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GMT > SEC Filings for GMT > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for GATX CORP


30-Oct-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 nine months ended September 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 September
                                                              30                    Nine Months Ended September 30
                                                     2013             2012             2013                2012
Segment Revenues
Rail North America                               $   206.5         $   193.4     $       605.2       $       568.5
Rail International                                    47.5              41.5             138.0               123.0
ASC                                                   74.1              80.2             160.2               169.2
Portfolio Management                                  25.1              16.8              61.0                50.8
                                                 $   353.2         $   331.9     $       964.4       $       911.5
Segment Profit
Rail North America                               $    57.9         $    45.6     $       156.4       $       149.5
Rail International                                    34.8              17.9              77.8                22.2
ASC                                                   12.9              13.2              23.8                29.3
Portfolio Management                                  17.7              15.0              47.5                51.6
                                                     123.3              91.7             305.5               252.6
Less:
Selling, general and administrative expense
("SG&A")                                              42.0              38.6             129.8               115.6
Unallocated interest expense, net                      0.4               1.8               2.7                 4.0
Other, including eliminations                         (0.5 )            (0.3 )            (0.6 )              (0.9 )
Income taxes (includes $(3.7) and $(0.5) QTR,
and $9.7 and $4.0 YTD related to affiliates'
earnings)                                             27.6              (2.2 )            57.6                26.3
Net Income                                       $    53.8         $    53.8     $       116.0       $       107.6
Net income, excluding tax adjustments and other
items                                            $    51.0         $    35.6     $       111.5       $       106.9
Diluted earnings per share                            1.15              1.13              2.45                2.26
Diluted earnings per share, excluding tax
adjustments and other items                           1.09              0.75              2.36                2.24
Investment Volume                                    196.2             131.6             666.8               523.4

The following table shows our return on equity for the trailing twelve months ended September 30:
2013 2012 Return on equity 11.5 % 11.7 % Return on equity, excluding tax adjustments and other items 10.9 % 11.5 %

Our net income was $116.0 million, or $2.45 per diluted share, for the first nine months of 2013, compared to $107.6 million, or $2.26 per diluted share, in 2012. Results for 2013 and 2012 included benefits from tax adjustments and other items of $4.5 million and $0.7 million, 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 nine months of 2013 was $111.5 million, compared to $106.9 million in 2012. The increase in 2013 was driven by higher railcar lease revenue, partially offset by increased maintenance expense and higher SG&A expense.
Our net income was $53.8 million, or $1.15 per diluted share, for the third quarter of 2013, compared to $53.8 million, or $1.13 per diluted share, in 2012. Results for the third quarter of 2013 and 2012 included benefits from tax adjustments and other items of $2.8 million and $18.2 million. Excluding the impact of these items, our net income for the third quarter of 2013 was $51.0 million, compared to $35.6 million in 2012. The increase in 2013 was primarily due to higher railcar lease revenue and higher asset remarketing income offset by increased maintenance expense and higher SG&A expense.


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, pre-tax 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 our 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 third 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 market. The average renewal rate on leases for railcars in our Lease Price Index (the "LPI," see definition below) increased 34.3% from the average expiring lease rate in the current quarter, compared to increases of 36.0% in the prior quarter and 26.4% in the third quarter of 2012. Lease terms on renewals for railcars in the LPI averaged 63 months in the current quarter compared to 58 months in the prior quarter and 59 months in the third 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 98.5% compared to 98.2% at the end of prior quarter and 98.2% at September 30, 2012. For the remainder of 2013, we have leases expiring on approximately 5,000 railcars, of which 1,100 serve the coal market. In the current strong environment for tank cars, we expect to continue to pursue longer lease terms on both renewals and assignments. We also expect strong asset remarketing gains in the fourth quarter. As we expected, the number of railcars undergoing regulatory compliance work has increased in 2013 and we anticipate this compliance activity to continue in the fourth quarter and into 2014.
The following table shows Rail North America's segment results (in millions):
                                                   Three Months Ended September 30           Nine Months Ended September 30
                                                     2013                   2012                2013                2012
Revenues
Lease revenue                                 $         192.2         $         180.7     $       563.3       $       531.9
Other revenue                                            14.3                    12.7              41.9                36.6
Total Revenues                                          206.5                   193.4             605.2               568.5
Expenses
Maintenance expense                                      58.6                    51.3             170.8               148.1
Depreciation expense                                     44.9                    42.2             129.9               125.7
Operating lease expense                                  29.7                    31.4              94.0                94.1
Other operating expense                                   4.9                     5.2              13.9                13.6
Total Expenses                                          138.1                   130.1             408.6               381.5
Other Income (Expense)
Net gain on asset dispositions                           20.5                     9.2              40.9                39.7
Interest expense, net                                   (26.1 )                 (26.3 )           (80.5 )             (78.0 )
Other expense                                            (4.8 )                  (1.8 )            (8.9 )              (3.9 )
Share of affiliates' earnings (pre-tax)                  (0.1 )                   1.2               8.3                 4.7
Segment Profit                                $          57.9         $          45.6     $       156.4       $       149.5

