10-Q 1 gmt-20130630x10q.htm 10-Q GMT-20130630-10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________ 
FORM 10-Q
__________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-2328
GATX Corporation
(Exact name of registrant as specified in its charter)
New York
36-1124040
(State of incorporation)
(I.R.S. Employer Identification No.)
222 West Adams Street
Chicago, Illinois 60606-5314
(Address of principal executive offices, including zip code)
(312)621-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
 
x
Large accelerated filer
 
¨
Accelerated filer
 
¨
Non-accelerated filer
 
¨
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨    No  x
As of June 30, 2013, 46.2 million common shares were outstanding.
 
 
 
 
 



GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2013
INDEX
Item No.
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
 
June 30 2013
 
December 31 2012
Assets
 
 
 
Cash and Cash Equivalents
$
96.7

 
$
234.2

Restricted Cash
25.3

 
29.7

Receivables
 
 
 
Rent and other receivables
83.8

 
88.4

Loans
24.4

 
27.2

Finance leases
222.7

 
245.7

Less: allowance for losses
(4.5
)
 
(4.6
)
 
326.4

 
356.7

Operating Assets and Facilities ($123.2 and $123.1 related to a consolidated VIE)
7,198.3

 
6,855.2

Less: allowance for depreciation ($27.4 and $24.7 related to a consolidated VIE)
(2,239.8
)
 
(2,200.8
)
 
4,958.5

 
4,654.4

Investments in Affiliated Companies
424.3

 
502.0

Goodwill
90.8

 
91.7

Other Assets
197.2

 
186.7

Total Assets
$
6,119.2

 
$
6,055.4

Liabilities and Shareholders’ Equity
 
 
 
Accounts Payable and Accrued Expenses
$
167.2

 
$
177.4

Debt
 
 
 
Commercial paper and borrowings under bank credit facilities
17.4

 
273.6

Recourse
3,546.4

 
3,152.4

Nonrecourse ($30.3 and $35.1 related to a consolidated VIE)
103.0

 
130.6

Capital lease obligations
10.1

 
11.3

 
3,676.9

 
3,567.9

Deferred Income Taxes
807.5

 
783.0

Other Liabilities
248.5

 
282.9

Total Liabilities
4,900.1

 
4,811.2

Shareholders’ Equity
 
 
 
Preferred stock, Series A &B $2.50 Cumulative Convertible, $1.00 par value:
Authorized shares — 5,000,000
Issued and outstanding shares — 0 and 15,567
Aggregate liquidation preference — $0 and $0.9 million
—



*

Common stock, $0.625 par value:
Authorized shares — 120,000,000
Issued shares — 66,335,153 and 66,021,444
Outstanding shares — 46,217,033 and 46,898,924
41.3

 
41.2

Additional paid-in capital
660.6

 
658.5

Retained earnings
1,281.2

 
1,249.4

Accumulated other comprehensive loss
(153.7
)
 
(144.6
)
Treasury stock, at cost (shares — 20,118,120 and 19,122,520)
(610.3
)
 
(560.3
)
Total Shareholders’ Equity
1,219.1

 
1,244.2

Total Liabilities and Shareholders’ Equity
$
6,119.2

 
$
6,055.4

________________
* Less than $0.1 million.
See accompanying notes to consolidated financial statements.

1

GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions, except per share data)

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Lease revenue
$
239.0

 
$
225.6

 
$
476.2

 
$
451.1

Marine operating revenue
83.3

 
83.1

 
101.8

 
100.6

Other revenue
16.6

 
14.4

 
33.2

 
27.9

Total Revenues
338.9

 
323.1

 
611.2

 
579.6

Expenses
 
 
 
 
 
 
 
Maintenance expense
74.3

 
67.8

 
141.0

 
128.7

Marine operating expense
57.7

 
55.2

 
74.3

 
68.7

Depreciation expense
63.1

 
59.5

 
121.0

 
115.2

Operating lease expense
33.6

 
32.5

 
65.9

 
63.9

Other operating expense
7.0

 
6.3

 
12.3

 
10.0

Selling, general and administrative expense
45.8

 
38.9

 
87.8

 
77.0

Total Expenses
281.5

 
260.2

 
502.3

 
463.5

Other Income (Expense)
 
 
 
 
 
 
 
Net gain on asset dispositions
19.6

 
18.3

 
36.3

 
46.3

Interest expense, net
(43.2
)
 
(41.6
)
 
(84.1
)
 
(84.2
)
Other (expense) income
(3.1
)
 
0.5

 
(4.2
)
 
(0.1
)
Income before Income Taxes and Share of Affiliates’ Earnings   
30.7

 
40.1

 
56.9

 
78.1

Income Taxes
(9.1
)
 
(13.2
)
 
(16.6
)
 
(24.0
)
Share of Affiliates’ Earnings, Net of Tax
13.5

 
(3.4
)
 
21.9

 
(0.3
)
Net Income    
$
35.1

 
$
23.5

 
$
62.2

 
$
53.8

Other Comprehensive Income, Net of Taxes
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2.5
)
 
(27.4
)
 
(19.5
)
 
(2.1
)
Unrealized gain on securities
0.1

 
(0.4
)
 
0.2

 
0.1

Unrealized gain on derivative instruments
4.4

 
11.2

 
5.9

 
13.4

Post-retirement benefit plans
2.3

 
1.3

 
4.3

 
2.7

Other Comprehensive Income (Loss)
4.3

 
(15.3
)
 
$
(9.1
)
 
$
14.1

Comprehensive Income   
$
39.4

 
$
8.2

 
$
53.1

 
$
67.9

 
 
 
 
 
 
 
 
Share Data
 
 
 
 
 
 
 
Basic earnings per share
$
0.75

 
$
0.50

 
$
1.33

 
$
1.15

Average number of common shares
46.5

 
46.8

 
46.7

 
46.8

Diluted earnings per share
$
0.74

 
$
0.49

 
$
1.31

 
$
1.13

Average number of common shares and equivalents
47.1

 
47.5

 
47.4

 
47.5

Dividends declared per common share
$
0.31

 
$
0.30

 
$
0.62

 
$
0.60


See accompanying notes to consolidated financial statements.

2

GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
 
Six Months Ended June 30
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
62.2

 
$
53.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gains on sales of assets
(30.4
)
 
(42.0
)
Depreciation
127.2

 
121.1

Deferred income taxes
11.1

 
16.5

Share of affiliates’ earnings, net of dividends received
(10.4
)
 
7.2

Change in accrued operating lease expense
(21.0
)
 
(29.2
)
Employee benefit plans
4.1

 
0.1

Other
(13.9
)
 
(15.2
)
Net cash provided by operating activities
128.9

 
112.3

Investing Activities
 
 
 
Additions to operating assets and facilities
(360.8
)
 
(369.9
)
Loans extended
(8.5
)
 
(1.0
)
Investments in affiliates
(101.3
)
 
(20.9
)
Portfolio investments and capital additions
(470.6
)
 
(391.8
)
Purchases of leased-in assets
(11.3
)
 
(0.7
)
Portfolio proceeds
168.2

 
227.1

Proceeds from sales of other assets
18.0

 
16.7

Net decrease in restricted cash
4.5

 
5.3

Net cash used in investing activities
(291.2
)
 
(143.4
)
Financing Activities
 
 
 
Net proceeds from issuances of debt (original maturities longer than 90 days)
726.9

 
282.2

Repayments of debt (original maturities longer than 90 days)
(362.0
)
 
(315.2
)
Net (decrease) increase in debt with original maturities of 90 days or less
(256.0
)
 
73.4

Stock repurchases
(50.0
)
 
—

Dividends
(31.3
)
 
(29.5
)
Other
(0.8
)
 
0.1

Net cash provided by financing activities
26.8

 
11.0

Effect of Exchange Rate Changes on Cash and Cash Equivalents
(2.0
)
 
(0.6
)
Net decrease in Cash and Cash Equivalents
$
(137.5
)
 
$
(20.7
)
Cash and Cash Equivalents, beginning of period
234.2

 
248.4

Cash and Cash Equivalents, end of period
$
96.7

 
$
227.7

 
 
 
 
Noncash Investing Transactions
 
 
 
Distributions from affiliates (a)
$
173.0

 
 
________
(a)
In 2013, we received five vessels and related working capital from our Singco and Somargas affiliates in connection with our exit from those joint ventures. Additionally, we received distributions of 591 railcars from our Southern Capital affiliate.
See accompanying notes to consolidated financial statements.

