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| GMT > SEC Filings for GMT > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-2009
Quarterly Report
DISCUSSION OF OPERATING RESULTS
Net income was $59.9 million or $1.24 per diluted share for the first nine
months of 2009 compared to net income of $165.9 million or $3.31 per diluted
share for the first nine months of 2008. The 2009 results include after tax
unrealized losses of $18.5 million or $0.38 per diluted share related to certain
interest rate swaps at GATX's AAE Cargo A.G. affiliate (AAE). Results for the
first nine months of 2008 include $26.4 million or $0.52 per diluted share in
aggregate after tax income from the reversal of an income tax accrual, a gain on
the sale of real estate and the reversal of environmental reserves, both in
Europe, and net unrealized gains related to AAE interest rate swaps.
Net income was $19.6 million or $0.42 per diluted share for the third quarter
of 2009 compared to net income of $73.9 million or $1.46 per diluted share for
the third quarter of 2008. Third quarter 2008 results include after tax income
of $24.4 million or $0.48 per diluted share in income from a gain on the sale of
real estate and the reversal of environmental reserves as well as unrealized
gains from AAE interest rate swaps.
Total investment volume was $376.5 million for the first nine months of 2009
compared to $444.8 million for the first nine months of 2008.
The following table presents a financial summary of GATX's operating segments
(in millions, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Gross Income
Rail $ 226.2 $ 277.1 $ 676.6 $ 778.1
Specialty 28.4 47.5 88.8 131.1
ASC 37.3 99.5 78.8 203.9
Total segment gross income 291.9 424.1 844.2 1,113.1
Other income 0.2 (3.6 ) 1.0 (3.2 )
Consolidated Gross Income 292.1 420.5 845.2 1,109.9
Segment Profit
Rail 47.8 106.3 135.2 250.4
Specialty 13.2 31.9 43.5 92.4
ASC 1.3 13.9 10.1 19.8
Total Segment Profit 62.3 152.1 188.8 362.6
Less:
Selling, general and administrative expenses 35.0 48.1 102.1 129.1
Unallocated interest expense, net 0.6 0.3 3.0 2.7
Other, including eliminations (0.2 ) 3.6 (2.4 ) 3.5
Income taxes 7.3 26.2 26.2 61.4
Net Income $ 19.6 $ 73.9 $ 59.9 $ 165.9
Basic earnings per share $ 0.43 $ 1.52 $ 1.28 $ 3.51
Diluted earnings per share $ 0.42 $ 1.46 $ 1.24 $ 3.31
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Return on Equity
GATX's return on equity ("ROE") is shown for the trailing twelve months ended
September 30:
2009 2008 ROE 7.4 % 17.5 %
Segment Operations
Segment profit is an internal performance measure used by the Chief Executive
Officer to assess the performance of each segment in a given period. Segment
profit includes all revenues and affiliates' earnings attributable to the
segments, as well as ownership costs and other costs that management believes
are directly associated with the maintenance or operation of the revenue earning
assets. Other costs and expenses include, but are not limited to, maintenance,
marine operating costs, asset impairment charges, litigation, provisions for
losses, environmental costs and asset storage costs. Segment profit excludes
selling, general and administrative expenses, income taxes and certain other
amounts not allocated to the segments. These amounts are discussed below in
Other.
GATX allocates debt balances and related interest expense to each segment
based upon a pre-determined, fixed recourse leverage level expressed as a ratio
of recourse debt (including off balance sheet debt) to equity. The leverage
levels for Rail, Specialty and ASC are set at 4:1, 3:1 and 1.5:1, respectively.
Management believes that by utilizing this leverage and interest expense
allocation methodology, each operating segment's financial performance reflects
appropriate risk-adjusted borrowing costs.
Components of Rail's operating results are outlined below (in millions):
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Gross Income
Lease income $ 208.8 $ 218.5 $ 634.3 $ 658.5
Asset remarketing income 0.2 8.5 11.4 21.7
Other income 13.6 35.9 39.7 78.8
Revenues 222.6 262.9 685.4 759.0
Affiliates' earnings 3.6 14.2 (8.8 ) 19.1
226.2 277.1 676.6 778.1
Ownership Costs
Depreciation 47.4 45.9 141.0 135.7
Interest expense, net 30.6 28.4 95.7 84.8
Operating lease expense 34.0 34.7 100.9 109.7
112.0 109.0 337.6 330.2
Other Costs and Expenses
Maintenance expense 61.0 60.0 185.1 182.0
Other 5.4 1.8 18.7 15.5
66.4 61.8 203.8 197.5
Segment profit $ 47.8 $ 106.3 $ 135.2 $ 250.4
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GATX Lease Price Index
The LPI is an internally generated business indicator that measures general
lease rate pricing on renewals within Rail's North American fleet. The index
reflects the weighted average lease rate for a select group of railcar types
that GATX believes to be representative of its overall North American fleet. The
LPI measures the percentage change between the weighted average expiring lease
rate and the weighted average renewal lease rate. Average renewal term reflects
the weighted average renewal lease term in months.
