10-K 1 gatx20181231-10k.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, 2018
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2328
______________________
logo12312017a01.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.)
233 South Wacker Drive
Chicago, IL 60606-7147
(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 every Interactive Data File required to be submitted 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 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 an 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 $2.8 billion as of June 30, 2018.

Common shares outstanding were 36.6 million at January 31, 2019.

DOCUMENTS INCORPORATED BY REFERENCE
GATX’s definitive Proxy Statement to be filed on or about March 18, 2019
PART III







GATX CORPORATION
2018 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.
 






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,” “outlook,” “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, including increased costs due to tariffs or trade disputes
reduced opportunities to generate asset remarketing income
 
operational and financial risks related to our affiliate investments, including the Rolls-Royce & Partners Finance joint ventures (collectively the "RRPF affiliates")
fluctuations in foreign exchange rates
failure to successfully negotiate collective bargaining agreements with the unions representing a substantial portion of our employees
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
uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021
competitive factors in our primary markets, including competitors with a significantly lower cost of capital than GATX
risks related to our international operations and expansion into new geographic markets, including the imposition of new or additional tariffs, quotas, or trade barriers
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



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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, Portfolio Management, and American Steamship Company (“ASC”).
 
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.

At December 31, 2018, we had total assets of $8.0 billion, composed 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 148,000 railcars is one of the largest railcar lease fleets in the world. We currently lease tank cars, freight cars, and locomotives in North America, tank cars and freight cars in Europe and Russia, and freight cars in India. The following table sets forth our worldwide rail fleet data as of December 31, 2018:
 
Tank
Railcars
 
Freight
Railcars
 
Total Fleet
 
Managed
Railcars
 
Total Railcars
 
Locomotives
Rail North America
60,513

 
61,179

 
121,692

 
295

 
121,987

 
680

Rail International
21,128

 
4,691

 
25,819

 
7

 
25,826

 

Total
81,641

 
65,870

 
147,511

 
302

 
147,813

 
680



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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 over 500 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
 
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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 860 customers. In 2018, no single customer accounted for more than 5% of Rail North America’s total lease revenue, and the top ten customers combined accounted for approximately 18% 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 40 months as of December 31, 2018. 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 Rail Group, LLC, 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. Under the terms of that agreement, we agreed to order 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, 2018, 7,992 railcars have been ordered, of which 5,670 railcars have been delivered. On May 24, 2018, we amended our long-term supply agreement with Trinity to extend the term to December 2023. We agreed to purchase an additional 4,800 tank cars (1,200 per year) beginning in January 2020 and continuing through the expiration of the extended term.

On July 30, 2018, we entered into a multi-year railcar supply agreement with American Railcar Industries, Inc., pursuant to which we will purchase 7,650 newly built railcars. The order encompasses a mix of tank and freight cars that are to be delivered over a five-year period, beginning in April 2019. Under the terms of this agreement, ARI will deliver 450 railcars in 2019, with the remaining 7,200 to be delivered ratably over the four-year period of 2020 to 2023. The agreement also includes an option to order up to an additional 4,400 railcars subject to certain restrictions.

On November 12, 2018, we entered into an agreement to purchase a fleet of up to 3,100 railcars from ECN Capital Corporation. As of December 31, 2018, we had acquired 2,832 railcars, with the balance to be acquired in early 2019.

Rail North America also owns a fleet of locomotives, consisting of 644 four-axle and 36 six-axle locomotives as of December 31, 2018. Locomotive customers are primarily regional and short-line railroads, industrial users, and Class I railroads. Lease terms vary from month-to-month to ten years. As of December 31, 2018, 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 its rail assets, and such remarketing activities generate gains which may contribute significantly to Rail North America’s segment profit.


4


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, interior blast and lining, 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, 2018, 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 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. Eleven of these locations operate as independent maintenance repair units that are not affiliated with physical locations.
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 2018, wholly owned and third-party maintenance facilities performed approximately 55,000 service events, including multiple independent service events for the same car. In 2018, third-party maintenance network expenses accounted for approximately 25% of Rail North America’s total maintenance network expenses (excluding repairs performed by railroads). Approximately 75% of the maintenance hours, incurred for our tank cars and specialty freight cars during 2018, 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. 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 has provided leasing, maintenance and asset remarketing services to Adler, for which it received a base service fee and a performance-based asset remarketing fee. As of December 31, 2018, all railcar assets have been sold, and the partnership is in the process of winding down remaining activities.

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 210 customers. In 2018, 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, 2018, the average remaining lease term of the European fleet was approximately 21 months. 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 Greenbrier-Astra Rail (Wagony Swidnica sp. z.o.o and Astra Rail Industries S.A.), Tatravagónka a.s., and Legios Loco a.s. Additionally, GRE's Ostróda, Poland maintenance facility assembles several hundred tank cars each year. As of December 31, 2018, GRE had commitments to acquire approximately 1,500 newly manufactured railcars to be delivered

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in 2019, primarily from Tatravagónka a.s., and Greenbrier. The majority of the railcars to be delivered in 2019 have committed leases in place with customers.

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, 2018, Rail India owned 2,053 railcars with estimated useful lives of 20-25 years. Rail India's leases are net leases and have terms generally ranging from three to 12 years. As of December 31, 2018, the average remaining lease term of the Indian fleet was approximately six years. Rail India has a small customer base with approximately ten customers in the container, steel and automotive transport sector, as well as the public sector. As of December 31, 2018, Rail India had entered into contracts to acquire approximately 1,100 railcars to be delivered in 2019, all of which have committed leases in place with customers.

As of December 31, 2018, Rail Russia owned 354 railcars and had commitments to acquire 26 railcars to be delivered in 2019, all of which have committed leases in place with customers.

Maintenance

As of December 31, 2018, GRE operates a maintenance facility in Ostróda, Poland. In the second quarter of 2018, GRE closed its railcar maintenance facility in Hannover, Germany. The maintenance facility in Ostróda, Poland performs significant repairs, regulatory compliance and modernization work for owned railcars, and assembles railcars. This service center is supplemented by a number of third-party repair facilities, which in 2018 accounted for approximately 42% of GRE's fleet repair costs.

Similar to our Rail North America segment, GRE's customers periodically require maintenance services that are not included in the full-service lease agreement. 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.

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, including six chemical parcel tankers, a number of inland marine vessels, and our 50% interest in the Cardinal Marine joint venture. These investments were all sold as of December 31, 2017. See the Portfolio Management section in Part II, Item 7 of this Form 10-K for further details.
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Affiliates

The Rolls-Royce & Partners Finance companies (collectively the “RRPF affiliates”) are a group of seventeen 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, 2018, the RRPF affiliates, in aggregate, owned 452 engines, of which 253 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, 2018, 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.

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, 2018, 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, 2018, Portfolio Management's managed activities consisted primarily of managing leases of three power plants.

ASC

ASC operates the largest fleet of U.S.-flagged vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities such as iron ore, coal, limestone aggregates, and metallurgical limestone. End markets served 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, 2018, ASC’s fleet consisted of 12 vessels with a net book value of $257.0 million. All vessels are compliant with applicable regulatory guidelines. The vessels are diesel powered, with an average age of 41 years and estimated useful lives of 65 years. For 2019, 11 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 2021 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.
item1asc-revised.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 24 hours a day, seven days a week. ASC’s vessels are capable of transporting

7


and unloading almost any free flowing, dry bulk commodity. In 2018, ASC served 21 customers, with the top five customers accounting for 88% of total revenue.

