Summary of GATX CORP - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This document contains statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions of those sections and the Private Securities Litigation Reform Act of 1995. Some of these statements may be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" or other words and terms of similar meaning. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in GATX's Annual Report on Form 10-K and other filings with the SEC, and that actual results or developments may differ materially from those in the forward-looking statements. Specific factors that might cause actual results to differ from expectations include, but are not limited to, general economic, market, regulatory and political conditions in the rail, marine, industrial and other industries served by GATX and its customers; lease rates, utilization levels and operating costs in GATX's primary asset segments; conditions in the capital markets; changes in GATX's credit ratings and financing costs; regulatory rulings that may impact the economic value and operating costs of assets; costs associated with maintenance initiatives; competitive factors in GATX's primary markets including lease pricing and asset availability; changes in loss provision levels within GATX's portfolio; impaired asset charges that may result from changing market conditions or portfolio management decisions implemented by GATX; the opportunity for remarketing income; the outcome of pending or threatened litigation; and other factors. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. GATX has based these forward-looking statements on information currently available and disclaims any intention or obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.
Business Overview
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on financial data derived from the financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") and certain other financial data that is prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see Non-GAAP Financial Measures at the end of this Item.
GATX Corporation 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, 2009, are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2009. For further information, refer to the Company's Current Report on Form 8-K, containing the consolidated financial statements for the year ended December 31, 2008, filed with the Securities and Exchange Commission ("SEC") on May 8, 2009 ("GATX's May 8th Current Report").

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DISCUSSION OF OPERATING RESULTS
Net income was $40.3 million or $0.83 per diluted share for the first six months of 2009 compared to net income of $92.0 million or $1.84 per diluted share for the first six months of 2008. Results for the six months ended June 30, 2009 and 2008 include after-tax unrealized losses of $18.3 million and $4.8 million, respectively, related to certain interest rate swaps at GATX's AAE Cargo A.G. affiliate ("AAE"). Net income was $12.7 million or $0.27 per diluted share for the second quarter of 2009 compared to net income of $40.2 million or $0.82 per diluted share for the second quarter of 2008. Results for the second quarter of 2009 and 2008 include after-tax unrealized losses of $6.7 million and $4.8 million, respectively, related to the previously mentioned interest rate swaps at AAE.
Results for 2008 have been restated to reflect the adoption of FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). See Note 2 to the consolidated financial statements for further information.
Total investment volume was $190.4 million for the first six months of 2009 compared to $216.6 million for the first six months of 2008.
The following table presents a financial summary of GATX's operating segments (in millions, except per share data):

                                                      Three Months Ended                Six Months Ended
                                                           June 30                          June 30
                                                     2009             2008            2009            2008
Gross Income
Rail                                              $    224.9         $ 247.5        $   450.4        $ 501.0
Specialty                                               23.3            41.4             59.8           83.6
ASC                                                     39.3            89.2             41.5          104.4

Total segment gross income                             287.5           378.1            551.7          689.0
Other income                                             0.6             0.2              0.8            0.4

Consolidated Gross Income                              288.1           378.3            552.5          689.4


Segment Profit
Rail                                                    44.3            70.3             87.4          144.1
Specialty                                                7.3            30.5             30.3           60.5
ASC                                                      4.0             5.2              8.8            5.9

Total Segment Profit                                    55.6           106.0            126.5          210.5
Less:
Selling, general and administrative expenses            34.1            42.5             67.1           81.0
Unallocated interest expense, net                        2.5             2.8              2.4            2.4
Other, including eliminations                           (0.7 )           0.2             (2.2 )         (0.1 )
Income taxes                                             7.0            20.3             18.9           35.2

  Net Income                                      $     12.7         $  40.2        $    40.3        $  92.0


Basic earnings per share                          $     0.27         $  0.87        $    0.85        $  1.97
Diluted earnings per share                        $     0.27         $  0.82        $    0.83        $  1.84

Return on Equity
GATX's return on equity ("ROE") is based on income from continuing operations and is shown for the trailing twelve months ended June 30:

2009 2008 ROE 12.3 % 16.8 %

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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 affiliate earnings attributable to the segments, as well as ownership costs and other costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Other costs and expenses include, but are not limited to, maintenance, marine operating costs, asset impairment charges, litigation, 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 segment's financial performance reflects appropriate risk-adjusted borrowing costs.