3

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 1.Description of Business
As used herein, "GATX," "we," "us," "our," and similar terms refer to GATX Corporation and its subsidiaries, unless indicated otherwise.
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 are headquartered in Chicago, Illinois, and have four primary business segments: Rail North America, Rail International, American Steamship Company (“ASC”) and Portfolio Management.
NOTE 2.Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our unaudited consolidated financial statements do not include all of the information and footnotes required for complete financial statements. We have included all of the normal recurring adjustments that we deemed necessary for a fair presentation.
Our operating results for the six months ended June 30, 2013, are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2013. In particular, ASC’s fleet is inactive for a significant portion of the first quarter of each year due to winter conditions on the Great Lakes. In addition, asset remarketing income does not occur evenly throughout the year. For more information, refer to the consolidated financial statements and footnotes in our Annual Report on Form 10-K/A for the year ended December 31, 2012.
Accounting Change
Accumulated Other Comprehensive Income — In January 2013, the Financial Accounting Standards Board issued authoritative accounting guidance that requires presentation and disclosure of the effects on components of net income of significant amounts reclassified out of accumulated other comprehensive income. The guidance is effective for periods beginning after December 31, 2012. Application of the new guidance did not impact our financial position, results of operations or cash flows. See "Note 4. Fair Value Disclosure", "Note 5. Pension and Other Post-Retirement Benefits" and "Note 10. Accumulated Other Comprehensive Income (Loss)" for the applicable disclosures.
NOTE 3.Variable Interest Entities
We evaluate whether an entity is a variable interest entity (“VIE”) based on the sufficiency of the entity’s equity and determining whether the equity holders have the characteristics of a controlling financial interest. We assess whether we are the primary beneficiary of a VIE based on our ability to direct the activities that most significantly impact the economic performance of the VIE and our obligation to absorb losses or our right to receive benefits that may be significant to the VIE. These determinations are both qualitative and quantitative, and they require us to make judgments and assumptions about the VIE’s forecasted financial performance and the volatility inherent in those forecasts. We evaluate new investments for VIE classification, and we regularly review all existing entities for events that may result in an entity becoming a VIE or us becoming a primary beneficiary.
We determined that we are the primary beneficiary of one of our VIEs, a structured lease financing for a portfolio of railcars, because we have the authority to direct its significant activities. We consolidate this VIE and the risks associated with it are similar to those of our wholly-owned railcar leasing activities.
The following table shows the carrying amounts of our consolidated VIE's assets and liabilities (in millions):
 
June 30 2013
 
December 31
2012
Operating assets, net of accumulated depreciation (a)
$
95.8

 
$
98.4

Nonrecourse debt
30.3

 
35.1

________________
(a) All operating assets are pledged as collateral on the nonrecourse debt.

4

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

We determined that we are not the primary beneficiary of our other VIEs, primarily investments in railcar and equipment leasing affiliates that were financed through a variety of equity investments and third party lending arrangements. We are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. For the investments in affiliates that we determined are VIEs, we concluded that power was shared by the affiliate partners based on the terms of the relevant joint venture agreements, which require approval of all partners for significant decisions involving the VIE.
The following table shows the carrying amounts and maximum exposure to loss for our VIEs that we do not consolidate (in millions):
 
June 30, 2013
 
December 31, 2012
 
Net
Carrying
Amount
 
Maximum
Exposure
to Loss
 
Net
Carrying
Amount
 
Maximum
Exposure
to Loss
Investments in affiliates
$
121.3

 
$
121.3

 
$
110.7

 
$
110.7

Other investment
0.6

 
0.6

 
0.7

 
0.7

Total
$
121.9

 
$
121.9

 
$
111.4

 
$
111.4

NOTE 4.Fair Value Disclosure
The following tables show our assets and liabilities that are measured at fair value on a recurring basis (in millions):
 
June 30
2013
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate derivatives (a)
$
8.1

 
$
—

 
$
8.1

 
$
—

Foreign exchange rate derivatives (b)
0.3

 
—

 
0.3

 
—

Available-for-sale equity securities
3.8

 
3.8

 
—

 
—

Liabilities
 
 
 
 
 
 
 
Interest rate derivatives (a)
0.1

 
—

 
0.1

 
—

Interest rate derivatives (b)
0.3

 
—

 
0.3

 
—

 
December 31 2012
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate derivatives (a)
$
10.2

 
$
—

 
$
10.2

 
$
—

Available-for-sale equity securities
3.3

 
3.3

 
—

 
—

Liabilities
 
 
 
 
 
 
 
Interest rate derivatives (a)
1.0

 
—

 
1.0

 
—

Interest rate derivatives (b)
0.3

 
—

 
0.3

 
—

Foreign exchange rate derivatives (b)
2.1

 
—

 
2.1

 
—

________________
(a)
Designated as hedges
(b)
Not designated as hedges

5

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

We base our valuations of available-for-sale equity securities on their quoted prices on an active exchange. We value derivatives using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or that can be derived principally from observable market data.
Derivative instruments
Fair Value Hedges — We use interest rate swaps to manage the fixed-to-floating rate mix of our debt obligations by converting fixed rate debt to floating rate debt. For fair value hedges, we recognize changes in the fair value of both the derivative and the hedged item as interest expense. As of June 30, 2013 and December 31, 2012, we had one instrument outstanding with an aggregate notional amount of $100.0 million. This derivative matures in 2015.
Cash Flow Hedges — We use interest rate swaps to convert floating rate debt to fixed rate debt. We also use Treasury rate locks to hedge our exposure to interest rate risk on anticipated transactions. We had 6 instruments outstanding with an aggregate notional amount of $113.3 million as of June 30, 2013, and 12 instruments outstanding with an aggregate notional amount of $129.2 million as of December 31, 2012. These instruments have maturities ranging from 2013–2019. Within the next 12 months, we expect to reclassify $6.5 million ($4.1 million aftertax) of net losses on previously terminated derivatives from accumulated other comprehensive loss. We reclassify these amounts when interest and operating lease expense on the related hedged transactions affect earnings.
Non-designated Derivatives — We do not hold derivative financial instruments for purposes other than hedging, although certain of our derivatives are not designated as accounting hedges. We recognize changes in the fair value of these derivatives in other (income) expense immediately.
Some of our derivative instruments contain credit risk provisions that require us to make immediate payment on net liability positions in the event we default on certain outstanding debt obligations. The aggregate fair value of our derivative instruments with credit risk related contingent features that are in a liability position as of June 30, 2013, was $0.4 million. We are not required to post collateral on our derivative instruments and do not expect the credit risk provisions to be triggered.
In the event that a counterparty fails to meet the terms of an active derivative contract, our exposure is limited to the fair value of the derivative, if in our favor. We manage the credit risk of counterparties by transacting with institutions that we consider financially sound and by avoiding concentrations of risk with a single counterparty. We believe that the risk of non-performance by any of our counterparties is remote.
The following table shows the impacts of our derivative instruments on our statement of comprehensive income (in millions):
Derivative
Designation
 
Location of Gain (Loss) Recognized
 
Three Months Ended June 30
 
Six Months Ended June 30
2013
 
2012
 
2013
 
2012
Fair value hedges (a)
 
Interest expense
 
$
(1.2
)
 
$
(1.5
)
 
$
(2.3
)
 
$
(2.6
)
Cash flow hedges
 
Unrealized gain on derivative instruments (effective portion)
 
0.6

 
0.4

 
0.9

 
0.7

Cash flow hedges
 
Interest expense (effective portion reclassified from accumulated other comprehensive loss)
 
(1.3
)
 
(1.1
)
 
(2.5
)
 
(3.0
)
Cash flow hedges
 
Operating lease expense (effective portion reclassified from accumulated other comprehensive loss)
 
(0.3
)
 
(0.3
)
 
(0.7
)
 
(0.7
)
Non-designated
 
Other income (expense)
 
1.5

 
(1.8
)
 
2.0

 
(1.5
)
__________________
(a)
The fair value adjustments related to the underlying debt equally offsets the amounts recognized in interest expense.
Other Financial Instruments
The carrying amounts of our cash and cash equivalents, restricted cash, rent and other receivables, accounts payable, commercial paper, and bank credit facilities approximate fair value due to the short maturity of those instruments. We base the fair values of investment funds, which are accounted for under the cost method, on the best information available, which may include quoted investment fund values. We estimate the fair values of loans, and fixed and floating rate debt using discounted cash flow analyses based on interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The inputs we use to estimate each of these fair values are classified in Level 2 of the fair value hierarchy because they are directly or indirectly observable inputs.

