10-K 1 gatx20171231-10k.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, 2017
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2328
______________________
logo12312017.jpg
GATX Corporation
(Exact name of registrant as specified in its charter)
New York
36-1124040
(State or Other Jurisdiction of incorporation or Organization)
(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
 
   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 Section 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer     o Accelerated filer     o Non-accelerated filer o Smaller reporting company o Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.5 billion as of June 30, 2017.

As of January 31, 2018, 38.0 million common shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
GATX’s definitive Proxy Statement to be filed on or about March 19, 2018
PART III







GATX CORPORATION
2017 FORM 10-K
INDEX
Item No.
 
Page
 
Part I
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.
Item 16.
 



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 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,” “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 U.S. 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
a significant decline in customer demand for our railcars or other assets or services, including as a result of:
weak macroeconomic conditions
weak market conditions in our customers' businesses
declines in harvest or production volumes
adverse changes in the price of, or demand for, commodities
changes in railroad operations or efficiency
changes in supply chains
availability of pipelines, trucks, and other alternative modes of transportation
other operational or commercial needs or decisions of our customers
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")
the impact of changes to the Internal Revenue Code as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), and uncertainty as to how this legislation will be interpreted and applied.
fluctuations in foreign exchange rates
failure to successfully negotiate collective bargaining agreements with the unions representing a substantial portion of our employees
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 U.S.-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, 2017, we had total assets of $7.9 billion, comprised largely of railcars. This amount includes $0.4 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 145,000 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 2,100 railcars, and we actively manage more than 300 railcars for other third-party owners. The following table sets forth our worldwide rail fleet data as of December 31, 2017:
 
Tank
Railcars
 
Freight
Railcars
 
Total Fleet
 
Affiliate
Railcars
 
Managed
Railcars
 
Total Railcars
 
Locomotives
Rail North America
60,459

 
59,669

 
120,128

 
2,141

 
341

 
122,610

 
665

Rail International
22,443

 
1,945

 
24,388

 

 
7

 
24,395

 

Total
82,902

 
61,614

 
144,516

 
2,141

 
348

 
147,005

 
665



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 650 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/Pneumatic 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
Grain
Metals and Related
Paper and Packaging
Biofuels
Vinyl Chloride Monomer
Hydrochloric Acid
Sugar
Sand
Aggregates
Lumber and Building Products
Edible Oils and Syrups
Miscellaneous Chemicals
Caustic Soda
Starch
Cement
Coke
Mixed Freight
Chemicals
 
Phosphoric Acid
Carbon Black
Soda Ash
Waste
 
item1raila15.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 insurance, and provides 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 870 customers. In 2017, 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 23% of Rail North America’s total lease revenue. Rail North America leases railcars for terms that generally range from one to ten years, which vary based on railcar types and market conditions. The average remaining lease term of the North American fleet was approximately four years as of December 31, 2017. Rail North America’s primary competitors are Union Tank Car Company, Wells Fargo Rail, the CIT Group, Trinity Industries Leasing Company, SMBC Rail Services, LLC, the Andersons Rail Group, and American Railcar Industries, Inc. Rail North America competes primarily on the basis of lease rate, maintenance capabilities, customer relationships, engineering expertise, and availability of railcars.

Rail North America purchases new railcars from a number of manufacturers, including Trinity Industries, American Railcar Industries, Inc., National Steel Car Ltd., and Freightcar America. We also acquire railcars in the secondary market. 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, 2017, 5,249 railcars have been ordered, of which 3,032 railcars have been delivered. Pursuant to the terms of the agreement, the parties conducted a review of the contract pricing in January 2017 as a result of changes in market rates. Based on this review, the parties agreed to reduce contract pricing for eligible future orders beginning January 1, 2018.

Rail North America also owns a fleet of locomotives, consisting of 627 four-axle and 38 six-axle locomotives as of December 31, 2017. Locomotive customers are primarily regional and short-line railroads, industrial users, and Class I railroads. Lease terms vary from month-to-month to 10 years. As of December 31, 2017, the average remaining lease term of the locomotive fleet was approximately two 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 railcar maintenance services 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, 2017, 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.
Five customer-dedicated sites operating solely within specific customer facilities that offer services tailored to the needs of our customers’ fleets.
Fifteen 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 providers. 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 2017, wholly owned and third-party maintenance facilities performed approximately 59,000 service events, including multiple independent service events for the same car. In 2017, third-party maintenance network expenses accounted for approximately 32% of Rail North America’s total maintenance network expenses (excluding repairs performed by railroads). Approximately 73% of the maintenance hours incurred for our tank cars and specialty freight cars during 2017 were performed internally at our own maintenance facilities.

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 utilize our services that are not included in the full-service lease agreement, such as repairs of railcar damage or other customer-specific requirements. 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, 2017, Adler owned approximately 2,140 railcars in North America consisting of freight cars with an average age of approximately fourteen years.

RAIL INTERNATIONAL

Rail International is composed of our operations in Europe ("GATX Rail Europe" or "GRE"), India ("Rail India"), and 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 230 customers. In 2017, 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, 2017, 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, Wascosa AG, and On Rail.

GRE acquires new railcars primarily from Astra Rail Industries S.A. and Wagony Swidnica sp. z.o.o, both of which are a part of Greenbrier Europe, as well as Tatravagónka a.s., and Feldbinder Spezialfahrzeugwerke GmbH. Additionally, GRE's Ostróda, Poland maintenance facility assembles several hundred tank cars each year. As of December 31, 2017, GRE had commitments to acquire approximately 300 newly manufactured railcars to be delivered in 2018, primarily from Tatravagónka a.s.

Rail India began operations in 2012 as the first company registered to lease railcars under the Indian Railways Wagon Leasing Scheme. As of December 31, 2017, Rail India owned 1,052 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, 2017, the average remaining lease term of the Indian fleet was approximately four years. As of December 31, 2017, Rail India had already entered into contracts to acquire approximately 350 additional railcars to be delivered in 2018.

As of December 31, 2017, Rail Russia owned 170 railcars and had commitments to acquire approximately 165 railcars to be delivered in 2018.

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 2017 accounted for approximately 37% of GRE's fleet repair costs.


6


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 railcar damage caused by customers and railways. Revenue earned from these maintenance activities is recorded in other revenue.

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

In Russia, all railcar maintenance is performed by third-party repair facilities either owned or authorized by Russian Railways, in accordance with regulatory requirements.

ASC

ASC operates the largest fleet of U.S.-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, vessel availability, 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 in March and continue to operate into January of the following year.

At December 31, 2017, ASC’s fleet consisted of 12 vessels with a net book value of $251.2 million. All vessels are compliant with applicable regulatory guidelines. The vessels are diesel powered, with an average age of 40 years and estimated useful lives of 65 years. In December 2017, ASC sold three vessels and also returned a vessel that was previously leased. In addition, in March 2017, ASC returned the articulated tug-barge that was leased. See the ASC section in Part II, Item 7 of this Form 10-K for further details. For 2018, eleven 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.
item1asca07.jpg

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 2017, ASC served 21 customers, with the top five customers accounting for 84% of total revenue.


