATX owns approximately 3,600 railcars
with a total carrying value of approximately $126 million that carry these
materials and will develop an implementation plan for submission to the AAR.
GATX believes that, of the approximately 2,100 cars currently utilized by its
customers to transport anhydrous ammonia, a significant portion can be deployed
into alternative services, which will allow those cars to remain in service
beyond the specified date of December 31, 2017. Based on management's review,
GATX does not expect the requirements contained in the new rules will have a
material impact on the Company's financial position or results of operations.
COMPARISON OF THE FIRST NINE MONTHS OF 2006 TO THE FIRST NINE MONTHS OF
2005.
SUMMARY
Rail continued to benefit from favorable conditions in its markets during
the nine 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. For the nine months of 2006, the
average North American renewal lease rate on a basket of common car types
increased 16.1% over the expiring rate. Additionally, Rail extended term on
certain renewals, an action that is expected to temper future earnings
volatility. Rail expects lease income to continue to increase in the fourth
quarter of 2006 and into 2007 when the full year effects of the 2006 lease rate
increases will be fully realized.
Notwithstanding the favorable market conditions benefiting Rail's
operations, the North American rail market appears to be showing signs of
speculation as some equipment lessors are acquiring railcars that are being held
in inventory. Additionally, Rail has noted indications that near term delivery
opportunities have materialized in some manufacturers' production backlogs.
These observations are not conclusive indicators that future lease rates may
come under pressure, however, Rail will be monitoring future developments
closely and remains committed to meeting customer needs while earning an
appropriate rate of return for GATX's shareholders.
During the nine months of 2006, Rail invested $316.3 million, acquiring
approximately 4,200 railcars and 47 locomotives. Rail also exercised two
purchase options on approximately 4,700 railcars leased in under operating
leases for an aggregate cost of $260.9 million. Additionally, during the third
quarter of 2006, Rail signed a purchase agreement with American Railcar
Industries, Inc. for delivery, beginning in 2008, of up to 4,000 newly
manufactured railcars. Investment volume for the comparable period of 2005
totaled $262.3 million, with Rail acquiring approximately 4,200 railcars and 12
locomotives. In 2005, Rail also completed a sale leaseback transaction for 2,900
railcars with a net book value of $170.0 million.
Rail's net income of $89.5 million for the nine months of 2006 was $25.7
million higher than the prior year period. The increase was driven primarily by
an average of 2,700 more railcars on lease than the comparable period of 2005 as
well as rate increases on both lease renewals and assignments of existing cars.
Additionally, Rail benefited from stronger affiliates' earnings and a $5.9
million deferred tax benefit recorded in the second quarter of 2006 due to a
reduction in Canadian statutory tax rates.
GROSS INCOME
Rail's gross income of $656.9 million for the nine months of 2006 was $44.5
million higher than the prior year period. In North America, lease income
increased $33.7 million primarily due to higher lease rates and an average of
2,100 more cars on lease compared to the first nine months of 2005.
Asset remarketing income increased $2.7 million versus the prior year
period. In 2006, Rail has capitalized on the stronger market conditions by
selling certain less desirable railcar types resulting in the current
remarketing gains.
Lower other income in 2006 primarily reflects lower repair revenues on
third party railcars, partially offset by higher gains in 2006 on the scrapping
of railcars. Repair revenues were lower in 2006 due to GATX's major service
centers focus on maintaining GATX's growing North American fleet in lieu of
third party railcars. Scrapping gains were higher in 2006 due to an increase in
the price of steel.
21
The increase in share of affiliates' earnings versus the prior year period
reflects mark to market gains of $4.9 million on certain derivative financial
instruments at the AAE Cargo affiliate. Prior year affiliates' earnings were
affected by the write down of an investment in a non-core foreign logistics
business, partially offset by an asset remarketing gain recognized by a domestic
affiliate. Excluding the items discussed herein from both years, affiliates'
earnings in 2006 were comparable to 2005.
OWNERSHIP COSTS
Ownership costs of $301.9 million for the nine months of 2006 were $10.0
million higher than the prior year period, reflective of increased interest
costs and depreciation associated with Rail's asset acquisitions. Over the past
21 months, Rail has invested approximately $710 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 a total of 4,700 railcars for an aggregate
cost of $260.9 million.