The following table sets forth ASC's fleet as of December 31, 2018:
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 and may also be supplemented with additional spot volume opportunities. In 2018, ASC operated 11 vessels and carried 26.2 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


TRADEMARKS AND PATENTS

Patents, trademarks, and licenses 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.

See "Note 13. Concentrations" in Part II, Item 8 of this Form 10-K for additional information.

EMPLOYEES AND EMPLOYEE RELATIONS

As of December 31, 2018, we employed 2,225 persons, of whom approximately 42% 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 United States 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, 2018, 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.


9


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
 
59
Thomas A. Ellman
Executive Vice President and Chief Financial Officer
2018
 
50
James M. Conniff
Executive Vice President and Chief Human Resources Officer
2018
 
61
Deborah A. Golden
Executive Vice President, General Counsel and Corporate Secretary
2012
 
64
Robert C. Lyons
Executive Vice President and President, Rail North America
2018
 
55
N. Gokce Tezel
Executive Vice President and President, Rail International
2018
 
44
Niyi A. Adedoyin
Senior Vice President and Chief Information Officer
2016
 
51
Michael T. Brooks
Senior Vice President, Portfolio Management
2018
 
49
Eric D. Harkness
Senior Vice President, Treasurer and Chief Risk Officer
2018
 
46
William M. Muckian
Senior Vice President, Controller and Chief Accounting Officer
2007
 
59
Amita Shetty
Senior Vice President, Business Development
2018
 
42
Paul F. Titterton
Senior Vice President and Chief Operating Officer, Rail North America
2018
 
43
Jeffery R. Young
Senior Vice President and Chief Tax Officer
2018
 
56
Robert A. Zmudka
Senior Vice President and Chief Commercial Officer, Rail North America
2018
 
51

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. Ellman was elected Executive Vice President and Chief Financial Officer in August, 2018. Previously, Mr. Ellman served as Executive Vice President and President, Rail North America from 2013 to August 2018, Senior Vice President and Chief Commercial Officer from 2011 to 2013, and Vice President and Chief Commercial Officer from 2006 to 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.

Mr. Conniff was elected Executive Vice President and Chief Human Resources Officer in August 2018. Previously, Mr. Conniff served as Senior Vice President, Human Resources from 2014 to August 2018, Vice President, Human Resources in 2014, and Senior Director, Benefits and Employee Services from 2008 to 2014. Mr. Conniff joined GATX in 1981 and has held a variety of positions in finance and human resources.

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

Mr. Lyons was elected Executive Vice President and President, Rail North America in August 2018. Previously, Mr. Lyons served as Executive Vice President and Chief Financial Officer from 2012 to August 2018, Senior Vice President and Chief Financial Officer from 2007 to 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.


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Mr. Tezel was elected Executive Vice President and President, Rail International in August 2018, Previously, Mr. Tezel served as Senior Vice President and President, Rail International from March 2018 to August 2018, Vice President and Senior Vice President - Business Development, Rail International from 2015 to March 2018, Vice President and Group Executive, Emerging Markets from 2012 to 2015, Vice President - International Business Development 2008 to 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. Adedoyin has served as Senior Vice President and Chief Information Officer since January 2016. Previously, Mr. Adedoyin served as Vice President and Chief Information Officer from 2013 to January 2016 and Senior Director, IT Strategy and Project Management Office from 2008 to 2013.

Mr. Brooks was elected Senior Vice President, Portfolio Management in August 2018. Previously, Mr. Brooks served as Senior Vice President and Chief Operations Officer, Rail North America from 2016 to August 2018, Senior Vice President, Operations and Technology from 2013 to 2016, and Senior Vice President and Chief Information Officer from 2008 to 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. Harkness was elected Senior Vice President, Treasurer, and Chief Risk Officer in August 2018. Previously, Mr. Harkness served as Vice President, Treasurer and Chief Risk Officer from 2012 to August 2018, Vice President, Chief Risk Officer from 2010 to 2012, and Senior Investment Risk Officer from 2007 to 2010. Prior to joining GATX, Mr. Harkness served in a variety of positions of increasing responsibility in the financial services industry.

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.

Ms. Shetty was elected Senior Vice President, Business Development in August 2018. Previously, Ms. Shetty served as Vice President and Executive Director, Strategy from 2016 to August 2018, Vice President, Marketing & Customer Experience from 2014 to 2016, and Senior Director, Customer Experience from 2013 to 2014. Prior to joining GATX, Ms. Shetty spent more than ten years at various divisions of General Electric, including GE Capital Railcar Services.

Mr. Titterton was elected Senior Vice President and Chief Operating Officer, Rail North America in August 2018. Previously, Mr. Titterton served as Senior Vice President and Chief Commercial Officer, Rail North America from 2015 to August 2018, Vice President and Chief Commercial Officer from 2013 to 2015, Vice President and Group Executive, Fleet Management, Marketing and Government Affairs from 2011 to 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. Young was elected Senior Vice President and Chief Tax Officer in August 2018. Previously, Mr. Young served as Vice President and Chief Tax Officer from 2015 to August 2018, Vice President of Tax from 2007 to 2015, and as Director of Tax from 2003 to 2007. Prior to joining GATX, Mr. Young spent twenty years in a variety of increasingly responsible tax related positions in public accounting and the financial services industry.

Mr. Zmudka was elected Senior Vice President and Chief Commercial Officer, Rail North America in August 2018. Previously, Mr. Zmudka served as Vice President and Group Executive, North American Sales & Marketing from 2010 to August 2018, Vice President and Executive Director, Strategic Sales from 2007 to 2010, and Vice President, National Accounts from 2006 to 2007. Mr. Zmudka joined GATX in 1989 and worked in various sales and fleet portfolio roles before being promoted to Vice President, Regional Sales in 2001.

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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”). The SEC maintains a website that contains reports, proxy, and other information that we have filed with the SEC. The SEC website may be found at http://www.sec.gov. 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
Availability of pipelines, trucks, and other alternative modes of transportation

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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. In addition, if tariffs, trade disputes, commodity prices, or other factors lead to higher prices for steel or other raw materials used to manufacture railcars, we may be required to pay higher prices to purchase new railcars, which could adversely affect our ability to profitably lease those railcars to customers.

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 17 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. In addition, Rolls-Royce manages the RRPF affiliates and, as a result, we may not have control over operational matters, which could result in actions that have an adverse economic impact on the RRPF affiliates, or us, or could expose us to potential liability. The RRPF affiliates contribute significantly to our financial results. If the financial or operating performance of the RRPF affiliates deteriorates, our results of operations and cash flows could be negatively affected.

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

Upon consolidation, we translate the financial results of certain subsidiaries from their local currency to the 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.


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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. Typical funding sources include commercial paper, bank term loans, public debt issuances, and a variety of other secured and unsecured financing structures. 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.

Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our current or future debt obligations, including our long-term debt instruments and our bank credit facilities.

We have a material amount of borrowing arrangements and financing structures that base interest rates on the London Inter-Bank Offering Rate ("LIBOR"). Regulators and law enforcement agencies in the United Kingdom and elsewhere are conducting civil and criminal investigations into whether the banks that contributed to the British Bankers’ Association (the “BBA”) in connection with the calculation of daily LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. Actions by the BBA or any other administrator of LIBOR, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined, the phasing out of LIBOR or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. As a result, LIBOR may be discontinued by 2021. Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates that could replace LIBOR include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. At this time, it is not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any such changes, phase out, alternative reference rates or other reforms, if they occur, would have on the amount of interest paid on, or the market value of, our current or future debt obligations, including our long-term debt instruments and our bank credit facilities. Uncertainty as to the nature of such potential changes, phase out, alternative reference rates or other reforms may materially adversely affect the trading market for LIBOR-based securities, including our long-term debt instruments and our bank credit facilities. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks” may materially adversely affect the market value of, the applicable interest rate on and the amount of interest paid on our current or future debt obligations, including our long-term debt instruments and our bank credit

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facilities.

