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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
September 30, 2000 2-54754
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GATX RAIL CORPORATION
Incorporated in the IRS Employer Identification No.
State of New York 36-2827991
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 1,000 shares of common stock outstanding (all owned by
GATX Corporation) as of October 31, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GROSS INCOME
Lease and financing services $ 144.5 $ 148.2 $ 429.0 $ 426.9
Other income 7.9 6.6 22.4 19.6
-------- -------- -------- --------
REVENUES 152.4 154.8 451.4 446.5
Share of affiliates' earnings .7 .6 2.6 2.4
-------- -------- -------- --------
TOTAL GROSS INCOME 153.1 155.4 454.0 448.9
OWNERSHIP COSTS
Depreciation and amortization 24.2 24.6 74.5 73.9
Interest 15.5 15.3 48.2 43.4
Operating lease expense 35.6 26.9 96.7 80.7
-------- -------- -------- --------
TOTAL OWNERSHIP COSTS 75.3 66.8 219.4 198.0
OTHER COSTS AND EXPENSES
Operating expenses 30.8 37.0 89.1 107.5
Selling, general and administrative 16.1 13.9 46.3 39.6
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 30.9 37.7 99.2 103.8
INCOME TAXES 11.5 14.4 36.9 38.9
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 19.4 23.3 62.3 64.9
INCOME FROM DISCONTINUED OPERATIONS
9.0 6.0 22.5 20.6
-------- -------- -------- --------
NET INCOME $ 28.4 $ 29.3 $ 84.8 $ 85.5
======== ======== ======== ========
</TABLE>
(1) The consolidated balance sheet at December 31, 1999 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 and financial
position for the respective periods. Operating results for the nine months
ended September 30, 2000 are not necessarily indicative of the results that
may be achieved for the entire year ending December 31, 2000. Certain
amounts in 1999 have been reclassified to conform to the current
presentation.
(2) Discontinued operations -- Operating results for GATX Terminals Corp. are
shown net of taxes of $5.9, $4.8, $13.3, and $15.8, respectively, for the
four periods displayed.
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GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 66.4 $ 52.3
TRADE RECEIVABLES - NET 97.8 82.2
OPERATING LEASE ASSETS AND FACILITIES
Railcars and service facilities 2,687.2 2,698.7
Tank storage terminals and pipelines 1,465.5 1,221.7
---------- ----------
4,152.7 3,920.4
Less - Allowance for depreciation (1,905.2) (1,775.2)
---------- ----------
2,247.5 2,145.2
DUE FROM GATX CORPORATION 349.9 418.5
INVESTMENTS IN AFFILIATED COMPANIES 173.8 287.2
OTHER ASSETS 137.0 135.3
---------- ----------
$ 3,072.4 $ 3,120.7
========== ==========
LIABILITIES, DEFERRED ITEMS AND SHAREHOLDER'S EQUITY
ACCOUNTS PAYABLE $ 133.2 $ 164.3
ACCRUED EXPENSES 62.4 60.2
DEBT
Short-term debt 107.2 248.0
Long-term debt:
Recourse 1,232.9 1,159.5
Nonrecourse 65.0 66.0
Capital lease obligations 71.9 81.9
---------- ----------
1,477.0 1,555.4
DEFERRED INCOME TAXES 409.1 360.9
OTHER DEFERRED ITEMS 214.2 223.7
---------- ----------
TOTAL LIABILITIES AND DEFERRED ITEMS 2,295.9 2,364.5
SHAREHOLDER'S EQUITY
Common stock - par value $1 per share, 1,000 shares authorized,
issued and outstanding (owned by GATX Corporation) - -
Additional capital 335.0 335.0
Reinvested earnings 496.4 447.0
Accumulated other comprehensive loss (54.9) (25.8)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 776.5 756.2
---------- ----------
$ 3,072.4 $ 3,120.7
========== ==========
</TABLE>
2
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GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 28.4 $ 29.3 $ 84.8 $ 85.5
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 37.0 35.7 115.2 107.3
Deferred income taxes 13.1 9.8 30.4 28.8
Other, including working capital (28.7) (23.0) (61.8) (64.7)
--------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49.8 51.8 168.6 156.9
INVESTING ACTIVITIES
Additions to operating lease assets and facilities:
Railcars and service facilities (71.0) (83.1) (344.3) (274.9)
Tank storage terminals and pipelines (5.6) (16.7) (76.1) (32.8)
Investments in affiliated companies (.1) (11.3) (1.5) (37.9)
--------- --------- --------- ---------
Capital additions (76.7) (111.1) (421.9) (345.6)
Proceeds from other asset sales 24.0 199.8 330.4 249.0
