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GMT > SEC Filings for GMT > Form 10-Q on 25-Jul-2013All Recent SEC Filings

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Form 10-Q for GATX CORP


25-Jul-2013

Quarterly Report


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

Forward-Looking Statements
Our interim Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A in our Annual Report on Form 10-K/A for the year ended December 31, 2012. Our MD&A includes forward-looking statements, as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to the safe harbor provisions of those sections and the Private Securities Litigation Reform Act of 1995. We use forward-looking statements to refer to information that is not purely historical, such as estimates, projections, and statements relating to our business plans, objectives, and expected operating results, as well as the assumptions we used when making those estimates or projections. Some of those statements may be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "predict," "project," or other similar words or expressions.
We describe in detail the risks and uncertainties that we believe are material to our business in "Item 1A. Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2012, and in our other filings with the Securities and Exchange Commission. Specific risks and uncertainties that could cause our actual results to differ from our expectations include, but are not limited to, (1) general economic, market, regulatory, and political conditions affecting the rail, marine, and other industries served by us and our customers;
(2) competitive factors in our primary markets, including lease pricing and asset availability; (3) lease rates, utilization levels, and operating costs in our primary operating segments; (4) conditions in the capital markets or changes in our credit ratings and financing costs; (5) risks related to our international operations and our expansion into new geographic markets; (6) risks related to our compliance with, or changes to, laws, rules, and regulations applicable to us and our rail, marine, and other assets; (7) operational disruption and increased costs associated with our compliance maintenance programs and other maintenance initiatives; (8) operational and financial risks associated with our long-term railcar purchase commitments; (9) changes in loss allowance levels within our portfolio; (10) conditions affecting certain assets, customers, or regions where we have a large investment; (11) impaired asset charges that may result from changing market conditions or portfolio management decisions that we implement; (12) opportunities for remarketing income; (13) labor relations with unions representing our employees; and (14) the outcome of pending or threatened litigation. We caution investors that forward-looking statements are not guarantees of our future performance, that our future performance involves various risks and uncertainties, and that actual results or events may differ materially from the forward-looking statements. In light of these risks and uncertainties, investors should not place undue reliance on our forward-looking statements, which reflect our analyses, judgments, beliefs, or expectations based only on the information that is currently available to us. We disclaim any intention or obligation to update these forward-looking statements for subsequent events. Business Overview
Our MD&A is based on data derived from our financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), and on other financial data that we prepare using non-GAAP components. We have included a reconciliation of these non-GAAP components to the most comparable GAAP components, in "Non-GAAP Financial Measures" at the end of this item.
We lease, operate, manage, and remarket long-lived, widely-used assets, primarily in the rail and marine markets. We also invest in joint ventures that complement our existing business activities. We have four primary business segments: Rail North America, Rail International, American Steamship Company ("ASC") and Portfolio Management.
Our operating results for the three and six months ended June 30, 2013, are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2013. For more information about our business, refer to our Annual Report on Form 10-K/A for the year ended December 31, 2012.


DISCUSSION OF OPERATING RESULTS
The following table shows a summary of our segment and consolidated financial
results (in millions, except per share data):
                                                    Three Months Ended June 30          Six Months Ended June 30
                                                      2013               2012             2013             2012
Segment Revenues
Rail North America                               $      201.1       $      188.7     $     398.7       $     375.1
Rail International                                       45.3               40.6            90.5              81.5
ASC                                                      72.7               77.2            86.1              89.0
Portfolio Management                                     19.8               16.6            35.9              34.0
                                                 $      338.9       $      323.1     $     611.2       $     579.6
Segment Profit
Rail North America                               $       48.2       $       53.2     $      98.5       $     103.9
Rail International                                       24.4               (3.6 )          43.0               4.3
ASC                                                      10.1               14.0            10.9              16.1
Portfolio Management                                     17.3               14.6            29.8              36.6
                                                        100.0               78.2           182.2             160.9
Less:
Selling, general and administrative expense
("SG&A")                                                 45.8               38.9            87.8              77.0
Unallocated interest expense, net                         1.0                0.8             2.3               2.2
Other, including eliminations                            (0.3 )             (0.3 )          (0.1 )            (0.6 )
Income taxes ($9.3 and $2.1 QTR, and $13.4 and
$4.5 YTD related to affiliates' earnings)                18.4               15.3            30.0              28.5
Net Income                                       $       35.1       $       23.5     $      62.2       $      53.8
Net income, excluding tax adjustments and other
items                                            $       32.1       $       38.8     $      60.5       $      71.3
Diluted earnings per share                               0.74               0.49            1.31              1.13
Diluted earnings per share, excluding tax
adjustments and other items                              0.68               0.80            1.27              1.49
Investment Volume                                       320.7              238.1           470.6             391.8

