Attached files
file | filename |
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EX-32 - EX-32 - GATX CORP | c64769exv32.htm |
EX-31.A - EX-31.A - GATX CORP | c64769exv31wa.htm |
EX-31.B - EX-31.B - GATX CORP | c64769exv31wb.htm |
EXCEL - IDEA: XBRL DOCUMENT - GATX CORP | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | 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)
Chicago, Illinois 60606-5314
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrants telephone number, including area code)
(Registrants 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 þ No o
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 þ No o
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).
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a 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 o No þ
As of June 30, 2011, 46.6 million common shares were outstanding.
GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2011
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2011
INDEX
Item No. | Page No. | |||||||
Part I FINANCIAL INFORMATION |
||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
15 | ||||||||
15 | ||||||||
16 | ||||||||
17 | ||||||||
25 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
29 | ||||||||
Part II OTHER INFORMATION |
||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ in millions, except share data)
June 30 | December 31 | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Cash and Cash Equivalents |
$ | 50.2 | $ | 78.5 | ||||
Restricted Cash |
52.4 | 56.6 | ||||||
Receivables |
||||||||
Rent and other receivables |
76.7 | 70.6 | ||||||
Loans |
19.2 | 0.5 | ||||||
Finance leases |
327.8 | 347.7 | ||||||
Less: allowance for possible losses |
(11.8 | ) | (11.6 | ) | ||||
411.9 | 407.2 | |||||||
Operating Assets and Facilities |
||||||||
Rail (includes $123.5 and $123.7 relating to a consolidated VIE at June 30, 2011 and
December 31, 2010, respectively) |
5,675.6 | 5,513.6 | ||||||
Specialty |
296.0 | 280.8 | ||||||
ASC |
371.0 | 389.1 | ||||||
Less: allowance for depreciation (includes $16.4 and $13.6 relating to a consolidated VIE at
June 30, 2011 and December 31, 2010, respectively) |
(2,080.9 | ) | (2,049.7 | ) | ||||
4,261.7 | 4,133.8 | |||||||
Investments in Affiliated Companies |
567.6 | 486.1 | ||||||
Goodwill |
98.5 | 92.7 | ||||||
Other Assets |
200.2 | 187.5 | ||||||
Total Assets |
$ | 5,642.5 | $ | 5,442.4 | ||||
Liabilities and Shareholders Equity |
||||||||
Accounts Payable and Accrued Expenses |
$ | 137.6 | $ | 114.6 | ||||
Debt |
||||||||
Commercial paper and borrowings under bank credit facilities |
102.2 | 115.6 | ||||||
Recourse |
2,990.1 | 2,801.8 | ||||||
Nonrecourse (includes $50.8 and $56.2 relating to a consolidated VIE at June 30, 2011 and
December 31, 2010, respectively) |
189.8 | 217.2 | ||||||
Capital lease obligations |
15.4 | 41.9 | ||||||
3,297.5 | 3,176.5 | |||||||
Deferred Income Taxes |
760.1 | 750.6 | ||||||
Other Liabilities |
256.2 | 287.0 | ||||||
Total Liabilities |
4,451.4 | 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
June 30, 2011 and December 31, 2010, respectively, aggregate liquidation preference of
$1.0) |
* | * | ||||||
Common stock ($0.625 par value, 120,000,000 authorized, 65,704,063 and 65,482,950 shares
issued and 46,581,543 and 46,360,430 shares outstanding as of June 30, 2011 and December
31, 2010, respectively) |
41.0 | 40.9 | ||||||
Additional paid in capital |
636.7 | 626.2 | ||||||
Retained earnings |
1,134.9 | 1,116.9 | ||||||
Accumulated other comprehensive loss |
(61.2 | ) | (110.0 | ) | ||||
Treasury stock at cost (19,122,520 shares at June 30, 2011 and December 31, 2010) |
(560.3 | ) | (560.3 | ) | ||||
Total Shareholders Equity |
1,191.1 | 1,113.7 | ||||||
Total Liabilities and Shareholders Equity |
$ | 5,642.5 | $ | 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 | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross Income |
||||||||||||||||
Lease income |
$ | 227.2 | $ | 213.7 | $ | 452.0 | $ | 434.9 | ||||||||
Marine operating revenue |
56.6 | 52.4 | 67.7 | 60.7 | ||||||||||||
Asset remarketing income |
8.2 | 3.9 | 17.1 | 18.3 | ||||||||||||
Other income |
22.6 | 18.2 | 42.8 | 37.9 | ||||||||||||
Revenues |
314.6 | 288.2 | 579.6 | 551.8 | ||||||||||||
Share of affiliates earnings |
15.0 | 6.6 | 32.1 | 24.9 | ||||||||||||
Total Gross Income |
329.6 | 294.8 | 611.7 | 576.7 | ||||||||||||
Ownership Costs |
||||||||||||||||
Depreciation |
57.3 | 55.1 | 109.6 | 106.8 | ||||||||||||
Interest expense, net |
43.1 | 41.2 | 86.0 | 83.8 | ||||||||||||
Operating lease expense |
33.3 | 34.8 | 67.9 | 69.4 | ||||||||||||
Total Ownership Costs |
133.7 | 131.1 | 263.5 | 260.0 | ||||||||||||
Other Costs and Expenses |
||||||||||||||||
Maintenance expense |
70.8 | 65.2 | 140.1 | 133.0 | ||||||||||||
Marine operating expense |
39.2 | 35.1 | 48.1 | 41.5 | ||||||||||||
Selling, general and administrative |
37.4 | 32.8 | 73.8 | 66.3 | ||||||||||||
Other expense |
12.8 | 5.4 | 24.7 | 24.4 | ||||||||||||
Total Other Costs and Expenses |
160.2 | 138.5 | 286.7 | 265.2 | ||||||||||||
Income before Income Taxes |
35.7 | 25.2 | 61.5 | 51.5 | ||||||||||||
Income Taxes |
9.3 | 3.7 | 15.2 | 11.3 | ||||||||||||
Net Income |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.2 | ||||||||
Per Share Data |
||||||||||||||||
Basic |
$ | 0.57 | $ | 0.47 | $ | 1.00 | $ | 0.87 | ||||||||
Average number of common shares (in millions) |
46.4 | 46.2 | 46.4 | 46.1 | ||||||||||||
Diluted |
0.56 | 0.46 | 0.98 | 0.86 | ||||||||||||
Average
number of common shares and common share
equivalents (in millions) |
47.2 | 46.7 | 47.1 | 47.1 | ||||||||||||
Dividends declared per common share |
$ | 0.29 | $ | 0.28 | $ | 0.58 | $ | 0.56 |
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)
Six Months Ended | ||||||||
June 30 | ||||||||
2011 | 2010 | |||||||
Operating Activities |
||||||||
Net income |
$ | 46.3 | $ | 40.2 | ||||
Adjustments to reconcile income to net cash provided by operating activities: |
||||||||
Gains on sales of assets |
(30.0 | ) | (22.3 | ) | ||||
Depreciation |
115.5 | 112.1 | ||||||
Provision (reversal of provision) for losses |
0.2 | (0.3 | ) | |||||
Asset impairment charges |
1.8 | 5.4 | ||||||
Deferred income taxes |
10.7 | 7.5 | ||||||
Share of affiliates earnings, net of dividends |
(27.1 | ) | 1.8 | |||||
Change in income taxes payable |
9.5 | (5.2 | ) | |||||
Change in accrued operating lease expense |
(23.4 | ) | (33.1 | ) | ||||
Employee benefit plans |
(2.9 | ) | (3.4 | ) | ||||
Other |
15.8 | (16.7 | ) | |||||
Net cash provided by operating activities |
116.4 | 86.0 | ||||||
Investing Activities |
||||||||
Additions to operating assets and facilities |
(189.8 | ) | (115.5 | ) | ||||
Loans extended |
(19.1 | ) | | |||||
Investments in affiliates |
(51.1 | ) | (15.5 | ) | ||||
Other |
(0.1 | ) | (0.1 | ) | ||||
Portfolio investments and capital additions |
(260.1 | ) | (131.1 | ) | ||||
Purchases of leased-in assets |
(61.1 | ) | | |||||
Portfolio proceeds |
78.7 | 42.4 | ||||||
Proceeds from sales of other assets |
21.2 | 14.5 | ||||||
Net decrease in restricted cash |
4.2 | 1.7 | ||||||
Other |
(0.1 | ) | | |||||
Net cash used in investing activities |
(217.2 | ) | (72.5 | ) | ||||
Financing Activities |
||||||||
Net proceeds from issuances of debt (original maturities longer than 90 days) |
352.7 | 259.1 | ||||||
Repayments of debt (original maturities longer than 90 days) |
(222.5 | ) | (293.0 | ) | ||||
Net (decrease) increase in debt with original maturities of 90 days or less |
(16.3 | ) | 36.7 | |||||
Payments on capital lease obligations |
(17.4 | ) | (2.9 | ) | ||||
Employee exercises of stock options |
4.9 | 0.8 | ||||||
Cash dividends |
(28.4 | ) | (27.1 | ) | ||||
Net cash provided by (used in) financing activities |
73.0 | (26.4 | ) | |||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(0.5 | ) | 0.5 | |||||
Net decrease in Cash and Cash Equivalents during the period |
(28.3 | ) | (12.4 | ) | ||||
Cash and Cash Equivalents at beginning of period |
78.5 | 41.7 | ||||||
Cash and Cash Equivalents at end of period |
$ | 50.2 | $ | 29.3 | ||||
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 six months ended
June 30, 2011, are not necessarily indicative of the results that may be achieved for the entire
year ending December 31, 2011. In particular, ASCs 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 Companys 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
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 GATXs financial position, results of
operations or cash flows.
