GATX Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. GATX leases, operates, manages, and remarkets rail and marine assets and invests in related joint ventures. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. Figures are in U.S. dollars; financial statements are unaudited.
Financial results and liquidity
| Metric | Third quarter 2015 | Third quarter 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $386.2 million | $397.2 million | $1,071.2 million | $1,049.6 million |
| Net income | $39.5 million | $51.3 million | $147.1 million | $146.5 million |
| Diluted EPS | $0.91 | $1.14 | $3.33 | $3.18 |
| Net cash from operating activities | Not presented quarterly | $312.0 million | $285.3 million |
- Revenue mix and performance: Nine-month lease revenue increased to $845.1 million from $804.0 million, while marine operating revenue fell to $167.8 million from $188.8 million. Management attributed improved adjusted earnings principally to higher Rail North America lease rates and gains, partly offset by euro weakness and lower ASC iron ore business.
- Cash flow and investment: Nine-month investing cash outflow was $293.6 million, compared with $760.4 million in 2014, as portfolio investments and capital additions declined to $498.3 million from $826.6 million. Portfolio proceeds were $298.2 million, up from $181.8 million. Cash and cash equivalents decreased $93.9 million during the period to $116.0 million.
- Debt and liquidity: Total debt was $4.302 billion at September 30, 2015, versus $4.274 billion at year-end 2014; recourse debt was $4.271 billion. The company had $561 million available under its $575 million U.S. revolving credit facility, with $14 million of commercial paper outstanding. It reported compliance with all credit covenants; ratings outlooks were stable (S&P BBB long-term, Moody’s Baa2).
- Equity returns: Shareholders’ equity was $1.269 billion, down from $1.314 billion at year-end 2014. GATX repurchased $105.0 million of shares and paid $51.9 million in dividends during the first nine months. Declared dividends were $1.14 per share versus $0.99 in the prior-year period.
- Margins: The filing does not provide a single consolidated operating-margin measure. Segment profit, an internal non-GAAP performance measure, totaled $353.1 million for the first nine months, compared with $348.3 million.
Material changes versus the prior comparable period
- Third-quarter revenue decreased $11.0 million year over year, while nine-month revenue rose $21.6 million. Third-quarter net income fell $11.8 million; nine-month net income was broadly unchanged.
- Reported 2015 results included a $49.8 million pretax impairment related to the planned exit of most Portfolio Management marine investments: $30.8 million on vessels and $19.0 million on the Cardinal Marine affiliate. The resulting net-income adjustment was $26.6 million. Excluding these items, management reported third-quarter net income of $66.1 million and nine-month net income of $173.7 million, versus $51.3 million and $146.5 million, respectively, in 2014. These are company-defined non-GAAP measures.
- Rail North America nine-month segment profit increased to $280.7 million from $237.3 million, supported by higher lease rates and the boxcar fleet acquired in 2014. Rail International profit declined to $56.4 million from $59.8 million, with a weaker euro reducing nine-month lease revenue by approximately $25.1 million and segment profit (excluding other income and expense) by approximately $13.3 million.
- ASC nine-month segment profit declined to $13.4 million from $17.1 million, primarily due to lower shipments of higher-margin long-haul iron ore. Portfolio Management reported a $17.3 million third-quarter segment loss versus $16.7 million profit, chiefly reflecting marine-asset impairments and exit-related losses.
- Operating cash flow improved by $26.7 million year over year. Net cash used in investing activities and portfolio investment volume were substantially lower than in 2014, which included the approximately $340 million boxcar fleet acquisition.
Outlook, risks, contingencies, and unusual items
- Management expected ASC’s full-year 2015 segment profit to be below 2014, driven by reduced iron ore tonnage. GATX expected to complete sales of the targeted Portfolio Management marine assets by year-end 2015, with aggregate proceeds for the targeted assets expected to be approximately $250 million; further gains were expected to partially offset the third-quarter impairments.
- Rail North America management anticipated softer conditions for some car types. Renewal lease-rate increases remained positive, but the company noted particular weakness in some categories, including coal cars. At quarter-end, utilization was 99.2% for the fleet excluding boxcars and 96.6% for boxcars.
- New U.S. and Canadian rules require design changes, modification, or removal from flammable-liquid service for affected tank cars over specified timelines. GATX had approximately 14,000 affected North American tank cars, including approximately 4,500 used for crude oil and ethanol; it had not determined how many would be modified, repurposed, or retired. Most affected cars had compliance deadlines in 2023 or later. U.S. rule challenges and petitions were pending.
- Contractual commitments totaled $6.759 billion, including $1.730 billion of portfolio investments, primarily railcar purchase commitments. A supply agreement provides for purchases of up to 8,950 new railcars from 2016 through 2020, with pricing and termination provisions described in the filing.
- The Viareggio derailment litigation in Italy remains unresolved. GATX said it could not reasonably estimate a potential loss and had recorded no accrual. Approximately $10.6 million of legal defense costs remained unreimbursed at quarter-end; an arbitration hearing against an insurer was scheduled for November 2015.
- Commercial commitments were $32.5 million, with $4.4 million of related balance-sheet liabilities. The company reported no known event requiring it to satisfy these commitments and anticipated no material losses on letters of credit or performance bonds.
- Management cautioned that results may vary with asset remarketing timing, demand and lease rates, economic conditions, crude-oil market effects, regulation, financing costs, foreign exchange, asset impairments, litigation, environmental costs, and other disclosed risks. Nine-month results were not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile reported earnings with the $49.8 million pretax marine-related impairment and review the company’s non-GAAP adjustments.
- Track completion, proceeds, and any additional gains or losses from the planned marine-investment sales.
- Monitor ASC’s iron ore volumes and full-year performance, and North American railcar demand, lease renewals, and utilization.
- Assess the cost and timing of tank-car regulatory compliance and the company’s substantial railcar purchase commitments.
- Follow the Viareggio trial and insurance reimbursement proceedings, including potential exposure that GATX says cannot currently be estimated.
- Review debt maturities, liquidity, covenant compliance, and the effect of future investment and shareholder-return decisions on leverage.