10-K 1 gatx20161231-10k.htm 10-K Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2016
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2328
______________________
logo12312016.jpg
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, IL 60606-5314
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class or series
 
   Name of each exchange
   on which registered
Common Stock
 
New York Stock Exchange
Chicago Stock Exchange


Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ
-
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  
þ

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 ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer     o Accelerated filer     o Non-accelerated filer o 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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1.8 billion as of June 30, 2016.

As of January 31, 2017, 39.4 million common shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
GATX’s definitive Proxy Statement to be filed on or about March 24, 2017
PART III






GATX CORPORATION
2016 FORM 10-K
INDEX
Item No.
 
Page No.
Part I
 
Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
 
 
 
 
 
 
 
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
 
 
 

1


FORWARD-LOOKING STATEMENTS

Statements in this report not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and, accordingly, involve known and unknown risks and uncertainties that are difficult to predict and could cause our actual results, performance, or achievements to differ materially from those discussed. These statements include statements as to our future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance, prospects, or future events. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “likely,” “will,” and “would”, and similar words and phrases. Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the date they are made, and are not guarantees of future performance. We do not undertake any obligation to publicly update or revise these forward-looking statements.

The following factors, in addition to those discussed under "Risk Factors", and elsewhere in this report and in our other filings with the US Securities and Exchange Commission ("SEC"), could cause actual results to differ materially from our current expectations expressed in forward looking statements:
exposure to damages, fines, criminal and civil penalties, and reputational harm arising from a negative outcome in litigation, including claims arising from an accident involving our railcars
inability to maintain our assets on lease at satisfactory rates due to oversupply of railcars in the market or other changes in supply and demand
weak economic conditions and other factors that may decrease demand for our assets and services
decreased demand for portions of our railcar fleet due to adverse changes in the price of, or demand for, commodities that are shipped in our railcars
higher costs associated with increased railcar assignments following non-renewal of leases, customer defaults, and compliance maintenance programs or other maintenance initiatives
events having an adverse impact on assets, customers, or regions where we have a concentrated investment exposure
financial and operational risks associated with long-term railcar purchase commitments
reduced opportunities to generate asset remarketing income
operational and financial risks related to our affiliate investments, including the Rolls-Royce & Partners Finance joint ventures (collectively the “RRPF affiliates”)
fluctuations in foreign exchange rates
 
failure to successfully negotiate collective bargaining agreements with the unions representing a substantial portion of our employees
improvements in railroad efficiency that could decrease demand for railcars
the impact of regulatory requirements applicable to tank cars carrying crude, ethanol, and other flammable liquids
asset impairment charges we may be required to recognize
deterioration of conditions in the capital markets, reductions in our credit ratings, or increases in our financing costs
competitive factors in our primary markets, including competitors with a significantly lower cost of capital than GATX
risks related to international operations and expansion into new geographic markets
changes in, or failure to comply with, laws, rules, and regulations
inability to obtain cost-effective insurance
environmental remediation costs
inadequate allowances to cover credit losses in our portfolio
inability to maintain and secure our information technology infrastructure from cybersecurity threats and related disruption of our business



2


PART I

Item 1. Business

GENERAL

GATX Corporation ("GATX", "we,""us,""our," and similar terms), a New York corporation founded in 1898, is the leading global railcar lessor, owning fleets in North America, Europe, and Asia. In addition, we operate the largest fleet of US-flagged vessels on the Great Lakes and jointly with Rolls-Royce plc, we own one of the largest aircraft spare engine lease portfolios in the world. We report our financial results through four primary business segments: Rail North America, Rail International, American Steamship Company (“ASC”), and Portfolio Management.
 
The following description of our business should be read in conjunction with the information contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. For geographic and financial information relating to each of our reportable segments, see "Note 21. Foreign Operations" and "Note 23. Financial Data of Business Segments" included with our consolidated financial statements.

At December 31, 2016, we had total assets of $7.6 billion, comprised largely of railcars. This amount includes $0.5 billion of off-balance sheet assets, primarily railcars that were financed with operating leases.

OPERATIONS
GATX RAIL BUSINESS OVERVIEW

We strive to be recognized as the finest railcar leasing company in the world by our customers, our shareholders, our employees, and the communities where we operate. Our wholly owned fleet of approximately 146,300 railcars is one of the largest railcar lease fleets in the world. With more than a century of rail industry experience, we offer customers leasing, maintenance, asset, financial, and management expertise. We currently lease tank cars, freight cars, and locomotives in North America, tank cars and freight cars in Europe and freight cars in India and Russia. We also have an ownership interest in an affiliate investment that owns approximately 2,200 railcars, and we actively manage approximately 400 railcars for other third-party owners. The following table sets forth our worldwide rail fleet data as of December 31, 2016:
 
Tank
Railcars
 
Freight
Railcars (1)
 
Total Fleet
 
Affiliate
Railcars
 
Managed
Railcars
 
Total Railcars
 
Locomotives
Rail North America
60,916

 
61,312

 
122,228

 
2,219

 
418

 
124,865

 
660

Rail International
22,502

 
1,567

 
24,069

 

 
7

 
24,076

 

 
83,418

 
62,879

 
146,297

 
2,219

 
425

 
148,941

 
660



3


Our rail customers primarily operate in the petroleum, chemical, food/agriculture and transportation industries. Our worldwide railcar fleet consists of diverse railcar types that our customers use to ship more than 550 different commodities. The following table presents an overview of our railcar types as well as the industries of our customers and the commodities they ship.
 
General-Service Tank Cars
High-Pressure Tank Cars
Specialty and Acid Tank Cars
Specialty Covered Hoppers
Gravity Covered Hoppers
Open-Top Cars
Boxcars
Principal Industries Served
Petroleum
Petroleum
Chemical
Plastics
Agriculture
Energy
Food
Agriculture
Chemical
Petroleum
Food
Energy
Steel
Consumer Goods
Construction
 
 
Industrial
Industrial
Construction
Forest Products
Food
 
 
 
Construction
Forest Products
Packaging
Chemical
 
 
 
 
 
Construction
 
 
 
 
 
 
 
 
Principal Commodities
Refined Petroleum Products
Natural Gas Liquids
Sulfuric Acid
Plastics
Fertilizer
Coal
Packaged Food and Beverages
Fertilizer
Propylene
Molten Sulfur
Flour
Sand
Finished and Scrap Steel
Paper and Packaging
Crude Oil
Vinyl Chloride Monomer
Hydrochloric Acid
Sugar
Grain
Aggregates
Lumber and Building Products
Ethanol
 
Caustic Soda
Starch
Cement
Coke
Freight - All Kinds
Vegetable Oil
 
Phosphoric Acid
Carbon Black
Soda Ash
Woodchips
 

railitem1a02.jpg


4


RAIL NORTH AMERICA

Rail North America is composed of our operations in the United States, Canada, and Mexico. Rail North America primarily provides railcars pursuant to full-service leases under which it maintains the railcars, pays ad valorem taxes and property insurance, and provides administrative and other ancillary services. These railcars have estimated useful economic lives of 27 to 45 years and an average age of approximately 20 years. Rail North America has a large and diverse customer base, serving approximately 900 customers. In 2016, no single customer accounted for more than 6% of Rail North America’s total lease revenue, and the top ten customers combined accounted for approximately 24% of Rail North America’s total lease revenue. Rail North America leases railcars for terms that generally range from three to ten years, although leases may be for longer or shorter terms depending on market conditions. The average remaining lease term of the North American fleet was approximately three years as of December 31, 2016. Rail North America’s primary competitors are Union Tank Car Company, Wells Fargo Rail, the CIT Group, Trinity Industries Leasing Company, and SMBC Rail Services, LLC. Rail North America competes primarily on the basis of lease rate, maintenance capabilities, customer relationships, engineering expertise, and availability of railcars.

Rail North America can purchase new railcars from a number of manufacturers, including Trinity Industries, American Railcar Industries, Inc., National Steel Car Ltd., Freightcar America, and The Greenbrier Companies. We also acquire railcars in the secondary market. During 2014, we acquired more than 18,500 boxcars from General Electric Railcar Services Corporation for approximately $340 million (the "Boxcar Fleet"). In 2014, we entered into a long-term supply agreement with Trinity Rail Group, LLC ("Trinity") a subsidiary of Trinity Industries that took effect in mid-2016. Under the terms of that agreement, we may order up to 8,950 newly built railcars over a four-year period from March, 2016 through March, 2020. We may order either tank or freight cars; however, we expect that the majority of the order will be for tank cars. As of December 31, 2016, 3,173 railcars have been ordered, of which 776 railcars have been delivered. Pursuant to the terms of the agreement, the parties conducted a review of the contract pricing in January 2017 as it no longer reflected market rates. Based on this review, the parties agreed to reduce contract pricing for future orders pursuant to the terms of the agreement. Under a prior supply agreement with Trinity entered into in 2011, we ordered 12,500 newly built railcars, of which 12,313 railcars have been delivered as of December 31, 2016.

Rail North America also owns a fleet of locomotives, consisting of 631 older four-axle and 29 six-axle locomotives as of December 31, 2016. Locomotive customers are primarily Class I, regional, and short-line railroads and industrial users. Lease terms vary from month-to-month to 10 years. As of December 31, 2016, the average remaining lease term of the locomotive fleet was approximately six years. Rail North America's primary competitors in locomotive leasing are Wells Fargo Rail, CIT Group Inc., and Progress Rail Services Corporation. Competitive factors in the market include lease rates, customer service, maintenance, and availability.

Rail North America also remarkets rail assets, including assets managed for third parties and an affiliate. Remarketing activities related to GATX's owned fleet generate gains which may contribute significantly to Rail North America’s segment profit.

Maintenance

Rail North America operates an extensive network of maintenance facilities in the United States and Canada dedicated to performing safe, timely, efficient, and high quality maintenance for customers. Services include interior cleaning of railcars, routine maintenance and general repairs to the car body and safety appliances, regulatory compliance work, wheelset replacements, exterior blast and painting, and car stenciling. To the extent possible, railcar maintenance is scheduled in a manner that minimizes the amount of time the car is out of service. At December 31, 2016, Rail North America’s maintenance network consisted of:
Six major maintenance facilities that can complete all types of maintenance services.
Four maintenance facilities that primarily focus on routine cleaning, repair, and regulatory compliance services.
Six customer-dedicated sites operating solely within specific customer facilities that offer services tailored to the needs of our customers’ fleets.
Seventeen locations with mobile units that travel to many track-side field locations to provide spot repairs and interior cleaning services, thus avoiding the need to send a railcar to a major maintenance facility.

5


The maintenance network is supplemented by a number of preferred third-party maintenance facilities. In certain cases, we have entered into fixed-capacity contracts with these third parties under which Rail North America has secured access to maintenance capacity. In 2016, wholly owned and third-party maintenance facilities performed approximately 62,000 service events, including multiple independent service events for the same car. In 2016, third-party maintenance network expenses accounted for approximately 45% of Rail North America’s total maintenance network expenses (excludes repairs performed by railroads). Approximately 75% of the maintenance on our tank cars and specialty freight cars is performed internally.

Our maintenance activities are substantially dedicated to servicing our wholly owned railcar fleet pursuant to the provisions of our lease contracts. Additionally, our customers periodically require services that are not included in the full-service lease agreement, such as repair of railcar damage. We also provide maintenance services to one of our affiliates, as noted below. Revenue earned from these types of maintenance services is recorded in other revenue.

Affiliates

Adler Funding LLC ("Adler") is a 12.5% owned railcar leasing partnership that was formed in 2010 with UniCredit Bank AG, Sperber Rail Holdings Inc., and LBT Holding Corporation. Rail North America provides lease, maintenance and asset remarketing services to Adler, for which it receives a base service fee and a performance-based asset remarketing fee. As of December 31, 2016, Adler owned approximately 2,200 railcars in North America consisting of freight cars with an average age of approximately twelve years.

Southern Capital Corporation LLC (“SCC”) was a 50% owned joint venture with the Kansas City Southern Railroad, formed in 1996. During 2014 and 2015, SCC sold its remaining railcars and locomotives.

RAIL INTERNATIONAL

Rail International is composed of our wholly owned European operations ("GATX Rail Europe" or "GRE"), a wholly owned railcar leasing business in India ("Rail India"), and our operations in Russia ("Rail Russia"). GRE leases railcars to customers throughout Europe pursuant to full-service leases under which it maintains the railcars and provides value-adding services according to customer requirements. These railcars have estimated useful lives of 30 to 40 years and an average age of approximately 18 years. GRE has a diverse customer base with approximately 220 customers. In 2016, two customers each accounted for more than 10% of GRE's total lease revenue and the top ten customers combined accounted for approximately 60% of GRE's total lease revenue. GRE's lease terms generally range from one to ten years and as of December 31, 2016, the average remaining lease term of the European fleet was approximately two years. GRE competes principally on the basis of customer relationships, lease rate, maintenance expertise, and availability of railcars. Its primary competitors are VTG Aktiengesellschaft, the Ermewa Group, Nacco, a subsidiary of CIT Group Inc, Wascosa AG, and On Rail.

GRE acquires new railcars primarily from Astra Rail Industries S.R.L., Legios Loco a.s., and Feldbinder Spezialfahrzeugwerke GmbH. Additionally, GRE's Ostróda, Poland maintenance facility assembles several hundred tank cars each year. As of December 31, 2016, GRE has a firm commitment to acquire approximately 400 newly manufactured railcars to be delivered in 2017.

Rail India began operations in 2012 as the first company registered to lease railcars under the Indian Railways Wagon Leasing Scheme. In 2016, Rail India focused on pursuing investment opportunities in new and existing flat wagons, diversification of its fleet, and developing relationships with customers, suppliers and the Indian Railways. As of December 31, 2016 Rail India owned 777 railcars with estimated useful lives of 20-25 years. Rail India's lease terms, all of which are net leases, generally range from one to ten years and as of December 31, 2016, the average remaining lease term of the Indian fleet was approximately four years. In 2017, Rail India expects to continue to pursue investment opportunities to diversify and grow its fleet.