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 GATXs 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.
4
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Operating results for all affiliated companies, assuming GATX held a 100% interest, would be
(in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 162.6 | $ | 157.3 | $ | 336.1 | $ | 333.4 | ||||||||
Pre-tax income reported by affiliates |
33.4 | 11.0 | 82.5 | 42.1 |
NOTE 4. Fair Value Disclosure
The following tables set forth GATXs assets and liabilities measured at fair value on a
recurring basis (in millions):
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
June 30, | Assets | Inputs | Inputs | |||||||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets |
||||||||||||||||
Interest rate derivatives (a) |
$ | 16.9 | $ | | $ | 16.9 | $ | | ||||||||
Foreign exchange rate derivatives (b) |
0.1 | | 0.1 | | ||||||||||||
Available for sale equity securities |
3.7 | 3.7 | | | ||||||||||||
Liabilities |
||||||||||||||||
Interest rate derivatives (a) |
3.4 | | 3.4 | | ||||||||||||
Foreign exchange rate derivatives (b) |
0.5 | | 0.5 | | ||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (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.
5
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables set forth certain disclosures relating to GATXs non-recurring Level 3
fair value measurements (in millions):
Fair Value | Carrying | Impairment | ||||||||||
Six months ended June 30 | of Assets | Value of Assets | Losses | |||||||||
2011 |
$ | 2.2 | $ | 3.4 | $ | 1.2 | ||||||
2010 |
3.5 | 8.9 | 5.4 |
Fair Value | Carrying | Impairment | ||||||||||
Three months ended June 30 | of Assets | Value of Assets | Losses | |||||||||
2011 |
$ | 1.5 | $ | 2.1 | $ | 0.6 | ||||||
2010 |
0.5 | 1.1 | 0.6 |
For the first six months and second quarter of 2011, impairment losses of $1.2 million and
$0.6 million, respectively, primarily related to scrapped wheelsets in Rails European fleet. For
the first six months and second quarter of 2010, impairment losses of $0.6 million related to
scrapped wheelsets in Rails European fleet. Also in the first six 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 June 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 June 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 June 30, 2011 and December 31, 2010, GATX had 12 instruments and
13 instruments outstanding, respectively, with an aggregate notional amount of $78.8 million and
$130.4 million, respectively. As of June 30, 2011, these derivatives had maturities ranging from
2011-2015. 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 GATXs 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 June 30, 2011 was
$3.4 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, GATXs exposure is limited to the fair value of the swap if in
GATXs 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.
6
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The income statement and other comprehensive income (loss) impacts of GATXs derivative
instruments were (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||||||
Derivative | June 30 | June 30 | ||||||||||||||||||
Designation | Location of Gain (Loss) Recognized | 2011 | 2010 | 2011 | 2010 | |||||||||||||||
Fair value hedges
(a) |
Interest expense | $ | 1.4 | $ | 5.2 | $ | (0.7 | ) | $ | 7.7 | ||||||||||
Cash flow hedges |
Amount recognized in other comprehensive (loss) income (effective portion) | (6.9 | ) | (4.8 | ) | (5.9 | ) | (8.2 | ) | |||||||||||
Cash flow hedges |
Amount reclassified from accumulated other comprehensive loss to interest expense (effective portion) | (2.0 | ) | (1.9 | ) | (3.9 | ) | (3.7 | ) | |||||||||||
Cash flow hedges |
Amount reclassified from accumulated other comprehensive loss to operating lease expense (effective portion) | (0.4 | ) | (0.4 | ) | (0.8 | ) | (0.8 | ) | |||||||||||
Cash flow hedges |
Amount recognized in other expense (ineffective portion) | | (0.1 | ) | | (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 GATXs
other financial instruments as of (in millions):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets |
||||||||||||||||
Investment Funds |
$ | 4.6 | $ | 8.7 | $ | 6.8 | $ | 10.2 | ||||||||
Loans |
19.2 | 19.2 | 0.5 | 0.5 | ||||||||||||
Liabilities |
||||||||||||||||
Recourse fixed rate debt |
$ | 2,535.0 | $ | 2,694.2 | $ | 2,459.3 | $ | 2,615.9 | ||||||||
Recourse floating rate debt |
455.1 | 455.1 | 342.5 | 341.5 | ||||||||||||
Nonrecourse debt |
189.8 | 203.5 | 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 GATXs 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.
7
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table sets forth GATXs commercial commitments as of (in millions):
June 30 | December 31 | |||||||
2011 | 2010 | |||||||
Affiliate guarantees |
$ | 50.0 | $ | 30.0 | ||||
Asset residual value guarantees |
49.3 | 48.0 | ||||||
Lease payment guarantees |
49.9 | 52.7 | ||||||
Total guarantees (a) |
149.2 | 130.7 | ||||||
Standby letters of credit and bonds |
11.0 | 11.5 | ||||||
$ | 160.2 | $ | 142.2 | |||||
(a) At June 30, 2011 and December 31, 2010, the carrying values of liabilities on the balance sheet for guarantees were $6.8 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 GATXs 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 GATXs 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 GATXs guarantees to financial institutions of finance and
operating lease payments to unrelated parties. Any liability resulting from GATXs 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 June 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 entitys 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 VIEs 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.
