GATX Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. GATX leases, operates, manages, and remarkets assets, primarily in rail and marine markets, and reports Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management segments. Amounts are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $365.8 million | $338.9 million | $652.4 million | $611.2 million |
| Net income | $53.1 million | $35.1 million | $95.2 million | $62.2 million |
| Diluted EPS | $1.15 | $0.74 | $2.05 | $1.31 |
| Net income margin | 14.5% | 10.4% | 14.6% | 10.2% |
| Net cash from operations | Not provided for the quarter | $168.1 million | $128.9 million |
Revenue rose 7.9% in Q2 and 6.7% year to date; net income increased 51.3% and 53.1%, respectively. Six-month net income excluding the prior-year AAE interest-rate-swap gain was $95.2 million versus $60.5 million. The filing attributes improved results mainly to higher North American rail lease rates and asset remarketing gains, partly offset by increased rail maintenance costs and weaker ASC results.
- Segment trends, six months: Rail North America segment profit increased to $166.7 million from $98.5 million. Rail International declined to $40.1 million from $43.0 million; ASC fell to $1.9 million from $10.9 million; Portfolio Management declined to $23.4 million from $29.8 million.
- Cash flow and investment: Operating cash flow was $168.1 million. Investing activities used $644.3 million, including $655.1 million of portfolio investments and capital additions and $150.5 million for leased-in asset purchases; financing activities provided $205.7 million. Cash and cash equivalents fell to $110.3 million from $379.7 million at year-end 2013.
- Debt and liquidity at June 30: Total debt was $4.203 billion, including $4.034 billion recourse debt, $20.5 million nonrecourse debt, and $140.6 million commercial paper and bank-facility borrowings. The $575 million revolver had $455 million of available capacity after backing outstanding commercial paper. GATX reported compliance with debt covenants and stable outlooks; its long-term unsecured ratings were BBB from S&P and Baa2 from Moody’s.
- Capital returns: GATX repurchased 1.4 million shares for $88.5 million under a newly authorized $250 million program, with $161.5 million remaining. Six-month dividends were $0.66 per share.
Material changes, outlook, and risks
- GATX acquired more than 18,500 boxcars for approximately $340 million in Q1. North American rail utilization excluding boxcars was 98.6%; acquired boxcar utilization improved from 80.7% at Q1-end to 90.7% at Q2-end.
- A useful-life estimate change for North American railcars increased average depreciable life by about 2.2 years. It reduced depreciation expense and increased net income by $11.1 million and $7.1 million, respectively, for the first six months (about $0.15 per diluted share). Management estimated a full-year 2014 benefit of $14.0 million, or about $0.30 per diluted share.
- Management expected higher North American lease revenue and higher maintenance expense for the remainder of 2014, citing the tank-car compliance cycle; approximately 19,000 railcar leases were due to expire, with management expecting strong renewal success at attractive rates, particularly for tank cars. The filing provides no consolidated EPS or revenue guidance.
- ASC carried 8.3 million net tons in the first six months, down from 10.5 million, because Great Lakes ice and Coast Guard restrictions delayed operations. Management said full-year volume and segment profit were unlikely to reach prior-year levels despite expected improved second-half conditions and incremental spot business.
- New U.S. and Canadian proposed or adopted tank-car requirements could require retrofits, removal from service, or repurposing. GATX had about 13,000 North American tank cars in flammable-liquid service, including about 4,900 carrying crude oil and ethanol; it said costs and fleet effects could not yet be determined. The U.S. proposal was issued after quarter-end.
- In the Viareggio, Italy derailment litigation, 32 people died. Most significant civil claims had been settled, but about 90 claimants remained in the trial. GATX said the outcome and potential loss could not be reasonably estimated and recorded no accrual. Unreimbursed defense costs were approximately $5.9 million, with insurance reimbursement disputed.
- Commercial commitments totaled $40.8 million, principally lease-payment guarantees and standby letters of credit; the company reported no known event requiring payment. Contractual commitments totaled $6.102 billion, including $966.5 million of portfolio investments, primarily railcar purchase commitments. The filing notes interim results may not indicate full-year performance, in part because ASC is seasonal and asset remarketing income is uneven.
Key facts for investors to verify
- Whether final tank-car regulations materially change retrofit costs, usable fleet, lease demand, or capital requirements.
- Whether North American lease renewals and acquired-boxcar utilization remain strong while compliance-related maintenance costs rise.
- Whether ASC’s second-half recovery can offset the weather-related shortfall and whether full-year results remain below 2013.
- Progress and potential exposure in the Viareggio trial and the recovery of disputed defense costs from insurers.
- The durability of earnings growth after considering the $14.0 million estimated full-year depreciation benefit and asset-disposition gains.
- Funding needs for investment commitments, debt maturities, share repurchases, and dividends, alongside cash balances and revolver capacity.