GATX Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its continuing segments are Rail North America, Rail International, and Portfolio Management. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $300.5 | $297.5 | $599.9 | $602.8 |
| Income from continuing operations | $37.0 | $60.3 | $84.2 | $101.5 |
| Net income, including discontinued operations | $39.3 | $68.0 | $85.6 | $109.5 |
| Diluted EPS, continuing operations | $1.05 | $1.65 | $2.38 | $2.75 |
| Diluted EPS, consolidated | $1.11 | $1.86 | $2.42 | $2.97 |
| Operating cash flow, continuing operations | — | — | $199.3 | $180.6 |
- Q2 continuing-operations income fell $23.3, and first-half income fell $17.3. Management attributed the decline principally to lower Rail North America asset disposition gains, higher maintenance costs, and lower lease revenue; higher affiliate income partly offset these factors. The 2019 comparison also included a $2.8 Alberta tax benefit.
- Consolidated expenses were $232.2 in Q2 versus $227.0 a year earlier; net gain on asset dispositions declined to $6.0 from $32.9. Interest expense was $47.4 versus $45.5. The filing does not present a single standard consolidated operating-margin measure.
- At June 30, cash was $492.9; total reported debt was $5,053.4, including $5,047.5 recourse debt. Lease obligations were $404.1. Net debt and lease obligations were $4,964.6, and reported recourse leverage was 2.6x.
- Cash from continuing operations was $199.3 for the first half. Continuing investing activities used $287.9, including $391.5 of portfolio investments and capital additions. Ending cash of $492.9 also reflects $251.6 net cash provided by discontinued operations, including $256.5 of ASC sale proceeds.
- GATX reported $850 million of available U.S. revolving credit facilities and €33.5 million available under European facilities. It reported covenant compliance, stable credit-rating outlooks, and no debt maturities due before June 2021.
Segments and material developments
- Rail North America: Q2 segment profit was $50.0 versus $85.8; first-half profit was $122.0 versus $154.2. Q2 lease revenue declined 4% year over year. Quarter-end utilization was 98.7% for the principal fleet and 94.6% for boxcars. Renewal pricing in the company’s Lease Price Index fell 28.0%, compared with a 2.8% decline a year earlier.
- Rail International: Q2 segment profit was $20.0 versus $21.3; first-half profit was $33.9 versus $36.1. Revenue increased, supported by more cars on lease, while foreign-exchange effects, higher depreciation and interest, and Viareggio-related legal costs weighed on results. GRE utilization was 98.4%.
- Portfolio Management: Q2 segment profit was $19.3 versus $11.9; first-half profit was $38.8 versus $24.2, reflecting higher affiliate earnings and improved marine contribution. RRPF aircraft-engine utilization was 95.1%, down from 97.0% a year earlier.
- GATX completed the sale of American Steamship Company (ASC) on May 14 for approximately $260 million, subject to customary adjustments, and recognized a $3.6 after-tax gain. ASC is presented as discontinued operations. Its first-half operating results included a $2.2 after-tax loss, versus $8.0 of income in the prior-year period.
Outlook, risks, and contingencies
- Management withheld full-year 2020 earnings guidance because of the uncertain COVID-19 outlook. It expects the pandemic to continue adversely affecting results, but cannot estimate the magnitude or duration.
- COVID-19 weakened rail loadings and leasing conditions, prompted customer requests for payment deferrals and lease restructurings, and disrupted some repair and manufacturing activity. Management expects pressure on rail utilization, lease rates, maintenance costs, and cash flow. It also expects continued aviation-sector weakness to pressure aircraft-engine utilization and lease rates, and low gas-shipping demand to weigh on marine operations.
- Management described liquidity and capital access as strong, while noting that customer payment capacity, renewals, asset values, and financing conditions remain exposed to the pandemic and economic downturn.
- Contractual commitments totaled $9.136 billion, including $1.574 billion of purchase commitments, primarily railcar orders. This total includes debt principal and interest and lease payments; it is not presented as debt alone.
- In the Viareggio derailment matter, GATX’s Austrian subsidiary and employees appealed Italian convictions. The Supreme Court hearing was scheduled to begin December 2, 2020. GATX said it could not reasonably estimate a possible loss range; ongoing legal costs were not expected to be material.
Key facts for investors to verify
- How subsequent railcar utilization, renewal pricing, customer payment deferrals, and maintenance costs developed after June 30, 2020.
- Whether COVID-19 affected RRPF affiliate earnings, aircraft-engine lease collections, and vessel utilization beyond the period reported.
- Final ASC sale adjustments and the use of sale proceeds, including repayment of the $250 million drawn on GATX’s three-year credit facility.
- Execution and delivery timing for railcar purchase commitments, and any resulting effect on investment spending and leverage.
- Developments in the Viareggio appeal and any change in the company’s ability to estimate related exposure.