Rail's Fleet Data
The following table summarizes fleet activity for Rail's North American
railcars for the quarters indicated:
September 30 December 31 March 31 June 30 September 30
2008 2008 2009 2009 2009
Beginning balance 110,195 109,874 112,976 112,326 111,154
Cars added 1,535 4,411 354 711 1,478
Cars scrapped (1,078 ) (970 ) (855 ) (1,056 ) (1,302 )
Cars sold (778 ) (339 ) (149 ) (827 ) (124 )
Ending balance 109,874 112,976 112,326 111,154 111,206
Utilization rate at quarter end 97.8 % 97.9 % 96.5 % 96.0 % 95.9 %
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[[Image Removed: (BAR CHART)]] The following table summarizes fleet activity for Rail's European railcars for the quarters indicated:
September 30 December 31 March 31 June 30 September 30
2008 2008 2009 2009 2009
Beginning balance 19,507 19,583 19,724 19,886 20,000
Cars added 135 144 190 124 91
Cars scrapped or sold (59 ) (3 ) (28 ) (10 ) (86 )
Ending balance 19,583 19,724 19,886 20,000 20,005
Utilization rate at quarter end 97.6 % 97.1 % 96.5 % 95.6 % 94.7 %
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[[Image Removed: (BAR CHART)]]
The following table summarizes Rail's average active cars for the three and nine months ended September 30:
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
North America 106,136 107,565 107,867 108,502
Europe 19,045 19,074 19,104 19,009
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Rail's Lease Income
Components of Rail's lease income for the three and nine months ended
September 30 are outlined below (in millions):
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
North America $ 164.2 $ 169.4 $ 506.2 $ 513.0
Europe 36.6 40.3 104.0 119.5
Locomotives 8.0 8.8 24.1 26.0
$ 208.8 $ 218.5 $ 634.3 $ 658.5
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Comparison of the First Nine Months of 2009 to the First Nine Months of 2008
Segment Profit
Rail's segment profit in 2009 was impacted by $22.0 million of unrealized
losses due to changes in the fair value of certain interest rate swaps at AAE.
Segment profit in 2008 reflected a $12.0 million gain on the sale of an office
building and the reversal of $8.2 million of reserves due to the settlement of
an environmental liability, both in Europe, and a $3.7 million unrealized gain
on the interest rate swaps at AAE. Excluding these items, Rail's segment profit
decreased $69.3 million, primarily due to lower lease, scrapping and asset
remarketing income.
Gross Income
Lease income in North America decreased $6.8 million, primarily due to fewer
cars on lease and $5.2 million of reduced rents on restructured leases resulting
from customer bankruptcies and non-performing leases. These items were partially
offset by higher lease rates on leases renewed in the prior year. On average
during the first nine months of 2009, there were approximately 600 fewer
railcars on lease as compared to the first nine months of 2008, primarily due to
lease-end returns. The current year includes 3,650 active cars that were
acquired in December 2008 from Allco Finance Group Limited ("Allco"), largely
offsetting the impact of lease-end returns on 2009 lease income. In Europe, a
$15.5 million decrease in lease income was driven by the unfavorable foreign
exchange effects of a stronger U.S. Dollar and was partially offset by higher
lease rates and an average of 95 more cars on lease. Asset remarketing income
decreased $10.3 million due to fewer asset sales in the current period. Other
income was $39.1 million lower, primarily due to lower scrap income (driven by
significantly lower steel prices), a $12.0 million gain on the sale of an office
building recorded in 2008 and the receipt in the prior year of a lease
termination fee. Affiliates' earnings were lower due to the $22.0 million
unrealized loss at AAE compared to the $3.7 million unrealized gain in 2008.
Excluding the unrealized loss and gain, 2009 affiliates' earnings were lower
primarily due to a casualty gain recognized by an affiliate in the prior year
and lower operating results at AAE due to fewer cars on lease.
AAE holds multiple derivative instruments to hedge interest rate risk
associated with forecasted floating rate debt issuances. These instruments do
not qualify for hedge accounting and as a result, changes in their fair values
are recognized currently in income. The unrealized loss recognized in 2009 was
primarily driven by the significant decline in benchmark interest rates. AAE's
earnings may be impacted by future unrealized gains or losses associated with
these instruments.
Ownership Costs
Ownership costs increased $7.4 million, net of a $7.0 million reduction due
to the favorable foreign exchange effects of a stronger U.S. Dollar. The
increase in ownership costs was largely driven by interest and depreciation
expense associated with investment volume over the last 12 months, particularly
the acquisition of the Allco fleet. The mix of ownership costs was
impacted by the sale and lease-back of railcars in 2009 and the purchases of
previously leased-in railcars in 2009 and 2008.
Other Costs and Expenses
In North America, maintenance costs increased $12.2 million, largely due to
higher car volumes, increased lessee turnover activity and increased repairs
performed by railroads. In Europe, maintenance costs were $9.1 million lower,
primarily due to the favorable foreign exchange effects of a stronger U.S.
Dollar and the receipt of a manufacturer's reimbursement for the cost of certain
warranty repairs performed by GATX.