Competition could result in decreased profitability.

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

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

We generate a significant amount of our net income outside the United States. In recent years, we have increased our focus on international rail growth and expansion into select emerging markets as a means to grow and diversify earnings.

Our foreign operations and international expansion strategy are subject to the following risks associated with international operations:
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

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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.

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. Governments or regulators may change the legislative or regulatory frameworks within which we operate, including environmental laws and regulations, without providing us any recourse to address any adverse effects such changes may have on our business. 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 over 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.


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

There is increasing global regulatory focus on climate change and greenhouse gas (“GHG”) emissions. Climate change may also pose regulatory and environmental risks that could harm our results of operations and affect the way we conduct business. Severe weather, climate change, and natural disasters, such as tornadoes, flooding and earthquakes, could cause significant business interruptions and result in increased costs and liabilities and decreased revenues. Changes in laws, rules, and regulations, or actions by authorities under existing laws, rules, or regulations, to address GHG and climate change could negatively impact our customers and business. For example, restrictions on GHG 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. Any of these factors, individually or in operation with one or more of the other factors, or other unforeseen impacts of climate change could reduce the demand for our assets and 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.

Six shareholders collectively control more than 65% 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, 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.

Threats to IT systems associated with cybersecurity risks and cyber incidents or attacks have continued to increase in recent years. We rely on our IT infrastructure to process, transmit, and store electronic information that is used in 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 material error.

Item 1B.  Unresolved Staff Comments

None.


19


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, 2018, 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
Ostróda, Poland
Płock, Poland
Hamburg, Germany
 
 
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
 
 
 
 

20


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.


21


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 1,643 common shareholders of record as of January 31, 2019.

Issuer Purchases of Equity Securities

During 2018, we repurchased 1.5 million shares for $115.4 million, excluding commissions, under the share repurchase program authorized on January 26, 2018. As of December 31, 2018, $134.6 million remained available under this program.
On January 25, 2019, our board of directors ("Board") approved 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. This authorization replaced the prior program approved in 2018. 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 2018 and remaining share purchase authorization under the 2018 repurchase program:
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, 2018 - October 31, 2018
 
339,292

 
$
77.57

 
339,292

 
$
186.3

November 1, 2018 - November 30, 2018
 
366,769

 
$
79.31

 
366,769

 
$
157.2

December 1, 2018- December 31, 2018
 
311,420

 
$
72.75

 
311,420

 
$
134.6

Total
 
1,017,481

 
$
76.72

 
1,017,481

 
 


22


Equity Compensation Plan Information as of December 31, 2018:
 
 
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
 
2,092,478

(1)
 
$
55.73

(2)
 
3,666,612

Equity Compensation Plans Not Approved by Shareholders
 

 
 
 
 
 

Total
 
2,092,478

 
 
 
 
 
3,666,612

__________
(1) Consists of 435,552 stock appreciation rights, 963,557 non-qualified stock options, 260,396 performance shares, 205,507 restricted stock units and 227,466 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.

23



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, 2018, 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, 2013, and that all dividends were reinvested.

chart-stockperf.jpg



12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
 
12/31/17
 
12/31/18
GATX
$
100.00

 
$
112.70

 
$
85.86

 
$
128.64

 
$
133.51

 
$
155.73

S&P 500
100.00

 
113.68

 
115.24

 
129.02

 
157.17

 
150.27

S&P MidCap 400
100.00

 
109.74

 
107.34

 
129.60

 
150.63

 
133.91

Russell 3000
100.00

 
112.55

 
113.09

 
127.47

 
154.40

 
146.29



24


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.
 
2018
 
2017
 
2016
 
2015
 
2014
Results of Operations
 
 
 
 
 
 
 
 
 
Revenue
$
1,360.9

 
$
1,376.9

 
$
1,418.3

 
$
1,449.9

 
$
1,451.0

Net gain on asset dispositions
72.8

 
54.1

 
98.0

 
79.2

 
87.2

Share of affiliates’ pre-tax income
61.1

 
55.9

 
53.1

 
45.4

 
67.8

Net income (GAAP)
211.3

 
502.0

 
257.1

 
205.3

 
205.0

Net income, excluding tax adjustments and other items (non-GAAP) (1)
199.8

 
185.0

 
235.9

 
234.9

 
205.0

Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings (GAAP)
5.62

 
12.95

 
6.35

 
4.76

 
4.55

Diluted earnings (GAAP)
5.52

 
12.75

 
6.29

 
4.69

 
4.48

Diluted earnings, excluding tax adjustments and other items (non-GAAP) (1)
5.22

 
4.70

 
5.77

 
5.37

 
4.48

Dividends declared
1.76

 
1.68

 
1.60

 
1.52

 
1.32

Financial Condition
 
 
 
 
 
 
 
 
 
Operating assets and facilities, net of accumulated depreciation
$
6,549.5

 
$
6,192.1

 
$
5,804.7

 
$
5,698.4

 
$
5,688.0

Investments in affiliated companies
464.5

 
441.0

 
387.0

 
348.5

 
357.7

Total assets
7,616.7

 
7,422.4

 
7,105.4

 
6,894.2

 
6,919.9

Off-balance sheet assets (1)
430.2

 
435.7

 
459.1

 
495.5

 
617.8

Short-term borrowings
110.8

 
4.3

 
3.8

 
7.4

 
72.1

Long-term debt and capital lease obligations
4,441.0

 
4,384.2

 
4,268.1

 
4,196.8

 
4,184.5

Shareholders’ equity (2)
1,788.1

 
1,792.7

 
1,347.2

 
1,280.2

 
1,314.0

Other Data
 
 
 
 
 
 
 
 
 
Average number of common shares and common share equivalents
38.3

 
39.4

 
40.9

 
43.8

 
45.8

Net cash provided by operating activities
$
508.5

 
$
496.8

 
$
629.4

 
$
541.8

 
$
458.4

Portfolio proceeds
$
234.4

 
$
165.6

 
$
223.7

 
$
482.2

 
$
264.0

Portfolio investments and capital additions
$
943.4

 
$
603.4

 
$
620.7

 
$
714.7

 
$
1,030.5

Recourse leverage (3)
2.7

 
2.5

 
3.3

 
3.5

 
3.5

Return on equity (GAAP)
11.8
%
 
32.0
%
 
19.6
%
 
15.8
%
 
15.1
%
Return on equity, excluding tax adjustments and other items (non-GAAP) (1)(4)
13.6
%
 
13.1
%
 
18.0
%
 
18.1
%
 
15.1
%
_________
(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)
Balances for 2018 and 2017 reflect increases in shareholders' equity resulting from the impact of the Tax Cuts and Jobs Act of 2017 ("Tax Act").
(3)
The reduction in recourse leverage beginning with 2017 is due to the increase in shareholders' equity resulting from the impact of the Tax Act.
(4)
Shareholder's equity used in this calculation for 2018 and 2017 excludes the impact of the Tax Act.

