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GMT > SEC Filings for GMT > Form 10-Q on 24-Oct-2012All Recent SEC Filings

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Form 10-Q for GATX CORP


24-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This document contains statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions of those sections and the Private Securities Litigation Reform Act of 1995. Some of these statements may be identified by words like "anticipate," "believe," "estimate," "expect," "intend," "plan," "predict," "project" or other similar words. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in GATX's Annual Report on Form 10-K for the year ended December 31, 2011, and other filings with the SEC, and that actual results or developments may differ materially from those in the forward-looking statements.

Specific factors that might cause actual results to differ from expectations include, but are not limited to, (1) general economic, market, regulatory and political conditions affecting the rail, marine and other industries served by GATX and its customers; (2) competitive factors in GATX's primary markets, including lease pricing and asset availability; (3) lease rates, utilization levels and operating costs in GATX's primary operating segments; (4) conditions in the capital markets or changes in GATX's credit ratings and financing costs;
(5) risks related to compliance with, or changes to, laws, rules and regulations applicable to GATX and its rail, marine and other assets; (6) costs associated with maintenance initiatives; (7) operational and financial risks associated with long-term railcar purchase commitments; (8) changes in loss provision levels within GATX's portfolio; (9) conditions affecting certain assets, customers or regions where GATX has a large investment; (10) impaired asset charges that may result from changing market conditions or portfolio management decisions implemented by GATX; (11) opportunities for remarketing income;
(12) labor relations with unions representing GATX employees; and (13) the outcome of pending or threatened litigation.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. GATX has based these forward-looking statements on information currently available and disclaims any intention or obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.

Business Overview

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and certain other financial data that is prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see "Non-GAAP Financial Measures" at the end of this Item.

GATX Corporation leases, operates, manages and remarkets long-lived, widely-used assets primarily in the rail and marine markets. GATX also invests in affiliates that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, American Steamship Company ("ASC") and Portfolio Management.

Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2012. For further information, refer to GATX's Annual Report on Form 10-K for the year ended December 31, 2011.


Table of Contents

DISCUSSION OF OPERATING RESULTS

Net income was $107.6 million for the first nine months of 2012 compared to net income of $79.2 million for the first nine months of 2011. Results for the first nine months of 2012 and 2011 include benefits from Tax Adjustments and Other Items of $0.7 million and $13.9 million, respectively. Net income was $53.8 million for the third quarter of 2012 compared to net income of $32.9 million for the third quarter of 2011. Results for the third quarter of 2012 and 2011 include benefits from Tax Adjustments and Other Items of $18.2 million and $1.3 million, respectively. Details of the Tax Adjustments and Other Items can be found under Non-GAAP Financial Measures at the end of this Item 2.

Total investment volume was $523.4 million for the first nine months of 2012 compared to $460.1 million for the first nine months of 2011.

The following table presents a financial summary of GATX's financial reporting segments (in millions, except per share data):

                                                       Three Months Ended            Nine Months Ended
                                                          September 30                 September 30
                                                      2012            2011          2012           2011
Gross Income
Rail                                                $   249.5        $ 240.6      $   723.8       $ 730.5
ASC                                                      80.2           71.3          169.2         142.2
Portfolio Management                                     32.6           27.5          100.5          77.7

Total segment gross income                              362.3          339.4          993.5         950.4
Other                                                     0.2            0.3            0.7           1.0

Consolidated Gross Income                           $   362.5        $ 339.7      $   994.2       $ 951.4


Segment Profit
Rail                                                $    63.5        $  63.0      $   171.7       $ 171.3
ASC                                                      13.2            8.5           29.3          17.9
Portfolio Management                                     15.0           11.5           51.6          31.0

Total Segment Profit                                     91.7           83.0          252.6         220.2
Less:
Selling, general and administrative expenses             38.6           38.5          115.6         112.3
Unallocated interest expense, net                         1.8            0.8            4.0           3.1
Other income and expense, including eliminations         (0.3 )           -            (0.9 )        (0.4 )
Income taxes                                             (2.2 )         10.8           26.3          26.0

Consolidated Net Income                             $    53.8        $  32.9      $   107.6       $  79.2


Basic earnings per share                            $    1.15        $  0.71      $    2.30       $  1.71
Diluted earnings per share                          $    1.13        $  0.70      $    2.26       $  1.68

Return on Equity

The following table presents GATX's return on equity ("ROE") for the trailing
twelve months ended September 30:



                                                           2012       2011
         ROE                                                11.7 %      8.8 %
         ROE, excluding Tax Adjustments and Other Items     11.5 %      7.1 %


Table of Contents

Segment Operations

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues and GATX's share of affiliates' earnings attributable to the segments as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, and other operating costs such as litigation, asset impairment charges, provisions for losses, environmental costs and asset storage costs. Segment profit excludes selling, general and administrative expenses, income taxes and certain other amounts not allocated to the segments. These amounts are discussed below in Other.

