GATX Corporation — 2017 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. GATX leases, maintains, manages, and remarkets railcars and other long-lived assets. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management, which includes aircraft-engine joint ventures with Rolls-Royce. At year-end, GATX owned approximately 144,500 railcars and reported $7.9 billion of on- and off-balance-sheet assets. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $1,376.9 million | $1,418.3 million | Down 2.9% |
| GAAP net income | $502.0 million | $257.1 million | Includes $315.9 million one-time, noncash Tax Act benefit |
| Adjusted net income (non-GAAP) | $185.0 million | $235.9 million | Down 21.6% |
| Diluted EPS, GAAP | $12.75 | $6.29 | Tax benefit substantially drove the increase |
| Diluted EPS, adjusted (non-GAAP) | $4.70 | $5.77 | Down from prior year |
| Cash from operating activities | $496.8 million | $629.4 million | Down $132.6 million |
| Net gain on asset dispositions | $54.1 million | $98.0 million | Lower residual-sharing income, partly offset by fewer impairments |
| Total assets, including off-balance-sheet assets | $7,858.1 million | $7,564.5 million | Includes $435.7 million of off-balance-sheet assets in 2017 |
| Balance-sheet debt | $4,388.5 million | $4,271.9 million | Includes $4,371.7 million recourse debt |
| Shareholders’ equity | $1,792.7 million | $1,347.2 million | Increase largely reflects reported net income and currency translation |
Unrestricted cash was $296.5 million. GATX had $850 million available across its U.S. revolving and secured railcar facilities; its long-term unsecured ratings were BBB (S&P) and Baa2 (Moody’s), both with stable outlooks. Recourse leverage was 2.5x as reported, or 3.1x excluding the Tax Act’s effect on equity. Including operating-lease obligations, reported debt was $4.824 billion. Dividends declared were $1.68 per share, up from $1.60; the company repurchased $100 million of shares in 2017.
Material changes versus 2016
- Rail North America segment profit fell to $299.3 million from $321.9 million. Lower lease rates and fewer cars on lease weighed on results; 2017 utilization was 98.2% for the fleet excluding boxcars, while the renewal Lease Price Index declined 28.2%.
- Rail International segment profit rose to $68.8 million from $63.0 million, supported by higher lease revenue, lower maintenance costs, and a stronger euro.
- ASC segment profit increased to $24.5 million from $10.1 million as freight volume and commodity mix improved and 2016 included unusual expenses. Cargo carried rose to 27.8 million net tons from 25.4 million.
- Portfolio Management segment profit declined to $56.3 million from $136.9 million. 2016 included $49.1 million from settlement of a prior residual-sharing dispute and $82.8 million of residual-sharing income; 2017 also faced weaker Norgas vessel rates. Higher RRPF affiliate earnings partly offset the decline.
- Operating cash flow decreased, in part because residual-sharing income was $10.2 million versus $83.6 million in 2016.
Outlook, risks, contingencies, and unusual items
- Management expected North American railcar oversupply to persist in 2018, with no near-term catalyst for material lease-rate improvement. It forecast lower Rail North America segment profit, relatively flat Rail International profit in local currency, slightly higher ASC profit, and lower Portfolio Management profit.
- The 2018 Rail North America outlook cited declining lease revenue and higher scheduled maintenance costs, partly offset by expected higher remarketing income. Management reported that a substantial portion of 2018 deliveries under its supply agreement was already placed and that relatively few leases were scheduled to expire in 2018.
- The Tax Act produced a provisional $315.9 million noncash benefit, principally from remeasuring deferred tax liabilities, partly offset by a $57.2 million transition tax. Management expected the lower corporate rate to benefit future reported earnings but did not expect a material future cash-flow impact based on its anticipated tax-return position. The estimate could change with further interpretation and guidance.
- GATX had $927.3 million of purchase commitments, primarily for railcars, and $7.762 billion in total contractual commitments, including debt principal and interest and lease payments. Management planned to fund 2018 needs with cash, operating cash flow, portfolio proceeds, debt issuance, and credit facilities.
- Regulatory tank-car requirements affect approximately 13,450 North American cars used in flammable-liquids service; over 97% have compliance deadlines in 2023 or later. GATX generally expects to retire, redeploy, or sell affected cars rather than retrofit most of them.
- In the Viareggio derailment case, an Italian court issued guilty verdicts against GATX’s Austrian subsidiary and imposed a €1.4 million fine; the subsidiary appealed, and the penalties were not enforceable pending appeal. Most civil claims were settled or expected to be largely covered by insurance. GATX said the ultimate litigation exposure could not be reasonably estimated.
- Recorded litigation accruals were $3.7 million; environmental remediation accruals were $13.1 million across 16 sites. Management did not expect these matters to materially affect consolidated financial position or liquidity, but noted that resolutions could materially affect results in an individual period.
- Other key exposures include market demand and lease rates, railcar oversupply, interest and foreign exchange rates, RRPF affiliate performance and customer concentration, regulatory and environmental costs, litigation, cybersecurity, and access to capital. A 100-basis-point rate increase was estimated to raise 2018 after-tax interest expense by $7.3 million.
Important facts for investors to verify
- Separate recurring operating performance from the $315.9 million Tax Act benefit; compare GAAP results with management’s non-GAAP adjusted earnings.
- Track North American lease renewals, utilization—particularly boxcars—and the pace of improvement in lease rates amid industry oversupply.
- Assess whether planned railcar investment, maintenance spending, and the $927.3 million of purchase commitments can earn adequate returns.
- Monitor cash generation, refinancing needs, leverage including off-balance-sheet lease obligations, and remaining credit-facility availability.
- Follow the Viareggio appeal, asbestos claims, environmental remediation estimates, and any changes to the provisional tax accounting.