10-Q 1 d247276d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 September 30, 2011

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 September 30, 2011, 46.6 million common shares were outstanding.

 

 

 


Table of Contents

GATX CORPORATION

FORM 10-Q

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2011

INDEX

 

Item No.

   Page No.  
Part I – FINANCIAL INFORMATION   

Item 1. Financial Statements

  
  

Consolidated Balance Sheets (Unaudited)

     1   
  

Consolidated Statements of Income (Unaudited)

     2   
  

Consolidated Statements of Cash Flows (Unaudited)

     3   
  

Notes to the Consolidated Financial Statements (Unaudited)

     4   

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

  
  

Forward Looking Statements

     16   
  

Business Overview

     16   
  

Discussion of Operating Results

     17   
  

Segment Operations

     18   
  

Cash Flow and Liquidity

     27   
  

Critical Accounting Policies

     29   
  

Non-GAAP Financial Measures

     29   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     30   

Item 4. Controls and Procedures

     30   
Part II – OTHER INFORMATION   

Item 1. Legal Proceedings

     31   

Item 1A. Risk Factors

     31   

Item 6. Exhibits

     32   

SIGNATURE

     33   

EXHIBIT INDEX

     34   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

GATX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

($ in millions, except share data)

 

     September 30
2011
    December 31
2010
 

Assets

    

Cash and Cash Equivalents

   $ 115.0      $ 78.5   

Restricted Cash

     50.6        56.6   

Receivables

    

Rent and other receivables

     78.3        70.6   

Loans

     18.6        0.5   

Finance leases

     330.3        347.7   

Less: allowance for possible losses

     (11.8     (11.6
  

 

 

   

 

 

 
     415.4        407.2   

Operating Assets and Facilities

    

Rail (includes $123.5 and $123.7 relating to a consolidated VIE at September 30, 2011 and December 31, 2010, respectively)

     5,652.7        5,513.6   

Specialty

     372.9        280.8   

ASC

     373.6        389.1   

Less: allowance for depreciation (includes $17.8 and $13.6 relating to a consolidated VIE at September 30, 2011 and December 31, 2010, respectively)

     (2,061.2     (2,049.7
  

 

 

   

 

 

 
     4,338.0        4,133.8   

Investments in Affiliated Companies

     547.5        486.1   

Goodwill

     92.7        92.7   

Other Assets

     197.3        187.5   
  

 

 

   

 

 

 

Total Assets

   $ 5,756.5      $ 5,442.4   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Accounts Payable and Accrued Expenses

   $ 150.0      $ 114.6   

Debt

    

Commercial paper and borrowings under bank credit facilities

     124.2        115.6   

Recourse

     3,145.6        2,801.8   

Nonrecourse (includes $48.1 and $56.2 relating to a consolidated VIE at September 30, 2011 and December 31, 2010, respectively)

     157.8        217.2   

Capital lease obligations

     14.3        41.9   
  

 

 

   

 

 

 
     3,441.9        3,176.5   

Deferred Income Taxes

     769.8        750.6   

Other Liabilities

     239.5        287.0   
  

 

 

   

 

 

 

Total Liabilities

     4,601.2        4,328.7   

Shareholders’ Equity

    

Preferred stock ($1.00 par value, 5,000,000 shares authorized, 16,644 and 16,694 shares of Series A and B $2.50 Cumulative Convertible Preferred Stock issued and outstanding as of September 30, 2011 and December 31, 2010, respectively, aggregate liquidation preference of $1.0)

     *        *   

Common stock ($0.625 par value, 120,000,000 authorized, 65,718,449 and 65,482,950 shares issued and 46,595,929 and 46,360,430 shares outstanding as of September 30, 2011 and December 31, 2010, respectively)

     41.0        40.9   

Additional paid in capital

     638.9        626.2   

Retained earnings

     1,153.6        1,116.9   

Accumulated other comprehensive loss

     (117.9     (110.0

Treasury stock at cost (19,122,520 shares at September 30, 2011 and December 31, 2010)

     (560.3     (560.3
  

 

 

   

 

 

 

Total Shareholders’ Equity

     1,155.3        1,113.7   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 5,756.5      $ 5,442.4   
  

 

 

   

 

 

 

  

 

* Less than $0.1 million.

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

GATX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in millions, except per share data)

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

Gross Income

           

Lease income

   $ 227.9       $ 216.1       $ 679.9       $ 651.0   

Marine operating revenue

     70.3         64.8         138.0         125.5   

Asset remarketing income

     16.2         10.1         33.3         28.4   

Other income

     23.5         17.7         66.3         55.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

     337.9         308.7         917.5         860.5   

Share of affiliates’ earnings

     1.8         5.7         33.9         30.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Income

     339.7         314.4         951.4         891.1   

Ownership Costs

           

Depreciation

     57.7         54.3         167.3         161.1   

Interest expense, net

     40.9         41.3         126.9         125.1   

Operating lease expense

     31.7         35.0         99.6         104.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Ownership Costs

     130.3         130.6         393.8         390.6   

Other Costs and Expenses

           

Maintenance expense

     68.5         65.7         208.6         198.7   

Marine operating expense

     50.5         43.7         98.6         85.2   

Selling, general and administrative

     38.5         31.0         112.3         97.3   

Other expense

     8.2         15.1         32.9         39.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Costs and Expenses

     165.7         155.5         452.4         420.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before Income Taxes

     43.7         28.3         105.2         79.8   

Income Taxes

     10.8         7.2         26.0         18.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 32.9       $ 21.1       $ 79.2       $ 61.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per Share Data

           

Basic

   $ 0.71       $ 0.45       $ 1.71       $ 1.33   

Average number of common shares (in millions)

     46.5         46.2         46.4         46.1   

Diluted

     0.70         0.45         1.68         1.31   

Average number of common shares and common share equivalents (in millions)

     47.2         46.7         47.1         47.0   

Dividends declared per common share

   $ 0.29       $ 0.28       $ 0.87       $ 0.84   

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

GATX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

     Nine Months  Ended
September 30
 
     2011     2010  

Operating Activities

    

Net income

   $ 79.2      $ 61.3   

Adjustments to reconcile income to net cash provided by operating activities:

    

Gains on sales of assets

     (51.2     (35.1

Depreciation

     176.0        169.3   

Provision (reversal of provision) for losses

     0.3        (0.2

Asset impairment charges

     2.5        5.8   

Deferred income taxes

     18.9        12.7   

Share of affiliates’ earnings, net of dividends

     (28.2     (1.4

Change in income taxes payable

     11.5        (4.9

Change in accrued operating lease expense

     (32.5     (38.2

Employee benefit plans

     (4.0     (20.2

Other

     15.3        1.5   
  

 

 

   

 

 

 

Net cash provided by operating activities

     187.8        150.6   

Investing Activities

    

Additions to operating assets and facilities

     (327.7     (219.5

Loans extended

     (19.1     —     

Investments in affiliates

     (113.2     (24.9

Other

     (0.1     (0.1
  

 

 

   

 

 

 

Portfolio investments and capital additions

     (460.1     (244.5

Purchases of leased-in assets

     (61.1     (1.5

Portfolio proceeds

     108.9        55.4   

Proceeds from sales of other assets

     31.5        21.9   

Proceeds from sale-leaseback

     —          78.9   

Net decrease in restricted cash

     6.0        1.2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (374.8     (88.6

Financing Activities

    

Net proceeds from issuances of debt (original maturities longer than 90 days)

     545.9        259.1   

Repayments of debt (original maturities longer than 90 days)

     (277.1     (298.0

Net increase in debt with original maturities of 90 days or less

     9.1        2.6   

Payments on capital lease obligations

     (18.5     (4.4

Employee exercises of stock options

     5.1        0.8   

Cash dividends

     (42.3     (40.3
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     222.2        (80.2

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     1.3        0.1   
  

 

 

   

 

 

 

Net increase (decrease) in Cash and Cash Equivalents during the period

     36.5        (18.1

Cash and Cash Equivalents at beginning of period

     78.5        41.7   
  

 

 

   

 

 

 

Cash and Cash Equivalents at end of period

   $ 115.0      $ 23.6   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. Description of Business

GATX Corporation (“GATX” or the “Company”) leases, operates and manages long-lived, widely-used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”).

 

NOTE 2. Basis of Presentation

The accompanying unaudited consolidated financial statements of GATX Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by these accounting principles for complete financial statements. In the opinion of management, all adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2011, are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2011. In particular, ASC’s fleet is generally inactive for a significant portion of the first quarter of each year due to the winter conditions on the Great Lakes. In addition, the timing of asset remarketing income is dependent, in part, on market conditions and, therefore, does not occur evenly from period to period. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2010, as set forth in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

Accounting Adjustment

In the first quarter of 2010, the Company discovered a clerical error in the preparation of its Consolidated Balance Sheet as of December 31, 2009, and Consolidated Statement of Cash Flows for the quarter and year ended December 31, 2009. The error resulted in a $13.1 million overstatement in each of cash and cash equivalents; accounts payable and accrued expenses; and net cash provided by operating activities. Management has determined that the effect of this error is immaterial and adjusted its Consolidated Balance Sheet and Consolidated Statement of Cash Flows in 2010 to correct this error.

New Accounting Pronouncements

Multiemployer Benefit Plans — In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative accounting guidance that requires an entity to provide additional quantitative and qualitative disclosures about its involvement in multiemployer pension and other postretirement benefit plans. The disclosures include the entity’s level of participation in multiemployer benefit plans, the financial health of those plans, and the nature of the entity’s commitments to the plans. The guidance becomes effective for annual periods ending after December 15, 2011, with early adoption permitted. The application of the new guidance will not impact GATX’s financial position, results of operations or cash flows.