The following table shows our return on equity ("ROE") for the trailing twelve months ended June 30:
2013 2012 Return on equity ("ROE") 12.2 % 10.0 % ROE, excluding tax adjustments and other items 10.3 % 11.2 %

Our net income was $62.2 million, or $1.31 per diluted share, for the first six months of 2013, compared to $53.8 million, or $1.13 per diluted share in 2012. Our results for 2013 and 2012 included a positive $1.7 million and a negative $17.5 million in tax adjustments and other items, which we have summarized in "Non-GAAP Financial Measures" at the end of MD&A. Excluding the impact of these items, our net income for the first six months of 2013 was $60.5 million, compared to $71.3 million in 2012. The decrease in 2013 was primarily due to increased maintenance expense, which was expected, higher SG&A and lower remarketing activity, substantially offset by higher lease revenues. Asset remarketing income varies materially from quarter to quarter and, based on strong demand for our assets, we expect it to increase over the remainder of 2013.
Our net income was $35.1 million, or $0.74 per diluted share, for the second quarter of 2013, compared to $23.5 million, or $0.49 per diluted share, in 2012. Our results for the second quarter of 2013 and 2012 included a positive $3.0 million and a negative $15.3 million in tax adjustments and other items. Excluding the impact of these items, our net income for the second quarter of 2013 was $32.1 million, compared to $38.8 million in 2012. The decrease in 2013 was primarily due to increased maintenance expense, higher SG&A and depreciation expense, substantially offset by higher lease revenues.


Segment Operations
Segment profit is an internal performance measure our Chief Executive Officer uses to assess the performance of each segment in a given period. Segment profit includes all revenues, pretax earnings from affiliates, and net gains on asset dispositions that are attributable to the segments as well as expenses that we believe are directly associated with the financing, maintenance, and operation of the revenue-earning assets. Segment profit excludes selling, general and administrative expenses, income taxes, and other unallocated amounts. We include these amounts in "Other", which is not a segment.
We allocate debt and interest expense to each segment based upon a predetermined fixed recourse leverage level expressed as a ratio of recourse debt (including off-balance-sheet debt) to equity. The leverage levels are 5:1 for Rail North America, 2:1 for Rail International, 1.5:1 for ASC, and 3:1 for Portfolio Management. We believe that by utilizing this allocation methodology, each segment's financial performance reflects appropriate risk-adjusted borrowing costs.