Rail Segment Summary
During 2009, economic weakness in North America has negatively affected lease pricing and demand for railcars. After holding steady at approximately 98% throughout 2008, utilization in 2009 has trended down, as expected. North American fleet utilization was 96.0% at the end of the second quarter, compared to 96.5% at the end of the first quarter and 97.9% at the end of 2008. Average lease renewal pricing on cars in the GATX Lease Price Index (the "LPI") (see definition below) declined 9.8% from the average expiring lease rates in the second quarter of 2009, compared to a decline of 5.5% for the first quarter of 2009 and an increase of 5.9% for the second quarter of 2008. Lease terms on renewals for cars in the LPI averaged 36 months in the second quarter of 2009, compared to 45 months for the first quarter of 2009 and 63 months in the second quarter of 2008.
In Europe, economic weakness is also having a negative impact on rail operations, most significantly in the freight car sector. Rail's wholly-owned tank car fleet is performing relatively well due to a high concentration of cars deployed in the more stable petroleum market. Fleet utilization declined to 95.6% at the end of the second quarter, compared to 96.5% at the end of the first quarter and 97.1% at the end of 2008, with customers renewing a majority of leases that have expired in 2009. However, AAE is experiencing substantial market pressure due to its concentration in freight cars, particularly intermodal cars.
During the first six months of 2009, Rail's investments, which consisted primarily of new railcars acquired pursuant to existing commitments, were $172.0 million compared to $128.0 million in 2008. At June 30, 2009, Rail had total assets of $5.1 billion, including $1.0 billion of off balance sheet assets, compared to $5.0 billion, including $1.2 billion of off balance sheet assets, at June 30, 2008.

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

                                      Three Months Ended          Six Months Ended
                                            June 30                    June 30
                                       2009          2008         2009         2008
         Gross Income
         Lease income               $    209.0      $ 220.5     $   425.5     $ 440.0
         Asset remarketing income          6.5          2.2          11.2        13.2
         Other income                     12.9         25.4          26.1        42.9

         Revenues                        228.4        248.1         462.8       496.1
         Affiliate earnings               (3.5 )       (0.6 )       (12.4 )       4.9

                                         224.9        247.5         450.4       501.0

         Ownership Costs
         Depreciation                     47.4         45.6          93.6        89.8
         Interest expense, net            31.5         26.3          65.1        56.4
         Operating lease expense          33.3         37.4          66.9        75.0

                                         112.2        109.3         225.6       221.2

         Other Costs and Expenses
         Maintenance expense              62.9         61.8         124.1       122.0
         Other                             5.5          6.1          13.3        13.7

                                          68.4         67.9         137.4       135.7


         Segment profit             $     44.3      $  70.3     $    87.4     $ 144.1

Rail's Lease Income
   Components of Rail's lease income for the three and six months ended June 30
are outlined below (in millions):

                                Three Months Ended          Six Months Ended
                                      June 30                    June 30
                                 2009          2008         2009         2008
              North America   $    166.4      $ 171.0     $   342.0     $ 343.6
              Europe                34.6         40.9          67.4        79.2
              Locomotives            8.0          8.6          16.1        17.2

                              $    209.0      $ 220.5     $   425.5     $ 440.0

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

[[Image Removed: (LINE GRAPH)]]

Rail's Fleet Data
   The following table summarizes fleet activity for Rail's North American
railcars for the quarters indicated:

                                         June 30           September 30          December 31          March 31            June 30
                                          2008                 2008                 2008                2009               2009

Beginning balance                        110,754               110,195              109,874            112,976            112,326
Cars added                                   871                 1,535                4,411                354                711
Cars scrapped or sold                     (1,430 )              (1,856 )             (1,309 )           (1,004 )           (1,883 )

Ending balance                           110,195               109,874              112,976            112,326            111,154
Utilization rate at quarter end             98.0 %                97.8 %               97.9 %             96.5 %             96.0 %

[[Image Removed: (BAR GRAPH)]]

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The following table summarizes fleet activity for Rail's European railcars for the quarters indicated:

                                        June 30          September 30          December 31          March 31          June 30
                                          2008               2008                 2008                2009              2009

Beginning of year                        19,483               19,507               19,583            19,724            19,886
Cars added                                   62                  135                  144               190               124
Cars scrapped or sold                       (38 )                (59 )                 (3 )             (28 )             (10 )

Ending balance                           19,507               19,583               19,724            19,886            20,000
Utilization rate at quarter end            97.7 %               97.6 %               97.1 %            96.5 %            95.6 %