In 2016, Rail Russia focused on managing its small fleet, while developing relationships with potential, future customers. As of December 31, 2016, Rail Russia owned 170 railcars. In 2017, Rail Russia plans to expand its customer base and to pursue investment opportunities to grow its fleet.


6


Maintenance

GRE operates maintenance facilities in Hannover, Germany and Ostróda, Poland that perform significant repairs, regulatory compliance and modernization work for owned railcars. These service centers are supplemented by a number of third-party repair facilities, which in 2016 accounted for approximately 41% of GRE's fleet repair costs.

Similar to our Rail North America segment, Rail International's customers periodically require maintenance services that are not included in the full-service lease agreement. For GRE, these services are generally related to the repair of damages by customers and railways. Revenue earned from these maintenance activities is recorded in other revenue.

In India, all railcar maintenance is performed by the Indian Railways or an authorized third-party provider, in accordance with regulatory requirements.

Affiliates

In 2012, IMC-GATX Financial Leasing (Shanghai) Co., Ltd. (“IMC-GATX China”) was established as a 50% owned China-based joint venture between GATX and IMC Pan Asia Alliance Group (“IMC”) to pursue investing opportunities in rail or other equipment. IMC is a well-established shipping enterprise with experience operating in China and was also our partner in a marine joint venture until we sold our interest in 2015. We have made the determination to exit the joint venture and are in discussions with IMC to dispose of our interest in IMC-GATX China.

ASC

ASC operates the largest fleet of US-flagged vessels on the Great Lakes and strives to attain the highest levels of safety, delivery efficiency, and environmental stewardship. ASC provides waterborne transportation of dry bulk commodities such as iron ore, coal, limestone aggregates, and metallurgical limestone, which serve end markets that include steel making, domestic automobile manufacturing, electricity generation, and non-residential construction. Customer service, primarily in the form of scheduling flexibility, reliability, and operating safety, is key to ASC’s success. ASC’s sailing season generally runs from April 1 through December 31; however, depending on customer demand and weather conditions, vessels may commence operations during March and continue to operate into January of the following year.

At December 31, 2016, ASC’s fleet consisted of 17 vessels with a net book value of $233.9 million and $2.6 million of off-balance sheet assets. All vessels are environmentally and operationally compliant. Fourteen of the vessels are diesel powered, have an average age of 39 years, and estimated useful lives of 65 years. Two steam powered vessels were built in the 1940s and 1950s and have estimated remaining useful lives of three years. The other vessel in ASC's fleet is a diesel-powered articulated tug-barge built in 2012, which is leased by ASC under an operating lease that expires in April 2017. ASC has made the decision to return the vessel at lease expiration. For 2017, fifteen of ASC’s vessels are generally available for both service contracts and spot business; the remaining vessel is dedicated to a time charter agreement that is scheduled to expire following the 2018 sailing season. ASC’s vessels operate exclusively in the fresh water of the Great Lakes and as a result, with proper maintenance and periodic refurbishment, may achieve extended service well beyond the useful life estimates.
ascitem1a02.jpg

7




All of ASC’s vessels are equipped with self-unloading equipment, enabling them to discharge dry bulk cargo without shore-side assistance. This equipment enables the vessels to operate twenty-four hours a day, seven days a week. ASC’s vessels are capable of transporting and unloading almost any free flowing, dry bulk commodity. In 2016, ASC served 25 customers with the top five customers accounting for 83% of total revenue.

The following table sets forth ASC's fleet as of December 31, 2016:
Great Lakes Vessels
 
Length (feet)
 
Capacity (gross tons)
M/V American Spirit
 
1004'
 
62,400
M/V Burns Harbor
 
1000'
 
80,900
M/V Indiana Harbor
 
1000'
 
80,900
M/V Walter J. McCarthy, Jr
 
1000'
 
80,900
M/V American Century
 
1000'
 
78,850
M/V American Integrity
 
1000'
 
78,850
M/V St. Clair
 
770'
 
44,800
M/V American Mariner
 
730'
 
37,300
M/V H. Lee White
 
704'
 
35,400
M/V John J. Boland
 
680'
 
34,000
M/V Adam E. Cornelius
 
680'
 
29,200
M/V Buffalo
 
634'-10"
 
24,300
M/V Sam Laud
 
634'-10"
 
24,300
M/V American Courage
 
634'-10"
 
23,800
Str. American Victory
 
730'
 
26,300
Str. American Valor
 
767'
 
25,500
Ken Boothe and Lakes Contender (articulated tug-barge) (1)
 
740'
 
34,000
________
(1) ASC operates the vessel pursuant to a lease agreement that expires in April, 2017, at which time the vessel will be returned to the lessor.

ASC’s vessels operate pursuant to customer contracts that stipulate freight volume and may also be supplemented with additional spot volume opportunities. In 2016, ASC operated 11 vessels and carried 25.4 million net tons of cargo. The number of vessels deployed by ASC in any given year is dependent on customer volume requirements.

ASC’s primary competitors on the Great Lakes are Interlake Steamship Company, Great Lakes Fleet, Inc., Grand River Navigation, Central Marine Logistics, and VanEnkevort Tug and Barge. ASC principally competes on the basis of service capabilities, customer relationships, and price.

The United States shipping industry is subject to the Jones Act, which requires all commercial vessels transporting goods between US ports to be built, owned, operated and manned by US citizens, and registered under the US flag.


8


PORTFOLIO MANAGEMENT

Portfolio Management is composed primarily of our ownership in a group of joint ventures with Rolls-Royce plc that lease aircraft spare engines, as well as five liquefied gas carrying vessels and assorted other marine assets. In prior years, Portfolio Management generated leasing, marine operating, asset remarketing, and management fee income through a collection of diversified wholly owned assets and joint venture investments. In 2015, we made the decision to exit the majority of the marine investments within our Portfolio Management segment, including six chemical parcel tankers, a number of inland marine vessels, and our 50% interest in the Cardinal Marine joint venture. The six chemical parcel tankers, the majority of our inland marine vessels, and our 50% interest in the Cardinal Marine joint venture were sold during 2015 and 2016, with the remainder expected to be sold in 2017. See the Portfolio Management section in Part II, Item 7 of this Form 10-K for further details.

pmitem1assets.jpg

The following table sets forth the approximate net book value of Portfolio Management’s assets as of December 31 (in millions):
 
 
Owned Assets
 
Affiliate Investments
 
Managed
Assets
2016
$
218.2

 
$
375.3

 
$
51.8

2015
301.4

 
335.1

 
114.5

2014
474.6

 
338.7

 
64.1


Owned and Managed Assets

Portfolio Management's wholly owned portfolio consists of marine assets operating in pooling arrangements, assets subject to operating and finance leases, and secured loans. As of December 31, 2016, $45.6 million of the owned assets were held for sale. Upon completion of the disposal of these assets, Portfolio Management's remaining owned assets will consist primarily of five liquefied gas carrying vessels operating under a pooling arrangement.

Portfolio Management also manages portfolios of assets for third parties which generate fee and residual sharing income through portfolio administration and the remarketing of these assets.

Affiliates

The Rolls-Royce & Partners Finance companies (collectively the “RRPF affiliates”) are a group of fifteen 50% owned domestic and foreign joint ventures with Rolls-Royce plc (or affiliates thereof, collectively “Rolls-Royce”), a leading manufacturer of commercial aircraft jet engines. The RRPF affiliates are primarily engaged in two business activities: lease financing of aircraft spare engines to a diverse group of commercial aircraft operators worldwide and sale-leaseback financing of aircraft spare engines to Rolls-Royce for use in their engine maintenance programs. As of December 31, 2016, the RRPF affiliates, in aggregate, owned 407 engines, of which 211 were on lease to Rolls-Royce. Aircraft engines generally have an estimated economic useful life of 25 years when new and, depending on actual hours of usage and with proper maintenance, may achieve extended service well beyond the useful life estimates. As of

9


December 31, 2016, the average age of these engines was approximately 11 years. Lease terms vary but typically range from 3 to 12 years. Rolls-Royce acts as manager for each of the RRPF affiliates and also performs substantially all required maintenance activities.

Cardinal Marine Investments LLC (“Cardinal Marine”) was a 50% owned marine joint venture with IMC Holdings, a subsidiary of IMC. IMC is a leading Asia-focused integrated maritime and industrial solutions provider with diversified interests in dry and liquid bulk shipping, ship and crew management, offshore and marine engineering, oil and gas assets, and services and logistics. Cardinal Marine owned five chemical parcel tankers (each with 45,000 dead weight tons carrying capacity) that operated under a pooling arrangement with IMC's other chemical tankers in support of the movement of liquid bulk chemicals in the Middle East Gulf/Far East and US Gulf/Far East trades. In 2015, we sold our interest in this joint venture to our partner, IMC Holdings.

Intermodal Investment Funds V and VII were each 50% owned joint ventures with DVB Bank SE. The affiliates were formed to finance shipping containers, which were on direct finance leases to third parties. In 2014, we sold our investments in these joint ventures.

TRADEMARKS, PATENTS AND RESEARCH ACTIVITIES

Patents, trademarks, licenses and research and development activities are not material to our businesses taken as a whole.

SEASONAL NATURE OF BUSINESS

ASC’s fleet is inactive for a significant portion of the first quarter of each year due to the winter conditions on the Great Lakes.

CUSTOMER BASE

GATX, taken as a whole, is not dependent upon a single customer nor does it have any significant customer concentrations. Segment concentrations, if material, are described above.


10


EMPLOYEES AND EMPLOYEE RELATIONS

As of December 31, 2016, we employed 2,260 persons, of whom approximately 43% were union workers covered by collective bargaining agreements.

See "Note 13. Concentrations" in Part II, Item 8 of this Form 10-K for additional information about our employees and concentration of labor force.

ENVIRONMENTAL MATTERS

Our operations, facilities and properties are subject to extensive federal, state, local, and foreign environmental laws and regulations. These laws cover discharges to waters; air emissions; toxic substances; the generation, handling, storage, transportation, and disposal of waste and hazardous materials; and the investigation and remediation of contamination. These laws have the effect of increasing the cost and liability associated with leasing and operating assets, and violations can result in significant fines, penalties, or other liabilities. Environmental risks and compliance with applicable environmental laws and regulations are inherent in rail operations, which frequently involve transporting chemicals and other hazardous materials.

We are subject to, and may from time to time continue to be subject to, environmental cleanup and enforcement actions in the US and in the foreign countries in which we operate. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the Superfund law, generally imposes joint and several liability for investigation, cleanup and enforcement costs on current and former owners and operators of a site, without regard to fault or the legality of the original conduct. Accordingly, we have been and may, in the future, be named as a potentially responsible party under CERCLA and other federal, state, local, and foreign laws or regulations for all or a portion of the costs to investigate and clean up sites at which certain contaminants may have been discharged or released by us, our current lessees, former owners or lessees of properties, or other third parties. Environmental remediation and other environmental costs are accrued when considered probable and amounts can be reasonably estimated. As of December 31, 2016, environmental costs were not material to our financial position, results of operations or cash flows. For further discussion, see "Note 22. Legal Proceedings and Other Contingencies" in Part II, Item 8 of this Form 10-K.


EXECUTIVE OFFICERS OF THE REGISTRANT

The following information regarding our executive officers is included in Part I in lieu of inclusion in our definitive Proxy Statement:
 
 
Name
 
 
Offices Held
Position Held Since
 
Age
Brian A. Kenney
Chairman, President and Chief Executive Officer
2005
 
57
Robert C. Lyons
Executive Vice President and Chief Financial Officer
2012
 
53
James F. Earl
Executive Vice President and President, Rail International
2012
 
60
Thomas A. Ellman
Executive Vice President and President, Rail North America
2013
 
48
Deborah A. Golden
Executive Vice President, General Counsel and Corporate Secretary
2012
 
62
Niyi A. Adedoyin
Senior Vice President and Chief Information Officer
2016
 
49
Michael T. Brooks
Senior Vice President and Chief Operations Officer, Rail North America
2016
 
47
James M. Conniff
Senior Vice President, Human Resources
2014
 
59
William M. Muckian
Senior Vice President, Controller and Chief Accounting Officer
2007
 
57
Paul F. Titterton
Senior Vice President and Chief Commercial Officer, Rail North America
2015
 
41
Eric D. Harkness
Vice President, Treasurer and Chief Risk Officer
2012
 
44
Jeffery R. Young
Vice President and Chief Tax Officer
2015
 
54

Mr. Kenney has served as Chairman, President and Chief Executive Officer since 2005. Previously, Mr. Kenney served as President from 2004 to 2005, Senior Vice President, Finance and Chief Financial Officer from 2002 to 2004, Vice President, Finance and Chief

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Financial Officer from 1999 to 2002, Vice President, Finance from 1998 to 1999, Vice President and Treasurer from 1997 to 1998, and Treasurer from 1995 to 1996.

Mr. Lyons has served as Executive Vice President and Chief Financial Officer since June 2012. Previously, Mr. Lyons served as Senior Vice President and Chief Financial Officer from 2007 to June 2012, Vice President and Chief Financial Officer from 2004 to 2007, Vice President, Investor Relations from 2000 to 2004, Project Manager, Corporate Finance from 1998 to 2000, and Director of Investor Relations from 1996 to 1998.

Mr. Earl has served as Executive Vice President and President, Rail International since June 2012. In addition, Mr. Earl has served as the Chief Executive Officer of American Steamship Company since June 2012. Previously, Mr. Earl served as Executive Vice President and Chief Operating Officer from 2006 to June 2012, Executive Vice President — Rail from 2004 to 2006, Executive Vice President — Commercial at Rail from 2001 to 2004 and in a variety of increasingly responsible positions in the GATX Capital Rail Group from 1988 to 2001.

Mr. Ellman has served as Executive Vice President and President, Rail North America since June 2013. Previously, Mr. Ellman served as Senior Vice President and Chief Commercial Officer from November 2011 to June 2013, Vice President and Chief Commercial Officer from 2006 to November 2011. Prior to re-joining GATX in 2006, Mr. Ellman served as Senior Vice President and Chief Risk Officer and Senior Vice President, Asset Management of GE Equipment Services, Railcar Services and held various positions at GATX in the GATX Rail Finance Group.

