GATX Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless noted. GATX leases, operates and manages assets in rail, marine and industrial markets through Rail, Specialty and American Steamship Company (ASC).
Financial results and position
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $288.2 million | $282.9 million | $551.8 million | $545.8 million |
| Income before tax | $25.2 million | $19.7 million | $51.5 million | $59.2 million |
| Net income | $21.5 million | $12.7 million | $40.2 million | $40.3 million |
| Diluted EPS | $0.46 | $0.27 | $0.86 | $0.83 |
| Net margin, calculated | 7.5% | 4.5% | 7.3% | 7.4% |
- Cash flow: First-half operating cash flow was $86.0 million, unchanged year over year. Investing used $72.5 million and financing used $26.4 million. Cash declined $12.4 million to $29.3 million; restricted cash was $31.6 million.
- Investment: Portfolio investments and capital additions were $131.1 million in the first half, down from $190.4 million.
- Debt and liquidity: Total reported debt and capital lease obligations were $2,893.8 million at June 30, versus $2,912.8 million at year-end 2009. The $550 million revolving facility had $476.1 million available. GATX reported covenant compliance.
- Equity: Shareholders’ equity was $1,044.9 million, down from $1,102.6 million at year-end. Accumulated other comprehensive loss widened to $159.0 million, largely reflecting currency translation effects.
Material changes and operating performance
- Q2 net income increased to $21.5 million from $12.7 million. First-half net income was essentially flat. Results included after-tax net benefits of $3.3 million for Q2 and $2.5 million for the first half, from favorable litigation resolution and a tax accrual reversal, partly offset by unrealized losses on AAE interest-rate swaps.
- First-half consolidated gross income rose to $576.7 million from $553.2 million, while segment profit declined to $114.8 million from $126.6 million. Lower Rail and Specialty segment profit was partly offset by stronger ASC results. First-half pretax income fell to $51.5 million from $59.2 million.
- Rail: North American railcar utilization improved to 96.5%. Renewals in the company’s Lease Price Index were 18.6% below expiring rates in Q2, and management expected below-expiring renewals to continue pressuring lease income in the near term. First-half Rail segment profit was $78.7 million versus $87.5 million.
- Specialty: Q2 segment profit rose to $14.5 million from $7.3 million, helped by remarketing and affiliate earnings and lower other costs. First-half segment profit fell to $26.6 million from $30.3 million, primarily because of reduced asset remarketing income.
- ASC: First-half freight volume rose to 9.6 million net tons from 6.5 million; 13 vessels operated versus 9 a year earlier. Management noted uncertainty for the second half, as steel mills indicated production could be reduced, potentially weakening iron ore demand.
- The effective tax rate was 22% for the first half, versus 32% in 2009; excluding specified tax benefits, the rates were 29% and 36%, respectively.
Outlook, risks and unusual items
- The filing provides no numerical full-year earnings guidance. Management cautioned that interim results may not indicate full-year performance; ASC’s seasonal operations and the timing of asset remarketing can make results uneven.
- Management cited economic and market conditions, lease rates and utilization, financing costs and credit ratings, asset maintenance, impairment and loss provisions, remarketing opportunities, regulation and litigation as factors that could cause results to differ from expectations. Both major rating agencies had a negative outlook on GATX’s long-term unsecured debt ratings.
- GATX recorded $5.4 million of first-half asset impairment charges, including $4.8 million related to a regulatory change that shortened the expected economic life of 358 aluminum hopper cars.
- The Viareggio derailment investigation and claims remained unresolved. Approximately 246 claims notices had been received; the company could not estimate potential losses and had recorded no accrual for this matter. GATX noted that future European wheelset inspection or maintenance requirements could increase costs.
- In the PKP litigation, GATX had accrued $15.5 million against claims totaling $39.5 million; an appeal of a trial-court ruling in GATX’s favor was pending. The company said a larger eventual resolution could materially affect a particular period’s results.
- The Flightlease/Airbus litigation was globally settled in May 2010. GATX made no settlement payment and received an immaterial amount. A $2.0 million environmental reserve addition related to a sold facility was also recorded.
- A clerical error overstated cash, accounts payable and operating cash flow by $13.1 million in the December 2009 statements. Management deemed the prior-period effect immaterial and corrected the statements in 2010.
Important facts for investors to verify
- Whether North American railcar utilization and renewal pricing stabilize, given renewals remained materially below expiring rates.
- How the Viareggio investigation, claims and evolving European wheelset requirements affect potential liabilities and maintenance expense.
- Whether ASC’s second-half freight volumes hold up if steel production and iron ore demand weaken.
- The sensitivity of earnings to AAE’s unhedged-for-accounting purposes swap fair-value changes, and to tax and litigation benefits included in 2010 results.
- Liquidity and refinancing capacity, including the negative rating outlook, facility availability, covenant requirements and contractual purchase obligations of $143.7 million.