GATX Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. 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).
Financial performance and position
- Revenue: $317.0 million, up 3.8% from $305.3 million. Lease revenue was $274.4 million; other revenue rose to $29.5 million from $17.9 million, mainly on higher repair revenue and lease termination fees.
- Profit: Net income was $41.5 million, down from $76.3 million; diluted EPS was $1.12 versus $1.98. The decline primarily reflected asset disposition gains of $8.9 million, compared with $56.1 million a year earlier.
- Costs and interest: Total expenses increased to $241.0 million from $237.6 million. Net interest expense rose to $46.5 million from $39.9 million, reflecting higher average rates and debt balances.
- Cash flow: Operating cash flow was $64.3 million, versus $77.2 million. Investing activities used $98.6 million, including $147.3 million of portfolio investments and capital additions. Financing activities provided $182.5 million, including $495.2 million of net debt issuance proceeds.
- Liquidity and debt: Cash and cash equivalents were $248.4 million at quarter-end. Debt totaled $4.784 billion, including $4.768 billion of recourse debt; lessee lease obligations were $467.3 million. Recourse leverage was 2.8x. GATX reported $850 million available across its U.S. revolving and secured railcar facilities, and compliance with all debt covenants.
- Equity and distributions: Shareholders’ equity was $1.809 billion. GATX repurchased 529,243 shares for approximately $40 million during the quarter and paid $19.2 million in dividends.
Changes versus the prior-year quarter
- Rail North America segment profit fell to $68.4 million from $108.9 million, chiefly because asset disposition gains were $8.2 million versus $54.1 million. Fleet utilization was 99.4%, up from 98.2% a year earlier; the Lease Price Index renewal rate change improved to 5.2% from negative 11.6%.
- Rail International segment profit declined to $14.8 million from $19.0 million. A weaker euro reduced lease revenue by about $4 million and segment profit, excluding other income and expense, by about $2 million; Viareggio-related litigation costs also weighed on results. GRE utilization improved to 98.9% from 96.7%.
- Portfolio Management segment profit was $12.3 million versus $13.9 million, as lower Norgas vessel revenue offset higher affiliate earnings. ASC profit increased to $2.5 million from $0.8 million, supported by improved sailing conditions and higher freight volume.
- GATX adopted the new lease accounting standard on January 1, 2019. It recognized operating lease right-of-use assets and liabilities, and recorded a one-time $39.4 million after-tax increase to equity. Comparative periods were not restated; the adoption did not affect cash flows.
Outlook, risks, and unusual items
- The filing provides no specific full-year earnings guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results: ASC is seasonally less active in winter, and asset remarketing income is uneven.
- Management described improving North American tank-car lease rates and stable underlying demand, while freight-car lease rates remained under pressure in a competitive market. Rail International reported improving European lease conditions and steady demand.
- At March 31, about 14,600 tank and freight cars and 2,800 boxcars were scheduled to expire during the remainder of 2019, excluding leases already renewed or reassigned. Returned cars may require additional repair costs.
- Purchase commitments totaled $2.220 billion, primarily for railcars. These include supply arrangements with Trinity and American Railcar Industries; delivery schedules and estimated costs are subject to the agreements and management estimates.
- The Viareggio derailment litigation remained unresolved. Appellate hearings concluded in April 2019; management expected a ruling later in the year. GATX stated it could not reasonably estimate potential costs from the litigation.
- An ASC vessel was damaged by fire during winter maintenance. Management was assessing the damage and did not expect a material adverse effect on operations or cash flows.
- Other disclosed risks include demand and lease-rate changes, asset remarketing opportunities, financing costs and credit ratings, foreign exchange, environmental remediation, and long-term railcar purchase commitments. Management reported stable credit outlooks and no expected covenant violations.
Important facts for investors to verify
- Whether lease rates, utilization, and renewal performance continue to support Rail North America results, particularly as scheduled lease expirations occur.
- How much reported earnings in future periods depend on asset sales and remarketing gains, given the sharp year-over-year decline in Q1 gains.
- Cash generation and debt trends after the $500 million unsecured debt issuance, debt repayments, investment spending, and share repurchases.
- Updates on the Viareggio appeals and the financial exposure, which the filing says cannot currently be estimated.
- Execution and funding of the railcar purchase commitments, and the operating and financial impact of the ASC vessel fire.
- The effect of lease-accounting adoption on reported assets, liabilities, and future operating lease expense; management estimated an approximately $4 million pre-tax expense impact in 2019.