Goodwill — In September 2011, the FASB issued authoritative accounting guidance that provides an entity the option to assess qualitative factors to determine if performing the two-step goodwill impairment test is necessary. The assessment of qualitative factors requires an entity to evaluate all events or circumstances that could impact the likelihood that the fair value of a reporting unit is less than its carrying amount. The guidance becomes effective for periods beginning after December 15, 2011, with early adoption permitted. Upon adoption, GATX may revise its goodwill impairment testing policy, but application of the new guidance will not impact GATX’s financial position, results of operations or cash flows.

Presentation of Comprehensive Income — In June 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative accounting guidance that revises the requirements for reporting other comprehensive income and its components. The guidance requires an entity to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The guidance becomes effective for periods beginning after December 15, 2011, with early adoption permitted. Upon adoption, GATX may revise the presentation of its financial statements, but application of the new guidance will not impact GATX’s financial position, results of operations or cash flows.

 

4


Table of Contents

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

 

Fair Value Measurement — In May 2011, the FASB issued authoritative accounting guidance that changes some fair value measurement principles, clarifies application of existing guidance, and enhances fair value disclosure requirements. The guidance requires an entity to disclose transfers between Level 1 and Level 2 fair value measurements and the reasons for those transfers. The guidance becomes effective for periods beginning after December 15, 2011. Application of the new guidance is not expected to impact GATX’s financial position, results of operations or cash flows.

 

NOTE 3. Investments in Affiliated Companies

Investments in affiliated companies represent investments in, and loans to and from, domestic and foreign companies and joint ventures that are in businesses similar to those of GATX, such as lease financing and related services for customers operating rail, marine and industrial equipment assets, as well as other business activities, including ventures that provide asset residual value guarantees.

Operating results for all affiliated companies, assuming GATX held a 100% interest, would be (in millions):

     Three Months Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

Revenues

   $ 165.9       $ 155.5       $ 502.0       $ 488.9   

Pre-tax income reported by affiliates

     6.7         15.7         89.2         57.8   

In the third quarter of 2011, the Clipper Fourth Limited and Clipper Fourth APS (collectively, the “Clipper Entities”) marine joint ventures, in each of which GATX held a 45% interest, were dissolved. In connection with the dissolutions, GATX contributed $62.1 million, representing its share of the Clipper Entities’ outstanding debt, and received liquidating distributions consisting of six vessels with an aggregate fair value of $88.8 million. GATX recognized an impairment loss of $5.2 million as a result of the transfer, which is reflected in share of affiliates’ earnings.

 

5


Table of Contents

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

 

NOTE 4. Fair Value Disclosure

The following tables set forth GATX’s assets and liabilities measured at fair value on a recurring basis (in millions):

 

      September 30,
2011
     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)

   $ 17.3       $ —         $ 17.3       $ —     

Foreign exchange rate derivatives (b)

     2.3         —           2.3         —     

Available for sale equity securities

     3.3         3.3         —           —     

Liabilities

           

Interest rate derivatives (a)

     3.0         —           3.0         —     

 

      December 31,
2010
     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)

   $ 17.6       $ —         $ 17.6       $ —     

Available for sale equity securities

     4.3         4.3         —           —     

Liabilities

           

Interest rate derivatives (a)

     4.6         —           4.6         —     

Foreign exchange rate derivatives (b)

     0.5         —           0.5         —     

 

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

Available for sale equity securities are valued based on quoted prices in an active exchange market. Derivative contracts are valued using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or can be derived principally from or corroborated by observable market data.

The following tables set forth certain disclosures relating to GATX’s non-recurring Level 3 fair value measurements (in millions):

 

Nine months ended September 30    Fair Value
of Assets
     Carrying
Value of Assets
     Impairment
Losses
 

2011

   $ 3.2       $ 5.4       $ 2.2   

2010

     3.8         9.6         5.8   

 

Three months ended September 30    Fair Value
of Assets
     Carrying
Value of Assets
     Impairment
Losses
 

2011

   $ 1.0       $ 2.0       $ 1.0   

2010

     0.3         0.7         0.4   

 

6


Table of Contents

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

 

For the first nine months and third quarter of 2011, impairment losses of $2.2 million and $1.0 million, respectively, primarily related to scrapped wheelsets in Rail’s European fleet. For the first nine months and third quarter of 2010, impairment losses of $1.0 million and $0.4 million, respectively, related to scrapped wheelsets in Rail’s European fleet. Also in the first nine months of 2010, impairment losses of $4.8 million related to an industry-wide, regulatory mandate issued by the Association of American Railroads that resulted in a significant decrease to the expected economic life of 358 aluminum hopper railcars. In each case, the fair value was determined using discounted cash flow methodologies and third-party appraisal data, as applicable.

Derivative instruments

GATX recognizes all derivative instruments at fair value and classifies them on the balance sheet as either other assets or other liabilities. Classification of derivative activity in the statements of income and cash flows is generally determined by the nature of the hedged item. Gains and losses on derivatives that are not accounted for as hedges are classified as other operating expenses and the related cash flows are included in cash flows from operating activities. Although GATX does not hold or issue derivative financial instruments for purposes other than hedging, certain derivatives may not qualify for hedge accounting. Changes in the fair value of these derivatives are recognized in earnings immediately.

Fair Value Hedges — GATX uses interest rate swaps to convert fixed rate debt to floating rate debt and to manage the fixed to floating rate mix of its debt obligations. For fair value hedges, changes in fair value of both the derivative and the hedged item are recognized in earnings as interest expense. As of September 30, 2011 and December 31, 2010, GATX had three instruments outstanding with an aggregate notional amount of $350.0 million for each period. As of September 30, 2011, these derivatives had maturities ranging from 2012-2015.

Cash Flow Hedges — GATX uses interest rate swaps to convert floating rate debt to fixed rate debt and to manage the fixed to floating rate mix of its debt obligations. GATX also uses interest rate swaps and Treasury rate locks to hedge its exposure to interest rate risk on existing and anticipated transactions. As of September 30, 2011 and December 31, 2010, GATX had 12 instruments and 13 instruments outstanding, respectively, with an aggregate notional amount of $78.0 million and $130.4 million, respectively. As of September 30, 2011, these derivatives had maturities ranging from 2012-2015. Within the next 12 months, GATX expects to reclassify $7.1 million ($4.5 million after-tax) of net losses on previously terminated derivatives from accumulated other comprehensive income (loss) to earnings. Amounts are reclassified when interest and operating expense related to the hedged risks affect earnings.

Certain of GATX’s derivative instruments contain credit risk provisions that could require GATX to make immediate payment on net liability positions in the event that GATX defaulted on certain outstanding debt obligations. The aggregate fair value of all derivative instruments with credit risk related contingent features that are in a liability position as of September 30, 2011 was $3.0 million. GATX is not required to post any collateral on its derivative instruments and does not expect the credit risk provisions to be triggered.

In the event that a counterparty fails to meet the terms of the interest rate swap agreement or a foreign exchange contract, GATX’s exposure is limited to the fair value of the swap if in GATX’s favor. GATX manages the credit risk of counterparties by transacting only with institutions that the Company considers financially sound and by avoiding concentrations of risk with a single counterparty. GATX considers the risk of non-performance by a counterparty to be remote.

 

7


Table of Contents

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

 

The income statement and other comprehensive income (loss) impacts of GATX’s derivative instruments were (in millions):

 

Derivative

Designation

  

Location of Gain (Loss) Recognized

   Three Months  Ended
September 30
    Nine Months  Ended
September 30
 
      2011     2010     2011     2010  

Fair value hedges (a)

  

Interest expense

   $ 0.4      $ 4.0      $ (0.3   $ 11.7   

Cash flow hedges

  

Amount recognized in other comprehensive income (loss) (effective portion)

     0.8        (2.7     (5.1     (10.9

Cash flow hedges

  

Amount reclassified from accumulated other comprehensive loss to interest expense (effective portion)

     (2.1     (2.0     (6.0     (5.7

Cash flow hedges

  

Amount reclassified from accumulated other comprehensive loss to operating lease expense (effective portion)

     (0.4     (0.4     (1.2     (1.2

Cash flow hedges

  

Amount recognized in other expense (ineffective portion)

     (0.4     —          (0.4     (0.1

 

(a) Equally offsetting the amount recognized in interest expense was the fair value adjustment relating to the underlying debt.

Other Financial Instruments

The carrying amounts of cash and cash equivalents, restricted cash, money market funds, rent and other receivables, accounts payable, commercial paper and bank credit facilities approximate fair value due to the short maturity of those instruments. The fair values of investment funds were based on the best information available and may include quoted investment fund values. The fair values of loans and fixed and floating rate debt were estimated based on discounted cash flow analyses using interest rates representative of loans with similar terms to borrowers of comparable credit quality. The following table sets forth the carrying amounts and fair values of GATX’s other financial instruments as of (in millions):

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Assets

           

Investment funds

   $ 4.4       $ 7.3       $ 6.8       $ 10.2   

Loans

     18.6         18.7         0.5         0.5   

Liabilities

           

Recourse fixed rate debt

   $ 2,653.9       $ 2,784.7       $ 2,459.3       $ 2,615.9   

Recourse floating rate debt

     491.7         487.5         342.5         341.5   

Nonrecourse debt

     157.8         168.0         217.2         233.0   

 

NOTE 5. Commercial Commitments

In connection with certain investments or transactions, GATX has entered into various commercial commitments, such as guarantees and standby letters of credit, which could potentially require performance in the event of demands by third parties. Similar to GATX’s balance sheet investments, these guarantees expose GATX to credit, market and equipment risk; accordingly, GATX evaluates its commitments and other contingent obligations using techniques similar to those used to evaluate funded transactions.

