GATX Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. GATX leases, operates, manages and remarkets rail and marine assets and reports Rail, American Steamship Company (ASC) and Portfolio Management segments. Results are unaudited; management cautions that first-quarter results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $284.5 million | $265.0 million; up 7.4% |
| Total gross income, including affiliate earnings | $290.0 million | $282.1 million |
| Income before taxes | $43.5 million | $25.8 million |
| Net income | $30.3 million | $19.9 million |
| Diluted EPS | $0.64 | $0.42 |
| Operating cash flow | $28.2 million | $37.2 million |
| Capital additions and portfolio investments | $153.7 million | $96.2 million |
| Cash and cash equivalents at quarter-end | $141.0 million | $248.4 million at Dec. 31, 2011 |
| Total debt, including commercial paper, nonrecourse debt and capital leases | $3,476.9 million | $3,547.1 million at Dec. 31, 2011 |
Net margin was approximately 10.6% of revenue, compared with approximately 7.5% in Q1 2011. Interest expense, net was $42.6 million versus $42.9 million. Dividends declared were $0.30 per common share versus $0.29.
Material changes and segment results
- Rail: Segment profit rose to $58.6 million from $51.6 million. North American utilization was 98.5%, up from 97.8% a year earlier; renewal rates for cars in GATX’s Lease Price Index averaged 19.2% above expiring rates. Improvement reflected lower maintenance expense and higher lease and remarketing income. Reported affiliate earnings were affected by AAE swap fair-value losses.
- ASC: Segment profit increased to $2.1 million from $0.8 million, mainly on lower marine operating expense and a bad-debt recovery. Freight volume was 1.3 million net tons, modestly above the prior year.
- Portfolio Management: Segment profit rose to $22.0 million from $10.7 million, mainly from higher remarketing income, including a gain on barge sales. Affiliate earnings declined. Investment volume was $3.1 million, compared with $36.4 million.
Consolidated earnings included $2.2 million, or $0.05 per diluted share, of after-tax unrealized losses on interest-rate swaps at European affiliate AAE; Q1 2011 included $6.4 million, or $0.14 per diluted share, of after-tax unrealized gains. The effective tax rate increased to 30% from 23%.
Cash, debt and liquidity
Cash decreased by $107.4 million during the quarter. Operating cash flow was lower year over year, while portfolio proceeds increased to $97.7 million from $43.5 million. Cash uses included $153.7 million for investments and capital additions, $258.6 million in debt repayments, and $14.7 million in dividends. Financing included $180.9 million of debt, commercial paper and facility proceeds.
At March 31, GATX had $176.0 million of commercial paper and bank-facility borrowings. Availability under its $560 million revolving credit facility, maturing May 2015, was $424.4 million; the facility backs $126.0 million of commercial paper and $9.6 million of letters of credit. GATX reported compliance with its debt covenants and did not anticipate violations. On April 26, 2012, Moody’s lowered its long-term rating from Baa1 to Baa2, affirmed its P-2 short-term rating, and maintained a stable outlook; S&P ratings were BBB/A-2 with a stable outlook.
Outlook, risks and contingencies
- Management expected a favorable North American rail lease environment and strong renewal success through 2012. However, about 1,700 coal cars had leases expiring during the rest of 2012, and some might not renew. European rail utilization remained affected by economic weakness.
- ASC anticipated modestly higher tonnage volumes, supported by improved steel production and auto sales. First-quarter results are seasonally affected by Great Lakes winter conditions.
- Management cited continued pressure in marine markets from weak transport demand and vessel overcapacity in certain markets.
- Contractual commitments totaled $6.05 billion, including $1.44 billion of portfolio investments, primarily railcar purchase commitments. Commercial commitments totaled $133.3 million; GATX said it did not expect material losses or performance requirements.
- GATX reported $20.8 million of gross unrecognized tax benefits and said $15.9 million might be recognized within 12 months, subject to audits or statute expirations. Ordinary-course legal matters remained pending; the filing refers readers to the 2011 Form 10-K for details.
- Forward-looking risks include economic and market conditions, lease pricing and utilization, financing costs and credit ratings, maintenance costs, railcar purchase commitments, portfolio losses, asset impairments, remarketing opportunities, regulation, labor relations and litigation.
Investor verification priorities
- Check whether rail utilization, renewal pricing and lease renewals—particularly coal-car expirations—supported the 2012 outlook.
- Assess the durability of earnings growth, including the effects of AAE swap valuations, asset sales, recoveries and lower maintenance costs.
- Reconcile operating cash flow with investment spending, debt maturities and the decline in cash; monitor revolving-credit availability and the Moody’s downgrade.
- Review the timing and funding of railcar purchase commitments, off-balance-sheet lease exposure, commercial commitments and potential tax-benefit recognition.
- Consider seasonality in ASC and the risks from European rail weakness and marine-market overcapacity when interpreting quarterly results.