Ms. Golden has served as Executive Vice President, General Counsel and Corporate Secretary since June 2012. Previously, Ms. Golden served as Senior Vice President, General Counsel and Corporate Secretary from 2007 to June 2012. Ms. Golden joined GATX in 2006 as Vice President, General Counsel and Corporate Secretary. Prior to joining GATX, Ms. Golden served as Vice President and General Counsel of Midwest Generation, LLC from 2004 to 2005, Deputy General Counsel, State of Illinois, Office of the Governor from 2003 to 2004 and Assistant General Counsel with Ameritech Corporation/SBC Communications, Inc. from 1997 to 2001.

Mr. Adedoyin was elected Senior Vice President and Chief Information Officer in January 2016. Previously, Mr. Adedoyin served as Vice President and Chief Information Officer from 2013 to 2016 and Senior Director, IT Strategy and Project Management Office from 2008 to 2013.

Mr. Brooks was elected Senior Vice President and Chief Operations Officer, Rail North America in April 2016. Previously, Mr. Brooks served as Senior Vice President, Operations and Technology since June 2013 and Senior Vice President and Chief Information Officer from January 2008 to June 2013. Prior to joining GATX, Mr. Brooks served as Chief Information Officer and Vice President of the retail division of Constellation Energy and held various consulting roles of increasing responsibility with Accenture and Oracle Corporation.

Mr. Conniff has served as Senior Vice President, Human Resources since December 2014. Previously, Mr. Conniff served as Vice President, Human Resources since 2014 and Senior Director, Benefits and Employee Services since 2008. Mr. Conniff joined GATX in 1981 and has held a variety of positions in finance and human resources.

Mr. Muckian has served as Senior Vice President, Controller and Chief Accounting Officer since 2007. Previously, Mr. Muckian served as Vice President, Controller and Chief Accounting Officer from 2002 to 2007, Controller and Chief Accounting Officer from 2000 to 2002, and Director of Taxes of GATX from 1994 to 2000.

Mr. Titterton has served as Senior Vice President and Chief Commercial Officer, Rail North America since April 2015. Previously, Mr. Titterton served as Vice President and Chief Commercial Officer from June 2013 to April 2015, Vice President and Group Executive, Fleet Management, Marketing and Government Affairs from December 2011 to June 2013, Vice President and Executive Director, Fleet Management from 2008 to 2011, and in a variety of increasingly responsible positions since joining the company in 1997.

Mr. Harkness has served as Vice President, Treasurer and Chief Risk Officer since October 2012. Previously, Mr. Harkness served as Vice President, Chief Risk Officer from September 2010 to October 2012 and Senior Investment Risk Officer from 2007 to September 2010. Prior to joining GATX, Mr. Harkness served in a variety of positions of increasing responsibility in the financial services industry.


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Mr. Young has served as Vice President and Chief Tax Officer since January 2015. Previously, Mr. Young served as Vice President of Tax from 2007 to January 2015 and as Director of Tax from 2003 to 2007. Prior to joining GATX, Mr. Young spent twenty years in a variety of tax related positions in public accounting and the financial services industry.


AVAILABLE INFORMATION

We make available free of charge at our website, www.gatx.com, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the US Securities and Exchange Commission (“SEC”). Charters for the Audit Committee, Compensation Committee and Governance Committee of the Board of Directors, the Corporate Governance Guidelines, the Code of Business Conduct and Ethics and the Code of Ethics for Senior Company Officers are posted under Corporate Governance in the Investor Relations section of our website, and are available in print upon request by any shareholder. Within the time period prescribed by SEC and New York Stock Exchange regulations, we will post on our website any amendment to the Code of Ethics for Senior Company Officers and the Code of Business Conduct and Ethics or any waivers thereof. The information on our website is not incorporated by reference into this report.

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Item 1A.  Risk Factors

Investors should consider the risk factors described below as well as other information contained in this filing or our other filings with the US Securities and Exchange Commission before investing in our securities. If any of the events described in the risk factors below occur, our business, financial condition and results of operations could be materially adversely affected.

We have been and may continue to be involved in various types of litigation, including claims for personal injury, property damage, environmental damage, and other claims arising from an accident involving our railcars.

The nature of our business and our assets potentially exposes us to significant personal injury and property damage claims and litigation, environmental claims, or other types of lawsuits inside and outside the US. Customers use certain types of our railcars to transport flammable liquids and other hazardous materials, and an accident involving our railcars could lead to litigation and subject us to significant liability, particularly where the accident involves serious personal injuries or the loss of life. If we do not maintain railcars in compliance with governmental regulations and industry rules, we could be subject to fines, penalties, and claims for personal injury, property damage, and environmental damage. In some jurisdictions, an accident can give rise to both civil and criminal liabilities for us and, in some cases, our employees. In the event of an unfavorable outcome, we could be subject to substantial penalties or monetary damages, including criminal penalties and fines, and our employees who are named as criminal defendants in any such litigation may be subject to incarceration and fines. A substantial adverse judgment against us could have a material effect on our financial position, results of operations, cash flows, and reputation.

We may be unable to maintain assets on lease at satisfactory rates due to decreases in customer demand, oversupply of railcars in the market, or other changes in supply and demand.

Our profitability depends on our ability to lease assets at satisfactory rates and to re-lease assets upon lease expiration. Circumstances such as excess capacity in particular railcar types or generally in the marketplace, decreases in customer demand for our railcars, economic downturns, changes in customer behavior, or other changes in supply or demand can adversely affect asset utilization rates and lease rates. Economic uncertainty or a decline in customer demand for our assets could cause customers to request shorter lease terms and lower lease rates, which may result in a decrease in our asset utilization rate and reduced revenues. Alternatively, customers may seek to lock-in relatively low lease rates for longer terms, which may result in an adverse impact on current or future revenues.

Weak economic conditions and other factors may decrease customer demand for our assets and services and negatively impact our business and results of operations.

We rely on continued demand from our customers to lease our railcars. Demand for these assets and services depends on the markets for our customers’ products and services and the strength and growth of their businesses. Some of our customers operate in cyclical markets, such as the steel, energy, chemical, and construction industries, which are susceptible to macroeconomic downturns and may experience significant changes in demand over time. Weakness in certain sectors of the economy in the United States and other parts of the world may make it more difficult for us to lease certain types of railcars that are either returned at the end of a lease term or returned as a result of a customer bankruptcy or default.

Additional factors, such as changes in harvest or production volumes, changes in supply chains, choices in types of transportation assets, availability of pipelines or other modes of transportation, and other operational needs may also influence customer demand for our assets. Demand for our marine assets and shipping services also depends on many of the factors discussed above. Significant declines in customer demand for our assets and services could adversely affect our financial performance.

In many cases, demand for our assets also depends on our customers’ desire to lease, rather than buy, the assets. Tax and accounting considerations, interest rates, and operational flexibility, among other factors, may influence a customer’s decision to lease or buy assets. We have no control over these external considerations, and changes in these factors, including anticipated changes to lease accounting rules, could negatively impact demand for our assets held for lease.

Adverse changes in the price of, or demand for, commodities could reduce demand for our railcars and have a negative impact on our results of operations.

Adverse changes in commodity prices or reduced demand for commodities could reduce customer demand for various types of railcars in our fleet. A significant decrease in the price of a commodity may cause producers of that commodity to reduce their production levels. A significant increase in the price of a commodity could cause our customers to switch to less expensive alternatives that are not delivered by rail. In each case, these changes in customer behavior can reduce demand for the portions of our fleet that are used to transport the commodity.


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Demand for railcars that are used to transport crude oil and related products, including commodities used in drilling operations and commodities produced by refineries, is dependent on the demand for these commodities. While only about 1.4% of our worldwide fleet is engaged in the shipment of crude oil, approximately 21% of our North American fleet is leased to refiners and other petroleum-related customers, making them an important source of our worldwide revenue. Sustained low oil prices have caused and may continue to cause oil producers to curtail the drilling of new wells or cease production at certain existing wells that are uneconomical to operate at current crude price levels. Reduced oil drilling activity has resulted in and may continue to result in decreased demand for our railcars used to transport the commodities used in drilling operations, such as frac sand and fracking chemicals, and the commodities produced by drilling operations, including crude oil and natural gas liquids. Market conditions unfavorable to refiners could result in decreased shipments of refined products such as gasoline, diesel fuel, petrochemicals and natural gas liquids. Sustained low prices for crude oil and/or the existence of unfavorable market conditions for North American refiners could reduce (and in some cases have already reduced) customer demand for our railcars and negatively impact revenue and our results of operations.

Demand for railcars that are used to transport ethanol and other renewable fuels may be affected by government subsidies and mandates, which may be enacted, changed, or eliminated from time to time. It is possible that the reduction or elimination of current US mandates for ethanol blending in motor fuels could reduce the production of ethanol, which would reduce demand for portions of our tank car fleet and negatively impact our revenue and profitability.

A significant decrease in lease renewals by our customers or a significant increase in the number of tank cars requiring compliance-based maintenance could negatively impact operations and substantially increase our costs.

Decreases in customer demand for our railcars could increase the number of leases that are not renewed upon expiration, resulting in the early return of railcars. Railcars that are returned by our customers often must undergo maintenance and service work before being leased to new customers. A significant increase in the number of railcars requiring maintenance may negatively affect our operations and substantially increase maintenance and other related costs. In addition, low demand for certain types of railcars in our fleet may make those railcars more difficult to lease to new customers if they are returned at the end of their existing leases or following a customer default, which could negatively affect our results of operations.

We also perform a variety of government or industry-mandated maintenance programs on our full-service tank cars based on their service time. These compliance programs are cyclical in nature, and as a result, we can face significant increases in the volume of tank cars requiring extensive maintenance in any given year. A significant increase in the number of tank cars requiring maintenance may negatively impact our operations and substantially increase maintenance and other related costs. In addition, while we have contracted with third party maintenance providers to assist with these compliance procedures to the extent our demand exceeds our owned maintenance capacity, high demand faced by these providers from other tank car owners may constrain our access to the providers or may substantially increase our costs.

Events that negatively affect certain assets, customers, or geographic regions could have a negative impact on our results of operations.

We generally derive our revenues from a variety of asset types, customers, industries, and geographic locations. However, from time to time we could have a large investment in a particular asset type, a large revenue stream associated with a particular customer or industry, or a large number of customers located in a particular geographic region. Decreased demand from a discrete event impacting a specific asset type, customer, industry, or region in which we have a concentrated exposure could negatively impact our results of operations.


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Our long-term railcar purchase commitments could subject us to material operational and financial risks.

Unlike some of our competitors in the railcar leasing market, we do not manufacture railcars. In order to obtain committed access to a supply of newly built railcars on competitive terms, we regularly enter into long-term supply agreements with manufacturers to purchase significant numbers of newly built railcars over a multi-year period. Some of these agreements may provide for flexibility in the pricing, timing, and quantity of our purchasing commitments, while other agreements may provide no such flexibility. Therefore, if economic conditions weaken during the term of a long-term supply agreement, it is possible that we may be required to continue to accept delivery of, and pay for, new railcars at times when it may be difficult for us to lease such railcars and our financing costs may be high, which could negatively affect our revenues and profitability.

Soft market conditions and declines in asset values may reduce opportunities for us to generate remarketing income.

We utilize our extensive knowledge and experience to remarket rail assets in order to optimize the composition of our fleet, and these activities generate income that contributes significantly to Rail North America’s segment profit.  Reduced demand for our assets due to adverse market conditions could reduce opportunities for us to generate remarketing income.  A significant or prolonged decline in the secondary market for our assets could adversely affect our financial performance.

We have significant financial exposure related to the performance of our aircraft engine leasing affiliate investments.

GATX and Rolls-Royce plc (“Rolls Royce”) each own 50% of fifteen domestic and foreign joint venture entities (collectively, the “RRPF affiliates”) that own and lease aircraft engines to Rolls-Royce and owners and operators of commercial aircraft. These investments expose us to various risks associated with the commercial aviation industry, including geographic exposure and customer concentrations unique to that industry. The financial results of the RRPF affiliates depend heavily on the performance of Rolls-Royce, as Rolls-Royce is both a major customer of, and a critical supplier of maintenance services to, the RRPF affiliates. The RRPF affiliates contribute significantly to our financial results. If the financial or operating performance of the RRPF affiliates deteriorates, our results of operations and cash flows could be negatively affected.

Fluctuations in foreign exchange rates and interest rates could negatively impact our results of operations.

Upon consolidation, we translate the financial results of certain subsidiaries from their local currency to the US dollar, which exposes us to foreign exchange rate fluctuations. As exchange rates vary, the translated operating results of foreign subsidiaries may differ materially from period to period. We also have gains and losses on foreign currency transactions, which could vary based on fluctuations in exchange rates and the timing of the transactions and their settlement. In addition, fluctuations in foreign exchange rates can affect the demand and price for services we provide both domestically and internationally, and could negatively impact our results of operations. We also face risks associated with fluctuations in interest rates. We may seek to limit our exposure to foreign exchange rate and interest rate risk with currency or interest rate derivatives, which may or may not be effective. A material and unexpected change in interest rates or foreign exchange rates could negatively affect our financial performance.

Many of our employees are represented by unions, and failure to successfully negotiate collective bargaining agreements may result in strikes, work stoppages, or substantially higher labor costs.

A significant portion of our employees are represented by labor unions and work under collective bargaining agreements that cover a range of workplace matters, such as wages, health and welfare benefits, and work rules. We have generally been successful in negotiating acceptable agreements with the unions without experiencing material work stoppages. However, if we fail to negotiate acceptable new agreements, our business could be disrupted by strikes or lockouts. We could also incur increased operating costs due to higher wages or benefits paid to union workers. Business disruptions or higher operating costs could both have an adverse effect on our financial position, results of operations, or cash flows.

Changes in railroad efficiency may adversely affect demand for our railcars.

Railroad infrastructure investments that improve efficiency or declines in rail traffic due to decreased demand could increase the average speed at which railroads can operate their trains, which may reduce the number of railcars needed for railroads to haul the same amount of cargo. Adverse weather conditions, railroad mergers, and increases in rail traffic could result in slower transit times making rail transportation less attractive to shippers versus other modes of transport. In each case, these changes could reduce demand for our railcars and negatively impact revenue and our results of operations.