 

8


Table of Contents

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

 

The following table sets forth GATX’s commercial commitments as of (in millions):

 

     September 30
2011
     December 31
2010
 

Affiliate guarantees

   $ 50.0       $ 30.0   

Asset residual value guarantees

     34.1         48.0   

Lease payment guarantees

     48.3         52.7   
  

 

 

    

 

 

 

Total guarantees (a)

     132.4         130.7   

Standby letters of credit and bonds

     10.9         11.5   
  

 

 

    

 

 

 
   $ 143.3       $ 142.2   
  

 

 

    

 

 

 

 

(a) At September 30, 2011 and December 31, 2010, the carrying values of liabilities on the balance sheet for guarantees were $6.6 million and $7.3 million, respectively. The expirations of these guarantees range from 2011 to 2019. GATX is not aware of any event that would require it to satisfy these guarantees.

Affiliate guarantees generally involve guaranteeing repayment of the financing utilized to acquire or lease-in assets and are in lieu of making direct equity investments in the affiliate. GATX is not aware of any event of default that would require it to satisfy these guarantees and expects the affiliates to generate sufficient cash flow to satisfy their lease and loan obligations.

Asset residual value guarantees represent GATX’s commitment to third parties that an asset or group of assets will be worth a specified amount at the end of a lease term. GATX earns an initial fee for providing these asset value guarantees, which is amortized into income over the guarantee period. Upon disposition of the assets, GATX receives a share of any proceeds in excess of the amount guaranteed and such residual sharing gains are recorded in asset remarketing income. If at the end of the lease term, the net realizable value of the asset is less than the guaranteed amount, any liability resulting from GATX’s performance pursuant to the residual value guarantee will be reduced by the value realized from disposition of the asset. Asset residual value guarantees include those related to assets of affiliated companies.

Lease payment guarantees represent GATX’s guarantees to financial institutions of finance and operating lease payments to unrelated parties. Any liability resulting from GATX’s performance pursuant to the lease payment guarantees will be reduced by the value realized from the underlying asset or group of assets.

GATX and its subsidiaries are also parties to standing letters of credit and bonds primarily related to workers’ compensation and general liability insurance coverages. No material claims have been made against these obligations. At September 30, 2011, GATX does not expect any material losses to result from these off balance sheet instruments since performance is not anticipated to be required.

 

NOTE 6. Variable Interest Entities

GATX evaluates whether an entity is a VIE based on the sufficiency of the entity’s equity and whether the equity holders have the characteristics of a controlling financial interest. To determine if it is the primary beneficiary of a VIE, GATX assesses whether it has the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that may be significant to the VIE. These determinations are both qualitative and quantitative in nature and require certain judgments and assumptions about the VIE’s forecasted financial performance and the volatility inherent in those forecasted results. GATX evaluates new investments for VIE determination and regularly reviews all existing entities for any events that may result in an entity becoming a VIE or GATX becoming the primary beneficiary of an existing VIE.

GATX is the primary beneficiary of a consolidated VIE related to a structured lease financing for a portfolio of railcars because it has the power to direct the significant activities of the VIE through its ownership of the equity interests in the transaction.

 

9


Table of Contents

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

 

The carrying amounts of assets and liabilities of the VIE that GATX consolidates were as follows (in millions):

 

     September 30
2011
     December 31
2010
 

Operating assets, net of accumulated depreciation (a)

   $ 105.7       $ 110.1   

Nonrecourse debt

     48.1         56.2   

 

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

GATX is also involved with other entities determined to be VIEs of which GATX is not the primary beneficiary. These VIEs are primarily leveraged leases and certain investments in railcar and equipment leasing affiliates that have been financed through a mix of equity investments and third party lending arrangements. GATX determined that it is not the primary beneficiary of these VIEs because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. For certain investments in affiliates determined to be VIEs, GATX concluded that power was shared between 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 carrying amounts and maximum exposure to loss with respect to VIEs that GATX does not consolidate were as follows (in millions):

 

     September 30, 2011      December 31, 2010  
     Net
Carrying
Amount
     Maximum
Exposure
to Loss
     Net
Carrying
Amount
     Maximum
Exposure
to Loss
 

Investments in affiliates

   $ 78.4       $ 78.4       $ 60.9       $ 60.9   

Leveraged leases

     72.2         72.2         74.1         74.1   

Other investment

     0.9         0.9         1.0         1.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 151.5       $ 151.5       $ 136.0       $ 136.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTE 7. Comprehensive Income

The components of comprehensive (loss) income were as follows (in millions):

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011     2010      2011     2010  

Net income

   $ 32.9      $ 21.1       $ 79.2      $ 61.3   

Other comprehensive (loss) income, net of taxes:

         

Foreign currency translation (loss) gain

     (56.4     44.3         (16.9     (28.2

Unrealized (loss) gain on securities

     (0.2     0.1         (0.6     0.8   

Unrealized (loss) gain on derivative instruments

     (1.0     —           6.8        (4.5

Post retirement benefit plans

     0.9        0.2         2.8        2.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive (loss) income

   $ (23.8   $ 65.7       $ 71.3      $ 31.4   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

NOTE 8. Share-Based Compensation

In the first nine months of 2011, GATX granted 417,600 stock appreciation rights (“SARs”), 200,736 restricted stock units, 87,570 performance shares and 14,831 phantom stock units. For the three and nine months ended September 30, 2011, total share-based compensation expense was $2.0 million ($1.2 million after tax) and $6.9 million ($4.3 million after tax), respectively. For the three and nine months ended September 30, 2010, total share-based compensation expense was $1.6 million ($1.0 million after tax) and $5.0 million ($3.1 million after tax), respectively.

 

10


Table of Contents

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

 

The weighted average estimated fair value of GATX’s 2011 SAR awards and underlying assumptions thereof are noted in the table below. The vesting period for the 2011 SAR grant is 3 years, with 1/3 vesting after each year.

 

     2011  

Weighted average fair value of SAR award

   $ 13.88   

Annual dividend

   $ 1.16   

Expected life of the SAR, in years

     4.3   

Risk free interest rate

     1.6

Dividend yield

     3.4

Expected stock price volatility

     41.91

 

NOTE 9. Income Taxes

GATX’s effective tax rate was 25% for the nine months ended September 30, 2011, compared to 23% for the nine months ended September 30, 2010. In the prior year, GATX’s liability for unrecognized tax benefits was reduced by $3.7 million in connection with the close of various federal and foreign tax audits. Additionally, a $1.9 million deferred tax benefit was recognized in connection with a reduction in the statutory tax rates of the United Kingdom. In the current year, GATX recognized a $4.1 million deferred tax benefit in connection with a further reduction in the statutory tax rates of the United Kingdom. Excluding the effect of these tax benefits from each year, GATX’s effective tax rate for the first nine months of 2011 and 2010 was 29% and 30% respectively. The difference between the 2011 and 2010 effective tax rates was driven by variability in the mix of pre-tax income, including share of affiliates’ earnings, among domestic and foreign jurisdictions, which are taxed at different rates.

As of September 30, 2011, GATX’s gross liability for unrecognized tax benefits totaled $43.7 million, which, if fully recognized, would decrease income tax expense by $23.3 million ($21.2 million net of federal tax).

 

NOTE 10. Pension and Other Post-Retirement Benefits

The components of pension and other post-retirement benefit costs for the three months ended September 30, 2011 and 2010, were as follows (in millions):

 

     2011 Pension
Benefits
    2010 Pension
Benefits
    2011 Retiree
Health and
Life
    2010 Retiree
Health and
Life
 

Service cost

   $ 1.4      $ 1.2      $ 0.1      $ (0.1

Interest cost

     5.2        5.6        0.6        0.6   

Expected return on plan assets

     (8.4     (8.5     —          —     

Amortization of:

        

Unrecognized prior service credit

     (0.3     (0.2     —          (0.1

Unrecognized net actuarial loss (gain)

     1.8        1.1        (0.1     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net costs (a)

   $ (0.3   $ (0.8   $ 0.6      $ 0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of pension and other post-retirement benefit costs for the nine months ended September 30, 2011 and 2010, were as follows (in millions):

 

     2011 Pension
Benefits
    2010 Pension
Benefits
    2011 Retiree
Health and
Life
    2010 Retiree
Health and
Life
 

Service cost

   $ 4.1      $ 4.0      $ 0.2      $ 0.1   

Interest cost

     15.6        16.6        1.7        1.8   

Expected return on plan assets

     (25.0     (25.1     —          —     

Amortization of:

        

Unrecognized prior service credit

     (0.8     (0.8     (0.1     (0.1

Unrecognized net actuarial loss (gain)

     5.4        4.5        (0.2     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net costs (a)

   $ (0.7   $ (0.8   $ 1.6      $ 1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The amounts reported herein are based on estimated annual costs. Actual annual costs for the year ending December 31, 2011, may differ from these estimates.

 

11


Table of Contents

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

 

NOTE 11. Earnings Per Share

Basic earnings per share were computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Shares issued or reacquired during the period, if applicable, were weighted for the portion of the period that they were outstanding. Diluted earnings per share give effect to potentially dilutive securities, including convertible preferred stock, employee stock options/SARs, restricted stock and convertible debt.

