Business Context and Reporting Period
Company: GATX Corporation (GATX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: GATX leases, operates, and manages long-lived assets in rail, marine, and industrial equipment markets. The company operates through three segments: Rail (tank cars, freight cars, locomotives), Specialty (marine and industrial equipment leasing), and American Steamship Company (ASC) (Great Lakes dry bulk transportation). The former Air segment was sold in 2007 and is reported as discontinued operations.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Consolidated Gross Income | $1,153.9 million | $1,443.1 million |
| Income from Continuing Operations | $81.4 million | $194.8 million |
| Diluted EPS (Continuing Ops) | $1.70 | $3.88 |
| Total Assets (On-Balance Sheet) | $5,206.4 million | $5,190.5 million |
| Total Debt (On-Balance Sheet) | $2,912.8 million | $2,809.3 million |
| Shareholders' Equity | $1,102.6 million | $1,124.5 million |
| Net Cash from Operating Activities | $265.4 million | $364.0 million |
| Return on Equity (ROE) | 7.3% | 17.1% |
Note: GATX also utilizes approximately $1.0 billion of off-balance sheet assets (primarily railcars) financed via operating leases.
Material Changes vs. Prior Period
- Profitability Decline: Income from continuing operations dropped 58.2% to $81.4 million. Excluding tax benefits and other items, income decreased 45.9% to $94.7 million.
- Segment Performance:
- Rail: Segment profit fell 45.4% to $169.1 million due to lower lease rates (LPI down 11.0%), reduced utilization (95.9%), and significantly lower remarketing/scrapping income. Results included a $24.4 million unrealized loss on interest rate swaps at affiliate AAE.
- Specialty: Segment profit fell 51.3% to $51.6 million, driven by lower joint venture earnings (marine sector downturn) and reduced asset remarketing income.
- ASC: Segment profit fell 38.5% to $16.1 million. Freight volume dropped 40.6% to 21.2 million net tons due to the steel industry downturn. Only 12 of 18 vessels were deployed.
- Costs: Maintenance expenses increased across segments due to higher lessee turnover and regulatory compliance costs, partially offset by a stronger U.S. dollar reducing foreign currency impacts.
- Investment Volume: Total investment volume decreased to $480.4 million from $781.1 million in 2008, reflecting a disciplined approach in a weak market.
Guidance, Outlook, and Risks
- Outlook: Management expects challenges to persist into 2010. Pressure on lease rates and utilization is anticipated to continue until the economy shows sustainable improvement. ASC expects to deploy 9-10 vessels in 2010.
- Liquidity: GATX expects to meet 2010 obligations through operating cash flow, portfolio proceeds, and revolving credit facilities. Unrestricted cash was $41.7 million at year-end. The company has $506.9 million available under its $550 million revolving credit facility.
- Key Risks:
- Economic Conditions: Continued weakness in steel, chemical, and construction sectors reduces demand for assets.
- Regulatory: New FRA rules for toxic-by-inhalation (TIH) railcars and potential ballast water treatment standards for Great Lakes vessels could increase compliance costs.
- Legal: Ongoing litigation regarding the 2009 Viareggio, Italy train derailment (32 deaths) and the Flightlease/Airbus dispute. No accruals were made for Viareggio as liability cannot be estimated; a $15.5 million accrual exists for the PKP Poland litigation.
- Joint Ventures: Exposure to market volatility through significant investments in affiliates (e.g., AAE, Rolls-Royce joint ventures).
Investor Verification Checklist
- AAE Swap Losses: Verify the impact of the $24.4 million unrealized loss on AAE interest rate swaps and the potential for future volatility in this affiliate's earnings.
- ASC Volume Recovery: Monitor the steel industry's recovery and ASC's ability to increase vessel deployment beyond the 9-10 vessels planned for 2010.
- Regulatory Compliance Costs: Assess the financial impact of new FRA TIH car rules and potential Great Lakes ballast water treatment mandates.
- Legal Contingencies: Track developments in the Viareggio derailment investigation and the Flightlease/Airbus litigation, which could result in material liabilities.
- Debt Covenants: Confirm continued compliance with the fixed charge coverage ratio (1.5x actual vs. 1.2x required) and asset coverage tests under the revolving credit facility.