GATX Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results. GATX leases, operates, manages, and remarkets transportation assets, primarily railcars. The company completed the sale of American Steamship Company (ASC) on May 14, 2020; ASC is reported as discontinued operations.
Financial performance and liquidity
- Third-quarter revenue: $304.4 million, compared with $298.8 million in Q3 2019. Continuing-operations net income was $48.2 million versus $37.2 million; diluted continuing-operations EPS was $1.36 versus $1.03. Q3 2020 included a $12.3 million deferred tax expense related to the UK tax-rate change. Excluding this item, management reported non-GAAP continuing net income of $60.5 million and diluted EPS of $1.71.
- Nine-month results: Revenue was $904.3 million versus $901.6 million. Continuing-operations net income was $132.4 million versus $138.7 million, and diluted EPS was $3.74 versus $3.79. Excluding specified tax adjustments, non-GAAP continuing net income was $144.7 million versus $135.9 million. Consolidated net income, including discontinued operations, was $133.5 million versus $154.6 million.
- Segment performance: Q3 segment profit was $56.1 million in Rail North America (down from $60.9 million), $24.0 million in Rail International (up from $19.9 million), and $44.3 million in Portfolio Management (up from $10.7 million). Portfolio Management benefited from affiliate gains on aircraft engine sales; GATX’s share of those pre-tax gains was $32.1 million in Q3.
- Cash flow and investment: Nine-month operating cash flow from continuing operations was $302.1 million, compared with $278.2 million. Portfolio investments and capital additions were $641.4 million versus $503.8 million. Cash and cash equivalents ended the period at $459.8 million, up from $151.0 million at year-end 2019; discontinued-operation cash flow, including ASC sale proceeds, contributed $254.2 million during the period.
- Debt and liquidity: Recourse debt was $5.183 billion and operating lease obligations were $368.0 million at September 30. Management’s recourse leverage measure was 2.6x, including debt and lease obligations net of unrestricted cash. GATX reported $459.8 million in unrestricted cash, fully available U.S. revolving facilities of $850 million, and €23.5 million available on European facilities. It reported no debt maturities before June 2021 and compliance with its debt covenants.
- Other metrics: Total assets were $8.690 billion and shareholders’ equity was $1.930 billion. The quarterly dividend declared was $0.48 per share. The filing does not provide a directly comparable consolidated operating-margin figure.
Material changes versus the prior comparable period
- North American Rail segment profit declined in the first nine months to $178.1 million from $215.1 million, reflecting lower lease revenue, higher maintenance costs, and lower asset disposition gains. Q3 fleet utilization was 98.2%, down from 99.2% a year earlier; the renewal rate change index was negative 29.4% versus negative 7.7%.
- Rail International nine-month segment profit rose to $57.9 million from $56.0 million, supported by a larger leased fleet, partly offset by higher depreciation and other expenses.
- Portfolio Management nine-month segment profit increased to $83.1 million from $34.9 million, primarily due to higher Rolls-Royce & Partners Finance affiliate earnings and engine-sale gains. Engine utilization was 94.3% at quarter-end, versus 95.6% a year earlier.
- GATX sold ASC for estimated proceeds of $258.3 million. The company recorded a $3.6 million after-tax gain in Q2 and a $0.3 million after-tax loss in Q3 from final sale adjustments and expenses.
- Capital investment increased, while no share repurchases were made in the first nine months of 2020; $150 million remained under the repurchase authorization.
Outlook, risks, and unusual items
- Management said COVID-19 negatively affected operating conditions across segments and expects continued adverse effects, but could not estimate their magnitude or duration. It cited risks to customer payment capacity, renewals, lease rates, utilization, asset values, and liquidity.
- North American rail markets remained oversupplied, with significant pressure on lease rates. Management expects continuing pressure on future utilization, lease rates, and other metrics. European rail results remained comparatively strong, though future utilization and rates may also face pressure.
- COVID-19 has severely reduced global air travel. RRPF affiliates granted rent deferrals and faced customer bankruptcies or restructurings; management expects pressure on engine utilization, lease rates, and future results. Its gas-shipping business also remained exposed to pandemic-related weakness.
- GATX reported $1.262 billion in purchase commitments, primarily for railcars. It also faces ongoing litigation related to the 2009 Viareggio derailment in Italy; the company said it could not reasonably estimate a possible loss range. Supreme Court oral arguments were scheduled to begin December 2, 2020.
- The ASC sale, engine disposition gains, and the UK deferred-tax charge materially affected comparability. The filing provides no specific earnings guidance for the remainder of 2020.
Key facts for investors to verify
- Whether COVID-19-related customer relief, defaults, and market weakness lead to further deterioration in utilization, renewal rates, lease pricing, or credit losses.
- How much of Portfolio Management’s earnings growth reflects recurring affiliate performance versus aircraft-engine disposition gains, and the outlook for RRPF utilization and customer collections.
- Railcar purchase commitments, planned investment levels, and the returns earned on the enlarged North American fleet.
- Cash generation, debt and lease obligations, covenant headroom, and available liquidity as maturities and committed purchases approach.
- Final ASC sale adjustments and developments in the Viareggio litigation, including any financial consequences not currently estimable.