-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IFGmO/HVH1gg64sbpy9C5BIr/DsEe6B1UEVAPWS0R4OFb7CwA6quJc8b4DuJWkAy 1TZp6Qz3mWpd7yJoSGqkoA== 0000950137-02-003116.txt : 20020515 0000950137-02-003116.hdr.sgml : 20020515 20020515161531 ACCESSION NUMBER: 0000950137-02-003116 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATX FINANCIAL CORP CENTRAL INDEX KEY: 0000357019 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 941661392 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08319 FILM NUMBER: 02652544 BUSINESS ADDRESS: STREET 1: 500 W MONROE ST CITY: CHICAGO STATE: IL ZIP: 60661-3676 BUSINESS PHONE: 4159553200 FORMER COMPANY: FORMER CONFORMED NAME: GATX CAPITAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GATX LEASING CORP DATE OF NAME CHANGE: 19900405 10-Q 1 c69728e10-q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended Commission File Number March 31, 2002 1-8319 --------------------- GATX FINANCIAL CORPORATION Incorporated in the IRS Employer Identification No. State of Delaware 94-1661392 500 West Monroe Street Chicago, IL 60661-3676 (312) 621-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No --- --- Registrant had 1,031,250 shares of $1 par value common stock outstanding (all owned by GATX Corporation) as of April 30, 2002. ================================================================================ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS) THREE MONTHS ENDED MARCH 31 ------------------ 2002 2001 ---- ---- GROSS INCOME Revenues $307.5 $361.2 Gain on extinguishment of debt 13.9 -- Share of affiliates' earnings 18.0 14.5 ------ ------ TOTAL GROSS INCOME 339.4 375.7 OWNERSHIP COSTS Depreciation and amortization 92.1 101.8 Interest, net 52.8 62.3 Operating lease expense 44.1 47.1 ------ ------ TOTAL OWNERSHIP COSTS 189.0 211.2 OTHER COSTS AND EXPENSES Operating expenses 43.6 61.1 Selling, general and administrative 40.3 53.5 Provision for possible losses 17.7 21.3 Asset impairment charges 2.6 -- Fair value adjustments for derivatives 1.3 1.1 ------ ------ TOTAL OTHER COSTS AND EXPENSES 105.5 137.0 ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 44.9 27.5 INCOME TAXES 16.7 11.4 ------ ------ INCOME FROM CONTINUING OPERATIONS 28.2 16.1 DISCONTINUED OPERATIONS Operating results, net of taxes -- 3.1 Gain on sale of portion of segment, net of taxes 6.2 171.4 ------ ------ TOTAL DISCONTINUED OPERATIONS 6.2 174.5 ------ ------ NET INCOME $ 34.4 $190.6 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 1 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS) MARCH 31 DECEMBER 31 2002 2001 ---------- ----------- (Unaudited) ASSETS CASH AND CASH EQUIVALENTS $ 184.9 $ 222.7 RESTRICTED CASH 123.3 124.4 RECEIVABLES Rent and other receivables 127.1 125.4 Finance leases 810.4 853.0 Secured loans 503.2 557.4 Less - allowance for possible losses (87.5) (88.1) -------- -------- 1,353.2 1,447.7 OPERATING LEASE ASSETS, FACILITIES AND OTHER Railcars and service facilities 2,858.1 2,958.2 Operating lease investments and other 1,724.9 1,566.5 Less - allowance for depreciation (1,893.5) (1,896.3) -------- -------- 2,689.5 2,628.4 Progress payments for aircraft and other equipment 212.5 260.0 -------- -------- 2,902.0 2,888.4 DUE FROM GATX CORPORATION 329.8 430.4 INVESTMENTS IN AFFILIATED COMPANIES 953.4 953.0 GOODWILL, NET OF ACCUMULATED AMORTIZATION 73.9 63.3 OTHER ASSETS 281.2 258.1 -------- -------- $6,201.7 $6,388.0 ======== ======== 2 MARCH 31 DECEMBER 31 2002 2001 -------- ----------- (Unaudited) LIABILITIES, DEFERRED ITEMS AND SHAREHOLDER'S EQUITY ACCOUNTS PAYABLE $ 245.1 $ 261.2 ACCRUED EXPENSES 30.5 54.5 DEBT Short-term 85.5 328.5 Long-term: Recourse 2,934.3 2,896.8 Nonrecourse 689.9 728.2 Capital lease obligations 73.3 83.5 -------- -------- 3,783.0 4,037.0 DEFERRED INCOME TAXES 416.9 391.0 OTHER DEFERRED ITEMS 242.1 228.8 -------- -------- TOTAL LIABILITIES AND DEFERRED ITEMS 4,717.6 4,972.5 SHAREHOLDER'S EQUITY Preferred stock 125.0 125.0 Common stock 1.0 1.0 Additional capital 492.9 447.9 Reinvested earnings 937.1 910.6 Accumulated other comprehensive loss (71.9) (69.0) -------- -------- TOTAL SHAREHOLDER'S EQUITY 1,484.1 1,415.5 -------- -------- $6,201.7 $6,388.0 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ------------------ 2002 2001 ---- ---- OPERATING ACTIVITIES Income from continuing operations $ 28.2 $ 16.1 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Realized gains on remarketing of leased equipment (9.8) (8.5) Gains on sales of securities (.5) (15.3) Depreciation and amortization 92.1 101.8 Provision for possible losses 17.7 21.3 Asset impairment charges 2.6 -- Payments related to litigation settlement -- (94.0) Deferred income taxes 11.3 (19.4) Gain on extinguishment of debt (13.9) -- Other, including working capital (70.0) 35.1 -------- -------- Net cash provided by continuing operations 57.7 37.1 INVESTING ACTIVITIES Additions to equipment on lease, net of nonrecourse financing for leveraged leases (250.6) (266.0) Additions to operating lease assets and facilities (13.0) (38.1) Secured loans extended (11.8) (80.5) Investments in affiliated companies (14.3) (116.5) Progress payments (30.5) (34.1) Other investments (1.4) (104.1) -------- -------- Portfolio investments and capital additions (321.6) (639.3) Portfolio proceeds 245.8 248.4 Proceeds from other asset sales 96.3 5.0 -------- -------- Net cash provided by (used in) investing activities of continuing operations 20.5 (385.9) FINANCING ACTIVITIES Net proceeds from issuance of long-term debt 327.0 62.0 Repayment of long-term debt (318.2) (304.1) Net (decrease) increase in short-term debt (243.0) 44.6 Net decrease in capital lease obligations (10.2) (6.6) Equity contribution from GATX Corporation 45.0 50.0 Net decrease in amount due from GATX Corporation 100.6 .3 Cash dividends paid to GATX Corporation (7.9) (58.0) -------- -------- Net cash used in financing activities of continuing operations (106.7) (211.8) NET TRANSFERS TO DISCONTINUED OPERATIONS (13.6) (6.1) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (42.1) (566.7) PROCEEDS FROM SALE OF PORTION OF SEGMENT 3.2 1,021.3 -------- -------- (38.9) 454.6 NET DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS -- (13.2) -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (38.9) $ 441.4 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 GATX FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (IN MILLIONS) THREE MONTHS ENDED MARCH 31 --------------------- 2002 2001 ---- ---- NET INCOME $ 34.4 $190.6 OTHER COMPREHENSIVE LOSS, NET OF TAX: Foreign currency translation adjustment (9.4) (10.6) Unrealized loss on securities, net of reclassification adjustments (a) (1.3) (13.7) Unrealized gain on derivatives 7.8 4.7 ------ ------ OTHER COMPREHENSIVE LOSS (2.9) (19.6) ------ ------ COMPREHENSIVE INCOME $ 31.5 $171.0 ====== ====== (a) Reclassification adjustments: Unrealized loss on securities $ (1.0) $ (4.4) Less - reclassification adjustment for gains realized included in net income (.3) (9.3) ------ ------ Net unrealized loss on securities $ (1.3) $(13.7) ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 5 GATX FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date. All other consolidated financial statements are unaudited but include all adjustments, consisting only of normal recurring items, which management considers necessary for a fair statement of the consolidated results of operations, financial position and cash flow for the respective periods. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2002. (2) Certain amounts in the 2001 financial statements have been reclassified to conform to the current presentation. (3) Discontinued operations - Operating results for GATX Terminals Corporation are shown net of taxes of zero and $1.8 million, respectively, for the two periods displayed. The 2002 gain on sale of a portion of segment represents the sale of GATX Financial Corporation's (GFC or the Company) interest in a terminals facility located in Mexico and is net of taxes of $3.0 million. The 2001 gain on sale of portion of segment primarily reflects the sale of substantially all of the Company's interest in GATX Terminals Corporation and its subsidiary companies and is net of taxes of $199.8 million. (4) GFC and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, it is the opinion of management that amounts, if any, required to be paid by GFC and its subsidiaries in the discharge of such liabilities are not likely to be material to GFC's consolidated financial position or results of operations. (5) Effective January 1, 2002, GFC adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Under these new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but rather are subject to an annual impairment test in accordance with the Statements. During 2002, GFC will perform the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. GFC has not yet determined the impact, if any, such review will have on GFC's consolidated financial position or results of operations. Changes in the carrying amount of goodwill by segment during the first quarter of 2002 are as follows (in millions): GATX GATX CAPITAL RAIL TOTAL ------ ------ ------ BALANCE AT DECEMBER 31, 2001 $ 21.4 $ 41.9 $ 63.3 Purchase accounting adjustments - 10.5 10.5 ------ ------ ------ BALANCE AT MARCH 31, 2002 $ 21.4 $ 52.4 $ 73.8 ====== ====== ====== Application of the non-amortization provisions of the Statement resulted in an increase in net income from continuing operations of $1.4 million in the first quarter of 2002, compared to the prior year period, and is expected to result in an increase in net income from continuing operations of approximately $6.8 million for the full year 2002, compared to the full year 2001. 