GATX Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. GATX leases, operates, manages, and remarkets railcars and other long-lived assets. Its segments are Rail North America, Rail International, Portfolio Management, and American Steamship Company (ASC).
Financial results and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,360.9 million | $1,376.9 million |
| Net income (GAAP) | $211.3 million | $502.0 million |
| Diluted EPS (GAAP) | $5.52 | $12.75 |
| Adjusted net income (non-GAAP) | $199.8 million | $185.0 million |
| Adjusted diluted EPS (non-GAAP) | $5.22 | $4.70 |
| Operating cash flow | $508.5 million | $496.8 million |
| Portfolio investments and capital additions | $943.4 million | $603.4 million |
| Year-end cash and cash equivalents | $100.2 million | $296.5 million |
| Balance-sheet debt | $4,551.8 million | $4,388.5 million |
| Off-balance-sheet recourse debt | $430.2 million | $435.7 million |
| Recourse leverage | 2.7x | 2.5x |
Reported 2018 net income included an $11.5 million net benefit from tax adjustments and other items; 2017 included a $317.0 million net benefit, principally the Tax Act benefit. Reported 2017 earnings are therefore not a clean operating comparison. The 2018 effective tax rate was 17.5%, versus negative 113.7% in 2017. The fourth quarter of 2018 had revenue of $356.4 million and net income of $49.2 million; fourth-quarter 2017 net income of $342.1 million included a $315.9 million tax benefit.
2018 revenue declined 1.2%, while adjusted net income rose from 2017. Operating cash flow increased modestly. Net cash used in investing activities was $676.1 million; capital investment exceeded operating cash flow, with spending supported by asset-sale proceeds and borrowing. The company paid $69.3 million in dividends and repurchased $115.5 million of shares.
Segment profit was $307.9 million in Rail North America (up from $299.3 million), $68.6 million in Rail International (near prior-year level), $38.7 million in Portfolio Management (down from $56.3 million), and $33.0 million in ASC (up from $24.5 million). These are segment measures, not consolidated operating margins.
Material changes and operating developments
- Rail North America segment profit improved on higher asset-disposition gains and lower maintenance costs, despite lower lease revenue and termination fees. Year-end utilization was 99.4% for railcars excluding boxcars and 94.2% for boxcars; lease-renewal pricing remained negative, but improved to -9.8% from -28.2% in 2017.
- Rail International lease revenue increased with fleet growth and favorable currency effects. Segment profit included $9.5 million of costs related to closing a German maintenance facility; excluding those costs, results improved.
- Portfolio Management results fell amid weaker Norgas vessel rates, lower residual-sharing fees, and the absence of income from marine assets sold in 2017. Earnings from the Rolls-Royce & Partners Finance joint ventures increased.
- ASC profit increased on higher freight rates and favorable operating conditions, despite carrying 26.2 million tons versus 27.8 million in 2017.
- Investment volume rose to $943.4 million, including $737.4 million in Rail North America. GATX acquired 2,832 railcars from ECN Capital in 2018.
Outlook, risks, and unusual items
- Management expected a stable North American railcar-leasing market in 2019, but forecast lower Rail North America segment profit due to revenue pressure, higher tank-car qualification maintenance, higher interest expense, and lease-accounting effects. Rail International, Portfolio Management, and ASC segment profit were each expected to increase.
- GATX reported $2.23 billion of purchase commitments, primarily railcars, at year-end. Agreements include substantial deliveries through 2023, creating investment and leasing-demand exposure.
- Adoption of the new lease standard on January 1, 2019 was expected to add approximately $470 million of right-of-use assets and $480 million of lease liabilities, increase equity by about $40 million, and add approximately $4 million to 2019 operating lease expense; management did not expect a cash-flow impact.
- Key risks include railcar demand, utilization and lease rates; maintenance and regulatory compliance costs; asset remarketing values; financing costs and LIBOR transition; currency movements; RRPF affiliate performance; environmental obligations; and litigation involving rail incidents. The Viareggio derailment appeal remained pending; related criminal fines and penalties were not enforceable pending appeal, and the ultimate outcome could not be estimated.
- Environmental remediation accruals were $13.7 million and litigation accruals were $5.8 million. Management said no material adverse effect on consolidated financial position or liquidity was expected, while noting outcomes could affect results in a particular period.
Important facts for investors to verify
- Separate underlying operating performance from the Tax Act-driven 2017 GAAP earnings and compare the company’s non-GAAP reconciliation with reported results.
- Track North American renewal rates, lease pricing, utilization, lease expirations, and maintenance requirements against management’s 2019 expectations.
- Assess the return and financing implications of the elevated 2018 investment program and outstanding railcar purchase commitments.
- Review debt maturities, available credit capacity, interest-rate exposure, and the effect of adding lease liabilities under the new accounting standard.
- Monitor RRPF affiliate earnings and exposure to Rolls-Royce, as well as outcomes in the Viareggio litigation and environmental matters.