GATX allocates debt balances and related interest expense to each segment based upon a pre-determined fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. The leverage levels for Rail, ASC and Portfolio Management are set at 4:1, 1.5:1 and 3:1, respectively. Management believes that by utilizing this leverage and interest expense allocation methodology, each operating segment's financial performance reflects appropriate risk-adjusted borrowing costs.

Rail

In the third quarter of 2012, lease rate pricing and demand for tank railcars remained strong. Rail's utilization in North America was 98.2%, compared to 98.3% at the end of the second quarter and 98.2% at September 30, 2011. The average lease renewal rate on cars in the GATX Lease Price Index (the "LPI", see definition below) increased 26.4% from the weighted average expiring lease rate, compared to increases of 23.9% for the second quarter of 2012 and 9.6% for the third quarter of 2011.

Rail entered 2012 with leases on approximately 20,000 railcars in North America scheduled to expire during the year, of which approximately 3,700 remained at the end of the third quarter. The majority of year-to-date expirations were renewed with existing customers. In the current strong lease rate environment, as evidenced by the LPI, Rail is highly focused on lengthening lease terms. Lease terms on renewals for cars in the LPI averaged 59 months in the current quarter, consistent with the prior quarter and up from 49 months in the third quarter of 2011. While utilization is high for most railcar types, demand across freight car types is inconsistent, with coal cars particularly weak. Leases on approximately 200 coal cars are scheduled to expire during the remainder of 2012, a portion of which are unlikely to be renewed.

In Europe, Rail has experienced modest improvements in lease rate pricing and has increased its wholly-owned tank car fleet through investments in new railcars. At the end of the third quarter of 2012, fleet utilization was 96.6% compared to 96.3% at the end of the second quarter and 96.0% at September 30, 2011. Demand for tank cars serving the petroleum markets is solid; however, demand for railcars serving the chemical markets has softened. GATX's European Rail affiliate, AAE Cargo A.G. ("AAE"), which serves freight car markets, is experiencing relatively stable operating results; however, fleet utilization remains much lower than historical norms due to ongoing weakness in the European economy.

During the first nine months of 2012, Rail's investment volume was $443.9 million, compared to $290.1 million in 2011. Year-to-date, Rail has acquired approximately 4,300 railcars, including railcars delivering under a five-year supply agreement. Also, during the second quarter, GATX entered the Indian railcar leasing market with an agreement to purchase newly manufactured railcars, which are expected to deliver and be placed on lease beginning in the fourth quarter.


Table of Contents

Components of Rail's operating results are outlined below (in millions):

                                     Three Months Ended           Nine Months Ended
                                        September 30                 September 30
                                      2012          2011          2012          2011
        Gross Income
        Lease income               $    220.8      $ 212.1      $   651.1      $ 632.8
        Asset remarketing income          6.6          8.0           29.8         22.7
        Other income                     17.8         22.5           55.1         61.6

        Revenues                        245.2        242.6          736.0        717.1
        Affiliate earnings                4.3         (2.0 )        (12.2 )       13.4

                                        249.5        240.6          723.8        730.5
        Ownership Costs
        Depreciation                     51.1         49.6          151.8        146.4
        Interest expense, net            32.4         30.8           97.0         96.1
        Operating lease expense          31.4         31.4           94.1         98.8

                                        114.9        111.8          342.9        341.3
        Other Costs and Expenses
        Maintenance expense              60.9         61.8          182.1        196.4
        Other costs                      10.2          4.0           27.1         21.5

                                         71.1         65.8          209.2        217.9

        Segment Profit             $     63.5      $  63.0      $   171.7      $ 171.3

GATX Lease Price Index

The LPI is an internally generated business indicator that measures general lease rate pricing on renewals within GATX's North American rail fleet. The index reflects the weighted average lease rate for a select group of railcar types that GATX believes to be representative of its overall North American fleet. The average renewal lease rate change reflects the percentage change between the weighted average renewal lease rate and the weighted average expiring lease rate for railcars in the LPI. The average renewal term reflects the weighted average renewal lease term in months for railcars in the LPI.