8
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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):
June 30 | December 31 | |||||||
2011 | 2010 | |||||||
Operating assets, net of accumulated depreciation (a) |
$ | 107.1 | $ | 110.1 | ||||
Nonrecourse debt |
50.8 | 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):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Net | Maximum | Net | Maximum | |||||||||||||
Carrying | Exposure | Carrying | Exposure | |||||||||||||
Amount | to Loss | Amount | to Loss | |||||||||||||
Investments in affiliates |
$ | 88.3 | $ | 88.3 | $ | 60.9 | $ | 60.9 | ||||||||
Leveraged leases |
71.8 | 71.8 | 74.1 | 74.1 | ||||||||||||
Other investment |
0.9 | 0.9 | 1.0 | 1.0 | ||||||||||||
Total |
$ | 161.0 | $ | 161.0 | $ | 136.0 | $ | 136.0 | ||||||||
NOTE 7. Comprehensive Income
The components of comprehensive income (loss) were as follows (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.2 | ||||||||
Other comprehensive income, net of taxes: |
||||||||||||||||
Foreign currency translation gain (loss) |
19.0 | (57.3 | ) | 39.5 | (72.5 | ) | ||||||||||
Unrealized (loss) gain on securities |
(0.4 | ) | 0.1 | (0.4 | ) | 0.7 | ||||||||||
Unrealized (loss) gain on derivative
instruments |
(1.0 | ) | (5.4 | ) | 7.8 | (4.5 | ) | |||||||||
Post retirement benefit plans |
0.8 | 0.9 | 1.9 | 1.8 | ||||||||||||
Comprehensive income (loss) |
$ | 44.8 | $ | (40.2 | ) | $ | 95.1 | $ | (34.3 | ) | ||||||
NOTE 8. Share-Based Compensation
In the first six months of 2011, GATX granted 416,700 stock appreciation rights (SARs),
200,366 restricted stock units, 87,570 performance shares and 10,444 phantom stock units. For the
three and six months ended June 30, 2011, total share-based
compensation expense was $2.4 million
($1.5 million after tax) and $4.9 million ($3.1 million after tax), respectively. For the three
and six months ended June 30, 2010, total share-based compensation expense was $1.6 million ($1.0
million after tax) and $3.4 million ($2.1 million after tax), respectively.
9
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The weighted average estimated fair value of GATXs 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
GATXs effective tax rate was 25% for the six months ended June 30, 2011, compared to 22% for
the six months ended June 30, 2010. In the prior year, GATXs liability for unrecognized tax
benefits was reduced by $3.7 million in connection with the close of various federal and foreign
tax audits. Excluding the effect of the tax benefits, GATXs effective rate for the first six
months of 2010 was 29%. The difference in GATXs effective tax rate was largely 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 June 30, 2011, GATXs gross liability for unrecognized tax benefits totaled $43.3
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
June 30, 2011 and 2010, were as follows (in millions):
2011 Retiree | 2010 Retiree | |||||||||||||||
2011 Pension | 2010 Pension | Health and | Health and | |||||||||||||
Benefits | Benefits | Life | Life | |||||||||||||
Service cost |
$ | 1.2 | $ | 1.4 | $ | 0.1 | $ | 0.1 | ||||||||
Interest cost |
5.2 | 5.5 | 0.6 | 0.6 | ||||||||||||
Expected return on plan assets |
(8.3 | ) | (8.3 | ) | | | ||||||||||
Amortization of: |
||||||||||||||||
Unrecognized prior service credit |
(0.2 | ) | (0.3 | ) | (0.1 | ) | | |||||||||
Unrecognized net actuarial loss (gain) |
1.6 | 1.7 | (0.1 | ) | | |||||||||||
Net costs (a) |
$ | (0.5 | ) | $ | | $ | 0.5 | $ | 0.7 | |||||||
The components of pension and other post-retirement benefit costs for the six months ended
June 30, 2011 and 2010, were as follows (in millions):
2011 Retiree | 2010 Retiree | |||||||||||||||
2011 Pension | 2010 Pension | Health and | Health and | |||||||||||||
Benefits | Benefits | Life | Life | |||||||||||||
Service cost |
$ | 2.7 | $ | 2.8 | $ | 0.1 | $ | 0.2 | ||||||||
Interest cost |
10.4 | 11.0 | 1.1 | 1.2 | ||||||||||||
Expected return on plan assets |
(16.6 | ) | (16.6 | ) | | | ||||||||||
Amortization of: |
||||||||||||||||
Unrecognized prior service credit |
(0.5 | ) | (0.6 | ) | (0.1 | ) | | |||||||||
Unrecognized net actuarial loss (gain) |
3.6 | 3.4 | (0.1 | ) | | |||||||||||
Net costs (a) |
$ | (0.4 | ) | $ | | $ | 1.0 | $ | 1.4 | |||||||
(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. |
10
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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 | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.2 | ||||||||
Numerator for basic earnings per share income
available to common shareholders |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.2 | ||||||||
Effect of dilutive securities: |
||||||||||||||||
After-tax interest expense on convertible securities |
| | | 0.2 | ||||||||||||
Numerator for diluted earnings per share income
available to common shareholders |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.4 | ||||||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per share weighted
average shares |
46.4 | 46.2 | 46.4 | 46.1 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Equity compensation plans |
0.7 | 0.4 | 0.6 | 0.4 | ||||||||||||
Convertible preferred stock |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
Convertible securities |
| | | 0.5 | ||||||||||||
Denominator for diluted earnings per share
adjusted weighted average and assumed conversion |
47.2 | 46.7 | 47.1 | 47.1 | ||||||||||||
Basic earnings per share |
$ | 0.57 | $ | 0.47 | $ | 1.00 | $ | 0.87 | ||||||||
Diluted earnings per share |
$ | 0.56 | $ | 0.46 | $ | 0.98 | $ | 0.86 | ||||||||
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 Companys consolidated financial statements as set forth in GATXs 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.
11
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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 GATXs 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
Kolspeds ultimate parent company, PKP, from its guarantee of Kolspeds 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 Kolspeds 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 Banks 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 PKPs claims. PKP appealed and, on March
24, 2011, the Court of Appeals rejected the appeal and affirmed the trial courts ruling. A
further appeal by PKP to the Supreme Court is pending.
As of June 30, 2011, PKPs claims for damages totaled approximately PLN 144.1 million, or
$52.6 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 $15.6 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.
12
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 segments financial performance reflects appropriate
risk-adjusted borrowing costs.