6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following table shows the carrying amounts and fair values of our other financial instruments as of (in millions):
 
June 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Assets
 
 
 
 
 
 
 
Investment funds
$
1.9

 
$
5.9

 
$
2.5

 
$
5.8

Loans
24.4

 
24.9

 
27.2

 
27.7

Liabilities
 
 
 
 
 
 
 
Recourse fixed rate debt
$
2,683.5

 
$
2,801.3

 
$
2,343.3

 
$
2,513.4

Recourse floating rate debt
862.9

 
869.1

 
809.1

 
807.9

Nonrecourse debt
103.0

 
106.9

 
130.6

 
138.2

NOTE 5.Pension and Other Post-Retirement Benefits
The following table shows the components of our pension and other post-retirement benefit expense for the three months ended June 30, 2013 and 2012 (in millions):
 
2013 Pension
Benefits
 
2012 Pension
Benefits
 
2013 Retiree
Health and
Life
 
2012 Retiree
Health and
Life
Service cost
$
1.6

 
$
1.5

 
$
—

 
$
—

Interest cost
4.6

 
5.0

 
0.4

 
0.5

Expected return on plan assets
(6.9
)
 
(7.4
)
 
—

 
—

Amortization of (a):
 
 
 
 
 
 
 
Unrecognized prior service credit
(0.2
)
 
(0.2
)
 
(0.1
)
 
(0.1
)
Unrecognized net actuarial loss (gain)
4.0

 
2.5

 
(0.1
)
 
(0.1
)
Net expense
$
3.1

 
$
1.4

 
$
0.2

 
$
0.3

The following table shows the components of our pension and other post-retirement benefit expense for the six months ended June 30, 2013 and 2012 (in millions):
 
2013 Pension
Benefits
 
2012 Pension
Benefits
 
2013 Retiree
Health and
Life
 
2012 Retiree
Health and
Life
Service cost
$
3.4

 
$
3.0

 
$
0.1

 
$
0.1

Interest cost
9.2

 
9.9

 
0.8

 
1.0

Expected return on plan assets
(13.8
)
 
(14.8
)
 
—

 
—

Amortization of (a):
 
 
 
 
 
 
 
Unrecognized prior service credit
(0.5
)
 
(0.5
)
 
(0.1
)
 
(0.1
)
Unrecognized net actuarial loss (gain)
7.5

 
5.0

 
—

 
(0.1
)
Net expense
$
5.8

 
$
2.6

 
$
0.8

 
$
0.9

________________
(a)
Amounts are reclassified from accumulated other comprehensive loss.
NOTE 6. Share-Based Compensation
During the first six months of 2013, we granted 317,100 stock appreciation rights (“SARs”), 64,220 restricted stock units, 68,780 performance shares, and 10,166 phantom stock units. For the three and six months ended June 30, 2013, total share-based compensation expense was $3.2 million and $6.4 million and the related tax benefits were $1.2 million and $2.4 million. For the three and six months ended June 30, 2012, total share-based compensation expense was $3.0 million and $6.1 million and the related tax benefits were $1.2 million and $2.3 million, respectively.

7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The weighted average estimated fair value of our 2013 SARs awards and our related underlying assumptions are shown in the table below.
 
2013
Weighted average estimated fair value
$
18.89

Quarterly dividend rate
$
0.30

Expected term of SARs, in years
4.7

Risk-free interest rate
0.7
%
Dividend yield
2.6
%
Expected stock price volatility
42.4
%
Present value of dividends
$
5.60

NOTE 7.Income Taxes
Our effective tax rate was 29% for the six months ended June 30, 2013 compared to 30% for the six months ended June 30, 2012. In each case, the difference from the federal statutory rate of 35% was driven by income that was earned in foreign jurisdictions, which is taxed at lower rates.
As of June 30, 2013, our gross liability for unrecognized tax benefits was $4.7 million. If fully recognized, these tax benefits would decrease our income tax expense by $4.7 million ($3.2 million, net of federal tax). Subject to the completion of certain audits or the expiration of the applicable statute of limitations, we believe it is reasonably possible that we will recognize $0.4 million in unrecognized tax benefits within the next 12 months.
NOTE 8. Commercial Commitments
We have entered into various commercial commitments, such as guarantees and standby letters of credit, related to certain transactions. These commercial commitments require us to fulfill specified obligations in the event of third-party demands. Similar to our balance sheet investments, these commitments expose us to credit, market, and equipment risk. Accordingly, we evaluate our commitments and other contingent obligations using techniques similar to those we use to evaluate funded transactions.
The following table shows our commercial commitments (in millions):
 
June 30 2013
 
December 31
2012
Affiliate guarantees (a)
$
—

 
$
42.0

Asset residual value guarantees
5.1

 
11.2

Lease payment guarantees
37.9

 
41.0

Performance bonds
0.6

 
0.6

Standby letters of credit
15.4

 
9.7

Total commercial commitments (b)
$
59.0

 
$
104.5

________________
(a)
No amount is provided for one of our guarantees that does not state a maximum potential future payment and for which we believe the likelihood that we will be required to perform under the guarantee is remote. In April 2013, $42.0 million of our affiliate guarantees were terminated.
(b)
The carrying values of liabilities on the balance sheet for our commercial commitments were $5.9 million at June 30, 2013 and $6.4 million at December 31, 2012. The expiration dates for our commitments range from 2014–2022.
Affiliate guarantees are our commitments to repay financing used by affiliates to acquire assets. We make these guarantees in lieu of direct equity investments in the affiliates.
Asset residual value guarantees are our commitments to third parties that an asset or asset group will be worth a specified amount at the end of a lease term. We earn a fee for providing these guarantees, which we amortize into income over the guarantee period. If the assets are disposed of for more than the amount we guaranteed, we receive a share of the proceeds in excess of the guaranteed amount.
Lease payment guarantees are our commitments to financial institutions to make lease payments for a third-party in the event of their default. Any liability that results from these guarantees may be reduced by the value of the underlying asset or asset group.

8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

We are also a party to standby letters of credit and performance bonds, which primarily relate to contractual obligations and general liability insurance coverages. No material claims have been made against these obligations, and no material losses are anticipated.
NOTE 9.Earnings Per Share
We compute basic earnings per share by dividing our net income available to our common stockholders by the weighted average number of shares of our common stock outstanding. Shares that we issued or reacquired during the period were appropriately weighted for the portion of the period that they were outstanding. Our diluted earnings per share reflect the impacts of our potentially dilutive securities, which include our convertible preferred stock and our equity compensation awards.
In the second quarter of 2013, both series of our preferred stock were retired with all shares either converted to common stock or redeemed.
The following table shows the computation of our basic and diluted net income per common share (in millions, except per share amounts):
 
Three Months Ended June 30

Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
Net income
$
35.1

 
$
23.5

 
$
62.2

 
$
53.8

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
46.5

 
46.8

 
46.7

 
46.8

Effect of dilutive securities:
 
 
 
 
 
 
 
Equity compensation plans
0.6

 
0.6

 
0.7

 
0.6

Convertible preferred stock
*

 
0.1

 
*

 
0.1

Weighted average shares outstanding - diluted
47.1

 
47.5

 
47.4

 
47.5

Basic earnings per share
$
0.75

 
$
0.50

 
$
1.33

 
$
1.15

Diluted earnings per share
$
0.74

 
$
0.49

 
$
1.31

 
$
1.13

________________
* Antidilutive
NOTE 10. Accumulated Other Comprehensive Income (Loss)
The following table shows the changes in the components of our accumulated other comprehensive income (loss) (in millions):
 
   Foreign
   Currency
 Translation
 Gain (Loss)
 
Unrealized
 Gain (Loss) on Securities
 
Unrealized Loss on Derivative Instruments
 
   Post- RetirementBenefit Plans
 



  Total
Balance at December 31, 2012
$
31.4

 
$
(0.4
)
 
$
(44.5
)
 
$
(131.1
)
 
$
(144.6
)
Change in component
(17.0
)
 
0.2

 
0.6

 
—

 
(16.2
)
Reclassification adjustments into earnings
—

 
—

 
1.6

 
3.3

 
4.9

Income tax effect
—

 
(0.1
)
 
(0.7
)
 
(1.3
)
 
(2.1
)
Balance at March 31, 2013
14.4

 
(0.3
)
 
(43.0
)
 
(129.1
)
 
(158.0
)
Change in component
(2.5
)
 
0.1

 
4.3

 
—

 
1.9

Reclassification adjustments into earnings
—

 
—

 
1.6

 
3.6

 
5.2

Income tax effect
—

 
—

 
(1.5
)
 
(1.3
)
 
(2.8
)
Balance at June 30, 2013
$
11.9

 
$
(0.2
)
 
$
(38.6
)
 
$
(126.8
)
 
$
(153.7
)
________________
See "Note 4. Fair Value Disclosure" and "Note 5. Pension and Other Post-Retirement Benefits" for the effects of the reclassification adjustments on the statement of comprehensive income.