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Rules in the US and Canada applicable to tank cars carrying crude oil, ethanol, and other flammable liquids have negatively impacted and may continue to negatively impact our tank car fleet in flammable liquids service.

In 2015, legislators and regulatory authorities in the US and Canada adopted legislation and regulations that revised the design standards for tank cars used to transport various flammable liquids. Existing tank cars in flammables service that were built prior to the adoption of the revised design standards must be modified or removed from service between November, 2016, and May, 2029, depending on the type of car, the type of commodity carried, and whether the car is used in the US, Canada, or both countries. We have a fleet of approximately 122,000 railcars in North America, including approximately 12,200 tank cars currently used to transport flammable liquids that are affected by the new rules, of which approximately 3,800 are moving crude oil and ethanol. Over 90% of our affected tank cars have a compliance deadline of 2023 or later. We expect to modify some of the most modern of our affected cars tank cars to comply with the new standards. However, for the majority of the affected cars, we currently anticipate retiring, redeploying, or selling them rather than performing retrofits. We have recognized an impairment charge on approximately 2,400 of the affected railcars to write them down to their estimated fair value, and we could incur additional impairment charges in the future. The additional costs to modify certain tank cars and the cost of retiring tank cars early could have an adverse impact on our business and results of operations.

We may incur future asset impairment charges.

We review long-lived assets and joint venture investments for impairment regularly, or when circumstances indicate the carrying value of an asset or investment may not be recoverable. Among other circumstances, the following may change our estimates of the cash flows we expect our long-lived assets or joint venture investments will generate, which could require us to recognize asset impairment charges:

A weak economic environment or challenging market conditions
New laws, rules or regulations affecting our assets, or changes to existing laws, rules or regulations
Events related to particular customers or asset types
Asset or portfolio sale decisions by management

Deterioration of conditions in the global capital markets or negative changes in our credit ratings may limit our ability to secure financing and may increase our borrowing costs.

We rely largely on banks and capital markets to fund our operations and contractual commitments, including the issuance of long-term debt instruments and commercial paper. These markets can experience high levels of volatility and access to capital can be limited for an extended period of time. In addition to conditions in the capital markets, changes in our financial performance or credit ratings or ratings outlook, as determined by rating agencies such as Standard & Poor’s and Moody’s Investors Service, could cause us to incur increased borrowing costs or to have greater difficulty accessing public and private markets for secured and unsecured debt. If we are unable to secure financing on acceptable terms, our other sources of funds, including available cash, bank facilities, cash flow from operations, and portfolio proceeds, may not be adequate to fund our operations and contractual commitments.

Competition could result in decreased profitability.

We operate in a highly competitive business environment. In certain cases, our competitors are larger than we are and have greater financial resources, higher credit ratings, and a lower cost of capital. These factors may enable our competitors to offer leases to customers at lower rates than we can provide, thus negatively impacting our profitability, asset utilization and investment volume.

Risks related to our international operations and expansion into new geographic markets could adversely affect our business, financial condition, and operating results.

We generate a significant amount of our net income outside the United States. In recent years, we have increased our focus on international rail growth and expansion into select emerging markets as a means to grow and diversify earnings. Our foreign operations and international expansion strategy are subject to the following risks associated with international operations:

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Noncompliance with US laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act
Noncompliance with a variety of foreign laws and regulations
Failure to properly implement changes in tax laws and the interpretation of those laws
Failure to develop and maintain data management practices that comply with laws related to cybersecurity, privacy, data localization, and data protection
Fluctuations in currency values
Sudden changes in foreign currency exchange controls
Discriminatory or conflicting fiscal policies
Difficulties enforcing contractual rights or foreclosing to obtain the return of our assets in certain jurisdictions
Uncollectible accounts and longer collection cycles that may be more prevalent in foreign countries
Ineffective or delayed implementation of appropriate controls, policies, and processes across our diverse operations and employee base
Imposition of sanctions against countries where we operate or specific companies or individuals with whom we do business
Nationalization or confiscation of assets by foreign governments, and imposition of additional or new tariffs, quotas, trade barriers, and similar restrictions on our operations outside the United States.

Our rail and marine assets and operations are subject to various laws, rules, and regulations. If these laws rules, and regulations change or we fail to comply with them, it could have a significant negative effect on our business and profitability.

Our rail and marine operations are subject to various laws, rules, and regulations administered by authorities in jurisdictions where we do business. In North America, our railcar fleet and operations are subject to safety, operations, maintenance, and mechanical standards, rules, and regulations enforced by various federal and state agencies and industry organizations, including the US Department of Transportation, the Federal Railroad Administration, the Pipeline and Hazardous Materials Safety Administration of the US Department of Transportation, Transport Canada, and the Association of American Railroads. State and provincial agencies regulate some health and safety matters related to rail operations not otherwise preempted by federal law. Our business and our railcar fleet may be adversely impacted by new rules or regulations, or changes to existing rules or regulations, which could require additional maintenance or substantial modification or refurbishment of our railcars, or could make certain types of railcars inoperable or obsolete or require them to be phased out prior to the end of their useful lives. In addition, violations of these rules and regulations can result in substantial fines and penalties, including potential limitations on operations or forfeitures of assets.

Similarly, our marine assets and operations are subject to rules and regulations relating to safety, US citizen ownership requirements, emissions, ballast discharges, and other environmental and operational matters enforced by various federal and state agencies, including the Maritime Administration of the US Department of Transportation, the US Coast Guard, and the US Environmental Protection Agency. If we fail to comply with these rules and regulations, we could be prohibited from operating or leasing marine assets in the US market, and under certain circumstances, could incur severe fines and penalties, including potential limitations on operations or forfeitures of assets.

In addition, our foreign operations are subject to the jurisdiction of authorities in countries where we do business. If we fail to comply with these laws, rules, and regulations, or if they change in the future, the use of our assets could be restricted, or the economic value of our assets may be reduced. These restrictions or reductions could lead to loss of revenue or cause us to incur significant expenses to comply with laws, rules, and regulations, thereby increasing operating expenses. Certain changes to or actions by authorities under existing laws, rules, and regulations, or actions, could result in the obsolescence of various assets or impose compliance costs that are significant enough to render those assets economically obsolete.

We may not be able to obtain cost-effective insurance.

We manage our exposure to risk, in part, by purchasing insurance. There is no guarantee that cost-effective insurance will consistently be available. If insurance coverage becomes prohibitively expensive, we could be forced to reduce our coverage amount and increase the amount of self-insured risk we retain, thereby increasing our exposure to uninsured adverse judgments and other losses and liabilities that could have a material effect on our financial position, results of operations and cash flows.


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We are subject to extensive environmental regulations and the costs of remediation may be material.

We are subject to extensive federal, foreign, state, and local environmental laws and regulations concerning, among other things, the discharge of hazardous materials and remediation of contaminated sites. In addition, some of our properties, including those previously owned or leased, have been used for industrial purposes, which may have resulted in discharges onto these properties. Environmental liability can extend to previously owned or operated properties in addition to properties we currently own or use. Additionally, we could incur substantial costs, including cleanup costs, fines and costs arising out of third-party claims for property or natural resource damage and personal injury as a result of violations of or liabilities under environmental laws and regulations in connection with our or our lessees’ current or historical operations. Under some environmental laws in the United States and certain other countries, the owner of a leased railcar may be liable for environmental damage, cleanup or other costs in the event of a spill or discharge of material from a railcar without regard to the owner's fault. We routinely assess environmental liabilities, including our potential obligations and commitments for remediation of contaminated sites and the possible amount of recoveries from other responsible parties. Due to the regulatory complexities, risk of unidentified contaminants on our properties and the potential liability for the operations of our lessees, it is possible environmental and remediation costs may be materially different from the costs we have estimated.

The fair market value of our long-lived assets may differ from the value of those assets reflected in our financial statements.

Our assets primarily consist of long-lived assets such as railcars and marine vessels. The carrying value of these assets in our financial statements may sometimes differ from their fair market value. These valuation differences may be positive or negative and could be material based on market conditions and demand for certain assets.

Our assets may become obsolete.

In addition to changes in laws, rules, and regulations that may make assets obsolete, changes in the preferred method our customers use to ship their products, changes in demand for particular products, or a shift by customers toward purchasing assets rather than leasing them may adversely impact us. Our customers' industries are driven by dynamic market forces and trends, which are influenced by economic and political factors. Changes in our customers' markets may significantly affect demand for our rail and marine assets. A reduction in customer demand or change in customers' preferred method of product transportation could result in the economic obsolescence of the assets leased by those customers.

Unfavorable conditions on the Great Lakes could impact business operations, which could result in increases in costs and decreases in revenues.

The success of our ASC subsidiary depends on the efficiency of its operations on the Great Lakes. Disruptions at the Sault St. Marie locks or severe weather conditions, such as high wind and ice formation, could cause significant business interruptions or shortened sailing seasons. Additionally, low water levels and vessel draft restrictions may restrict the volume that ASC's vessels can transport per trip. These conditions could negatively impact our results of operations through increased operating costs or decreased revenues.

We are subject to the inherent risks of our affiliate investments.

We are indirectly exposed to risks through our ownership interests in affiliates, as our affiliates may experience many of the same risks discussed in this "Risk Factors" section. Rolls-Royce manages our RRPF affiliates, and we sometimes retain third parties to manage assets we own directly, such as our ocean-going vessels. Poor business or financial results of these affiliates, or the third parties who manage, operate, or invest along with us in these affiliates, could negatively impact our financial results. Additionally, when a third party manages or operates an affiliate or asset, we may not have control over operational matters related to the affiliate or asset, which could result in actions that have an adverse economic impact on the affiliate, the asset, or GATX or could expose GATX to potential liability.

We may be affected by climate change or market or regulatory responses to climate change.

Changes in laws, rules, and regulations, or actions by authorities under existing laws, rules, or regulations, to address greenhouse gas emissions and climate change could negatively impact our customers and business. For example, restrictions on emissions could significantly increase costs for our customers whose production processes require significant amounts of energy. Customers' increased costs could reduce their demand to lease our assets. In addition, railcars in our fleet that are used to carry fossil fuels, such as coal and petroleum, could see reduced demand if new government regulations mandate a reduction in fossil fuel consumption. New government regulations could also increase our operating costs and compliance with those regulations could be costly. Potential consequences of laws, rules, or regulations addressing climate change could have an adverse effect on our financial position, results of operations, and cash flows.

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A small number of shareholders could significantly influence our business.

Four shareholders collectively control more than 50% of our outstanding common stock. Accordingly, a small number of shareholders could affect matters that require shareholder approval, such as the election of directors and the approval of significant business transactions.

Changes to assumptions used to calculate post-retirement costs, increases in funding requirements, and investment losses in pension funds could adversely affect our results of operations.

We calculate our pension and other post-retirement costs using various assumptions, such as discount rates, long-term return on plan assets, salary increases, health care cost trend rates, and other factors. Changes to any of these assumptions could adversely affect our financial position and results of operations. Periods of low interest rates reduce the discount rate we use to calculate our funding obligations, which may increase our funding requirements. Additionally, changes to laws, regulations, or rules could require us to increase funding requirements or to compensate for investment losses in pension plan assets. If we were forced to increase contributions to our pension plans, our financial position, results of operations, and cash flows could be negatively affected.

Changes in the mix of earnings in the US and foreign countries could adversely affect our effective tax rate.

We are subject to taxes in the United States and various foreign jurisdictions. As a result, our effective tax rate could be adversely affected by changes in the mix of earnings in the United States and foreign countries with differing statutory tax rates. Our effective tax rate could also be adversely affected by changes in tax laws, material audit assessments, or legislative changes that impact statutory tax rates, which could include an impact on previously-recorded deferred tax assets and liabilities.

Our allowance for losses may be inadequate.

Our allowance for losses on reservable assets may not be adequate to cover credit losses in our portfolio if unexpected adverse changes occur in macroeconomic conditions or if discrete events adversely affect specific customers, industries, or markets. If the credit quality of our customer base materially deteriorates, it may require us to incur additional credit losses and our financial position or results of operations could be negatively impacted.

We cannot predict with certainty the impact that inflation or deflation will have on our financial results.

The timing and duration of the effects of inflation are unpredictable and depend on market conditions and economic factors. Inflation in lease rates as well as inflation in residual values for rail and marine assets has historically benefited our financial results. However, these benefits may be offset by increases in the costs for goods and services we purchase, including salaries and wages, health care costs, supplies, utilities, maintenance and repair services, and materials, as well as increased financing costs. Significant increases in our cost of goods and services could adversely impact our financial performance. Conversely, a period of prolonged deflation could negatively impact our lease rate pricing, residual values, and asset remarketing opportunities. These negative impacts of deflation may be offset by decreases to our costs for goods and services, including those listed above.

We could be adversely affected by United States and global political conditions, including acts or threats of terrorism or war.

We may be adversely affected by national and international political developments, instability, and uncertainties, including political unrest and threats of terrorist attacks, which could lead to the following:

Legislation or regulatory action directed toward improving the security of railcars and marine vessels against acts of terrorism, which could affect the construction or operation of railcars and marine vessels
A decrease in demand for rail and marine services
Lower utilization of rail and marine equipment
Lower rail lease and marine charter rates
Impairments of rail and marine assets
Capital market disruption, which may raise our financing costs or limit our access to capital
Liability or losses resulting from acts of terrorism involving our assets
A downturn in the commercial aviation industry, which could lead to adverse financial results for our RRPF affiliates.

Depending upon the severity, scope, and duration of these circumstances, the impact on our financial position, results of operations, and cash flows could be material.


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We rely on technology in all aspects of our business operations. If we are unable to adequately maintain and secure our IT infrastructure from cybersecurity threats and related disruptions, our business could be negatively impacted.