The following tables depict the profitability, financial position and capital expenditures of
each of GATXs business segments for the three and six months ended June 30, 2011 and 2010 (in
millions):
GATX | ||||||||||||||||||||
Rail | Specialty | ASC | Other | Consolidated | ||||||||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||||||
Profitability |
||||||||||||||||||||
Revenues |
$ | 237.7 | $ | 17.6 | $ | 58.8 | $ | 0.5 | $ | 314.6 | ||||||||||
Share of affiliates earnings |
8.3 | 6.7 | | | 15.0 | |||||||||||||||
Total gross income |
246.0 | 24.3 | 58.8 | 0.5 | 329.6 | |||||||||||||||
Ownership costs |
114.5 | 12.2 | 5.9 | 1.1 | 133.7 | |||||||||||||||
Other costs and expenses |
74.8 | 3.3 | 44.3 | 0.4 | 122.8 | |||||||||||||||
Segment profit (loss) |
$ | 56.7 | $ | 8.8 | $ | 8.6 | $ | (1.0 | ) | 73.1 | ||||||||||
SG&A |
37.4 | |||||||||||||||||||
Income before income taxes |
$ | 35.7 | ||||||||||||||||||
Capital Expenditures |
||||||||||||||||||||
Portfolio investments and capital additions |
$ | 102.4 | $ | 52.9 | $ | 7.4 | $ | 1.2 | $ | 163.9 | ||||||||||
Selected Balance Sheet Data at June 30, 2011 |
||||||||||||||||||||
Investments in affiliated companies |
$ | 164.4 | $ | 403.2 | $ | | $ | | $ | 567.6 | ||||||||||
Identifiable assets |
$ | 4,458.2 | $ | 799.5 | $ | 286.3 | $ | 98.5 | $ | 5,642.5 | ||||||||||
Three Months Ended June 30, 2010 |
||||||||||||||||||||
Profitability |
||||||||||||||||||||
Revenues |
$ | 217.8 | $ | 16.3 | $ | 53.4 | $ | 0.7 | $ | 288.2 | ||||||||||
Share of affiliates earnings |
(4.7 | ) | 11.3 | | | 6.6 | ||||||||||||||
Total gross income |
213.1 | 27.6 | 53.4 | 0.7 | 294.8 | |||||||||||||||
Ownership costs |
113.8 | 11.6 | 5.5 | 0.2 | 131.1 | |||||||||||||||
Other costs and expenses |
69.9 | 1.5 | 38.8 | (4.5 | ) | 105.7 | ||||||||||||||
Segment profit |
$ | 29.4 | $ | 14.5 | $ | 9.1 | $ | 5.0 | 58.0 | |||||||||||
SG&A |
32.8 | |||||||||||||||||||
Income before income taxes |
$ | 25.2 | ||||||||||||||||||
Capital Expenditures |
||||||||||||||||||||
Portfolio investments and capital additions |
$ | 40.4 | $ | 13.5 | $ | 5.4 | $ | 1.6 | $ | 60.9 | ||||||||||
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 |
13
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
GATX | ||||||||||||||||||||
Rail | Specialty | ASC | Other | Consolidated | ||||||||||||||||
Six Months Ended June 30, 2011 |
||||||||||||||||||||
Profitability |
||||||||||||||||||||
Revenues |
$ | 474.5 | $ | 33.5 | $ | 70.9 | $ | 0.7 | $ | 579.6 | ||||||||||
Share of affiliates earnings |
15.4 | 16.7 | | | 32.1 | |||||||||||||||
Total gross income |
489.9 | 50.2 | 70.9 | 0.7 | 611.7 | |||||||||||||||
Ownership costs |
229.5 | 24.0 | 7.9 | 2.1 | 263.5 | |||||||||||||||
Other costs and expenses |
152.1 | 6.7 | 53.6 | 0.5 | 212.9 | |||||||||||||||
Segment profit (loss) |
$ | 108.3 | $ | 19.5 | $ | 9.4 | $ | (1.9 | ) | 135.3 | ||||||||||
SG&A |
73.8 | |||||||||||||||||||
Income before income taxes |
$ | 61.5 | ||||||||||||||||||
Capital Expenditures |
||||||||||||||||||||
Portfolio investments and capital additions |
$ | 156.3 | $ | 89.3 | $ | 12.6 | $ | 1.9 | $ | 260.1 | ||||||||||
Six Months Ended June 30, 2010 |
||||||||||||||||||||
Profitability |
||||||||||||||||||||
Revenues |
$ | 454.5 | $ | 33.7 | $ | 62.7 | $ | 0.9 | $ | 551.8 | ||||||||||
Share of affiliates earnings |
3.9 | 21.0 | | | 24.9 | |||||||||||||||
Total gross income |
458.4 | 54.7 | 62.7 | 0.9 | 576.7 | |||||||||||||||
Ownership costs |
227.5 | 22.8 | 7.6 | 2.1 | 260.0 | |||||||||||||||
Other costs and expenses |
152.2 | 5.3 | 45.6 | (4.2 | ) | 198.9 | ||||||||||||||
Segment profit |
$ | 78.7 | $ | 26.6 | $ | 9.5 | $ | 3.0 | 117.8 | |||||||||||
SG&A |
66.3 | |||||||||||||||||||
Income before income taxes |
$ | 51.5 | ||||||||||||||||||
Capital Expenditures |
||||||||||||||||||||
Portfolio investments and capital additions |
$ | 88.5 | $ | 33.1 | $ | 7.0 | $ | 2.5 | $ | 131.1 |
14
Table of Contents
Item 2. Managements 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
GATXs 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 GATXs primary
operating segments; conditions in the capital markets; changes in GATXs 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 GATXs 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 GATXs
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 managements 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 Managements 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 six months ended June 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 GATXs Annual Report on Form 10-K, as filed with the SEC, which contains the
Companys consolidated financial statements for the year ended December 31, 2010.
15
Table of Contents
DISCUSSION OF OPERATING RESULTS
Net income was $46.3 million, or $0.98 per diluted share, for the first six months of
2011 compared to net income of $40.2 million, or $0.86 per diluted share, for the first six months
of 2010. The 2011 results include $12.6 million, or $0.27 per diluted share, of after-tax
unrealized gains related to certain interest rate swaps at GATXs European Rail affiliate, AAE
Cargo A.G. (AAE). Results for the first six months of 2010 include a net benefit of $2.5
million, or $0.05 per diluted share, in aggregate after-tax income related to the favorable
resolution of a litigation matter and a reversal of an income tax accrual, partially offset by
unrealized losses related to certain interest rate swaps at AAE.
Net income was $26.4 million, or $0.56 per diluted share, for the second quarter of 2011
compared to net income of $21.5 million, or $0.46 per diluted share, for the second quarter of
2010. Results for the second quarter of 2011 include $6.2 million, or $0.13 per diluted share, of
after-tax unrealized gains related to certain interest rate swaps at AAE. Second quarter 2010
results include a net benefit of $3.3 million, or $0.07 per diluted share, in aggregate after-tax
income related to the favorable resolution of a litigation matter and a reversal of an income tax
accrual, partially offset by unrealized losses related to the previously mentioned interest rate
swaps at AAE.
Total investment volume was $260.1 million for the first six months of 2011 compared to $131.1
million for the first six months of 2010.
The following table presents a financial summary of GATXs operating segments (in millions,
except per share data):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross Income |
||||||||||||||||
Rail |
$ | 246.0 | $ | 213.1 | $ | 489.9 | $ | 458.4 | ||||||||
Specialty |
24.3 | 27.6 | 50.2 | 54.7 | ||||||||||||
ASC |
58.8 | 53.4 | 70.9 | 62.7 | ||||||||||||
Total segment gross income |
329.1 | 294.1 | 611.0 | 575.8 | ||||||||||||
Other |
0.5 | 0.7 | 0.7 | 0.9 | ||||||||||||
Consolidated Gross Income |
$ | 329.6 | $ | 294.8 | $ | 611.7 | $ | 576.7 | ||||||||
Segment Profit |
||||||||||||||||
Rail |
$ | 56.7 | $ | 29.4 | $ | 108.3 | $ | 78.7 | ||||||||
Specialty |
8.8 | 14.5 | 19.5 | 26.6 | ||||||||||||
ASC |
8.6 | 9.1 | 9.4 | 9.5 | ||||||||||||
Total Segment Profit |
74.1 | 53.0 | 137.2 | 114.8 | ||||||||||||
Less: |
||||||||||||||||
Selling, general and administrative expenses |
37.4 | 32.8 | 73.8 | 66.3 | ||||||||||||
Unallocated interest expense, net |
1.2 | 0.3 | 2.3 | 2.3 | ||||||||||||
Other income and expense, including eliminations |
(0.2 | ) | (5.3 | ) | (0.4 | ) | (5.3 | ) | ||||||||
Income taxes |
9.3 | 3.7 | 15.2 | 11.3 | ||||||||||||
Consolidated Net Income |
$ | 26.4 | $ | 21.5 | $ | 46.3 | $ | 40.2 | ||||||||
Basic earnings per share |
$ | 0.57 | $ | 0.47 | $ | 1.00 | $ | 0.87 | ||||||||
Diluted earnings per share |
$ | 0.56 | $ | 0.46 | $ | 0.98 | $ | 0.86 |
Return on Equity
The following table presents GATXs return on equity (ROE) for the trailing twelve months
ended June 30:
2011 | 2010 | |||||||
ROE |
7.8 | % | 7.7 | % | ||||
ROE,
excluding certain items (a) |
6.3 | % | 7.0 | % |
(a) | See definition under Non-GAAP Financial Measures |
16
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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
GATXs 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 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 segments financial performance reflects appropriate
risk-adjusted borrowing costs.