7


The following table sets forth ASC's fleet as of December 31, 2017:
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 Sam Laud
 
634'-10"
 
24,300
M/V American Courage
 
634'-10"
 
23,800

ASC’s vessels operate pursuant to customer contracts that stipulate freight volume commitments that may also be supplemented with additional spot volume opportunities. In 2017, ASC operated 12 vessels and carried 27.8 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 U.S. ports to be built, owned, operated and manned by U.S. citizens, and registered under the U.S. 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 (the "Norgas Vessels"). 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 these ancillary 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. These investments have all been sold as of December 31, 2017. See the Portfolio Management section in Part II, Item 7 of this Form 10-K for further details.

item1pma10.jpg

The following table sets forth the approximate net book value of Portfolio Management’s assets as of December 31 (in millions):
 
 
Investment in RRPF Affiliates
 
Owned Assets
 
Managed
Assets
2017
$
434.2

 
$
148.6

 
$
41.6

2016
375.3

 
218.2

 
51.8

2015
335.1

 
301.4

 
114.5


Affiliates

The Rolls-Royce & Partners Finance companies (collectively the “RRPF affiliates”) are a group of sixteen 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, 2017, the RRPF affiliates, in aggregate, owned 432 engines, of which 229 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 December 31, 2017, 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. 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 U.S. Gulf/Far East trades. In 2015, we sold our interest in this joint venture to our partner, IMC Holdings.


9


Owned and Managed Assets

Historically, Portfolio Management's wholly owned portfolio consisted of marine assets operating in pooling arrangements, assets subject to operating and finance leases, and secured loans. As of December 31, 2017, Portfolio Management's remaining owned assets consisted primarily of the Norgas Vessels operating under a pooling arrangement. The Norgas Vessels specialize in the transport of pressurized gases and chemicals, such as liquefied petroleum gas, liquefied natural gas, and ethylene, primarily on shorter-term spot contracts for major oil and chemical customers worldwide.

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. As of December 31, 2017, Portfolio Management's managed activities consisted primarily of managing leases for three power plants.

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.

EMPLOYEES AND EMPLOYEE RELATIONS

As of December 31, 2017, we employed 2,267 persons, of whom approximately 45% 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 and marine 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 U.S. 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, 2017, 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.



10


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
 
58
Robert C. Lyons
Executive Vice President and Chief Financial Officer
2012
 
54
James F. Earl (1)
Executive Vice President and President, Rail International
2012
 
61
Thomas A. Ellman
Executive Vice President and President, Rail North America
2013
 
49
Deborah A. Golden
Executive Vice President, General Counsel and Corporate Secretary
2012
 
63
Niyi A. Adedoyin
Senior Vice President and Chief Information Officer
2016
 
50
Michael T. Brooks
Senior Vice President and Chief Operations Officer, Rail North America
2016
 
48
James M. Conniff
Senior Vice President, Human Resources
2014
 
60
William M. Muckian
Senior Vice President, Controller and Chief Accounting Officer
2007
 
58
N. Gokce Tezel (2)
Senior Vice President and President, Rail International
2018
 
43
Paul F. Titterton
Senior Vice President and Chief Commercial Officer, Rail North America
2015
 
42
Eric D. Harkness
Vice President, Treasurer and Chief Risk Officer
2012
 
45
Jeffery R. Young
Vice President and Chief Tax Officer
2015
 
55
_________
(1) Mr. Earl will retire on March 1, 2018.
(2) Mr. Tezel's role as Senior Vice President and President, Rail International will become effective March 1, 2018, contemporaneously with Mr. Earl's retirement.

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 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

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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. Tezel was elected Senior Vice President and President, Rail International effective March 1, 2018. Previously, Mr. Tezel served as Vice President and Senior Vice President - Business Development, Rail International from March 2015 to February 2018, Vice President and Group Executive, Emerging Markets from July 2012 to February 2015, Vice President - International Business Development from 2008 to July 2012, Vice President - Strategic Growth from 2007 to 2008, Director, Marketing and Product Development from 2005 to 2007, Director, Corporate Finance from 2003 to 2005, and Associate Director, Corporate Finance from 2000 to 2003.

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.

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.


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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 U.S. Securities and Exchange Commission (“SEC”). Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. 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.

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 U.S. 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 or other assets.

The nature of our business and 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 U.S. Customers use certain types of 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.

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.

We depend on continued demand from our customers to lease our railcars and utilize our other assets and services. A significant decline in customer demand could negatively impact our business and financial performance.

Customer demand for our railcars and other assets and services can be adversely affected by various economic and other factors, including:
Weak macroeconomic conditions
Weak market conditions in our customers’ businesses
Declines in harvest or production volumes
Adverse changes in the price of, or demand for, commodities
Changes in railroad operations and efficiency
Changes in supply chains

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Availability of pipelines, trucks, and other alternative modes of transportation
Other operational or commercial needs or decisions of our customers.

Demand for our railcars and other assets is dependent on the strength and growth of our customers' 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.

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 either case, these changes in customer behavior can reduce demand for the portions of our fleet that are used to transport the commodity. In addition, demand for railcars 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.

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. Reductions in service by railroads to conform to new financial goals or operating practices could reduce the attractiveness of rail to shippers relative to other modes of transportation. In each case, these changes could reduce demand for our railcars and negatively impact revenue and our results of operations.

The availability and relative cost of alternative modes of transportation and changes in customer transportation preferences also could reduce demand for our railcars. For example, technological innovations in the trucking industry and patterns in U.S. economic growth that favor truck over rail could result in a modal shift away from rail and reduce customer demand for our rail assets. Demand for our marine assets and shipping services is also influenced by many of the factors discussed above. A significant decline 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 recent changes to lease accounting rules and the Tax Act, could negatively impact demand for our assets held for lease.

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 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.


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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.

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 sixteen 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.

Recent changes to U.S. federal tax law as a result of the Tax Act may adversely affect our financial condition, results of operations and cash flows.

The Tax Act has significantly changed the way that U.S. corporations are taxed at the federal level, including by:
Reducing the U.S. corporate income tax rate
Limiting interest deductions
Permitting immediate expensing of certain capital expenditures
Adopting elements of a territorial tax system, imposing a one-time transition tax on all undistributed earnings and profits of certain U.S.-owned foreign corporations
Revising the rules governing net operating losses and the rules governing foreign tax credits
Repealing the deduction of certain performance-based compensation paid to an expanded group of executive officers
Introducing new anti-base erosion provisions.
 
Many of these changes were effective immediately, without any transition periods or grandfathering for existing transactions. The legislation was unclear in certain respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Department of Treasury and the Internal Revenue Service, any of which could reduce or increase certain impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxes, which often use federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going-forward basis.

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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 U.S. 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.

We may incur future asset impairment charges.

We review long-lived assets and joint venture investments for impairment annually, 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 the 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.

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Our foreign operations and international expansion strategy are subject to the following risks associated with international operations:
Noncompliance with U.S. 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 U.S. Department of Transportation, the Federal Railroad Administration, the Pipeline and Hazardous Materials Safety Administration of the U.S. 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, U.S. 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 U.S. Department of Transportation, the U.S. Coast Guard, and the U.S. 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 U.S. 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.

There can be no assurance that we will continue to pay dividends or repurchase shares of our common stock at current levels.

Although we have paid regular cash dividends for 100 consecutive years and conduct periodic share repurchase programs, the timing, amount and payment of future dividends to shareholders and repurchases of our common stock fall within the discretion of our Board of Directors (the "Board"). The Board’s decisions regarding the payment of dividends and repurchase of shares depend on many factors such as our financial condition, earnings, capital requirements, debt service obligations, legal requirements, regulatory constraints, and other factors that our Board may deem relevant. We cannot guarantee that we will continue to pay dividends or repurchase shares in the future, and our payment of dividends and repurchase of shares could vary from historical practices and our stated expectations.

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 pronounced 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 of our American Steamship Company (“ASC”) subsidiary, 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.


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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 us or could expose us 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.

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 U.S. 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 (including changes to federal tax law as a result of the Tax Cuts and Jobs Act of 2017), 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.


