Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GMT > SEC Filings for GMT > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for GATX CORP

Form 10-K for GATX CORP


25-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

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 report our financial results through four primary business segments: Rail North America, Rail International, American Steamship Company ("ASC"), and Portfolio Management. A more complete description of our business is included in "Item 1. Business," in Part I of this Form 10-K.

The following discussion and analysis should be read in conjunction with the audited financial statements included in "Item 8. Financial Statements and Supplementary Data" in this Form10-K. We based the discussion and analysis that follows on financial data we derived from the financial statements prepared in accordance with GAAP and on certain other financial data that we 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.

DISCUSSION OF OPERATING RESULTS

The following table shows a summary of our reporting segments and consolidated
financial results for years ended December 31 (in millions, except per share
data and percentages):
                                                          2013          2012          2011
Segment Revenues
Rail North America                                     $   817.1     $   765.3     $   742.4
Rail International                                         189.0         167.7         168.3
ASC                                                        227.7         243.4         216.4
Portfolio Management                                        87.2          66.8          64.3
                                                       $ 1,321.0     $ 1,243.2     $ 1,191.4
Segment Profit
Rail North America                                     $   231.6     $   209.3     $   172.7
Rail International                                          97.4          32.7          60.7
ASC                                                         28.9          37.5          27.3
Portfolio Management                                        74.4          50.2          47.6
                                                           432.3         329.7         308.3
Less:
Selling, general and administrative expense                178.3         160.2         155.3
Unallocated interest expense, net                            3.8           5.4           4.5
Other, including eliminations                               (1.1 )        (1.3 )         0.3
Income taxes ($16.5, $2.0 and $8.2 related to               82.0          28.1          37.4
affiliates' earnings)
  Net Income                                           $   169.3     $   137.3     $   110.8

Net income, excluding tax adjustments and other items  $   164.8     $   133.8     $    95.0
Diluted earnings per share                                  3.59          2.88          2.35
Diluted earnings per share, excluding tax adjustments
and other items                                             3.50          2.81          2.01

Return on equity                                            12.8 %        11.6 %         9.9 %
Return on equity, excluding tax adjustments and other       12.5 %        11.3 %         8.5 %
items

Investment Volume                                      $   859.6     $   770.0     $   614.6


2013 Summary

Net income was $169.3 million, or $3.59 per diluted share, for 2013 compared to $137.3 million, or $2.88 per diluted share, for 2012 and $110.8 million, or $2.35 per diluted share, for 2011. Results included benefits from tax adjustments and other items of $4.5 million for 2013, $3.5 million for 2012, and $15.8 million for 2011 (see "Non-GAAP Financial Measures" at the end of this item for further details). Excluding the impact of these items, net income was $164.8 million for 2013, which represented an increase of $31.0 million or 23.2%, compared to 2012. Net income was $133.8 million for 2012, which represented an increase of $38.8 million or 40.8% compared to 2011.
• At Rail North America, higher lease rates and increased asset remarketing income drove an increase in segment profit. These increases were partially offset by higher maintenance costs from increased compliance work and higher depreciation expense as new cars were added to the fleet.

• At Rail International, higher lease revenue, lower maintenance costs, and increased scrapping partially offset by higher depreciation, drove an increase in segment profit.

• At ASC, lower iron ore freight volumes and operating delays caused segment profit to decrease. In addition, the decision to scrap an older vessel resulted in an impairment loss in the current year, which negatively impacted segment results.

• At Portfolio Management, higher marine operating results, which reflect 100% ownership of the former Singco and Somargas vessels (collectively the "Norgas vessels") for a portion of the year, and higher affiliate earnings, drove an increase in segment profit compared to the prior year. These increases were partially offset by lower lease revenue.