--------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (52.7) 88.7 (91.5) (96.6)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 100.0 - 160.0 120.0
Repayment of long-term debt and other (50.0) (24.9) (96.7) (126.6)
Net (decrease) increase in short-term debt (141.1) (74.3) (157.4) 95.4
Other receipts (advances) .6 36.0 7.9 (7.9)
Repayment of capital lease obligations (3.6) - (10.0) (5.8)
Cash dividends paid to GATX Corporation (14.1) (13.1) (35.4) (37.8)
Net decrease (increase) in amount due from GATX
Corporation 113.8 6.2 68.6 (20.3)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5.6 (70.1) (63.0) 17.0
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 2.7 $ 70.4 $ 14.1 $ 77.3
========= ========= ========= =========
</TABLE>
3
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GATX RAIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 28.4 $ 29.3 $ 84.8 $ 85.5
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment (8.1) 4.3 (29.1) 6.5
-------- ------- -------- -------
COMPREHENSIVE INCOME $ 20.3 $ 33.6 $ 55.7 $ 92.0
======== ======= ======== =======
</TABLE>
4
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GATX RAIL CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
GATX RAIL OTHER TOTAL
---------- -------- ----------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
PROFITABILITY
Revenues $ 144.5 $ 7.9 $ 152.4
Share of affiliates' earnings .7 - .7
---------- -------- ----------
Gross income 145.2 7.9 153.1
Interest expense 13.0 2.5 15.5
Depreciation and amortization 24.2 - 24.2
Income from continuing operations before 25.6 5.3 30.9
taxes
Income from continuing operations 15.9 3.5 19.4
FINANCIAL POSITION
Investments in affiliated companies 89.6 - 89.6
Identifiable assets 1,665.6 361.5 2,027.1
ITEMS AFFECTING CASH FLOW
Net cash provided by (used in) operating 17.6 9.2 26.8
activities
Capital additions 71.1 - 71.1
THREE MONTHS ENDED SEPTEMBER 30, 1999
PROFITABILITY
Revenues $ 148.2 $ 6.6 $ 154.8
Share of affiliates' earnings .6 - .6
---------- -------- ----------
Gross income 148.8 6.6 155.4
Interest expense 14.0 1.3 15.3
Depreciation and amortization 24.6 - 24.6
Income from continuing operations before 32.8 4.9 37.7
taxes
Income from continuing operations 20.0 3.3 23.3
FINANCIAL POSITION AT DECEMBER 31, 1999
Investments in affiliated companies 91.3 - 91.3
Identifiable assets 1,693.8 429.0 2,122.8
ITEMS AFFECTING CASH FLOW
Net cash provided by operating activities 20.1 9.0 29.1
Capital additions 94.4 - 94.4
</TABLE>
5
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GATX RAIL CORPORATION AND SUBSIDIARIES
FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
GATX RAIL OTHER TOTAL
---------- -------- ----------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
PROFITABILITY
Revenues $ 429.0 $ 22.4 $ 451.4
Share of affiliates' earnings 2.6 - 2.6
---------- -------- ----------
Gross income 431.6 22.4 454.0
Interest expense 41.5 6.7 48.2
Depreciation and amortization 74.5 - 74.5
Income from continuing operations before 83.9 15.3 99.2
taxes
Income from continuing operations 52.3 10.0 62.3
FINANCIAL POSITION
Investments in affiliated companies 89.6 - 89.6
Identifiable assets 1,665.6 361.5 2,027.1
ITEMS AFFECTING CASH FLOW
Net cash provided by operating 116.8 11.5 128.3
activities
Capital additions 345.8 - 345.8
NINE MONTHS ENDED SEPTEMBER 30, 1999
PROFITABILITY
Revenues $ 426.9 $ 19.6 $ 446.5
Share of affiliates' earnings 2.4 - 2.4
---------- -------- ----------
Gross income 429.3 19.6 448.9
Interest expense 39.5 3.9 43.4
Depreciation and amortization 73.9 - 73.9
Income from continuing operations before 88.6 15.2 103.8
taxes
Income from continuing operations 55.0 9.9 64.9
FINANCIAL POSITION AT DECEMBER 31, 1999
Investments in affiliated companies 91.3 - 91.3
Identifiable assets 1,693.8 429.0 2,122.8
ITEMS AFFECTING CASH FLOW
Net cash provided by operating activities 107.5 17.3 124.8
Capital additions 297.9 - 297.9
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FIRST NINE MONTHS OF 2000
TO FIRST NINE MONTHS OF 1999
GATX Rail Corporation's (GRC) net income for the first nine months of 2000 of
$85 million was $1 million lower than the first nine months of 1999. The prior
year's net income included $3 million primarily related to a gain on the sale of
1,700 grain cars partially offset by certain incremental operating expenses.
