GATX Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its segments are Rail North America, Rail International, Portfolio Management, and American Steamship Company (ASC). All amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $305.3 million | $316.1 million | Down 3.4% |
| Net income | $76.3 million | $57.5 million | Up $18.8 million |
| Diluted EPS | $1.98 | $1.44 | Up 37.5% |
| Operating cash flow | $77.2 million | $51.7 million | Up $25.5 million |
| Dividends declared per share | $0.44 | $0.42 | Up $0.02 |
Net income growth primarily reflected higher asset disposition gains, especially in Rail North America, and higher Rail International lease revenue. Net gains on asset dispositions were $56.1 million, versus $24.9 million a year earlier. Lease revenue was nearly flat at $273.2 million; marine operating and other revenue declined. Total expenses rose to $237.6 million from $230.9 million. Interest expense, net, was $39.9 million versus $39.2 million.
Cash flow from operations increased, helped by lower operating lease payments and income taxes paid, and favorable foreign exchange and working-capital effects, partly offset by higher interest payments. Investing activities used $83.0 million, including $178.4 million of portfolio investments and capital additions, partly offset by $123.2 million of portfolio proceeds. Financing activities used $56.7 million, including $25.0 million of share repurchases and $18.6 million of dividends. Cash, cash equivalents, and restricted cash ended the quarter at $237.4 million; unrestricted cash was $233.1 million.
Balance sheet and liquidity
Total assets were $7.468 billion at March 31, 2018, and shareholders’ equity was $1.840 billion. Debt totaled $4.376 billion, including $4.360 billion of recourse debt. GATX reported non-GAAP recourse leverage of 2.5x, including off-balance-sheet recourse debt and netting unrestricted cash. The company had $600 million available under its U.S. unsecured revolving facility and $250 million available under its secured railcar facility. It reported compliance with all credit agreement covenants; management did not anticipate covenant violations or financing restrictions. Ratings were BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Contractual commitments totaled $7.559 billion, including $4.405 billion of recourse debt principal, $1.745 billion of related interest, and $821.7 million of purchase commitments, primarily for railcars. These are scheduled contractual payments, not current-period expenses.
Material changes and segment trends
- Rail North America: Segment profit increased to $108.9 million from $93.0 million, largely due to higher asset disposition gains. Lease revenue fell 3.4% to $219.5 million amid fewer railcars on lease and lower lease rates. Utilization excluding boxcars was 98.2%, down from 99.1% a year earlier; boxcar utilization was 93.5%. Renewal pricing under the Lease Price Index was down 11.6%, though the filing cautions that this quarter’s expiring-rate mix was not representative of the rest of the year. Management said the market remained challenging due to railcar oversupply and excess manufacturing capacity.
- Rail International: Segment profit rose to $19.0 million from $13.4 million. Lease revenue increased 21.0%, reflecting more cars on lease and a stronger euro; management estimated the euro added $6.8 million to lease revenue and $3.1 million to segment profit, excluding other income and expense. GRE utilization was 96.7%.
- Portfolio Management: Segment profit declined to $13.9 million from $14.7 million. Higher earnings from the Rolls-Royce joint ventures were offset by the absence of income from marine assets sold in 2017 and a prior-year tax-indemnity settlement. Norgas vessel revenue was lower amid substantially lower shipping rates, decreased demand, and new vessel capacity.
- ASC: Segment profit improved to $0.8 million from a $0.2 million loss, primarily from improved rates and late-season surcharges. Freight volume fell to 0.9 million net tons from 1.0 million. ASC’s first-quarter results are seasonally affected by Great Lakes winter conditions.
GATX repurchased 365,401 shares for approximately $25.0 million during the quarter. After the Board’s additional authorization, $225.0 million remained available at quarter-end. GATX had ordered 5,635 railcars under its Trinity supply agreement, of which 3,926 had been delivered; the agreement permits orders of up to 8,950 cars through March 2020.
Outlook, risks, and unusual items
The filing does not provide a clear numerical full-year earnings or revenue guidance. Management described the North American railcar market and the remainder of 2018 as uncertain, citing oversupply and excess manufacturing capacity; it reported stable utilization and expected scheduled new-car deliveries to be placed through year-end. Management cautioned that quarterly results are not necessarily indicative of full-year results because asset remarketing income is uneven and ASC is seasonally affected.
The $56.1 million of disposition gains materially supported Q1 earnings; management said the quarter’s gains represented the majority of its expected full-year amount for Rail North America. The effective tax rate was 25%, compared with 30% a year earlier, primarily reflecting the Tax Act’s reduction in the U.S. corporate tax rate. The filing notes that the 2017 provisional $315.9 million Tax Act tax benefit was non-cash and that its ultimate impact could change; no estimate adjustment was made in Q1. GAAP trailing-12-month ROE was 32.3%, while ROE excluding tax adjustments and other items was 14.0%, down from 16.8% a year earlier.
Key risks include railcar supply-demand and lease-rate pressure, customer demand and defaults, asset remarketing opportunities, long-term railcar purchase commitments, affiliate investment performance, foreign-exchange movements, financing costs and credit access, environmental remediation, litigation, and cybersecurity. The filing reports ordinary-course legal proceedings and contingencies but does not provide a clear quantified potential loss. GATX adopted several accounting updates with immaterial effects, except for a $19.4 million reclassification of stranded Tax Act effects from accumulated other comprehensive income to retained earnings. It planned to adopt the new lease standard on January 1, 2019 and was still assessing the amounts to be recognized for operating-lease assets and liabilities.
Important facts for investors to verify
- How much of earnings growth is sustainable operating performance versus asset-sale gains, and whether disposition gains meet management’s full-year expectation.
- Rail North America renewal pricing, utilization, lease expirations, and the impact of oversupply on rates and re-leasing costs.
- Whether Rail International’s growth persists apart from favorable currency effects, and the operating and market outlook for Norgas vessels.
- Capital spending and railcar purchase commitments relative to operating cash generation, debt service, and available liquidity.
- Potential changes to the provisional Tax Act estimates, and quantified exposure, if disclosed later, from legal matters, guarantees, or other contingencies.