GATX Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing. GATX leases, operates and manages rail, marine and industrial assets through Rail, Specialty and American Steamship Company (ASC).
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $1,166.8 million | $1,124.9 million |
| Gross income | $1,204.9 million | $1,153.9 million |
| Net income | $80.8 million | $81.4 million |
| Diluted EPS | $1.72 | $1.70 |
| Operating cash flow | $242.1 million | $265.4 million as reported |
| Capital investment | $585.1 million | $480.4 million |
- Revenue rose about 3.7%, while net income was nearly flat. Excluding specified tax benefits and other items, net income fell 21.2% to $74.6 million and diluted EPS fell to $1.59 from $1.97.
- Reported net income included $11.4 million of tax benefits, $10.4 million of unrealized losses on AAE interest-rate swaps, and a $6.5 million favorable litigation resolution. The company’s adjusted measure excludes these and other identified items.
- Segment profit: Rail $150.6 million (down from $169.1 million); Specialty $48.7 million (down from $51.6 million); ASC $28.6 million (up from $16.1 million).
- Rail’s North American fleet utilization improved to 97.4% from 95.9%, but renewal rates in the company’s Lease Price Index declined 15.8% on average. ASC carried 28.0 million net tons, up 32% year over year.
- Assets were $5.442 billion on balance sheet, or $6.414 billion including $971.5 million of off-balance-sheet assets. Shareholders’ equity was $1.114 billion.
- Balance-sheet debt and capital lease obligations totaled $3.177 billion, up $263.7 million; this excludes $971.5 million of estimated present-value operating-lease commitments shown separately as off-balance-sheet debt. Unrestricted cash was $78.5 million; restricted cash was $56.6 million.
- Cash dividends were $53.5 million and declared dividends were $1.12 per common share, unchanged from 2009. No common stock repurchases occurred in 2010.
Changes, outlook and commentary
- Rail results remained under pressure from lower North American lease rates and fewer railcars on lease. Management noted that about 21,000 North American car leases were due to expire in 2011, many at above-current-market rates, creating near-term rollover pressure. It intended to focus on pricing, remarketing and selective investment.
- Specialty earnings eased, mainly due to lower remarketing income and marine-affiliate earnings. Management expected shipping-market capacity and charter-rate pressure to continue into 2011, while seeking selective growth and remarketing opportunities.
- ASC benefited from a recovery in freight volumes, especially iron ore. Management expected 2011 volumes to be similar to 2010 and anticipated putting about 11 vessels into service.
- GATX stated it expected to meet 2011 contractual obligations using operating cash flow, portfolio proceeds, credit facilities and available cash. It expected approximately $7.0 million of 2011 contributions to funded and unfunded defined-benefit and post-retirement plans.
- The company issued $500 million of new five- and six-year fixed-rate unsecured debt in 2010. S&P lowered its long-term unsecured rating from BBB+ to BBB; Moody’s affirmed Baa1. Both outlooks were revised to stable. GATX reported covenant compliance, including a fixed-charge coverage ratio of 1.5 against a 1.2 minimum.
Risks, contingencies and unusual items
- Major risks include economic cyclicality and customer demand, railcar utilization and lease pricing, access to financing, interest and foreign-exchange movements, asset impairment and residual values, environmental liability, regulation, labor relations and the performance of joint ventures.
- The 2009 Viareggio derailment in Italy caused 32 deaths and injuries. Investigations and claims remained unresolved; GATX had not accrued potential liability because it could not reasonably estimate a loss. Insurance coverage was in place.
- A Polish court ruled for GATX’s subsidiary in the PKP dispute, but an appeal remained pending. GATX had accrued $15.5 million against claimed damages of approximately $47.0 million; a larger resolution was possible and could affect a particular period’s results.
- GATX reported 858 pending asbestos-related cases as of January 28, 2011, most involving ASC Jones Act claims. Management did not expect the described legal matters to materially affect consolidated financial position or liquidity, but acknowledged possible material effects on results in a particular quarter or year.
- Environmental reserves were $19.3 million for known sites. The company noted that remediation estimates may change as investigations and cleanup progress.
- In 2010, GATX corrected an immaterial clerical error that had overstated 2009 cash, accounts payable and operating cash flow by $13.1 million each. Operating cash flow comparisons should account for this correction.
- An industry regulatory mandate led to a $4.8 million impairment charge on 358 aluminum hopper cars. European railcar wheelset work also continued to raise repair activity and capital spending.
Key facts for investors to verify
- Whether Rail renewals and utilization offset the scheduled 2011 lease expirations and continued rate pressure.
- Cash generation and investment requirements relative to debt maturities, operating-lease commitments and available credit facilities.
- Whether ASC’s expected 2011 shipping volumes materialized, and the outcome and cost implications of proposed Great Lakes ballast-water rules.
- Developments in the Viareggio investigation and claims, the PKP appeal, asbestos litigation and environmental remediation estimates.
- The sustainability of reported earnings given tax benefits, AAE swap valuation changes and other unusual items; review the company’s reconciliation of its non-GAAP adjusted earnings.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2010.