GATX Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. GATX leases, operates, manages, and remarkets railcars and other long-lived assets. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,449.9 million | $1,451.0 million | Down 0.1% |
| Net income | $205.3 million | $205.0 million | Up 0.1% |
| Diluted EPS | $4.69 | $4.48 | Up 4.7% |
| Adjusted net income, excluding tax adjustments and other items | $234.9 million | $205.0 million | Up 14.6% |
| Operating cash flow | $534.3 million | $449.2 million | Up $85.1 million |
| Net gain on asset dispositions | $79.2 million | $87.2 million | Down $8.0 million |
Net margin was approximately 14.2%, broadly unchanged from 2014. Operating cash flow rose on higher lease revenue and lower maintenance expense, partly offset by lower affiliate distributions and working-capital movements. Portfolio investments and capital additions were $696.9 million, down from $1,030.5 million, principally because 2014 included the $340 million boxcar acquisition.
Balance sheet and liquidity: Total assets were $6.89 billion on balance sheet and $7.39 billion including $495.5 million of off-balance-sheet assets, primarily railcars financed through operating leases. Cash was $202.4 million. Balance-sheet debt was $4.20 billion; including estimated operating-lease obligations, disclosed debt was $4.70 billion. Recourse leverage was 3.5x. Shareholders’ equity was $1.28 billion. The company had the full $575 million revolving credit facility available, was in covenant compliance, and had stable BBB/Baa2 long-term ratings. Contractual obligations totaled $6.62 billion, including $1.74 billion in purchase commitments, primarily for railcars.
Dividends declared increased to $1.52 per share from $1.32. GATX repurchased 2.4 million shares for $125.4 million and authorized a new $300 million repurchase program after year-end.
Segment results and material changes
| Segment profit | 2015 | 2014 | Key driver |
|---|---|---|---|
| Rail North America | $379.5 million | $321.0 million | Higher lease rates, full-year boxcar contribution, lower net maintenance costs, and higher remarketing gains |
| Rail International | $70.1 million | $78.7 million | Weaker euro; reported lease revenue was reduced by about $30.8 million by foreign exchange |
| ASC | $15.1 million | $27.3 million | Lower iron ore shipments and fewer vessels deployed |
| Portfolio Management | $49.8 million | $68.2 million | Marine-exit impairments and reduced activity outweighed higher RRPF affiliate income |
North American railcar utilization remained high: 99.1% excluding boxcars and 97.7% for boxcars at year-end. However, leasing conditions weakened during the year, particularly in coal, frac sand, and flammable-liquids markets; renewal lease-price increases slowed to 32.2% from 38.8% in 2014. ASC carried 26.5 million net tons versus 30.5 million in 2014. Rolls-Royce & Partners Finance affiliates contributed $65.5 million to Portfolio Management segment profit.
Outlook, commentary, and risks
- For 2016, management expected Rail North America segment profit to decline, mainly because of lower anticipated remarketing activity; Rail International to be similar to 2015; ASC to improve with fleet efficiency, subject to steel demand and tonnage; and Portfolio Management to be comparable, driven largely by RRPF affiliate performance.
- Management cited global economic uncertainty, a slowdown in U.S. energy markets, and a declining railcar leasing market. It expected weaker markets for 2016 lease expirations and prioritized keeping cars on lease and maintaining utilization.
- GATX decided to exit most Portfolio Management marine investments. The decision generated $49.8 million of impairment charges, including $30.8 million on vessels and $19.0 million on the Cardinal Marine affiliate. Certain sales produced $124.4 million of proceeds and $21.6 million of net gains; further asset sales were expected in 2016. At year-end, $103.4 million of assets were held for sale.
- Tank-car regulations require affected cars to be modified or removed from flammable-liquids service over deadlines extending from 2017 to 2029. GATX identified about 13,900 affected North American cars, including about 4,300 used for crude oil and ethanol; it expected to retrofit some and retire, redeploy, or sell most others.
- Key exposures include railcar utilization and lease rates, sustained low oil prices and commodity demand, maintenance capacity and costs, railcar purchase commitments, foreign exchange, funding and interest rates, affiliate performance, regulation, environmental liabilities, and labor relations. About 42% of employees were unionized, and agreements covering 22% of employees were due to expire within a year.
- The Viareggio derailment litigation in Italy remained pending, with criminal and civil claims and continuing defense costs; GATX said it could not reasonably estimate the possible loss. Environmental accruals were $13.2 million for 18 sites. Management did not expect known matters to materially affect consolidated financial position or liquidity, while acknowledging that outcomes could materially affect a particular period’s results.
Unusual items and reporting notes
GAAP net income was nearly flat, while adjusted net income rose 14.6%. The filing’s adjustments include the marine-exit losses, a $9.0 million early-retirement charge, and tax-rate changes. The 2015 effective tax rate was 41.0%, including a $14.1 million deferred state-tax charge; GATX also recorded a $7.7 million affiliate tax benefit from a U.K. statutory rate reduction. Fourth-quarter net income was $58.2 million; the quarter included marine disposition gains, the state-tax charge, the U.K. tax benefit, and early-retirement expenses. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile GAAP earnings with adjusted earnings and assess the recurring versus one-time components, especially tax adjustments and marine-exit charges.
- Track North American lease renewals, utilization, expiring leases, and remarketing gains against management’s weaker-market outlook.
- Confirm the timing, proceeds, and remaining carrying value of planned marine-asset sales and monitor RRPF affiliate earnings and exposure to Rolls-Royce.
- Review the scale and funding of railcar purchase commitments, debt maturities, operating-lease obligations, and planned repurchases relative to cash generation and liquidity.
- Monitor tank-car compliance costs and deadlines, energy and steel-market demand, foreign-exchange impacts, and potential developments in Viareggio and environmental matters.