OTHER COSTS AND EXPENSES
Maintenance expense of $148.9 million for the nine months of 2006 was $8.3
million higher than the prior year period. 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 different types of
services. Rail continues to face the possibility of newly mandated security or
safety legislation or regulations, including the AAR action noted above, that,
if enacted, may increase future maintenance costs or negatively impact asset
valuations.
Selling, general and administrative costs were $6.1 million 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 $7.2 million lower than the prior year period. The
decrease was primarily due to lower claims related expenses, the reversal of an
environmental reserve at GATX Rail Europe resulting from a definitive government
ruling that reduced its liability and favorable foreign currency exchange gains.
Asset impairment charges in 2005 primarily reflect the write down of a repair
facility that was held for sale. The repair facility was sold during the current
year period for its adjusted book value.
TAXES
See "Consolidated Income Taxes" for a discussion of GATX's consolidated
income tax expense.
COMPARISON OF THIRD QUARTER 2006 TO THIRD QUARTER 2005
SUMMARY
Rail's net income of $29.3 million for the third quarter of 2006 was $8.6
million higher than the prior year period. The increase was driven primarily by
an average of 1,800 more railcars on lease than the prior period, an increase in
lease rates on lease renewals and assignments, and higher affiliates' earnings.
Partially offsetting the increase were higher ownership and maintenance costs on
the larger active fleet.
GROSS INCOME
Rail's gross income of $223.2 million for the third quarter of 2006 was
$20.2 million higher than the prior year period. In North America, lease income
increased $10.8 million, reflecting the effects of higher lease rates and an
average of 1,600 more cars on lease compared to the third quarter of 2005. Other
income was comparable to the prior period as higher gains on the scrapping of
railcars were offset by lower repair revenues. The increase in share of
affiliates' earnings versus the prior year period reflects mark to market gains
of $3.0 million on certain derivative financial instruments at the AAE Cargo
affiliate. Prior year affiliates' earnings were affected by the write down of an
investment in a non-core foreign logistics business. Excluding the items
discussed herein from both years, affiliates' earnings in 2006 were comparable
to 2005.
22
OWNERSHIP COSTS
Ownership costs of $100.4 million were $3.9 million higher than the prior
year period, reflective of increased interest costs and depreciation associated
with Rail's asset acquisition activity. The comparative mix among the ownership
cost components of depreciation, interest and operating lease expense was
impacted by Rail's exercise of purchase options on a total of 4,700 railcars
leased in under two operating leases for an aggregate cost of $260.9 million in
the first and second quarters of 2006.
OTHER COSTS AND EXPENSES
Maintenance expense increased $3.8 million from the prior year period to
$50.7 million. The increase reflects the costs associated with maintaining a
larger fleet, increased repairs performed by North American railroads and 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.
Other expenses were $2.4 million lower than the prior year period. The
decrease was primarily due to lower claims related expenses and the reversal of
an environmental reserve at GATX Rail Europe resulting from a definitive
government ruling that reduced its liability.