The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

Numerator:

           

Net income

   $ 32.9       $ 21.1       $ 79.2       $ 61.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic earnings per share — income available to common shareholders

   $ 32.9       $ 21.1       $ 79.2       $ 61.3   

Effect of dilutive securities:

           

After-tax interest expense on convertible securities

     —           —           —           0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted earnings per share — income available to common shareholders

   $ 32.9       $ 21.1       $ 79.2       $ 61.5   

Denominator:

           

Denominator for basic earnings per share — weighted average shares

     46.5         46.2         46.4         46.1   

Effect of dilutive securities:

           

Equity compensation plans

     0.6         0.4         0.6         0.5   

Convertible preferred stock

     0.1         0.1         0.1         0.1   

Convertible securities

     —           —           —           0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share — adjusted weighted average and assumed conversion

     47.2         46.7         47.1         47.0   

Basic earnings per share

   $ 0.71       $ 0.45       $ 1.71       $ 1.33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.70       $ 0.45       $ 1.68       $ 1.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTE 12. Legal Proceedings and Other Contingencies

Various legal actions, claims, assessments and other contingencies arising in the ordinary course of business are pending against GATX and certain of its subsidiaries. These matters are subject to many uncertainties, and it is possible that some of these matters could ultimately be decided, resolved or settled adversely. For a discussion of these matters, please refer to Note 22 to the Company’s consolidated financial statements as set forth in GATX’s Annual Report on Form 10-K for the year ended December 31, 2010. Except as noted below, there have been no material changes or developments in these matters.

 

12


Table of Contents

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

 

Polskie Koleje Panstwowe S.A. v. DEC sp. z o.o.

In December 2005, Polskie Koleje Panstwowe S.A. (“PKP”) filed a complaint, Polskie Koleje Panstwowe S.A. v. DEC sp. z o.o., in the Regional Court in Warsaw, Poland against DEC sp. z o.o. (“DEC”), an indirect wholly-owned subsidiary of the Company currently named GATX Rail Poland, sp. z o.o. The complaint alleges that, prior to GATX’s acquisition of DEC in 2001, DEC breached a Conditional Sales Agreement (the “Agreement”) to purchase shares of Kolsped S.A. (“Kolsped”), an indirect subsidiary of PKP. The allegedly breached condition required DEC to obtain a release of Kolsped’s ultimate parent company, PKP, from its guarantee of Kolsped’s promissory note securing a $9.8 million bank loan. Pursuant to an amendment to the Agreement, DEC satisfied this condition by providing PKP with a blank promissory note (the “DEC Note”) and a promissory note declaration which allowed PKP to fill in the DEC Note up to $10 million in the event a demand was made upon it as guarantor of Kolsped’s note to the bank (the “Kolsped Note”). In May 1999, the then current holder of the Kolsped Note, a bank (“Bank”), sued PKP under its guarantee. PKP lost the DEC Note and therefore did not use it to satisfy the guarantee, and the Bank ultimately secured a judgment against PKP in 2002. PKP also failed to notify DEC of the Bank’s lawsuit while the lawsuit was pending.

After exhausting its appeals of the judgment entered against it, PKP filed suit against DEC in December 2005, alleging that DEC failed to fulfill its obligation to release PKP as a guarantor of the Kolsped Note and is purportedly liable to PKP, as a third party beneficiary of the Agreement. DEC filed an answer to the complaint denying the material allegations and raising numerous defenses, including, among others, that: (i) the Agreement did not create an actionable obligation, but rather was a condition precedent to the purchase of shares in Kolsped; (ii) DEC fulfilled that condition by issuing the DEC Note, which was subsequently lost by PKP and redeemed by a Polish court; (iii) PKP was not a third party beneficiary of the Agreement; and (iv) the action is barred by the governing limitations period. The first day of trial was held on March 5, 2008, and the second and final day of trial was held on December 7, 2009. On February 16, 2010, the court issued a written opinion in favor of DEC and rejecting all of PKP’s claims. PKP appealed and, on March 24, 2011, the Court of Appeals rejected the appeal and affirmed the trial court’s ruling. A further appeal by PKP to the Supreme Court is pending.

As of September 30, 2011, PKP’s claims for damages totaled approximately PLN 146.7 million, or $44.4 million, which consists of the principal amount, interest and costs allegedly paid by it to the Bank and statutory interest. Statutory interest would be assessed only if, on remand, the Court of Appeals or the trial court ultimately awards damages to PKP, in which case interest would be assessed on the amount of the award from the date of filing of the claim in December 2005, to the date of the award. The Company has recorded an accrual of $15.5 million for this litigation pending final resolution on appeal. While the ultimate resolution of this matter for an amount in excess of this accrual is possible, the Company believes that any such excess would not be material to its financial position or liquidity. However, such resolution could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

NOTE 13. Financial Data of Business Segments

GATX leases, operates and manages long-lived, widely-used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and ASC.

Rail is principally engaged in leasing tank and freight railcars, and locomotives. Rail provides railcars primarily pursuant to full-service leases, under which it maintains the railcars, pays ad valorem taxes and insurance, and provides other ancillary services. Rail also offers net leases for railcars and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes.

Specialty provides leasing, asset remarketing and asset management services to the marine and industrial equipment markets. Specialty offers operating leases, direct finance leases and loans, and extends its market reach through joint venture investments.

ASC owns and operates the largest fleet of U.S. flagged self-unloading vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities for a range of industrial customers.

 

13


Table of Contents

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

 

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

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

The following tables depict the profitability, financial position and capital expenditures of each of GATX’s business segments for the three and nine months ended September 30, 2011 and 2010 (in millions):

 

     Rail     Specialty      ASC      Other     GATX
Consolidated
 

Three Months Ended September 30, 2011

            

Profitability

            

Revenues

   $ 242.6      $ 23.7       $ 71.3       $ 0.3      $ 337.9   

Share of affiliates’ earnings

     (2.0     3.8         —           —          1.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total gross income

     240.6        27.5         71.3         0.3        339.7   

Ownership costs

     111.8        12.1         5.6         0.8        130.3   

Other costs and expenses

     65.8        3.9         57.2         0.3        127.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Segment profit (loss)

   $ 63.0      $ 11.5       $ 8.5       $ (0.8     82.2   

SG&A

               38.5   
            

 

 

 

Income before income taxes

             $ 43.7   

Capital Expenditures

            

Portfolio investments and capital additions

   $ 133.8      $ 62.1       $ 3.3       $ 0.8      $ 200.0   

Selected Balance Sheet Data at September 30, 2011

            

Investments in affiliated companies

   $ 163.0      $ 384.5       $ —         $ —        $ 547.5   

Identifiable assets

   $ 4,448.6      $ 862.0       $ 286.3       $ 159.6      $ 5,756.5   

Three Months Ended September 30, 2010

            

Profitability

            

Revenues

   $ 221.6      $ 21.0       $ 65.9       $ 0.2      $ 308.7   

Share of affiliates’ earnings

     (2.1     7.8         —           —          5.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total gross income

     219.5        28.8         65.9         0.2        314.4   

Ownership costs

     112.8        12.2         5.6         —          130.6   

Other costs and expenses

     74.0        3.0         47.8         (0.3     124.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Segment profit

   $ 32.7      $ 13.6       $ 12.5       $ 0.5        59.3   

SG&A

               31.0   
            

 

 

 

Income before income taxes

             $ 28.3   

Capital Expenditures

            

Portfolio investments and capital additions

   $ 93.0      $ 19.5       $ 0.3       $ 0.6      $ 113.4   

Selected Balance Sheet Data at December 31, 2010

            

Investments in affiliated companies

   $ 141.0      $ 345.1       $ —         $ —        $ 486.1   

Identifiable assets

   $ 4,292.4      $ 741.0       $ 271.3       $ 137.7      $ 5,442.4   

 

14


Table of Contents

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

 

     Rail      Specialty      ASC      Other     GATX
Consolidated
 

Nine Months Ended September 30, 2011

             

Profitability

             

Revenues

   $ 717.1       $ 57.2       $ 142.2       $ 1.0      $ 917.5   

Share of affiliates’ earnings

     13.4         20.5         —           —          33.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total gross income

     730.5         77.7         142.2         1.0        951.4   

Ownership costs

     341.3         36.1         13.5         2.9        393.8   

Other costs and expenses

     217.9         10.6         110.8         0.8        340.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment profit (loss)

   $ 171.3       $ 31.0       $ 17.9       $ (2.7     217.5   

SG&A

                112.3   
             

 

 

 

Income before income taxes

              $ 105.2   

Capital Expenditures

             

Portfolio investments and capital additions

   $ 290.1       $ 151.4       $ 15.9       $ 2.7      $ 460.1   

Nine Months Ended September 30, 2010

             

Profitability

             

Revenues

   $ 676.1       $ 54.7       $ 128.6       $ 1.1      $ 860.5   

Share of affiliates’ earnings

     1.8         28.8         —           —          30.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total gross income

     677.9         83.5         128.6         1.1        891.1   

Ownership costs

     340.3         35.0         13.2         2.1        390.6   

Other costs and expenses

     226.2         8.3         93.4         (4.5     323.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment profit

   $ 111.4       $ 40.2       $ 22.0       $ 3.5        177.1   

SG&A

                97.3   
             

 

 

 

Income before income taxes

              $ 79.8   

Capital Expenditures

             

Portfolio investments and capital additions

   $ 181.5       $ 52.6       $ 7.3       $ 3.1      $ 244.5   

 

15


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This document contains statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions of those sections and the Private Securities Litigation Reform Act of 1995. Some of these statements may be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” or other words and terms of similar meaning. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in GATX’s Annual Report on Form 10-K for the year ended December 31, 2010 and other filings with the Securities and Exchange Commission (“SEC”), and that actual results or developments may differ materially from those in the forward-looking statements. Specific factors that might cause actual results to differ from expectations include, but are not limited to, general economic, market, regulatory and political conditions in the rail, marine, industrial and other industries served by GATX and its customers; lease rates, utilization levels and operating costs in GATX’s primary operating segments; conditions in the capital markets; changes in GATX’s credit ratings and financing costs; regulatory rulings that may impact the economic value and operating costs of assets; costs associated with maintenance initiatives; competitive factors in GATX’s primary markets including lease pricing and asset availability; operational and financial risks associated with long-term railcar purchase commitments; changes in loss provision levels within GATX’s portfolio; impaired asset charges that may result from changing market conditions or portfolio management decisions implemented by GATX; the opportunity for remarketing income; uncertainties in relations with labor unions representing GATX employees; and the outcome of pending or threatened litigation. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. GATX has based these forward-looking statements on information currently available and disclaims any intention or obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.