25


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, Portfolio Management, and American Steamship Company (“ASC”). 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):
 
2018
 
2017
 
2016
Segment Revenues
 
 
 
 
 
Rail North America
$
941.5

 
$
977.4

 
$
1,018.5

Rail International
217.5

 
197.1

 
189.0

Portfolio Management
16.1

 
29.9

 
56.6

ASC
185.8

 
172.5

 
154.2

 
$
1,360.9

 
$
1,376.9

 
$
1,418.3

Segment Profit
 
 
 
 
 
Rail North America
$
307.9

 
$
299.3

 
$
321.9

Rail International
68.6

 
68.8

 
63.0

Portfolio Management
38.7

 
56.3

 
136.9

ASC
33.0

 
24.5

 
10.1

 
448.2

 
448.9

 
531.9

Less:
 
 
 
 
 
Selling, general and administrative expense
191.1

 
180.0

 
169.0

Unallocated interest (income) expense
(8.6
)
 
(8.5
)
 
(4.8
)
Other, including eliminations
9.5

 
7.1

 
9.2

Income taxes ($10.8, $12.0 and $5.7 related to affiliates' earnings)
44.9

 
(231.7
)
 
101.4

   Net Income   
$
211.3

 
$
502.0

 
$
257.1

 
 
 
 
 
 
Net income, excluding tax adjustments and other items (non-GAAP)
$
199.8

 
$
185.0

 
$
235.9

Diluted earnings per share (GAAP)
$
5.52

 
$
12.75

 
$
6.29

Diluted earnings per share, excluding tax adjustments and other items (non-GAAP)
$
5.22

 
$
4.70

 
$
5.77

 
 
 
 
 
 
Return on equity (GAAP)
11.8
%
 
32.0
%
 
19.6
%
Return on equity, excluding tax adjustments and other items (non-GAAP)
13.6
%
 
13.1
%
 
18.0
%
 
 
 
 
 
 
Investment Volume
$
943.4

 
$
603.4

 
$
620.7



26


2018 Summary

Net income was $211.3 million, or $5.52 per diluted share, for 2018 compared to $502.0 million, or $12.75 per diluted share, for 2017, and $257.1 million, or $6.29 per diluted share, for 2016. Results for 2018 include a net benefit of $11.5 million from tax adjustments and other items, compared to a net benefit of $317.0 million in 2017 and a net benefit of $21.2 million in 2016 (see "Non-GAAP Financial Measures" at the end of this item for further details).
At Rail North America, segment profit was higher in 2018 attributable to higher asset disposition gains and lower maintenance expense, resulting from fewer repairs performed by the railroads, as well as fewer tank qualifications. These positive drivers were partially offset by lower lease revenue, due to lower average lease rates and fewer railcars on lease, as well as lower lease termination fees.
At Rail International, segment profit in 2018 approximated the prior year as expenses associated with the closure of a railcar maintenance facility in Germany were substantially offset by higher revenue from more railcars on lease and the positive impact of foreign exchange rates.
At Portfolio Management, segment profit decreased in 2018, primarily due to lower residual sharing fees from the managed portfolio, a lower contribution from the Norgas Vessels, and the absence of operating income from the marine assets sold during 2017, partially offset by higher income from the Rolls-Royce & Partners Finance joint ventures (collectively the "RRPF affiliates").
At ASC, segment profit was higher in 2018, largely due to higher shipping rates, favorable operating conditions, and efficient fleet performance, which more than offset lower tonnage carried.
Total investment volume was $943.4 million in 2018, compared to $603.4 million in 2017, and $620.7 million in 2016.
2019 Outlook
Despite economic and political uncertainty, we currently expect a stable railcar leasing market in North America in 2019. A substantial portion of the new railcars to be delivered in 2019 are committed to customer leases. Our strong balance sheet also offers us flexibility to pursue secondary market acquisitions as attractive opportunities arise.
We expect Rail North America's segment profit in 2019 to decrease from 2018. Despite the increases in absolute lease rates experienced in 2018, we will face continued revenue pressure on the existing fleet as the average rate for expiring leases continues to move higher. As a result, we project revenue to decline compared to prior year. We also expect higher railcar maintenance expense as tank car qualification work increases in 2019. Higher interest expense, due to increased interest rates, and the impact of a new lease accounting standard will also negatively impact our expected segment profit. See "Note 2. Accounting Changes" in Part II, Item 8 of this Form 10-K for a summary of the impact of the new lease accounting standard.
We anticipate Rail International's segment profit in 2019 to increase from 2018. The market in Europe continues to improve, and lease revenue is expected to be higher in 2019, resulting from more cars on lease and higher lease rates. In addition, our railcar fleet in India grew in 2018, and we expect additional revenue from new investments in 2018 and 2019.
We believe Portfolio Management's segment profit in 2019 will be higher than 2018. Strong operating results at the RRPF affiliates are expected to continue. In addition, we anticipate higher income from our marine operations.
We expect ASC’s segment profit in 2019 to be slightly higher than 2018. We anticipate higher revenue, resulting from higher volume and increased freight rates, partially offset by higher operating and maintenance expenses.

27


Segment Operations

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the profitability of each segment. Segment profit includes all revenues, expenses, pre-tax earnings from affiliates, and net gains on asset dispositions that are directly attributable to each segment. We allocate interest expense to the segments based on what we believe to be the appropriate risk-adjusted borrowing costs for each segment. 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.

RAIL NORTH AMERICA

Segment Summary

The operating environment for Rail North America improved in 2018, as lease rates improved, railroad car loadings increased, and railroad velocity decreased relative to 2017. Capitalizing on the improved railcar leasing environment, Rail North America realized higher fleet utilization, a higher renewal success rate, and higher lease renewal rates than originally expected. However, despite broad increases in lease rates in 2018, revenue was still pressured as expiring lease rates increased in 2018 relative to the prior year. At December 31, 2018, Rail North America's wholly owned fleet, excluding boxcars, consisted of approximately 105,500 cars. Fleet utilization, excluding boxcars, was 99.4% at the end of 2018, compared to 98.2% at the end of 2017, and 98.9% at the end of 2016. Fleet utilization for approximately 16,200 boxcars was 94.2% at the end of 2018 compared to 92.6% at the end of 2017, and 93.8% at the end of 2016.

During 2018, an average of approximately 102,100 railcars, excluding boxcars, were on lease, compared to 102,600 in 2017, and 103,900 in 2016. The decrease in railcars on lease in the current year is largely due to railcars that were sold or scrapped exceeding the number of new railcars added to the fleet during the year. During 2018, the renewal rate change of the Lease Price Index (the "LPI", see definition below) was negative 9.8%, compared to negative 28.2% in 2017 and negative 20.3% in 2016. Lease terms on renewals for cars in the LPI averaged 38 months in 2018, compared to 33 months in 2017, and 32 months in 2016. Additionally, the renewal success rate, which represents the percentage of expiring leases that were renewed with the existing lessee, was 82.9% in 2018, compared to 74.7% in 2017, and 66.7% in 2016. Railcars returned by our customers may incur transitional costs, including additional repairs and related service prior to being leased to new customers, which may increase maintenance and associated expenses.

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. Under the terms of that agreement, we agreed to order 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, 2018, 7,992 railcars have been ordered, of which 5,670 railcars have been delivered. On May 24, 2018, we amended our long-term supply agreement with Trinity to extend the term to December 2023. We agreed to purchase an additional 4,800 tank cars (1,200 per year) beginning in January 2020 and continuing through the expiration of the extended term.

On July 30, 2018, we entered into a multi-year railcar supply agreement with American Railcar Industries, Inc., pursuant to which we will purchase 7,650 newly built railcars. The order encompasses a mix of tank and freight cars that are to be delivered over a five-year period, beginning in April 2019. Under the terms of this agreement, ARI will deliver 450 railcars in 2019, with the remaining 7,200 to be delivered ratably over the four-year period of 2020 to 2023. The agreement also includes an option to order up to an additional 4,400 railcars subject to certain restrictions.