GATX SPECIALTY
Components of Specialty's statements of income are summarized below (in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
-------- ------- ------ --------
GROSS INCOME
Lease income ......................................................... $11.1 $ 7.1 $ 30.0 $ 22.5
Interest income on loans ............................................. 0.6 2.4 3.1 6.9
Asset remarketing income ............................................. 3.4 3.7 25.8 27.2
Fees ................................................................. 0.7 0.7 2.9 2.8
Other income ......................................................... 1.9 1.0 4.1 8.5
----- ----- ------ ------
Revenues ........................................................... 17.7 14.9 65.9 67.9
Share of affiliates' earnings ........................................ 18.4 19.9 45.7 51.2
----- ----- ------ ------
TOTAL GROSS INCOME ................................................... 36.1 34.8 111.6 119.1
OWNERSHIP COSTS
Depreciation ......................................................... 1.8 1.1 4.9 3.1
Interest expense, net ................................................ 4.5 3.9 13.8 14.0
Operating lease expense .............................................. 0.9 1.1 2.9 3.1
----- ----- ------ ------
TOTAL OWNERSHIP COSTS ................................................ 7.2 6.1 21.6 20.2
OTHER COSTS AND EXPENSES
Maintenance expense .................................................. -- -- -- 0.7
Selling, general and administrative .................................. 2.1 2.0 6.4 5.5
Asset impairment charges ............................................. -- -- 2.9 1.5
Other expenses ....................................................... 1.3 0.9 2.2 1.3
----- ----- ------ ------
TOTAL OTHER COSTS AND EXPENSES ....................................... 3.4 2.9 11.5 9.0
----- ----- ------ ------
INCOME BEFORE INCOME TAXES ........................................... 25.5 25.8 78.5 89.9
INCOME TAXES ......................................................... 9.5 9.9 30.4 33.8
----- ----- ------ ------
NET INCOME ........................................................... $16.0 $15.9 $ 48.1 $ 56.1
===== ===== ====== ======
23
FINANCIAL PERFORMANCE MEASURES FOR SPECIALTY
The following table summarizes the financial performance measures for the
trailing-12-month periods ended September 30:
2006 2005
----- -----
Return on assets ..................................................... 11.0% 12.9%
SG&A efficiency ...................................................... 0.95% 0.60%
For additional information see Non-GAAP Financial Performance Measures on
page 29.
SPECIALTY'S PORTFOLIO DATA
The following table summarizes information on Specialty's owned and managed
portfolio as of September 30 (in millions):
2006 2005
------ ------
Net book value of owned assets (A) ................................... $489.2 $474.4
Net book value of managed portfolio .................................. 474.4 560.0
(A) Includes off balance sheet assets
INVESTMENTS TRANSFERRED TO SPECIALTY FROM AIR
As previously mentioned, certain investments previously reported as part of
Air will not be disposed of as part of the Air disposition and have been
transferred to Specialty. The total carrying value of these investments was
$31.9 million and $33.5 million as of September 30, 2006 and 2005, respectively,
comprised primarily of GATX's 50% investment in an aircraft engine leasing joint
venture. Specialty's historical financial results for all periods presented have
been restated to reflect this transfer.
COMPARISON OF THE FIRST NINE MONTHS OF 2006 TO THE FIRST NINE MONTHS OF 2005.
SUMMARY
Specialty's net income of $48.1 million for the nine months of 2006 was
$8.0 million lower than the prior year period. The decrease was primarily due to
lower interest income, gains from the sale of securities and share of
affiliates' earnings, partially offset by higher lease income in the current
year.
During the nine months of 2006, Specialty's net book value of owned assets
increased $22.6 million to $489.2 million, reflecting GATX's efforts to grow
this segment by following a disciplined approach that focuses on marine and
select industrial equipment assets. In 2006, Specialty invested $65.3 million,
including $50.6 million for industrial equipment assets and $13 million for
marine assets.
GROSS INCOME
Gross income of $111.6 million was $7.5 million lower than the prior year.
Lease income increased primarily due to investments in new operating lease
assets and higher usage rent from certain marine assets. Interest income
decreased $3.8 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 dependent 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 $45.7 million decreased $5.5 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.
24
OWNERSHIP COSTS
Ownership costs of $21.6 million increased $1.4 million primarily as a
result of increased depreciation expense related to investments in new operating
lease assets.
OTHER COSTS AND EXPENSES
Other costs and expenses of $11.5 million increased $2.5 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.
COMPARISON OF THIRD QUARTER 2006 TO THIRD QUARTER 2005
SUMMARY
Specialty's net income of $16.0 million for the three months ended
September 30, 2006, was comparable to the prior year period. Increased lease
income offset the impact of lower interest income and affiliates' earnings in
the current year.
GROSS INCOME
Gross income of $36.1 million was $1.3 million higher than the prior year.
Lease income increased $4.0 million primarily due to investments in new
operating lease assets and higher usage rent on certain marine assets. Interest
income decreased $1.8 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 increased by $1.3 million from the prior year.
Share of affiliates' earnings of $18.4 million decreased $1.5 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 $1.1 million primarily as a
result of increased depreciation and interest expense related to investments in
new operating lease assets.
OTHER COSTS AND EXPENSES
Other costs and expenses of $3.4 million increased $0.5 million primarily
due to higher operating expenses for certain marine assets in the current year.
