GATX Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars, and reports four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. Amounts below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $358.9 million | $365.3 million | $693.3 million | $685.0 million |
| Net income | $61.2 million | $45.4 million | $130.5 million | $107.6 million |
| Diluted EPS | $1.49 | $1.03 | $3.15 | $2.42 |
| Net margin | 17.1% | 12.4% | 18.8% | 15.7% |
Six-month operating cash flow was $238.9 million, up from $191.5 million. Investing activities used $282.0 million, including $322.2 million of portfolio investments and capital additions; financing activities provided $18.7 million. Cash and cash equivalents declined $24.8 million to $177.6 million.
At June 30, total debt was $4.346 billion, compared with $4.204 billion at December 31, 2015; shareholders’ equity was $1.309 billion. The company’s non-GAAP recourse leverage ratio was 3.5. A new $600 million five-year revolving credit facility was entirely available. GATX reported compliance with its debt covenants and stable outlooks on its BBB (S&P) and Baa2 (Moody’s) long-term ratings.
Dividends declared were $0.40 per share in Q2 and $0.80 per share for the first half. GATX repurchased $70.0 million of stock during the first half under a new $300 million authorization.
Material changes and segment performance
- Consolidated: First-half net income rose 21% year over year, while revenue rose 1%. Q2 revenue declined about 2%, but net income increased 35%. Gains on asset dispositions were $36.9 million in Q2 versus $8.7 million a year earlier, materially supporting earnings.
- Rail North America: First-half segment profit fell to $185.5 million from $190.7 million. Railcar utilization excluding boxcars declined to 98.1% from 99.3% a year earlier; Q2 renewal lease pricing (LPI) fell 25.4%, and the renewal success rate was 62.6%, versus 84.0% a year earlier. Higher lease revenue and fees were offset by maintenance, storage and freight costs and lower disposition gains.
- Rail International: First-half segment profit fell to $25.6 million from $40.9 million, despite higher lease revenue. Higher wheelset replacement and revision costs, interest expense, and the absence of a prior-year workshop sale gain contributed to the decline. GRE utilization was 94.8%, versus 95.5% a year earlier.
- ASC: First-half segment profit increased to $5.1 million from $2.5 million, as fewer vessels deployed and improved operating efficiency lowered costs. Management nevertheless expected lower iron ore demand and shipments to weigh on results through 2016.
- Portfolio Management: First-half segment profit increased to $55.1 million from $26.2 million, principally reflecting higher residual-sharing gains. Q2 included $31.6 million of residual-sharing income from the sale of interests in two leased nuclear power plant facilities; management said remaining managed assets were not expected to generate comparable gains. The segment is also exiting most marine investments.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided in the filing. GATX expected to sell the remaining targeted marine investments during 2016.
- Management described continued deterioration in the North American railcar leasing market, citing oversupply, fewer carloadings, and improved railroad velocity. It anticipated further pressure on renewal pricing from expiring leases and declining renewal rates.
- GATX recorded $4.5 million of gains on marine investment sales and $1.8 million of impairment losses on remaining marine assets in the first half. The filing also reports an additional loss reserve in 2016 related to one investment.
- Approximately 13,500 North American tank cars were affected by flammable-liquid regulations; over 90% had compliance deadlines in 2023 or later. GATX expected to retrofit some newer cars and retire, redeploy, or sell most others. Fewer than 25 cars were affected by Canada’s October 2016 crude-oil removal deadline.
- GATX had $1.384 billion of estimated portfolio investment commitments, primarily railcar purchases. A supply agreement allows for purchases of up to 8,950 new railcars between March 2016 and March 2020; commitment timing and costs are estimates.
- The Viareggio derailment litigation in Italy remained unresolved. About 59 civil claimants had not settled; closing arguments were scheduled to begin September 12, 2016. GATX could not reasonably estimate any ultimate loss. It reported $16.3 million in unreimbursed defense costs at June 30 and was pursuing insurance reimbursement.
- Rail Europe continued addressing wheelset corrosion issues and seeking warranty remedies. Other stated risks include rail-market weakness, commodity exposure, financing costs and ratings, regulatory changes, and litigation.
Important facts for investors to verify
- Whether North American utilization, renewal pricing, and renewal success stabilize, and how the scheduled 2016 lease expirations affect fleet performance.
- How much of first-half earnings growth is repeatable after the unusually large residual-sharing gains, and whether further marine asset sales produce additional gains or impairments.
- The ongoing cost, recovery prospects, and potential outcome of the Viareggio proceedings and related insurance disputes.
- Future maintenance and retrofit costs, including European wheelset work and tank-car regulatory compliance, as well as the funding and economics of railcar purchase commitments.
- Debt maturities, liquidity and covenant headroom, alongside the effects of continued buybacks and investment spending on leverage.