GATX Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars, through Rail North America, Rail International, Portfolio Management, and American Steamship Company (ASC). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $359.4 | $349.5 | $676.4 | $654.8 |
| Net income | $68.0 | $38.8 | $109.5 | $115.1 |
| Diluted EPS | $1.86 | $1.01 | $2.97 | $2.99 |
| Net cash from operating activities | Not presented for quarter | Not presented for quarter | $175.8 | $206.7 |
- Q2 revenue increased 2.8%; net income increased 75.3%, primarily reflecting substantially higher asset-disposition gains and the absence of the prior-year Rail International maintenance-facility closure expense. Q2 diluted EPS also benefited from a $2.8 million deferred tax benefit ($0.08 per share) related to an Alberta tax-rate change.
- For the first half, revenue rose 3.3%, while net income declined 4.9%. Excluding disclosed tax adjustments and other items, first-half net income was $106.7 million versus $120.9 million, and diluted EPS was $2.89 versus $3.14. Management attributed the decline mainly to lower asset-disposition gains.
- Q2 asset-disposition gains were $32.9 million, compared with $6.1 million a year earlier; first-half gains were $41.8 million, down from $62.2 million. Reported results are therefore sensitive to the timing and level of remarketing gains.
- Interest expense, net, was $47.1 million in Q2 and $93.6 million in the first half, versus $42.2 million and $82.1 million, respectively, in 2018. The filing does not provide a clear consolidated operating-margin figure.
Segments and operating trends
- Rail North America: Q2 segment profit was $85.8 million versus $64.2 million; first-half profit was $154.2 million versus $173.1 million. Q2 results benefited from higher disposition gains, repair revenue, and lease revenue; first-half profit was lower mainly because disposition gains declined and maintenance costs increased. Non-boxcar fleet utilization was 99.5%; boxcar utilization was 94.1%. The renewal Lease Price Index was down 2.8% in Q2.
- Rail International: Q2 segment profit was $21.3 million versus $12.8 million; first-half profit was $36.1 million versus $31.8 million. Results improved with more cars on lease and the absence of prior-year facility-closure costs, partly offset by a weaker euro. GRE utilization was 98.9%.
- Portfolio Management: Q2 segment profit was $11.9 million versus $11.4 million; first-half profit was $24.2 million versus $25.3 million. RRPF affiliate earnings increased, while specialized gas-vessel revenue fell during a transition to a new commercial manager that left vessels idle for a significant part of Q2. Management expects results to improve as the vessels begin operating under the new agreement.
- ASC: Q2 segment profit was $12.1 million versus $8.0 million; first-half profit was $14.6 million versus $8.8 million. Favorable sailing conditions, high water levels, and an additional vessel in service supported higher freight volume.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $286.6 million, compared with $100.2 million at year-end 2018. First-half operating cash flow was $175.8 million; investing cash outflow was $181.8 million; financing cash inflow was $185.8 million.
- First-half portfolio investments and capital additions were $331.4 million. GATX issued $549.5 million of debt proceeds, repaid $244.8 million of debt and short-term borrowings, repurchased $82.4 million of stock, and paid $36.2 million in dividends.
- Reported debt was $4.86 billion, including $4.83 billion of recourse debt. Operating- and finance-lease obligations added $465.1 million. Recourse leverage, as defined by the company and net of unrestricted cash, was 2.7 times equity.
- GATX had $850 million available under its two U.S. revolving credit facilities at June 30, 2019; it reported compliance with all credit covenants. Credit ratings were BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Outlook, accounting, and risks
- The filing provides no specific full-year earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results: ASC is seasonally less active in winter, and asset remarketing income varies through the year.
- Railcar markets remained challenging: management cited increased railroad velocities, lower railcar loadings, and robust new-car supply. Risks include lease-rate pressure, customer demand and defaults, maintenance costs, commodity and macroeconomic conditions, financing costs, foreign exchange, and asset remarketing variability.
- GATX adopted the new lease accounting standard on January 1, 2019. It recognized operating-lease right-of-use assets and liabilities; the adoption produced a $39.4 million after-tax equity increase and is expected to add about $4.0 million of pre-tax operating lease expense in 2019. Adoption did not affect cash flows.
- In the Viareggio derailment case, an Italian appeals court upheld adverse verdicts against GATX Rail Austria and employees in June 2019, with minor changes. GATX Rail Austria intends to appeal to Italy’s Supreme Court; penalties are not enforceable pending final disposition. The company cannot reasonably estimate possible ultimate costs.
- A vessel was damaged by fire during ASC winter maintenance in February 2019. The assessment was ongoing, but the company did not expect a material adverse effect on operations or cash flows. The filing also reports $2.15 billion of purchase commitments, primarily for railcars.
Important facts for investors to verify
- Whether railcar utilization, renewal pricing, and market supply trends support lease revenue and pricing.
- How much earnings depend on asset-sale gains, and whether Q2’s higher gains are repeatable.
- Progress and financial impact of the specialized gas-vessel management transition and the ASC fire-damaged vessel assessment.
- Debt growth, interest expense, leverage, and funding needs for railcar purchase commitments.
- Developments in the Viareggio appeal and any resulting financial or operational exposure.