Total investment volume was $859.6 million in 2013, compared to $770.0 million in 2012 and $614.6 million in 2011.
2014 Outlook
Overall, we are optimistic about the year ahead primarily due to critical steps we took during the recession that have allowed our rail platforms to benefit from favorable current trends that we expect will continue into 2014.
• We expect higher segment profit at Rail North America in 2014 as lease revenue continues to increase. Lease rates on most tank car types are at record highs and the environment currently appears stable. We plan to capitalize on this continued high demand by placing railcars on long-term leases. Growing lease revenues should more than offset a modest decline in remarketing income and increased maintenance expense as we work through our tank car compliance cycle. Separately, recent serious accidents in crude by rail transportation have created uncertainty around how new and existing tank cars must be outfitted for various types of service. As a result, tank car regulations may change and we may incur costs to ensure that our fleet continues to comply with the applicable regulations. It is not possible at this time to estimate the extent or timing of any regulatory changes, or what impact they might have on us.

• We expect a slight increase in Rail International segment profit in 2014 due to slowly improving market conditions. Investment volume in the past two years was at the highest levels since we made our initial investment in Europe nearly twenty years ago, and we anticipate another strong investment year in 2014. Our continued investment in Europe is a result of our commitment to assist our customers with the fleet replacement required in the European tank car market.

• We expect a slight increase in ASC's segment profit in 2014 as shipping volume should improve in 2014 as we expect to recapture some of the tonnage lost during the challenging weather conditions experienced in the fourth quarter of 2013.

• We believe Portfolio Management's segment profit will decrease modestly in 2014. While we expect continued strong performance at the Rolls-Royce affiliates, aggregate earnings from affiliates and remarketing income will be lower.


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, pretax earnings from affiliates, and net gains on asset dispositions that are attributable to the segments, as well as expenses that management believes 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 certain other amounts not allocated to the segments. These amounts are included in other.

We allocate debt balances and related 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 using this leverage and interest expense allocation methodology, each operating segment's financial performance reflects appropriate risk-adjusted borrowing costs.

RAIL NORTH AMERICA

Segment Summary

In 2013, Rail North America continued to experience strong demand for tank cars, which led to historically high lease rate pricing and longer lease terms. The weighted average lease renewal rate on cars in our Lease Price Index (the "LPI," see definition below) increased 34.5% from the weighted average expiring lease rate, compared to an increase of 25.6% in 2012 and 6.9% in 2011. Lease terms on renewals for cars in the LPI averaged 62 months in 2013, compared to 60 months in 2012 and 45 months in 2011. During 2013, an average of 107,721 railcars were on lease compared to 107,255 in 2012. Utilization was 98.5% at the end of 2013, compared to 97.9% at the end of 2012.

In 2014, we expect higher lease revenue, a modest decline in remarketing income, and increased maintenance expense as we work through the tank car compliance cycle. Leases for approximately 20,000 railcars will expire in 2014, and we expect strong renewal success at attractive rates, particularly for tank cars. However, cars that serve the coal markets, including 2,750 cars that have leases expiring in 2014, are experiencing relatively weak demand, and we expect that utilization and lease pricing for these cars will remain below historical norms.

In 2011, we entered into a purchase agreement for 12,500 railcars, which was the largest such commitment in our history. Under this agreement, we have taken delivery of 5,900 railcars as of December 31, 2013, and expect to take delivery of 2,500 railcars in 2014. We also expect to acquire an additional 900 new railcars outside of this agreement in 2014. We may add other selected assets to our fleet, although rising asset prices may impact our investment spending.


The following table shows Rail North America's segment results for the years ended December 31 (in millions):

                                         2013        2012        2011
Revenues
Lease revenue                          $ 758.9     $ 713.9     $ 690.9
Other revenue                             58.2        51.4        51.5
  Total Revenues                         817.1       765.3       742.4

Expenses
Maintenance expense                      228.2       201.4       206.1
Depreciation expense                     176.7       167.7       162.5
Operating lease expense                  124.4       126.5       130.9
Other operating expense                   18.4        18.5        18.8
  Total Expenses                         547.7       514.1       518.3