On November 12, 2018, we entered into an agreement to purchase a fleet of up to 3,100 railcars from ECN Capital Corporation. As of December 31, 2018, we had acquired 2,832 railcars, with the balance to be acquired in early 2019.

As of December 31, 2018, leases for approximately 17,800 tank cars and freight cars and approximately 3,100 boxcars are scheduled to expire in 2019. These amounts exclude railcars on leases expiring in 2019 that have already been renewed or assigned to a new lessee.


28


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

2018

2017

2016
Revenues








Lease revenue
$
873.4


$
899.9


$
935.1

Other revenue
68.1


77.5


83.4

   Total Revenues
941.5


977.4


1,018.5

 
 
 
 
 
 
Expenses








Maintenance expense
254.7

 
265.0

 
266.5

Depreciation expense
248.5


239.4


231.8

Operating lease expense
49.6


60.7


67.6

Other operating expense
27.3


28.7


34.1

   Total Expenses
580.1


593.8


600.0

 
 
 
 
 
 
Other Income (Expense)








Net gain on asset dispositions
76.3

 
45.2

 
16.6

Interest expense, net
(125.2
)

(121.2
)

(110.1
)
Other expense
(5.2
)
 
(5.9
)
 
(3.6
)
Share of affiliates' pre-tax income (loss)
0.6


(2.4
)

0.5

Segment Profit   
$
307.9


$
299.3


$
321.9

 
 
 
 
 
 
Investment Volume
$
737.4


$
460.9


$
495.6


The following table shows the components of Rail North America's lease revenue for the years ended December 31 (in millions):
 
2018
 
2017
 
2016
Railcars
$
757.8

 
$
785.1

 
$
815.0

Boxcars
76.8

 
75.7

 
80.6

Locomotives
38.8

 
39.1

 
39.5

Total
$
873.4

 
$
899.9

 
$
935.1


Lease Price Index

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




29


chart-lpi.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:
 
2018
 
2017
 
2016
Beginning balance
103,730

 
104,522

 
106,146

Cars added
6,958

 
3,442

 
3,519

Cars scrapped
(2,211
)
 
(2,900
)
 
(2,479
)
Cars sold
(3,005
)
 
(1,334
)
 
(2,664
)
Ending balance
105,472

 
103,730

 
104,522

Utilization rate at year end
99.4
%
 
98.2
%
 
98.9
%
Active railcars at year end
104,864

 
101,849

 
103,329

Average (monthly) active railcars
102,061

 
102,600

 
103,900


30



chart-mdarailna.jpg

The following table shows fleet statistics for Rail North America boxcars for the years ended December 31:
 
2018
 
2017
 
2016
Ending balance
16,220

 
16,398

 
17,706

Utilization rate at year end
94.2
%
 
92.6
%
 
93.8
%

The following table shows fleet activity for Rail North America locomotives for the years ended December 31:
 
2018
 
2017
 
2016
Beginning balance
665

 
660

 
637

Locomotives added, net of scrapped or sold
15

 
5

 
23

Ending balance
680

 
665

 
660

Utilization rate at year end
91.5
%
 
92.5
%
 
93.3
%
Active locomotives at year end
622

 
615

 
616

Average (monthly) active locomotives
622

 
623

 
605


Segment Profit

In 2018, segment profit of $307.9 million increased 2.9% compared to $299.3 million in 2017. The increase was driven by higher asset disposition gains and lower maintenance expense, partially offset by lower lease revenue and lower lease termination fees.

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.


31


Revenues

In 2018, lease revenue decreased $26.5 million, or 2.9%, primarily due to lower lease rates and fewer railcars on lease. Other revenue decreased $9.4 million, largely a result of lower lease termination fees in the current year. Other revenue in 2017 included $7.8 million as compensation for damage to returned railcars. The expenses to repair these railcars will be recognized as incurred.

In 2017, lease revenue decreased $35.2 million, or 3.8%, primarily due to lower lease rates and fewer railcars on lease. Other revenue decreased $5.9 million, largely a result of lower lease termination fees in 2017. 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, as noted above.

Expenses

In 2018, maintenance expense decreased $10.3 million, driven by fewer repairs performed by the railroads, as well as fewer tank qualifications and lower costs from reassigning railcars to new lessees. Depreciation expense increased $9.1 million due to railcar investments and the purchase of railcars previously on operating leases. Operating lease expense decreased $11.1 million, resulting from the purchase of railcars previously on operating leases. Operating lease expense is expected to increase in 2019 due to the adoption of the new lease accounting standard. See "Note 2. Accounting Changes" in Part II, Item 8 of this Form 10-K for a summary of the impact of the new lease accounting standard. Other operating expense decreased $1.4 million, due to lower switching, storage, and freight costs, reflective of lower assignment activity attributable to a stronger overall lease environment.

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. 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 2017.

Other Income (Expense)

In 2018, net gain on asset dispositions increased $31.1 million, attributable to more railcars sold in the current year, as well as higher scrapping gains resulting primarily from a higher scrap price per ton. 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 $4.0 million, driven by a higher average interest rate and a higher average debt balance.

In 2017, net gain on asset dispositions increased $28.6 million, largely due to the impact of lower impairments. 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. 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 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 railcars in that fleet.

32



Investment Volume

During 2018, investment volume was $737.4 million compared to $460.9 million in 2017, and $495.6 million in 2016. We acquired 7,489 railcars in 2018, including 2,832 railcars purchased as part of the ECN Capital Corporation transaction, compared to 3,613 railcars in 2017, and 3,465 railcars in 2016.

Our investment volume is predominantly composed of acquired railcars, but also includes certain capitalized repairs and improvements to owned railcars and our maintenance facilities. As a result, the dollar value of investment volume does not necessarily correspond to the number of railcars acquired in any given period. In addition, the comparability of amounts invested and the number of railcars acquired in each period is impacted by the mix of railcars purchased, which may include tank cars and freight cars, as well as newly manufactured railcars or those purchased in the secondary market.

RAIL INTERNATIONAL

Segment Summary
 
Rail International, composed primarily of GATX Rail Europe ("GRE"), produced solid operating results in 2018. In Europe, we experienced gradual, broad improvement across the chemical, petroleum, and freight markets, and GRE achieved high utilization across all railcar types. Railcar utilization for GRE was 98.8% at the end of 2018, compared to 96.8% at the end of 2017, and 95.6% at the end of 2016. 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. In addition, Rail India and Rail Russia benefited from more cars on lease as they continue to expand their fleets.

In 2018, GRE recorded $9.5 million of expenses attributable to the closure of a railcar maintenance facility in Germany.

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 2018, Rail India added 1,001 railcars, compared to 275 in 2017 and zero in 2016. Rail India expects continued fleet growth and diversification in 2019.

Rail Russia focused on managing its fleet and developing relationships with new customers. In 2018, Rail Russia added 184 railcars, compared to zero in 2017 and 20 railcars in 2016. Rail Russia plans to evaluate the economic environment for potential expansion of both its fleet and customer base in 2019.