6 As required by SFAS No. 142, the results of operations for periods prior to adoption have not been restated. Following is a reconciliation of net income, as reported, to net income, as adjusted, for the three month period ended March 31, 2001, computed as if SFAS No. 142 had been adopted effective January 1, 2001 (in millions): THREE MONTHS ENDED MARCH 31, 2001 ------------------ NET INCOME, AS REPORTED $ 190.6 Adjusted for: Goodwill amortization, net of tax .6 Amortization of equity method goodwill, net of tax .8 ------------------ NET INCOME, AS ADJUSTED $ 192.0 ================== (6) In the fourth quarter of 2001, GFC recorded a pre-tax charge of $10.9 million related to a reduction in workforce. This action was part of the parent company's previously announced initiative to reduce selling, general and administrative costs in response to economic conditions and the divestiture of the terminals operations. The reduction in workforce charge included involuntary employee separation and benefit costs for 135 employees company wide, as well as legal fees, occupancy and other costs. The employee groups terminated included professional and administrative staff. As of March 31, 2002, all of the employee terminations were completed. The amount of termination benefits paid in the first quarter of 2002 totaled $3.1 million. Remaining cash payments of $5.7 million will be funded from ongoing operations and are not expected to have a material impact on GFC's liquidity. (7) In April 2002, the Federal Railroad Administration (FRA) issued a Railworthiness Directive (Directive) relating to a certain class of tank cars that were built or modified with reinforcing bars by GATX Rail (Rail) prior to 1974. In its Directive, the FRA indicated that cars within this class must be inspected, and repaired if necessary, according to an FRA approved maintenance plan. Approximately 4,200 of Rail's owned railcars with a net book value of approximately $4.0 million, or 3% of Rail's North American fleet, are affected by this Directive. The impact of this Directive on Rail's operating results will likely include increased costs with respect to inspection, maintenance and storage, in addition to potential impaired asset charges. The Company is diligently working with the FRA and customers to efficiently address this issue. Upon inspection, a determination will be made as to the extent of mandatory repairs. If, based on the age of the cars and required repairs, it is not economical to continue the cars in service, the Company may substitute similar cars if feasible. However, suitable substitutes may not be available for all customers, resulting in possible reductions in revenue this year. In addition, this Directive applies to the affected cars manufactured by GATX Rail that are currently owned by third parties. GATX Rail is making efforts to contact current third-party car owners to inform them of this Directive. While the total amount cannot be quantified with certainty, the Company expects the impact not to exceed $10.0 million after-tax in 2002, and is not expected to have any material effect in years thereafter. (8) In the first quarter of 2002, GFC entered into a railcar financing transaction with GATX Rail Holdings, I, Inc. a wholly-owned subsidiary of GATX Corporation, for a $93.6 million sale-leaseback of covered hopper cars and tank cars. (9) Interest income on advances to GATX, which is included in gross income on the income statement, was $6.5 million compared to $7.2 million in the prior year period. These advances have no fixed maturity date. Interest income on advances to GATX was based on an interest rate that is adjusted annually in accordance with an estimate of short-term rates. 7 In the first quarter of 2002, the parent company issued convertible debt securities for net proceeds of $169.5 million. The proceeds were subsequently provided to GFC, $124.5 million as a repayment of advances due from GATX and $45.0 million as an equity contribution. (10) The financial data presented below conforms to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and depicts the profitability, financial position and cash flow of each of GFC's continuing business segments. Segment profitability is presented to reflect operating results inclusive of allocated support expenses from the parent company, and interest costs based upon the debt levels shown below. GFC provides its services and products through two operating segments: GATX Capital and GATX Rail. Previously the GATX Capital segment included a rail business unit, which leased freight cars and locomotives under operating and finance leases. In 2001, GFC combined the rail business unit of GATX Capital with GATX Rail, a full service lessor of specialized railcars, primarily tank cars into one rail segment. The financial data for GATX Rail and GATX Capital has been restated for all periods presented to reflect the change in the composition of each operating segment.