Other Income (Expense)
Net gain on asset dispositions            67.7        58.6        52.1
Interest expense, net                   (106.0 )    (101.9 )    (101.7 )
Other expense                             (9.8 )      (5.1 )      (5.7 )
Share of affiliates' earnings (pretax)    10.3         6.5         3.9
Segment Profit                         $ 231.6     $ 209.3     $ 172.7

Investment Volume                      $ 502.4     $ 465.9     $ 280.5

The following table shows the components of Rail North America's lease revenue for the years ended December 31 (in millions):

              2013       2012       2011
Railcars    $ 726.7    $ 680.0    $ 654.9
Locomotives    32.2       33.9       36.0
            $ 758.9    $ 713.9    $ 690.9

Lease Price Index

Our LPI is an internally-generated business indicator that measures 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. The average renewal lease rate change is reported as the percentage change between the average renewal lease rate and the average expiring lease rate, weighted by fleet composition. 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]]

Rail North America Fleet Data

The following table shows fleet activity for Rail North America railcars for the
years ended December 31:
                                    2013        2012        2011
Beginning balance                 109,551     109,070     111,389
Cars added                          5,116       4,572       2,873
Cars scrapped                      (1,828 )    (2,045 )    (3,363 )
Cars sold                          (3,726 )    (2,046 )    (1,829 )
Ending balance                    109,113     109,551     109,070
Utilization rate at year end         98.5 %      97.9 %      98.2 %
Active railcars at year end       107,502     107,216     107,075

Average (monthly) active railcars 107,721 107,255 107,320


[[Image Removed]]

The following table shows fleet activity for Rail North America locomotives for the years ended December 31:

                                      2013     2012     2011
Beginning balance                     561      572      550
Locomotives added                      83       50       28
Locomotives scrapped or sold          (49 )    (61 )     (6 )
Ending balance                        595      561      572
Utilization rate at year end         98.2 %   98.6 %   98.1 %
Active locomotives at year end        584      553      561
Average (monthly) active locomotives  547      549      553

Segment Profit

In 2013, segment profit increased to $231.6 million, compared to $209.3 million in 2012, primarily due to higher lease revenue and net gain on asset dispositions, partially offset by increased maintenance expense.

In 2012, segment profit increased to $209.3 million compared to $172.7 million in 2011. The 2011 results included $5.5 million of revenue from a leveraged lease adjustment that related to changes in the timing of the taxable income from a leveraged lease structure. Excluding the effect of this item, segment profit increased $42.1 million, primarily due to higher lease revenue and gains on asset dispositions combined with lower maintenance expense.

Revenues

In 2013, lease revenue increased $45.0 million, primarily because of higher lease rates and an average of approximately 500 more cars on lease compared to the prior year. Other revenue increased $6.8 million, primarily due to higher repair revenue in the current year.

In 2012, lease revenue increased $23.0 million, primarily due to higher lease rates, as the average number of cars on lease approximated 2011. The absence of the aforementioned leveraged lease adjustment partially offset the increase.


Expenses

In 2013, maintenance expense increased $26.8 million, primarily due to the expected increase in compliance maintenance and higher costs of repairs. Depreciation expense increased $9.0 million, primarily due to fleet additions. Operating lease expense decreased $2.1 million, due to the 2013 and 2012 acquisitions of railcars previously leased in on operating leases.

In 2012, maintenance expense decreased $4.7 million, driven by high lease renewal success relative to 2011which led to fewer service events. Depreciation increased $5.2 million, primarily due to investment activity. Operating lease expense decreased $4.4 million, the result of our acquisition of railcars previously leased in on operating leases that expired in 2011.

Other Income (Expense)

In 2013, net gain on asset dispositions increased $9.1 million, primarily due to sales of approximately 1,700 more railcars in the current year. The prior year included an $11.1 million fee on the early termination of a residual value guarantee. Net interest expense increased $4.1 million due to higher debt balances in 2013. Other expense increased $4.7 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 $3.8 million, primarily due to gains on dispositions of railcars from our Southern Capital affiliate.