Rail
Market conditions continued to improve in the second quarter of 2011 as U.S. carloadings
increased, idle railcars declined, and lease rate pricing improved. Rails utilization in North
America increased to 98.2% compared to 97.8% at the end of the first quarter and 96.5% at June 30,
2010. Lease rates on renewals and assignments also improved during the quarter as indicated by the
average lease renewal rate on cars in the GATX Lease Price Index (the LPI, see definition below),
which increased 4.4% from the average expiring lease rate, compared to decreases of 0.5% for the
first quarter and 18.6% for the second quarter of 2010. Rail entered 2011 with approximately
21,000 cars on leases scheduled to expire during the year, of which
approximately 8,700 occurred through
the second 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 41 months in the current
quarter and the first quarter, compared to 36 months for the second quarter of 2010. Rail is
highly focused on lease pricing improvement in this recovering market. In Europe, Rails
wholly-owned tank car fleet has increased due to investments in new cars. At the end of the second
quarter of 2011, fleet utilization was 95.7% compared to 95.8% at the end of the first quarter and
94.4% at June 30, 2010. AAE, which serves the freight railcar markets, is experiencing some
improvement in its markets and fleet utilization is increasing. During the first six months of
2011, Rails investment volume was $156.3 million, compared to $88.5 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 Rails operating results are outlined below (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross Income |
||||||||||||||||
Lease income |
$ | 211.3 | $ | 200.3 | $ | 420.7 | $ | 405.2 | ||||||||
Asset remarketing income |
7.1 | 0.3 | 14.7 | 12.8 | ||||||||||||
Other income |
19.3 | 17.2 | 39.1 | 36.5 | ||||||||||||
Revenues |
237.7 | 217.8 | 474.5 | 454.5 | ||||||||||||
Affiliate earnings |
8.3 | (4.7 | ) | 15.4 | 3.9 | |||||||||||
246.0 | 213.1 | 489.9 | 458.4 | |||||||||||||
Ownership Costs |
||||||||||||||||
Depreciation |
48.9 | 47.5 | 96.8 | 95.1 | ||||||||||||
Interest expense, net |
32.6 | 31.8 | 65.3 | 63.5 | ||||||||||||
Operating lease expense |
33.0 | 34.5 | 67.4 | 68.9 | ||||||||||||
114.5 | 113.8 | 229.5 | 227.5 | |||||||||||||
Other Costs and Expenses |
||||||||||||||||
Maintenance expense |
65.7 | 61.5 | 134.6 | 128.9 | ||||||||||||
Other costs |
9.1 | 8.4 | 17.5 | 23.3 | ||||||||||||
74.8 | 69.9 | 152.1 | 152.2 | |||||||||||||
Segment Profit |
$ | 56.7 | $ | 29.4 | $ | 108.3 | $ | 78.7 | ||||||||
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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 Rails 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.
Lease
Price Index
Rails Fleet Data
The following table summarizes certain fleet data for Rails North American railcars for the
quarters indicated:
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||
2010 | 2010 | 2010 | 2011 | 2011 | ||||||||||||||||
Beginning balance |
108,918 | 108,626 | 108,800 | 111,389 | 109,780 | |||||||||||||||
Cars added |
434 | 1,189 | 3,479 | 175 | 657 | |||||||||||||||
Cars scrapped |
(726 | ) | (917 | ) | (870 | ) | (963 | ) | (1,102 | ) | ||||||||||
Cars sold |
| (98 | ) | (20 | ) | (821 | ) | (571 | ) | |||||||||||
Ending balance |
108,626 | 108,800 | 111,389 | 109,780 | 108,764 | |||||||||||||||
Utilization rate at quarter end |
96.5 | % | 96.8 | % | 97.4 | % | 97.8 | % | 98.2 | % | ||||||||||
Average active railcars |
104,530 | 104,611 | 106,732 | 108,061 | 106,935 |
18
Table of Contents
North
American Fleet
The following table summarizes certain fleet data for Rails European railcars for the
quarters indicated:
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||
2010 | 2010 | 2010 | 2011 | 2011 | ||||||||||||||||
Beginning balance |
20,321 | 20,302 | 20,226 | 20,432 | 20,524 | |||||||||||||||
Cars added |
15 | 61 | 298 | 109 | 164 | |||||||||||||||
Cars scrapped or sold |
(34 | ) | (137 | ) | (92 | ) | (17 | ) | (13 | ) | ||||||||||
Ending balance |
20,302 | 20,226 | 20,432 | 20,524 | 20,675 | |||||||||||||||
Utilization rate at quarter end |
94.4 | % | 95.3 | % | 95.7 | % | 95.8 | % | 95.7 | % | ||||||||||
Average active railcars |
19,198 | 19,223 | 19,430 | 19,596 | 19,728 |
European
Fleet
19
Table of Contents
The following table summarizes certain fleet data for Rails North American locomotives for
the quarters indicated:
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||
2010 | 2010 | 2010 | 2011 | 2011 | ||||||||||||||||
Beginning balance |
535 | 536 | 542 | 550 | 560 | |||||||||||||||
Locomotives added |
1 | 6 | 8 | 10 | 13 | |||||||||||||||
Locomotives scrapped or sold |
| | | | (1 | ) | ||||||||||||||
Ending balance |
536 | 542 | 550 | 560 | 572 | |||||||||||||||
Utilization rate at quarter end |
98.1 | % | 98.7 | % | 97.6 | % | 97.7 | % | 97.7 | % | ||||||||||
Average active locomotives |
517 | 531 | 536 | 541 | 553 |
Rails Lease Income
Components of Rails lease income are outlined below (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
North American railcars |
$ | 161.2 | $ | 158.5 | $ | 323.2 | $ | 319.1 | ||||||||
European railcars |
41.3 | 33.6 | 79.9 | 69.9 | ||||||||||||
Locomotives |
8.8 | 8.2 | 17.6 | 16.2 | ||||||||||||
$ | 211.3 | $ | 200.3 | $ | 420.7 | $ | 405.2 | |||||||||
Comparison of the First Six Months of 2011 to the First Six Months of 2010
Segment Profit
Rails segment profit for the first six months of 2011 reflects unrealized gains of $14.1
million representing the change in the fair value of certain interest rate swaps at AAE, while
segment profit for the first six months of 2010 reflects unrealized losses of $5.9 million related
to the interest rate swaps. Excluding the effect of these items from each period, Rails segment
profit increased $9.6 million, primarily due to higher lease and asset remarketing income and
higher scrapping gains, partially offset by lower affiliate earnings and higher maintenance costs
in Europe.