GATX GATX (IN MILLIONS) CAPITAL RAIL OTHER TOTAL -------- -------- ------- -------- THREE MONTHS ENDED MARCH 31, 2002 PROFITABILITY Revenues $ 128.7 $ 172.8 $ 6.0 $ 307.5 Gain on extinguishment of debt 13.9 -- -- 13.9 Share of affiliates' earnings 14.3 3.7 -- 18.0 -------- -------- -------- -------- Total gross income 156.9 176.5 6.0 339.4 Depreciation 63.5 28.6 -- 92.1 Interest, net 35.1 16.5 1.2 52.8 Operating lease expense .3 43.8 -- 44.1 Income from continuing operations before income taxes 12.1 28.3 4.5 44.9 Income from continuing operations 7.4 17.9 2.9 28.2 FINANCIAL POSITION Debt 2,831.6 1,086.6 (135.2) 3,783.0 Equity 391.9 504.2 588.0 1,484.1 Investments in affiliated companies 752.6 200.8 -- 953.4 Identifiable assets 3,629.1 2,200.2 372.4 6,201.7 ITEMS AFFECTING CASH FLOW Net cash provided by (used in) continuing operations 39.7 29.5 (11.5) 57.7 Portfolio proceeds 240.3 5.5 -- 245.8 -------- -------- -------- -------- Total cash provided 280.0 35.0 (11.5) 303.5 Portfolio investments and capital additions 308.0 13.6 -- 321.6 ------------------------------------------------------------------------------------------------
8
GATX GATX (IN MILLIONS) CAPITAL RAIL OTHER TOTAL -------- -------- ------- -------- THREE MONTHS ENDED MARCH 31, 2001 PROFITABILITY Revenues $ 190.4 $ 162.7 $ 8.1 $ 361.2 Share of affiliates' earnings 12.5 2.0 -- 14.5 -------- -------- -------- -------- Total gross income 202.9 164.7 8.1 375.7 Depreciation and amortization 73.5 28.3 -- 101.8 Interest, net 49.9 18.0 (5.6) 62.3 Operating lease expense 8.0 39.2 (.1) 47.1 Income (loss) from continuing operations before income taxes 17.6 (3.7) 13.6 27.5 Income (loss) from continuing operations 10.7 (3.3) 8.7 16.1 FINANCIAL POSITION AT DECEMBER 31, 2001 Debt 2,776.6 1,185.7 74.7 4,037.0 Equity 377.2 504.2 534.1 1,415.5 Investments in affiliated companies 752.4 200.6 -- 953.0 Identifiable assets 3,565.7 2,280.9 541.4 6,388.0 ITEMS AFFECTING CASH FLOW Net cash provided by continuing operations 1.8 27.7 7.6 37.1 Portfolio proceeds 218.3 30.1 -- 248.4 -------- -------- -------- -------- Total cash provided 220.1 57.8 7.6 285.5 Portfolio investments and capital additions 486.5 152.8 -- 639.3 ------------------------------------------------------------------------------------------------
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FIRST THREE MONTHS OF 2002 TO FIRST THREE MONTHS OF 2001 GATX Financial Corporation's (GFC or the Company) net income for the first three months of 2002 was $34.4 million, a $156.2 million decrease from the $190.6 million reported for the same period in 2001. Comparisons between periods are affected by various non-comparable items including gains on the sale of discontinued operations in both periods. Earnings for the 2002 first quarter included a $6.2 million after-tax gain related to the sale of a portion of a discontinued segment. Earnings for the 2001 first quarter included $20.2 million of after-tax expense for non-comparable items, primarily related to the closure of a GATX Rail service facility, and a $171.4 million after-tax gain related to the sale of substantially all the GATX Terminals segment. RESULTS OF CONTINUING OPERATIONS GFC's gross income from continuing operations of $339.4 million was $36.3 million lower than the prior year. Income from continuing operations for the first three months of 2002 was $28.2 million compared to $16.1 million in the prior year period, with the increase largely due to costs attributable to the closure of a GATX Rail service facility recorded in the 2001 period. GATX CAPITAL GATX Capital's gross income of $156.9 million included $13.9 million attributable to a gain on extinguishment of debt, as discussed below. Excluding this gain, gross income decreased $59.9 million from the prior year period principally due to decreases in lease and interest income, and lower gains with respect to asset remarketing and sales of securities. Lease income of $98.7 million declined $38.1 million from the prior year period due to lower average finance lease balances and operating lease assets combined with lower lease rates. Interest income of $15.4 million decreased $4.1 million from the prior year period due to lower average secured loan balances compared to the prior year period. GATX Capital continues to be negatively impacted by the current economic environment and challenging market conditions. Air travel is steadily increasing as the industry recovers from the impact of September 11, 2001, however, competition in the aircraft leasing industry has negatively affected lease rates as most lessors have aggressively attempted to maintain high utilization. As a result, lease rates remain under pressure. Currently, there are leases in place or signed letters of intent with respect to 15 of the 16 new aircraft scheduled for delivery in 2002. The Company has signed letters of intent with respect to four of the seven existing aircraft scheduled for renewal in 2002. Asset remarketing income includes gains from the sale of assets from GATX Capital's own portfolio as well as residual sharing fees from the sale of managed assets. Asset remarketing income of $7.6 million decreased $6.2 million from the prior year period primarily due to decreased residual sharing fees on air assets, partially offset by an increase in technology asset remarketing activity. The prior year period included remarketing gains on the sale of two