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Table of Contents

Rail's Fleet Data

The following table summarizes certain fleet data for railcars in North America
for the quarters indicated:



                                   September 30        December 31       March 31        June 30        September 30
                                       2011               2011             2012           2012              2012
Beginning balance                        108,764            109,091        109,070        109,116             109,187
Cars added                                 1,069                972          1,223          1,385                 858
Cars scrapped                               (602 )             (696 )         (544 )         (591 )              (544 )
Cars sold                                   (140 )             (297 )         (633 )         (723 )              (339 )

Ending balance                           109,091            109,070        109,116        109,187             109,162

Utilization rate at quarter end             98.2 %             98.2 %         98.5 %         98.3 %              98.2 %
Average active railcars                  106,984            107,121        107,328        107,452             107,224

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The following table summarizes certain fleet data for railcars in Europe for the quarters indicated:

                                    September 30         December 31        March 31        June 30         September 30
                                        2011                2011              2012            2012              2012
Beginning balance                          20,675              20,828          20,927         21,064               21,209
Cars added                                    200                 368             304            273                  355
Cars scrapped or sold                         (47 )              (269 )          (167 )         (128 )               (250 )

Ending balance                             20,828              20,927          21,064         21,209               21,314

Utilization rate at quarter end              96.0 %              97.1 %          96.7 %         96.3 %               96.6 %
Average active railcars                    19,881              20,112          20,356         20,386               20,490


Table of Contents

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The following table summarizes certain fleet data for locomotives in North America for the quarters indicated:

                                    September 30         December 31         March 31         June 30         September 30
                                        2011                2011               2012            2012               2012
Beginning balance                             572                 572              572             576                  549
Locomotives added                               5                  -                 4              16                    7
Locomotives scrapped or sold                   (5 )                -                -              (43 )                 (2 )

Ending balance                                572                 572              576             549                  554

Utilization rate at quarter end              95.9 %              98.1 %           94.3 %          98.5 %               99.1 %
Average active locomotives                    560                 561              552             531                  545

Rail's Lease Income

Components of Rail's lease income are outlined below (in millions):



                                       Three Months Ended          Nine Months Ended
                                          September 30                September 30
                                        2012          2011          2012         2011
       North America - railcars      $    172.2      $ 161.6     $    506.9     $ 484.8
       North America - locomotives          8.5          9.1           25.1        26.7
       Europe                              40.1         41.4          119.1       121.3

                                     $    220.8      $ 212.1     $    651.1     $ 632.8


Table of Contents

Comparison of the First Nine Months of 2012 to the First Nine Months of 2011

Segment Profit

Rail's segment profit for the first nine months of 2012 and 2011 reflects losses of $20.9 million and gains of $11.0 million respectively, related to certain interest rate swaps at AAE. Excluding these items from each period, Rail's segment profit increased $32.3 million, primarily due to higher lease and asset remarketing income, higher affiliate earnings and lower maintenance costs, partially offset by the unfavorable remeasurement of an embedded foreign currency derivative, lower scrapping gains and the unfavorable foreign exchange effects of a stronger U.S. dollar.

AAE holds multiple interest rate swaps intended to hedge interest rate risk associated with existing and forecasted floating rate debt issuances. Some of these swaps do not qualify for hedge accounting and as a result, changes in their fair values are recognized currently in income. The unrealized gains and losses were primarily driven by changes in the underlying benchmark interest rates. AAE's earnings may be impacted by future gains or losses associated with these swaps. Unrealized losses in 2012 were $7.4 million and unrealized gains in 2011 were $11.0 million. Additionally, in the second quarter of 2012, AAE refinanced a portion of its debt and terminated an associated swap at a loss. GATX's portion of the loss was $13.5 million, which was included in share of affiliates' earnings.

Gross Income

Lease income in North America increased $20.5 million, primarily due to higher lease rates in the current year. In Europe, a $2.2 million decrease in lease income was driven primarily by the foreign exchange rate effects of a stronger U.S. dollar, partially offset by higher lease rates and an average of approximately 650 more railcars on lease. Asset remarketing income increased $7.1 million, primarily due to more assets sold in the current year. Other income was $6.5 million lower, primarily due to lower scrapping gains resulting from lower scrap steel rates. Affiliates' earnings decreased $25.6 million from the prior year. Excluding the impact of the interest rate swaps at AAE from each period, affiliates' earnings increased $6.3 million, primarily due to higher affiliate operating income, which included lower depreciation expense at AAE of $4.1 million due to a change in railcar depreciation policy enacted in the third quarter of 2012 (based on a re-evaluation of the underlying assumptions) that extended depreciable lives and increased estimated salvage values. The change in policy is expected to benefit AAE's pre-tax income by an additional $2.0 million in the fourth quarter.

Ownership Costs

Ownership costs were $1.6 million higher than the prior year, primarily due to higher debt and asset balances from acquisitions of railcars, partially offset by the foreign exchange effects of a stronger U.S. dollar.