Business Overview

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on financial data derived from the financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and certain other financial data that is prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see Non-GAAP Financial Measures at the end of this Item.

GATX Corporation (“GATX” or the “Company”) leases, operates and manages long-lived, widely-used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”).

Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2011. For further information, refer to GATX’s Annual Report on Form 10-K, as filed with the SEC, which contains the Company’s consolidated financial statements for the year ended December 31, 2010.

 

16


Table of Contents

DISCUSSION OF OPERATING RESULTS

Net income was $79.2 million, or $1.68 per diluted share, for the first nine months of 2011 compared to net income of $61.3 million, or $1.31 per diluted share, for the first nine months of 2010. Results for the first nine months of 2010 include after-tax income of $4.1 million, or $0.09 per diluted share, related to the favorable resolution of a litigation matter, $3.7 million, or $0.08 per diluted share, related to the reversal of an income tax accrual and $1.9 million, or $0.04 per diluted share, related to a deferred tax benefit attributable to a reduction in the statutory tax rates of the United Kingdom, partially offset by after-tax unrealized losses of $8.0 million, or $0.17 per diluted share, related to certain interest rate swaps at GATX’s European Rail affiliate, AAE Cargo A.G. (“AAE”). The 2011 results include a net benefit of $9.8 million, or $0.21 per diluted share, in after-tax unrealized gains related to certain interest rate swaps at AAE and a $4.1 million, or $0.09 per diluted share, deferred tax benefit attributable to a further reduction in the statutory tax rates of the United Kingdom.

Net income was $32.9 million, or $0.70 per diluted share, for the third quarter of 2011 compared to net income of $21.1 million, or $0.45 per diluted share, for the third quarter of 2010. Third quarter 2010 results include $2.7 million, or $0.06 per diluted share, of after-tax unrealized losses related to certain interest rate swaps at AAE and a $1.9 million, or $0.04 per diluted share, deferred tax benefit attributable to a reduction in the statutory tax rates of the United Kingdom. Results for the third quarter of 2011 include $2.8 million, or $0.06 per diluted share, of after-tax unrealized losses related to certain interest rate swaps at AAE and a $4.1 million, or $0.09 per diluted share, deferred tax benefit attributable to a further reduction in the statutory tax rates of the United Kingdom.

Total investment volume was $460.1 million for the first nine months of 2011 compared to $244.5 million for the first nine months of 2010.

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

 

     Three Months  Ended
September 30
    Nine Months  Ended
September 30
 
     2011      2010     2011     2010  

Gross Income

         

Rail

   $ 240.6       $ 219.5      $ 730.5      $ 677.9   

Specialty

     27.5         28.8        77.7        83.5   

ASC

     71.3         65.9        142.2        128.6   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total segment gross income

     339.4         314.2        950.4        890.0   

Other

     0.3         0.2        1.0        1.1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Consolidated Gross Income

   $ 339.7       $ 314.4      $ 951.4      $ 891.1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment Profit

         

Rail

   $ 63.0       $ 32.7      $ 171.3      $ 111.4   

Specialty

     11.5         13.6        31.0        40.2   

ASC

     8.5         12.5        17.9        22.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Segment Profit

     83.0         58.8        220.2        173.6   

Less:

         

Selling, general and administrative expenses

     38.5         31.0        112.3        97.3   

Unallocated interest expense, net

     0.8         —          3.1        2.3   

Other income and expense, including eliminations

     —           (0.5     (0.4     (5.8

Income taxes

     10.8         7.2        26.0        18.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Consolidated Net Income

   $ 32.9       $ 21.1      $ 79.2      $ 61.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.71       $ 0.45      $ 1.71      $ 1.33   

Diluted earnings per share

   $ 0.70       $ 0.45      $ 1.68      $ 1.31   

Return on Equity

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

 

     2011     2010  

ROE

     8.8     7.5

ROE, excluding certain items (a)

     7.1     6.9

 

(a) See definition under “Non-GAAP Financial Measures”

 

17


Table of Contents

Segment Operations

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

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

Rail

Market conditions continued to improve in the third quarter of 2011. Industry-wide, U.S. carloadings have increased modestly. Rail’s utilization in North America was 98.2%, consistent with the second quarter and higher than utilization of 96.8% at September 30, 2010. Lease rates on renewals improved during the quarter as indicated by the weighted average lease renewal rate on cars in the GATX Lease Price Index (the “LPI”, see definition below), which increased 9.6% from the weighted average expiring lease rate, compared to an increase of 4.4% for the second quarter and a decrease of 15.7% for the third quarter of 2010.

Rail entered 2011 with approximately 21,000 cars on leases scheduled to expire during the year, of which approximately 14,600 occurred through the current quarter. The majority of these leases were either renewed or the underlying railcars were placed with new customers. Lease terms on renewals for cars in the LPI averaged 49 months in the current quarter compared to 41 months for the second quarter and 36 months for the third quarter of 2010. In Europe, Rail’s wholly-owned tank car fleet increased due to investments in new cars. At the end of the third quarter of 2011, fleet utilization was 96.0% compared to 95.7% at the end of the second quarter and 95.3% at September 30, 2010. AAE, which serves the European freight railcar markets, has experienced modest improvement in its markets and fleet utilization is stable. During the first nine months of 2011, Rail’s investment volume was $290.1 million, compared to $181.5 million in 2010. In March 2011, GATX entered into an agreement to acquire 12,500 newly built railcars that are expected to deliver ratably over a five-year period.

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

 

     Three Months  Ended
September 30
    Nine Months  Ended
September 30
 
     2011     2010     2011      2010  

Gross Income

         

Lease income

   $ 212.1      $ 201.4      $ 632.8       $ 606.6   

Asset remarketing income

     8.0        2.7        22.7         15.5   

Other income

     22.5        17.5        61.6         54.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Revenues

     242.6        221.6        717.1         676.1   

Affiliate earnings

     (2.0     (2.1     13.4         1.8   
  

 

 

   

 

 

   

 

 

    

 

 

 
     240.6        219.5        730.5         677.9   

Ownership Costs

         

Depreciation

     49.6        46.1        146.4         141.2   

Interest expense, net

     30.8        32.0        96.1         95.5   

Operating lease expense

     31.4        34.7        98.8         103.6   
  

 

 

   

 

 

   

 

 

    

 

 

 
     111.8        112.8        341.3         340.3   

Other Costs and Expenses

         

Maintenance expense

     61.8        61.6        196.4         190.5   

Other costs

     4.0        12.4        21.5         35.7   
  

 

 

   

 

 

   

 

 

    

 

 

 
     65.8        74.0        217.9         226.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Segment Profit

   $ 63.0      $ 32.7      $ 171.3       $ 111.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

18


Table of Contents

GATX Lease Price Index

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

LOGO

Rail’s Fleet Data

The following table summarizes certain fleet data for Rail’s North American railcars for the quarters indicated:

 

     September 30
2010
    December 31
2010
    March 31
2011
    June 30
2011
    September 30
2011
 

Beginning balance

     108,626        108,800        111,389        109,780        108,764   

Cars added

     1,189        3,479        175        657        1,069   

Cars scrapped

     (917     (870     (963     (1,102     (602

Cars sold

     (98     (20     (821     (571     (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     108,800        111,389        109,780        108,764        109,091   

Utilization rate at quarter end

     96.8     97.4     97.8     98.2     98.2

Average active railcars

     104,611        106,732        108,061        106,935        106,984   

 

19


Table of Contents

LOGO

The following table summarizes certain fleet data for Rail’s European railcars for the quarters indicated:

 

     September 30
2010
    December 31
2010
    March 31
2011
    June 30
2011
    September 30
2011
 

Beginning balance

     20,302        20,226        20,432        20,524        20,675   

Cars added

     61        298        109        164        200   

Cars scrapped or sold

     (137     (92     (17     (13     (47
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     20,226        20,432        20,524        20,675        20,828   

Utilization rate at quarter end

     95.3     95.7     95.8     95.7     96.0

Average active railcars

     19,223        19,430        19,596        19,728        19,881   

LOGO

 

20


Table of Contents

The following table summarizes certain fleet data for Rail’s North American locomotives for the quarters indicated:

 

     September 30
2010
    December 31
2010
    March 31
2011
    June 30
2011
    September 30
2011
 

Beginning balance

     536        542        550        560        572   

Locomotives added

     6        8        10        13        5   

Locomotives scrapped or sold

     —          —          —          (1     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     542        550        560        572        572   

Utilization rate at quarter end

     98.7     97.6     97.7     97.7     95.9

Average active locomotives

     531        536        541        553        560   

Rail’s Lease Income

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

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

North American railcars

   $ 161.6       $ 157.6       $ 484.8       $ 476.7   

European railcars

     41.4         34.7         121.3         104.6   

Locomotives

     9.1         9.1         26.7         25.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 212.1       $ 201.4       $ 632.8       $ 606.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comparison of the First Nine Months of 2011 to the First Nine Months of 2010

Segment Profit

Rail’s segment profit for the first nine months of 2011 reflects unrealized gains of $11.0 million representing the change in the fair value of certain interest rate swaps at AAE, while segment profit for the first nine months of 2010 reflects unrealized losses of $8.9 million related to the interest rate swaps. Excluding the effect of these items from each period, Rail’s segment profit increased $10.4 million, primarily due to higher lease and asset remarketing income and higher scrapping gains, partially offset by lower affiliate earnings and higher maintenance costs.