In 2012, net gain on asset dispositions increased $6.5 million, primarily due to the $11.1 million residual value guarantee fee noted above. This increase was partially offset by lower scrapping gains, as fewer railcars were scrapped at lower scrapping rates. Share of affiliates' earnings increased $2.6 million, primarily due to asset remarketing gains at the Adler affiliate in 2012.

Investment Volume

Investment volume was $502.4 million in 2013, $465.9 million in 2012, and $280.5 million in 2011. During 2013, we acquired approximately 4,520 railcars compared to 4,470 railcars in 2012, and 2,650 railcars in 2011.

North American Rail Regulatory Matters

Recent derailments involving trains carrying crude oil and ethanol have led to increased regulatory scrutiny of railroad operations, shippers' classification of products, and the tank cars carrying these commodities. On September 6, 2013, the Pipeline and Hazardous Materials Safety Administration of the US 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, ethanol and other flammable commodities. The period for public comments on the ANPRM ended on December 5, 2013. We participated in the rulemaking process through The Railway Supply Institute, a rail industry trade association which submitted comments on the ANPRM. The ANPRM did not propose specific design enhancements or retirement schedules for the existing fleet of DOT 111 tank cars. Accordingly, 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. We have approximately 4,000 tank cars currently in crude and ethanol service and another 8,000 cars in flammable liquids service.

RAIL INTERNATIONAL

Segment Summary

Rail International performed well in 2013, despite a weaker European railcar leasing market. Investment volume was strong and we anticipate another strong investment year in 2014. At the end of 2013, our fleet utilization was 96.4% compared to 95.1% at the end of 2012. During 2013, there were an average of 20,994 railcars on lease compared to 20,468 in 2012. In 2013, we sold our 37.5% interest in Ahaus Alstätter Eisenbahn Cargo AG ("AAE"), a Switzerland-based freight car lessor, for a cash payment of $23.0 million and a seller loan of $91.1 million. This sale will provide us the opportunity to independently pursue new investments in the European freight car market.


We are expecting a slight increase in Rail International's segment profit in 2014 due to slowly improving market conditions. Investment volume at Rail International will be comparable to 2013 as we expect to take delivery of approximately 1,100 new railcars in 2014. Our continued investment in Europe is a result of our commitment to assist our customers with the fleet replacement required in the European tank car market.
Rail India commenced operations in 2012, taking delivery of 46 newly manufactured railcars in 2012 and an additional 137 railcars in 2013.

The following table shows Rail International's segment results for the years ended December 31 (in millions):

                                         2013        2012        2011
Revenues
Lease revenue                          $ 180.2     $ 161.2     $ 160.5
Other revenue                              8.8         6.5         7.8
  Total Revenues                         189.0       167.7       168.3

Expenses
Maintenance expense                       42.9        46.6        52.1
Depreciation expense                      43.2        36.1        33.6
Other operating expense                    5.3         5.1         4.2
  Total Expenses                          91.4        87.8        89.9

Other Income (Expense)
Net gain on asset dispositions             3.7         1.7           -
Interest expense, net                    (23.9 )     (24.5 )     (25.4 )
Other (expense) income                    (1.1 )      (6.1 )       7.2
Share of affiliates' earnings (pretax)    21.1       (18.3 )       0.5
Segment Profit                         $  97.4     $  32.7     $  60.7

Investment Volume                      $ 168.5     $ 200.1     $ 140.8

The following table shows fleet activity for Rail International railcars for the years ended December 31:

                                    2013       2012       2011
Beginning balance                 21,840     20,927     20,432
Cars added                         1,505      1,582        841
Cars scrapped or sold             (1,326 )     (669 )     (346 )
Ending balance                    22,019     21,840     20,927
Utilization rate at year end        96.4 %     95.1 %     97.1 %
Active railcars at year end       21,235     20,763     20,321

Average (monthly) active railcars 20,994 20,468 19,834


[[Image Removed]]

Foreign Currency

Segment profit for Rail International was impacted by changes in the exchange rate of foreign currencies, primarily the Euro. In 2013, a stronger Euro contributed to the increase in lease revenue and segment profit compared to 2012. A weaker Euro negatively impacted lease revenue and segment profit in 2012 compared to 2011.