We rely on our IT infrastructure to process, transmit, and store electronic information that is critical to all aspects of our business operations, including employee and customer information. All IT systems are vulnerable to security threats, such as hacking, viruses, malicious software, and other unlawful attempts to disrupt or gain access to these systems. Although we have taken steps to mitigate these risks, we may not be able to prevent breaches of our IT infrastructure, some of which is managed by third parties. Breaches of our IT infrastructure could lead to disruptions in our business, potentially including the theft, destruction, loss, misappropriation, or release of confidential employee and customer information stored on our IT systems or confidential data or other business information and subject us to potential lawsuits or other material legal liabilities. These disruptions could adversely affect our operations, financial position, and results of operations.

Our internal control over financial accounting and reporting may not detect all errors or omissions in the financial statements.

If we fail to maintain adequate internal controls over financial accounting, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. Although management has concluded that adequate internal control procedures are in place, no system of internal control provides absolute assurance that the financial statements are accurate and free of error.

Item 1B.  Unresolved Staff Comments

None.


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Item 2.  Properties

Information regarding the general character of our properties is included in Item 1, “Business” of this Form 10-K.

As of December 31, 2016, the locations of our operations were as follows:
 
GATX Headquarters
 
 
 
 
 
Chicago, Illinois
 
 
 
 
Rail North America
 
 
 
Business Offices
Major Maintenance Facilities
Mobile Units
Chicago, Illinois
Colton, California
Camp Minden, Louisiana
Houston, Texas
Hearne, Texas
Copperhill, Tennessee
Calgary, Alberta
Waycross, Georgia
Crown Point, Indiana
Mexico City, Mexico
Montreal, Quebec
Donaldsonville, Louisiana
 
Moose Jaw, Saskatchewan
Galena Park, Texas
 
Red Deer, Alberta
Lake Charles, Louisiana
 
 
Lakeland, Florida
 
Maintenance Facilities
Macon, Georgia
 
Kansas City, Kansas
Mobile, Alabama
 
Plantersville, Texas
Olympia, Washington
 
Terre Haute, Indiana
Sioux City, Iowa
 
Sarnia, Ontario
Clarkson, Ontario
 
 
Edmonton, Alberta
 
Customer Site Locations
Montreal, Quebec
 
Aurora, North Carolina
Quebec City, Quebec
 
Catoosa, Oklahoma
Red Deer, Alberta
 
Donaldsonville, Louisiana
Sarnia, Ontario
 
Freeport, Texas
 
 
Geismar, Louisiana
 
 
Yazoo City, Mississippi
 
 
 
 
Rail International
 
 
 
Business Offices
Major Maintenance Facilities
Customer Site Locations
Düsseldorf, Germany
Hannover, Germany
Płock, Poland
Hamburg, Germany
Ostróda, Poland
 
Leipzig, Germany
 
 
Moscow, Russia
 
 
Gurgaon, India
 
 
Paris, France
 
 
Vienna, Austria
 
 
Warsaw, Poland
 
 
 
 
 
 
American Steamship Company
 
 
 
 
 
Duluth, Minnesota
 
 
Toledo, Ohio
 
 
Williamsville, New York
 
 
 
Portfolio Management
 
 
 
 
 
Chicago, Illinois
 
 
 
 

22


Item 3.  Legal Proceedings

Information concerning litigation and other contingencies is described in "Note 22. Legal Proceedings and Other Contingencies" in Part II, Item 8 of this Form 10-K and is incorporated herein by reference.

Item 4.  Mine Safety Disclosures

None.


23


PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock is listed on the New York and Chicago Stock Exchanges under ticker symbol GATX. We had approximately 1,849 common shareholders of record as of January 31, 2017. The following table shows the reported high and low sales price of our common shares and the dividends declared per share for each of the quarters in 2016 and 2015:

 
 
 
 
 
 
 
 
 
2016
 
2015
 
2016
 
2016
 
2015
 
2015
 
Dividends
Declared
 
Dividends
Declared
Common Stock
High
 
Low
 
High
 
Low
 
 
First quarter
$
50.66

 
$
35.12

 
$
63.36

 
$
52.67

 
$
0.40

 
$
0.38

Second quarter
50.80

 
41.98

 
61.41

 
53.10

 
0.40

 
0.38

Third quarter
47.98

 
40.83

 
53.72

 
42.94

 
0.40

 
0.38

Fourth quarter
64.17

 
42.65

 
50.56

 
37.95

 
0.40

 
0.38


Issuer Purchases of Equity Securities

On January 29, 2016, our board of directors authorized a $300 million share repurchase program, pursuant to which we are authorized to purchase shares of our common stock in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan. The share repurchase program does not have an expiration date, does not obligate the Company to repurchase any dollar amount or shares of common stock, and may be suspended or discontinued at any time. During 2016, we repurchased 2.7 million shares for $120.0 million under this program. As of December 31, 2016, $180.0 million remained available under the repurchase authorization.
The following is a summary of common stock repurchases completed by month during the fourth quarter of 2016 (in millions, except per share amounts):
Issuer Purchases of Equity Securities
 
 
(a)
 
(b)
 
(c)
 
(d)
Total
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
November 1, 2016 - November 30, 2016
 
450,757

 
$
49.41

 
450,757

 
$
182.7

December 1, 2016 - December 31, 2016
 
48,007

 
$
56.85

 
48,007

 
$
180.0

Total
 
498,764

 
$
50.12

 
498,764

 
 


24


Equity Compensation Plan Information as of December 31, 2016:
 
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column (a))
Plan Category
 
(a)
 
(b)
 
(c)
Equity Compensation Plans Approved by Shareholders
 
2,273,247

(1)
 
$
46.73

(2)
 
1,088,201

Equity Compensation Plans Not Approved by Shareholders
 

 
 
 
 
 

Total
 
2,273,247

 
 
 
 
 
1,088,201

__________
(1)
Consists of 1,188,635 stock appreciation rights, 459,600 non-qualified stock options, 232,459 performance shares, 203,130 restricted stock units and 189,423 phantom stock units.
(2)
The weighted-average exercise price does not include performance shares, restricted stock or phantom stock units.

For additional information about issuable securities under our equity compensation plans and the related weighted average exercise price, see "Note 11. Share-Based Compensation" in Part II, Item 8 of this Form 10-K.



    


25


Common Stock Performance Graph

The performance graph below compares the cumulative total shareholder return on our common stock for the five-year period ended December 31, 2016, with the cumulative total return of the S&P 500, the S&P MidCap 400, and the Russell 3000. We are not aware of any peer companies whose businesses are directly comparable to ours and, therefore, the graph displays the returns of the S&P 500, the S&P MidCap 400, and the Russell 3000 since those indices comprise companies with market capitalizations similar to ours. The graph and table assume that $100 was invested in our common stock and each of the indices on December 31, 2011, and that all dividends were reinvested.

commonstockperformancegraph.jpg



12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
GATX
$
100.00

 
$
102.05

 
$
126.09

 
$
142.07

 
$
108.33

 
$
162.15

S&P 500
100.00

 
115.98

 
153.51

 
174.47

 
176.88

 
197.98

S&P MidCap 400
100.00

 
117.80

 
157.20

 
172.48

 
168.73

 
203.67

Russell 3000
100.00

 
116.41

 
155.46

 
174.94

 
175.79

 
198.11



26


Item 6.  Selected Financial Data

The following financial information has been derived from our audited consolidated financial statements for the years ended December 31 (in millions, except per share data, recourse leverage, and return on equity). This information should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and accompanying notes thereto included elsewhere herein.

 
2016
 
2015
 
2014
 
2013
 
2012
Results of Operations
 
 
 
 
 
 
 
 
 
Revenue
$
1,418.3

 
$
1,449.9

 
$
1,451.0

 
$
1,321.0

 
$
1,243.2

Net gain on asset dispositions
98.0

 
79.2

 
87.2

 
85.6

 
79.5

Share of affiliates’ earnings (pretax)
53.1

 
45.4

 
67.8

 
92.3

 
21.6

Net income
257.1

 
205.3

 
205.0

 
169.3

 
137.3

Net income, excluding tax adjustments and other items (1)
235.9

 
234.9

 
205.0

 
164.8

 
133.8

Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings
6.35

 
4.76

 
4.55

 
3.64

 
2.93

Diluted earnings
6.29

 
4.69

 
4.48

 
3.59

 
2.88

Diluted earnings, excluding tax adjustments and other items (1)
5.77

 
5.37

 
4.48

 
3.50

 
2.81

Dividends declared
1.60

 
1.52

 
1.32

 
1.24

 
1.20

Financial Condition
 
 
 
 
 
 
 
 
 
Operating assets and facilities, net of accumulated depreciation
$
5,804.7

 
$
5,698.4

 
$
5,688.0

 
$
5,070.3

 
$
4,654.4

Investments in affiliated companies
387.0

 
348.5

 
357.7

 
354.3

 
502.0

Total assets
7,105.4

 
6,894.2

 
6,919.9

 
6,535.5

 
6,044.7

Off-balance sheet assets (1)
459.1

 
495.5

 
617.8

 
904.4

 
884.5

Short-term borrowings
3.8

 
7.4

 
72.1

 
23.6

 
273.6

Long-term debt and capital lease obligations
4,268.1

 
4,196.8

 
4,184.5

 
3,833.3

 
3,283.6

Shareholders’ equity
1,347.2

 
1,280.2

 
1,314.0

 
1,397.0

 
1,244.2

Other Data
 
 
 
 
 
 
 
 
 
Average number of common shares and common share equivalents
40.9

 
43.8

 
45.8

 
47.1

 
47.6

Net cash provided by operating activities
$
626.1

 
$
534.3

 
$
449.2

 
$
400.7

 
$
370.2

Portfolio proceeds
$
223.7

 
$
482.2

 
$
264.0

 
$
385.3

 
$
288.9

Portfolio investments and capital additions
$
620.7

 
$
714.7

 
$
1,030.5

 
$
859.6

 
$
770.0

Recourse leverage
3.3

 
3.5

 
3.5

 
3.0

 
3.2

ROE
19.6
%
 
15.8
%
 
15.1
%
 
12.8
%
 
11.6
%
ROE, excluding tax adjustments and other items (1)
18.0
%
 
18.1
%
 
15.1
%
 
12.5
%
 
11.3
%
_________
(1) See "Non-GAAP Financial Measures" included in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for an explanation of tax adjustments and other items, as well as a reconciliation to the most directly comparable GAAP measure.



27


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

OVERVIEW

We lease, operate, manage, and remarket long-lived, widely-used assets, primarily in the rail market. We report our financial results through four primary business segments: Rail North America, Rail International, American Steamship Company (“ASC”), and Portfolio Management. A more complete description of our business is included in "Item 1. Business," in Part I of this Form 10-K.

The following discussion and analysis should be read in conjunction with the audited financial statements included in "Item 8. Financial Statements and Supplementary Data" in this Form10-K. We based the discussion and analysis that follows on financial data we derived from the financial statements prepared in accordance with US generally accepted accounting principles ("GAAP") and on certain other financial data that we prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see “Non-GAAP Financial Measures” at the end of this item.

DISCUSSION OF OPERATING RESULTS

The following table shows a summary of our reporting segments and consolidated financial results for years ended December 31 (in millions, except per share data):
 
2016
 
2015
 
2014
Segment Revenues
 
 
 
 
 
Rail North America
$
1,018.5

 
$
1,006.8

 
$
927.5

Rail International
189.0

 
180.4

 
198.9

ASC
154.2

 
170.2

 
227.2

Portfolio Management
56.6

 
92.5

 
97.4

 
$
1,418.3

 
$
1,449.9

 
$
1,451.0

Segment Profit
 
 
 
 
 
Rail North America
$
321.9

 
$
379.5

 
$
321.0

Rail International
63.0

 
70.1

 
78.7

ASC
10.1

 
15.1

 
27.3

Portfolio Management
136.9

 
49.8

 
68.2

 
531.9

 
514.5

 
495.2

Less:
 
 
 
 
 
Selling, general and administrative expense
174.7

 
192.4

 
189.2

Unallocated interest expense, net
(4.8
)
 
5.3

 
5.4

Other, including eliminations
3.5

 
1.1

 
1.6

Income taxes ($5.7, ($0.5) and $18.3 related to affiliates' earnings)
101.4

 
110.4

 
94.0

   Net Income   
$
257.1

 
$
205.3

 
$
205.0

 
 
 
 
 
 
Net income, excluding tax adjustments and other items
$
235.9

 
$
234.9

 
$
205.0

Diluted earnings per share
$
6.29

 
$
4.69

 
$
4.48

Diluted earnings per share, excluding tax adjustments and other items
$
5.77

 
$
5.37

 
$
4.48

 
 
 
 
 
 
Return on equity
19.6
%
 
15.8
%
 
15.1
%
Return on equity, excluding tax adjustments and other items
18.0
%
 
18.1
%
 
15.1
%
 
 
 
 
 
 
Investment Volume
$
620.7

 
$
714.7

 
$
1,030.5



28


2016 Summary

Net income was $257.1 million, or $6.29 per diluted share, for 2016 compared to $205.3 million, or $4.69 per diluted share, for 2015, and $205.0 million, or $4.48 per diluted share, for 2014. Results for 2016 include a net benefit of $21.2 million from tax adjustments and other items, compared to a net negative impact of $29.6 million in 2015 and no impact in 2014. (see "Non-GAAP Financial Measures" at the end of this item for further details).
At Rail North America, asset impairments, lower asset disposition gains, higher depreciation expense, and higher switching, freight and storage expenses were partially offset by higher lease revenue and fee income, resulting in a net decrease in segment profit in 2016.
At Rail International, segment profit in 2016 declined primarily due to higher maintenance expense and lower remarketing gains, partially offset by higher lease revenue and lower net litigation costs.
At ASC, segment profit was lower in 2016, largely due to lower volume and a reduction in higher-margin, long-haul shipments of various commodities, as well as expenses attributable to asbestos-related litigation reserves and lease termination costs.
At Portfolio Management, comparisons of reported results were impacted by the sale of marine investments in 2016 and 2015, as well as a settlement fee received in 2016 related to a residual value guarantee. Segment profit increased in 2016 primarily due to higher residual sharing gains on managed portfolio sales, partially offset by the absence of contributions from sold assets and lower income at our Rolls-Royce Partners Finance affiliates.
Total investment volume was $620.7 million in 2016, compared to $714.7 million in 2015 and $1,030.5 million in 2014.
2017 Outlook
For the second consecutive year, excess railcar supply, muted demand for certain railcar types, and increased railroad efficiency have combined to put pressure on lease rates for most car types. Despite these conditions, we believe that we are well positioned to continue to benefit from our North American fleet actions taken over the past few years. By extending average lease terms and optimizing our fleet mix, we have a relatively low number of leases scheduled for expiration in 2017. Our focus in 2017 will be to maintain high utilization. We will also focus on shortening lease terms to optimize our ability to reprice these leases when the market recovers. For 2017, we have already placed a majority of the cars to be delivered from our supply agreements. Our strong balance sheet also offers us flexibility to pursue secondary market acquisitions if attractive opportunities arise.
We expect Rail North America's segment profit in 2017 to decrease from 2016. We plan to invest in additional railcars during 2017 to add to our existing fleet; however lease revenue is expected to decline, driven by the impact of lower renewal rates and lower utilization. In addition, maintenance expense is expected to increase overall, as higher costs attributable to cars not renewed will be partially offset by lower scheduled maintenance and an increase in work performed within our own maintenance network. Finally, we expect remarketing income to be lower than 2016.
We anticipate Rail International's segment profit in 2017 to grow slightly compared to 2016 on a local currency basis. Higher lease revenue, resulting from modest fleet growth and continued strong utilization, as well as lower maintenance expenses, will drive this increase.
We expect ASC’s segment profit in 2017 to be higher than 2016. We anticipate higher revenue, due to similar tonnage carried at more favorable freight rates. In addition, operating expenses are expected to decrease, as we plan to have one fewer vessel in service during 2017 compared to 2016.
We believe Portfolio Management's segment profit in 2017 will be lower than 2016. We will benefit from the continuation of strong financial results at the Rolls-Royce Partners Finance affiliates; however, this will be offset by substantially lower remarketing income, as the magnitude of residual sharing fees received in 2016 will not be replicated.