Gross Income

Lease income in North America increased $9.5 million, primarily due to an average of approximately 2,500 more railcars and 40 more locomotives on lease. In Europe, a $16.7 million increase in lease income was driven primarily by an average of approximately 550 more railcars on lease and the foreign exchange rate effects of a weaker U.S. dollar. Asset remarketing income increased $7.2 million primarily due to more railcar sales in the current year. Other income was $7.6 million higher, primarily due to the combination of higher scrapping gains resulting from more cars scrapped at higher scrap steel rates and higher revenue from customer liability repairs, partially offset by the absence of income from certain end-of-lease settlements received in the prior year. Affiliates’ earnings increased $11.6 million from the prior year. Excluding the impact of the aforementioned interest rate swaps at AAE from the current and prior years, affiliates’ earnings declined $8.3 million, primarily due to the combination of a current year charge related to a bankrupt customer at AAE and the absence of a prior year asset remarketing gain at another affiliate.

AAE holds multiple derivative instruments originally intended to hedge interest rate risk associated with forecasted floating rate debt issuances. These instruments do not qualify for hedge accounting and as a result, changes in their fair values are recognized currently in income. The unrealized gains and losses were primarily driven by changes in the underlying benchmark interest rates. AAE’s earnings may be impacted by future unrealized gains or losses associated with these instruments.

Ownership Costs

Ownership costs were $1.0 million higher than prior year, primarily due to higher interest and depreciation expense related to new investments, including capitalized wheelsets in Europe, and the foreign exchange effects of a weaker U.S. dollar.

 

21


Table of Contents

Other Costs and Expenses

In North America, maintenance costs increased by $2.9 million, primarily due to higher railroad repair volumes, partially offset by fewer base fleet repairs and lower regulatory compliance costs. In Europe, maintenance costs were $3.0 million higher, primarily due to a higher volume of underframe revisions in the current year and the foreign exchange effects of a weaker U.S. dollar.

Other costs in 2011 were $14.2 million lower than the prior year, primarily due to lower asset impairment charges, lower storage and switching fees, a favorable fair value adjustment on a foreign currency derivative in the current year, and net remeasurement gains on non-functional currency assets and liabilities in the current year compared to net losses in the prior year. Asset impairment charges of $2.6 million in the current year primarily related to wheelsets scrapped in Europe in connection with the wheelset replacement program. Asset impairments in the prior year primarily consisted of a $4.8 million charge in North America attributable to an Association of American Railroads industry-wide regulatory mandate that resulted in a significant decrease to the expected economic life of 358 GATX aluminum hopper railcars and a $1.0 million charge related to scrapped wheelsets in Europe.

Comparison of the Third Quarter 2011 to the Third Quarter 2010

Segment Profit

Rail’s segment profit for the third quarter of 2011 and 2010 reflects unrealized losses of $3.1 million and $3.0 million, respectively, representing the change in the fair value of certain interest rate swaps at AAE. Excluding the unrealized losses, Rail’s segment profit increased $30.4 million, primarily due to higher lease and asset remarketing income and higher scrapping gains.

Gross Income

Lease income in North America increased $4.0 million, primarily due to an average of approximately 2,400 more railcars and 29 more locomotives on lease. In Europe, a $6.7 million increase in lease income was driven primarily by an average of approximately 650 more railcars on lease, as well as by the foreign exchange effects of a weaker U.S. dollar. Asset remarketing income increased $5.3 million due to more railcar sales in the current year. Other income was $5.0 million higher, primarily due to higher scrapping gains resulting from higher scrap steel rates and higher revenue from customer liability repairs. Share of affiliates’ earnings was comparable to the prior year period.

Ownership Costs

Ownership costs were $1.0 million lower than the prior year, primarily due to lower interest rates, partially offset by higher depreciation expense related to new investments, including capitalized wheelsets in Europe, and the foreign exchange effects of a weaker U.S. dollar.

Other Costs and Expenses

In North America, maintenance costs increased $1.7 million, largely due to higher railroad repair volumes, partially offset by fewer base fleet repairs. In Europe, maintenance costs were $1.5 million lower, primarily due to a greater number of wheelsets expensed in the prior year in connection with the wheelset replacement program, partially offset by the foreign exchange effects of a weaker U.S. dollar.

Other costs were $8.4 million lower than the prior year, primarily due to lower storage and switching fees and a favorable fair value adjustment on a foreign currency derivative in the current year.

Specialty

Specialty’s total asset base, including off balance sheet assets, was $864.8 million at September 30, 2011, compared to $744.4 million at December 31, 2010, and $721.7 million at September 30, 2010. Investment volume was $151.4 million in the first nine months of 2011 compared to $52.6 million in the prior year period. Investments in 2011 primarily consisted of $113.2 million of equity investments in joint ventures, $19.1 million in senior secured loans and $19.1 million in marine assets. Challenging market conditions for Specialty’s marine affiliates continue due to a combination of inconsistent demand for marine transport services and vessel overcapacity in these markets, while Specialty’s Rolls-Royce affiliate continues to produce strong operating results.

 

22


Table of Contents

In the third quarter of 2011, the Clipper Fourth Limited and Clipper Fourth APS (collectively, the “Clipper Entities”) marine joint ventures, in each of which GATX held a 45% interest, were dissolved. In connection with the dissolutions, GATX contributed $62.1 million, representing its share of the Clipper Entities’ outstanding debt, and received liquidating distributions consisting of six vessels with an aggregate fair value of $88.8 million. GATX recognized an impairment loss of $5.2 million as a result of the transfer, which is reflected in share of affiliates’ earnings.

Components of Specialty’s operating results are outlined below (in millions):

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

Gross Income

           

Lease income

   $ 14.8       $ 13.6       $ 44.0       $ 41.3   

Asset remarketing income

     8.2         7.4         10.6         12.9   

Other income

     0.7         —           2.6         0.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

     23.7         21.0         57.2         54.7   

Affiliate earnings

     3.8         7.8         20.5         28.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
     27.5         28.8         77.7         83.5   

Ownership Costs

           

Depreciation

     4.4         4.6         13.3         13.0   

Interest expense, net

     7.4         7.3         21.8         21.0   

Operating lease expense

     0.3         0.3         1.0         1.0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     12.1         12.2         36.1         35.0   

Other Costs and Expenses

     3.9         3.0         10.6         8.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment Profit

   $ 11.5       $ 13.6       $ 31.0       $ 40.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Specialty’s Portfolio Data

The following table summarizes information on the owned and managed Specialty portfolio (in millions):

 

     September 30
2010
     December 31
2010
     March 31
2011
     June 30
2011
     September 30
2011
 

Net book value of owned assets (a)

   $ 721.7       $ 744.4       $ 763.6       $ 802.5       $ 864.8   

Net book value of managed portfolio

   $ 208.0       $ 204.6       $ 196.8       $ 185.4       $ 176.7   

 

(a) Includes off balance sheet assets

Comparison of the First Nine Months of 2011 to the First Nine Months of 2010

Segment Profit

Specialty’s segment profit for the first nine months of 2011 was $9.2 million lower than the prior year, primarily due to lower affiliate earnings, including the aforementioned impairment loss.

Gross Income

Lease income was $2.7 million higher than the prior year, primarily due to income from new leases and higher pooled barge income. Asset remarketing income was $2.3 million lower than the prior year due to fewer asset sales. Other income was $2.1 million higher than the prior year, primarily due to gains on the sale of securities in the current year and interest income from new loans. Share of affiliates’ earnings decreased $8.3 million, primarily due to the aforementioned impairment loss and an adjustment attributable to an accounting change for residual value guarantees, partially offset by higher affiliate asset remarketing income in the current year.

Ownership Costs

Ownership costs were $1.1 million higher than the prior year, primarily due to depreciation and interest expenses on new investments.

 

23


Table of Contents

Other Costs and Expenses

Other costs and expenses increased $2.3 million, primarily due to higher operating costs for pooled barges and the absence of a bad debt recovery received in the prior year.

Comparison of the Third Quarter of 2011 to the Third Quarter of 2010

Segment Profit

Specialty’s segment profit for the third quarter of 2011 was $2.1 million lower than the prior year, primarily due to the aforementioned impairment loss, partially offset by higher revenues.