Gross Income
Lease income in North America increased $5.5 million, primarily due to an average of 2,500
more railcars and 50 more locomotives on lease, partially offset by the effect of lower renewal
rates over the past year. In Europe, a $10.0 million increase in lease income was driven primarily
by an average of approximately 500 more railcars on lease and the foreign exchange rate effects of
a weaker U.S. dollar. Asset remarketing income increased $1.9 million primarily due to more
railcar sales in the current year. Other income was $2.6 million higher, primarily due to higher
scrapping gains resulting from higher scrap steel rates, partially offset by the absence of income
from end-of-lease settlements received in the prior year. Affiliates earnings increased $11.5
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 $8.5 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 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. AAEs
earnings may be impacted by future unrealized gains or losses associated with these instruments.
Ownership Costs
Ownership costs were $2.0 million higher than prior year, primarily due to the combination of
higher interest and depreciation expense related to new investments, including capitalized
wheelsets in Europe, partially offset by lower operating lease expense resulting from the purchase
of previously leased-in assets.
20
Table of Contents
Other Costs and Expenses
In North America, maintenance costs increased by $1.2 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 $4.5 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 $5.8 million lower than the prior year, primarily due to lower asset
impairment charges, lower storage and switching fees, 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 $1.9 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.
Comparison of the Second Quarter 2011 to the Second Quarter 2010
Segment Profit
Rails segment profit for the second quarter of 2011 reflects unrealized gains of $6.9 million
representing the change in the fair value of certain interest rate swaps at AAE, while segment
profit for the second quarter of 2010 reflects unrealized losses of $5.0 million related to the
interest rate swaps. Excluding the effect of these items from each period, Rails segment profit
increased $15.4 million, primarily due to higher lease and asset remarketing income and higher
scrapping gains.
Gross Income
Lease income in North America increased $3.3 million, primarily due to an average of 2,400
more railcars and 36 more locomotives on lease. In Europe, a $7.7 million increase in lease income
was driven primarily by an average of approximately 500 more railcars on lease and higher lease
rates, as well as by the foreign exchange effects of a weaker U.S. dollar. Asset remarketing
income increased $6.8 million due to higher railcar sales in the current year. Other income was
$2.1 million higher, primarily due to higher scrapping gains resulting from higher scrap steel
rates. Share of affiliates earnings was $13.0 million higher than the prior year period.
Excluding the impact of the aforementioned interest rate swaps at AAE from the current and prior
years, affiliates earnings increased $1.1 million, primarily due to improved operating income at
AAE and a current year asset remarketing gain at another affiliate.
Ownership Costs
Ownership costs were comparable to the prior year.
Other Costs and Expenses
In North America, maintenance costs decreased $1.8 million, largely due to fewer base fleet
repairs and regulatory compliance costs, partially offset by higher railroad repair volumes. In
Europe, maintenance costs were $5.9 million higher, primarily due to a higher volume of underframe
revisions in the current year, the foreign exchange effects of a weaker U.S. dollar and the timing
of the capitalization of new wheelsets in the prior year in connection with the wheelset
replacement program.
Specialty
Specialtys total asset base, including off balance sheet assets, was $802.5 million at June
30, 2011, compared to $744.4 million at December 31, 2010, and $699.4 million at June 30, 2010.
Investment volume was $89.3 million in the first six months of 2011 compared to $33.1 million in
the prior year period. Investments in 2011 primarily consisted of $51.1 million of equity
investments in joint ventures, $19.1 million in senior secured
loans and $19.1 million in marine assets. Specialty continues to evaluate investment opportunities in a disciplined manner,
focusing on targeted asset types, asset cost and appropriate risk
adjusted returns. Market conditions for Specialtys marine
affiliates remain challenging due to a combination of inconsistent demand for
marine transport services and vessel overcapacity in these markets.
21
Table of Contents
Components of Specialtys operating results are outlined below (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross Income |
||||||||||||||||
Lease income |
$ | 14.8 | $ | 12.4 | $ | 29.2 | $ | 27.7 | ||||||||
Asset remarketing income |
1.1 | 3.6 | 2.4 | 5.5 | ||||||||||||
Other income |
1.7 | 0.3 | 1.9 | 0.5 | ||||||||||||
Revenues |
17.6 | 16.3 | 33.5 | 33.7 | ||||||||||||
Affiliate earnings |
6.7 | 11.3 | 16.7 | 21.0 | ||||||||||||
24.3 | 27.6 | 50.2 | 54.7 | |||||||||||||
Ownership Costs |
||||||||||||||||
Depreciation |
4.5 | 4.3 | 8.9 | 8.4 | ||||||||||||
Interest expense, net |
7.3 | 6.9 | 14.4 | 13.7 | ||||||||||||
Operating lease expense |
0.4 | 0.4 | 0.7 | 0.7 | ||||||||||||
12.2 | 11.6 | 24.0 | 22.8 | |||||||||||||
Other Costs and Expenses |
3.3 | 1.5 | 6.7 | 5.3 | ||||||||||||
Segment Profit |
$ | 8.8 | $ | 14.5 | $ | 19.5 | $ | 26.6 | ||||||||
Specialtys Portfolio Data
The following table summarizes information on the owned and managed Specialty portfolio (in
millions):
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||
2010 | 2010 | 2010 | 2011 | 2011 | ||||||||||||||||
Net book value of owned assets (a) |
$ | 699.4 | $ | 721.7 | $ | 744.4 | $ | 763.6 | $ | 802.5 | ||||||||||
Net book value of managed portfolio |
$ | 209.8 | $ | 208.0 | $ | 204.6 | $ | 196.8 | $ | 185.4 |
(a) | Includes off balance sheet assets |
Comparison of the First Six Months of 2011 to the First Six Months of 2010
Segment Profit
Specialtys segment profit for the first six months of 2011 was $7.1 million lower than the
prior year, primarily due to lower affiliate earnings and lower asset remarketing income.
Gross Income
Lease income was $1.5 million higher than the prior year, primarily due to income from new
leases and higher pooled barge income. Asset remarketing income was $3.1 million lower than the
prior year due to fewer asset sales. Other income was $1.4 million higher than the prior year,
primarily due to gains on the sale of securities in the current year. Share of affiliates
earnings decreased $4.3 million, primarily due to an adjustment attributable to an accounting
change for residual value guarantees.
Ownership Costs
Ownership costs were $1.2 million higher than the prior year, primarily due to depreciation
and interest expenses on new investments.
Other Costs and Expenses
Other costs and expenses increased $1.4 million, primarily due to higher operating costs for
pooled barges and the absence of a bad debt recovery received in the prior year.
22
Table of Contents
Comparison of the Second Quarter of 2011 to the Second Quarter of 2010
Segment Profit
Specialtys segment profit for the second quarter of 2011 was $5.7 million lower than the
prior year, primarily due to lower affiliate earnings and lower asset remarketing income.
Gross Income
Lease income was $2.4 million higher, primarily due to higher pooled barge income and income
from new leases. Asset remarketing income was $2.5 million
lower, primarily due to fewer asset
sales. Other income was $1.4 million higher than the prior year, primarily due to gains on the
sale of securities. Share of affiliates earnings decreased $4.6 million, primarily due to an
asset remarketing gain on the sale of a vessel in the prior year and lower earnings from marine
affiliates in the current year.
Ownership Costs
Ownership costs were $0.6 million higher than the prior year, primarily due to depreciation
and interest expenses on new investments.