29


Segment Operations

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, pretax earnings from affiliates, and net gains on asset dispositions that are attributable to the segments, as well as expenses that management believes are directly associated with the financing, maintenance, and operation of the revenue earning assets. Segment profit excludes selling, general and administrative expenses, income taxes, and certain other amounts not allocated to the segments. These amounts are included in Other.

We allocate debt balances and related interest expense to each segment based upon predetermined debt to equity leverage ratios. Due to the changes in the composition of our segments, we modified segment leverage levels for 2016. The leverage levels for 2016 were 5:1 for Rail North America, 3:1 for Rail International, 1.5:1 for ASC, and 1:1 for Portfolio Management. Prior to 2016, the leverage levels were 5:1 for Rail North America, 2:1 for Rail International, 1.5:1 for ASC, and 3:1 for Portfolio Management. We believe that by using this leverage and interest expense allocation methodology, each operating segment’s financial performance reflects appropriate risk-adjusted borrowing costs.


RAIL NORTH AMERICA

Segment Summary

At December 31, 2016, Rail North America's wholly owned fleet, excluding boxcars, consisted of approximately 104,500 cars. Fleet utilization, excluding boxcars, was 98.9% at the end of 2016, compared to 99.1% at the end of 2015, and 99.2% at the end of 2014. Fleet utilization for approximately 17,700 boxcars was 93.8% at the end of 2016 compared to 97.7% at the end of 2015, and 92.7% at the end of 2014. In 2014, we acquired more than 18,500 boxcars from General Electric Railcar Services Corporation for approximately $340 million (the "Boxcar Fleet").

The downturn in the rail market continued in 2016, as the oversupply of railcars resulted in a challenging lease rate environment. During the year, the Lease Price Index (the "LPI", see definition below) decreased 20.3%, compared to increases of 32.2% in 2015, and 38.8% in 2014. Lease terms on renewals for cars in the LPI averaged 32 months in 2016, compared to 54 months in 2015, and 66 months in 2014. During 2016, an average of approximately 103,900 railcars, excluding boxcars, were on lease, compared to 106,000 in 2015, and 105,800 in 2014. The decrease in railcars on lease in the current year is largely due to railcars that were sold or scrapped in an effort to optimize the composition of our fleet. The decline in demand, and the resulting decline in lease rates, was broad-based, but was particularly severe among cars serving the energy markets.

During 2016, we recorded impairment losses of $31.2 million, including $29.8 million related specifically to certain railcars in flammable service that we believe have been permanently and negatively impacted by regulatory changes.

In 2014, we entered into a long-term supply agreement with Trinity Rail Group, LLC ("Trinity") a subsidiary of Trinity Industries that took effect in mid-2016. Under the terms of that agreement, we may order up to 8,950 newly built railcars over a four-year period from March, 2016 through March, 2020. We may order either tank or freight cars; however, we expect that the majority of the order will be for tank cars. As of December 31, 2016, 3,173 railcars have been ordered, of which 776 railcars have been delivered. Pursuant to the terms of the agreement, the parties conducted a review of the contract pricing in January 2017 as it no longer reflected market rates. Based on this review, the parties agreed to reduce contract pricing for future orders pursuant to the terms of the agreement. Under a prior supply agreement with Trinity entered into in 2011, we ordered 12,500 newly built railcars, of which 12,313 railcars have been delivered as of December 31, 2016.

As of December 31, 2016, leases for approximately 15,100 railcars in our term lease fleet and approximately 5,200 boxcars are scheduled to expire in 2017. These amounts exclude railcars on leases that are scheduled to expire in 2017 but have already been renewed or assigned to a new lessee.




30


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

2016

2015

2014
Revenues








Lease revenue
$
935.1


$
930.9


$
864.1

Other revenue
83.4


75.9


63.4

   Total Revenues
1,018.5


1,006.8


927.5

 
 
 
 
 
 
Expenses








Maintenance expense
266.5

 
264.2

 
265.5

Depreciation expense
231.8


215.1


190.0

Operating lease expense
67.6


82.2


103.7

Other operating expense
34.1


26.2


21.9

   Total Expenses
600.0


587.7


581.1

 
 
 
 
 
 
Other Income (Expense)








Net gain on asset dispositions
16.6

 
67.2

 
72.3

Interest expense, net
(110.1
)

(102.1
)

(98.4
)
Other expense
(3.6
)
 
(5.2
)
 
(7.2
)
Share of affiliates' earnings (pretax)
0.5


0.5


7.9

Segment Profit   
$
321.9


$
379.5


$
321.0

 
 
 
 
 
 
Investment Volume
$
495.6


$
524.5


$
810.6


The following table shows the components of Rail North America's lease revenue for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Railcars
$
815.0

 
$
809.7

 
$
764.5

Boxcars
80.6

 
83.6

 
64.7

Locomotives
39.5

 
37.6

 
34.9

 
$
935.1

 
$
930.9

 
$
864.1


Lease Price Index

Our LPI is an internally-generated business indicator that measures lease rate pricing on renewals for our North American railcar fleet, excluding boxcars. We calculate the index using the weighted average lease rate for a group of railcar types that we believe best represents our overall North American fleet, excluding boxcars. The average renewal lease rate change is reported as the percentage change between the average renewal lease rate and the average expiring lease rate, weighted by fleet composition. The average renewal lease term is reported in months and reflects the average renewal lease term of railcar types in the LPI, weighted by fleet composition.




31


mdalpi.jpg

Rail North America Fleet Data
The following table shows fleet activity for Rail North America railcars, excluding boxcars, for the years ended December 31:
 
2016
 
2015
 
2014
Beginning balance
106,146

 
107,343

 
107,004

Cars added
3,519

 
3,762

 
3,453

Cars scrapped
(2,479
)
 
(1,445
)
 
(1,397
)
Cars sold
(2,664
)
 
(3,514
)
 
(1,717
)
Ending balance
104,522

 
106,146

 
107,343

Utilization rate at year end
98.9
%
 
99.1
%
 
99.2
%
Active railcars at year end
103,329

 
105,164

 
106,500

Average (monthly) active railcars
103,900

 
105,987

 
105,791


32



mdarailnafleet.jpg

The following table shows fleet statistics for Rail North America boxcars for the years ended December 31:
 
2016
 
2015
 
2014
Ending balance
17,706

 
18,429

 
19,021

Utilization rate at year end
93.8
%
 
97.7
%
 
92.7
%

The following table shows fleet activity for Rail North America locomotives for the years ended December 31:
 
2016
 
2015
 
2014
Beginning balance
637

 
603

 
595

Locomotives added, net of scrapped or sold
23

 
34

 
8

Ending balance
660

 
637

 
603

Utilization rate at year end
93.3
%
 
93.3
%
 
99.3
%
Active locomotives at year end
616

 
584

 
599

Average (monthly) active locomotives
605

 
589

 
590



33


Segment Profit

In 2016, segment profit was $321.9 million, compared to $379.5 million in 2015. The decrease was driven by lower asset disposition gains, which includes the impairment losses noted above, and higher depreciation expense, partially offset by higher lease revenue and fee income.

In 2015, segment profit was $379.5 million, compared to $321.0 million in 2014. The increase was driven by higher lease rates, a positive contribution from the full year impact of the Boxcar Fleet in 2015, and lower net maintenance expense, partially offset by higher depreciation expense and lower share of affiliates' earnings.

Revenues

In 2016, lease revenue increased $4.2 million, primarily due to revenue from new cars added to the fleet and higher utilization revenue, partially offset by the impact of fewer cars on lease. Other revenue increased $7.5 million due to higher lease termination fees. Fees in 2016 included approximately $10.0 million for a penalty imposed by GATX for allowing a customer to return 200 crude oil railcars prior to the contractual end of an existing lease. The majority of these railcars were subsequently placed with other GATX customers. On occasion, customers may request relief from their lease commitments, particularly when underlying commodity markets turn down. However, our lease agreements do not include provisions for payment, and any such arrangement would be negotiated and dependent on achieving an optimal economic outcome.

In 2015, lease revenue increased $66.8 million, primarily due to higher lease rates across the fleet and a full year of revenue in 2015 from the acquired Boxcar Fleet. Other revenue increased $12.5 million, primarily due to higher repair revenue, mileage equalization revenue, and lease termination fees.

Expenses

In 2016, maintenance expense increased $2.3 million, primarily due to higher repair costs for the base fleet and lower costs eligible for capitalization for the boxcar fleet, partially offset by lower railroad repairs. Depreciation expense increased $16.7 million, largely due to new railcar investments and the purchase of railcars previously on operating leases. Operating lease expense decreased $14.6 million, as a result of purchases of railcars previously on operating leases in both 2016 and 2015. Other operating expense increased $7.9 million, primarily due to higher switching, storage, and freight costs as a result of more cars being moved into storage.

In 2015, maintenance expense decreased $1.3 million, primarily due to lower tank car compliance maintenance, partially offset by higher costs attributable to the boxcar fleet. Depreciation expense increased $25.1 million, largely due to depreciation on new investments, including the Boxcar Fleet. Operating lease expense decreased $21.5 million, resulting from the purchase of railcars previously on operating leases in each year. Other operating expense increased $4.3 million, primarily due to higher switching, storage, and freight costs.

Other Income (Expense)

In 2016, net gain on asset dispositions decreased $50.6 million largely due to a combination of higher impairments of railcars, primarily railcars in flammable service, and lower disposition gains, as fewer railcars were sold in 2016. See Note 23."Financial Data of Business Segments", Item 8 of this Form 10-K, for further details of the components of net gains on asset dispositions and Note 9."Asset Impairments and Assets Held for Sale", Item 8 of this Form 10-K, for additional analysis regarding the impairment loss. The timing of disposition gains is dependent on a number of factors and will vary from year to year. Net interest expense increased $8.0 million, due to a higher average debt balance and a higher average interest rates. Other expense decreased $1.6 million primarily due to a $1.9 million gain from the sale of an investment security in 2016.

In 2015, net gain on asset dispositions decreased $5.1 million, primarily due to lower scrapping proceeds, resulting from lower prices for scrap and fewer cars scrapped, as well as lower residual sharing gains, and higher impairments of railcars in 2015. These impacts were partially offset by higher gains on cars sold. Net interest expense increased $3.7 million, primarily due to higher average debt balances, partially offset by the impact of lower average interest rates. Share of affiliates' earnings decreased $7.4 million, primarily due to gains on dispositions of railcars at our Southern Capital affiliate in the prior year.

34



Investment Volume

During 2016, investment volume was $495.6 million compared to $524.5 million in 2015, and $810.6 million in 2014. We acquired approximately 3,465 railcars in 2016, compared to 3,790 railcars in 2015, and 3,570 railcars in 2014. Additionally, investments in 2014 included the purchase of the Boxcar Fleet of approximately 18,500 boxcars for approximately $340 million.

North American Rail Regulatory Matters

In 2015, the Pipeline and Hazardous Materials Safety Administration of the US Department of Transportation (“PHMSA”) issued regulations that established new design standards for tank cars in flammable liquids service (the “PHMSA Rules”). In addition to setting standards for newly built tank cars, the PHMSA regulations established standards for modifying existing tank cars in certain flammable liquids service and deadlines for modifying or removing those cars from service. The deadlines range from January 2018 to May 2029, depending on the type of car and the type of commodity carried. The regulations were subsequently modified by legislation adopted by Congress, and in August 2016, PHMSA adopted final regulations that incorporated the legislative mandates.

Transport Canada (“TC”) also issued rules establishing revised design standards for tank cars carrying flammable liquids in Canada (the “Canadian Rules”). The Canadian Rules established standards for newly built tank cars, standards for modifying existing cars flammable liquids service, and deadlines for modifying or removing cars from service. The Canadian deadlines range from November 2016 to May 2025, depending on the type of car and the type of commodity carried.

We have a fleet of approximately 122,000 railcars in North America, including approximately 12,200 tank cars currently used to transport flammable liquids that are affected by the new rules, of which approximately 3,800 are moving crude oil and ethanol. Over 90% of our affected tank cars have a compliance deadline of 2023 or later. We expect to modify some of the most modern of our affected tank cars to comply with the new standards. However, for the majority of the affected cars, we currently anticipate retiring, redeploying, or selling them rather than performing retrofits. We recorded impairment losses on approximately 2,400 of these railcars, as noted above. See Note 9."Asset Impairments and Assets Held for Sale" in Part II, Item 8 of this Form 10-K for further details.