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 11. Legal Proceedings and Other Contingencies
Various legal actions, claims, assessments, and other contingencies arise in the ordinary course of our business and are pending against us. Legal matters are subject to numerous uncertainties and they may be resolved adversely. For a full discussion of our material pending legal matters, please refer to "Note 22. Legal Proceedings and Other Contingencies" of our consolidated financial statements in our Annual Report on Form 10-K/A for the year ended December 31, 2012. Except as noted below, there have been no material changes in our legal matters.
Viareggio Derailment
In June 2009, a train consisting of fourteen liquefied petroleum gas (“LPG”) tank cars owned by GATX Rail Austria GmbH and two of its subsidiaries (collectively, “GRA”) derailed while passing through Viareggio, a city in the province of Lucca, Italy. Five tank cars overturned and one of the overturned cars was punctured by a peg or obstacle along the side of the track, resulting in a release of LPG, which subsequently ignited. Thirty-two people died and others were injured in the fire, which also resulted in property damage. The LPG tank cars were leased to FS Logistica S.p.A., a subsidiary of the Italian state-owned railway, Ferrovie dello Stato S.p.A (the “Italian Railway”).
The public prosecutors of Lucca conducted an investigation of the Viareggio accident, and on February 19, 2013, the Court of Lucca notified GRA, as well as several of its maintenance and supervisory employees (the “Employees”) and an external supervisor, that the public prosecutors were seeking indictments against them for various negligence-based crimes related to the accident, all of which are punishable under Italian law by incarceration, damages and fines. Similar notices were issued to four Italian Railway companies and eighteen of their employees, as well as to the Italian workshop Cima Riparazioni S.p.A. and four of its employees. The public prosecutors assert that a crack in one of the tank car's axles broke, causing the derailment and ultimately resulting in a tank car rupture and release of LPG, after the car hit an obstacle on the side of the track placed there by the Italian Railway. Their report alleges that the crack was detectable at the time of final inspection but was overlooked by the Employees at the workshop owned by GRA's subsidiary, Jungenthal Waggon GmbH. On July 18, 2013, the judge presiding over the preliminary hearing ruled that both GRA and the Employees would proceed to trial. We believe that GRA and its Employees acted diligently and properly with respect to applicable legal and industry standards, and they will present numerous scientific and technical defenses to the public prosecutor's report in the ongoing proceedings.
With respect to claims for personal injuries and property damages arising out of the accident, GATX and its subsidiaries maintain insurance for such losses, and those insurers are working cooperatively with the insurer for the Italian Railway to adjust and settle these claims. These joint settlement efforts have resolved the majority of asserted civil damage claims related to the accident, and joint efforts to resolve the remaining civil claims are ongoing. Notwithstanding these settlement efforts, approximately 120 civil claims were brought in the preliminary hearing proceeding against the Employees by parties seeking recovery for personal injuries and property damages. Civil claimants have received leave from the court to bring such claims against GRA and the employees of the other defendants. Up to the commencement of the trial, such claimants will be permitted to file civil damages claims and join as parties to the proceedings. In addition to the ongoing settlement of civil claims, the insurers also had been providing reimbursement for legal defense costs. One of the eleven insurers has notified us that, with respect to its layer of coverage, it will not reimburse the costs of defense, and another insurer has issued a general reservation of rights. We are engaged in insurance coverage discussions with the insurers to attempt to resolve these issues. We cannot predict the outcome of those discussions or the amount of defense costs that ultimately may not be reimbursed. Additionally, we cannot predict the outcome of the foregoing legal proceedings or what other legal proceedings, if any, may be initiated against GRA or its personnel, and, therefore, cannot reasonably estimate the amount or range of loss (including legal defense costs) that may ultimately be incurred in connection with this accident. Accordingly, we have not established any accruals with respect to this matter.

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 12. Financial Data of Business Segments
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.
Rail North America is comprised of our wholly-owned operations in the United States, Canada, and Mexico, as well as two affiliate investments. Rail North America primarily leases railcars to customers on full-service leases, which require us to maintain the railcars, pay ad valorem taxes and insurance, and provide other ancillary services.
Rail International is comprised of our wholly-owned European rail operations ("Rail Europe") and our newly-established railcar leasing business in India ("Rail India"), as well as two affiliate investments. Rail Europe leases railcars, predominantly tank cars, to customers throughout Europe on full-service leases, which require us to maintain the railcars and provide insurance and other ancillary services.
ASC operates the largest fleet of U.S. flagged vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities such as iron ore, coal, limestone aggregates, and metallurgical limestone.
Portfolio Management is an aggregation of a group of diversified owned assets and joint venture investments ("affiliates"), and provides leasing, asset remarketing, and asset management services. Portfolio Management selectively invests in long-lived, widely-used assets with a focus on domestic marine and container related equipment, and extends our market reach through affiliate investments.
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 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.

11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

The following tables show the profitability, financial position, and investment volume of each of our business segments (in millions):



Rail North America
 

Rail International
 

ASC
 

Portfolio Management
 
Other
 
GATX Consolidated
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Profitability
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenue
$
187.3

 
$
43.6

 
$
1.0

 
$
7.1

 
$
—

 
$
239.0

Marine operating revenue
—

 
—

 
71.7

 
11.6

 
—

 
83.3

Other revenue
13.8

 
1.7

 
—

 
1.1

 
—

 
16.6

Total Revenues   
201.1

 
45.3

 
72.7

 
19.8

 
—

 
338.9

Expenses
 
 
 
 
 
 
 
 
 
 
 
Maintenance expense
57.6

 
9.6

 
7.1

 
—

 
—

 
74.3

Marine operating expense
—

 
—

 
48.2

 
9.5

 
—

 
57.7

Depreciation expense
42.7

 
10.6

 
4.0

 
5.8

 
—

 
63.1

Operating lease expense
32.0

 
—

 
1.7

 
—

 
(0.1
)
 
33.6

Other operating expense
5.0

 
1.4

 
—

 
0.6

 
—

 
7.0

Total Expenses
137.3

 
21.6

 
61.0

 
15.9

 
(0.1
)
 
235.7

Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
Net gain on asset dispositions
10.2

 
1.3

 
—

 
8.1

 
—

 
19.6

Interest expense, net
(28.7
)
 
(5.2
)
 
(1.6
)
 
(6.7
)
 
(1.0
)
 
(43.2
)
Other (expense) income
(3.3
)
 
—

 
—

 
—

 
0.2

 
(3.1
)
Share of affiliates' earnings (pretax)
6.2

 
4.6

 
—

 
12.0

 
—

 
22.8

Segment Profit (Loss)   
$
48.2

 
$
24.4

 
$
10.1

 
$
17.3

 
$
(0.7
)
 
99.3

Selling, general and administrative expense
 
45.8

Income taxes ($9.3 million related to affiliates' earnings)
 
18.4

Net Income
 
$
35.1

Investment Volume
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments and capital additions
$
129.4

 
$
46.9

 
$
7.8

 
$
135.2

 
$
1.4

 
$
320.7

Selected Balance Sheet Data at June 30, 2013
 
 
 
 
 
 
 
 
Investments in affiliated companies
$
33.5

 
$
83.8

 
$
—

 
$
307.0

 
$
—

 
$
424.3

Identifiable assets
$
3,710.2

 
$
1,151.1

 
$
298.6

 
$
828.0

 
$
131.3

 
$
6,119.2



12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)




Rail North America
 

Rail International
 

ASC
 

Portfolio Management
 
Other
 
GATX Consolidated
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Profitability
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenue
$
176.6

 
$
39.0

 
$
1.0

 
$
9.0

 
$
—

 
$
225.6

Marine operating revenue
—

 
—

 
76.2

 
6.9

 
—

 
83.1

Other revenue
12.1

 
1.6

 
—

 
0.7

 
—

 
14.4

Total Revenues   
188.7

 
40.6

 
77.2

 
16.6

 
—

 
323.1

Expenses
 
 
 
 
 
 
 
 
 
 
 
Maintenance expense
48.8

 
12.3

 
6.7

 
—

 
—

 
67.8

Marine operating expense
—

 
—

 
49.6

 
5.6

 
—

 
55.2

Depreciation expense
41.8

 
8.6

 
3.9

 
5.2

 
—

 
59.5

Operating lease expense
31.3

 
—

 
1.2

 
0.1

 
(0.1
)
 
