GATX Corporation — Q2 2011 Form 10-Q
Business context and period. GATX leases, operates and manages rail, marine and industrial equipment and invests in related joint ventures. Its reporting segments are Rail, Specialty and American Steamship Company (ASC). This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $314.6 million | $288.2 million | $579.6 million | $551.8 million |
| Total gross income, including affiliate earnings | $329.6 million | $294.8 million | $611.7 million | $576.7 million |
| Income before taxes | $35.7 million | $25.2 million | $61.5 million | $51.5 million |
| Net income | $26.4 million | $21.5 million | $46.3 million | $40.2 million |
| Diluted EPS | $0.56 | $0.46 | $0.98 | $0.86 |
- Revenue rose about 9% in Q2 and 5% in the first half; net income increased about 23% and 15%, respectively. Calculated net margin was about 8.4% in Q2 2011 versus 7.5% in Q2 2010, and 8.0% versus 7.3% for the six-month periods.
- Q2 total ownership costs were $133.7 million and other costs and expenses were $160.2 million. For the first half, these were $263.5 million and $286.7 million, respectively. Interest expense, net, was $43.1 million in Q2 and $86.0 million for the first half.
- First-half operating cash flow was $116.4 million, up from $86.0 million. Investing cash use was $217.2 million, including $260.1 million of portfolio investments and capital additions; financing provided $73.0 million. Cash declined $28.3 million to $50.2 million. Restricted cash was $52.4 million.
- At June 30, total balance-sheet debt was $3.30 billion, compared with $3.18 billion at December 31, 2010; shareholders’ equity was $1.19 billion. Debt comprised $102.2 million of commercial paper and bank-facility borrowings, $2.99 billion of recourse debt, $189.8 million of nonrecourse debt and $15.4 million of capital lease obligations.
- GATX had $495.9 million available under its new $560 million revolving credit facility, maturing May 2015. The company reported compliance with all debt covenants. Long-term unsecured debt ratings were BBB from S&P and Baa1 from Moody’s, both with stable outlooks.
Material changes and segment performance
- Rail: First-half segment profit increased to $108.3 million from $78.7 million. North American fleet utilization reached 98.2%, versus 96.5% a year earlier; renewal rates in the company’s lease price index rose 4.4% in Q2 from expiring rates. Rail’s reported results included unrealized gains on AAE interest-rate swaps, versus unrealized losses in 2010; excluding those effects, first-half Rail profit still increased $9.6 million.
- Specialty: First-half segment profit fell to $19.5 million from $26.6 million, mainly due to lower affiliate earnings and asset remarketing income. Management described marine-affiliate markets as challenging, with inconsistent demand and vessel overcapacity.
- ASC: First-half segment profit was $9.4 million, approximately flat with $9.5 million. Freight carried declined to 9.0 million net tons from 9.6 million, as weather and mechanical delays constrained volume; higher freight rates and a gain on return of a leased-in vessel supported gross income.
- Total investment volume rose to $260.1 million from $131.1 million. Rail and Specialty investments were $156.3 million and $89.3 million, respectively.
Outlook, risks and unusual items
- No full-year earnings or EPS guidance is provided. Management said ASC expected steady customer demand through the rest of 2011, while noting that operations could be affected by labor negotiations. ASC’s collective bargaining agreement with the AMO expired August 1, 2011; a prolonged dispute could affect results in a quarter or year.
- Rail management described improving market conditions, utilization and lease pricing. GATX agreed to acquire 12,500 newly built railcars, expected to be delivered ratably over five years. Contractual commitments listed $1.35 billion of future portfolio investments, primarily railcar purchase commitments.
- Reported first-half 2011 net income included $12.6 million, or $0.27 per diluted share, of after-tax unrealized gains on certain AAE swaps. The filing cautions that such instruments do not qualify for hedge accounting and future fair-value changes may affect earnings. 2010 comparisons included favorable litigation and tax items, partly offset by swap losses.
- A Polish subsidiary is defending a claim by PKP for approximately $52.6 million. GATX recorded a $15.6 million accrual; an appeal to the Polish Supreme Court remained pending. The company said an excess over the accrual was possible and could materially affect results in a particular period, though it did not expect such excess to be material to financial position or liquidity.
- Guarantees and standby letters of credit totaled $160.2 million; recorded guarantee liabilities were $6.8 million. Management reported no known event requiring payment and did not expect material losses from these commitments. Maximum exposure to loss for unconsolidated VIE interests was $161.0 million.
- Other disclosed sensitivities include rail lease rates and utilization, maintenance and regulatory costs, capital-market access and financing costs, market-dependent remarketing income, affiliate performance, litigation, and ASC weather and labor conditions. The company said six-month results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported earnings growth came from AAE swap gains, and how sensitive are future results to interest-rate movements?
- Whether Rail’s improved utilization and renewal pricing persist, and how the 12,500-car purchase commitment will be funded and deployed.
- Whether Specialty’s marine-affiliate results recover amid overcapacity and inconsistent demand.
- The outcome of ASC labor negotiations and any operational impact, alongside freight volumes and cost recovery through fuel surcharges.
- Developments in the PKP litigation, tax uncertainties, guarantees and other contingent obligations.
- Liquidity and refinancing needs relative to debt maturities, investment commitments, operating-lease payments and the company’s access to capital markets.