[[Image Removed: (BAR GRAPH)]] Comparison of the First Six Months of 2009 to the First Six Months of 2008 Segment Profit
Rail's segment profit was significantly impacted by a $21.8 million unrealized loss due to changes in the fair value of certain interest rate swaps at AAE. Segment profit in 2008 reflected a $5.5 million unrealized loss on interest rate swaps at AAE. Excluding the unrealized losses, Rail's segment profit decreased $40.4 million, primarily due to lower scrapping gains, a moderate increase in ownership costs and the unfavorable foreign exchange effects of a stronger U.S. Dollar.
Gross Income
Lease income in North America decreased $1.6 million, primarily due to $1.7 million of reduced rents on restructured leases resulting from customer bankruptcies and the absence of $1.3 million of income from certain non-performing leases in the current period. These items were partially offset by higher lease rates on lease renewals in the prior year. Additionally, during the first six months of 2009, the average active fleet declined by approximately 300 railcars from the first six months of 2008. The addition of 3,650 active cars from the December 2008 fleet acquisition from Allco Finance Group Limited ("Allco") substantially offset lease-end returns. In Europe, lease income decreased $11.8 million due to the unfavorable foreign exchange effects of a stronger U.S. Dollar, partially offset by higher lease rates and an average of 150 more cars on lease. Other income was lower, primarily due to lower scrap income, driven by significantly lower steel prices, and the receipt in the prior year of a lease termination fee. Affiliate earnings were lower due to the $21.8 million unrealized loss at AAE compared to the $5.5 million unrealized loss at AAE in 2008. Excluding the unrealized losses, affiliate earnings were lower due to lower operating earnings at AAE. Pressures in the European freight car market remain intense, particularly in intermodal cars where AAE has substantial exposure. It is likely that AAE's operating performance will be under increasing stress as 2009 progresses.
AAE holds multiple derivative instruments to hedge interest rate risk associated with forecasted floating rate debt issuances related to future new car orders. These instruments do not qualify for hedge accounting based on their applicable terms and as a result, changes in their fair values are recognized currently in income. The additional unrealized loss recognized in 2009 was primarily driven by the significant decline in benchmark interest rates. AAE's earnings may be impacted by future unrealized gains or losses associated with these instruments.

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Ownership Costs
Ownership costs increased $4.4 million, net of a $5.2 million reduction due to the favorable foreign exchange effects of a stronger U.S. Dollar. The increase in ownership costs was largely driven by interest and depreciation expense associated with investment volume over the last 12 months, particularly the acquisition of the Allco fleet. The mix of ownership costs was impacted by the purchase of $70.1 million of previously leased-in assets in 2008. Other Costs and Expenses
Maintenance expenses increased $2.1 million, primarily as a result of higher car volumes and increased repairs performed by railroads, largely offset by the favorable foreign exchange effects of a stronger U.S. Dollar. In North America, maintenance costs increased $10.3 million, largely the result of increased car volumes related to increased assignment activity and increased repairs performed by railroads. In Europe, maintenance costs were $8.2 million lower, primarily due to the favorable foreign exchange effects of a stronger U.S. Dollar and the receipt of a manufacturer's reimbursement for the cost of warranty repairs performed by GATX.
Other was $0.4 million lower, primarily due to a reversal of a provision of losses of $6.9 million, partially offset by an asset impairment charge of $4.4 million. Both the provision reversal and the impairment charge were related to the restructuring of leases with a customer that had declared bankruptcy. Comparison of the Second Quarter 2009 to the Second Quarter 2008 Segment Profit
Rail's segment profit for the second quarter of 2009 was significantly impacted by a $7.5 million unrealized loss due to changes in the fair value of certain interest rate swaps at AAE. Segment profit for the second quarter of 2008 reflected a $5.5 million unrealized loss on interest rate swaps at AAE. Excluding the unrealized losses, Rail's segment profit decreased $24.0 million, primarily due to lower scrapping gains and lease income and the unfavorable foreign exchange effects of a stronger U.S. Dollar. Gross Income
Lease income in North America decreased $4.6 million, primarily due to $1.6 million of reduced rents on restructured leases resulting from customer bankruptcies and the absence of $1.3 million of income from certain non-performing leases in the current period. Additionally, during the second quarter of 2009, the average active fleet declined by approximately 900 railcars from the second quarter of 2008. The addition of 3,650 active cars from the December 2008 Allco fleet acquisition partially offset lease-end returns. In Europe, lease income decreased $6.3 million due to the unfavorable foreign exchange effects of a stronger U.S. Dollar, partially offset by an average of approximately 100 more cars on lease. Asset remarketing income increased $4.3 million as the current year included the disposition of nearly 500 railcars and 27 locomotives, while the prior year included the disposition of approximately 200 railcars. Other income was lower, primarily due to lower scrap income largely resulting from significantly lower steel prices. Affiliate earnings were lower due to the $7.5 million unrealized loss at AAE compared to the $5.5 million unrealized loss at AAE in 2008. Excluding the unrealized losses, 2009 affiliate earnings were lower due to lower operating earnings at AAE.
Ownership Costs
Ownership costs increased $2.9 million, primarily due to interest and depreciation associated with investment volume over the last 12 months, particularly the acquisition of the Allco fleet. The mix of ownership costs was impacted by the purchase of $70.1 million of previously leased-in assets in 2008.
Other Costs and Expenses
Maintenance expenses increased $1.1 million, primarily the result of higher car volumes, partially offset by the effect of the favorable foreign exchange effects of a stronger U.S. Dollar. In North America, maintenance costs were $5.6 million higher largely due to increased car volumes related to increased assignment activity. In Europe, maintenance costs were $4.5 million lower, primarily due to the favorable foreign exchange effects of a stronger U.S. Dollar and the receipt of a manufacturer's reimbursement for the cost of warranty repairs performed by GATX.

