GATX Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. GATX leases, operates and manages rail, marine and industrial assets through its Rail, Specialty and American Steamship Company (ASC) segments. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $265.0 | $263.6 |
| Net income | $19.9 | $18.7 |
| Diluted EPS | $0.42 | $0.40 |
| Operating cash flow | $36.8 | $(0.3) |
| Capital additions and portfolio investments | $96.2 | $70.2 |
Revenue increased about 0.5% and net income about 6.4% year over year. Net margin was approximately 7.5%, versus 7.1%. Income before taxes was $25.8, compared with $26.3; income tax expense fell to $5.9 from $7.6, and the effective tax rate declined to 23% from 29%. Dividends declared were $0.29 per common share, versus $0.28.
Quarterly results included $6.4 after-tax of unrealized gains on interest-rate swaps at European Rail affiliate AAE. Management cautioned that these gains are mark-to-market and may reverse or vary; therefore, reported earnings growth is not solely indicative of operating improvement.
Balance sheet, debt and liquidity
- At March 31, total assets were $5,498.7 and shareholders’ equity was $1,153.7. Cash and cash equivalents were $53.9; restricted cash was $54.7.
- Total reported debt, including capital lease obligations, was $3,220.1, up from $3,176.5 at December 31, 2010. This comprised $2,810.6 recourse debt, $193.1 nonrecourse debt, $175.8 commercial paper and bank-facility borrowings, and $40.6 capital leases.
- Operating cash flow was $36.8; investing activities used $77.3 and financing activities provided $16.2. Cash declined $24.6 during the quarter to $53.9.
- A $550 revolving credit facility matures in May 2012. Availability was $406.7 at quarter-end, including $133.7 of commercial paper and $9.6 of letters of credit backed by the facility. GATX reported compliance with all credit covenants; management did not anticipate covenant violations.
- Long-term unsecured debt ratings were BBB (S&P) and Baa1 (Moody’s), both with stable outlooks.
Material changes and segment results
- Rail: Segment profit rose to $51.6 from $49.3, including AAE swap gains. North American fleet utilization improved to 97.8% from 96.0% a year earlier; renewal rates in the company’s lease-price index were 0.5% below expiring rates, a substantially smaller decline than in prior comparative quarters. European utilization was 95.8%, up from 94.4%. Excluding swap effects, Rail profit declined, mainly due to lower remarketing and affiliate earnings and the absence of prior-year lease settlements.
- Specialty: Segment profit decreased to $10.7 from $12.1, primarily from lower lease and remarketing income. Management noted continued pressure in marine affiliate markets from inconsistent demand and vessel overcapacity; its aircraft-engine leasing affiliate continued to report positive operating results.
- ASC: Segment profit increased to $0.8 from $0.4. Freight volume was comparable at 1.2 million net tons; higher marine revenue and fuel surcharges were offset in part by increased fuel costs. ASC’s fleet is seasonally less active in the first quarter.
- Total segment profit was $63.1 versus $61.8. SG&A increased to $36.4 from $33.5, primarily due to higher compensation costs.
Outlook, risks and unusual items
- No specific full-year earnings or financial guidance is provided. Management said U.S. rail market fundamentals continued to improve, with rising carloadings, fewer idle cars and improving lease-rate trends. ASC anticipated marginally higher tonnage than the prior year, but customer freight discussions were ongoing as of the filing.
- In March, GATX agreed to purchase 12,500 newly built railcars over five years. The filing’s contractual commitments table lists $1,475.6 of portfolio investments, primarily railcar purchase commitments, including $343.9 due in 2011.
- PKP litigation claims were approximately $49.8. A Polish appeals court affirmed a ruling in GATX’s favor, but a further appeal was pending. GATX had accrued $15.6; it said an excess loss was possible and could materially affect a particular quarter or year, although it did not expect such excess to be material to financial position or liquidity.
- Other exposures include $141.1 of guarantees, letters of credit and bonds, with $7.0 of guarantee liabilities recorded. GATX said it was unaware of events requiring performance and did not expect material losses from these instruments.
- Forward-looking risks include economic and market conditions, utilization and lease rates, financing costs and credit ratings, regulation, maintenance costs, railcar purchase commitments, impairment and loss provisions, remarketing opportunities, and litigation outcomes. Management said first-quarter results may not indicate full-year results, partly because of ASC seasonality and the uneven timing of asset remarketing income.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of future earnings reflects underlying leasing and operating performance versus AAE’s volatile unrealized swap gains or losses.
- Whether improving North American utilization and lease pricing persist as leases renew, and how the five-year 12,500-car commitment affects investment needs and returns.
- Liquidity and refinancing plans around the May 2012 maturity of the $550 revolving credit facility, alongside debt maturities and investment commitments.
- Developments in the PKP appeal and whether the $15.6 litigation accrual remains adequate.
- Whether marine-market conditions, ASC’s seasonal volumes and fuel costs, and affiliate performance change materially during the rest of 2011.