32.5

Other operating expense
4.0

 
1.8

 
(0.1
)
 
0.6

 
—

 
6.3

Total Expenses
125.9

 
22.7

 
61.3

 
11.5

 
(0.1
)
 
221.3

Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
Net gain on asset dispositions
14.5

 
1.2

 
—

 
2.6

 
—

 
18.3

Interest expense, net
(25.9
)
 
(6.5
)
 
(1.9
)
 
(6.5
)
 
(0.8
)
 
(41.6
)
Other (expense) income
(0.2
)
 
0.3

 
—

 
0.2

 
0.2

 
0.5

Share of affiliates' earnings (pretax)
2.0

 
(16.5
)
 
—

 
13.2

 
—

 
(1.3
)
Segment Profit (Loss)   
$
53.2

 
$
(3.6
)
 
$
14.0

 
$
14.6

 
$
(0.5
)
 
77.7

Selling, general and administrative expense
 
38.9

Income taxes ($2.1 million related to affiliates' earnings)
 
15.3

Net Income
 
$
23.5

Investment Volume
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments and capital additions
$
137.7

 
$
39.2

 
$
5.5

 
$
53.4

 
$
2.3

 
$
238.1

Selected Balance Sheet Data at December 31, 2012
 
 
 
 
 
 
 
 
Investments in affiliated companies
$
46.9

 
$
77.2

 
$
—

 
$
377.9

 
$
—

 
$
502.0

Identifiable assets
$
3,601.1

 
$
1,105.8

 
$
284.2

 
$
797.4

 
$
266.9

 
$
6,055.4



13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)




Rail North America
 

Rail International
 

ASC
 

Portfolio Management
 
Other
 
GATX Consolidated
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Profitability
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenue
$
371.1

 
$
86.6

 
$
2.1

 
$
16.4

 
$
—

 
$
476.2

Marine operating revenue
—

 
—

 
84.0

 
17.8

 
—

 
101.8

Other revenue
27.6

 
3.9

 
—

 
1.7

 
—

 
33.2

Total Revenues   
398.7

 
90.5

 
86.1

 
35.9

 
—

 
611.2

Expenses
 
 
 
 
 
 
 
 
 
 
 
Maintenance expense
112.2

 
21.1

 
7.7

 
—

 
—

 
141.0

Marine operating expense
—

 
—

 
58.0

 
16.3

 
—

 
74.3

Depreciation expense
85.0

 
20.7

 
4.0

 
11.3

 
—

 
121.0

Operating lease expense
64.3

 
—

 
1.7

 
—

 
(0.1
)
 
65.9

Other operating expense
9.0

 
2.3

 
—

 
1.0

 
—

 
12.3

Total Expenses
270.5

 
44.1

 
71.4

 
28.6

 
(0.1
)
 
414.5

Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
Net gain on asset dispositions
20.4

 
2.5

 
—

 
13.4

 
—

 
36.3

Interest expense, net
(54.4
)
 
(10.8
)
 
(3.2
)
 
(13.4
)
 
(2.3
)
 
(84.1
)
Other (expense) income
(4.1
)
 
0.5

 
(0.6
)
 
—

 
—

 
(4.2
)
Share of affiliates' earnings (pretax)
8.4

 
4.4

 
—

 
22.5

 
—

 
35.3

Segment Profit (Loss)   
$
98.5

 
$
43.0

 
$
10.9

 
$
29.8

 
$
(2.2
)
 
180.0

Selling, general and administrative expense
 
87.8

Income taxes ($13.4 million related to affiliates' earnings)
 
30.0

Net Income
 
$
62.2

Investment Volume
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments and capital additions
$
215.1

 
$
91.2

 
$
11.0

 
$
151.2

 
$
2.1

 
$
470.6



14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)




Rail North America
 

Rail International
 

ASC
 

Portfolio Management
 
Other
 
GATX Consolidated
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Profitability
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenue
$
351.2

 
$
79.0

 
$
2.1

 
$
18.8

 
$
—

 
$
451.1

Marine operating revenue
—

 
—

 
86.9

 
13.7

 
—

 
100.6

Other revenue
23.9

 
2.5

 
—

 
1.5

 
—

 
27.9

Total Revenues   
375.1

 
81.5

 
89.0

 
34.0

 
—

 
579.6

Expenses
 
 
 
 
 
 
 
 
 
 
 
Maintenance expense
96.8

 
24.8

 
7.1

 
—

 
—

 
128.7

Marine operating expense
—

 
—

 
57.3

 
11.4

 
—

 
68.7

Depreciation expense
83.5

 
17.2

 
3.9

 
10.6

 
—

 
115.2

Operating lease expense
62.7

 
—

 
1.2

 
0.2

 
(0.2
)
 
63.9

Other operating expense
8.4

 
2.9

 
(0.3
)
 
(1.0
)
 
—

 
10.0

Total Expenses
251.4

 
44.9

 
69.2

 
21.2

 
(0.2
)
 
386.5

Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
Net gain on asset dispositions
30.5

 
2.1

 
—

 
13.7

 
—

 
46.3

Interest expense, net
(51.7
)
 
(12.9
)
 
(3.7
)
 
(13.7
)
 
(2.2
)
 
(84.2
)
Other (expense) income
(2.1
)
 
(1.5
)
 
—

 
3.1

 
0.4

 
(0.1
)
Share of affiliates' earnings (pretax)
3.5

 
(20.0
)
 
—

 
20.7

 
—

 
4.2

Segment Profit (Loss)   
$
103.9

 
$
4.3

 
$
16.1

 
$
36.6

 
$
(1.6
)
 
159.3

Selling, general and administrative expense
 
77.0

Income taxes ($4.5 million related to affiliates' earnings)
 
28.5

Net Income
 
$
53.8

Investment Volume
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments and capital additions
$
236.6

 
$
84.0

 
$
11.4

 
$
56.5

 
$
3.3

 
$
391.8




15

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.


16

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.

17

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


18

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.

19

Fleet Information
The following table shows Rail North America's railcar fleet activity:
 
June 30
2012

 
September 30
2012
 
December 31
2012
 
March 31
2013

 
June 30
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

 

The following table shows Rail North America's locomotive fleet activity:
 
June 30
2012

 
September 30
2012
 
December 31
2012
 
March 31
2013

 
June 30
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



20

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. 


21

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
2012

 
September 30
2012
 
December 31
2012
 
March 31
2013

 
June 30
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



22

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.

23

Revenues
Lease revenue increased $4.6 million, primarily due to an average of 562 more railcars on lease.
Expenses
Maintenance expense decreased $2.7 million, primarily due to fewer underframe revisions due in part to the aforementioned scrapping of older railcars. Depreciation expense increased $2.0 million, primarily due to investment activity, which includes capitalized wheelsets.
Other Income (Expense)
Net interest expense decreased $1.3 million, primarily due to lower interest rates. Excluding the impact of the interest rate swaps at AAE from each period, share of affiliates' earnings increased $1.5 million, due to lower depreciation expense at AAE attributable to a change in policy that was enacted in 2012.
ASC
During the first six months of both 2013 and 2012, we carried 10.5 million net tons of freight. In 2013, we expect to carry modestly less than our 2012 full year freight volume of 29.7 million net tons and we have deployed 13 vessels compared to 14 in 2012.
Record low water levels in the Great Lakes were a significant concern at the start of the 2013 sailing season. While water levels remain below historical averages, heavy winter and spring precipitation has resulted in levels consistent with the prior year.
The following table shows the components of ASC’s operating results (in millions):
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Lease revenue
$
1.0

 
$
1.0

 
$
2.1

 
$
2.1

Marine operating revenue
71.7

 
76.2

 
84.0

 
86.9

Total Revenues
72.7

 
77.2

 
86.1

 
89.0

Expenses
 
 
 
 
 
 
 
Maintenance expense
7.1

 
6.7

 
7.7

 
7.1

Marine operating expense
48.2

 
49.6

 
58.0

 
57.3

Depreciation expense
4.0

 
3.9

 
4.0

 
3.9

Operating lease expense
1.7

 
1.2

 
1.7

 
1.2

Other operating expense
—

 
(0.1
)
 
—

 
(0.3
)
Total Expenses
61.0

 
61.3

 
71.4

 
69.2

Other Income (Expense)
 
 
 
 
 
 
 
Interest expense, net
(1.6
)
 
(1.9
)
 
(3.2
)
 
(3.7
)
Other expense
—

 
—

 
(0.6
)
 
—

Segment Profit
$
10.1

 
$
14.0

 
$
10.9

 
$
16.1

Investment Volume
$
7.8

 
$
5.5

 
$
11.0

 
$
11.4


Comparison of the First Six Months of 2013 to the First Six Months of 2012
Segment Profit
Segment profit was $5.2 million lower than prior year, primarily due to lower revenue and higher operating costs.
Revenues
Marine operating revenue decreased $2.9 million, primarily due to a heavier mix of iron ore tonnage in the prior year, which earns a higher rate, and lower fuel surcharges, which are correlated with fuel rates. Revenue was also impacted by low water levels early in the sailing season, which limited load sizes.

