GATX Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. GATX leases and manages rail, marine, and industrial assets through Rail, Specialty, and American Steamship Company (ASC).
Financial results and liquidity
- Q3 revenue: $308.7 million, up from $276.6 million. Net income was $21.1 million versus $19.6 million; diluted EPS was $0.45 versus $0.42.
- First nine months: Revenue was $860.5 million versus $822.4 million. Net income was $61.3 million versus $59.9 million; diluted EPS was $1.31 versus $1.24. Approximate net margin was 7.1%, compared with 7.3%.
- Cash flow, nine months: Operating activities provided $150.6 million versus $132.0 million. Investing activities used $88.6 million versus $232.5 million; financing activities used $80.2 million versus providing $81.2 million. Portfolio investments and capital additions were $244.5 million, down from $376.5 million.
- Balance sheet at September 30: Cash and cash equivalents were $23.6 million, with a further $32.0 million restricted. Total debt was $2,879.6 million, down from $2,912.8 million at year-end 2009; shareholders’ equity was $1,098.6 million. Total assets were $5,133.5 million.
- Funding: A $550 million unsecured revolving credit facility had $525.5 million available. GATX reported compliance with its covenants. The quarterly dividend was $0.28 per common share, unchanged from 2009.
Changes and segment performance
- ASC drove much of the revenue improvement: Q3 segment gross income rose to $65.9 million from $37.3 million, and segment profit to $12.5 million from $1.3 million. For nine months, ASC carried 19.5 million net tons versus 12.6 million as steel and iron-ore demand recovered.
- Rail’s nine-month segment profit declined to $111.4 million from $135.2 million. Lower North American lease income, higher European maintenance costs, and impairment charges weighed on results; prior-year comparisons also included larger unrealized swap losses. North American fleet utilization improved to 96.8%, but Q3 renewal rates for the tracked cars averaged 15.7% below expiring rates.
- Specialty’s nine-month segment profit was $40.2 million versus $43.5 million, mainly reflecting lower affiliate earnings. Q3 profit was broadly stable at $13.6 million.
- Reported earnings included unusual items: Q3 results included a $1.9 million UK deferred tax benefit and $2.7 million after-tax unrealized swap losses at European affiliate AAE. Nine-month results included a $6.5 million litigation-resolution benefit, tax-related benefits, and AAE swap losses. The effective tax rate was 23% for the nine months, versus 31% in 2009; excluding specified tax benefits, it was 30% versus 33%.
Outlook, risks, and contingencies
- Management described gradual improvement in rail leasing demand, but warned that industry-wide idle cars would continue to pressure lease rates; renewals were expected to remain below expiring rates through the remainder of 2010 and 2011. No specific full-year earnings guidance is provided in the filing.
- Management cited general economic and market conditions, utilization and lease rates, funding costs and credit ratings, asset impairment, maintenance costs, remarketing opportunities, and litigation outcomes as factors that could cause results to differ from expectations. Results are subject to seasonality at ASC and variable timing of asset remarketing.
- GATX recorded a $5.8 million impairment charge in the first nine months, including $4.8 million related to a regulatory change reducing the expected economic lives of 358 aluminum hopper cars.
- In the PKP litigation, a Polish trial court ruled in favor of GATX’s subsidiary, but an appeal was pending. PKP claimed approximately $47.0 million; GATX had accrued $15.5 million. The company said a larger resolution could materially affect a particular quarter or year.
- Following the fatal 2009 Viareggio derailment in Italy, GATX had received notices of claims from approximately 246 persons and companies. The cause and potential loss remained uncertain, and no accrual had been established.
- In August 2010, S&P lowered GATX’s long-term unsecured rating from BBB+ to BBB and changed the outlook to stable. Moody’s maintained Baa1 and also moved the outlook to stable.
Important facts for investors to verify
- Whether rail utilization gains translate into improved renewal rates and lease income despite management’s stated rate pressure.
- How ASC’s freight volumes and profitability develop, including the effects of fuel and operating costs and seasonal inactivity.
- The underlying earnings impact of AAE swap marks, tax benefits, litigation resolutions, and asset impairments.
- Updates on the PKP appeal and Viareggio claims, including any change in accruals, insurance coverage, or estimated exposure.
- Debt-market access, covenant headroom, and liquidity after the credit-rating downgrade; also note the $13.1 million clerical error identified in 2010, which overstated 2009 cash, payables, and operating cash flow and was corrected as immaterial to prior periods.