25
OTHER
Components of Other's statements of operations are summarized below (in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
----- ----- ------ ------
GROSS INCOME
Marine operating revenue ............................................. $76.1 $46.5 $139.2 $ 92.5
Lease income ......................................................... 1.1 0.9 3.2 0.9
Other income ......................................................... (0.5) 0.7 (0.3) 2.2
----- ----- ------ ------
TOTAL GROSS INCOME ................................................... 76.7 48.1 142.1 95.6
OWNERSHIP COSTS
Depreciation ......................................................... 4.0 2.3 6.6 4.3
Interest expense, net ................................................ 5.2 1.9 10.8 4.5
----- ----- ------ ------
TOTAL OWNERSHIP COSTS ................................................ 9.2 4.2 17.4 8.8
OTHER COSTS AND EXPENSES
Marine operating expense ............................................. 58.9 37.0 107.7 72.3
Selling, general and administrative .................................. 14.1 14.4 40.4 42.8
Other expenses ....................................................... (0.3) (0.1) (0.4) 9.7
----- ----- ------ ------
TOTAL OTHER COSTS AND EXPENSES ....................................... 72.7 51.3 147.7 124.8
----- ----- ------ ------
LOSS BEFORE INCOME TAXES ............................................. (5.2) (7.4) (23.0) (38.0)
INCOME TAX BENEFIT ................................................... (2.7) (2.5) (8.3) (14.2)
----- ----- ------ ------
NET LOSS ............................................................. $(2.5) $(4.9) $(14.7) $(23.8)
===== ===== ====== ======
Other is comprised of corporate results, including SG&A and interest
expense net of amounts allocated to the segments, and the results of ASC. In
June 2006, ASC acquired six vessels from Oglebay Norton Marine Services for
$126.3 million, bringing the total number of vessels in its fleet to 18.
COMPARISON OF THE FIRST NINE MONTHS OF 2006 TO THE FIRST NINE MONTHS OF 2005.
SUMMARY
For the nine months of 2006, Other reported a net loss of $14.7 million
compared to a net loss of $23.8 million in the prior year. 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, operating results
improved by $1.7 million primarily due to increased income from ASC, partially
offset by higher interest expense. The higher ASC net income was driven
primarily by the new vessels added to ASC's fleet, which led to significantly
higher marine operating revenues and expenses. The increased interest expense
was due to finance costs resulting from ASC's fleet acquisitions and higher
unallocated interest.
COMPARISON OF THIRD QUARTER 2006 TO THIRD QUARTER 2005
SUMMARY
For the third quarter of 2006, Other reported a net loss of $2.5 million
compared to a net loss of $4.9 million in the prior year. The improvement in
operating results from 2005 was primarily due to increased income from ASC,
partially offset by higher interest expense. The higher ASC net income was
driven primarily by the new vessels added to ASC's fleet, which led to
significantly higher marine operating revenues and expenses. The increased
interest expense was due to finance costs resulting from ASC's fleet
acquisitions and higher unallocated interest.
26
GATX CONSOLIDATED
CONSOLIDATED INCOME TAXES
GATX's effective tax rate for continuing operations was 32% for the nine
months ended September 30, 2006 compared to 35% for the nine months ended
September 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 36%, which reflects the impact of state
income taxes, partially offset by lower tax rates on foreign source income.
DISCONTINUED OPERATIONS
On September 28, 2006, GATX signed a definitive agreement to sell the
majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited
("MALL"). Previously, GATX signed definitive agreements for the sale of 22
wholly owned and partnered aircraft along with letters of intent for an
additional five partnered aircraft and sold its interest in its Pembroke
affiliate. The combination of the pending and completed sales will result in the
disposition of substantially all of Air's operations. GATX expects to complete
the remaining Air sales prior to the end of the year for estimated gross
proceeds (based on valuations as of September 30, 2006) of approximately $1.4
billion, of which approximately $0.8 billion will be used to repay Air specific
debt, transaction costs and income taxes. GATX has not yet determined the use of
the remaining proceeds.