33


The following table shows Rail International's segment results for the years ended December 31 (in millions):
 
2018
 
2017
 
2016
Revenues
 
 
 
 
 
Lease revenue
$
209.3

 
$
190.3

 
$
182.0

Other revenue
8.2

 
6.8

 
7.0

   Total Revenues
217.5

 
197.1

 
189.0

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
44.5

 
41.1

 
47.2

Depreciation expense
55.5

 
48.9

 
45.5

Other operating expense
5.8

 
4.7

 
5.3

   Total Expenses
105.8

 
94.7

 
98.0

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net (loss) gain on asset dispositions
(0.2
)
 
3.1

 
1.1

Interest expense, net
(35.9
)
 
(33.4
)
 
(29.7
)
Other (expense) income
(7.0
)
 
(3.2
)
 
0.8

Share of affiliates' pre-tax loss

 
(0.1
)
 
(0.2
)
Segment Profit   
$
68.6

 
$
68.8

 
$
63.0

 
 
 
 
 
 
Investment Volume
$
152.7

 
$
90.9

 
$
87.1


The following table shows fleet activity for GRE railcars for the years ended December 31:
 
2018
 
2017
 
2016
Beginning balance
23,166

 
23,122

 
22,923

Cars added
847

 
871

 
879

Cars scrapped or sold
(601
)
 
(827
)
 
(680
)
Ending balance
23,412

 
23,166

 
23,122

Utilization rate at year end
98.8
%
 
96.8
%
 
95.6
%
Active railcars at year end
23,124

 
22,422

 
22,108

Average (monthly) active railcars
22,619

 
22,137

 
21,869



34


chart-mdagre.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 2018, a stronger euro positively impacted lease revenue by approximately $8.4 million and segment profit, excluding other income (expense), by approximately $4.3 million compared to 2017. In 2017, fluctuations in the value of the 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.

Segment Profit

In 2018, segment profit of $68.6 million decreased 0.3% compared to $68.8 million in 2017. Segment profit included expenses of approximately $9.5 million attributable to the closure of a railcar maintenance facility in Germany. Excluding these costs, results for Rail International were $9.3 million higher than 2017, primarily due to more railcars on lease and the positive impact of foreign exchange rates.

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 impact of foreign exchange rates.

Revenues

In 2018, lease revenue increased $19.0 million, or 10.0%, due to more railcars on lease and the impact of foreign exchange rates. Other revenue increased $1.4 million, driven by higher repair revenue.

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


35


Expenses

In 2018, maintenance expense increased $3.4 million, primarily due to higher wheelset costs and the impact of foreign exchange rates, partially offset by lower regulatory compliance costs. Depreciation expense increased $6.6 million, driven by the impact of new railcars added to the fleet, as well as the impact of foreign exchange rates.

In 2017, maintenance expense decreased $6.1 million, primarily due to lower wheelset costs and reimbursements received in 2017 from manufacturers, partially offset by the impact of foreign exchange rates. Wheelset costs at GRE were were higher in 2016 due to a refurbishment program to address anti-corrosion paint issues on certain wheelsets. In 2017, GRE received reimbursements from manufacturers for a portion of the previously incurred refurbishment costs. Other operating expense was comparable to prior year.

Other Income (Expense)

In 2018, net gain on asset dispositions decreased $3.3 million, attributable to the impairment recorded for the maintenance facility in Germany. Net interest expense increased $2.5 million, due to a higher average debt balance and a higher average interest rate. Other expense increased $3.8 million, driven by the railcar maintenance facility closure costs and higher legal expenses, partially offset by the favorable impact of changes in foreign exchange rates on non-functional currency items and derivatives.

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.

Investment Volume

Investment volume was $152.7 million in 2018, $90.9 million in 2017, and $87.1 million in 2016. During 2018, we acquired approximately 847 railcars at GRE (including 316 assembled at the Ostroda, Poland facility), 1,001 rail cars at Rail India, and 184 railcars at Rail Russia, compared to 871 railcars at GRE (including 272 assembled at the Ostroda, Poland facility) and 275 railcars at Rail India in 2017, and 879 railcars at GRE (including 357 assembled at the Ostroda, Poland facility) and 20 in Rail Russia 2016.

Our investment volume is predominantly composed of acquired railcars, but may also include certain capitalized repairs and improvements to owned railcars. As a result, the dollar value of investment volume does not necessarily correspond to the number of railcars acquired in any given period. In addition, the comparability of amounts invested and the number of railcars acquired in each period is impacted by the mix of the various car types acquired, as well as fluctuations in the exchange rates of the foreign currencies in which Rail International conducts business.

PORTFOLIO MANAGEMENT

Segment Summary

Portfolio Management's segment profit is primarily attributable to income from the RRPF affiliates, a group of seventeen 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 $60.5 million for 2018, $57.3 million for 2017, and $51.8 million for 2016. Portfolio Management invested $14.1 million in the RRPF affiliates in 2018, compared to $36.6 million in 2017 and $25.0 million in 2016. Dividend distributions from the RRPF affiliates totaled $35.2 million in 2018, compared to $30.2 million in 2017 and $35.2 million in 2016. The RRPF affiliates owned 452 aircraft spare engines with a net book value of approximately $4,435.6 million at the end of 2018 compared to 432 aircraft spare engines with a net book value of approximately $3,764.5 million at the end of 2017 and 407 aircraft spare engines with a net book value of $3,291.9 million at the end of 2016.

As we have disclosed previously, 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 on certain of the assets, including $6.7 million in 2016. As of December 31, 2017, we had completed all planned sales of the marine assets, including our 50% interest in the Cardinal Marine joint venture. We received proceeds of $46.8 million and $59.9 million in 2017 and 2016. These sales resulted in net gains of $1.8 million in 2017 and $4.2 million in 2016.

36



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. Income of $49.1 million was 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 $606.8 million at December 31, 2018, compared to $582.8 million at December 31, 2017, and $593.5 million at December 31, 2016.

The following table shows Portfolio Management’s segment results for the years ended December 31 (in millions):
 
2018
 
2017
 
2016
Revenues
 
 
 
 
 
Lease revenue
$
1.0

 
$
3.8

 
$
5.8

Marine operating revenue
14.3

 
25.0

 
49.3

Other revenue
0.8

 
1.1

 
1.5

   Total Revenues
16.1

 
29.9

 
56.6

 
 
 
 
 
 
Expenses
 
 
 
 
 
Marine operating expense
16.8

 
24.8

 
32.8

Depreciation expense
7.3

 
7.0

 
7.0

Other operating expense

 
1.0

 
4.4

   Total Expenses
24.1

 
32.8

 
44.2

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net (loss) gain on asset dispositions
(3.4
)
 
7.7

 
80.3

Interest expense, net
(10.4
)
 
(9.2
)
 
(8.6
)
Other income

 
2.3

 

Share of affiliates' pre-tax income
60.5

 
58.4

 
52.8

Segment Profit   
$
38.7

 
$
56.3

 
$
136.9

 
 
 
 
 
 
Investment Volume   
$
14.1

 
$
36.6

 
$
25.0


37


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 (1)
2018
$
464.3

 
$
142.5

 
$
32.3

2017
434.2

 
148.6

 
41.6

2016
375.3

 
218.2

 
51.8

_________
(1)
Amounts shown represent the estimated net book value of assets managed for third parties and are not included in our consolidated balance sheets.

chart-mdapm.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:
 
2018
 
2017
 
2016
Beginning balance
432

 
407

 
436

Engine acquisitions
48

 
35

 
25

Engine dispositions
(28
)
 
(10
)
 
(54
)
Ending balance
452

 
432

 
407

Utilization rate at December 31
96.9
%
 
94.7
%
 
94.6
%




38


chart-mdarrpf.jpg

Comparison of Reported Results

Comparisons of reported results for each year are impacted by the sale of marine investments.

Segment Profit

In 2018, segment profit was $38.7 million compared to $56.3 million in 2017. Segment profit for 2017 included net gains of approximately $1.8 million associated with the planned exit of marine investments. Excluding this item, results for the Portfolio Management segment were $15.8 million lower in 2018 compared to 2017, primarily due to the absence of operating income from the marine assets sold during 2017, lower residual sharing fees from the managed portfolio, and a lower contribution from the Norgas Vessels. The difficult market fundamentals experienced in 2017 for the Norgas Vessels continued in 2018, marked by substantially lower shipping rates that negatively impacted revenue due to decreased demand and the excess supply provided by new vessels that have entered the market. The decreases were partially offset by higher RRPF affiliate income.