Gross Income

Lease income was $1.2 million higher than the prior year, primarily due to higher pooled barge income and income from new leases. Other income was $0.7 million higher than the prior year, primarily due to interest income from new loans. Share of affiliates’ earnings decreased $4.0 million, primarily due to the aforementioned impairment loss, partially offset by higher affiliate asset remarketing income in the current year.

Ownership Costs

Ownership costs were comparable to the prior year.

Other Costs and Expenses

Other costs and expenses increased $0.9 million, primarily due to higher operating costs for pooled barges.

ASC

U.S. steel production remained strong through the third quarter, continuing to drive customer demand for iron ore shipments. However, a work stoppage during the third quarter resulting from a strike by the licensed crew members represented by the American Maritime Officers (AMO) union negatively impacted operations. See “ASC Labor Agreement” below for a more detailed discussion of this event. During the first nine months of 2011, ASC carried 18.6 million net tons of freight compared to 19.5 million net tons in the prior year. ASC was operating 14 vessels at the end of the current quarter compared to 13 vessels in the prior year. ASC expects steady customer demand for tonnage through the remainder of the year; however, a full recovery of the lost tonnage from the work stoppage is uncertain.

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

 

     Three Months  Ended
September 30
     Nine Months  Ended
September 30
 
     2011      2010      2011      2010  

Gross Income

           

Marine operating revenues

   $ 70.3       $ 64.8       $ 138.0       $ 125.5   

Lease income

     1.0         1.1         3.1         3.1   

Other income

     —           —           1.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     71.3         65.9         142.2         128.6   

Ownership Costs

           

Depreciation

     3.7         3.6         7.6         6.9   

Interest expense, net

     1.9         2.0         5.9         6.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5.6         5.6         13.5         13.2   

Other Costs and Expenses

           

Maintenance expense

     6.7         4.1         12.2         8.2   

Marine operating expense

     50.5         43.7         98.6         85.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
     57.2         47.8         110.8         93.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment Profit

   $ 8.5       $ 12.5       $ 17.9       $ 22.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Comparison of the First Nine Months of 2011 to the First Nine Months of 2010

Segment Profit

ASC’s segment profit for the first nine months of 2011 was $4.1 million lower than the prior year, primarily due to higher maintenance costs as well as incremental expenses related to the aforementioned work stoppage, partially offset by a gain on the return of a leased-in vessel.

Gross Income

Gross income increased $13.6 million, primarily due to a combination of higher freight rates, a gain on the return of a leased-in vessel and higher fuel surcharges (which offset higher operating expenses), partially offset by lower freight volume.

Ownership Costs

Ownership costs were comparable to the prior year.

Other Costs and Expenses

Maintenance costs were $4.0 million higher, primarily due to more extensive winter work. Marine operating expenses increased $13.4 million, primarily due to increased fuel costs, which are recoverable through fuel surcharges, higher operating costs due to more vessels operating and expenses related to the aforementioned work stoppage.

Comparison of the Third Quarter of 2011 to the Third Quarter of 2010

Segment Profit

ASC’s segment profit for the third quarter of 2011 was $4.0 million lower than the prior year, primarily due to higher maintenance costs as well as incremental expenses related to the aforementioned work stoppage.

Gross Income

Gross income increased $5.4 million, primarily due to a combination of higher freight rates and higher fuel surcharges (which offset higher operating expenses), partially offset by lower freight volume.

Ownership Costs

Ownership costs were comparable to the prior year.

Other Costs and Expenses

Maintenance costs increased $2.6 million, primarily due to more extensive winter work. Marine operating expenses increased $6.8 million, primarily due to increased fuel costs, which are recoverable through fuel surcharges, and expenses related to the aforementioned work stoppage.

ASC Labor Agreement

Licensed crew members working aboard ASC’s Great Lakes vessels are represented for collective bargaining by the American Maritime Officers union (the “AMO”). The AMO-represented employees went on strike following the expiration of their labor contract on August 1, 2011. However, on August 5, 2011, ASC announced that the AMO-represented employees had agreed to return to work and ASC would restart operations. ASC and the AMO have agreed to extend the recently expired contract through 2011 and potentially into 2012, if needed, in order to negotiate a new labor agreement.

 

25


Table of Contents

ASC Regulatory Issues

In 2009, the U.S. Coast Guard (“Coast Guard”) issued proposed ballast water treatment standards, to be implemented in two phases, for allowable concentrations of living organisms in ballast water discharged when transiting between all major U.S. ports, including those on the Great Lakes. The phase-one standard is based on the International Maritime Organization’s standard. Installations of phase-one treatment systems would be required by the first dry-docking after 2016 for ASC’s existing fleet and all new vessels after January 2012. Adoption of the phase-two standard is subject to a technical review to determine whether technology to achieve the standard can be practicably implemented. If implemented, the phase-two standard would be 1,000-times more stringent than the phase-one standard. In January 2011, the Coast Guard announced that it expected to publish final rules in April, 2011; however, those rules have not yet been published. ASC continues to monitor legislative and regulatory proposals regarding ballast water treatment standards.

Other

Other is comprised of selling, general and administrative expenses (“SG&A”), unallocated interest expense and miscellaneous income and expense not directly associated with the reporting segments, and eliminations.

Components of Other are outlined below (in millions):

 

     Three Months  Ended
September 30
    Nine Months  Ended
September 30
 
     2011      2010     2011     2010  

Selling, general and administrative expenses

   $ 38.5       $ 31.0      $ 112.3      $ 97.3   

Unallocated interest expense, net

     0.8         —          3.1        2.3   

Other income and expense, including eliminations

     —           (0.5     (0.4     (5.8

Income taxes

     10.8         7.2        26.0        18.5   

SG&A in 2011 was $15.0 million and $7.5 million higher for the first nine months and third quarter, respectively, compared to the prior year. The increases were primarily due to higher compensation expenses, IT expenditures and outside services spending, partially offset by lower pension expense. Unallocated interest expense (the difference between external interest expense and amounts allocated to the reporting segments in accordance with assigned leverage targets) for the first nine months and third quarter of 2011 was $0.8 million higher than the prior year, primarily due to the timing of debt issuances and investment funding. Other income and expense for the first nine months of 2010 primarily reflected a $6.5 million benefit from the resolution of a litigation matter, partially offset by a $2.0 million addition to an environmental reserve related to a sold facility.

Income Taxes

GATX’s effective tax rate was 25% for the nine months ended September 30, 2011, compared to 23% for the nine months ended September 30, 2010. In the prior year, GATX’s liability for unrecognized tax benefits was reduced by $3.7 million in connection with the close of various federal and foreign tax audits. Additionally, a $1.9 million deferred tax benefit was recognized in connection with a reduction in the statutory tax rates of the United Kingdom. In the current year, GATX recognized a $4.1 million deferred tax benefit in connection with a further reduction in the statutory tax rates of the United Kingdom. Excluding the effect of these tax benefits from each year, GATX’s effective tax rate for the first nine months of 2011 and 2010 was 29% and 30% respectively. The difference between the 2011 and 2010 effective tax rates was driven by variability in the mix of pre-tax income, including share of affiliates’ earnings, among domestic and foreign jurisdictions, which are taxed at different rates.

As of September 30, 2011, GATX’s gross liability for unrecognized tax benefits totaled $43.7 million, which, if fully recognized, would decrease income tax expense by $23.3 million ($21.2 million net of federal tax).

 

26


Table of Contents

Cash Flow and Liquidity

GATX generates a significant amount of cash from its operating activities and proceeds from its investment portfolio, which is used to service debt, pay dividends, and fund portfolio investments and capital additions. Cash flows from operations and portfolio proceeds are impacted by changes in working capital and the timing of asset dispositions. As a result, cash flow components may vary materially from quarter to quarter and year to year. As of September 30, 2011, GATX had unrestricted cash balances of $115.0 million.

The following table sets forth GATX’s principal sources and uses of cash for the nine months ended September 30 (in millions):

 

     2011     2010  

Principal sources of cash

    

Net cash provided by operating activities

   $ 187.8      $ 150.6   

Portfolio proceeds

     108.9        55.4   

Other asset sales

     31.5        21.9   

Proceeds from sale-leaseback

     —          78.9   

Proceeds from issuance of debt, commercial paper and credit facilities

     555.0        261.7   
  

 

 

   

 

 

 
   $ 883.2      $ 568.5   
  

 

 

   

 

 

 

Principal uses of cash

    

Portfolio investments and capital additions

   $ (460.1   $ (244.5

Repayments of debt, commercial paper and credit facilities

     (277.1     (298.0

Purchases of leased-in assets

     (61.1     (1.5

Payments on capital lease obligations

     (18.5     (4.4

Cash dividends

     (42.3     (40.3
  

 

 

   

 

 

 
   $ (859.1   $ (588.7
  

 

 

   

 

 

 

Net cash provided by operating activities for the first nine months of 2011 was $187.8 million, an increase of $37.2 million from the prior year. The increase was primarily driven by higher lease income, lower U.S. pension plan contributions and net refunds for income and value added taxes in the current year compared to net payments in the prior year, partially offset by lower dividends from affiliates in the current year and other changes in working capital. The prior year also included a $13.1 million negative adjustment to cash from operations resulting from the correction of the overstatement of cash and cash equivalents at December 31, 2009.

Portfolio investments and capital additions for the first nine months of 2011 totaled $460.1 million, an increase of $215.6 million from the prior year. Rail and Specialty investments in 2011 were $290.1 million and $151.4 million, respectively, compared to $181.5 million and $52.6 million, respectively, in 2010.