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Other was $0.6 million lower, primarily due to a reversal of a provision of losses of $6.9 million, partially offset by an asset impairment charge of $4.4 million. Both the provision reversal and the impairment charge were related to the restructuring of leases with a customer that had declared bankruptcy. Rail Regulatory Update
Rules Affecting TIH Cars. On January 13, 2009, the U.S. Pipeline and Hazardous Materials Safety Administration, in coordination with the Federal Railroad Administration ("FRA") issued final interim rules (the "FRA Interim Rules") that, among other things, establish new interim design standards for pressurized tank cars that transport toxic-by-inhalation hazardous materials ("TIH cars"). The designation "final interim" indicates that the FRA intends to continue to research enhanced design standards for TIH cars and will issue additional rulemaking in the future that will prescribe final design requirements. Under the FRA Interim Rules, TIH cars manufactured after the effective date of the rules must be built to a higher pressure class rating relative to U.S Department of Transportation specifications for tank cars. Unlike the original version of the rules proposed in April 2008, the FRA Interim Rules as adopted do not include a retirement schedule for TIH cars manufactured prior to effective date of the rules. However, the FRA Interim Rules require that existing TIH cars receive appropriate certification from the Association of American Railroads ("AAR") in order to remain in TIH service. The certification requirements are currently being developed by the AAR and, depending on the final certification requirements adopted, it is possible that some existing TIH cars will need to be removed from TIH service. Until these certification procedures are finalized, GATX cannot reasonably conclude what impact, if any, the FRA Interim Rules may have on GATX's tank car fleet. Once final certification standards are adopted, GATX will evaluate the technical requirements of the final design standards to determine the effect on its fleet.
In addition, the Tank Car Committee of the AAR had adopted rules in 2007 establishing new performance standards for TIH cars. However, in the third quarter of 2009, the AAR suspended indefinitely the implementation of those rules. As a result, design and performance standards for TIH are are now governed by the FRA Interim Rules and the forthcoming AAR certification requirements thereunder, rather than by the rules adopted by the AAR in 2007.
As of June 30, 2009, approximately 2,200 TIH cars remained in service in GATX's fleet (approximately 2% of its North American fleet) and, based upon management's review, GATX does not expect that the FRA Interim Rules will have a material impact on the Company's financial position or results of operations.
European Regulatory Developments. An immaterial number of railcars owned by GATX Rail Austria GmbH (an indirect subsidiary of the Company, "GATX Rail Austria") and its subsidiaries, have been affected by restrictions on their movement imposed by the Italian and French rail safety authorities. The restrictions are focused on attributes associated with certain wheelsets of the type installed on the railcars involved in the June 29, 2009 derailment in the city of Viareggio, Italy. (See Note 13 to the consolidated financial statements for further information on the derailment.) To clear these movement restrictions, it may be necessary for GATX Rail Austria and its subsidiaries to implement a wheelset inspection or replacement program or other maintenance initiatives. The scope and cost of any potential maintenance initiatives by GATX Rail Austria and its subsidiaries are not known at this time. The Company does not currently expect that any costs associated with these potential initiatives will be material to the Company's financial position or liquidity. However, any such costs could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

Specialty Segment Summary
Capital market volatility continues to create investment uncertainty for Specialty's industrial equipment customers, which has resulted in limited investment opportunities in 2009. Specialty's total asset base, including off balance sheet assets, was $611.4 million at June 30, 2009, compared to $654.4 million at December 31, 2008, and $565.5 million at June 30, 2008. During the first six months of 2009, Specialty invested $7.6 million, compared to . . .