GATX Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. GATX leases, operates, manages and remarkets rail, marine and other long-lived assets, and reports four segments: Rail North America, Rail International, American Steamship Company (ASC) and Portfolio Management.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $1,243.2 million | $1,191.4 million |
| Net income | $137.3 million | $110.8 million |
| Diluted EPS | $2.88 | $2.35 |
| Adjusted net income, excluding tax adjustments and other items | $133.8 million | $95.0 million |
| Adjusted diluted EPS | $2.81 | $2.01 |
| Operating cash flow | $370.2 million | $306.8 million |
| Portfolio investments and capital additions | $770.0 million | $614.6 million |
| Portfolio proceeds | $288.9 million | $154.1 million |
| Cash and cash equivalents at year-end | $234.2 million | $248.4 million |
| Balance-sheet debt | $3,567.9 million | $3,547.1 million |
| Shareholders’ equity | $1,244.2 million | $1,127.3 million |
Fourth-quarter 2012 revenue was $331.7 million and net income was $29.7 million, or $0.62 diluted EPS, versus $330.0 million, $31.6 million and $0.67, respectively, in fourth-quarter 2011. The filing does not provide a clear consolidated operating-margin measure. The reported effective tax rate was 18.2%, versus 27.1% in 2011; the 2012 rate benefited from a $15.5 million release of previously unrecognized tax benefits.
Year-end balance-sheet debt excludes $884.5 million of estimated off-balance-sheet operating-lease financing obligations; GATX reported total debt including these obligations of $4,452.4 million. The company had $273.6 million of commercial paper and bank-facility borrowings, $365.3 million available under its $560 million revolving facility, and $23.5 million available under European credit lines. It was in compliance with debt covenants. The fixed-charge coverage ratio was 1.8 against a 1.2 minimum.
Material changes and segment performance
- Revenue increased 4.3% and net income increased 23.9% year over year. Adjusted net income rose 40.8%, primarily on stronger Rail North America lease rates and remarketing income, and lower maintenance expense.
- Rail North America: Segment profit increased to $209.3 million from $172.7 million. Renewal rates in the company’s lease-price index rose 25.6% against expiring rates; year-end railcar utilization was 97.9%. Higher lease income and disposition gains and lower maintenance expense drove improvement.
- Rail International: Segment profit fell to $32.7 million from $60.7 million. The 2012 result included $22.9 million of losses related to AAE interest-rate swaps; stronger U.S. dollar effects also weighed on results. European rail demand and pricing improved, but utilization declined to 95.1% from 97.1%.
- ASC: Segment profit increased to $37.5 million from $27.3 million, reflecting higher iron-ore volumes and freight rates and the absence of the prior-year labor stoppage’s costs. ASC carried 29.7 million net tons, versus 28.4 million.
- Portfolio Management: Segment profit rose to $50.2 million from $47.6 million, supported by asset-disposition gains and Rolls-Royce affiliate earnings, partly offset by Enerven affiliate impairments and losses.
- Net gains on asset dispositions were $79.5 million, up from $65.8 million. This included $22.6 million of residual-sharing income and $5.0 million of asset impairment charges.
Outlook, risks and unusual items
- No specific consolidated earnings guidance was provided. Management expected to meet 2013 contractual obligations using operating cash flow, portfolio proceeds, revolving facilities and year-end cash. It expected 2013 investment to exceed contractual commitments as it pursued strategic opportunities.
- Rail North America expected strong renewal success and higher rates, especially for tank cars, but noted weak demand for coal- and grain-market cars; about 20,500 railcar leases were due to expire in 2013. It anticipated materially higher regulatory maintenance expense in 2013 and 2014 and planned delivery of about 2,750 new railcars in 2013.
- ASC expected shipping volumes to decline slightly in 2013 and identified record-low Great Lakes water levels as a potential operating headwind. Marine operations are seasonal.
- GATX had a 12,500-car, five-year purchase agreement with Trinity; about 9,300 cars remained to be delivered at year-end. Total disclosed contractual commitments were $6.22 billion, including $1.47 billion of portfolio investment commitments, primarily railcar purchases.
- The Viareggio derailment litigation remains significant: the 2009 accident killed 32 people. Criminal proceedings were anticipated, most civil claims had been resolved, and the company had not accrued a loss because the outcome and potential amount could not be reasonably estimated. Insurance reimbursement for some criminal defense costs was uncertain.
- At January 31, 2013, 188 asbestos-related cases were pending. Environmental remediation accruals were $15.6 million for 17 sites; management could not estimate a maximum potential loss. Other litigation accruals totaled $2.0 million.
- Other notable exposures include AAE’s interest-rate swaps, pension funding, regulatory maintenance and environmental requirements, labor negotiations, asset utilization and residual values, international and currency risks, financing access, and dependence on Rolls-Royce-related affiliate earnings. The 2012 Enerven asset sale and liquidation produced a $14.8 million impairment; total affiliate-related impairment and operating losses reported in the Portfolio Management discussion were $18.9 million.
Most important facts for investors to verify
- How much of the increase in earnings is repeatable versus attributable to tax benefits, asset sales and remarketing, and other unusual items.
- Railcar renewal pricing and utilization, especially the re-leasing outlook for coal- and grain-market cars and the effect of scheduled regulatory maintenance costs.
- AAE swap exposure, future affiliate results, and the concentration of Portfolio Management earnings in Rolls-Royce-related ventures.
- Funding capacity and refinancing needs alongside planned railcar purchases, investment commitments, and off-balance-sheet lease obligations.
- Developments in Viareggio and asbestos litigation, environmental remediation, pension contributions, and Great Lakes operating conditions.