RAIL INTERNATIONAL

Segment Summary
 
Rail International, composed primarily of GATX Rail Europe ("GRE"), continued to maintain stable utilization for its railcars and produced solid operating results in 2016. Railcar utilization for GRE was 95.6% at the end of 2016, compared to 95.8% at the end of 2015, and 95.9% at the end of 2014. GRE's results in 2016 continued to be impacted by higher wheelset costs, primarily due to a refurbishment program to address anti-corrosion paint issues on certain existing wheelsets. GRE is addressing this issue with the wheelset suppliers and is pursuing potential warranty remedies.

Rail India has continued to focus on investment opportunities and developing relationships with customers, suppliers and the Indian Railways. In 2016, Rail India did not add any new railcars, compared to 410 railcars added in 2015 and 184 railcars added in 2014. While Rail India had no new investments in 2016, it has entered into contracts to acquire additional railcars in 2017 and expects continued fleet growth and diversification throughout 2017.

Rail Russia has continued to focus on managing its small fleet and developing relationships with customers. In 2016, Rail Russia added 20 railcars to its fleet, compared to 150 railcars added in 2015 and none added in 2014. Rail Russia plans to expand its customer base and pursue investment opportunities to grow its fleet in 2017.


35


The following table shows Rail International's segment results for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Revenues
 
 
 
 
 
Lease revenue
$
182.0

 
$
172.9

 
$
188.6

Other revenue
7.0

 
7.5

 
10.3

   Total Revenues
189.0

 
180.4

 
198.9

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
47.2

 
39.6

 
45.9

Depreciation expense
45.5

 
43.7

 
47.1

Other operating expense
5.3

 
5.1

 
5.1

   Total Expenses
98.0

 
88.4

 
98.1

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net gain on asset dispositions
1.1

 
6.8

 
6.0

Interest expense, net
(29.7
)
 
(22.4
)
 
(24.7
)
Other (expense) income
0.8

 
(6.0
)
 
(3.1
)
Share of affiliates' earnings (pretax)
(0.2
)
 
(0.3
)
 
(0.3
)
Segment Profit   
$
63.0

 
$
70.1

 
$
78.7

 
 
 
 
 
 
Investment Volume
$
87.1

 
$
148.0

 
$
163.6


The following table shows fleet activity for GRE railcars for the years ended December 31:
 
2016
 
2015
 
2014
Beginning balance
22,923

 
22,451

 
21,836

Cars added
879

 
1,421

 
1,672

Cars scrapped or sold
(680
)
 
(949
)
 
(1,057
)
Ending balance
23,122

 
22,923

 
22,451

Utilization rate at year end
95.6
%
 
95.8
%
 
95.9
%
Active railcars at year end
22,108

 
21,969

 
21,533

Average (monthly) active railcars
21,869

 
21,598

 
20,915



36


mdarailintlfleet.jpg\

Foreign Currency

Rail International's reported results of operations are impacted by fluctuations in the exchange rates of the foreign currencies in which it conducts business, primarily the euro. In 2016, the value of the euro fluctuated; however, in aggregate, the changes did not have a meaningful impact on revenue or segment profit compared to 2015. In 2015, a weaker euro negatively impacted lease revenue by approximately $30.8 million and segment profit, excluding other income (expense), by approximately $16.1 million compared to 2014.

Segment Profit

In 2016, segment profit was $63.0 million, compared to $70.1 million in 2015. The decrease was largely due to higher maintenance expense, primarily as a result of higher wheelset costs, and the absence of a gain recognized on the sale of a workshop in 2015, partially offset by higher lease revenue and lower net legal defense costs.

In 2015, segment profit was $70.1 million, compared to $78.7 million in 2014. The decrease was largely due to the negative effects of foreign exchange.

Revenues

In 2016, lease revenue increased $9.1 million, primarily due to more cars on lease in 2016. Other revenue decreased $0.5 million, primarily due to the absence of interest income on a loan that was repaid in 2015.

In 2015, lease revenue decreased $15.7 million, due to the effects of a weaker euro, as noted above. The decrease was partially offset by additional cars on lease in 2015. Other revenue decreased $2.8 million, primarily due to the absence of interest income on a loan that was repaid in 2015.


37


Expenses

In 2016, maintenance expense increased $7.6 million, primarily due to the costs of wheelset replacements, as discussed above, and the higher cost of railcar revisions. Depreciation expense increased $1.8 million, driven by the impact of new cars added to the fleet. Other operating expense was comparable to prior year.

In 2015, maintenance expense decreased $6.3 million, primarily due to the effects of a weaker euro and lower costs at our European maintenance facilities, partially offset by the higher cost of railcar revisions. Depreciation expense decreased $3.4 million, largely due to the effects of a weaker euro, partially offset by the impact of new cars added to the fleet.

Other Income (Expense)

In 2016, net gain on asset dispositions decreased $5.7 million, primarily due to the absence of a gain recognized on the sale of a workshop in 2015 and lower railcar scrapping gains as a result of fewer railcars scrapped in 2016. Net interest expense increased $7.3 million, largely due to a higher average debt balance, resulting from an increase in segment leverage in 2016, partially offset by lower average interest rates. Other expense decreased $6.8 million, largely due to lower net legal costs resulting from insurance reimbursements received in 2016 for previously expensed legal defense costs.

In 2015, net interest expense decreased $2.3 million, driven by the effects of foreign exchange. Other expense increased $2.9 million, primarily due to higher legal costs in 2015 and the absence of income from a warranty settlement in 2014, partially offset by the favorable impact of changes in foreign exchange rates on non-functional currency items and derivatives.

Investment Volume

Investment volume was $87.1 million in 2016, $148.0 million in 2015, and $163.6 million in 2014. During 2016, we acquired approximately 879 railcars compared to 1,980 railcars in 2015, and 1,860 railcars in 2014.


ASC

Segment Summary

In 2016, lower demand across most commodities, as well as a reduction in higher-margin, long-haul shipments, negatively impacted operating results. ASC carried 25.4 million net tons of freight and deployed 11 vessels in 2016 compared to 26.5 million net tons and 13 vessels in 2015 and 30.5 million net tons and 15 vessels in 2014.


38


The following table shows ASC’s segment results for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Revenues
 
 
 
 
 
Lease revenue
$
4.2

 
$
4.1

 
$
4.2

Marine operating revenue
150.0

 
166.1

 
223.0

   Total Revenues
154.2

 
170.2

 
227.2

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
18.6

 
22.3

 
25.6

Marine operating expense
96.7

 
107.2

 
149.2

Depreciation expense
12.9

 
14.3

 
13.6

Operating lease expense
6.0

 
5.2

 
5.2

   Total Expenses
134.2

 
149.0

 
193.6

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net loss on asset dispositions

 
(0.1
)
 
(0.5
)
Interest expense, net
(4.5
)
 
(5.3
)
 
(5.6
)
Other expense
(5.4
)
 
(0.7
)
 
(0.2
)
Segment Profit   
$
10.1

 
$
15.1

 
$
27.3

 
 
 
 
 
 
Investment Volume
$
9.1

 
$
20.3

 
$
18.4

Total Net Tons Carried (000's)
25.4

 
26.5

 
30.5


mdaasc.jpg\

39



Segment Profit

In 2016, segment profit was $10.1 million compared to $15.1 million in 2015. The decrease was driven by $5.0 million of expense related to an increased accrual for asbestos-related litigation and costs associated with the scheduled return of a leased vessel in 2017. In addition, lower demand across most commodities and fewer higher-margin, long-haul shipments of iron ore negatively impacted segment profit, which was partially offset by lower operating costs as a result of deploying two fewer vessels throughout most of 2016.

In 2015, segment profit was $15.1 million compared to $27.3 million in 2014. Both periods were unfavorably impacted by difficult operating conditions on the Great Lakes at the start of each sailing season. Additionally, results in 2015 were negatively impacted by lower shipments of higher-margin, long-haul iron ore.

Revenues

In 2016, marine operating revenue decreased $16.1 million, primarily due lower shipping volume as a result of decreased demand, as well as fewer long-haul shipments of various commodities. In addition, lower fuel revenue, which is offset in marine operating expense, contributed to the variance. The terms of ASC's contracts provide that a substantial portion of fuel costs is passed on to customers.

In 2015, marine operating revenue decreased $56.9 million, largely due to $37.6 million lower fuel revenue. In addition, lower long-haul shipments of iron ore contributed to the variance.

Expenses

In 2016, maintenance expense decreased $3.7 million, primary due to fewer operating vessels and lower operating repairs. Marine operating expense decreased $10.5 million, largely driven by lower fuel costs, more efficient operations, and two fewer vessels deployed in the current year.

In 2015, maintenance expense decreased $3.3 million, due to less winter work and lower operating repairs. Marine operating expense decreased $42.0 million, largely driven by lower fuel costs and the impact of fewer operating days caused by the delay of deployment of vessels at the beginning of the season and fewer vessels operating late in the year. Inefficiencies associated with the extended winter conditions earlier in each year also negatively impacted operations in both years.

Operating lease expense in 2016, 2015 and 2014 was primarily related to the lease of ASC's tug-barge vessel.

Other Income (Expense)

In 2016, other expense increased $4.7 million, driven by the $5.0 million of aggregate expense noted above.

Investment Volume

ASC's investments in each of 2016, 2015, and 2014 consisted of structural and mechanical upgrades to our vessels.



PORTFOLIO MANAGEMENT

Segment Summary

A significant portion of Portfolio Management's segment profit is generated by the Rolls-Royce & Partners Finance companies. The Rolls-Royce & Partners Finance companies (collectively the “RRPF affiliates”) are a group of fifteen 50% owned domestic and foreign joint ventures with Rolls-Royce plc (or affiliates thereof, collectively “Rolls-Royce”), a leading manufacturer of commercial aircraft jet engines. Segment profit included earnings from the RRPF affiliates of $51.8 million for 2016, $65.5 million for 2015, and $55.9 million for 2014. The RRPF affiliates owned 407 aircraft engines at the end of 2016 compared to 436 at the end of 2015 and 433 at the end of

40


2014. Operating results and remarketing income for the RRPF affiliates continued to be strong in 2016. However, impairment losses recorded for certain models of aircraft spare engines negatively impacted overall income at the RRPF affiliates in 2016.

In 2015, we made the decision to exit the majority of our marine investments, including six chemical parcel tankers (the "Nordic Vessels"), most of our inland marine vessels, and our 50% interest in the Cardinal Marine joint venture. As a result, we initially recognized impairment losses of $30.8 million on the Nordic Vessels and $19.0 million on the Cardinal Marine joint venture in 2015. Further, an additional $1.8 million of impairment losses were recorded for certain of the Nordic Vessels in 2016. Subsequently, we completed the sales of all six of the Nordic Vessels, our 50% interest in the Cardinal Marine joint venture, and the majority of our inland marine assets for total proceeds of $59.9 million and $124.4 million in 2016 and 2015. These sales resulted in net gains of $4.2 million and $21.6 million for 2016 and 2015. We also recognized a gain of $1.0 million in 2016, resulting from contingent proceeds received from the sale of the Cardinal Marine joint venture. Based on the valuation of our remaining inland marine assets held for sale at December 31, 2016, we recorded further impairment losses of $4.9 million. We expect to sell the remaining targeted inland marine assets in 2017. Upon final completion of these sales, Portfolio Management will continue to own and operate other marine investments, consisting primarily of five liquefied gas carrying vessels (the "Norgas Vessels"). In 2016, we also realized residual sharing income of $82.8 million. Proceeds of $49.1 million were recorded as a result of the settlement of a residual sharing agreement. This agreement was originally entered into in 2001 and related to a residual guarantee we provided on certain rail assets in the U.K. Receipt of the settlement fee concludes our participation in this transaction. Additionally, a customer sold its interest in two leased nuclear power plant facilities and, as manager of the leases, we received residual sharing fees of $30.1 million.

In 2014, we sold our investments in the Intermodal Investment Fund V and Intermodal Investment Fund VII affiliates and received aggregate cash proceeds of $18.3 million.

Portfolio Management's total asset base was $593.5 million at December 31, 2016, compared to $636.5 million at December 31, 2015, and $813.3 million at December 31, 2014.

The following table shows Portfolio Management’s segment results for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Revenues
 
 
 
 
 
Lease revenue
$
5.8

 
$
22.2

 
$
29.7

Marine operating revenue
49.3

 
68.9

 
63.3

Other revenue
1.5

 
1.4

 
4.4

   Total Revenues
56.6

 
92.5

 
97.4

 
 
 
 
 
 
Expenses
 
 
 
 
 
Marine operating expense
32.8

 
48.7

 
48.6

Depreciation expense
7.0

 
17.4

 
22.8

Other operating expense
4.4

 
7.1

 
1.9

   Total Expenses
44.2

 
73.2

 
73.3

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net gain on asset dispositions
80.3

 
5.3

 
9.4

Interest expense, net
(8.6
)
 
(20.0
)
 
(24.3
)
Other expense

 

 
(1.2
)
Share of affiliates' earnings (pretax)
52.8

 
45.2

 
60.2

Segment Profit   
$
136.9

 
$
49.8

 
$
68.2

 
 
 
 
 
 
Investment Volume   
$
25.0

 
$
18.4

 
$
32.3



41


mdapminvestmentportfolio.jpg

Segment Profit

In 2016, segment profit was $136.9 million, compared to $49.8 million in 2015. Segment profit in 2016 included income of $49.1 million related to the settlement of a residual sharing agreement. In addition, segment profit in 2016 was impacted by a net pre-tax loss of approximately $1.5 million associated with the planned exit of the majority of marine investments, compared to a net pre-tax loss of approximately $28.2 million in 2015. Excluding the impact of these items, segment profit was $11.3 million higher in 2016 primarily due to higher residual sharing gains on managed portfolio sales, partially offset by lower RRPF affiliate income.