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. These decreases were partially offset by higher RRPF affiliate income.

Revenues

In 2018, lease revenue decreased $2.8 million, primarily due to the impact of the sales of assets in 2017. Marine operating revenue decreased $10.7 million, largely due to lower revenue from the Norgas Vessels and the absence of revenue from the marine assets that were sold in 2017. The revenue from the Norgas Vessels declined due to continued pressure on charter rates and lower utilization, resulting from weak demand and oversupply of vessels in the market.

39


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.

Expenses
    
In 2018, marine operating expense decreased $8.0 million, primarily due to the absence of the marine assets that were sold in 2017, as well as lower expenses from the Norgas vessels, which included higher drydocking costs in the prior year.

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 accrual recorded in 2016 in connection with one investment.

Other Income (Expense)

In 2018, net gain on asset dispositions decreased $11.1 million. Net gains of approximately $1.8 million were recorded in 2017 associated with the planned exit of marine investments. Excluding this item, net gain on asset dispositions decreased $9.3 million due to lower residual sharing fees from the managed portfolio, as well as well as higher impairment losses for certain inland marine supply vessels.

In 2017, net gain on asset dispositions decreased $72.6 million. Net gains of approximately $1.8 million were recorded in 2017 associated with the planned exit of marine investments, compared to net losses of approximately $2.5 million recorded in 2016. 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 2018, income from our share of affiliates' earnings increased $2.1 million, primarily from earnings at the RRPF affiliates due to higher operating income, driven by engines added to the fleet in 2018, partially offset by lower net disposition gains on engines sold.

In 2017, income from our share of affiliates' earnings increased $5.6 million, primarily from earnings at the RRPF affiliates due to higher operating results driven by engines added to the fleet in 2017.

Investment Volume

Investment volume of $14.1 million in 2018, $36.6 million in 2017, and $25.0 million in 2016 consisted primarily of investments in the RRPF affiliates.


40


ASC

Segment Summary

ASC generated strong operating results in 2018, driven by increased operational efficiency, favorable operating conditions, and strong demand. ASC deployed 11 vessels, carrying 26.2 million net tons of freight in 2018 compared to 12 vessels carrying 27.8 million net tons in 2017 and 11 vessels carrying 25.4 million net tons in 2016.

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 leased vessels.

The following table shows ASC’s segment results for the years ended December 31 (in millions):
 
2018
 
2017
 
2016
Revenues
 
 
 
 
 
Lease revenue
$
4.1

 
$
4.1

 
$
4.2

Marine operating revenue
181.7

 
168.4

 
150.0

   Total Revenues
185.8

 
172.5

 
154.2

 
 
 
 
 
 
Expenses
 
 
 
 
 
Maintenance expense
22.6

 
22.2

 
18.6

Marine operating expense
114.1

 
106.2

 
96.7

Depreciation expense
10.6

 
12.0

 
12.9

Operating lease expense

 
1.8

 
6.0

   Total Expenses
147.3

 
142.2

 
134.2

 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
Net gain (loss) on asset dispositions
0.1

 
(1.9
)
 

Interest expense, net
(5.7
)
 
(5.2
)
 
(4.5
)
Other income (expense)
0.1

 
1.3

 
(5.4
)
Segment Profit   
$
33.0

 
$
24.5

 
$
10.1

 
 
 
 
 
 
Investment Volume
$
15.8

 
$
14.0

 
$
9.1

Total Net Tons Carried
26.2

 
27.8

 
25.4



41


chart-mdaasc.jpg
 
Segment Profit

In 2018, segment profit was $33.0 million, compared to $24.5 million in 2017. In 2018, higher rates, favorable operating conditions, and efficient fleet performance more than offset lower volume.

In 2017, segment profit was $24.5 million, compared to $10.1 million 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.

Revenues

In 2018, marine operating revenue increased $13.3 million, or 7.9%, primarily due to higher rates and late 2017 sailing season surcharges realized in 2018. 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 2017, marine operating revenue increased $18.4 million, or 12.3%, resulting from 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.

Expenses

In 2018, maintenance expense was comparable to prior year. Marine operating expense increased $7.9 million, largely driven by higher fuel costs, partially offset by fewer operating days.

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


42


Operating lease expense in 2017 and 2016 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 2018, other income (expense) was unfavorable by $1.2 million, driven by expenses recorded in 2018 related to an accrual for asbestos-related litigation.

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.

Investment Volume

ASC's investments in each of 2018, 2017, and 2016 consisted of structural and mechanical upgrades to our vessels.

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):
 
2018
 
2017
 
2016
Selling, general and administrative expense
$
191.1

 
$
180.0

 
$
169.0

Unallocated interest (income) expense
(8.6
)
 
(8.5
)
 
(4.8
)
Other expense (income), including eliminations
9.5

 
7.1

 
9.2


SG&A, Unallocated Interest and Other

During 2017, we exercised our option to terminate 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 other expense (income) for 2016 also reflected costs associated with a voluntary early retirement program, including a pension settlement accounting adjustment of $6.1 million attributable to lump sum payments elected by eligible retirees.

In 2018, SG&A of $191.1 million increased $11.1 million from 2017. The increase was primarily due to higher employee compensation expenses and higher information technology expense. SG&A was also negatively impacted by a full year of accelerated depreciation of leasehold improvements resulting from the early lease termination of the office lease.

In 2017, SG&A of $180.0 million increased $11.0 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.

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

In 2018, other expense (income), including eliminations increased $2.4 million, driven by provisions recorded for environmental reserves and litigation accruals, as well as incremental pension expense associated with certain lump sum distributions in 2018, partially offset by the absence of costs recorded in 2017 associated with the early termination of the office lease.

In 2017, other expense (income), including eliminations decreased $2.1 million, attributable to lower non-service costs related to pension expense, including the absence of the pension settlement accounting adjustment recorded in 2016, and the absence of an environmental remediation accrual recorded in 2016 related to properties sold in prior years. These positive drivers were offset by an increase to a litigation accrual recorded in 2017 and the early lease termination costs noted above.

43



Consolidated Income Taxes

In 2017, the Tax Cuts and Jobs Act (the “Tax Act”) made broad and complex changes to the U.S. federal income tax laws. The Tax Act had a significant impact on our earnings in 2017, as we recorded a one-time net tax benefit of $315.9 million, which represented our provisional estimate of the impact of the Tax Act. This amount included a net benefit of $371.4 million associated with the remeasurement of our net deferred tax liability utilizing the lower U.S. federal income tax rate. The Tax Act also imposed a one-time transitional repatriation tax of $57.2 million on certain undistributed earnings of our non-U.S. subsidiaries and affiliates. Additional guidance was issued by the Internal Revenue Service, the U.S. Department of the Treasury, and state taxing authorities during 2018 and, as a result, we recorded an adjustment to our provisional estimates. Specifically, in the fourth quarter of 2018, we recorded an additional net tax benefit of $16.5 million based on this clarifying guidance, the filing of our 2017 income tax returns, and the final determination of our foreign undistributed earnings and associated tax attributes. We do not expect to record any future material adjustments associated with the Tax Act. As part of the Tax Act, the U.S. corporation income tax rate was reduced to 21% from 35%, and this reduction favorably impacted our consolidated effective tax rate, net income, and diluted earnings per share; however, the Tax Act has not had a material impact on our cash flows. See "Note 12. Income Taxes" in Part II, Item 8 of this Form 10-K for additional information on income taxes.