Investment Volume                             $         130.8         $          81.9     $       345.9       $       318.5


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

                                                 Three Months Ended           Nine Months Ended
                                                    September 30                September 30
                                                  2013          2012          2013          2012
Railcars                                      $    183.8     $  172.2     $    539.3     $  506.8
Locomotives                                          8.4          8.5           24.0         25.1
                                              $    192.2     $  180.7     $    563.3     $  531.9

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:
                                September 30    December 31     March 31     June 30     September 30
                                    2012            2012          2013         2013          2013
Beginning balance                   109,187        109,162      109,551      109,637         110,774
Cars added                              858          1,106          988        2,035             914
Cars scrapped                          (544 )         (366 )       (810 )       (456 )          (308 )
Cars sold                              (339 )         (351 )        (92 )       (442 )        (1,425 )
Ending balance                      109,162        109,551      109,637      110,774         109,955
Utilization rate at quarter end        98.2 %         97.9 %       97.8 %       98.2 %          98.5 %
Average active railcars             107,224        107,062      106,964      107,722         108,452

[[Image Removed]]

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

                                 September 30     December 31     March 31     June 30      September 30
                                     2012            2012           2013         2013           2013
Beginning balance                      549             554            561          564            558
Locomotives added                        7              23             36           10             31
Locomotives scrapped or sold            (2 )           (16 )          (33 )        (16 )            -
Ending balance                         554             561            564          558            589
Utilization rate at quarter end       99.1 %          98.6 %         94.0 %       95.2 %         97.8 %
Average active locomotives             545             557            525          528            555


Comparison of the First Nine Months of 2013 to the First Nine Months of 2012 Segment Profit
Segment profit of $156.4 million was $6.9 million higher than the prior year, primarily due to higher lease revenue and affiliate earnings, partially offset by increased maintenance expense.
Revenues
Lease revenue increased $31.4 million, driven by higher lease rates and an average of 337 more cars on lease compared to the prior year. Other revenue increased $5.3 million, primarily due to higher repair revenue in the current year.
Expenses
Maintenance expense was $22.7 million higher primarily due to increased regulatory compliance work, more wheelset replacements, and additional customer liability repairs.
Other Income (Expense)
Net gain on asset dispositions increased $1.2 million, primarily due to the receipt of a residual sharing fee. Net interest expense increased $2.5 million, as slightly higher rates offset lower debt balances. Other expense increased $5.0 million, primarily due to termination costs associated with the early buyout of an operating lease and the prepayment of certain secured debt issuances. Share of affiliates' earnings increased $3.6 million, primarily due to gains on dispositions of railcars at our Southern Capital affiliate, which included the transfer of 591 railcars to GATX. Investment Volume
During 2013, we acquired 2,243 new railcars and 1,753 railcars in the secondary market compared to 2,678 new railcars and 705 secondary market railcars in 2012. Comparison of the Third Quarter of 2013 to the Third Quarter of 2012 Segment Profit
Segment profit of $57.9 million was $12.3 million higher than the prior year, primarily due to higher lease revenue and increased asset sales. The increase was partially offset by higher maintenance expense. Revenues
Lease revenue increased $11.5 million, primarily because of higher lease rates and an average of 1,228 more cars on lease compared to the prior year. Other revenue increased $1.6 million, primarily due to higher repair revenue in the current quarter.
Expenses
Maintenance expense was $7.3 million higher in the current quarter, primarily due to increased regulatory compliance work and more customer liability repairs. Operating lease expense decreased $1.7 million as a result of an early buyout of an operating lease.
Other Income (Expense)
Net gain on asset dispositions increased $11.3 million, primarily due to the timing of asset sales. Net interest expense in 2013 approximated the prior year, as the impact of lower debt balances was offset by slightly higher rates. Other expense increased $3.0 million, driven by costs associated with the early buyout of an operating lease and the prepayment of certain secured debt issuances. Share of affiliates' earnings decreased $1.3 million, as the portfolio of railcars at our Southern Capital affiliate was substantially reduced when railcars were distributed to each of the partners earlier in 2013. North American Rail Regulatory Matters
On September 6, 2013, the Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation ("PHMSA") issued an Advance Notice of Proposed Rulemaking (the "ANPRM") seeking public comment on potential design enhancements to certain tank cars, commonly referred to as DOT 111 tank cars, used to transport various hazardous materials, including crude oil and ethanol. Public comments on the ANPRM are due on November 5, 2013, and we are closely monitoring and participating in the rulemaking process. Based on the potential design enhancements and the flammable hazardous commodities discussed in the ANPRM, we currently estimate that approximately 7,000 DOT 111 tank cars in our fleet may be affected by any new regulations PHMSA promulgates as a result of this process. Since the ANPRM did not propose specific design enhancements or retirement schedules for the existing fleet of DOT 111 tank cars, we currently are unable to assess what changes, if any, may ultimately be required with respect to these cars and how any new regulations may impact GATX.