aircraft and residual sharing fees on the sale of three managed aircraft. Gains on the sale of securities, which are derived from warrants received as part of financing and leasing transactions with non-public companies, were $0.5 million, down significantly from $15.3 million in the prior year. Decreases in gains from the sale of securities are indicative of limited initial public offering activity compared to 2001. Because the timing of such sales is dependent on changing market conditions, gains from the sale of securities and asset remarketing income do not occur evenly from period to period. Share of affiliates' earnings was $14.3 million, an increase of $1.8 million over 2001. The increase is due primarily to higher income from certain specialty finance affiliates and the absence of losses from telecommunications (telecom) affiliates compared to the prior year period. 10 Ownership costs of $98.9 million decreased $32.5 million compared to the prior year. Depreciation expense of $63.5 million decreased $10.0 million from 2001, reflecting lower operating lease assets. Operating lease expense of $0.3 million decreased $7.7 million from the prior year period primarily due to the reversal of a previously recorded sublease liability. Interest expense of $35.1 million decreased $14.8 million from 2001 primarily due to lower borrowing rates. Selling, general and administrative (SG&A) expenses of $21.7 million decreased $10.6 million compared to the prior year due to lower human resource and administrative expenses as a result of the fourth quarter 2001 reduction in workforce and reduced legal expenses attributable to litigation in 2001. The provision for possible losses is GATX Capital's estimate of future losses based on a review of credit, collateral and market risks. The provision for possible losses of $17.4 million decreased $3.8 million from the prior year quarter. The current quarter's loss provision included $10.0 million related to one technology leasing investment. Asset impairment charges also increased $2.6 million in the current quarter largely attributable to the same investment. Offsetting these charges was a gain of $13.9 million on the extinguishment of nonrecourse debt of which $13.1 million was associated with this technology investment. GATX Capital frequently utilizes nonrecourse debt to finance its technology portfolio. The allowance for possible losses decreased $2.2 million from December 31, 2001 to $83.2 million and was approximately 6.4% of reservable assets, up from 6.1% at year end. Reservable assets are defined as rent receivables, direct financing leases, leveraged leases and secured loans. Net charge-offs of reservable assets totaled $19.6 million for the three-month period primarily related to venture and technology investments, including $12.0 million related to the technology investment discussed above. GATX Capital has exited the business of financing telecom companies and its exposure in the telecom sector has been reduced to approximately $10.0 million, or approximately 0.3% of GATX Capital's total assets at March 31, 2002, a decrease of $10.3 million from December 31, 2001. The decrease from year end is due to collection of a note received in full. Non-performing assets of $121.9 million increased $25.5 million from year end primarily due to the placement of two A310 aircraft on non-accrual, partially offset by charge-offs of technology and venture investments. Net income of $7.4 million decreased $3.3 million from last year principally as a result of the decline in lease income from the 2001 period, partially offset by reduced ownership costs and SG&A expenses. GATX RAIL (RAIL) Rail's gross income of $176.5 million for the first three months of 2002 increased $11.8 million over the prior year period. Rental revenue of $156.9 million increased $4.9 million from the prior year period. In March 2001, Rail acquired Dyrekcja Eksploatacji Cystern (DEC), Poland's national tank car fleet. Excluding DEC, rental revenue of $149.1 million was down $2.9 million compared to last year due to a weaker rail market, as demand continues to be affected by the recession. A number of industries serviced by Rail, most notably the chemical industry, are experiencing consolidation and adverse market conditions. These factors, coupled with aggressive competition and railroad efficiency, have resulted in reduced railcar demand and pressure on lease rates. Asset remarketing income of $3.7 million increased $3.1 million from the prior year period due to the sale of a portfolio of residual sharing investments in the first quarter of 2002. Share of affiliates' earnings of $3.7 million increased $1.7 million primarily due to non-comparable accounting adjustments in the 2001 period. Rail's North American fleet totaled 128,000 cars at the end of the first quarter compared to 132,000 at the end of the prior year period. Approximately 117,000 railcars were on lease throughout North America at the end of the first quarter, compared to 122,000 a year ago. Rail's North American utilization was 91% at of March 31, 2002. Railcar demand remains soft, negatively impacting utilization; this condition is expected to continue through the remainder of 2002. In response to current rail market conditions, Rail has retired excess cars and limited orders of new railcars to specific customer lease commitments. 