Other in 2009 included a $2.8 million insurance recovery related to a fire at
a GATX repair facility in Europe, a $6.9 million reversal of provision for
losses and a $4.8 million asset impairment charge. Both the provision reversal
and impairment were recorded in connection with the restructuring of leases with
a customer who had declared bankruptcy. Other in 2008 included the
aforementioned reversal of $8.2 million of environmental reserves. Excluding
these items, Other in 2009 was comparable to the prior year.
Comparison of the Third Quarter 2009 to the Third Quarter 2008
Segment Profit
Rail's segment profit for the third quarter of 2008 reflected a $12.0 million
gain on the sale of an office building and the reversal of $8.2 million of
reserves due to the settlement of an environmental liability, both in Europe,
and a $9.2 million unrealized gain on interest rate swaps at AAE. Excluding
these items, Rail's segment profit decreased $29.1 million in the third quarter
of 2009, primarily due to lower lease, scrapping and asset remarketing income.
Gross Income
Lease income in North America decreased $5.2 million, primarily due to fewer
cars on lease and $2.5 million of reduced rents on restructured leases resulting
from customer bankruptcies. On average during the third quarter of 2009, there
were approximately 1,400 fewer railcars on lease as compared to the third
quarter of 2008, primarily due to lease-end returns. The current year includes
3,650 active cars that were acquired in December 2008 from Allco, largely
offsetting the impact of lease-end returns on 2009 lease income. In Europe, a
$3.7 million decrease in lease income due to the unfavorable foreign exchange
effects of a stronger U.S. Dollar was partially offset by higher renewal rates
in 2009. Asset remarketing income decreased $8.3 million due to fewer asset
sales in the current period. Other income was $22.3 million lower, primarily due
to lower scrap income largely resulting from significantly lower steel prices
and a $12.0 million gain on the sale of an office building recorded in 2008.
Affiliates' earnings were lower due to a $9.2 million unrealized gain recorded
by AAE in 2008. Excluding the unrealized gain, 2009 affiliates' earnings were
lower primarily due to a casualty gain recognized by an affiliate in the prior
year, unfavorable foreign exchange and lower operating results at AAE due to
fewer cars on lease.
Ownership Costs
Ownership costs increased $3.0 million, primarily due to interest and
depreciation associated with investment volume over the last 12 months,
particularly the acquisition of the Allco fleet. The mix of ownership costs was
impacted by the sale and lease-back of railcars in 2009 and the purchases of
previously leased-in railcars in 2009 and 2008.
Other Costs and Expenses
In North America, maintenance costs were $1.8 million higher largely due to
base fleet maintenance due to increased lessee turnover and higher regulatory
compliance costs. In Europe, maintenance costs were $0.8 million lower,
primarily due to the favorable foreign exchange effects of a stronger U.S.
Dollar, partially offset by higher repair and revision expenses.
Other increased $3.6 million, primarily due to the reversal of $8.2 million
of reserves in 2008 resulting from the settlement of an environmental liability
in Europe, partially offset by a $2.8 million insurance recovery related to a
GATX repair facility in Europe and a $1.2 million reversal of bad debt provision
in the current period.
Rail Regulatory Update
Rules Affecting TIH Cars. On January 13, 2009, the U.S. Pipeline and
Hazardous Materials Safety Administration, in coordination with the Federal
Railroad Administration ("FRA") issued final interim rules (the "FRA Interim
Rules") that, among other things, establish new interim design standards for
pressurized tank cars that transport toxic-by-inhalation hazardous materials
("TIH cars"). The designation "final interim" indicates that the FRA intends to
continue to research enhanced design standards for TIH cars and will issue
additional rulemaking in the future that will prescribe final design
requirements. Under the FRA Interim Rules, TIH cars manufactured after the
effective date of the rules must be built to a higher pressure class rating
relative to U.S Department of Transportation specifications for tank cars.
Unlike the original version of the rules proposed in April 2008, the FRA Interim
Rules as adopted do not include a retirement schedule for TIH cars manufactured
prior to effective date of the rules. However, the FRA Interim Rules require
that existing TIH cars receive appropriate certification from the Association of
American Railroads ("AAR") in order to remain in TIH service. The certification
requirements are currently being developed by the AAR and, depending on the
final certification requirements adopted, it is possible that some existing TIH
cars will need to be removed from TIH service. Until these certification
procedures are finalized, GATX cannot reasonably conclude precisely what impact,
if any, the FRA Interim Rules may have on GATX's tank car fleet. Once final
certification standards are adopted, GATX will evaluate the technical
requirements of the final design standards to determine the effect on its fleet.
As of September 30, 2009, approximately 2,100 TIH cars remained in service in
GATX's fleet (approximately 1.9% of its North American fleet) and, based upon
management's review, GATX does not expect that the FRA Interim Rules will have a
material impact on the Company's financial position or results of operations.
European Regulatory Developments. An immaterial number of railcars owned by
GATX Rail Austria GmbH (an indirect subsidiary of the Company, "GATX Rail
Austria") and its subsidiaries, have been affected by restrictions on their
movement imposed by the Italian rail safety authorities. Similar restrictions on
movement of these cars imposed by the French rail safety authorities were lifted
. . .
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