Other Costs and Expenses
Other costs and expenses increased $1.8 million, primarily due to higher operating costs for
pooled barges.
ASC
Higher steel production in the first half of the year drove strong customer demand for iron
ore. However, challenging weather conditions and some mechanical delays limited potential freight
volume. As a result, during the first six months of 2011, ASC carried 9.0 million net tons of
freight compared to 9.6 million net tons in the prior year. ASC was operating 12 vessels at the
end of the current quarter and deployed 2 additional vessels in July, compared to operating 13
vessels in the prior year. ASC expects steady customer demand for
tonnage through the remainder of the year; however, operations may be
affected by the outcome of the labor negotiations
described below under ASC Labor Agreement.
Components of ASCs operating results are outlined below (in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross Income |
||||||||||||||||
Marine operating revenues |
$ | 56.6 | $ | 52.4 | $ | 67.7 | $ | 60.7 | ||||||||
Lease income |
1.1 | 1.0 | 2.1 | 2.0 | ||||||||||||
Other income |
1.1 | | 1.1 | | ||||||||||||
58.8 | 53.4 | 70.9 | 62.7 | |||||||||||||
Ownership Costs |
||||||||||||||||
Depreciation |
3.9 | 3.3 | 3.9 | 3.3 | ||||||||||||
Interest expense, net |
2.0 | 2.2 | 4.0 | 4.3 | ||||||||||||
5.9 | 5.5 | 7.9 | 7.6 | |||||||||||||
Other Costs and Expenses |
||||||||||||||||
Maintenance expense |
5.1 | 3.7 | 5.5 | 4.1 | ||||||||||||
Marine operating expense |
39.2 | 35.1 | 48.1 | 41.5 | ||||||||||||
44.3 | 38.8 | 53.6 | 45.6 | |||||||||||||
Segment Profit |
$ | 8.6 | $ | 9.1 | $ | 9.4 | $ | 9.5 | ||||||||
23
Table of Contents
Comparison of the First Six Months of 2011 to the First Six Months of 2010
Segment Profit
ASCs segment profit for the first six months of 2011 was slightly lower than the prior year
as higher maintenance costs were largely offset by a gain realized on the return of a leased-in
vessel.
Gross Income
Gross income increased $8.2 million, primarily due to a combination of higher freight rates, a
gain on the return of a leased-in vessel and higher fuel surcharges (the effect of which is largely
offset in operating expenses).
Ownership Costs
Ownership costs were comparable to the prior year.
Other Costs and Expenses
Maintenance costs were $1.4 million higher, primarily due to more extensive winter work.
Marine operating expenses increased $6.6 million, primarily due to increased fuel costs, which are
recoverable through fuel surcharges.
Comparison of the Second Quarter of 2011 to the Second Quarter of 2010
Segment Profit
ASCs segment profit for the second quarter of 2011 was $0.5 million lower than the prior
year, primarily due to higher maintenance costs, partially offset by the previously noted gain.
Gross Income
Gross income increased $5.4 million, primarily due to a combination of higher freight rates, a
gain on the return of a leased-in vessel and higher fuel surcharges (the effect of which is largely
offset in operating expenses).
Ownership Costs
Ownership costs increased $0.4 million, primarily due to depreciation expense on capitalized
costs.
Other Costs and Expenses
Maintenance costs increased $1.4 million, primarily due to more extensive winter work. Marine
operating expenses increased $4.1 million, primarily due to increased costs for fuel, which are
recoverable through fuel surcharges.
ASC
Labor Agreement
Licensed
crew members working aboard ASCs Great Lakes vessels are
represented for collective bargaining by the American Maritime Officers
union (the AMO). The current collective bargaining
agreement between ASC and the AMO expires on August 1, 2011. ASC is
trying to negotiate with the AMO on a successor
agreement. In any collective bargaining situation, there is always a
risk that negotiations will not be successful and that a labor dispute
could result. ASC has developed a contingency plan to minimize the
impact of any potential labor dispute on operations and does not
anticipate that a labor dispute would have a material adverse
effect on its consolidated financial condition or cash flows; however,
a prolonged dispute could negatively impact GATXs results of
operations in a particular quarter or year.
24
Table of Contents
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 | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Selling, general and administrative expenses |
$ | 37.4 | $ | 32.8 | $ | 73.8 | $ | 66.3 | ||||||||
Unallocated interest expense, net |
1.2 | 0.3 | 2.3 | 2.3 | ||||||||||||
Other income and expense, including eliminations |
(0.2 | ) | (5.3 | ) | (0.4 | ) | (5.3 | ) | ||||||||
Income taxes |
9.3 | 3.7 | 15.2 | 11.3 |
SG&A in 2011 was $7.5 million and $4.6 million higher for the first six months and second
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 six months of 2011 was comparable to the prior year. Second quarter unallocated interest
expense was $0.9 million higher in 2011 than the prior year, primarily due to the timing of debt
issuances and investment funding. Other income and expense for the first six months and second
quarter 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
GATXs effective tax rate was 25% for the six months ended June 30, 2011, compared to 22% for
the six months ended June 30, 2010. In the prior year, GATXs liability for unrecognized tax
benefits was reduced by $3.7 million in connection with the close of various federal and foreign
tax audits. Excluding the effect of the tax benefits, GATXs effective rate for the first six
months of 2010 was 29%. The difference in GATXs effective tax rate was largely 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 June 30, 2011, GATXs gross liability for unrecognized tax benefits totaled $43.3
million, which, if fully recognized, would decrease income tax expense by $23.3 million ($21.2
million net of federal tax).
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 June 30, 2011, GATX
had unrestricted cash balances of $50.2 million.
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The following table sets forth GATXs principal sources and uses of cash for the six months
ended June 30 (in millions):
2011 | 2010 | |||||||
Principal sources of cash |
||||||||
Net cash provided by operating activities |
$ | 116.4 | $ | 86.0 | ||||
Portfolio proceeds |
78.7 | 42.4 | ||||||
Other asset sales |
21.2 | 14.5 | ||||||
Proceeds from issuance of debt, commercial paper and credit facilities |
352.7 | 295.8 | ||||||
$ | 569.0 | $ | 438.7 | |||||
Principal uses of cash |
||||||||
Portfolio investments and capital additions |
$ | (260.1 | ) | $ | (131.1 | ) | ||
Repayments of debt, commercial paper and credit facilities |
(238.8 | ) | (293.0 | ) | ||||
Purchases of leased-in assets |
(61.1 | ) | | |||||
Payments on capital lease obligations |
(17.4 | ) | (2.9 | ) | ||||
Cash dividends |
(28.4 | ) | (27.1 | ) | ||||
$ | (605.8 | ) | $ | (454.1 | ) | |||
Net cash provided by operating activities for the first six months of 2011 was $116.4
million, an increase of $30.4 million from the prior year. The increase was primarily driven by
higher lease income, lower operating lease payments 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 the absence of a prior year litigation recovery.
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 six months of 2011 totaled $260.1
million, an increase of $129.0 million from the prior year. Rail and Specialty investments in 2011
were $156.3 million and $89.3 million, respectively, compared to $88.5 million and $33.1 million,
respectively, in 2010.
Portfolio proceeds for the first six months of 2011 of $78.7 million increased by $36.3
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 $21.2 million for the first six months
of 2011 increased by $6.7 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 six months of 2011 were $352.7 million (net
of hedges and debt issuance costs). Debt repayments of $238.8 million for the first six months of
2011 primarily consisted of scheduled debt maturities and net repayments of short-term borrowings.