24

Expenses
Maintenance expense increased primarily due to higher vessel repairs. Marine operating expense was $0.7 million higher than prior year primarily due to more operating days, partially offset by lower fuel rates and lower consumption.
Other Income (Expense)
Other expense in the current year consisted of increased costs associated with ongoing asbestos-related litigation matters.
Investment Volume
Our investments in each year primarily consisted of structural and mechanical upgrades to our vessels.
Comparison of the Second Quarter of 2013 to the Second Quarter of 2012
Segment Profit
Segment profit was $3.9 million lower than prior year, primarily due to a heavier mix of iron ore tonnage in the prior year, which earns a higher rate, and lower overall freight volume in the current quarter, partially offset by lower operating expenses.
Revenues
Marine operating revenue decreased $4.5 million, primarily due to lower freight volume and lower fuel surcharges which are correlated with fuel rates. The prior year also included some high rate iron ore volume and higher profit spot tonnage that did not repeat in the current year.
Expenses
Maintenance expense increased primarily due to higher vessel repairs. Marine operating expense was $1.4 million lower than prior year primarily a result of lower fuel costs due to both rates and consumption. Additionally, we operated one less vessel in the current year. 
Regulatory Update
On March 28, 2013, the United States Environmental Protection Agency (the “EPA”) published its final 2013 Vessel General Permit (“VGP”) under the Clean Water Act. This five-year permit establishes numeric effluent limits for the discharge of living organisms in ballast water for certain commercial vessels, and becomes effective on December 19, 2013. The limits are based on the International Maritime Organization (“IMO”) standard.
This new VGP will not impose numeric treatment limits for ballast water discharges on existing Great Lakes bulk carrier vessels built before January 1, 2009, that operate exclusively within the Great Lakes and St. Lawrence Seaway, upstream of Anticosti Island (the “Exempt Vessels”), exempting all but one of ASC's vessels.  However, the new VGP continues to impose best management practices for the management of ballast water discharges for Exempt Vessels similar to those required in the current VGP. The EPA has specifically included a “permit reopener condition” in the new permit to allow them the ability to modify the permit to require installation of ballast water treatment systems on Great Lakes vessels, if such systems become available during the term of the permit.
Our leased-in barge, Lakes Contender, was constructed after January 1, 2009, a date that EPA chose because it was the date that IMO originally first required treatment for some new-build vessels. In doing so, they assert that any vessels constructed after that date should have been designed to accommodate retrofitting such systems. At present, no systems are available that will achieve the IMO treatment standard for the fresh water high capacity and high volume ballast water systems on Great Lakes vessels. Under the 2013 VGP, ballast water treatment system installation will be required at the vessel's first scheduled dry-docking after January 1, 2016. We continue to explore commercial and internally developed treatment solutions for the Lakes Contender.
The IMO adopted the International Convention for the Control and Management of Ship's Ballast Water and Sediments in 2004. The convention has yet to be placed into effect, as it has not yet been ratified by nations representing the required 35 percent of the world's merchant shipping tonnage. That ratification is expected to take place before the end of 2013, and would go into effect one year after ratification. Canada is a signatory to the convention. It is not clear to what extent Canada will apply the convention to ships operating in their waters of the Great Lakes, notwithstanding the exemption provided by the EPA or United States Coast Guard.
Section 401(d) of the Clean Water Act allows states to attach additional limitations and requirements to a federal permit. The states of Minnesota and Wisconsin continue to require state-specific permits for the discharge of ballast water within their borders including various best management practices, but have not imposed a numeric treatment standard for vessels that operate solely within the Great Lakes.

25

Portfolio Management
Portfolio Management’s total asset base was $828.0 million at June 30, 2013, compared to $797.4 million at December 31, 2012, and $804.7 million at June 30, 2012.
In April 2013, we terminated our Singco and Somargas marine affiliates, with each partner taking direct ownership of five liquified gas carrying vessels. In connection with the terminations we paid $101 million, primarily to satisfy our share of the affiliates' external debt. The vessels continue to operate in a vessel pooling arrangement that is managed by our former partner.
Market conditions for our recently acquired gas carriers are improved from 2012; however, those for our chemical tankers remain weak. The Rolls-Royce & Partners Finance companies (collectively our "RRPF Affiliates") continue to experience strong demand for their spare aircraft engines. Our RRPF Affiliates contributed $17.7 million and $9.4 million to our segment profit for the six months and second quarter of 2013, compared to $18.5 million and $10.5 million in 2012.
The following table shows Portfolio Management’s segment results (in millions):
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Lease revenue
$
7.1

 
$
9.0

 
$
16.4

 
$
18.8

Marine operating revenue
11.6

 
6.9

 
17.8

 
13.7

Other revenue
1.1

 
0.7

 
1.7

 
1.5

Total Revenues
19.8

 
16.6

 
35.9

 
34.0

Expenses
 
 
 
 
 
 
 
Marine operating expense
9.5

 
5.6

 
16.3

 
11.4

Depreciation expense
5.8

 
5.2

 
11.3

 
10.6

Operating lease expense
—

 
0.1

 
—

 
0.2

Other operating expense
0.6

 
0.6

 
1.0

 
(1.0
)
Total Expenses
15.9

 
11.5

 
28.6

 
21.2

Other Income (Expense)
 
 
 
 
 
 
 
Net gain on asset dispositions
8.1

 
2.6

 
13.4

 
13.7

Interest expense, net
(6.7
)
 
(6.5
)
 
(13.4
)
 
(13.7
)
Other income
—

 
0.2

 
—

 
3.1

Share of affiliates' earnings (pretax)
12.0

 
13.2

 
22.5

 
20.7

Segment Profit
$
17.3

 
$
14.6

 
$
29.8

 
$
36.6

Investment Volume
$
135.2

 
$
53.4

 
$
151.2

 
$
56.5

The following table shows the approximate net book values of Portfolio Management's assets (in millions):
 
June 30
2012

 
September 30
2012

 
December 31
2012

 
March 31
2013

 
June 30
2013
Net book value of owned assets
$
413.7

 
$
409.0

 
$
419.5

 
$
407.6

 
$
521.0

Affiliate Investments
391.0

 
406.1

 
377.9

 
358.7

 
307.0

Net book value of managed portfolio
149.0

 
147.5

 
143.2

 
140.7

 
129.1

Comparison of the First Six Months of 2013 to the First Six Months of 2012
Segment Profit
Segment profit of $29.8 million was $6.8 million million lower than the prior year, primarily due to the absence of certain favorable adjustments in the prior year and lower lease revenue. The decrease was partially offset by higher affiliates' earnings.

26

Revenues
Lease revenue was $2.4 million lower, primarily due to the sale of barges and other equipment in 2013. Marine operating revenue was $4.1 million higher, primarily due to revenue earned by the five vessels we received from our former Singco and Somargas affiliates.
Expenses
Marine operating expense was $4.9 million higher, primarily due to expense from the aforementioned five vessels and higher repair expenses on existing vessels. Other operating expense was $2.0 million higher, primarily due to the reversal of a provision for losses upon the sale of a non-performing leveraged lease investment in the prior year.
Other Income (Expenses)
Net gain on asset dispositions was $0.3 million lower, primarily due to the timing of asset remarketing gains. Other income in the prior year was positively impacted by the favorable remeasurement of derivatives. Share of affiliates' earnings was $1.8 million higher, primarily due to the absence of operating losses at our Enerven affiliate, which is in the process of liquidation. The increase was partially offset by lower asset remarketing gains at our RRPF Affiliates, primarily due to the timing of engine sales.
Investment Volume
Investments in 2013 consisted of $101 million to acquire the aforementioned five vessels, $34 million for investments in two offshore supply vessels and two inland marine vessels, a $9 million loan for a dry bulk vessel, and $7 million of container assets.
Comparison of the Second Quarter of 2013 to the Second Quarter of 2012
Segment Profit
Segment profit of $17.3 million was $2.7 million higher than the prior year, primarily due to the higher asset remarketing gains. The increase was partially offset by lower lease revenue and lower affiliates' earnings.
Revenues
Lease revenue was $1.9 million lower, primarily due to the sale of equipment in 2013. Marine operating revenue was $4.7 million higher, primarily due to revenue earned by the five vessels received from our former Singco and Somargas affiliates.
Expenses
Marine operating expense was $3.9 million higher, primarily due to expense from the aforementioned five vessels and higher repair expenses on existing vessels.
Other Income (Expenses)
Net gain on asset dispositions was $5.5 million higher, primarily due to increased asset remarketing gains. Share of affiliates' earnings was $1.2 million lower, primarily due to the absence of earnings from our former Singco and Somargas affiliates and the timing of engine sales at our RRPF Affiliates, partially offset by the absence of operating losses at our Enerven affiliate.
Other
Other is comprised of SG&A, unallocated interest expense and other, miscellaneous income and expense not directly associated with the reporting segments, and eliminations.
Components of Other are outlined below (in millions):
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Selling, general and administrative expense
$
45.8