Excluding this gain, the current period net income was up $2 million from the
prior year.
GRC is a wholly owned subsidiary of GATX Corporation. On July 11, 2000, GATX
Corporation announced its intention to sell GATX Terminals Corporation
(Terminals), a segment of GRC. As a result of this action, operating results for
Terminals have been segregated as discontinued operations in the accompanying
consolidated statements of income. Prior year results of operations have been
restated to reflect the current year's presentation of Terminals as a
discontinued operation.
RESULTS OF CONTINUING OPERATIONS
GRC's gross income from continuing operations of $454 million was $5 million
higher than the prior year. Net income from continuing operations for the first
nine months of 2000 was $62 million compared to $65 million for the first nine
months of 1999.
GATX RAIL
GATX Rail's gross income for the first nine months of 2000 increased slightly
over the prior year period as revenue generated by a larger active fleet more
than offset the absence of last year's gain associated with the sale of 1,700
grain cars. Approximately 85,400 tank and freight cars were on lease throughout
North America at September 30, 2000, compared to 81,900 railcars a year ago. The
average rental rate remained essentially flat with the prior year.
Growth in the active domestic fleet and rental rates has been slowed by industry
factors. Consolidation among major chemical customers has led to fleet
rationalization, and railroads have improved efficiency following a period of
merger-related congestion. These factors are expected to continue affecting car
demand and lease rates during the remainder of the year. Due to the current
market conditions, GATX Rail's utilization decreased to 93% as of September 30,
2000 from 95% at the end of prior year period, reflecting an increase in the
number of idle railcars. Correspondingly, fleet growth was scaled back in the
third quarter and for the remainder of the year.
In addition to the challenging market conditions, GATX Rail is addressing an
important issue with respect to its domestic service network. Employees at its
four domestic service centers, represented by the United Steelworkers of
America, have rejected the terms of a company-proposed labor contract. The
company's proposal is designed to improve the long-term competitive position of
GATX Rail's service centers. As a result of the uncertainty this situation has
caused, the amount of work at our service centers has declined and the use of
third party contract shops has increased to
7
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ensure seamless customer service. The service centers continue to remain open
and operational, but with smaller staffs given the lower volume of work. While
this has been an effective service alternative, GATX Rail will incur abnormally
high maintenance expenses during the fourth quarter absent the prompt signing of
a new contract.
Prior year net income included $3 million primarily related to a gain on the
sale of 1,700 grain cars partially offset by certain incremental operating
expenses. Excluding this gain, net income was up slightly from the prior year as
revenues from the larger active fleet and lower operating expenses were
partially offset by higher SG&A and ownership costs.
OTHER
All financing activities considered non-operational to Rail have been isolated
in the Other segment. Net income of $10 million is comparable to the prior year
period.
RESULTS OF DISCONTINUED OPERATIONS
On July 11, 2000, GATX Corporation announced its intention to sell Terminals.
Therefore, the segment is no longer considered to be an ongoing operation and
its results have been segregated as discontinued operations in the accompanying
consolidated income statements.
Operating results for the first nine months of 2000 were $23 million, up $2
million from the prior year period. Strong results in the domestic terminal and
pipeline business offset the absence of a nonrecurring gain recognized last year
on the sale of rights along the Central Florida Pipeline and lower affiliate
contribution from Olympic Pipeline Company (Olympic).
Terminals owned 25.1% of the common shares of Olympic Pipeline Company. On June
10, 1999, a pipeline rupture and explosion occurred on one of the pipelines
owned by Olympic. The affected section of the pipeline is not expected to resume
operations until next year. Several lawsuits have been filed against Olympic and
its operator. On September 20, 2000, Terminals sold its entire 25.1% ownership
of Olympic's common shares to BP's Pipelines Business Unit.