GATX has been in the commercial aircraft leasing business since 1968,
building a valuable operating lease platform and portfolio of aircraft. GATX
believes that, relative to its competitors in the industry, its lower scale and
higher cost of capital put it at a competitive disadvantage and that the sale of
the Air business will enable it to realize greater value for its shareholders
than could be realized from continuing to own the business. Additionally, the
sale will enable GATX to pursue additional opportunities in its higher return
Rail and Specialty businesses.
Prior to 2006, GATX completed the sale of substantially all the assets and
related nonrecourse debt of its former Technology segment ("Technology").
Financial data for Technology has also been segregated and reported as
discontinued operations for all periods presented.
The following table summarizes certain operating data for Air and
Technology (in millions).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2006 2005 2006 2005
------ ----- ------ ------
Gross Income ......................................................... $ 54.3 $40.4 $144.9 $116.8
Pre-tax:
Income from operations ............................................ 13.5 3.5 37.0 1.7
Loss on disposal of Air ........................................... (42.0) -- (52.6) --
------ ----- ------ ------
(Loss) income before taxes ........................................... (28.5) 3.5 (15.6) 1.7
Income from operations, net of taxes ................................. 8.5 2.6 22.9 1.4
Loss on disposal of Air, net of taxes ................................ (62.7) -- (69.1) --
------ ----- ------ ------
Net (loss) income from discontinued operations ....................... $(54.2) $ 2.6 $(46.2) $ 1.4
====== ===== ====== ======
For the three months ended September 30, 2006, GATX's loss on disposal of
Air was comprised of aircraft related impairment charges of $47.8 million,
consisting of a $44.7 million charge to write down the value of the majority of
the aircraft leasing business to fair value (based on the contract purchase
price) less costs to sell, $3.1 million of losses (net of recoveries) on sales
of aircraft previously identified as held for sale and $5.8 million of net
recoveries from the completed sales of GATX's interest in its Pembroke affiliate
and aircraft held in other joint ventures. Taxes associated with the disposal
include an estimated expense of $36.5 million related to the recapture of
previously deducted foreign losses related to GATX's interests in certain
foreign affiliates.
For the nine months ended September 30, 2006, GATX's loss on disposal of
Air was comprised of aircraft related impairment charges of $58.4 million,
consisting of the previously mentioned $44.7 million impairment charge, $13.7
million of losses (net of recoveries) on sales of aircraft previously identified
as held for sale and $5.8 million of net recoveries from the completed sales
GATX's interest in its Pembroke affiliate and aircraft held in other joint
ventures. Taxes associated with the
27
disposal include an estimated expense of $36.5 million related to the recapture
of previously deducted foreign losses related to GATX's interests in certain
foreign affiliates.
Results of operations for discontinued operations include a corporate
allocation for interest expense. Interest expense was allocated based on a fixed
recourse leverage ratio of 3:1. Interest expense allocated was $4.5 million and
$6.9 million for the three months ended September 30, 2006 and 2005,
respectively, and $13.7 million and $20.1 million for the nine months ended
September 30, 2006 and 2005, respectively.
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 sale of Air is expected to have a positive impact on GATX's financial
condition and results of operations by eliminating the earnings volatility
experienced during GATX's tenure as an aircraft lessor. Additionally, the Air
sale may result in an upgrade to GATX's credit ratings, which should lower its
borrowing costs and related interest expense and improve its access to the
capital markets.
The following discussion of cash flow activity is presented excluding the
impact of discontinued operations.
Net cash provided by continuing operations for the nine months of 2006 was
$187.1 million, an increase of $59.5 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 nine months of 2006
totaled $514.6 million, an increase of $183.3 million from the comparable 2005
period. Rail's investments of $316.3 million were $54.0 million higher than the
prior year period and included the addition of approximately 4,200 railcars to
its fleet. Specialty's investments of $65.3 million in 2006 were comparable to
the prior year period. Significant 2006 activity at Specialty included $50.6
million of investments in industrial equipment and $13.0 million in marine
assets. ASC invested $127.8 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 a total of 4,700
railcars for an aggregate cost of $260.9 million.
Portfolio proceeds of $104.5 million for the nine months of 2006 decreased
$43.8 million compared to the prior year period. This was primarily due to a
decrease in proceeds from asset remarketing and sales of securities, partially
offset by increased distributions from joint venture investments. 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.