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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 or war, 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.

We rely on technology in all aspects of our business operations. If we are unable to adequately maintain and secure our information technology ("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.


20


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, 2017, 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
Crown Point, Indiana
Burlington, Ontario
Waycross, Georgia
Donaldsonville, Louisiana
Calgary, Alberta
Montreal, Quebec
Galena Park, Texas
Mexico City, Mexico
Moose Jaw, Saskatchewan
Lake Charles, Louisiana
 
Red Deer, Alberta
Lakeland, Florida
 
 
Macon, Georgia
 
Maintenance Facilities
Olympia, Washington
 
Kansas City, Kansas
Sioux City, Iowa
 
Plantersville, Texas
Clarkson, Ontario
 
Terre Haute, Indiana
Edmonton, Alberta
 
Sarnia, Ontario
Montreal, Quebec
 
 
Quebec City, Quebec
 
Customer Site Locations
Red Deer, Alberta
 
Catoosa, Oklahoma
Sarnia, Ontario
 
Donaldsonville, Louisiana
 
 
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
 
 
 
 

21


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.


22


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 1,732 common shareholders of record as of January 31, 2018. The following chart shows the reported high and low sales price of our common shares and the dividends declared per share for each of the quarters in 2017 and 2016:

chart-70c9390295d1651e131.jpg

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 Rule 10b5-1 plans. During 2017, we repurchased 1.7 million shares for $100.0 million under this program. As of December 31, 2017, $80.0 million remained available under the repurchase authorization. On January 26, 2018, our board of directors approved an additional share repurchase authorization of $170 million, bringing GATX’s aggregate available repurchase authorization to $250 million. The share repurchase program does not have an expiration date, does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time. The timing of share repurchases will be dependent on market conditions and other factors.
The following is a summary of common stock repurchases completed by month during the fourth quarter of 2017:
Issuer Purchases of Equity Securities
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
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)
October 1, 2017 - October 31, 2017
 
18,300

 
$
59.68

 
18,300

 
$
103.9

November 1, 2017 - November 30, 2017
 
408,230

 
$
58.56

 
408,230

 
$
80.0

Total
 
426,530

 
$
58.61

 
426,530

 
 


23


Equity Compensation Plan Information as of December 31, 2017:
 
 
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
 
2,328,861

(1)
 
$
50.07

(2)
 
4,119,061

Equity Compensation Plans Not Approved by Shareholders
 

 
 
 
 
 

Total
 
2,328,861

 
 
 
 
 
4,119,061

__________
(1) Consists of 966,115 stock appreciation rights, 756,788 non-qualified stock options, 211,038 performance shares, 186,757 restricted stock units and 208,163 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.



    


24


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, 2017, with the cumulative total return of the S&P 500 Index, the S&P MidCap 400 Index, and the Russell 3000 Index. We are not aware of any peer companies whose businesses are directly comparable to ours and, therefore, the graph displays the returns of the indices noted above as those 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, 2012, and that all dividends were reinvested.

gatx20171231_chart-32822.jpg



12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
 
12/31/17
GATX
$
100.00

 
$
123.55

 
$
139.21

 
$
106.15

 
$
158.89

 
$
164.77

S&P 500
100.00

 
132.36

 
150.43

 
152.51

 
170.70

 
207.92

S&P MidCap 400
100.00

 
133.44

 
146.42

 
143.24

 
172.89

 
200.93

Russell 3000
100.00

 
133.55

 
150.29

 
151.01

 
170.19

 
206.09



25


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.
 
2017
 
2016
 
2015
 
2014
 
2013
Results of Operations
 
 
 
 
 
 
 
 
 
Revenue
$
1,376.9

 
$
1,418.3

 
$
1,449.9

 
$
1,451.0

 
$
1,321.0

Net gain on asset dispositions
54.1

 
98.0

 
79.2

 
87.2

 
85.6

Share of affiliates’ pre-tax income
55.9

 
53.1

 
45.4

 
67.8

 
92.3

Net income (GAAP)
502.0

 
257.1

 
205.3

 
205.0

 
169.3

Net income, excluding tax adjustments and other items (non-GAAP) (1)
185.0

 
235.9

 
234.9

 
205.0

 
164.8

Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings
12.95

 
6.35

 
4.76

 
4.55

 
3.64

Diluted earnings (GAAP)
12.75

 
6.29

 
4.69

 
4.48

 
3.59

Diluted earnings, excluding tax adjustments and other items (non-GAAP) (1)
4.70

 
5.77

 
5.37

 
4.48

 
3.50

Dividends declared
1.68

 
1.60

 
1.52

 
1.32

 
1.24

Financial Condition
 
 
 
 
 
 
 
 
 
Operating assets and facilities, net of accumulated depreciation
$
6,192.1

 
$
5,804.7

 
$
5,698.4

 
$
5,688.0

 
$
5,070.3

Investments in affiliated companies
441.0

 
387.0

 
348.5

 
357.7

 
354.3

Total assets
7,422.4

 
7,105.4

 
6,894.2

 
6,919.9

 
6,535.5

Off-balance sheet assets (1)
435.7

 
459.1

 
495.5

 
617.8

 
904.4

Short-term borrowings
4.3

 
3.8

 
7.4

 
72.1

 
23.6

Long-term debt and capital lease obligations
4,384.2

 
4,268.1

 
4,196.8

 
4,184.5

 
3,833.3

Shareholders’ equity
1,792.7

 
1,347.2

 
1,280.2

 
1,314.0

 
1,397.0

Other Data
 
 
 
 
 
 
 
 
 
Average number of common shares and common share equivalents
39.4

 
40.9

 
43.8

 
45.8

 
47.1

Net cash provided by operating activities (2)
$
496.8

 
$
629.4

 
$
541.8

 
$
458.4

 
$
411.4

Portfolio proceeds
$
165.6

 
$
223.7

 
$
482.2

 
$
264.0

 
$
385.3

Portfolio investments and capital additions
$
603.4

 
$
620.7

 
$
714.7

 
$
1,030.5

 
$
859.6

Recourse leverage (3)
2.5

 
3.3

 
3.5

 
3.5

 
3.0

Return on equity (GAAP)
32.0
%
 
19.6
%
 
15.8
%
 
15.1
%
 
12.8
%
Return on equity, excluding tax adjustments and other items (non-GAAP) (1)
13.1
%
 
18.0
%
 
18.1
%
 
15.1
%
 
12.5
%
_________
(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 measures.
(2)
In 2017, we adopted a new accounting standard requiring the reclassification of certain cash receipts and payments in the statement of cash flows. The standard was adopted on a retrospective basis, and as a result, net cash provided by operating activities has been restated for all prior years presented. The impact of this change was not material to our financial statements.
(3)
Excluding the impact of the Tax Cuts and Jobs Act enacted in 2017, leverage would be 3.1 for 2017. 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.