CASH FLOW AND LIQUIDITY
Net cash provided by operating activities for the first nine months of 2000 was
$169 million, a $12 million increase from last year's period, due to higher
depreciation being taken in the current year by GATX Rail and the timing of
working capital requirements.
Proceeds from other asset sales of $330 million increased $81 million from last
year's period and includes the proceeds from the sale-leaseback of railcars at
GATX Rail.
Capital additions for the first nine months of 2000 totaled $422 million, an
increase of $76 million from the first nine months of 1999. GATX Rail invested
$346 million, a $48 million increase from the prior year period, in its railcar
fleet, facilities, and international affiliates. Railcar additions at GATX Rail
are not anticipated to continue at the same rate for the remainder of 2000 in
response to current market conditions. Internally generated cash flow and GRC's
external sources will be used to fund future capital additions.
8
<PAGE> 10
GRC had unused committed lines of credit of $281 million at September 30, 2000.
GRC issued $30 million of medium-term notes and $130 million of other long-term
debt during the first nine months of 2000. Additional financing needs were met
by cash flow from operations, short-term debt and proceeds from asset sales,
which included two sale-leaseback financings. GRC has a $650 million shelf
registration of which $477 million has been issued through September 30, 2000.
OTHER MATTERS
Effective January 1, 2001, GATX will adopt Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB statement No. 133. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging instruments. The statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of the
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments though earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
GRC uses interest rate and currency swap agreements as hedges that manage the
exposure to interest rate and currency rate risk on existing and anticipated
transactions. Since these derivatives are used in a hedging capacity, the effect
of this change in accounting is not expected to be material to GRC's results of
operations and financial position.
Management's discussion includes statements that may constitute forward-looking
statements made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. 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. These risks and
uncertainties include, but are not limited to, unanticipated changes in the
markets served by GRC such as the rail, petroleum and chemical industries.
9
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COMPARISON OF THIRD QUARTER 2000
TO THIRD QUARTER 1999
For the third quarter of 2000 net income was $28 million as compared to $29
million for the third quarter of 1999. Income from continuing operations of $19
million for the third quarter of 2000 was down $4 million from the comparable
prior year period.
Increases and decreases in gross income and net income between third quarter
2000 and third quarter 1999 for all segments were principally due to the same
reasons as discussed previously in relation to the nine-month period.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Calnev Pipe Line Company ("Calnev"), a wholly owned subsidiary of GATX Terminals
Corporation, has agreed in a Compliance Order with Region 9 of the U.S.
Environmental Protection Agency ("EPA") to comply with and correct certain
alleged violations of the Clean Air Act. In general, the Order requires Calnev
to: (a) complete construction of a new vapor recovery unit in Las Vegas and
limit use of another; (b) comply with certain throughput limits and VOC emission
limits at the Las Vegas loading rack; (c) engage in certain recordkeeping; and,
(d) comply with certain authority and permitting requirements of the EPA and the
Clark County, Nevada, Health District. Calnev has not admitted to any violation
of permit, law or regulation. The United States of America, the State of Nevada
and Clark County have reserved the right to assess civil penalties.
GRC and its subsidiaries are engaged in various matters of litigation, including
but not limited to those described above, 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 damages, if any,
required to be paid by GRC and its subsidiaries in the discharge of such
liability are not likely to be material to GRC's consolidated financial position
nor results of operations.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 12 Statement regarding computation of earnings to fixed charges.
27 Financial Data Schedule for GRC for the quarter ended September
30, 2000. Submitted to the SEC along with the electronic
submission of this Quarterly Report on Form 10-Q.
Any instrument defining the rights of security holders with
respect to nonregistered long-term debt not being filed on the
basis that the amount of securities authorized does not exceed 10
percent of the total assets of the company and subsidiaries on a
consolidated basis will be furnished to the Commission upon
request.
(b) Form 8-K filed on July 12, 2000 reporting GATX Corporation's intention
to sell GATX Terminals Corporation, its wholly owned subsidiary
specializing in the storage and distribution of bulk petroleum and
chemical products.
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 RAIL CORPORATION
(Registrant)
/s/ Deborah A. House
------------------------------------------------
Deborah A. House
Controller and Chief Accounting Officer
(Duly Authorized Officer)
Date: November 13, 2000
11