11 Ownership costs of $88.9 million increased $3.4 million from last year reflecting the acquisition of DEC. Operating costs were $40.8 million, including $5.5 million related to DEC. In the prior year period, Rail's operating costs included $24.5 million of non-comparable items. Of this amount, $19.7 million related to the closing of its East Chicago repair facility. The 2001 period also included higher maintenance costs due to increased use of third party contract repair shops as a result of a labor dispute at Rail's domestic service centers. The labor dispute was resolved in the first quarter of 2001. SG&A expenses decreased $2.8 million from the prior year period to $18.3 million. Excluding DEC, SG&A expenses decreased $4.7 million from the prior year period primarily due to the fourth quarter 2001 reduction in workforce. Rail's net income of $17.9 million was $21.2 million higher than the prior year primarily due to the absence of 2001 closure costs related to its East Chicago repair facility and other non-comparable items. Excluding these non-comparable items, net income increased $5.0 million primarily due to higher asset remarketing income, increased share of affiliates' earnings and lower SG&A expenses. In April 2002, the Federal Railroad Administration (FRA) issued a Railworthiness Directive (Directive) relating to a certain class of tank cars that were built or modified with reinforcing bars by GATX Rail (Rail) prior to 1974. In its Directive, the FRA indicated that cars within this class must be inspected, and repaired if necessary, according to an FRA approved maintenance plan. Approximately 4,200 of Rail's owned railcars with a net book value of approximately $4.0 million, or 3% of Rail's North American fleet, are affected by this Directive. The impact of this Directive on Rail's operating results will likely include increased costs with respect to inspection, maintenance and storage, in addition to potential impaired asset charges. The Company is diligently working with the FRA and customers to efficiently address this issue. Upon inspection, a determination will be made as to the extent of mandatory repairs. If, based on the age of the cars and required repairs, it is not economical to continue the cars in service, the Company may substitute if feasible. However, suitable substitutes may not be available for all customers, resulting in possible reductions in revenue this year. In addition, this Directive applies to the affected cars manufactured by GATX Rail that are currently owned by third parties. GATX Rail is making efforts to contact current third-party car owners to inform them of this Directive. While the total amount cannot be quantified with certainty, the Company expects the impact not to exceed $10.0 million after-tax in 2002, and is not expected to have any material effect in years thereafter. OTHER Other net income of $2.9 million was $5.8 million lower than 2001, primarily due to an increase in net interest expense. The 2001 period reflected the utilization of the proceeds from the sale of GATX Terminals. RESULTS OF DISCONTINUED OPERATIONS As of March 31, 2002, GFC completed the divestiture of GATX Terminals Corporation (Terminals). Financial data for GATX Terminals Corporation has been segregated as discontinued operations for all periods presented. In the first quarter of 2002, GFC sold its interest in a terminals facility located in Mexico and recognized a $6.2 million after-tax gain. In the first quarter of 2001, GFC sold the majority of Terminals' domestic operations. In the first quarter of 2001, GFC also sold substantially all of Terminals' European operations and exited various smaller supply chain businesses. A net after-tax gain of $171.4 million was recognized on the sales of GATX Terminals assets in the first three months of 2001. Operating results for the first three months of 2002 were zero, down $3.1 million from the prior year period. Comparisons between periods were affected by the timing of the sale of GATX Terminals assets. CASH FLOW AND LIQUIDITY Net cash provided by operating activities of continuing operations for the first three months of 2002 was $57.7 12 million, an increase of $20.6 million from the prior year period, which included payments in the amount of $94.0 million related to a litigation settlement. Portfolio proceeds of $245.8 million were comparable to the 2001 period and include an increase in loan principle payments received, offset by lower proceeds from stock sales and lower cash distributions received from joint venture investments. Proceeds from other asset sales in 2002 of $96.3 million, included $93.6 million from the sale-leaseback of