26


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 U.S. 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):
 
2017
 
2016
 
2015
Segment Revenues
 
 
 
 
 
Rail North America
$
977.4

 
$
1,018.5

 
$
1,006.8

Rail International
197.1

 
189.0

 
180.4

ASC
172.5

 
154.2

 
170.2

Portfolio Management
29.9

 
56.6

 
92.5

 
$
1,376.9

 
$
1,418.3

 
$
1,449.9

Segment Profit
 
 
 
 
 
Rail North America
$
299.3

 
$
321.9

 
$
379.5

Rail International
68.8

 
63.0

 
70.1

ASC
24.5

 
10.1

 
15.1

Portfolio Management
56.3

 
136.9

 
49.8

 
448.9

 
531.9

 
514.5

Less:
 
 
 
 
 
Selling, general and administrative expense
181.5

 
174.7

 
192.4

Unallocated interest (income) expense, net
(8.5
)
 
(4.8
)
 
5.3

Other, including eliminations
5.6

 
3.5

 
1.1

Income taxes ($12.0, $5.7 and ($0.5) related to affiliates' earnings)
(231.7
)
 
101.4

 
110.4

   Net Income   
$
502.0

 
$
257.1

 
$
205.3

 
 
 
 
 
 
Net income, excluding tax adjustments and other items (non-GAAP)
$
185.0

 
$
235.9

 
$
234.9

Diluted earnings per share (GAAP)
$
12.75

 
$
6.29

 
$
4.69

Diluted earnings per share, excluding tax adjustments and other items (non-GAAP)
$
4.70

 
$
5.77

 
$
5.37

 
 
 
 
 
 
Return on equity (GAAP)
32.0
%
 
19.6
%
 
15.8
%
Return on equity, excluding tax adjustments and other items (non-GAAP)
13.1
%
 
18.0
%
 
18.1
%
 
 
 
 
 
 
Investment Volume
$
603.4

 
$
620.7

 
$
714.7



27


2017 Summary

Net income was $502.0 million, or $12.75 per diluted share, for 2017 compared to $257.1 million, or $6.29 per diluted share, for 2016, and $205.3 million, or $4.69 per diluted share, for 2015. Results for 2017 include a net benefit of $317.0 million from tax adjustments and other items, compared to a net benefit of $21.2 million in 2016 and a net negative impact of $29.6 million in 2015 (see "Non-GAAP Financial Measures" at the end of this item for further details).
At Rail North America, segment profit was lower in 2017 attributable to a decrease in lease revenue, resulting from lower lease rates and fewer cars on lease, as well as higher interest expense associated with investment volume. This decrease was partially offset by the absence of impairments recorded in the prior year on certain cars in flammable service.
At Rail International, segment profit in 2017 increased primarily due to higher lease revenue from more cars on lease and lower maintenance expense.
At ASC, segment profit was higher in 2017, largely due to higher volume and a favorable commodity mix, as well as increased operational efficiency.
At Portfolio Management, segment profit decreased in 2017, primarily due to lower residual sharing gains on managed portfolio sales, the absence of contributions from sold assets, and lower aggregate marine operating results on retained assets, partially offset by higher earnings at our Rolls-Royce Partners Finance affiliates.
Total investment volume was $603.4 million in 2017, compared to $620.7 million in 2016, and $714.7 million in 2015.
2018 Outlook
The North American railcar leasing market experienced its third consecutive year of a downturn in 2017 as large numbers of idle existing railcars, combined with the entry of newly manufactured railcars, resulted in continued oversupply across the industry. We anticipate this oversupply situation will continue in 2018. Certain industry data points suggest that the railcar leasing market may be slowly improving. While lease rates appear to have increased somewhat from market low points, there is no apparent demand catalyst to drive material improvements in lease pricing in the near term. Despite these difficult market conditions, we believe that we are well positioned to benefit from fleet actions taken over the past few years, including optimizing the fleet through railcar sales and strategic pricing and lease term management, which have enabled us to maintain high utilization. In addition, we expect to benefit from improved efficiency of our maintenance network. In 2018, we have already placed a substantial portion of the railcars to be delivered from our supply agreement, and a relatively modest number of railcar leases are scheduled for expiration in 2018. 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 2018 to decrease from 2017. We plan to continue to invest in additional railcars during 2018; however, lease revenue is expected to decline, as the impact of higher rates on expiring leases will more than offset the positive impact of new cars added to the fleet. In addition, maintenance expense is expected to increase due to more scheduled maintenance events, as well as increased costs related to boxcars we expect to place into service during 2018. Finally, we expect remarketing income to be higher than 2017.
We anticipate Rail International's segment profit in 2018 to be relatively flat in local currency, but will increase in U.S. dollars as a result of a stronger euro. Lease revenue is expected to be higher in 2018, resulting from more active railcars in the fleet, partially offset by lower lease rates. This increase will be offset by an increase in expected maintenance expense, driven by higher scheduled maintenance events.
We expect ASC’s segment profit in 2018 to be slightly higher than 2017. We anticipate higher revenue, resulting from favorable freight rates, partially offset by reduced volume. In addition, operating expenses are expected to decrease due to fleet efficiencies.
We believe Portfolio Management's segment profit in 2018 will be lower than 2017. Strong operating results at the Rolls-Royce Partners Finance affiliates are expected to continue; however, this will be more than offset by lower anticipated residual sharing gains from our managed portfolio.

28


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, pre-tax 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 2017 and 2016 were 5:1 for Rail North America, 3:1 for Rail International, 1.5:1 for ASC, and 1:1 for Portfolio Management. For 2015, 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

Challenging conditions continued in the North America railcar leasing market in 2017 due to the oversupply of existing railcars and continued delivery of new cars into the market. Despite this difficult environment, Rail North America has been successful in maintaining high utilization of its railcars across all tank and freight types. At December 31, 2017, Rail North America's wholly owned fleet, excluding boxcars, consisted of approximately 103,700 cars. Fleet utilization, excluding boxcars, was 98.2% at the end of 2017, compared to 98.9% at the end of 2016, and 99.1% at the end of 2015. Fleet utilization for approximately 16,400 boxcars was 92.6% at the end of 2017 compared to 93.8% at the end of 2016, and 97.7% at the end of 2015.

During 2017, an average of approximately 102,600 railcars, excluding boxcars, were on lease, compared to 103,900 in 2016, and 106,000 in 2015. 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. During the year, the renewal rate change of the Lease Price Index (the "LPI", see definition below) was negative 28.2%, compared to negative 20.3% in 2016 and positive 32.2% in 2015. The decline in demand and resulting decline in lease rates was broad-based, but was particularly severe among cars serving the energy markets. Lease terms on renewals for cars in the LPI averaged 33 months in 2017, compared to 32 months in 2016, and 54 months in 2015. Additionally, the renewal success rate was 74.7% in 2017, compared to 66.7% in 2016, and 81.4% in 2015.

During 2016, we recorded impairment losses of $31.2 million, including $29.8 million related specifically to certain railcars in flammable service that we believed had 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, 2017, 5,249 railcars have been ordered, of which 3,032 railcars have been delivered.

As of December 31, 2017, leases for approximately 13,900 railcars in our term lease fleet and approximately 2,400 boxcars are scheduled to expire in 2018. These amounts exclude railcars with leases expiring in 2018 that have already been renewed or assigned to a new lessee.




29


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

2017

2016

2015
Revenues








Lease revenue
$
899.9


$
935.1


$
930.9

Other revenue
77.5


83.4


75.9

   Total Revenues
977.4


1,018.5


1,006.8

 
 
 
 
 
 
Expenses








Maintenance expense
265.0

 
266.5

 
264.2

Depreciation expense
239.4


231.8


215.1

Operating lease expense
60.7


67.6


82.2

Other operating expense
28.7


34.1


26.2

   Total Expenses
593.8


600.0


587.7

 
 
 
 
 
 
Other Income (Expense)








Net gain on asset dispositions
45.2

 
16.6

 
67.2

Interest expense, net
(121.2
)

(110.1
)

(102.1
)
Other expense
(5.9
)
 
(3.6
)
 
(5.2
)
Share of affiliates' pre-tax (loss) income
(2.4
)

0.5


0.5

Segment Profit   
$
299.3


$
321.9


$
379.5

 
 
 
 
 
 
Investment Volume
$
460.9


$
495.6


$
524.5


The following table shows the components of Rail North America's lease revenue for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Railcars
$
785.1

 
$
815.0

 
$
809.7

Boxcars
75.7

 
80.6

 
83.6

Locomotives
39.1

 
39.5

 
37.6

Total
$
899.9

 
$
935.1

 
$
930.9


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.




