GATX Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its principal segments are Rail North America, Rail International, Portfolio Management, and American Steamship Company (ASC). Financial statements are unaudited.
Financial performance and position
- Third quarter: Revenue was $360.7 million, up 3.1% year over year; net income was $45.1 million versus $47.0 million; diluted EPS was $1.25 versus $1.22.
- Nine months: Revenue was $1.037 billion, up 3.2%; net income was $154.6 million versus $162.1 million; diluted EPS was $4.22 versus $4.21. Adjusted non-GAAP net income was $151.8 million versus $167.9 million, and adjusted diluted EPS was $4.15 versus $4.36.
- Earnings drivers: Lower asset disposition gains, mainly in Rail North America, weighed on year-to-date results. A $2.8 million tax benefit from Alberta’s tax-rate reduction partly offset the decline; the prior-year comparison included $5.8 million after-tax of maintenance-facility closure costs.
- Cash flow: Nine-month operating cash flow was $297.1 million, down from $341.3 million. Investing activities used $317.0 million; portfolio investments and capital additions were $522.5 million. Cash, cash equivalents, and restricted cash decreased $58.1 million to $48.6 million.
- Debt and liquidity: September 30 debt was $4.692 billion, including $4.580 billion of recourse debt and $112.0 million of commercial paper and bank-facility borrowings. Operating lease obligations were $440.3 million. Recourse leverage was 2.8 times. GATX reported $502 million available under its $600 million U.S. revolver, $250 million available under a separate U.S. facility, and €12.2 million available under European facilities; it was in covenant compliance.
- Other metrics: Total assets were $8.091 billion and shareholders’ equity was $1.787 billion. GATX repurchased $129.9 million of shares year to date and paid $52.8 million in dividends. Its 2019 investment volume was $522.5 million.
Material changes and segment developments
- Rail North America: Third-quarter segment profit fell 10.7% to $60.9 million; nine-month profit fell 10.9% to $215.1 million. Lower disposition gains and higher maintenance costs were key factors. Management described market conditions as deteriorating, citing lower railcar loadings, higher railroad velocities, and continuing new-car supply. Utilization was 99.2% for the non-boxcar fleet and 93.5% for boxcars. The renewal rate change in the Lease Price Index was negative 7.7% in the quarter, and the renewal success rate was 75.2%.
- Rail International: Nine-month segment profit increased to $56.0 million from $52.5 million, reflecting the absence of prior-year German facility closure costs and more cars on lease, partly offset by foreign exchange. European fleet utilization was 99.4%. A weaker euro reduced nine-month lease revenue by an estimated $9.2 million.
- Portfolio Management: Nine-month segment profit was $34.9 million versus $34.3 million. Higher Rolls-Royce & Partners Finance affiliate earnings were partly offset by lower Specialized Gas Vessel revenue during transition to a new commercial manager. Management said utilization increased in the third quarter and expected operating results to improve as the vessels continued operating under the new agreement.
- ASC: Nine-month segment profit rose to $26.7 million from $20.7 million, supported by favorable sailing conditions, high water levels, and an additional vessel in service. Freight volume increased to 19.5 million net tons from 17.7 million.
Outlook, risks, and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management cautions that nine-month results may not indicate full-year performance: ASC is seasonally less active in winter, and asset remarketing income is uneven.
- Key disclosed risks include railcar supply and demand, lease renewal pricing and utilization, customer demand and defaults, maintenance and reassignment costs, asset remarketing opportunities, foreign exchange, financing costs and capital-market access, long-term railcar purchase commitments, affiliate-investment performance, litigation, environmental costs, and cybersecurity.
- A fire damaged an ASC vessel during winter maintenance in February 2019. Assessment was ongoing; management did not expect a material adverse effect on operations or cash flows.
- GATX adopted the new lease accounting standard in 2019, recognizing operating-lease right-of-use assets and liabilities. At adoption it recorded $460.7 million of right-of-use assets and $483.6 million of liabilities, and a one-time $39.4 million after-tax increase to equity. The filing says adoption did not affect cash flows and would increase 2019 operating lease expense by about $4.0 million pre-tax.
- Management reported effective disclosure controls, no material change in internal control during the quarter, and no material change in risk factors since year-end 2018.
Important facts for investors to verify
- Whether North American railcar utilization, renewal rates, and lease pricing hold up amid the reported deterioration in market conditions and ongoing new-car supply.
- How much future earnings depend on asset disposition gains, and whether maintenance and repair costs remain elevated.
- Whether operating cash flow and liquidity are adequate relative to debt service, dividends, share repurchases, and $2.397 billion of disclosed purchase commitments.
- Progress and financial impact of the Specialized Gas Vessel management transition, and the final outcome of the ASC vessel fire assessment.
- The comparability of reported debt, lease obligations, leverage, and year-over-year results following lease-standard adoption; also distinguish GAAP from management’s non-GAAP measures.