 
$
38.9

 
$
87.8

 
$
77.0

Unallocated interest expense, net
1.0

 
0.8

 
2.3

 
2.2

Other expense (including eliminations)
(0.3
)
 
(0.3
)
 
(0.1
)
 
(0.6
)
SG&A was $10.8 million and $6.9 million higher for the first six months and second quarter, compared to the prior year. Each of the increases was primarily due to higher pension, salaries, and outside services expenses.

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Income Taxes
Our effective tax rate was 29% for the six months ended June 30, 2013, compared to 30% for the six months ended June 30, 2012. In each case, the difference from the federal statutory rate of 35% was driven by income that was earned in foreign jurisdictions, which is taxed at lower rates.
Cash Flow and Liquidity
We generate a significant amount of cash from operating activities and proceeds from our investment portfolio. We also access domestic and international capital markets by issuing unsecured or secured debt and commercial paper. We use these sources of cash, along with our available cash balances, to fulfill our debt, lease, and dividend obligations, and to fund portfolio investments and capital additions. We primarily use cash from operations and commercial paper issuances to fund daily operations.
Cash flows from operations and portfolio proceeds are impacted by the timing of asset dispositions and changes in working capital. As a result, these cash flow components may vary materially from quarter to quarter and year to year. As of June 30, 2013, we had unrestricted cash balances of $96.7 million.
The following table shows our principal sources and uses of cash for the six months ended ended June 30 (in millions):
 
2013
 
2012
Principal sources of cash
 
 
 
Net cash provided by operating activities
$
128.9

 
$
112.3

Portfolio proceeds
168.2

 
227.1

Other asset sales
18.0

 
16.7

Proceeds from issuance of debt, commercial paper, and credit facilities
726.9

 
355.6

 
$
1,042.0

 
$
711.7

Principal uses of cash
 
 
 
Portfolio investments and capital additions
$
(470.6
)
 
$
(391.8
)
Stock repurchases
(50.0
)
 
—

Repayments of debt, commercial paper, and credit facilities
(618.0
)
 
(315.2
)
Purchases of leased-in assets
(11.3
)
 
(0.7
)
Payments on capital lease obligations
(1.2
)
 
(1.8
)
Dividends
(31.3
)
 
(29.5
)
 
$
(1,182.4
)
 
$
(739.0
)
Net cash provided by operating activities for the first six months of 2013 was $128.9 million, an increase of $16.6 million from the prior year. The increase was primarily driven by higher lease income, lower operating lease payments, and other changes in working capital, partially offset by higher maintenance and compensation payments.
Portfolio proceeds for the first six months of 2013 of $168.2 million decreased by $58.9 million from the prior year, primarily due to lower equipment sales, partially offset by higher affiliate capital distributions and loan principal receipts. Proceeds in 2012 included $82.5 million from the sale of leveraged lease investments.
Proceeds from the issuance of debt for the first six months of 2013 were $726.9 million (net of hedges and debt issuance costs). In North America, proceeds consisted of $250 million of 5-year notes, $250 million of 10-year notes, and a $105 million 5-year term loan. In Europe, proceeds consisted of $132 million term loan with a 7.5-year term. Debt repayments of $618.0 million for the first six months of 2013 primarily consisted of commercial paper and bank credit facility repayments, and the early retirement of $268 million of higher cost term debt.
Portfolio investments and capital additions primarily consist of purchases of operating assets, investments in affiliates, loans, and capitalized asset improvements. See individual segment discussions for further information on investment volume.
In 2013, we resumed open-market repurchases of our common stock and in the first six months we reacquired 995,600 shares for $50.0 million. As of June 30, 2013, we had $18.6 million remaining under our $200 million repurchase authorization. We also retired both series of our preferred stock with all shares either redeemed or converted to common stock.

28

Short-Term Borrowings
The following table provides additional information regarding our short-term borrowings for the six months ended June 30, 2013:
 
North
America (a)
 
Europe (b)
Balance as of June 30 (in millions)
$
—

 
$
17.4

Weighted average interest rate
—
%
 
1.4
%
Euro/Dollar exchange rate
n/a

 
1.30

 
 
 
 
Average monthly amount outstanding during year (in millions)
$
39.3

 
$
102.9

Weighted average interest rate
0.4
%
 
1.5
%
Average Euro/Dollar exchange rate
n/a

 
1.31

 
 
 
 
Average monthly amount outstanding during 2nd quarter (in millions)
$
—

 
$
101.8

Weighted average interest rate
—
%
 
1.6
%
Average Euro/Dollar exchange rate
n/a

 
$
1.31

 
 
 
 
Maximum month-end amount outstanding (in millions)
$
90.0

 
$
137.9

Euro/Dollar exchange rate
n/a

 
1.30

________________
(a)
Short-term borrowings in North America consist solely of commercial paper issued in the U.S.
(b)
Short-term borrowings in Europe consist solely of borrowings under bank credit facilities.
Revolving Credit Facility
In April, we entered into a new $575 million 5-year unsecured credit facility, which replaced our prior $560 million facility. The covenants in the new facility are substantially unchanged from the prior facility. At June 30, 2013, the full $575 million was available under the facility.
Restrictive Covenants
Our committed credit facility contains various restrictive covenants, including requirements to maintain a minimum fixed charge coverage ratio and an asset coverage test. Some of our bank term loans have the same financial covenants as the committed facility.
The indentures for our public debt also contain various restrictive covenants, including limitation on liens provisions that limit the amount of additional secured indebtedness that we may incur. Additionally, certain exceptions to the covenants permit us to incur an unlimited amount of purchase money and nonrecourse indebtedness.
The loan agreements for our European rail subsidiaries also contain restrictive covenants, including leverage and cash flow covenants specific to those subsidiaries, restrictions on making loans, and limitations on their repayment of loans or payment of dividends to certain related parties (including GATX, the U.S. parent company). These covenants effectively limits their ability to transfer funds to GATX.
We do not anticipate any covenant violations nor do we anticipate that any of these covenants will restrict our operations or our ability to obtain additional financing. At June 30, 2013, we were in compliance with all covenants and conditions of all of our credit agreements.
Credit Ratings
Our funding options may be affected by the global capital market environment and outlook as well as our financial performance. Our access to capital markets at competitive rates is dependent on our credit rating and ratings outlook, as determined by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). As of June 30, 2013, our long-term unsecured debt was rated BBB by S&P and Baa2 by Moody’s. Our ratings outlook from both agencies was stable. Our short-term unsecured debt was rated A-2 by S&P and P-2 by Moody’s.

29

Contractual Commitments
The following table shows our contractual commitments, including debt maturities, lease payments, and portfolio investments at June 30, 2013, (in millions):
 
Payments Due by Period
 
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Recourse debt
$
3,546.1

 
$
153.8

 
$
420.3

 
$
541.8

 
$
639.6

 
$
359.9

 
$
1,430.7

Nonrecourse debt
104.3

 
26.7

 
57.4

 
9.2

 
8.2

 
2.8

 
—

Commercial paper and credit facilities
17.4

 
17.4

 
—

 
—

 
—

 
—

 
—

Capital lease obligations
11.5

 
1.5

 
3.1

 
3.1

 
2.7

 
1.1

 
—

Operating leases — recourse
871.1

 
33.0

 
104.7

 
125.4

 
101.5

 
89.3

 
417.2

Operating leases — nonrecourse
188.1

 
15.1

 
27.4

 
26.0

 
21.9

 
22.5

 
75.2

Portfolio investments (a)
1,292.3

 
352.9

 
401.6

 
331.8

 
198.2

 
1.1

 
6.7

 
$
6,030.8

 
$
600.4

 
$
1,014.5

 
$
1,037.3

 
$
972.1

 
$
476.7

 
$
1,929.8

________________
(a)
Primarily railcar purchase commitments.
Critical Accounting Policies
There have been no changes to our critical accounting policies during the six months ending June 30, 2013. Refer to our Annual Report on Form 10-K/A for the year ended December 31, 2012 for a summary of our policies.