30


gatx20171231_chart-33379.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:
 
2017
 
2016
 
2015
Beginning balance
104,522

 
106,146

 
107,343

Cars added
3,442

 
3,519

 
3,762

Cars scrapped
(2,900
)
 
(2,479
)
 
(1,445
)
Cars sold
(1,334
)
 
(2,664
)
 
(3,514
)
Ending balance
103,730

 
104,522

 
106,146

Utilization rate at year end
98.2
%
 
98.9
%
 
99.1
%
Active railcars at year end
101,849

 
103,329

 
105,164

Average (monthly) active railcars
102,600

 
103,900

 
105,987


31



gatx20171231_chart-35157.jpg

The following table shows fleet statistics for Rail North America boxcars for the years ended December 31:
 
2017
 
2016
 
2015
Ending balance
16,398

 
17,706

 
18,429

Utilization rate at year end
92.6
%
 
93.8
%
 
97.7
%

The following table shows fleet activity for Rail North America locomotives for the years ended December 31:
 
2017
 
2016
 
2015
Beginning balance
660

 
637

 
603

Locomotives added, net of scrapped or sold
5

 
23

 
34

Ending balance
665

 
660

 
637

Utilization rate at year end
92.5
%
 
93.3
%
 
93.3
%
Active locomotives at year end
615

 
616

 
584

Average (monthly) active locomotives
623

 
605

 
589


32



Segment Profit

In 2017, segment profit of $299.3 million decreased 7.0% compared to $321.9 million in 2016. The decrease was driven by lower lease revenue, partially offset by the absence of impairment losses recorded in 2016 for certain railcars in flammable service.

In 2016, segment profit of $321.9 million decreased 15.2% 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.

Revenues

In 2017, lease revenue decreased $35.2 million, or 3.8%, primarily due to lower average lease rates and fewer railcars on lease. Other revenue decreased $5.9 million, largely a result of lower lease termination fees. Other revenue in 2016 included a lease termination fee of 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. Other revenue in 2017 included $7.8 million of compensation for damage to returned railcars. The expenses to repair these railcars will be recognized as incurred.

In 2016, lease revenue increased $4.2 million, or 0.5%, 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, including the $10.0 million fee noted above.

Expenses

In 2017, maintenance expense decreased $1.5 million, primarily due to lower expenses for the boxcar fleet and lower repairs performed by the railroads, offset by an increase in costs associated with cars assigned to new lessees. Depreciation expense increased $7.6 million due to new railcar investments and the purchase of railcars previously on operating leases. Operating lease expense decreased $6.9 million, resulting from the purchase of railcars previously on operating leases in both 2017 and 2016. Other operating expense decreased $5.4 million, due to lower switching, storage, and freight costs resulting from fewer railcars coming off lease and being moved into storage in the current year.

In 2016, maintenance expense increased $2.3 million, primarily due to higher repair costs across the fleet, partially offset by lower repairs performed by the railroads. 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 railcars coming off lease and being moved into storage.

Other Income (Expense)

In 2017, net gain on asset dispositions increased $28.6 million, largely due to the impact of lower impairments in the current year. We recorded impairment losses of $4.6 million in 2017, compared to $31.2 million in 2016. In 2016, impairment losses included $29.8 million related specifically to certain railcars in flammable service that we believed had been permanently and negatively impacted by regulatory changes. Excluding impairment losses in each year, net gain on asset dispositions in 2017 decreased due to fewer railcars sold, offset by higher scrapping gains, resulting from more railcars scrapped and higher scrap prices. See Note 23."Financial Data of Business Segments", Item 8 of this Form 10-K, for further details of the components of net gain on asset dispositions. The timing of disposition gains is dependent on a number of factors and will vary from year to year. Net interest expense increased $11.1 million, due to a higher average interest rate and a higher average debt balance. Other expense in 2017 was comparable to the same period in 2016. Share of affiliates' pre-tax income was lower in 2017, driven by an impairment loss recognized with respect to our Adler investment to reflect a decline in the value of certain railcars in that fleet.

In 2016, net gain on asset dispositions decreased $50.6 million 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. Net interest expense increased $8.0 million, due

33


to a higher average debt balance and a higher average interest rate. Other expense in 2016 decreased $1.6 million compared to 2015, primarily due to a $1.9 million gain from the sale of an investment security in 2016.

Investment Volume

During 2017, investment volume was $460.9 million compared to $495.6 million in 2016, and $524.5 million in 2015. We acquired approximately 3,613 railcars in 2017, compared to 3,465 railcars in 2016, and 3,790 railcars in 2015.

North American Rail Regulatory Matters

In 2015, the Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation (“PHMSA”) issued regulations that established new design standards for tank cars in flammable liquids service. 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 120,000 railcars in North America, including approximately 13,450 tank cars currently used to transport flammable liquids that are affected by the new rules, of which approximately 3,900 are moving crude oil and ethanol. Over 97% 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.


RAIL INTERNATIONAL

Segment Summary
 
Rail International, composed primarily of GATX Rail Europe ("GRE"), produced solid operating results in 2017. Despite market pressure, GRE was successful in maintaining high fleet utilization. Railcar utilization for GRE was 96.8% at the end of 2017, compared to 95.6% at the end of 2016, and 95.8% at the end of 2015. GRE's results in 2017 benefited from lower maintenance expense, primarily due to lower wheelset costs, which were higher in 2016 due to a refurbishment program to address anti-corrosion paint issues on certain wheelsets.

Rail India continued to focus on investment opportunities and diversification of its fleet, as well as developing relationships with customers, suppliers and the Indian Railways. In 2017, Rail India added 275 railcars, compared to zero in 2016 and 410 railcars in 2015. As of December 31, 2017, Rail India had entered into contracts to acquire approximately 350 additional railcars in 2018 and expects continued fleet growth and diversification.

Rail Russia focused on managing its fleet and developing relationships with new customers. In 2017, Rail Russia did not add any new railcars, compared to 20 railcars added in 2016 and 150 railcars added in 2015. As of December 31, 2017, Rail Russia had commitments to acquire approximately 165 railcars in 2018 and plans to further expand both its fleet and customer base in 2018.


34


The following table shows Rail International's segment results for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
Lease revenue
$
190.3

 
$
182.0

 
$
172.9

Other revenue
6.8

 
7.0

 
7.5

   Total Revenues
197.1

 
189.0

 
180.4

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
41.1

 
47.2

 
39.6

Depreciation expense
48.9

 
45.5

 
43.7

Other operating expense
4.7

 
5.3

 
5.1

   Total Expenses
94.7

 
98.0

 
88.4

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net gain on asset dispositions
3.1

 
1.1

 
6.8

Interest expense, net
(33.4
)
 
(29.7
)
 
(22.4
)
Other (expense) income
(3.2
)
 
0.8

 
(6.0
)
Share of affiliates' pre-tax loss
(0.1
)
 
(0.2
)
 
(0.3
)
Segment Profit   
$
68.8

 
$
63.0

 
$
70.1

 
 
 
 
 
 
Investment Volume
$
90.9

 
$
87.1

 
$
148.0


The following table shows fleet activity for GRE railcars for the years ended December 31:
 
2017
 
2016
 
2015
Beginning balance
23,122

 
22,923

 
22,451

Cars added
871

 
879

 
1,421

Cars scrapped or sold
(827
)
 
(680
)
 
(949
)
Ending balance
23,166

 
23,122

 
22,923

Utilization rate at year end
96.8
%
 
95.6
%
 
95.8
%
Active railcars at year end
22,422

 
22,108

 
21,969

Average (monthly) active railcars
22,137

 
21,869

 
21,598



35


gatx20171231_chart-32744.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 2017, a stronger euro positively impacted lease revenue by approximately $4.5 million and segment profit, excluding other income (expense), by approximately $2.5 million compared to 2016. In 2016, fluctuations in the value of the euro did not have a meaningful impact on revenue or segment profit compared to the prior year.

