GATX

Business Context and Reporting Period

Company: GATX Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: GATX leases, operates, and manages long-lived assets in the rail, marine, and industrial equipment markets. The company operates through three segments: Rail, Specialty, and American Steamship Company (ASC).
Outstanding Shares: 46.3 million common shares as of March 31, 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased $8.9 million (32%) year-over-year. This decline was partially driven by a $13.4 million decrease in unrealized losses on interest rate swaps at the European Rail affiliate (AAE) in 2010 compared to 2009, which had previously suppressed earnings.
• Segment Performance:
  • Rail: Segment profit increased to $49.3 million from $43.2 million, driven by higher affiliate earnings and asset remarketing income, offset by higher maintenance costs and $4.8 million in asset impairment charges related to regulatory mandates on aluminum hopper cars.
  • Specialty: Segment profit fell to $12.1 million from $23.0 million, primarily due to a $7.8 million decrease in asset remarketing income.
  • ASC: Segment profit dropped to $0.4 million from $4.8 million. The prior year included a $5.6 million litigation settlement. Excluding this, the current year showed improvement due to higher freight volume.
• Liquidity: Cash and cash equivalents increased significantly to $173.8 million from $41.7 million at year-end 2009, driven by net debt issuances of $259.1 million and a correction of a prior period clerical error regarding cash balances.
• Operating Cash Flow: Shifted from positive $29.5 million in Q1 2009 to a slight usage of $0.3 million in Q1 2010, attributed to lower lease income, higher maintenance costs, and the absence of the ASC litigation recovery.

Guidance, Outlook, and Risks

• Market Conditions: Rail markets in North America have stabilized but at lower levels. Lease renewal rates are down 15.2% compared to expiring rates. The Great Lakes dry bulk market (ASC) remains uncertain, though demand has increased from 2009 lows.
• Regulatory Risks:
  • Viareggio Derailment: Following the June 2009 accident in Italy, GATX Rail Austria faces ongoing investigations and potential liability. The company has not established an accrual for potential losses but expects higher maintenance costs due to new wheelset inspection programs.
  • Asset Impairment: A regulatory mandate by the Association of American Railroads reduced the economic life of 358 aluminum hopper cars, resulting in $4.8 million in impairment charges.
• Legal Proceedings:
  • PKP Litigation: A Polish court ruled in favor of GATX subsidiary DEC in a dispute regarding a $9.8 million bank loan guarantee. PKP has appealed. GATX has accrued $15.5 million for this matter.
• Debt and Credit: GATX maintains a BBB+ (S&P) / Baa1 (Moody's) credit rating with a negative outlook. The company has a $550 million revolving credit facility with $540.5 million available.
• Accounting Adjustments: The company corrected a $13.1 million clerical error in the Q4 2009 cash flow statement, which was adjusted in Q1 2010.

Investor Verification Checklist

• Derivative Exposure: Verify the impact of unrealized gains/losses on interest rate swaps at the AAE affiliate, which significantly fluctuated between periods.
• Viareggio Liability: Monitor the status of the Italian derailment investigation and potential future accruals for liability or increased maintenance costs.
• Rail Lease Rates: Track the GATX Lease Price Index (LPI) and renewal rates, as downward pressure on lease rates continues to impact the Rail segment's near-term income.
• ASC Seasonality: Confirm the deployment of the ASC fleet as the Great Lakes navigation season progresses, given the significant seasonality in the first quarter.
• PKP Appeal: Watch for updates on the appeal of the Polish court ruling, as an adverse outcome could exceed the current $15.5 million accrual.