railcars at Rail. Portfolio investments and capital additions for the first three months of 2002 totaled $321.6 million, a decrease of $317.7 million from the first three months of 2001. Portfolio investments and capital additions at GATX Capital of $308.0 million were $178.5 million lower than the prior year period, primarily due to a decrease in technology investments. In the first quarter of 2001, GATX Capital acquired a portfolio of technology leases from El Camino Resources for $116.5 million (net of the assumption of $243.0 million of nonrecourse debt). Rail invested $13.6 million in the first three months of 2002, a decrease of $139.2 million from the prior year which included approximately $90.0 million for the acquisition of DEC. Indicative of current market conditions, Rail's capital spending for its railcar fleet was $49.2 million lower than the prior year period. Railcar additions are not anticipated to exceed prior year activity. Future portfolio investments and capital additions (excluding contractual commitments) will depend on market conditions and opportunities to acquire desirable assets. In the current three-month period GFC issued $327.0 million and repaid $318.2 million of long-term debt. Significant financings in the 2002 first quarter included a $142.2 million aircraft warehouse facility, a $75.0 million aircraft bridge loan and $35.1 million from the European Credit Agency financing program. Subsequent to March 31, 2002, GFC completed a financing facility with the Export-Import Bank of the United States that provided $139.5 million in aircraft financing. GFC funds asset growth and meets debt and lease obligations through cash flow from operations, portfolio proceeds (including proceeds from asset sales), uncommitted money market lines, committed revolving credit facilities, the issuance of unsecured debt, and a variety of secured borrowings. GFC utilizes both the domestic and international bank and capital markets. The availability of these funding options may be adversely impacted by certain factors. Access to capital markets at competitive rates is dependent on GFC's credit rating as determined by rating agencies such as Standard & Poor's (S&P) and Moody's Investors Service (Moody's). On March 13, 2002, Moody's downgraded GFC's long-term unsecured debt to Baa3 from Baa2 and GFC's commercial paper to Prime-3 from Prime-2. Moody's now maintains a stable outlook on GFC's ratings. On March 14, 2002, S&P downgraded GFC's long-term unsecured debt from BBB+ to BBB and GFC's commercial paper from A-2 to A-3. S&P also placed GFC's long-term unsecured debt on credit watch with negative implications. Due to these rating agency actions, GFC's access to the commercial paper market has been seriously constrained and GFC may have more difficulty accessing the long-term capital market on a cost efficient basis. A continued weak economic environment could decrease demand for GFC's services, which could impact the Company's ability to generate cash flow from operations and portfolio proceeds. GFC has revolving credit facilities totaling $775.0 million, consisting of a 364-day agreement for $141.7 million expiring in June, which GFC intends to replace, and two other agreements for $350.0 million and $283.3 million expiring in 2003 and 2004, respectively. At March 31, 2002, availability under the credit lines was reduced by $10.0 million of commercial paper outstanding. The revolving credit facilities contain various restrictive covenants, including dividend restrictions and requirements to maintain a defined minimum net worth and certain financial ratios. At March 31, 2002, GFC was in compliance with all of the covenants and conditions of the credit agreements. GFC has a shelf registration for $1.0 billion of debt securities of which $600.0 million had been issued through March 31, 2002. The unconditional purchase obligations of GFC's subsidiaries consist primarily of scheduled aircraft acquisitions. 13 Unconditional purchase obligations at March 31, 2002 were $915.3 million, comprised as follows: $460.4 million in the remainder of 2002, $266.0 million in 2003 and $188.9 million in 2004. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, GFC adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Under these new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but rather are subject to an annual impairment test in accordance with the Statements. During 2002, GFC will perform the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. GFC has not yet determined the impact, if any, such review will have on GFC's consolidated financial position or results of operations. Application of the non-amortization provisions of the Statement resulted in an increase in net income from continuing operations of $1.4 million in the first quarter of 2002, compared to the prior year period, and is expected to result in an increase in net income from continuing operations of approximately $6.8 million for the full year 2002, compared to the full year 2001. Also