Segment Profit

In 2017, segment profit of $68.8 million increased 9.2% compared to $63.0 million in 2016. The increase was largely due to higher lease revenue and lower maintenance expense, as well as the positive impacts of foreign exchange rates.

In 2016, segment profit of $63.0 million decreased 10.1% 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.

Revenues

In 2017, lease revenue increased $8.3 million, or 4.6%, due to more cars on lease, as well as the positive impacts of foreign exchange rates. Other revenue was comparable to the prior year.

In 2016, lease revenue increased $9.1 million, or 5.3%, primarily due to more cars on lease.


36


Expenses

In 2017, maintenance expense decreased $6.1 million, primarily due to lower wheelset costs and reimbursements from manufacturers on previously incurred wheelset costs, partially offset by the negative impacts of foreign exchange rates. Depreciation expense increased $3.4 million, driven by the impact of new cars added to the fleet, as well as the negative impacts of foreign exchange rates. Other operating expense was comparable to prior year.

In 2016, maintenance expense increased $7.6 million, primarily due to the costs of wheelset replacements related to the refurbishment program, as discussed above, and the higher costs associated with railcars undergoing regulatory compliance maintenance. 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.

Other Income (Expense)

In 2017, net gain on asset dispositions increased $2.0 million, primarily due to higher scrapping gains resulting from more railcars scrapped. Net interest expense increased $3.7 million, due to a higher average interest rate and a higher average debt balance. Other expense increased $4.0 million, driven by the unfavorable impact of changes in foreign exchange rates on non-functional currency items and derivatives.

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 a lower average interest rate. 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.

Investment Volume

Investment volume was $90.9 million in 2017, $87.1 million in 2016, and $148.0 million in 2015. During 2017, we acquired approximately 871 railcars compared to 879 railcars in 2016, and 1,980 railcars in 2015.


ASC

Segment Summary

ASC's operations benefited from strong demand for iron ore spot business, as well as favorable sailing conditions in 2017. ASC carried 27.8 million net tons of freight in 2017 compared to 25.4 million net tons in 2016 and 26.5 million net tons in 2015.

During 2017, ASC sold three of its vessels for total proceeds of $8.3 million, resulting in a net loss of $1.8 million. In addition, ASC returned two vessels that were previously leased.


37


The following table shows ASC’s segment results for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
Lease revenue
$
4.1

 
$
4.2

 
$
4.1

Marine operating revenue
168.4

 
150.0

 
166.1

   Total Revenues
172.5

 
154.2

 
170.2

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
22.2

 
18.6

 
22.3

Marine operating expense
106.2

 
96.7

 
107.2

Depreciation expense
12.0

 
12.9

 
14.3

Operating lease expense
1.8

 
6.0

 
5.2

   Total Expenses
142.2

 
134.2

 
149.0

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net loss on asset dispositions
(1.9
)
 

 
(0.1
)
Interest expense, net
(5.2
)
 
(4.5
)
 
(5.3
)
Other income (expense)
1.3

 
(5.4
)
 
(0.7
)
Segment Profit   
$
24.5

 
$
10.1

 
$
15.1

 
 
 
 
 
 
Investment Volume
$
14.0

 
$
9.1

 
$
20.3

Total Net Tons Carried
27.8

 
25.4

 
26.5


gatx20171231_chart-33039.jpg
 

38


Segment Profit

In 2017, segment profit of $24.5 million increased 142.6% compared to $10.1 million in 2016. In 2017, ASC operated 12 vessels compared to 11 vessels in 2016. The increase in segment profit was primarily due to higher volume and a favorable commodity mix, as well as the absence of $5.0 million of expenses recorded in 2016 related to an accrual for asbestos-related litigation and costs associated with the scheduled return of a leased vessel.

In 2016, segment profit of $10.1 million decreased 33.1% compared to $15.1 million in 2015. The decrease was driven by the $5.0 million of expenses recorded in 2016 noted above. 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.

Revenues

In 2017, marine operating revenue increased $18.4 million, or 12.3%, primarily due to higher volume, higher freight rates and a favorable mix of commodities shipped. Higher fuel revenue, which is offset in marine operating expense, also contributed to the variance. The terms of our contracts provide that a substantial portion of fuel costs are passed on to customers.

In 2016, marine operating revenue decreased $16.1 million, or 9.7%, primarily due to 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.

Expenses

In 2017, maintenance expense increased $3.6 million, due to more winter work and higher operating repairs. Marine operating expense increased $9.5 million, largely driven by the impact of an additional vessel in operation and more overall operating days, as well as higher fuel costs.

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

Operating lease expense in 2017, 2016, and 2015 included rent for the lease of ASC's tug-barge vessel that was returned at the beginning of 2017 and rent for a vessel that was returned in December 2017.

Other Income (Expense)

In 2017, other income (expense) improved by $6.7 million, due to the absence of $5.0 million of expenses recorded in 2016 related to an accrual for asbestos-related litigation and costs associated with the scheduled return of a leased vessel in 2017.

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

Investment Volume

ASC's investments in each of 2017, 2016, and 2015 consisted of structural and mechanical upgrades to our vessels.


PORTFOLIO MANAGEMENT

Segment Summary

Portfolio Management's segment profit includes income from our investment in the Rolls-Royce & Partners Finance companies (collectively the "RRPF affiliates"). The RRPF affiliates are a group of sixteen 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 $57.3 million for 2017, $51.8 million for 2016, and $65.5 million for 2015. The

39


RRPF affiliates owned 432 aircraft engines at the end of 2017 compared to 407 at the end of 2016 and 436 at the end of 2015. Impairment losses recorded for certain aircraft spare engines negatively impacted earnings 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 recorded impairment losses of $6.7 million and $49.8 million in 2016 and 2015. As of December 31, 2017, we completed the sales of all of the planned marine assets, including our 50% interest in the Cardinal Marine joint venture, and received proceeds of $46.8 million, $59.9 million, and $124.4 million in 2017, 2016, and 2015. These sales resulted in net gains of $1.8 million in 2017, $4.2 million in 2016, and $21.6 million in 2015.

Upon completion of these sales, Portfolio Management continues to own other marine assets, consisting primarily of five liquefied gas-carrying vessels (the "Norgas Vessels"). The Norgas Vessels specialize in the transport of pressurized gases and chemicals, such as liquefied petroleum gas, liquefied natural gas, and ethylene, primarily on shorter-term spot contracts for major oil and chemical customers worldwide.

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 prior year residual sharing dispute. This transaction originated in 2001 and was related to a residual value 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 power plant facilities and, as manager of the leases, we received residual sharing fees of $30.1 million.

Portfolio Management's total asset base was $582.8 million at December 31, 2017, compared to $593.5 million at December 31, 2016, and $636.5 million at December 31, 2015.