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Short-Term Borrowings
The following table provides certain information regarding GATXs short-term borrowings for
the six months ended June 30, 2011:
North | ||||||||
America (a) | Europe (a) | |||||||
Balance as of June 30 (in millions) |
$ | 54.5 | $ | 47.7 | ||||
Weighted average interest rate |
0.3 | % | 2.6 | % | ||||
Euro/Dollar exchange rate |
n/a | 1.4502 | ||||||
Average monthly amount outstanding during year (in millions) |
$ | 81.5 | $ | 36.7 | ||||
Weighted average interest rate |
0.4 | % | 4.5 | % | ||||
Average Euro/Dollar exchange rate |
n/a | 1.4042 | ||||||
Average monthly amount outstanding during 2nd quarter (in millions) |
$ | 71.1 | $ | 42.2 | ||||
Weighted average interest rate |
0.4 | % | 1.7 | % | ||||
Average Euro/Dollar exchange rate |
n/a | 1.4400 | ||||||
Maximum month-end amount outstanding (in millions) |
$ | 133.7 | $ | 47.7 | ||||
Euro/Dollar exchange rate |
n/a | 1.4502 |
(a) | Short-term borrowings in North America consist solely of commercial paper issued in the U.S. 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 bank facility, and entered into a new 4-year senior unsecured revolving bank 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 June 30, 2011, availability under the new
facility was $495.9 million, with $54.5 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 facility and another borrowing contains
various restrictive covenants and certain negative pledge provisions. The indentures for GATXs
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 GATXs 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 June 30, 2011, GATX was in compliance with all covenants and
conditions of its credit agreements.
Credit Ratings
The availability of GATXs funding options may be affected by certain factors, including the
global capital market environment and outlook as well as GATXs financial performance. GATXs
access to capital markets at competitive rates is dependent on its credit rating and rating
outlook, as determined by rating agencies such as Standard & Poors (S&P) and Moodys Investor
Service (Moodys). As of June 30, 2011, GATXs long-term unsecured debt was rated BBB by S&P and
Baa1 by Moodys. GATXs rating outlook from both agencies was stable. GATXs short-term unsecured
debt was rated A-2 by S&P and P-2 by Moodys.
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Contractual Commitments
At June 30, 2011, GATXs 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 |
$ | 2,978.3 | $ | 48.3 | $ | 727.0 | $ | 408.4 | $ | 411.9 | $ | 457.3 | $ | 925.4 | ||||||||||||||
Nonrecourse debt |
196.3 | 36.3 | 25.6 | 33.7 | 58.3 | 31.3 | 11.1 | |||||||||||||||||||||
Commercial paper and credit facilities |
102.2 | 102.2 | | | | | | |||||||||||||||||||||
Capital lease obligations |
18.5 | 1.6 | 3.3 | 3.4 | 3.3 | 3.1 | 3.8 | |||||||||||||||||||||
Operating leases recourse |
1,012.6 | 36.8 | 115.2 | 106.9 | 110.4 | 127.0 | 516.3 | |||||||||||||||||||||
Operating leases nonrecourse |
245.2 | 13.5 | 28.0 | 28.3 | 27.8 | 26.3 | 121.3 | |||||||||||||||||||||
Portfolio investments (a) |
1,351.6 | 220.1 | 239.7 | 240.7 | 250.9 | 258.9 | 141.3 | |||||||||||||||||||||
$ | 5,904.7 | $ | 458.8 | $ | 1,138.8 | $ | 821.4 | $ | 862.6 | $ | 903.9 | $ | 1,719.2 | |||||||||||||||
(a) | Primarily railcar purchase commitments pursuant to a five-year supply agreement. |
Critical Accounting Policies
There have been no changes to GATXs critical accounting policies during the six months ending
June 30, 2011; refer to GATXs Annual Report on Form 10-K for the fiscal year ended December 31,
2010, for a summary of GATXs 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 GATXs 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 GATXs business. In addition, GATX discloses total on and off
balance sheet assets because a significant portion of GATXs 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 GATXs businesses.
Glossary of Key Terms
| Non-GAAP Financial Measures Numerical or percentage based measures of a companys 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. |
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| 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):
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||
2010 | 2010 | 2010 | 2011 | 2011 | ||||||||||||||||
Consolidated On Balance Sheet Assets |
$ | 5,083.0 | $ | 5,133.5 | $ | 5,442.4 | $ | 5,498.7 | $ | 5,642.5 | ||||||||||
Off Balance Sheet Assets: |
||||||||||||||||||||
Rail |
940.4 | 979.4 | 968.1 | 899.8 | 906.2 | |||||||||||||||
Specialty |
3.7 | 3.5 | 3.4 | 3.2 | 3.0 | |||||||||||||||
Total On and Off Balance Sheet Assets |
$ | 6,027.1 | $ | 6,116.4 | $ | 6,413.9 | $ | 6,401.7 | $ | 6,551.7 | ||||||||||
Shareholders Equity |
$ | 1,044.9 | $ | 1,098.6 | $ | 1,113.7 | $ | 1,153.7 | $ | 1,191.1 |
The following table presents Net Income, excluding certain items for the trailing twelve
months ended June 30 (in millions):
2011 | 2010 | |||||||
Net Income, as reported |
$ | 86.9 | $ | 81.3 | ||||
Tax Benefits (a) |
(7.7 | ) | (11.1 | ) | ||||
(Gain) Loss on Interest Rate Swaps at AAE (net of tax) |
(8.6 | ) | 7.7 | |||||
Other Items (b) |
| (4.1 | ) | |||||
Net Income, excluding certain items |
$ | 70.6 | $ | 73.8 | ||||
(a) | For the trailing twelve months of 2011, tax benefits include $5.8 million primarily attributable to the reversal of accruals resulting from the close of certain domestic and foreign tax audits and a $1.9 million deferred benefit attributable to a reduction of statutory rates in the United Kingdom. For the trailing twelve months of 2010, tax benefits include $3.7 million in connection with the close of various federal and foreign tax audits and $7.4 million of realized foreign credits. | |
(b) | For the trailing twelve months of 2010, other items includes $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 GATXs interest rate and
foreign currency exposures or types of derivative instruments used to hedge these exposures. For a
discussion of the Companys exposure to market risk, refer to Part II: Item 7A, Quantitative and
Qualitative Disclosure about Market Risk of the Companys Annual Report on Form 10-K for the year
ended December 31, 2010.
Item 4. Controls and Procedures
The Companys management, with the participation of its Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the Companys 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 Companys Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of the period covered by this quarterly report, the
Companys disclosure controls and procedures were effective.
No change in the Companys internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended June 30, 2011, that materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.
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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 GATXs risk factors. For
a discussion of GATXs risk factors, refer to Part 1: Item 1A, Risk Factors of the Companys
Annual Report on Form 10-K for the year ended December 31, 2010.
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Item 6. Exhibits
Exhibits:
Reference is made to the exhibit index which is included herewith and is
incorporated by reference hereto.
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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: July 28, 2011
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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 Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, are formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (iv) Notes to the Consolidated Financial Statements.* | |
Incorporated by Reference: | ||
10.1
|
Four Year Credit Agreement with Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint book managers, Bank of America, N.A., as syndication agent, PNC Bank National Association, U.S. Bank National Association and Bayerische Landesbank, acting through its New York branch, as co-documentation agents, Citibank, N.A., as administrative agent, and the lenders party thereto, incorporated by reference to Exhibit 10.1 to GATXs Current Report on Form 8-K dated May 11, 2011, file number 1-2328. |
* | 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. |
33