GATX Corporation — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars and marine equipment, through Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. At year-end, reported assets were $6.55 billion; including approximately $904 million of off-balance-sheet assets, total assets deployed were about $7.45 billion.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $1,321.0 million | $1,243.2 million | +6.3% |
| Net income | $169.3 million | $137.3 million | +23.3% |
| Diluted EPS | $3.59 | $2.88 | +24.7% |
| Net margin | 12.8% | 11.0% | Higher |
| Operating cash flow | $400.7 million | $370.2 million | +$30.5 million |
| Portfolio investments and capital additions | $859.6 million | $770.0 million | +$89.6 million |
| Cash and cash equivalents | $379.7 million | $234.2 million | +$145.5 million |
| Balance-sheet debt | $3,871.0 million | $3,567.9 million | +$303.1 million |
| Shareholders’ equity | $1,397.0 million | $1,244.2 million | +$152.8 million |
Net income excluding the company’s specified tax adjustments and other items, a non-GAAP measure, was $164.8 million, or $3.50 per diluted share, versus $133.8 million, or $2.81, in 2012. Reported 2013 net income included a $23.2 million tax charge related to the AAE investment sale, partly offset by other tax and affiliate-related items. Interest expense, net, was $166.6 million, broadly unchanged from 2012. The filing reports operating expenses but does not present a single consolidated operating-margin measure.
Debt including estimated operating-lease obligations was approximately $4.78 billion. Recourse leverage was 3.0x, compared with 3.2x in 2012. The company had $575 million available under its revolving credit facility and reported compliance with its covenants. Contractual commitments totaled $6.12 billion, including $1.08 billion of portfolio investments, primarily railcar purchases. Contractual cash receipts from leases, finance leases, and loans totaled $3.87 billion. The filing does not provide a conventional current ratio or a single free-cash-flow measure.
Material changes and segment performance
- Rail North America: Segment profit rose to $231.6 million from $209.3 million, supported by higher lease rates and asset-disposition gains. Year-end utilization reached 98.5%; the lease renewal rate in the company’s Lease Price Index increased 34.5% over expiring rates. Higher compliance maintenance and repair costs partly offset the gains.
- Rail International: Segment profit increased to $97.4 million from $32.7 million. Results benefited from a $9.3 million gain on the AAE sale, $7.7 million of gains on certain AAE swaps, higher lease revenue, and lower maintenance costs. The segment sold its AAE interest for $114.1 million, including a $91.1 million seller loan.
- ASC: Segment profit declined to $28.9 million from $37.5 million. Freight volume fell to 28.8 million net tons from 29.7 million, with lower iron-ore volumes, operating delays, challenging weather, and a $1.3 million impairment related to a vessel expected to be scrapped.
- Portfolio Management: Segment profit increased to $74.4 million from $50.2 million. Higher marine results following the acquisition of the Norgas vessels and increased Rolls-Royce affiliate earnings contributed; the latter included $17.6 million of engine-sale gains. Earnings remain meaningfully dependent on the Rolls-Royce joint ventures.
GATX’s 2013 investment volume was $859.6 million, up from $770.0 million. Operating cash flow increased, while investing activities used $403.2 million. Financing activities provided $149.1 million, including substantial long-term debt issuance; the company also repurchased $68.6 million of shares and paid $60.5 million of dividends. The 2013 dividend declared per share was $1.24, up from $1.20.
Outlook, risks, and unusual items
- Management expected higher 2014 Rail North America segment profit as lease revenue grew, with modestly lower remarketing income and higher maintenance expense. About 20,000 railcar leases were due to expire in 2014; coal-market cars faced comparatively weak demand. The company expected to take delivery of 2,500 cars under its Trinity purchase agreement in 2014 and acquire about 900 additional new cars.
- Management anticipated a slight increase in Rail International profit, with investment volume comparable to 2013; a slight increase in ASC profit, subject to weather and recovery of lost tonnage; and a modest decline in Portfolio Management profit as affiliate earnings and remarketing income eased.
- Tank-car rules were under review following crude-oil and ethanol train accidents. GATX had approximately 4,000 tank cars in crude and ethanol service and another 8,000 in flammable-liquids service. The final requirements, timing, and costs were unknown; modifications, early retirement, or reduced rail demand could affect results.
- The company reported an ongoing criminal and civil trial in Italy concerning the 2009 Viareggio derailment, which killed 32 people. GATX could not estimate a potential loss and recorded no accrual for the matter. Insurers had covered civil claims to date, but reimbursement of approximately $5.0 million in defense costs was disputed. Separate litigation accruals were $1.9 million.
- Environmental remediation accruals were $14.7 million for 17 sites. Management said it could not estimate maximum potential exposure; costs above recorded accruals could affect results. Other key risks include rail and marine demand, lease rates and utilization, financing access and cost, purchase commitments, foreign exchange and interest rates, affiliate performance, union negotiations, and weather-related Great Lakes disruptions.
- Liquidity was expected to cover 2014 contractual obligations through available cash, operating cash flow, portfolio proceeds, and revolving facilities. Management cautioned that economic or capital-market changes could impair liquidity. A new $250 million share-repurchase authorization was approved after year-end.
Most important facts for investors to verify
- Whether tank-car regulatory changes require material retrofits, early retirements, or related spending, and how the rules affect customer demand.
- Whether high North American lease rates and utilization persist, particularly as 2014 expirations are renewed and coal-related cars remain weaker.
- The resolution and insurance coverage of the Viareggio proceedings, including defense-cost reimbursement, and any change in environmental or other litigation exposures.
- The quality and collectability of the $91.1 million AAE seller loan, its repayment or extensions, and the resulting cash proceeds.
- The sustainability of affiliate contributions to earnings, especially Rolls-Royce joint-venture results and asset-sale gains.
- Debt growth, operating-lease commitments, railcar purchase obligations, liquidity availability, and the company’s capacity to fund investment while maintaining covenant compliance.
- The basis for non-GAAP adjusted earnings and segment profit, which excludes specified items and is not directly comparable to GAAP net income.