During 2006, GATX, through its principal subsidiary, GATX Financial
Corporation ("GFC"), issued long-term debt for net proceeds of $370.4 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
$276.0 million of commercial paper. Debt repaid in 2006 consisted primarily of
scheduled maturities and certain bank credit facilities.
Subsequent to quarter end, GFC issued $200.0 million of senior unsecured
notes with a coupon of 5.50% and a maturity date of February 15, 2012. The
proceeds 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 September 30, 2006, availability under the credit
facility was $229.8 million, with $19.2 million of letters of credit issued and
$276.0 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 September 30, 2006, GFC was in compliance with
all covenants and conditions of the credit facility.
28
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 September 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 September 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 $200.0 million senior unsecured
notes, issued subsequent to the end of the third quarter, were also issued from
the shelf registration. As a result, $696.5 million of senior unsecured notes
have been issued from the shelf registration.
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 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. During the third quarter of 2006, GFC continued to
successfully utilize the commercial paper market as a source of liquidity,
however, the Moody's short-term unsecured debt rating of P-3 may restrict GFC's
future ability to utilize this market.
On September 28, 2006, S&P placed the ratings of GATX and GFC on
CreditWatch with positive implications based on GATX's announcement that it had
reached a definitive agreement to sell the majority of its remaining aircraft
leasing operation to MALL. Moody's also placed the credit ratings of GFC on
review for possible upgrade as a result of the announcement.
During 2006, unconditional purchase obligations from continuing operations
increased $266.0 million from December 31, 2005, primarily due to new
commitments to purchase railcars. At September 30, 2006, unconditional purchase
obligations from continuing operations consisted primarily of railcar orders and
were comprised as follows (in millions):
REMAINDER
TOTAL 2006 2007-2008 2009
------ --------- --------- -----
Rail ................................................................. $547.9 $147.0 $313.6 $87.3
Specialty ............................................................ 34.1 31.6 2.5 --
------ ------ ------ -----
Total unconditional purchase obligations ......................... $582.0 $178.6 $316.1 $87.3
====== ====== ====== =====
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 nine month period ending September 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
29
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.
30
RECONCILIATION OF THE NON-GAAP COMPONENTS USED IN THE COMPUTATION OF
CERTAIN FINANCIAL PERFORMANCE MEASURES (IN MILLIONS):
SEPTEMBER 30
------------------------------
2006 2005 2004
-------- -------- --------
BALANCE SHEET ASSETS AS REPORTED ..................................... $5,735.6 $5,384.2 $5,648.2
LESS: DISCONTINUED OPERATIONS ........................................ 1,561.9 1,923.5 2,083.4
-------- -------- --------
CONSOLIDATED ON BALANCE SHEET ASSETS ................................. $4,173.7 $3,460.7 $3,564.8
ON BALANCE SHEET ASSETS BY SEGMENT
Rail ................................................................. $3,197.2 $2,624.0 $2,641.8
Specialty ............................................................ 478.1 462.2 551.1
Other ................................................................ 498.4 374.5 371.9
-------- -------- --------
Consolidated ...................................................... $4,173.7 $3,460.7 $3,564.8
OFF BALANCE SHEET ASSETS(1)
Rail ................................................................. $1,302.0 $1,431.3 $1,340.4
Specialty ............................................................ 11.1 12.2 13.3
-------- -------- --------
Consolidated ...................................................... $1,313.1 $1,443.5 $1,353.7
TOTAL ON AND OFF BALANCE SHEET ASSETS(2)
Rail ................................................................. $4,499.2 $4,055.3 $3,982.2
Specialty ............................................................ 489.2 474.4 564.4
Other ................................................................ 498.4 374.5 371.9
-------- -------- --------
Consolidated ...................................................... $5,486.8 $4,904.2 $4,918.5
MANAGED ASSETS
Rail ................................................................. $ 38.2 $ 34.3 $ 99.1
Specialty ............................................................ 474.4 560.0 778.3
-------- -------- --------
Consolidated ...................................................... $ 512.6 $ 594.3 $ 877.4
TOTAL OWNED AND MANAGED ASSETS(3)
Rail ................................................................. $4,537.4 $4,089.6 $4,081.3
