GATX

Business Context and Reporting Period

Company: GATX Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
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). As of September 30, 2009, 46.1 million common shares were outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues for the nine months ended September 30, 2009, decreased to $822.2 million from $1,028.8 million in the prior year period. This was driven by lower lease income, reduced marine operating revenue, and lower asset remarketing income.
• Profitability Drop: Net income fell significantly to $59.9 million (9 months 2009) from $165.9 million (9 months 2008). Diluted EPS dropped from $3.31 to $1.24.
• Segment Performance:
  • Rail: Segment profit decreased due to lower lease rates, reduced utilization (North American fleet at 95.9%), and a $22.0 million unrealized loss on interest rate swaps at an affiliate (AAE).
  • Specialty: Segment profit declined due to lower marine affiliate earnings and reduced asset remarketing activity.
  • ASC: Segment profit dropped to $10.1 million from $19.8 million due to a severe downturn in the Great Lakes steel industry, resulting in significantly lower freight volumes (12.6 million net tons vs. 26.6 million net tons).
• Cash Flow: Net cash provided by operating activities decreased to $132.0 million from $216.0 million, primarily due to higher pension plan contributions and reduced joint venture distributions.

Guidance, Outlook, and Risks

• Market Conditions: Management notes continued economic weakness in North America and Europe affecting rail lease pricing and demand. The Great Lakes transportation market remains severely depressed.
• Investment Activity: Total investment volume for the first nine months of 2009 was $376.5 million, down from $444.8 million in 2008. Capital market volatility continues to create uncertainty for investment opportunities.
• Legal Contingencies:
  • Viareggio Derailment: A train derailment in Italy on June 29, 2009, involving GATX-owned LPG tank cars resulted in fatalities and injuries. The company cannot currently estimate potential losses or legal proceedings but has not established accruals.
  • PKP Litigation: A lawsuit in Poland regarding a 2001 acquisition involves a claim of $44.0 million. GATX has recorded an accrual of $15.5 million.
• Regulatory Risks: New U.S. interim rules for toxic-by-inhalation (TIH) tank cars and European restrictions on wheelsets following the Viareggio accident may impact operations, though management does not currently expect a material financial impact.
• Credit Ratings: Moody's and S&P have revised GATX's rating outlook from stable to negative, though the long-term unsecured debt rating remains BBB+ (S&P) and Baa1 (Moody's).

Key Facts for Investor Verification

• Unrealized Derivative Losses: Verify the impact of the $22.0 million unrealized loss on interest rate swaps at the AAE affiliate, which significantly reduced Rail segment profit.
• Viareggio Accident Liability: Monitor developments regarding the June 2009 derailment in Italy, as the company has not yet estimated potential liability or legal costs.
• ASC Fleet Utilization: Track the utilization of the ASC fleet, which was reduced to 8 vessels in service (down from 18) due to the steel industry downturn.
• Debt Covenants: Confirm continued compliance with restrictive covenants in the $550 million revolving credit facility and European subsidiary loan agreements.
• Pension Funding: Note the significant cash outflow ($46.6 million) for pension contributions in the first nine months of 2009.