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 third quarter of 2013, our fleet utilization was 96.2% compared to 95.6% at the end of the prior quarter and 96.6% at September 30, 2012. In the third quarter of 2013, we sold our 37.5% interest in AAE Cargo AG ("AAE"). This sale provides Rail Europe the opportunity to independently pursue new investments in the European freight car market. The following table shows Rail International's segment results (in millions):

                                                  Three Months Ended September 30          Nine Months Ended September 30
                                                     2013                  2012               2013                2012
Revenues
Lease revenue                                 $         45.6         $         40.1     $       132.2       $       119.1
Other revenue                                            1.9                    1.4               5.8                 3.9
Total Revenues                                          47.5                   41.5             138.0               123.0
Expenses
Maintenance expense                                     10.9                    9.8              32.0                34.6
Depreciation expense                                    10.8                    8.9              31.5                26.1
Other operating expense                                  1.3                    1.1               3.6                 4.0
Total Expenses                                          23.0                   19.8              67.1                64.7
Other Income (Expense)
Net gain on asset dispositions                           1.3                    1.0               3.8                 3.1
Interest expense, net                                   (6.7 )                 (6.1 )           (17.5 )             (19.0 )
Other income (expense)                                  (1.0 )                 (1.8 )            (0.5 )              (3.3 )
Share of affiliates' earnings (pre-tax)                 16.7                    3.1              21.1               (16.9 )
Segment Profit                                $         34.8         $         17.9     $        77.8       $        22.2

Investment Volume                             $         43.7         $         41.4     $       134.9       $       125.4

Fleet Information
The following table shows railcar fleet activity for Rail International:
                                September 30    December 31     March 31     June 30     September 30
                                    2012            2012          2013         2013          2013
Beginning balance                    21,209         21,314       21,840       21,896          21,986
Cars added                              355            650          361          492             349
Cars scrapped or sold                  (250 )         (124 )       (305 )       (402 )          (294 )
Ending balance                       21,314         21,840       21,896       21,986          22,041
Utilization rate at quarter end        96.6 %         95.1 %       95.5 %       95.6 %          96.2 %
Average active railcars              20,490         20,635       20,817       20,948          21,091


[[Image Removed]] Comparison of the First Nine Months of 2013 to the First Nine Months of 2012 Segment Profit
Segment profit was $77.8 million, an increase of $55.6 million over the prior year. The current year included a gain of $9.3 million on the sale of our AAE investment and gains of $7.7 million related to certain interest rate swaps at AAE, compared to losses of $20.9 million in the prior year. Excluding the impact of these items from each period, segment profit increased $17.7 million, as increased lease income and fewer maintenance events offset higher depreciation expense.
AAE held multiple interest rate swaps intended to hedge interest rate risk associated with existing and forecasted floating rate debt issuances. Some of these swaps did not qualify for hedge accounting, and as a result, changes in their fair values were recognized in income. Unrealized gains and losses that resulted from changes in fair value were primarily driven by changes in the underlying benchmark interest rates. 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 $13.1 million, primarily due to an average of 537 more railcars on lease, higher rates and the foreign exchange effects of a stronger Euro. Other revenue increased $1.9 million, primarily due to higher repair revenue.
Expenses
Maintenance expense decreased $2.6 million, primarily due to fewer underframe revisions due in part to the scrapping of older railcars. Investment activity, including capitalized wheelsets, drove depreciation expense higher by $5.4 million.
Other Income (Expense)
Net gain on asset dispositions increased $0.7 million as a result of more railcars scrapped. Net interest expense decreased $1.5 million, due to lower interest rates. Other expense decreased $2.8 million from the favorable remeasurement of an embedded foreign currency derivative. Excluding the impact of the AAE disposition gain and interest rate swaps from each period, share of affiliates' earnings was $4.1 million, substantially the same as the prior year. Investment Volume
During 2013, we acquired 1,202 railcars compared to 932 railcars in 2012. Comparison of the Third Quarter of 2013 to the Third Quarter of 2012 Segment Profit
Segment profit was $34.8 million, an increase of $16.9 million over the prior year. The current year results included a gain of $9.3 million on the sale of . . .

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