44


BALANCE SHEET DISCUSSION

Assets

Total assets (including on- and off-balance sheet) were $8.0 billion at December 31, 2018, compared to $7.9 billion at December 31, 2017. The increase was primarily driven by an increase in operating assets at Rail North America and Rail International, as well as additional investment in the RRPF affiliates, partially offset by a decrease in cash and cash equivalents at Corporate. In addition to the assets we recorded on our balance sheet, we utilized off-balance sheet assets, primarily railcars, which we leased pursuant to operating lease agreements. The off-balance sheet assets represent the estimated present value of our committed future operating lease payments for certain railcars that have been financed through sale-leasebacks. See “Non-GAAP Financial Measures” at the end of this item.

The following table shows on- and off-balance sheet assets by segment as of December 31 (in millions):
 
2018
 
2017
 
 
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
 
On-Balance Sheet
 
Off-Balance Sheet
 
Total
Rail North America
$
5,236.6

 
$
430.2

 
$
5,666.8

 
$
4,915.0

 
$
435.7

 
$
5,350.7

Rail International
1,363.2

 

 
1,363.2

 
1,332.9

 

 
1,332.9

Portfolio Management
606.8

 

 
606.8

 
582.8

 

 
582.8

ASC
297.8

 

 
297.8

 
286.7

 

 
286.7

Other
112.3

 

 
112.3

 
305.0

 

 
305.0

Total
$
7,616.7

 
$
430.2

 
$
8,046.9

 
$
7,422.4

 
$
435.7

 
$
7,858.1


Gross Receivables

Receivables of $213.4 million at December 31, 2018 decreased $6.1 million from December 31, 2017, primarily due to the timing of payments by customers.

Allowance for Losses
 
As of December 31, 2018, allowance for losses totaled $6.4 million, or 7.3% of rent and other receivables, compared to $6.4 million, or 7.7%, at December 31, 2017, 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 $357.4 million from 2017. The increase was primarily due to investments of $904.1 million and the acquisition of railcars previously on operating leases of $66.5 million, offset by depreciation of $326.9 million, asset dispositions of $238.7 million (including the impact of sale leasebacks), and negative foreign exchange rate effects of $65.4 million.

Investments in Affiliated Companies

Investments in affiliated companies increased $23.5 million in 2018 (see table below). The increase was driven by our share of earnings from RRPF and an investment of $14.1 million in an RRPF affiliate to fund the purchase of additional aircraft spare engines, partially offset by distributions from RRPF. In addition, all of Adler's railcar assets have been sold, and the partnership is in the process of winding down remaining activities.


45


The following table shows our investments in affiliated companies by segment as of December 31 (in millions):
 
2018
 
2017
Rail North America
$
0.2

 
$
6.8

Portfolio Management
464.3

 
434.2

Total
$
464.5

 
$
441.0


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

Goodwill

In 2018 and 2017, 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 2018, and no impairment was indicated.

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

Debt

Total debt increased $163.3 million from the prior year. Issuances of long-term debt of $700.0 million were offset by maturities and principal payments of $634.0 million and the effects of foreign exchange on foreign debt balances.

The following table shows the details of our long-term debt issuances in 2018 ($ in millions):
Type of Debt
 
Term
 
Interest Rate
 
Principal Amount
Recourse Unsecured
 
10.5 Years
 
4.55% Fixed
 
$
300.0

Recourse Unsecured
 
5.3 Years
 
4.35% Fixed
 
300.0

Recourse Unsecured
 
3.0 Years
 
3.30% Floating (1)
 
100.0

 
 
 
 
 
 
$
700.0

________
(1)
Floating interest rate at December 31, 2018.

As of December 31, 2018, our outstanding debt had a weighted average remaining term of 8.9 years and a weighted average interest rate of 4.01%, compared to 9.2 years and 3.96% at December 31, 2017.

46



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):
 
2018
 
2017
 
Secured
 
Unsecured
 
Total
 
Total
Commercial paper and borrowings under bank credit facilities
$

 
$
110.8

 
$
110.8

 
$
4.3

Recourse debt

 
4,429.7

 
4,429.7

 
4,371.7

Capital lease obligations
11.3

 

 
11.3

 
12.5

Balance sheet debt
11.3

 
4,540.5

 
4,551.8

 
4,388.5

Recourse off-balance sheet debt (1)
430.2

 

 
430.2

 
435.7

Total
$
441.5

 
$
4,540.5

 
$
4,982.0

 
$
4,824.2

________
(1) Off-balance sheet debt represents the estimated present value of committed operating lease payments for certain railcars that have been financed through sale-leasebacks and is equal to the amount reported as off-balance sheet assets. See “Non-GAAP Financial Measures” at the end of this item.

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

Equity

Total equity decreased $4.6 million in 2018, primarily due to stock repurchases of $115.5 million, including commissions, dividends of $69.0 million, $47.5 million of foreign currency translation adjustments due to the balance sheet effects of a stronger U.S. dollar and $4.2 million from the impact of adoption of new accounting standards as of January 1, 2018. These decreases were offset by net income of $211.3 million, $8.4 million from the effects of share-based compensation, $7.4 million from the effects of post-retirement benefit plan adjustments and $4.5 million of net unrealized gains on derivatives.

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 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 programs, 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, 2018, we had an unrestricted cash balance of $100.2 million.


47


The following table shows our principal sources and uses of cash for the years ended December 31 (in millions):
 
2018
 
2017
 
2016
Principal sources of cash
 
 
 
 
 
Net cash provided by operating activities
$
508.5

 
$
496.8

 
$
629.4

Portfolio proceeds
234.4

 
165.6

 
223.7

Other asset sales
37.3

 
30.3

 
23.0

Proceeds from sale-leasebacks
59.1

 
90.6

 
82.5

Proceeds from issuance of debt, commercial paper, and credit facilities
800.2

 
792.6

 
859.4

Total
$
1,639.5

 
$
1,575.9

 
$
1,818.0

 
 
 
 
 
 
Principal uses of cash
 
 
 
 
 
Portfolio investments and capital additions
$
(943.4
)
 
$
(603.4
)
 
$
(620.7
)
Repayments of debt, commercial paper, and credit facilities
(632.8
)
 
(703.3
)
 
(803.6
)
Purchases of leased-in assets
(66.6
)
 
(111.8
)
 
(117.1
)
Payments on capital lease obligations
(1.2
)
 
(2.4
)
 
(3.6
)
Stock repurchases
(115.5
)
 
(100.0
)
 
(120.1
)
Dividends
(69.3
)
 
(68.2
)
 
(67.4
)
Total
$
(1,828.8
)
 
$
(1,589.1
)
 
$
(1,732.5
)

Net Cash Provided by Operating Activities

Net cash provided by operating activities of $508.5 million increased $11.7 million compared to 2017. This increase was driven by lower operating lease payments and maintenance expenses, higher affiliate dividends, as well as the positive impact of changes in foreign exchange rates, partially offset by lower lease revenue, lower fee income, and higher interest payments.

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 $943.4 million increased $340.0 million compared to 2017, primarily due to more railcars acquired at Rail North America, including $204.2 million for the purchase of 2,832 railcars from ECN Capital Corporation, as well as more railcars acquired at Rail International, partially offset by lower investments at the RRPF affiliates at Portfolio Management. 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):
 
2018
 
2017
 
2016
Rail North America
$
737.4

 
$
460.9

 
$
495.6

Rail International
152.7

 
90.9

 
87.1

Portfolio Management
14.1

 
36.6