Rail North America
In the second quarter of 2013, demand for our tank railcars and related lease rate pricing remained strong; however, weakness persists for certain freight car types, particularly those serving the coal and grain markets. The average lease renewal rate on cars in our Lease Price Index (the "LPI," see definition below) increased 36.0% from the weighted average expiring lease rate, compared to increases of 30.8% for the prior quarter and 23.9% for the second quarter of 2012.
Lease terms on renewals for railcars in the LPI averaged 58 months in the current quarter. Renewal lease terms were 65 months in the prior quarter and 59 months in the second quarter of 2012. Lease terms on tank cars continue to exceed historical averages; however, we are keeping lease terms on weaker freight car types shorter in order to position these cars for renewal in a stronger market. Our utilization in North America was 98.2% compared to 97.8% at the end of prior quarter and 98.3% at June 30, 2012. For the remainder of 2013, we have leases for approximately 10,600 railcars that will expire, of which 1,850 serve coal and grain. As of the end of the second quarter, approximately 3,650 of our total lease expirations have already been renewed. In this current strong environment for tank cars, we expect to continue to pursue higher lease rates and longer lease terms on both renewals and assignments. We also expect asset remarketing gains to increase in the second half of 2013.
As we expected, the number of railcars undergoing regulatory compliance work has increased in 2013 and we anticipate increasing levels of compliance activity throughout the remainder of the year.
The following table shows Rail North America's segment results (in millions):
                                                 Three Months Ended June 30          Six Months Ended June 30
                                                   2013               2012             2013             2012
Revenues
Lease revenue                                 $      187.3       $      176.6     $     371.1       $     351.2
Other revenue                                         13.8               12.1            27.6              23.9
Total Revenues                                       201.1              188.7           398.7             375.1
Expenses
Maintenance expense                                   57.6               48.8           112.2              96.8
Depreciation expense                                  42.7               41.8            85.0              83.5
Operating lease expense                               32.0               31.3            64.3              62.7
Other operating expense                                5.0                4.0             9.0               8.4
Total Expenses                                       137.3              125.9           270.5             251.4
Other Income (Expense)
Net gain on asset dispositions                        10.2               14.5            20.4              30.5
Interest expense, net                                (28.7 )            (25.9 )         (54.4 )           (51.7 )
Other expense                                         (3.3 )             (0.2 )          (4.1 )            (2.1 )
Share of affiliates' earnings (pretax)                 6.2                2.0             8.4               3.5
Segment Profit                                $       48.2       $       53.2     $      98.5       $     103.9
Investment Volume                             $      129.4       $      137.7     $     215.1       $     236.6


The following table shows the components of Rail North America's lease income (in millions):

                                               Three Months Ended June 30      Six Months Ended June 30
                                                   2013            2012           2013            2012
North American railcars                       $       179.4     $  168.4     $       355.5     $  334.6
Locomotives                                             7.9          8.2              15.6         16.6
                                              $       187.3     $  176.6     $       371.1     $  351.2

Lease Price Index
Our Lease Price Index ("LPI") is an internally-generated business indicator that measures general lease rate pricing on renewals within our North American railcar fleet. We calculate the index using the weighted average lease rate for a group of railcar types that we believe best represents our overall North American fleet. In addition, we use this representative group of North American railcars to calculate an average renewal lease rate change and an average renewal term. The average renewal lease rate change is the percentage change between the weighted average renewal lease rate and the weighted average expiring lease rate. The average renewal lease term is reported in months and reflects the average renewal lease term of railcar types in the LPI, weighted by fleet composition.

[[Image Removed]]


Fleet Information
The following table shows Rail North America's railcar fleet activity:
                                June 30      September 30    December 31    March 31      June 30
                                  2012           2012            2012         2013          2013
Beginning balance                109,116         109,187        109,162      109,551      109,637
Cars added                         1,385             858          1,106          988        2,035
Cars scrapped                       (591 )          (544 )         (366 )       (810 )       (456 )
Cars sold                           (723 )          (339 )         (351 )        (92 )       (442 )
Ending balance                   109,187         109,162        109,551      109,637      110,774
Utilization rate at quarter end     98.3 %          98.2 %         97.9 %       97.8 %       98.2 %
Average active railcars          107,452         107,224        107,062      106,964      107,722

[[Image Removed]]

The following table shows Rail North America's locomotive fleet activity:

                                June 30       September 30     December 31    March 31      June 30
                                  2012            2012            2012          2013          2013
Beginning balance                    576            549             554            561          564
Locomotives added                     16              7              23             36           10
Locomotives scrapped or sold         (43 )           (2 )           (16 )          (33 )        (16 )
Ending balance                       549            554             561            564          558
Utilization rate at quarter end     98.5 %         99.1 %          98.6 %         94.0 %       95.2 %
Average active locomotives           531            545             557            525          528


Comparison of the First Six Months of 2013 to the First Six Months of 2012 Segment Profit
Segment profit of $98.5 million was $5.4 million lower than the prior year, primarily due to higher net maintenance expense and the timing of asset remarketing gains, which do not occur evenly over the course of the year. The decrease was partially offset by higher lease revenue and share of affiliates' earnings.
Revenues
Lease revenue increased $19.9 million, primarily driven by higher lease rates compared to the prior year. Other revenue increased $3.7 million, primarily due to higher repair revenue in the current year. Expenses
Maintenance expense was $15.4 million higher primarily due to increased regulatory compliance work, which was expected. We also completed more customer liability repairs, and more wheelsets were replaced by the railroads. Operating lease expense increased $1.6 million as a result of sale-leaseback transactions completed in the latter part of 2012. Other operating expense increased $0.6 million, primarily due to higher insurance costs and car taxes. Other Income (Expense)
Net gain on asset dispositions decreased $10.1 million, primarily due to the timing of remarketing gains. Net interest expense increased $2.7 million, primarily due to higher interest rates partially offset by lower debt balances. Other expense increased $2.0 million, primarily due to termination costs incurred on the early repayment of a higher cost secured debt issuance. Share of affiliates' earnings increased $4.9 million, primarily due to gains on dispositions of railcars at our Southern Capital affiliate. Investment Volume
During 2013, we acquired 1,316 new railcars and 1,113 secondary market railcars compared to 2,155 new railcars and 419 secondary market railcars in 2012. Additionally, we received 591 railcars in distributions from our Southern Capital affiliate in 2013.
Comparison of the Second Quarter of 2013 to the Second Quarter of 2012 Segment Profit
Segment profit of $48.2 million was $5.0 million lower than the prior year, primarily due to higher net maintenance expense and the timing of asset remarketing gains. The decrease was partially offset by higher lease revenue and share of affiliates' earnings.
Revenues
Lease revenue increased $10.7 million, primarily because of higher lease rates compared to the prior year. Other revenue increased $1.7 million, primarily due to higher repair revenue in the current quarter. Expenses
Maintenance expense was $8.8 million higher in the current quarter primarily due to increased regulatory compliance work. We also completed more customer liability repairs, and more wheelsets were replaced by the railroads. Operating lease expense increased $0.7 million as a result of sale-leaseback transactions completed in the latter part of 2012. Other operating expense increased $1.0 million, primarily due to higher insurance costs and car taxes. Other Income (Expense)
Net gain on asset dispositions decreased $4.3 million, primarily due to the timing of remarketing gains, partially offset by asset impairment charges in the prior year that related to sold locomotives. Net interest expense increased $2.8 million, primarily due to higher interest rates. Other expense increased $3.1 million, primarily due to termination costs incurred on the early repayment of debt. Share of affiliates' earnings increased $4.2 million, primarily due to a gain on a disposition of railcars at our Southern Capital affiliate. Labor Update
In the second quarter, we executed a new three-year collective bargaining agreement with the United Steelworkers, which represents approximately 300 hourly employees at Rail North America's three U.S. service centers.