In 2015, segment profit was $49.8 million, compared to $68.2 million in 2014. The decrease was driven by a net loss of approximately $28.2 million associated with the planned exit of the majority of the marine investments. Excluding this net loss, segment profit increased $9.8 million primarily due to higher RRPF affiliate income and higher residual sharing fees on managed portfolio sales.

Revenues

In 2016, lease revenue decreased $16.4 million, primarily due to the impact of the sales of leased assets in both years. Marine operating revenue decreased $19.6 million, largely due to the absence of revenue from the Nordic vessels that were sold during 2015 and 2016.

In 2015, lease revenue decreased $7.5 million, primarily due to the impact of sales of leased assets in both years. Marine operating revenue increased $5.6 million, primarily due to higher revenue from the Nordic Vessels and higher inland marine revenue, partially offset by lower revenue from the Norgas Vessels. Other revenue decreased $3.0 million primarily due to lower investment fund distributions in 2015 and lower interest income resulting from the repayment of loans in both years.

42



Expenses
    
In 2016, marine operating expense decreased $15.9 million, primarily due to the absence of the Nordic vessels that were sold during 2015 and 2016, as well as lower expenses from the Norgas Vessels. Depreciation expense decreased $10.4 million, driven by the sale of assets in 2015 and 2016. Other operating expense decreased $2.7 million, primarily due to proceeds received in 2016 for investments that had previously been reserved, lower barge painting expenses, and the absence of fleet manager incentive fees incurred in 2015.

In 2015, depreciation expense decreased $5.4 million, primarily due to the sale of leased assets. Other operating expense increased $5.2 million, largely due to a loss reserve recorded in 2015 in connection with one investment.

Other Income (Expense)

In 2016, net gain on asset dispositions increased $75.0 million. The current year included proceeds of $49.1 million related to the settlement of a residual sharing agreement. In addition, the current year included a net pre-tax loss of approximately $2.5 million associated with the planned exit of marine investments, compared to a net pre-tax loss of approximately $9.2 million in 2015. Excluding these net gains and losses, net gain on asset dispositions increased $19.2 million primarily due to higher residual sharing gains on managed portfolio sales in 2016. Net interest expense decreased $11.4 million as a result of a lower average debt balance, resulting from a combination of a lower asset base and a decrease in segment leverage in 2016, and lower average interest rates.

In 2015, net gain on asset dispositions decreased $4.1 million. The decrease was driven by a net loss of approximately $9.2 million associated with the planned exit of marine investments. Excluding the net loss from the marine investments, net gain on other asset dispositions increased $5.1 million primarily due to higher residual sharing gains on managed portfolio sales. Net interest expense decreased $4.3 million as a result of lower average debt balance and lower average interest rates.

In 2016, share of affiliates' earnings increased $7.6 million, primarily due to an impairment charge of $19.0 million associated with the planned sale of our interest in the Cardinal Marine affiliate in 2015, and a net gain on sale of $1.0 million related to Cardinal Marine affiliate in 2016. Excluding these items, the share of affiliates' earnings decreased $12.4 million, primarily due to lower net disposition gains at RRPF attributable to impairment losses incurred on certain models of aircraft spare engines.

In 2015, share of affiliates' earnings decreased $15.0 million. The decrease was driven by the $19.0 million impairment charge for our 50% interest in the Cardinal Marine joint venture. Excluding this item, affiliates' earnings increased $4.0 million primarily due to higher operating income and higher disposition gains on engine sales at the RRPF affiliates in 2015, partially offset by the absence of earnings from joint ventures sold in 2015 and 2014.

Investment Volume

Investment volume of $25.0 million in 2016 was for an incremental investment in an RRPF affiliate.

Investment volume of $18.4 million in 2015 consisted of $15.5 million for Portfolio Management's share in a newly created RRPF affiliate and $2.9 million to convert 51 open hopper barges to covered hopper barges.

Investment volume of $32.3 million in 2014 consisted of $10.5 million for two tank barges and one pushboat, $6.5 million for 13 new hopper barges and $15.3 million of incremental investment in an RRPF affiliate.

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


43


The following table shows components of other for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Selling, general and administrative expense
$
174.7

 
$
192.4

 
$
189.2

Unallocated interest (income) expense, net
(4.8
)
 
5.3

 
5.4

Other expense (including eliminations)
3.5

 
1.1

 
1.6


SG&A, Unallocated Interest and Other

In 2016, SG&A of $174.7 million decreased $17.7 million from 2015. The decrease was primarily due to lower employee costs, as well as lower pension and information technology expenses. In 2015, $9.0 million of expense was recorded associated with a voluntary early retirement program. The decrease in pension expense was driven by the change in accounting estimate discussed in "Note 2. Accounting Changes" in Part II, Item 8 of this Form 10-K. These decreases were partially offset by a settlement accounting adjustment in 2016 attributable to lump sum payments elected by eligible retirees as part of the early retirement program. IT costs were lower due to savings related to discretionary spending.

In 2015, SG&A of $192.4 million increased $3.2 million from 2014. The increase was primarily due to $9.0 million of expense associated with an early retirement program offered to certain employees in 2015, partially offset by lower compensation expense in 2015 and the absence of costs associated with the closure of our San Francisco office recognized in 2014.

Unallocated interest expense (the difference between external interest expense and interest expense allocated to the reporting segments in accordance with assigned leverage targets) in any year is affected by our consolidated leverage position, the timing of debt issuances and investing activities, and intercompany allocations.

Other expense and eliminations were immaterial in each of 2015 and 2014. 2016 included a $2.9 million environmental remediation accrual related to properties sold in prior years.

Consolidated Income Taxes

See "Note 12. Income Taxes" in Part II, Item 8 of this Form 10-K.


44


BALANCE SHEET DISCUSSION

Assets

Total assets (including on- and off-balance sheet) were $7.6 billion at December 31, 2016, compared to $7.4 billion at December 31, 2015. The increase was driven by an increase in cash, as well as an increase in Rail North America operating assets, partially offset by the sales of marine investments at Portfolio Management. In addition to the assets we recorded on our balance sheet, we utilized off-balance sheet assets, primarily railcars, which we leased in pursuant to operating lease agreements. The off-balance sheet assets represent the estimated present value of our committed future operating lease payments.

The following table shows on- and off-balance sheet assets by segment as of December 31 (in millions):
 
2016
 
2015
 
 
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
Rail North America
$
4,775.6

 
$
456.5

 
$
5,232.1

 
$
4,629.1

 
$
488.7

 
$
5,117.8

Rail International
1,128.7

 

 
1,128.7

 
1,117.6

 

 
1,117.6

ASC
278.8

 
2.6

 
281.4

 
284.7

 
6.8

 
291.5

Portfolio Management
593.5

 

 
593.5

 
636.5

 

 
636.5

Other
328.8

 

 
328.8

 
226.3

 

 
226.3

 
$
7,105.4

 
$
459.1

 
$
7,564.5

 
$
6,894.2

 
$
495.5

 
$
7,389.7


Gross Receivables

Receivables of 233.6 million at December 31, 2016 decreased $3.4 million from December 31, 2015, primarily due to the expiration of certain financing leases.

Allowance for Losses

As of December 31, 2016, allowance for losses totaled $6.1 million, compared to $10.3 million at December 31, 2015. At December 31, 2016, the entire $6.1 million, or 7.1% of rent and other receivables, related to general allowances, compared to $6.3 million, or 9.1%, at December 31, 2015. There were no specific allowances for finance leases at December 31, 2016 compared to $4.0 million at December 31, 2015. The specific allowance in 2015 was related to a loss reserve recorded in connection with one investment at Portfolio Management that was written off in the current year.

See "Note 17. Allowance for Losses" in Part II, Item 8 of this Form 10-K.

Operating Assets and Facilities

Net operating assets and facilities increased $106.3 million from 2015. The increase was primarily due to investments of $589.3 million and the purchase of leased-in assets of $117.1 million. These increases were offset by depreciation expense of $300.9 million, dispositions of $114.8 million, sale leasebacks of $68.5 million, reclassification of $47.3 million of assets to assets held-for-sale, and impairments of $31.2 million at Rail North America, as well as negative foreign exchange rate effects of $42.0 million.

Investments in Affiliated Companies

Investments in affiliated companies increased $38.5 million in 2016 (see table below). The increase was driven by RRPF operating results and an incremental investment of $25.0 million for an RRPF affiliate at Portfolio Management, partially offset by dividend distributions from RRPF and a loan repayment from an affiliate at Rail North America.

45


The following table shows our investments in affiliated companies by segment as of December 31 (in millions):
 
2016
 
2015
Rail North America
$
10.5

 
$
12.0

Rail International
1.2

 
1.4

Portfolio Management
375.3

 
335.1

 
$
387.0

 
$
348.5


See "Note 6. Investments in Affiliated Companies" in Part II, Item 8 of this Form 10-K.

Goodwill

In 2016 and 2015, changes in the balance of our goodwill, all of which are attributable to the Rail North America and Rail International segments, resulted from changes in foreign currency exchange rates. We tested our goodwill for impairment in the fourth quarter of 2016, and no impairment was indicated.

See "Note 16. Goodwill" in Part II, Item 8 of this Form 10-K.

Debt

Total debt increased $67.7 million from the prior year, primarily due to issuances of long-term debt of $882.8 million, largely offset by scheduled maturities and principal payments of $800.0 million and the effects of foreign exchange on outstanding long-term debt balances.

The following table shows the details of our long-term debt issuances in 2016 ($ in millions):
Type of Debt
 
Term
 
Interest Rate
 
Principal Amount
Recourse Unsecured
 
10.0 Years
 
3.25% Fixed
 
$
350.0

Recourse Unsecured
 
5.0 Years
 
2.18% Floating (2)
 
200.0

Recourse Unsecured
 
50.1 Years
 
5.63% Fixed
 
150.0

Recourse Secured (1)
 
5.0 Years
 
1.77% Floating (1)
 
125.0

Recourse Unsecured
 
5.0 Years
 
0.85% Floating (2)
 
57.8

 
 
 
 
 
 
$
882.8

________
(1)
This $125.0 million principal amount was repaid in 2016. The floating interest rate shown is as of the final payment date.
(2)
Floating interest rate at December 31, 2016.

46



The following table shows the carrying value of our debt obligations by major component, including off-balance sheet debt, as of December 31, 2016 (in millions):
 
Secured
 
Unsecured
 
Total
Commercial paper and borrowings under bank credit facilities
$

 
$
3.8

 
$
3.8

Recourse debt

 
4,253.2

 
4,253.2

Capital lease obligations
14.9

 

 
14.9

Balance sheet debt
14.9

 
4,257.0

 
4,271.9

Recourse off-balance sheet debt (1)
459.1

 

 
459.1

 
$
474.0

 
$
4,257.0

 
$
4,731.0

________
(1) Off-balance sheet debt represents the estimated present value of committed operating lease payments and is equal to the amount reported as off-balance sheet assets.

See "Note 7. Debt" in Part II, Item 8 of this Form 10-K.

Equity

Total equity increased $67.0 million from the prior year, primarily due to net income of $257.1 million, $12.8 million from the effects of post-retirement benefit plan adjustments, and $10.4 million from the effects of share-based compensation. These increases were partially offset by stock repurchases of $120.1 million, $68.1 million related to dividends, and $26.0 million of foreign currency translation adjustments due to the balance sheet effects of a stronger US dollar.

See "Note 19. Shareholders’ Equity" in Part II, Item 8 of this Form 10-K.


CASH FLOW DISCUSSION

We generate a significant amount of cash from operating activities and from our investment portfolio proceeds. We also access domestic and international capital markets by issuing unsecured or secured debt and commercial paper. We use these sources of cash, along with our available cash balances, to fulfill our debt, lease, and dividend obligations and to fund portfolio investments and capital additions. We primarily use cash from operations and commercial paper issuances to fund daily operations.

The timing of asset dispositions and changes in working capital impacts cash flows from portfolio proceeds and operations. As a result, these cash flow components may vary materially from quarter to quarter and year to year. As of December 31, 2016, we had an unrestricted cash balance of $307.5 million.


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The following table shows our principal sources and uses of cash for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Principal sources of cash
 
 
 
 
 
Net cash provided by operating activities
$
626.1

 
$
534.3

 
$
449.2

Portfolio proceeds
223.7

 
482.2

 
264.0

Other asset sales
23.0

 
18.7

 
26.9

Proceeds from sale-leasebacks
82.5

 

 

Proceeds from issuance of debt, commercial paper, and credit facilities
859.4

 
748.8

 
1,273.0

 
$
1,814.7

 
$
1,784.0

 
$
2,013.1

Principal uses of cash
 
 
 
 
 
Portfolio investments and capital additions
$
(620.7
)
 
$
(696.9
)
 
$
(1,030.5
)
Repayments of debt, commercial paper, and credit facilities
(803.6
)
 
(790.8
)
 
(819.8
)
Purchases of leased-in assets
(117.1
)
 
(118.4
)
 
(150.5
)
Payments on capital lease obligations
(3.6
)
 
(2.7
)
 
(2.6
)
Stock repurchases
(120.1
)
 
(125.4
)
 
(124.6
)
Cash dividends
(67.4
)
 
(68.2
)
 
(62.0
)
 
$
(1,732.5
)
 
$
(1,802.4
)
 
$
(2,190.0
)

Net Cash Provided by Operating Activities

Net cash provided by operating activities of $626.1 million increased $90.7 million compared to 2015. The increase was driven by higher fee income, primarily residual sharing income, and lower operating lease payments, partially offset by lower contributions from our marine operations at ASC and Portfolio Management.

Portfolio Investments and Capital Additions

Portfolio investments and capital additions primarily consist of purchases of operating assets, investments in affiliates, and capitalized asset improvements. Portfolio investments and capital additions of $620.7 million decreased $76.2 million compared to 2015, largely due to fewer railcar additions at Rail International and Rail North America. 2014 investments included Rail North America's purchase of approximately 18,500 boxcars for approximately $340 million. The timing of investments depends on purchase commitments, transaction opportunities, and market conditions.

The following table shows portfolio investments and capital additions by segment for the years ended December 31 (in millions):
 
2016
 
2015
 
2014
Rail North America (1)
$
495.6