Segment Profit

Segment profit was $97.4 million in 2013 compared to $32.7 million in 2012. The 2013 results 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. The 2012 results include losses of $22.9 million from the swaps. Excluding the effect of the AAE items noted, segment profit increased $24.8 million in 2013. This increase was due to increased lease revenue and fewer maintenance events, partially offset by higher depreciation expense.

AAE held 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 affiliates' earnings. Additionally, in 2012, AAE refinanced a portion of its debt and terminated an associated swap at a loss. Our portion of the loss was $13.5 million, which was included in share of affiliates' earnings.

Segment profit was $32.7 million in 2012 compared to $60.7 million in 2011. The 2012 results included the aforementioned losses of $22.9 million related to certain interest rate swaps at AAE compared to gains of $0.3 million on those swaps in 2011. Segment profit in 2011 also included $3.2 million from the favorable resolution of a litigation matter. Excluding the effect of these items from each period, segment profit decreased $1.6 million, partially due to the unfavorable remeasurement of an embedded foreign currency derivative. The decrease in segment profit was partially offset by lower maintenance expense and higher operating income at AAE.

Revenues

Lease revenue increased $19.0 million in 2013, primarily due to an average of approximately 500 more railcars on lease at higher lease rates and as noted above, the effects of a stronger Euro. Other revenue increased $2.3 million, primarily due to higher repair revenue in the current year.

Lease revenue in 2012 increased $0.7 million compared to 2011, primarily due to an average of approximately 600 more railcars on lease at higher lease rates. As noted above, lease revenue was negatively impacted by the foreign exchange rate effects of a weaker Euro. Other revenue decreased $1.3 million, primarily due to lower revenue from customer liability repairs.


Expenses

Maintenance expense decreased $3.7 million in 2013, primarily due to fewer underframe revisions and lower repairs as we accelerated scrapping of older railcars. Investment activity, including capitalized wheelsets in Europe drove depreciation expense higher by $7.1 million.

Maintenance expense in 2012 decreased $5.5 million compared to 2011. Depreciation increased $2.5 million, primarily due to investment activity, including capitalized wheelsets in Europe.

Other Income (Expense)

Net gain on asset dispositions increased $2.0 million in 2013 due to more railcars being scrapped. Net interest expense decreased $0.6 million, due to lower interest rates, however, the effects of lower rates were partially offset by higher debt balances. Other expense decreased $5.0 million, primarily due to the favorable remeasurement of an embedded foreign currency derivative (related to certain non-functional currency lease contracts) and higher net remeasurement gains on non-functional currency assets and liabilities in 2013. The decreases to other expense were partially offset by higher legal defense costs. Excluding the impact of the AAE disposition gain and the impact of the interest rate swaps from each period, share of affiliates' earnings decreased $0.5 million, primarily due to lower operating income at AAE, reflective of a partial year of ownership.

Net gain on asset dispositions in 2012 increased $1.7 million compared to 2011, primarily due to higher scrapping gains as more railcars and wheelsets were scrapped. Interest expense decreased $0.9 million, as interest income on cash deposits more than offset the effect of higher expenses from increased debt levels. Other expense increased $13.3 million, of which $3.2 million was due to the favorable resolution of a litigation matter in 2011 that reduced other expense. The remaining variance was primarily due to the unfavorable remeasurement of an embedded foreign currency derivative and higher legal defense costs. Excluding the impact of the interest rate swaps at AAE from each period, affiliates' earnings increased $4.4 million, primarily due to higher operating income at AAE, which included lower depreciation expense of $6.2 million due to a change in railcar depreciation policy enacted in 2012 that extended depreciable lives and increased estimated salvage values.

Investment Volume

Investment volume was $168.5 million in 2013, $200.1 million in 2012, and $140.8 . . .

  Add GMT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GMT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.