GATX Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless noted. GATX leases, operates, manages and remarkets rail and marine assets, with Rail, American Steamship Company (ASC) and Portfolio Management reporting segments. Amounts are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $343.4 | $337.9 | $970.9 | $917.5 |
| Total gross income, including affiliate earnings | $362.5 | $339.7 | $994.2 | $951.4 |
| Income before income taxes | $51.6 | $43.7 | $133.9 | $105.2 |
| Net income | $53.8 | $32.9 | $107.6 | $79.2 |
| Diluted EPS | $1.13 | $0.70 | $2.26 | $1.68 |
| Net margin (net income divided by revenue) | 15.7% | 9.7% | 11.1% | 8.6% |
- Cash flow: Nine-month operating cash flow was $224.6, versus $188.9. Investing used $163.1, versus $374.8, and financing provided $121.5, versus $221.1. Investment and capital additions totaled $523.4, compared with $460.1.
- Cash and liquidity: Cash and cash equivalents were $430.6 at September 30, up from $248.4 at December 31, 2011. The $560 million revolving credit facility had $415.4 of availability at quarter-end; $135.0 of commercial paper and $9.6 of letters of credit were backed by the facility.
- Debt and equity: Total reported debt, including commercial paper, borrowings and capital leases, was $3,708.1, versus $3,547.1 at year-end. Shareholders’ equity was $1,225.4, versus $1,127.3. Subsequent to quarter-end, GATX repaid $300.0 of debt and $85.0 of commercial paper.
- Dividends: Declared dividends were $0.30 per common share for Q3 and $0.90 for the first nine months, compared with $0.29 and $0.87, respectively, in 2011.
Material changes and segment trends
- Q3 revenue increased 1.6% and net income increased 63.5%; nine-month revenue rose 5.8% and net income rose 35.9%. Reported earnings include tax adjustments and other items: a net benefit of $18.2 in Q3 2012 versus $1.3 in Q3 2011, and $0.7 for the first nine months of 2012 versus $13.9 in 2011. The filing cautions that these items affect period comparisons.
- Rail: Q3 segment profit was $63.5 versus $63.0; nine-month segment profit was $171.7 versus $171.3. North American rail utilization was 98.2%; the average renewal rate for cars in the company’s lease-price index was 26.4% above expiring rates. Management cited strong tank-car demand, but weaker coal-car demand and softer European chemical-car markets. AAE, GATX’s European rail affiliate, continued to face low utilization amid economic weakness.
- ASC: Q3 segment profit rose to $13.2 from $8.5; nine-month profit rose to $29.3 from $17.9. Higher iron-ore volumes and rates contributed, as did the absence of the 2011 labor stoppage’s impact. A new articulated tug-barge entered service in Q2 2012.
- Portfolio Management: Q3 segment profit increased to $15.0 from $11.5; nine-month profit increased to $51.6 from $31.0, driven principally by higher affiliate earnings and remarketing income. Management described marine markets as generally weak; investment volume declined to $62.8 from $151.4 year over year.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management states that interim results are not necessarily indicative of full-year results; ASC is seasonally affected by Great Lakes winter conditions, and asset remarketing income varies with market conditions and timing.
- The effective tax rate for the first nine months was 20%, versus 25% in 2011; management said both periods would have been 31% excluding AAE swap effects and tax adjustments. 2012 included a $15.5 tax benefit from closing a federal tax audit and a $4.6 deferred tax benefit from a UK tax-rate reduction.
- Viareggio derailment: Italian prosecutors notified GATX Rail Austria and subsidiaries of intended negligence-based criminal charges related to the 2009 derailment, which caused 32 deaths and other losses. The company disputes the allegations and says it cannot reasonably estimate a loss; no accrual was recorded. Most asserted civil claims had been resolved, but one insurer disputed reimbursement of criminal-defense costs.
- Other contingencies: GATX recorded $1.9 for probable, estimable litigation losses and $15.9 for environmental remediation at 17 sites. Management said the recorded matters were not expected to materially affect consolidated financial position or liquidity, while noting that future costs could affect results in a particular period. Total commercial commitments were $130.6, with $6.7 of related balance-sheet liabilities.
- Other risks include economic and market conditions, lease pricing and utilization, financing costs and credit ratings, maintenance costs, railcar purchase commitments, asset impairments, remarketing opportunities, regulation, labor relations and litigation outcomes. GATX reported compliance with debt covenants and no material change in risk factors or market-risk exposures during the period.
Important facts for investors to verify
- How much of reported earnings growth reflects ongoing operations versus tax benefits and AAE interest-rate-swap gains or losses.
- Whether high North American rail utilization and renewal pricing persist, and how weaker coal, European chemical and European affiliate markets affect performance.
- The outcome and potential financial exposure of the Viareggio criminal proceedings, civil claims and the insurance reimbursement dispute.
- Cash available after the post-quarter debt repayments, upcoming debt maturities, and execution of the substantial railcar purchase commitments included in contractual commitments.
- Whether the $15.9 environmental accrual and other litigation and guarantee exposures remain adequate as investigations and proceedings develop.