Rail International At Rail Europe, we experienced modest improvements in lease rate pricing and continued to increase our fleet through investments in new tank cars. Demand for certain tank car types is being tempered by the weak European economy and as a result we have been scrapping some older railcars sooner than previously anticipated. At the end of the second quarter of 2013, our international fleet utilization was 95.6% compared to 95.1% at the end of 2012 and 96.3% at June 30, 2012. Our AAE affiliate, which serves freight car markets, is achieving stable operating results; however, fleet utilization remains much lower than historical levels due to the weak European economy. Rail India continues to pursue railcar leasing and investment opportunities.
The following table shows Rail International's segment results (in millions):

                                                 Three Months Ended June 30         Six Months Ended June 30
                                                   2013              2012             2013             2012
Revenues
Lease revenue                                 $      43.6       $      39.0      $      86.6       $      79.0
Other revenue                                         1.7               1.6              3.9               2.5
Total Revenues                                       45.3              40.6             90.5              81.5
Expenses
Maintenance expense                                   9.6              12.3             21.1              24.8
Depreciation expense                                 10.6               8.6             20.7              17.2
Other operating expense                               1.4               1.8              2.3               2.9
Total Expenses                                       21.6              22.7             44.1              44.9
Other Income (Expense)
Net gain on asset dispositions                        1.3               1.2              2.5               2.1
Interest expense, net                                (5.2 )            (6.5 )          (10.8 )           (12.9 )
Other income (expense)                                  -               0.3              0.5              (1.5 )
Share of affiliates' earnings (pretax)                4.6             (16.5 )            4.4             (20.0 )
Segment Profit                                $      24.4       $      (3.6 )    $      43.0       $       4.3
Investment Volume                             $      46.9       $      39.2      $      91.2       $      84.0

Fleet Information
The following table shows railcar fleet activity for Rail International:
                                June 30      September 30    December 31    March 31      June 30
                                  2012           2012            2012         2013          2013
Beginning balance                 21,064          21,209         21,314       21,840       21,896
Cars added                           273             355            650          361          492
Cars scrapped or sold               (128 )          (250 )         (124 )       (305 )       (402 )
Ending balance                    21,209          21,314         21,840       21,896       21,986
Utilization rate at quarter end     96.3 %          96.6 %         95.1 %       95.5 %       95.6 %
Average active railcars           20,386          20,490         20,635       20,817       20,948


[[Image Removed]] Comparison of the First Six Months of 2013 to the First Six Months of 2012 Segment Profit
Segment profit was $43.0 million, an increase of $38.7 million over the prior year. The current year included gains of $1.9 million related to certain interest rate swaps at AAE compared to losses of $18.8 million in the prior year. Excluding the impact of the AAE swaps from each period, segment profit increased $18.0 million, primarily due to higher lease revenue, lower net maintenance expense, and an increase in our share of affiliates' earnings. 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 currently recognized in income. Unrealized gains and losses that result from changes in fair value are 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. 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. Revenues
Lease revenue increased $7.6 million, primarily due to an average of 507 more railcars on lease and higher rates. Other revenue increased $1.4 million, primarily due to higher repair revenue.
Expenses
Maintenance expense decreased $3.7 million, primarily due to fewer underframe revisions due in part to the aforementioned scrapping of older railcars. Depreciation expense increased $3.5 million, primarily due to investment activity, which includes capitalized wheelsets. Other Income (Expense)
Net interest expense decreased $2.1 million, primarily due to lower interest rates. Other expense decreased $2.0 million, primarily due to the favorable remeasurement of an embedded foreign currency derivative. Excluding the impact of the interest rate swaps at AAE from each period, share of affiliates' earnings increased $3.7 million, primarily due to lower depreciation expense at AAE attributable to a change in policy that was enacted in 2012. Investment Volume
During 2013, we acquired 853 railcars compared to 577 railcars in 2012. Comparison of the Second Quarter of 2013 to the Second Quarter of 2012 Segment Profit
Segment profit was $24.4 million, an increase of $28.0 million over the prior year. The current year results included gains of $3.3 million related to certain interest rate swaps at AAE compared to losses of $16.3 million in the prior year. Excluding the impact of the AAE swaps from each period, segment profit increased $8.4 million, primarily due to higher lease revenue, lower net maintenance expense, and an increase in our share of affiliates' earnings.


Revenues
Lease revenue increased $4.6 million, primarily due to an average of 562 more . . .

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