Portfolio proceeds for the first nine months of 2011 of $108.9 million increased by $53.5 million from the prior year, primarily due to higher proceeds from asset sales and finance lease principal receipts. Proceeds from sales of other assets of $31.5 million for the first nine months of 2011 increased by $9.6 million from the prior year and primarily consisted of cash received from the scrapping of railcars.

GATX funds its investments and meets its debt, lease and dividend obligations through available cash balances, cash generated from operating activities, portfolio proceeds, sales of other assets, commercial paper issuances, committed revolving credit facilities and the issuance of secured and unsecured debt. Cash from operations and commercial paper issuances are the primary sources of cash used to fund daily operations. GATX utilizes both domestic and international capital markets and banks for its debt financing needs.

Proceeds from the issuance of debt for the first nine months of 2011 were $555.0 million (net of hedges and debt issuance costs). Debt repayments of $277.1 million for the first nine months of 2011 primarily consisted of scheduled debt maturities.

 

27


Table of Contents

Short-Term Borrowings

The following table provides certain information regarding GATX’s short-term borrowings for the nine months ended September 30, 2011:

 

     North
America (a)
    Europe (b)  

Balance as of September 30 (in millions)

   $ 98.0      $ 26.2   

Weighted average interest rate

     0.5     2.1

Euro/Dollar exchange rate

     n/a        1.3387   

Average monthly amount outstanding during year (in millions)

   $ 99.1      $ 38.6   

Weighted average interest rate

     0.4     2.9

Average Euro/Dollar exchange rate

     n/a        1.4071   

Average monthly amount outstanding during 3rd quarter (in millions)

   $ 118.6      $ 44.3   

Weighted average interest rate

     0.4     3.7

Average Euro/Dollar exchange rate

     n/a        1.4128   

Maximum month-end amount outstanding (in millions)

   $ 228.7      $ 52.6   

Euro/Dollar exchange rate

     n/a        1.3387   

 

(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.

In the second quarter of 2011, GATX terminated its existing $550 million senior unsecured revolving credit facility, and entered into a new 4-year senior unsecured revolving credit facility. The new facility amount is $560 million with a May 2015 maturity, and the covenants are substantially unchanged from the prior facility. As of September 30, 2011, availability under the new facility was $452.4 million, with $98.0 million of commercial paper outstanding and $9.6 million of letters of credit issued, both of which are backed by the facility.

Restrictive Covenants

The $560 million revolving credit facility contains various restrictive covenants, including requirements to maintain a minimum fixed charge coverage ratio and an asset coverage test. Certain bank term loans have the same financial covenants as the credit facility and another borrowing contains various restrictive covenants and certain negative pledge provisions. The indentures for GATX’s public debt also contain various restrictive covenants, including limitation on liens provisions, that limit the amount of secured indebtedness that GATX may incur, subject to several exceptions, including those permitting an unlimited amount of purchase money indebtedness and nonrecourse indebtedness. The loan agreements for certain of GATX’s wholly-owned European Rail subsidiaries (collectively, “GRE”) also contain restrictive covenants, including leverage and cash flow covenants specific to those subsidiaries, restrictions on making loans and limitations on the ability of these subsidiaries to repay loans to certain related parties (including GATX) and to pay dividends to GATX. The covenants relating to loans and dividends effectively limit the ability of GRE to transfer funds to GATX. GATX does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing. As of September 30, 2011, GATX was in compliance with all covenants and conditions of its credit agreements.

Credit Ratings

The availability of GATX’s funding options may be affected by certain factors, including the global capital market environment and outlook as well as GATX’s financial performance. GATX’s access to capital markets at competitive rates is dependent on its credit rating and rating outlook, as determined by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). As of September 30, 2011, GATX’s long-term unsecured debt was rated BBB by S&P and Baa1 by Moody’s. GATX’s rating outlook from both agencies was stable. GATX’s short-term unsecured debt was rated A-2 by S&P and P-2 by Moody’s.

 

28


Table of Contents

Contractual Commitments

At September 30, 2011, GATX’s contractual commitments, including debt maturities, lease payments, and portfolio investments were (in millions):

 

     Payments Due by Period  
     Total      2011      2012      2013      2014      2015      Thereafter  

Recourse debt

   $ 3,132.7       $ 26.7       $ 724.2       $ 414.0       $ 417.3       $ 470.6       $ 1,079.9   

Nonrecourse debt

     163.7         3.7         25.6         33.7         58.3         31.3         11.1   

Commercial paper and credit facilities

     124.2         124.2         —           —           —           —           —     

Capital lease obligations

     16.9         —           3.3         3.4         3.3         3.1         3.8   

Operating leases — recourse

     970.2         1.2         112.6         105.1         108.6         126.4         516.3   

Operating leases — nonrecourse

     238.1         6.4         28.0         28.3         27.8         26.3         121.3   

Portfolio investments (a)

     1,279.5         134.7         264.4         240.0         250.3         258.4         131.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,925.3       $ 296.9       $ 1,158.1       $ 824.5       $ 865.6       $ 916.1       $ 1,864.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Primarily railcar purchase commitments pursuant to a five-year supply agreement.

Critical Accounting Policies

There have been no changes to GATX’s critical accounting policies during the nine months ending September 30, 2011. Refer to GATX’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, for a summary of GATX’s critical accounting policies.

Non-GAAP Financial Measures

This report includes certain financial performance measures computed using non-GAAP components as defined by the SEC. GATX has provided a reconciliation of those non-GAAP components to the most directly comparable GAAP components. Financial measures disclosed in this report are meant to provide additional information and insight into the historical operating results and financial position of the Company. Management uses these measures in analyzing GATX’s financial performance from period to period and in making compensation decisions. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies.

GATX presents the financial measures of return on equity and net income that exclude the effect of certain items. Management believes that excluding these items facilitates a more meaningful comparison of financial performance between reporting periods and provides transparency into the operating results of GATX’s businesses. In addition, GATX discloses total on and off balance sheet assets because a significant portion of GATX’s 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. Management believes this information provides investors with a better representation of the assets deployed in GATX’s 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 Certain Items — Earnings in 2010 and 2011 excluding gains and/or losses on certain interest rate swaps at AAE, the favorable resolution of a litigation matter and certain tax benefits. GATX believes these items are not indicative of its operational performance.

 

   

Off Balance Sheet Assets — Assets, primarily railcars, which are financed with operating leases and therefore not recorded on the balance sheet. GATX estimates 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 as reported on the balance sheet.

 

29


Table of Contents
   

Total On and Off Balance Sheet Assets — The total of on balance sheet assets and off balance sheet assets.

 

   

Return on Equity — Net income divided by average total shareholders’ equity.

 

   

Return on Equity, Excluding Certain Items — Net income excluding certain items divided by average total shareholders’ equity.

Reconciliation of Non-GAAP Components used in the Computation of Certain Financial Measures

The following table presents Total On and Off Balance Sheet Assets (in millions):

 

     September 30
2010
     December 31
2010
     March 31
2011
     June 30
2011
     September 30
2011
 

Consolidated On Balance Sheet Assets

   $ 5,133.5       $ 5,442.4       $ 5,498.7       $ 5,642.5       $ 5,756.5   

Off Balance Sheet Assets:

              

Rail

     979.4         968.1         899.8         906.2         879.5   

Specialty

     3.5         3.4         3.2         3.0         2.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total On and Off Balance Sheet Assets

   $ 6,116.4       $ 6,413.9       $ 6,401.7       $ 6,551.7       $ 6,638.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Shareholders’ Equity

   $ 1,098.6       $ 1,113.7       $ 1,153.7       $ 1,191.1       $ 1,155.3   

The following table presents Net Income, excluding certain items for the trailing twelve months ended September 30 (in millions):

 

     2011     2010  

Net Income, as reported

   $ 98.7      $ 82.8   

Tax Benefits (a)

     (9.9     (13.0

(Gain) Loss on Interest Rate Swaps at AAE (net of tax)

     (8.5     10.2   

Other Items (b)

     —          (4.1
  

 

 

   

 

 

 

Net Income, excluding certain items

   $ 80.3      $ 75.9   
  

 

 

   

 

 

 

 

(a) For the trailing twelve months of 2010, tax benefits include $3.7 million attributable to the close of various tax audits, $7.4 million of realized foreign tax credits and a $1.9 million deferred benefit attributable to a reduction in the statutory tax rates of the United Kingdom. For the trailing twelve months of 2011, tax benefits include $5.8 million attributable to the close of various tax audits and a $4.1 million deferred tax benefit attributable to a further reduction in the statutory rates in the United Kingdom.
(b) For the trailing twelve months of 2010, other items include $4.1 million (after tax) of income from the favorable resolution of a litigation matter.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Since December 31, 2010, there have been no material changes in GATX’s interest rate and foreign currency exposures or types of derivative instruments used to hedge these exposures. For a discussion of the Company’s exposure to market risk, refer to Part II: Item 7A, Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 4. Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the Company’s 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”)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective.

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended September 30, 2011, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

30


Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

Information concerning litigation and other contingencies is described in Note 12 to the consolidated financial statements and is incorporated herein by reference.

 

Item 1A. Risk Factors

Since December 31, 2010, there have been no material changes in GATX’s risk factors. For a discussion of GATX’s risk factors, refer to Part 1: Item 1A, Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

31


Table of Contents
Item 6. Exhibits

Exhibits:

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

 

32


Table of Contents

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

Senior Vice President and

Chief Financial Officer

(Duly Authorized Officer)

Date: October 28, 2011

 

33


Table of Contents

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 September 30, 2011, are formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to the Consolidated Financial Statements.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

34