GATX Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. GATX leases, operates, manages, and remarkets rail and marine assets, with segments in North American rail, international rail, American Steamship Company (ASC), and Portfolio Management. Figures are in U.S. dollars; millions except per-share data.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $353.2 | $331.9 | $964.4 | $911.5 |
| Net income | $53.8 | $53.8 | $116.0 | $107.6 |
| Diluted EPS | $1.15 | $1.13 | $2.45 | $2.26 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $253.0 | $224.6 |
- Revenue increased 6.4% in Q3 and 5.8% year to date. Reported net margin was approximately 15.2% in Q3 and 12.0% year to date, calculated as net income divided by revenue.
- Management’s non-GAAP net income excluding tax adjustments and other items was $51.0 million ($1.09 diluted EPS) in Q3, versus $35.6 million ($0.75) a year earlier; year to date it was $111.5 million ($2.36), versus $106.9 million ($2.24). These measures are not GAAP.
- Nine-month investing cash outflow was $406.3 million, principally reflecting $666.8 million of portfolio investments and capital additions, partly offset by $286.6 million of portfolio proceeds. Financing provided $71.4 million. Cash fell $83.5 million to $150.7 million.
- At September 30, total debt was $3,753.5 million, up from $3,567.9 million at December 31, 2012; recourse debt was $3,621.8 million. Shareholders’ equity was $1,312.1 million. A new $575 million five-year unsecured revolving facility was fully available; the company reported covenant compliance and stable BBB / Baa2 long-term ratings.
- Quarterly dividend declared was $0.31 per share. The company repurchased 995,600 shares for $50.0 million in the first nine months; $18.6 million remained under its authorization.
Material changes and segment trends
- Rail North America Q3 segment profit rose to $57.9 million from $45.6 million, supported by higher lease revenue and asset-sale gains, partly offset by increased maintenance. Fleet utilization was 98.5%; tank-car demand and pricing were strong, while some freight-car types, particularly coal cars, remained weak.
- Rail International Q3 segment profit was $34.8 million versus $17.9 million. Results included the $9.3 million pre-tax gain on the sale of GATX’s 37.5% AAE interest and gains on certain AAE swaps. Year-to-date segment profit rose to $77.8 million from $22.2 million, also reflecting the comparison with prior-year swap losses. The AAE sale consideration included a $91.1 million seller loan.
- ASC Q3 segment profit was $12.9 million versus $13.2 million; year-to-date profit declined to $23.8 million from $29.3 million. Lower freight volumes, reduced iron-ore tonnage and lower fuel surcharges weighed on revenue. GATX expected modestly lower 2013 freight volume than 2012’s 29.7 million net tons, citing water levels and operation of 13 vessels versus 14.
- Portfolio Management Q3 segment profit increased to $17.7 million from $15.0 million; year-to-date profit fell to $47.5 million from $51.6 million. The year-to-date comparison reflected lower lease revenue after equipment sales and the absence of prior-year warrant income. The dissolution of the Singco and Somargas ventures brought five vessels and related working capital onto GATX’s books; GATX paid approximately $101 million, primarily to meet its share of external debt.
- Year-to-date SG&A rose $14.2 million, primarily due to higher pension and salary expenses. Maintenance expense also increased, including costs for railcar regulatory work and repairs.
Outlook, risks and unusual items
- Management expected strong North American rail asset-remarketing gains in Q4 and anticipated increased regulatory-compliance work through Q4 and into 2014. Approximately 5,000 railcars had leases expiring during the remainder of 2013.
- A PHMSA rulemaking notice could lead to design requirements for DOT 111 tank cars. GATX estimated about 7,000 cars in its fleet might be affected, but the proposal had no specific designs or retirement schedule, so the impact was not yet assessable.
- Effective tax rate was 45% for the first nine months, versus 20% a year earlier. GATX attributed the difference principally to $23.2 million of U.S. and state taxes on the AAE sale gain and prior-year tax-audit benefits. Excluding specified effects, management reported rates of 27% and 34%, respectively.
- After quarter-end, GATX elected to buy 3,275 railcars under an existing lease for approximately $119.3 million, expected to close in January 2014; the transaction was expected to eliminate $101.6 million of nonrecourse operating-lease payments.
- The Viareggio derailment trial was scheduled to begin November 13, 2013. Approximately 110 civil claimants had joined the proceeding. GATX could not estimate any ultimate loss and recorded no accrual. Insurers continued to cover civil claims, but an excess insurer disputed reimbursement of defense costs; unreimbursed costs were approximately $4.0 million, and GATX had initiated arbitration.
- GATX stated that interim results may not indicate full-year results, partly because ASC is seasonally affected and asset-remarketing income is uneven. The filing provided no consolidated earnings guidance. Forward-looking results remain exposed to market, utilization, pricing, financing, regulatory, maintenance, investment, and litigation risks.
Key facts for investors to verify
- Whether North American lease pricing, utilization, and remarketing gains remain strong, and how much regulatory compliance work costs.
- The final requirements and timing for DOT 111 tank-car rules and the effect on GATX’s estimated 7,000 potentially affected cars.
- Repayment terms and collectability of the $91.1 million AAE seller loan, and any remaining effects of the AAE disposal or swap-related items.
- Cash generation, debt maturities, liquidity, and funding needs alongside portfolio investment commitments and the planned $119.3 million railcar purchase.
- Developments in the Viareggio trial and insurance arbitration, including potential defense-cost reimbursement and any change in the company’s inability to estimate loss.