The following table shows Portfolio Management’s segment results for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
Lease revenue
$
3.8

 
$
5.8

 
$
22.2

Marine operating revenue
25.0

 
49.3

 
68.9

Other revenue
1.1

 
1.5

 
1.4

   Total Revenues
29.9

 
56.6

 
92.5

 
 
 
 
 
 
Expenses
 
 
 
 
 
Marine operating expense
24.8

 
32.8

 
48.7

Depreciation expense
7.0

 
7.0

 
17.4

Other operating expense
1.0

 
4.4

 
7.1

   Total Expenses
32.8

 
44.2

 
73.2

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net gain on asset dispositions
7.7

 
80.3

 
5.3

Interest expense, net
(9.2
)
 
(8.6
)
 
(20.0
)
Other income
2.3

 

 

Share of affiliates' pre-tax income
58.4

 
52.8

 
45.2

Segment Profit   
$
56.3

 
$
136.9

 
$
49.8

 
 
 
 
 
 
Investment Volume   
$
36.6

 
$
25.0

 
$
18.4



40


gatx20171231_chart-32579.jpg
RRPF Affiliates Engine Portfolio Data
The following table shows portfolio activity for the RRPF affiliates' aircraft spare engines for the years ended December 31:
 
2017
 
2016
 
2015
Beginning balance
407

 
436

 
431

Engine acquisitions
35

 
25

 
25

Engine dispositions
(10
)
 
(54
)
 
(20
)
Ending balance
432

 
407

 
436

Utilization rate at December 31
94.7
%
 
94.6
%
 
96.6
%




41


gatx20171231_chart-57539.jpg

Segment Profit

In 2017, segment profit was $56.3 million compared to $136.9 million in 2016. Segment profit included net gains of approximately $1.8 million in 2017 and net losses of approximately $1.5 million in 2016 associated with the planned exit of marine investments. In addition, segment profit in 2016 included $49.1 million of income from the settlement of a prior year residual sharing dispute. Excluding these items, results for the Portfolio Management segment were $34.8 million lower in 2017, primarily due to lower residual sharing fees from the managed portfolio and lower aggregate marine operating results. The markets in 2017 for the Norgas Vessels experienced substantially lower shipping rates that negatively impacted revenue due to decreased demand and new vessels that have entered the market. These decreases were partially offset by higher RRPF affiliate income.

In 2016, segment profit of $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 prior year residual sharing dispute. In addition, segment profit in 2016 was impacted by a net loss of approximately $1.5 million associated with the planned exit of the majority of marine investments, compared to a net 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 fees from the managed portfolio, partially offset by lower RRPF affiliate income.

Revenues

In 2017, lease revenue decreased $2.0 million, primarily due to the impact of the sales of leased assets in 2016. Marine operating revenue decreased $24.3 million, largely due to lower revenue from the Norgas Vessels resulting from substantially lower shipping rates, as well as the absence of revenue from the Nordic Vessels and other inland marine assets that were sold in 2016 and 2017.

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.

42


Expenses
    
In 2017, marine operating expense decreased $8.0 million, primarily due to the absence of the Nordic Vessels and other inland marine assets that were sold in 2016 and 2017, partially offset by higher expenses for the Norgas Vessels. Depreciation expense was comparable to 2016. Other operating expense was $3.4 million lower, due to a loss reserve recorded in 2016 in connection with one investment.

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 as well as the impact from the classification of certain assets as held for sale. 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, partially offset by the loss reserve recorded in 2016 in connection with one investment.

Other Income (Expense)

In 2017, net gain on asset dispositions decreased $72.6 million. A net gain of $1.8 million was recorded in 2017 compared to a net loss of $2.5 million in 2016 associated with the planned exit of marine investments. In addition, income of $49.1 million was recorded in 2016 from the settlement of a prior year residual sharing dispute. Excluding these items, net gain on asset dispositions decreased $27.8 million primarily due to lower residual sharing fees from the managed portfolio in 2017. Net interest expense increased $0.6 million, primarily due to a higher average interest rate.

In 2016, net gain on asset dispositions increased $75.0 million. Income of $49.1 million was recorded in 2016 related to the settlement of a prior year residual sharing dispute. In addition, net gain on asset dispositions in 2016 included a net loss of approximately $2.5 million associated with the planned exit of marine investments, compared to a net 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 fees from the managed portfolio 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, a decrease in segment leverage in 2016, and lower average interest rates.

In 2017, share of affiliates' earnings, comprised substantially of the RRPF affiliates, increased $5.6 million, primarily due to higher operating results driven by engines added to the fleet in 2017. Additionally, the absence of asset impairments that were recorded in 2016 were offset by lower net asset disposition gains in 2017.

In 2016, share of affiliates' earnings increased $7.6 million, primarily due to an impairment charge of $19.0 million in 2015 and a net gain on sale of $1.0 million in 2016 associated with the sale of our interest in the Cardinal Marine affiliate. 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 aircraft spare engines.

Investment Volume

Investment volume of $36.6 million in 2017, $25.0 million in 2016, and $18.4 million in 2015 consisted primarily of investments in the RRPF affiliates.


43


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.

The following table shows components of Other for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Selling, general and administrative expense
$
181.5

 
$
174.7

 
$
192.4

Unallocated interest (income) expense, net
(8.5
)
 
(4.8
)
 
5.3

Other expense (income), including eliminations
5.6

 
3.5

 
1.1


SG&A, Unallocated Interest and Other

During 2017, we terminated the office lease at our corporate headquarters early. As a result, accelerated depreciation on leasehold improvements was recorded in SG&A, and lease termination costs were recorded in other expense (income). Amounts reported in SG&A for 2016 and 2015 also included costs associated with a voluntary early retirement program extended to eligible employees. A pension settlement accounting adjustment of $6.1 million attributable to lump sum payments elected by eligible retirees as part of the program was recorded in 2016, and $9.0 million of benefit costs related to the program were recorded in 2015.

In 2017, SG&A of $181.5 million increased $6.8 million from 2016. The increase was due to the impact of the accelerated depreciation expense adjustment noted above, as well as higher compensation and employee benefits costs, partially offset by the absence of the pension settlement accounting adjustment recorded in 2016.
 
In 2016, SG&A of $174.7 million decreased $17.7 million from 2015. The decrease was primarily due to reduced employee costs, as well as lower pension and information technology expenses. Lower benefit costs recorded in 2016 associated with the early retirement program contributed to the decrease. 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.

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.

In 2017, other expense (income), including eliminations increased $2.1 million, attributable to an increase to a litigation accrual recorded in the current year and the early lease termination costs noted above, partially offset by the absence of an environmental remediation accrual recorded in 2016 related to properties sold in prior years.

In 2016, other expense (income), including eliminations was primarily composed of the environmental remediation accrual noted above.


44


Consolidated Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted which made broad and complex changes to the U.S. tax laws. In particular, the U.S. corporation income tax rate was reduced to 21% from 35%, and a new territorial tax system was implemented that will affect the future U.S. taxation of earnings repatriated from our foreign subsidiaries and affiliates. Other provisions included an immediate deduction for qualified investments and limitations on the deductibility of interest expense and executive compensation. The Tax Act has had a significant impact on our fourth quarter and full year earnings in 2017, and will impact future periods as well. In 2017, we recorded a one-time non-cash net tax benefit of $315.9 million which represents our provisional estimate of the impact of the Tax Act. This amount includes a net benefit of $371.4 million associated with the re-measurement of our net deferred tax liability utilizing the lower U.S. tax rate offset by a one-time transitional repatriation tax of $57.2 million on certain undistributed earnings of our non-U.S. subsidiaries and affiliates. We expect that the reduction in the U.S. corporate tax rates will favorably impact our consolidated effective tax rate and net income and diluted earnings per share in future periods beginning in 2018; however, based on our expected U.S. tax return filing position, we do not anticipate that the Tax Act will have a material impact on our future cash flows. We will continue to evaluate the provisions of the Tax Act, and the ultimate impact may differ from this provisional estimate, due to, among other things, changes in interpretations and assumptions made by us, additional guidance that may be issued by the Internal Revenue Service and the U.S. Department of the Treasury, and actions that we may take. See "Note 12. Income Taxes" in Part II, Item 8 of this Form 10-K for additional information on income taxes.


