GATX Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. GATX leases, operates, manages, and remarkets railcars and other long-lived assets. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $1,418.3 million | $1,449.9 million | Down 2.2% |
| Net income | $257.1 million | $205.3 million | Up 25.2% |
| Diluted EPS | $6.29 | $4.69 | Up 34.1% |
| Adjusted net income, excluding tax adjustments and other items | $235.9 million | $234.9 million | Up 0.4% |
| Adjusted diluted EPS | $5.77 | $5.37 | Up 7.4% |
| Net cash from operating activities | $626.1 million | $534.3 million | Up $90.7 million |
| Capital investments and additions | $620.7 million | $696.9 million | Down $76.2 million |
Reported net margin was approximately 18.1% versus 14.2% in 2015; adjusted net margin was approximately 16.6% versus 16.2%. The divergence reflects significant tax and unusual-item effects, rather than comparable growth in adjusted net income.
- Assets and liquidity: Total GAAP assets were $7.105 billion; including $459.1 million of off-balance-sheet assets, adjusted assets were $7.565 billion. Cash and cash equivalents were $307.5 million.
- Debt and leverage: Balance-sheet debt was $4.272 billion, including $4.253 billion recourse debt. Including $459.1 million of off-balance-sheet lease obligations, debt was $4.731 billion. Recourse leverage was 3.3x, down from 3.5x.
- Available credit: GATX reported $600 million available under its unsecured revolver and $250 million available under a secured railcar facility. Credit ratings were BBB / Baa2 for long-term unsecured debt, with stable outlooks.
- Capital returns: Dividends declared were $1.60 per share, up from $1.52. GATX repurchased 2.7 million shares for $120.0 million and had $180 million remaining under its repurchase authorization.
Changes versus the prior year
- Revenue declined mainly as ASC and Portfolio Management marine activity contracted, partly offset by higher Rail North America and Rail International lease revenue.
- GAAP net income rose to $257.1 million, but adjusted net income was essentially flat. 2016 included a $49.1 million residual-sharing settlement and a $7.1 million foreign tax credit benefit; 2015 included a $14.1 million state tax charge and other offsetting items.
- Rail North America segment profit fell to $321.9 million from $379.5 million. Lower disposition gains, railcar impairments, and higher depreciation outweighed higher lease revenue and fees. Its lease price index fell 20.3%; utilization was 98.9% excluding boxcars and 93.8% for boxcars.
- Rail International segment profit declined to $63.0 million from $70.1 million, mainly due to higher maintenance costs, including wheelset replacements, and lower remarketing gains.
- ASC segment profit fell to $10.1 million from $15.1 million. Cargo volume declined to 25.4 million net tons from 26.5 million, with fewer vessels deployed and fewer higher-margin long-haul shipments.
- Portfolio Management segment profit increased to $136.9 million from $49.8 million, largely reflecting the $49.1 million settlement and higher residual-sharing income. Earnings from Rolls-Royce & Partners Finance affiliates declined to $51.8 million from $65.5 million.
Outlook, risks, and unusual items
- 2017 outlook: Management expects Rail North America segment profit to decrease, citing lower renewal rates and utilization, higher maintenance costs, and lower remarketing income. Rail International profit is expected to grow slightly in local currency; ASC profit is expected to improve; Portfolio Management profit is expected to decline as 2016 residual-sharing gains are not expected to recur. No consolidated revenue or EPS guidance is provided.
- Industry conditions: Management cited excess railcar supply, muted demand for certain car types, increased railroad efficiency, and pressure on lease rates. It intends to prioritize utilization and shorten lease terms to retain repricing flexibility.
- Railcar regulation and impairments: GATX recorded $29.8 million of impairment losses on flammable-service tank cars in 2016, within $38.5 million of total asset impairments. Approximately 2,400 cars were identified as particularly vulnerable; over 90% of affected tank cars have compliance deadlines in 2023 or later. Additional impairment is possible.
- Concentrations and market exposures: Petroleum customers accounted for approximately 26% of revenue and chemical customers 19%. About 21% of the North American fleet was leased to refiners and other petroleum-related customers. Risks include commodity and economic cycles, customer defaults, lease-rate pressure, foreign exchange and interest rates, and access to capital.
- Litigation: In the Viareggio derailment case, an Italian court announced guilty verdicts on January 31, 2017 against GATX Rail Austria and certain employees. GATX plans to appeal; fines and penalties were not enforceable pending appeal. The company says it cannot reasonably estimate the ultimate litigation cost. Litigation accruals were $4.7 million.
- Environmental matters: Accruals for remediation were $14.9 million across 18 sites. Management says ultimate costs could exceed estimates, though it does not expect a material adverse effect on consolidated financial position or liquidity.
- Other commitments: Contractual commitments totaled $7.827 billion, including $1.211 billion of purchase commitments, primarily railcars. Management expects 2017 investments may exceed contractual commitments. ASC asbestos-related matters also affected 2016 results, including an increased litigation accrual and vessel-return costs.
Most important facts for investors to verify
- How much of 2016’s reported earnings and EPS growth is attributable to the $49.1 million settlement and tax benefits, versus recurring operations.
- Whether North American lease rates, utilization, and boxcar utilization stabilize, and how 2017 lease expirations and renewals perform.
- Potential further losses, retrofit costs, retirements, and redeployment outcomes for regulated flammable-service tank cars.
- The status and financial exposure from the Viareggio appeal and asbestos litigation, including whether claims or accruals change.
- Execution and funding of railcar purchase commitments, liquidity availability, debt maturities, and compliance with financing covenants.
- Whether ASC’s expected recovery in freight rates and costs materializes, and whether Portfolio Management can sustain affiliate earnings as unusual remarketing income declines.