GATX Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 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). Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $349.7 | $359.6 | $1,004.5 | $1,024.1 |
| Net income | $47.0 | $49.0 | $162.1 | $159.9 |
| Diluted EPS | $1.22 | $1.25 | $4.21 | $4.04 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $341.3 | $317.8 |
- Q3 revenue declined 2.8% and net income declined 4.1% year over year. Nine-month revenue fell 1.9%, while net income increased 1.4%. Nine-month diluted EPS increased from $4.04 to $4.21.
- Nine-month net income excluding specified items, a non-GAAP measure, was $167.9 versus $158.8; diluted EPS on the same basis was $4.36 versus $4.01. The 2018 adjustment adds back $8.6 million of Rail International maintenance-facility closure costs; the 2017 comparison removes a $1.8 million marine-investment gain.
- Q3 net gains on asset dispositions were $10.3; nine-month gains were $72.5, including $60.9 from owned-asset dispositions. Higher disposition gains supported year-to-date results.
- Margins are not separately presented as a headline measure in the filing.
Cash flow, balance sheet, and liquidity
- At September 30, cash and cash equivalents were $254.5; total assets were $7,517.4; shareholders’ equity was $1,838.0.
- Debt totaled $4,408.9, comprising $4,397.3 of recourse debt and $11.6 of capital lease obligations. Adjusted recourse leverage, a non-GAAP measure that includes off-balance-sheet recourse debt and nets unrestricted cash, was 2.5x.
- Nine-month operating cash flow was $341.3. Investing activities used $314.3 and financing activities used $63.9. Portfolio investments and capital additions were $536.7, up from $459.0 a year earlier; operating cash flow alone did not cover this investment amount.
- The company reported $850 million available across its U.S. revolving credit and secured railcar facilities. It said it was compliant with its credit covenants and did not anticipate violations. Long-term unsecured ratings were BBB (S&P) and Baa2 (Moody’s), both with stable outlooks.
- Nine-month dividends were $52.7 and share repurchases were $37.4. The board had authorized $250 million in aggregate repurchases; $212.6 million remained available at quarter-end.
Material changes and operating trends
- Rail North America: Nine-month segment profit rose to $241.3 from $238.1, supported by higher asset-sale gains and lower maintenance expense, partly offset by lower lease revenue. In Q3, segment profit fell to $68.2 from $70.2. Fleet utilization excluding boxcars was 99.2%; boxcar utilization was 94.7%. The North American Lease Price Index renewal rate change was negative 11.5% in Q3, an improvement from negative 27.0% a year earlier.
- Rail International: Nine-month segment profit rose to $52.5 from $50.1. Higher lease revenue, more cars on lease, and a stronger euro contributed; $8.6 of maintenance-facility closure costs partly offset these gains. GRE utilization was 98.4% at quarter-end.
- Portfolio Management: Nine-month segment profit declined to $34.3 from $47.3, primarily reflecting previously sold marine assets, lower residual-sharing fees, and weaker Norgas vessel results, partly offset by higher RRPF affiliate earnings. RRPF affiliate earnings were $47.6 for the nine months versus $39.9 in the segment table for 2017.
- ASC: Nine-month segment profit increased to $20.7 from $18.4 as higher rates and operating efficiency more than offset lower freight volume. ASC carried 17.7 million net tons versus 19.3 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management cautions that nine-month results are not necessarily indicative of full-year results; ASC operations are seasonal, and asset remarketing income is uneven.
- Management expects North American maintenance expense to rise in Q4 2018 and into 2019 as tank-car compliance service events increase. It described European rail markets as gradually improving and ASC operating conditions as favorable.
- GATX amended its Trinity supply agreement to add 4,800 tank cars for delivery from 2020 through 2023, and agreed to purchase 7,650 new cars from ARI over 2019–2023, with an option for up to 4,400 additional cars subject to restrictions. Total disclosed purchase commitments were $2,151.9, primarily railcars.
- Other key exposures cited include railcar supply and demand, lease rates and utilization, customer and commodity demand, maintenance and compliance costs, asset remarketing opportunities, affiliate performance, foreign exchange, financing costs, tariffs and trade barriers, environmental remediation, cybersecurity, and litigation. The filing reports ordinary-course legal matters but does not quantify a clear potential loss value.
- Commercial commitments totaled $20.1; the company said it knew of no event requiring performance and anticipated no material losses on letters of credit or performance bonds. Derivative liabilities with credit-risk contingent features totaled $34.7; GATX said it did not expect the provisions to be triggered.
- A $2.1 pension settlement expense was recorded in Q3 for lump-sum distributions. The 2017 Tax Act reduced the U.S. corporate rate; GATX reported no adjustment to its provisional 2017 Tax Act estimate during the first nine months of 2018.
- The company planned to adopt the new lease accounting standard on January 1, 2019, and expected to recognize right-of-use assets and lease liabilities for operating leases; amounts were still under assessment.
Most important facts for investors to verify
- Whether North American lease-rate pressure and the negative renewal-rate index continue to ease, and whether utilization remains high.
- How much future earnings depend on asset-sale gains: nine-month gains were $72.5, compared with $56.3 in the prior-year period.
- Execution, pricing, and funding for the railcar purchase commitments, alongside the increase in investment spending and expected compliance-related maintenance.
- RRPF affiliate earnings and Norgas vessel utilization and charter rates, given their contribution to Portfolio Management results.
- Potential developments in litigation, commercial commitments, and the estimated balance-sheet impact of adopting the lease standard.