45


BALANCE SHEET DISCUSSION

Assets

Total assets (including on- and off-balance sheet) were $7.9 billion at December 31, 2017, compared to $7.6 billion at December 31, 2016. The increase was primarily driven by an increase in operating assets at Rail North America and Rail International, partially offset by the sales of assets at Rail North America and Portfolio Management that were previously classified as held for sale. 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):
 
2017
 
2016
 
 
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
Rail North America
$
4,915.0

 
$
435.7

 
$
5,350.7

 
$
4,775.6

 
$
456.5

 
$
5,232.1

Rail International
1,332.9

 

 
1,332.9

 
1,128.7

 

 
1,128.7

ASC
286.7

 

 
286.7

 
278.8

 
2.6

 
281.4

Portfolio Management
582.8

 

 
582.8

 
593.5

 

 
593.5

Other
305.0

 

 
305.0

 
328.8

 

 
328.8

Total
$
7,422.4

 
$
435.7

 
$
7,858.1

 
$
7,105.4

 
$
459.1

 
$
7,564.5


Gross Receivables

Receivables of $219.5 million at December 31, 2017 decreased $14.1 million from December 31, 2016, primarily due to lower revenue and the timing of payments by customers.

Allowance for Losses
 
As of December 31, 2017, allowance for losses totaled $6.4 million, or 7.7% of rent and other receivables, compared to $6.1 million, or 7.1%, at December 31, 2016, both balances related entirely to general allowances.

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 $387.4 million from 2016. The increase was primarily due to investments of $564.4 million, positive foreign exchange rate effects of $157.4 million, and the purchase of leased-in assets of $123.4 million, offset by depreciation of $344.7 million, sale leasebacks of $83.9 million, and $80.6 million of asset dispositions.

Investments in Affiliated Companies

Investments in affiliated companies increased $54.0 million in 2017 (see table below). The increase was driven by our share of earnings from RRPF and an investment of $36.6 million in an RRPF affiliate to fund the purchase of additional aircraft spare engines, partially offset by distributions from RRPF.


46


The following table shows our investments in affiliated companies by segment as of December 31 (in millions):
 
2017
 
2016
Rail North America
$
6.8

 
$
10.5

Rail International

 
1.2

Portfolio Management
434.2

 
375.3

Total
$
441.0

 
$
387.0


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

Goodwill

In 2017 and 2016, changes in the balance of our goodwill, all of which are attributable to the Rail North America and Rail International segments, resulted from fluctuations in foreign currency exchange rates. We tested our goodwill for impairment in the fourth quarter of 2017, and no impairment was indicated.

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

Debt

Total debt increased $116.6 million from the prior year. Issuances of long-term debt of $800.0 million were offset by maturities and principal payments of $703.0 million and the effects of foreign exchange on foreign debt balances.

The following table shows the details of our long-term debt issuances in 2017 ($ in millions):
Type of Debt
 
Term
 
Interest Rate
 
Principal Amount
Recourse Unsecured
 
10.2 Years
 
3.85% Fixed
 
$
300.0

Recourse Unsecured
 
10.4 Years
 
3.50% Fixed
 
300.0

Recourse Unsecured
 
4.0 Years
 
2.11% Floating (1)
 
200.0

 
 
 
 
 
 
$
800.0

________
(1)
Floating interest rate at December 31, 2017.

As of December 31, 2017, our outstanding debt had a weighted average remaining term of 9.2 years and a weighted average interest rate of 3.96%, compared to 9.0 years and 3.65% at December 31, 2016.

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The following table shows the carrying value of our debt obligations by major component, including off-balance sheet debt, as of December 31 (in millions):
 
2017
 
2016
 
Secured
 
Unsecured
 
Total
 
Total
Commercial paper and borrowings under bank credit facilities
$

 
$
4.3

 
$
4.3

 
$
3.8

Recourse debt
11.6

 
4,360.1

 
4,371.7

 
4,253.2

Capital lease obligations
12.5

 

 
12.5

 
14.9

Balance sheet debt
24.1

 
4,364.4

 
4,388.5

 
4,271.9

Recourse off-balance sheet debt (1)
435.7

 

 
435.7

 
459.1

Total
$
459.8

 
$
4,364.4

 
$
4,824.2

 
$
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 $445.5 million in 2017, primarily due to net income of $502.0 million, which included $315.9 million from the impact of the Tax Cuts and Jobs Act enacted in 2017 (see "Non-GAAP Financial Measures"), $93.2 million of foreign currency translation adjustments due to the balance sheet effects of a weaker U.S. dollar, $10.0 million from the effects of share-based compensation, $4.8 million of net unrealized gains on derivatives, and $3.5 million from the effects of post-retirement benefit plan adjustments. These increases were partially offset by stock repurchases of $100.0 million and dividends of $68.2 million.

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 resources, along with our available cash balances, to fulfill our debt, lease, and dividend obligations, to support our share repurchase program, and to fund portfolio investments and capital additions. We primarily use cash from operations to fund daily operations.

The timing of asset dispositions and changes in working capital impact 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, 2017, we had an unrestricted cash balance of $296.5 million.


48


The following table shows our principal sources and uses of cash for the years ended December 31 (in millions):
 
2017
 
2016
 
2015
Principal sources of cash
 
 
 
 
 
Net cash provided by operating activities
$
496.8

 
$
629.4

 
$
541.8

Portfolio proceeds
165.6

 
223.7

 
482.2

Other asset sales
30.3

 
23.0

 
18.7

Proceeds from sale-leasebacks
90.6

 
82.5

 

Proceeds from issuance of debt, commercial paper, and credit facilities
792.6

 
859.4

 
748.8

Total
$
1,575.9

 
$
1,818.0

 
$
1,791.5

 
 
 
 
 
 
Principal uses of cash
 
 
 
 
 
Portfolio investments and capital additions
$
(603.4
)
 
$
(620.7
)
 
$
(696.9
)
Repayments of debt, commercial paper, and credit facilities
(703.3
)
 
(803.6
)
 
(790.8
)
Purchases of leased-in assets
(111.8
)
 
(117.1
)
 
(118.4
)
Payments on capital lease obligations
(2.4
)
 
(3.6
)
 
(2.7
)
Stock repurchases
(100.0
)
 
(120.1
)
 
(125.4
)
Dividends
(68.2
)
 
(67.4
)
 
(68.2
)
Total
$
(1,589.1
)
 
$
(1,732.5
)
 
$
(1,802.4
)

Net Cash Provided by Operating Activities

Net cash provided by operating activities of $496.8 million decreased $132.6 million compared to 2016. The decrease was driven by lower fee income, which included $10.2 million of residual sharing income in 2017 compared to $83.6 million in 2016, lower contributions from our marine operations at Portfolio Management, and lower lease revenue at Rail North America. In addition, the net impact of changes in the balances of certain working capital items also impacted cash provided by operating activities.

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 $603.4 million decreased $17.3 million compared to 2016, primarily due to fewer railcars acquired at Rail North America, partially offset by higher investments at the RRPF affiliates. 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):
 
2017
 
2016
 
2015
Rail North America
$
460.9

 
$
495.6

 
$
506.7

Rail International
90.9

 
87.1

 
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