GATX Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars, and reports Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management segments. Amounts are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $362.9 million | $386.2 million | $1,056.2 million | $1,071.2 million |
| Net income | $95.7 million | $39.5 million | $226.2 million | $147.1 million |
| Diluted EPS | $2.36 | $0.91 | $5.49 | $3.33 |
| Net income, excluding specified tax adjustments and other items (non-GAAP) | $91.4 million | $66.1 million | $220.2 million | $173.7 million |
| Adjusted diluted EPS (non-GAAP) | $2.25 | $1.52 | $5.35 | $3.94 |
Q3 revenue fell about 6% year over year; nine-month revenue declined about 1%. GAAP earnings rose substantially, but comparisons were affected by Portfolio Management marine exits, asset disposition gains, residual-sharing income, and tax items. Management reported adjusted net income growth of $25.3 million in Q3 and $46.5 million for the nine months, mainly from higher residual-sharing income, partly offset by lower disposition gains. The filing does not provide a single consolidated operating-margin figure.
- Cash flow: Nine-month operating cash flow was $433.0 million, up from $312.0 million. Investing used $274.5 million and financing used $149.2 million. Cash and cash equivalents were $211.5 million at September 30, 2016, versus $202.4 million at year-end 2015.
- Debt and liquidity: Reported debt was $4,224.6 million, versus $4,204.2 million at December 31, 2015; recourse debt was $4,204.4 million, with no nonrecourse debt outstanding. The company reported a 3.3x recourse leverage ratio, including off-balance-sheet recourse debt in its calculation. Its $600 million revolving credit facility was fully available; the company said it complied with covenants. Long-term unsecured ratings were BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
- Capital returns and investment: Nine-month portfolio investments and capital additions were $442.6 million. GATX repurchased $95.1 million of shares and paid $51.2 million in dividends. Its $300 million repurchase authorization had $205.0 million remaining at quarter-end.
Material changes and segment developments
- Rail North America: Nine-month segment profit declined to $273.4 million from $280.7 million. The market remained challenged by railcar oversupply, weak loadings, and high railroad velocity, pressuring lease rates and placements. Q3 renewal lease pricing (LPI) fell 21.4%; utilization for non-boxcars was 99.0%, while boxcar utilization was 94.7%.
- Rail International: Nine-month segment profit decreased to $48.9 million from $56.4 million, as higher maintenance and interest costs and a prior-year workshop sale gain outweighed higher lease revenue. European utilization was 95.0%; wheelset refurbishment costs remained a concern.
- ASC: Nine-month segment profit was $12.9 million versus $13.4 million. Freight volume fell to 18.2 million net tons from 19.5 million, reflecting weaker demand and fewer higher-margin long-haul shipments; two fewer vessels were deployed.
- Portfolio Management: Nine-month segment profit increased to $119.2 million from $8.9 million, largely reflecting higher residual-sharing income and marine-exit-related gains/losses in the comparison period. Residual-sharing income included $49.1 million from settling an agreement dating to 2001; total segment residual-sharing income was $82.5 million. GATX continued selling targeted marine assets and expected to sell the remaining targeted investments in 2016.
Outlook, risks, contingencies, and unusual items
- The filing gives no consolidated earnings guidance. Management cautioned that nine-month results may not indicate full-year performance because ASC is seasonally affected by Great Lakes winter conditions and asset remarketing income is uneven.
- Rail North America expected continued pressure from scheduled lease expirations and declining renewal rates. GATX was competing on price to preserve utilization and shortening lease terms as rates declined.
- New U.S. and Canadian tank-car rules require modifications or removal of affected cars on deadlines extending from 2017 to 2029. GATX identified approximately 13,300 affected North American tank cars; it anticipated retiring, redeploying, or selling most rather than retrofitting them.
- GATX had $1,322.1 million of estimated portfolio investment commitments, primarily railcar purchase commitments, including a supply agreement for up to 8,950 new railcars through March 2020. Contractual commitments also included $4,234.4 million of recourse debt principal and $633.1 million of operating lease payments.
- The Viareggio, Italy, 2009 derailment case remained in trial. GATX said it could not reasonably estimate possible fines, penalties, or losses; insurers were expected to cover virtually all civil damages if awarded, while certain claimed reputational damages may not be insured. Criminal charges included potential fines of €1.0 million against each of three GATX entities. The company also reported approximately $19.4 million in defense costs incurred through September 30, 2016 and an insurer settlement providing reimbursement of about 40% of defense costs, subject to terms.
- Other risks include railcar demand and lease rates, commodity exposure, asset remarketing, maintenance costs, financing and interest rates, foreign exchange, regulation, and litigation. GATX stated there had been no material change in risk factors since year-end 2015.
- Unusual items include a $62.7 million Q3 net gain on asset dispositions (versus a $4.5 million loss a year earlier), a $5.7 million pension settlement accounting adjustment in Q3, and a prospective pension-cost measurement change expected to reduce 2016 costs by about $4.5 million pretax. GATX also dissolved a consolidated railcar financing entity after taking full ownership of its assets and repaying its debt.
Key facts for investors to verify
- How much of reported and adjusted earnings growth depends on residual-sharing receipts, asset sales, and other nonrecurring items.
- Lease renewal pricing, expirations, utilization—particularly boxcars—and railcar demand and storage costs.
- Expected cost and timing of tank-car compliance, retirement, or redeployment, and the economics of railcar purchase commitments.
- Portfolio Management’s remaining marine asset sales, proceeds, and any further impairments or gains.
- Developments in the Viareggio trial, potential uninsured exposure, and actual insurance recoveries.
- Debt maturities, leverage, covenant headroom, liquidity, and the company’s capacity to fund investment and shareholder returns.