GATX Corporation — 2011 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2011. GATX leases, operates, manages and remarkets long-lived assets, primarily railcars and marine vessels, through Rail, American Steamship Company (ASC) and Portfolio Management. At year-end, reported assets were $5.86 billion; including operating-lease-financed assets not on the balance sheet, total assets were $6.74 billion.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $1,267.9 million | $1,166.8 million |
| Gross income, including affiliate earnings | $1,308.5 million | $1,204.9 million |
| Income before taxes | $148.2 million | $97.4 million |
| Net income | $110.8 million | $80.8 million |
| Diluted EPS | $2.35 | $1.72 |
| Operating cash flow | $306.8 million | $243.7 million |
| Portfolio investments and capital additions | $614.6 million | $585.1 million |
| Debt and capital lease obligations | $3,547.1 million | $3,176.5 million |
| Shareholders’ equity | $1,127.3 million | $1,113.7 million |
- Revenue rose 8.7%; reported net income rose 37.1%. Excluding the company’s defined “Tax Benefits and Other Items,” net income was $95.0 million versus $74.6 million, up 27.3%; adjusted diluted EPS was $2.01 versus $1.59. These are non-GAAP measures.
- Rail segment profit increased to $233.4 million from $150.6 million, supported by stronger leasing, utilization, remarketing and scrap proceeds. North American railcar utilization was 98.2%, up from 97.4%; Europe was 97.1%, up from 95.7%.
- ASC segment profit was $27.3 million versus $28.6 million: stronger freight revenue was offset by higher maintenance and labor-disruption costs. Portfolio Management segment profit declined to $47.6 million from $48.7 million, primarily on higher impairment charges.
- Cash and cash equivalents were $248.4 million at year-end, up from $78.5 million. The $560 million revolving credit facility had $550.2 million available; European credit lines had $29.7 million available. GATX reported compliance with debt covenants and stable BBB/Baa1 long-term unsecured ratings.
- Reported operating cash flow exceeded net income, while investing outflows were substantial. Debt increased $370.6 million during the year. Dividend declared per common share rose to $1.16 from $1.12.
Changes, outlook and notable items
- Rail markets strengthened in North America and Europe. Management expected strong renewal performance on approximately 20,000 North American railcars due to expire in 2012, generally at higher rates; 2012 volume growth at ASC was expected to be modest. No consolidated earnings or revenue guidance is stated in the supplied filing text.
- GATX committed to purchase 12,500 new North American railcars over five years; about 3,600 deliveries were expected in 2012, and the company said those cars had been placed with customers. European purchase commitments included 1,122 cars for 2012.
- ASC’s five-day crew strike in 2011 caused about three weeks of operational disruption and additional costs. A new five-year agreement was ratified in early 2012. ASC also entered a five-year lease for a newly constructed tug-barge in January 2012.
- Portfolio Management’s Clipper Fourth joint ventures were dissolved: GATX contributed $62.1 million toward debt and received six vessels valued at $88.8 million, recording a $5.2 million impairment. International shipping overcapacity and weak charter rates were expected to continue pressuring marine activities in 2012.
- Reported 2011 earnings included $8.9 million of tax benefits and other specified items, including a $5.5 million leveraged-lease adjustment and a $3.2 million litigation reserve release; 2010 also included tax benefits and other items. The reported effective tax rate was 25.2%, versus 17.1% in 2010.
- Material risks include cyclical customer demand, lease-rate and utilization pressure, financing access and interest-rate exposure, large railcar purchase commitments, asset impairment, joint-venture performance, environmental obligations, and labor and regulatory issues. A hypothetical 100-basis-point rate increase was estimated to raise 2012 after-tax interest expense by $7.1 million.
- The Viareggio derailment in Italy caused 32 deaths and generated notices of claims from approximately 380 parties. The investigation continued; GATX stated it could not estimate potential loss and had recorded no accrual. Environmental remediation accruals were $16.7 million; other probable, estimable litigation accruals totaled $1.8 million. The company said environmental costs were not material to its financial position, results or cash flows at year-end.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor verification priorities
- Reconcile GAAP earnings growth with the $15.8 million difference between 2011 reported net income and the company’s adjusted figure, including tax and other one-time items.
- Assess debt maturities and refinancing needs: contractual recourse debt payments included $735.1 million due in 2012; also evaluate operating-lease commitments and the $0.9 billion estimated present value of off-balance-sheet operating-lease financing.
- Test whether 2012 railcar renewals, lease rates and high utilization support management’s outlook, and whether committed deliveries remain placed at the expected rates.
- Monitor Viareggio claims and investigation, environmental remediation estimates, ASC labor and operating costs, and pension funding needs; funded pension plans were reported 94% funded.
- Evaluate Portfolio Management’s marine exposure, the Clipper vessel transfer and impairment, and dependence on joint-venture earnings, including the Rolls-Royce engine-leasing ventures.