GATX Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. GATX leases, operates and manages rail, marine and industrial assets through Rail, Specialty and American Steamship Company (ASC), and invests in related joint ventures. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $337.9 | $308.7 | $917.5 | $860.5 |
| Income before tax | $43.7 | $28.3 | $105.2 | $79.8 |
| Net income | $32.9 | $21.1 | $79.2 | $61.3 |
| Diluted EPS | $0.70 | $0.45 | $1.68 | $1.31 |
| Operating cash flow | Not separately presented | Not separately presented | $187.8 | $150.6 |
- Revenue rose 9% in Q3 and 7% for the first nine months. Net income increased 56% and 29%, respectively. Net income as a percentage of revenue was approximately 9.7% for Q3 (6.8% prior year) and 8.6% for nine months (7.1% prior year).
- Q3 total segment profit was $83.0, versus $58.8; nine-month segment profit was $220.2, versus $173.6. Rail drove the improvement. Specialty segment profit declined to $11.5 from $13.6 in Q3 and to $31.0 from $40.2 for nine months; ASC declined to $8.5 from $12.5 and to $17.9 from $22.0, respectively.
- Nine-month investing activities used $374.8 of cash, including $460.1 of portfolio investments and capital additions, partly offset by portfolio and other asset proceeds. Investment volume increased from $244.5 in the prior-year period. Financing provided $222.2, and cash increased $36.5 to $115.0. Cash and cash equivalents exclude restricted cash of $50.6.
- At September 30, total debt and capital lease obligations were $3,441.9, compared with $3,176.5 at year-end 2010. Recourse debt was $3,145.6; nonrecourse debt was $157.8. Total assets were $5,756.5 and shareholders’ equity was $1,155.3.
- GATX had $452.4 available under its $560 million revolving credit facility, maturing May 2015. The company reported compliance with debt covenants; long-term ratings were BBB from S&P and Baa1 from Moody’s, both with stable outlooks.
Material changes and operating developments
- Rail: North American railcar utilization was 98.2%, up from 96.8% a year earlier; European utilization was 96.0%, versus 95.3%. North American renewal rates in the company’s Lease Price Index were 9.6% above expiring rates in Q3, compared with a 15.7% decline in Q3 2010. Higher lease, remarketing and scrapping income supported results. The company entered into an agreement to acquire 12,500 new railcars, expected to be delivered over five years.
- Specialty: Nine-month investment volume rose to $151.4 from $52.6, including equity investments in joint ventures, loans and marine assets. Marine affiliates faced inconsistent demand and vessel overcapacity, while its Rolls-Royce affiliate continued to perform strongly. Two Clipper marine joint ventures were dissolved: GATX contributed $62.1 toward its share of their debt, received six vessels valued at $88.8, and recorded a $5.2 impairment loss.
- ASC: Revenue increased, but segment profit fell amid higher maintenance and operating costs and an August labor stoppage. ASC carried 18.6 million net tons in the first nine months, down from 19.5 million. Licensed crew members returned to work August 5; the expired labor contract was extended through 2011 and potentially into 2012 while negotiations continued.
- SG&A increased to $112.3 for nine months from $97.3, primarily due to higher compensation, IT and outside-services costs. Depreciation, maintenance and marine operating expenses also increased in the period.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or EPS guidance. Management said ASC expected steady customer demand through year-end, but recovery of tonnage lost during the work stoppage was uncertain. Results are subject to seasonality at ASC and variable timing of asset remarketing; nine-month results may not indicate full-year performance.
- Reported earnings include significant nonrecurring or volatile items. Nine-month 2011 results included a $9.8 after-tax benefit ($0.21 per diluted share) from unrealized gains on interest-rate swaps at European affiliate AAE and a $4.1 deferred UK tax benefit ($0.09 per diluted share). Q3 2011 included $2.8 of after-tax AAE swap losses ($0.06 per share) and the same $4.1 tax benefit. Prior-year periods also included tax and litigation benefits and AAE swap losses; comparisons should account for these items.
- A Polish subsidiary’s litigation with PKP remained on appeal to the Supreme Court. PKP claimed approximately $44.4; GATX accrued $15.5. The company said an excess over the accrual was possible and could materially affect results in a particular period, though it did not expect such excess to be material to financial position or liquidity.
- Other stated risks include economic and market conditions, lease rates and utilization, financing costs and credit ratings, regulation, maintenance, railcar purchase commitments, portfolio losses, remarketing opportunities, labor relations and litigation. Proposed ballast-water treatment requirements could affect ASC; final Coast Guard rules had not yet been published.
- Commercial commitments totaled $143.3, including $132.4 of guarantees and $10.9 of letters of credit and bonds. GATX reported no known event requiring guarantee performance and did not expect material losses from these off-balance-sheet instruments.
Most important facts for investors to verify
- Whether stronger Rail utilization, lease-renewal pricing and remarketing proceeds continued after Q3, and how much reported earnings depended on those factors.
- The performance and risk exposure of Specialty’s marine affiliates following the Clipper joint-venture dissolutions, including the $62.1 contribution and $5.2 impairment.
- The financial and operational effects of ASC’s labor disruption, contract negotiations and any ballast-water regulatory requirements.
- Debt maturities, liquidity and funding needs alongside elevated investment commitments, including the railcar supply agreement and $1,279.5 of disclosed future portfolio investments.
- Developments in the PKP appeal and the adequacy of the $15.5 litigation accrual; also monitor the $43.7 gross liability for unrecognized tax benefits.