Other Costs and Expenses

In North America, maintenance costs decreased by $9.7 million, largely due to fewer service events resulting from high lease renewal success. In Europe, maintenance costs were $4.7 million lower, primarily due to the foreign exchange effects of a stronger U.S. dollar.

Other costs were $5.6 million higher than the prior year, primarily due to the unfavorable current year impact from the remeasurement of an embedded foreign currency derivative (related to certain non-functional currency lease contracts).

Comparison of the Third Quarter 2012 to the Third Quarter 2011

Segment Profit

Rail's segment profit for the third quarter of 2012 and 2011 reflects unrealized losses of $2.1 million and $3.1 million, respectively, related to the interest rate swaps at AAE. Excluding these losses from each period, Rail's segment profit decreased $0.5 million, primarily due to the unfavorable impact from the remeasurement of an embedded foreign currency derivative, lower scrapping gains and the unfavorable foreign exchange effects of a stronger U.S. dollar, partially offset by higher lease and affiliate income.


Table of Contents

Gross Income

Lease income in North America increased $10.0 million, primarily due to higher lease rates. In Europe, a $1.3 million decrease in lease income was driven primarily by the foreign exchange effects of a stronger U.S. dollar, partially offset by an average of approximately 600 more railcars on lease at higher lease rates. Asset remarketing income decreased $1.4 million, primarily due to fewer assets sold in the current year. Other income was $4.7 million lower, primarily due to lower scrapping gains resulting from fewer railcars scrapped at lower scrap steel rates. Affiliates' earnings were $6.3 million higher than the prior year. Excluding the impact of the interest rate swaps at AAE from each period, affiliates' earnings were $5.3 million higher in the current year, primarily due to the change in depreciation policy at AAE.

Ownership Costs

Ownership costs were $3.1 million higher than the prior year, primarily due to higher debt and asset balances from acquisitions of railcars, partially offset by the foreign exchange effects of a stronger U.S. dollar.

Other Costs and Expenses

In North America, maintenance costs increased $0.8 million, largely due to higher railroad repairs. In Europe, maintenance costs were $1.7 million lower, primarily due to the foreign exchange effects of a stronger U.S. dollar.

Other costs were $6.2 million higher than the prior year, primarily due to the unfavorable current year impact from the remeasurement of an embedded foreign currency derivative.

ASC

Steel production increased in 2012, which drove strong customer demand for iron ore. During the first nine months of 2012, ASC carried 20.9 million net tons of freight compared to 18.6 million net tons in the prior year period. During the third quarter of 2011, the licensed crew members represented by the American Maritime Officers (AMO) declared a strike, which resulted in lower shipping volumes and higher operating costs. During the second quarter of 2012, ASC took delivery of and placed into service a newly constructed articulated tug-barge ("ATB"). This vessel is expected to bring added flexibility to ASC's fleet. ASC ended the third quarter operating 14 vessels, consistent with the prior year quarter.

Components of ASC's operating results are outlined below (in millions):

                                      Three Months Ended          Nine Months Ended
                                         September 30                September 30
                                      2012           2011          2012         2011
        Gross Income
        Marine operating revenues   $    79.1       $  70.3     $    166.0     $ 138.0
        Lease income                      1.1           1.0            3.2         3.1
        Other income                       -             -              -          1.1

                                         80.2          71.3          169.2       142.2

        Ownership Costs
        Depreciation                      4.0           3.7            7.9         7.6
        Interest expense, net             1.8           1.9            5.5         5.9
        Operating lease expense           1.3            -             2.5          -

                                          7.1           5.6           15.9        13.5

        Other Costs and Expenses
        Maintenance expense               7.7           6.7           14.8        12.2
        Marine operating expense         51.3          50.5          108.6        98.6
        Other costs                       0.9            -             0.6          -

                                         59.9          57.2          124.0       110.8

        Segment Profit              $    13.2       $   8.5     $     29.3     $  17.9


Table of Contents

Comparison of the First Nine Months of 2012 to the First Nine Months of 2011

Segment Profit

ASC's segment profit for the first nine months of 2012 was $11.4 million higher than the prior year, primarily due to higher iron ore freight volumes and the absence of the negative impact of a labor work stoppage in the prior year.

Gross Income

Gross income increased $27.0 million, primarily due to higher iron ore freight volumes and rates and higher fuel surcharges, which offset higher fuel costs.

Ownership Costs

Ownership costs were $2.4 million higher than the prior year, primarily due to lease expense related to the ATB.

Other Costs and Expenses

Maintenance costs were $2.6 million higher than the prior year, primarily due to increased repairs in the current year. Marine operating expenses including fuel . . .

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