Specialty ............................................................ 963.6 1,034.4 1,342.7
Other ................................................................ 498.4 374.5 371.9
-------- -------- --------
Consolidated ...................................................... $5,999.4 $5,498.5 $5,795.9
======== ======== ========
31
The following information is based on continuing operations for the
trailing-12-months ended September 30 (in millions):
2006 2005
------ ------
INCOME FROM CONTINUING OPERATIONS AS REPORTED
Rail ................................................................. $107.4 $ 79.6
Specialty ............................................................ 52.9 67.6
Other ................................................................ (28.2) 22.0
------ ------
Consolidated ...................................................... $132.1 $169.2
SG&A AS REPORTED
Rail ................................................................. $ 79.1 $ 73.2
Specialty ............................................................ 8.6 7.0
Other ................................................................ 58.5 59.9
------ ------
Consolidated ...................................................... $146.2 $140.1
INITIAL DIRECT COSTS
Specialty ............................................................ 0.9 --
------ ------
Consolidated ...................................................... $ 0.9 $ --
SG&A BEFORE CAPITALIZED INITIAL DIRECT COSTS(4)
Rail ................................................................. $ 79.1 $ 73.2
Specialty ............................................................ 9.5 7.0
Other ................................................................ 58.5 59.9
------ ------
Consolidated ...................................................... $147.1 $140.1
====== ======
(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 15d-15(f)) occurred during the
quarter ended September 30, 2006, that materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FLIGHTLEASE HOLDINGS (GUERNSEY) LTD. V. GATX FINANCIAL CORPORATION, ET AL.
The information contained in "Item 3. Legal Proceedings - Flightlease
Holdings (Guernsey) Ltd. v. GATX Financial Corporation, et al." of GATX
Corporation's Annual Report on Form 10-K for the period ended December 31, 2005
is incorporated herein by reference ("FHG Action").
A Tolling and Standstill Agreement (the "Agreement") was entered into on
October 13, 2006, among GATX Flightlease Aircraft Company Ltd. ("GFAC"),
Flightlease Holdings (Guernsey) Limited ("FHG"), Stephen John Akers, an
individual, in his capacity as Liquidator of FHG, Nick Stuart Wood, an
individual, in his capacity as Liquidator of FHG, GATX Financial Corporation
("GFC"), GATX Third Aircraft Corporation ("Third Aircraft"), James H. Morris, an
individual, in his capacity as a director of GFAC, and Alan Reinke, an
individual, in his capacity as a director of GFAC which, among other things,
provides for a standstill of claims or potential claims between or among the
parties. Pursuant to the Agreement, the FHG Action was dismissed without
prejudice and the governing statutes of limitation were tolled with respect to
any claims, counterclaims and defenses asserted in the FHG Action. The Agreement
also provides that FHG shall not bring any claims asserted in the FHG Action (or
any substantially similar claims) against GFC, Third Aircraft, GFAC, or Messrs.
Morris or Reinke until the conclusion of GFAC's action against Airbus in GATX
Flightlease Aircraft Company Limited v. Airbus S.A.S., pending in the Supreme
Court of the State and County of New York (the "Airbus Action"). In the event
that GFC or Third Aircraft seek and are permitted to intervene in the Airbus
Action, FHG can seek to amend its intervenor's complaint in this action to
include claims against GFC or Third Aircraft, including claims made in the FHG
Action, but GFC and Third Aircraft can oppose any such effort by FHG. The
Agreement does not resolve the merits or liability for (or against) any claims
nor require payment of any monetary compensation by any party to any other.
In connection with the Agreement, FHG and Messrs. Morris and Reinke, as
directors of GFAC, executed an agreement which provides, among other things,
that FHG would take the lead role in litigating the Airbus Action and would fund
all fees, costs and expenses of the litigation other than those fees, costs and
expenses incurred by GFAC at the direction, or related to the depositions, of
Messrs. Morris and Reinke.
Since December 31, 2005, there have been no other material changes or new
developments in GATX's legal proceedings.
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.
33
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: November 2, 2006
34
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
Filed with this Report:
10. Sale and Purchase Agreement dated as of September 28, 2006 between
GATX Financial Corporation and Macquarie Aircraft Leasing Limited.
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).
35