effective January 1, 2002, GFC adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Although the new rules retain many of the fundamental recognition and measurement provisions of SFAS No. 121, they modify the criteria required to classify an asset as held-for-sale. SFAS No. 144 also supersedes certain provisions of APB Opinion 30 with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be separately reported in discontinued operations during the period in which the losses are incurred (rather than as of the measurement date as presently required by APB 30). GFC does not expect this Statement to have a material impact on GFC's consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for fiscal years beginning after May 15, 2002, with early application encouraged. The provisions of this Statement update, clarify and simplify certain existing accounting pronouncements. For the period ended March 31, 2002, GFC applied the provisions of SFAS No. 145. SFAS No. 145 rescinds SFAS No. 4, which previously required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effects. In accordance with the Statement, GFC's gain on extinguishment of nonrecourse debt of $13.9 million recognized in the first quarter 2002 is not considered an extraordinary item, and was therefore included in results of operations. 14 FORWARD LOOKING STATEMENTS Certain statements in Management's Discussion and Analysis may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as "anticipate," "believe," "estimate," "expects," "intend," "predict," or "project" and similar expressions. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Risks and uncertainties include, but are not limited to, general economic conditions; aircraft and railcar lease rate and utilization levels; conditions in the capital markets and the potential for a downgrade in our credit rating, either of which could have an effect on our borrowing costs or our ability to access the markets for commercial paper or secured and unsecured debt; dynamics affecting customers within the chemical, petroleum and food industries; unanticipated costs or issues arising from the Federal Railroad Administration's Railworthiness Directive HM-04; competitors in the rail and air markets who may have access to capital at lower costs than GFC; additional potential write-downs and/or provisions within GFC's portfolio; and general market conditions in the rail, air, technology, venture, and other large-ticket industries. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS GFC and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, it is the opinion of management that amounts, if any, required to be paid by GFC and its subsidiaries in the discharge of such liabilities are not likely to be material to GFC's consolidated financial position or results of operations. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Reference is made to the exhibit index which is included herewith and is incorporated by reference hereto. (b) Reports on Form 8-K: None. 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 FINANCIAL CORPORATION (Registrant) --------------------------- /s/ Brian A. Kenney --------------------------- Brian A. Kenney Senior Vice President and Chief Financial Officer (Duly Authorized Officer) Date: May 15, 2002 16 EXHIBIT INDEX The following exhibit is filed as part of this quarterly report: Exhibit - ------- 12. Statement regarding computation of earnings to fixed charges. 17 EX-12 3 c69728ex12.txt STATEMENT RE: COMPUTATION OF EARNINGS EXHIBIT 12 GATX FINANCIAL CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (UNAUDITED) (IN MILLIONS, EXCEPT FOR RATIOS) THREE MONTHS ENDED MARCH 31 --------------------- 2002 2001 ---- ---- Earnings available for fixed charges: Income from continuing operations $28.2 $16.1 Add (deduct): Income taxes 16.7 11.4 Share of affiliates' earnings, net of distributions received (12.7) (9.6) Interest on indebtedness and amortization of debt discount and expense 52.8 62.3 Portion of rents representative of interest factor (deemed to be one-third) 14.7 15.7 ----- ----- Total earnings available for fixed charges $99.7 $95.9 ===== ===== Fixed Charges: Interest on indebtedness and amortization of debt discount and expense $52.8 $62.3 Capitalized interest 3.9 3.5 Portion of rents representative of interest factor (deemed to be one-third) 14.7 15.7 ----- ----- Total fixed charges $71.4 $81.5 ===== ===== Ratio of earnings to fixed charges (a) 1.40x 1.18x (a) The ratio of earnings to fixed charges represents the number of times "fixed charges" are covered by "earnings." "Fixed charges" consist of interest on outstanding debt and amortization of debt discount and expense, adjusted for capitalized interest and one-third (the proportion deemed representative of the interest factor) of operating lease expense. "Earnings" consist of consolidated income from continuing operations before income taxes and fixed charges, less share of affiliates' earnings, net of distributions received. -----END PRIVACY-ENHANCED MESSAGE-----