GATX Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. GATX leases, operates, manages, and remarkets assets primarily in rail and marine markets. Its segments are Rail, American Steamship Company (ASC), and Portfolio Management. Financial amounts are in millions unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $343.0 | $314.6 | $627.5 | $579.6 |
| Net income | $23.5 | $26.4 | $53.8 | $46.3 |
| Diluted EPS | $0.49 | $0.56 | $1.13 | $0.98 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $112.3 | $117.2 |
| Capital additions and portfolio investments | $238.1 | $163.9 | $391.8 | $260.1 |
- Revenue increased 9% in Q2 and 8% for the first half year over year. Net income declined 11% in Q2 but increased 16% for the half year.
- Reported Q2 net margin was approximately 6.9%; first-half net margin was approximately 8.6% (net income divided by revenue).
- Management-reported segment profit was $78.2 in Q2 versus $74.1, and $160.9 for the first half versus $137.2. Q2 segment profit comprised Rail $49.6, ASC $14.0, and Portfolio Management $14.6.
- Trailing-twelve-month return on equity was 10.0%, versus 7.8% a year earlier; excluding specified tax adjustments and other items, it was 11.2% versus 6.3%.
Balance sheet and liquidity
- At June 30, total assets were $5,917.9 and shareholders’ equity was $1,170.7, compared with $5,857.5 and $1,127.3 at December 31, 2011.
- Cash and cash equivalents were $227.7, down from $248.4 at year-end; restricted cash was $30.0.
- Total debt and capital lease obligations were $3,577.7: $100.5 commercial paper and bank-facility borrowings, $3,328.2 recourse debt, $136.5 nonrecourse debt, and $12.5 capital leases. The filing reports total debt at carrying value; recourse fixed-rate debt had a fair value above carrying value.
- Operating cash flow was $112.3 for the first half. Investing used $143.4 and financing provided $11.0; cash decreased $20.7 over the period.
- The $560 million revolving facility had $530.4 available at June 30. GATX said it was compliant with debt covenants and did not anticipate violations. Ratings were BBB/A-2 at S&P and Baa2/P-2 at Moody’s, both with stable outlooks; Moody’s downgraded the long-term rating from Baa1 in April.
Material changes and operating drivers
- Rail: North American fleet utilization was 98.3%; renewal rates in the company’s lease-price index were 23.9% above expiring rates in Q2. Rail segment profit fell to $49.6 from $56.7 in Q2, largely reflecting AAE affiliate swap losses; excluding those swap effects, management said Rail segment profit increased. Coal-car demand remained weak, and some 2012 expirations might not be renewed.
- ASC: First-half freight volume rose to 10.5 million net tons from 9.0 million, supported by stronger iron-ore shipments. Segment profit increased to $14.0 in Q2 from $8.6. ASC operated 14 vessels versus 12 a year earlier, including a newly delivered tug-barge.
- Portfolio Management: Segment profit rose to $14.6 in Q2 from $8.8 and to $36.6 for the half year from $19.5. Higher asset-sale income and affiliate earnings contributed; first-half results also included reversal of a provision for a non-performing leveraged lease investment.
- AAE swap losses and gains were a major period-to-period earnings swing: first-half 2012 results included $16.8 after-tax losses and 2011 included $12.6 after-tax gains. Q2 2012 included $14.6 after-tax losses, versus $6.2 after-tax gains in Q2 2011. AAE terminated a swap at a loss when refinancing debt.
Outlook, risks, contingencies, and unusual items
- Management expected steady ASC customer demand through the rest of 2012, but warned that a steel-industry labor stoppage could reduce shipping volumes. The filing gives no specific full-year earnings guidance and cautions that first-half results are not necessarily indicative of the full year.
- Rail market conditions were described as strong in North America, while European freight demand remained affected by economic weakness. Management also cited weak coal-car demand and generally weak marine markets.
- First-half effective tax rate was 35%, versus 25% in 2011; excluding identified swap-related and tax items, both periods were 29%. The current-period rate included a $0.7 deferred tax adjustment related to an Ontario tax-rate increase.
- GATX reported $131.3 of commercial commitments, with $6.0 of related balance-sheet liabilities, and said it did not expect material losses or to be required to perform. Future contractual commitments totaled $5,991.9, including $1,287.6 of portfolio investments, primarily railcar purchase commitments.
- GATX had $15.9 accrued for environmental remediation at 17 sites and $1.6 accrued for litigation matters. The company could not estimate maximum potential environmental losses.
- In the 2009 Viareggio derailment in Italy, prosecutors notified GATX Rail Austria and related parties that they intended to bring negligence-based charges. GATX disputed the allegations, could not estimate any potential loss, and recorded no accrual for the matter; most civil claims had been resolved, with others ongoing.
- Other disclosed risks include economic and market conditions, lease pricing and utilization, financing costs and credit ratings, maintenance costs, railcar purchase commitments, asset impairment, remarketing opportunities, foreign exchange and interest rates, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Rail and consolidated earnings depends on AAE’s non-hedge-accounted swaps, and how future fair-value changes or refinancing may affect results.
- Whether North American lease-rate gains and high utilization persist, particularly as scheduled lease expirations occur and coal-car demand remains weak.
- Whether ASC’s freight volumes and expected demand hold up, including the outcome of steel-industry labor negotiations.
- Funding and returns on the increased investment program, including railcar supply commitments, against debt maturities and available liquidity.
- Developments in the Viareggio criminal and civil proceedings, environmental matters, and unrecognized tax benefits; the filing does not quantify maximum losses for several contingencies.