30

Non-GAAP Financial Measures
We compute some financial measures using non-GAAP components, as defined by the SEC. We have provided a reconciliation of those non-GAAP components to the most directly comparable GAAP components. We include these non-GAAP financial measures to provide additional information and insight into our historical operating results and financial position. We use these measures in analyzing our financial performance from period to period and when making compensation decisions. These measures are not in accordance with, or a substitute for, GAAP and our financial measures may be different from non-GAAP financial measures used by other companies.
We present return on equity, net income, and diluted earnings per share excluding the effect of tax adjustments and other items. We exclude these items to provide a more meaningful comparison of financial performance between years and transparency into our operating results. In addition, we disclose total on- and off-balance-sheet assets because a significant portion of our rail fleet has been financed through sale-leasebacks that are accounted for as operating leases and the assets are not recorded on the balance sheet. We believe this information provides investors with a better representation of the assets deployed in our businesses.
Glossary of Key Terms
•
Non-GAAP financial measures — Numerical or percentage-based measures of a company’s historical performance, financial position, or liquidity calculated using a component different from that presented in the financial statements as prepared in accordance with GAAP.
•
Net income excluding tax adjustments and other items — Net income excluding certain items that we believe are not necessarily related to our ongoing business activities.
•
Diluted earnings per share excluding tax adjustments and other items — Diluted earnings per share excluding the impact of tax adjustments and other items.
•
Off-balance-sheet assets — Assets, primarily railcars, that are financed with operating leases and therefore not recorded on the balance sheet. We estimate the off-balance-sheet asset amount by calculating the present value of committed future operating lease payments using the interest rate implicit in each lease.
•
On-balance-sheet assets — Total assets reported on the balance sheet.
•
Return on equity — Net income divided by average shareholders’ equity.
•
Return on equity excluding tax adjustments and other items — Net income excluding tax adjustments and other items divided by average shareholders’ equity.
Reconciliation of Non-GAAP Components used in the Computation of Certain Financial Measures
The following table shows total on- and off-balance-sheet assets (in millions):
 
June 30
2012

 
September 30
2012

 
December 31
2012

 
March 31
2013
 
June 30
2013

Consolidated on-balance-sheet assets
$
5,917.9

 
$
6,125.1

 
$
6,055.4

 
$
6,144.7

 
$
6,119.2

Off-balance-sheet assets:
 
 
 
 
 
 
 
 
 
Rail North America
819.5

 
843.6

 
863.5

 
797.3

 
770.7

ASC
23.3

 
22.2

 
21.0

 
19.9

 
18.8

Total On- and Off-Balance-Sheet Assets
$
6,760.7

 
$
6,990.9

 
$
6,939.9

 
$
6,961.9

 
$
6,908.7

Shareholders’ Equity
$
1,170.7

 
$
1,225.4

 
$
1,244.2

 
$
1,223.5

 
$
1,219.1




31

The following table shows our net income excluding tax adjustments and other items (in millions):
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Net income, as reported
$
35.1

 
$
23.5

 
$
62.2

 
$
53.8

Income tax rate changes (a)
—

 
0.7

 
—

 
0.7

(Gains) losses on AAE interest rate swaps, net of tax (c)
(3.0
)
 
14.6

 
(1.7
)
 
16.8

Net income excluding tax adjustments and other items
$
32.1

 
$
38.8

 
$
60.5

 
$
71.3

The following table shows our diluted earnings per share excluding tax adjustments and other items:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Diluted earnings per share, as reported
$
0.74

 
$
0.49

 
$
1.31

 
$
1.13

Income tax rate changes (a)
—

 
0.01

 
—

 
0.01

(Gains) losses on AAE interest swaps, net of tax (c)
(0.06
)
 
0.30

 
(0.04
)
 
0.35

Diluted earnings per share excluding tax adjustments and other items
$
0.68

 
$
0.80

 
$
1.27

 
$
1.49

The following table shows our net income excluding tax adjustments and other items (in millions):
 
Trailing Twelve Months Ended June 30
 
2013
 
2012
Net income
$
145.7

 
$
118.3

Income tax rate changes (a)
(4.6
)
 
(3.4
)
Other tax adjustments (b)
(20.1
)
 
(4.8
)
(Gains) losses on AAE interest swaps, net of tax (c)
2.0

 
29.2

Litigation recoveries, no tax effect (d)
—

 
(3.2
)
Leveraged lease adjustment, net of tax (e)
—

 
(3.5
)
Net income excluding tax adjustments and other items
$
123.0

 
$
132.6

________________
(a)
Deferred tax adjustment due to enacted reductions to the statutory rates in the United Kingdom and increases to the statutory rates in Ontario, Canada.
(b)
Tax benefits recognized upon the close of domestic and foreign tax audits.
(c)
Realized and/or unrealized losses on AAE interest rate swaps.
(d)
Reserve release related to the favorable resolution of a litigation matter.
(e)
Gain on a leveraged lease adjustment.

32

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Since December 31, 2012, there have been no material changes in our interest rate and foreign currency exposures or types of derivative instruments used to hedge these exposures. For a discussion of our exposure to market risk, refer to "Item 7A. Quantitative and Qualitative Disclosure about Market Risk" of our Annual Report on Form 10-K/A for the year ended December 31, 2012.
Item4.Controls and Procedures
We have conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)), with the participation of our Chief Executive Officer and Chief Financial Officer. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective.
No change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended June 30, 2013, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

33

PART II — OTHER INFORMATION

Item 1.
Legal Proceedings
Information concerning litigation and other contingencies is described in Note 11 to the consolidated financial statements and is incorporated herein by reference.

Item 1A.
Risk Factors
Since December 31, 2012, there have been no material changes in our risk factors. For a discussion of our risk factors, refer to "Item 1A, Risk Factors" of our Annual Report on Form 10-K/A for the year ended December 31, 2012.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following is a summary of common and preferred stock repurchases for the quarter ended June 30, 2013. The shares of common stock were repurchased pursuant to a $200 million stock repurchase program authorized by our board of directors on January 23, 2008. As of March 31, 2013, $50.3 million remained available under the repurchase authorization. The shares of preferred stock were redeemed on June 10, 2013.
Issuer Purchases of Equity Securities
 
 
(a)
 
(b)
 
(c)
 
(d)
Total
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1-30, 2013 common
 
248,380

 
$
50.99

 
248,380

 
$37.6 million
May 1-31, 2013 common
 
210,425

 
$
52.05

 
210,425

 
$26.6 million
June 1-30, 2013 common
 
168,183

 
$
48.40

 
168,183

 
$18.6 million
June 1-30, 2013 preferred
 
2,690

 
$
63.06

 
2,690

 
 
Totals
 
629,678

 
$
50.57

 
629,678

 
 

Item 6.
Exhibits
Exhibits:
Reference is made to the exhibit index which is included herewith and is incorporated by reference hereto.

34

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
GATX CORPORATION
(Registrant)
 
/s/ Robert C. Lyons
Robert C. Lyons
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer)
Date: July 25, 2013

35

EXHIBIT INDEX
 
Exhibit
Number
  
Exhibit Description
 
 
 
 
  
Filed with this Report:
 
 
 
31A.
  
Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule 15d-14(a) (CEO Certification).
 
 
 
31B.
  
Certification Pursuant to Exchange Act Rule 13a-14(a) and Rule 15d-14(a) (CFO Certification).
 
 
 
32.
  
Certification Pursuant to 18 U.S.C. Section 1350 (CEO and CFO Certification).
 
 
 
101.
  
The following materials from GATX Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, and (iv) Notes to the Consolidated Financial Statements.
 
  
Incorporated by Reference
10.1
 
Five Year Credit Agreement dated as of April 30, 2013, among GATX Corporation, as borrower, Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as join lead arrangers and joint book managers; Bank of America, N.A., as syndication agent; PNC Bank, N.A., U.S. Bank N.A., and Bayerische Landesbank, acting through its New York branch, as co-documentation agents, Citibank, N.A., as administrative agent; and the lenders party thereto is incorporated herein by reference to Exhibit 10.2 to GATX's Form 8-K dated May 3, 2013, file number 001-02328.


36