GATX Corporation — Q2 2018 Form 10-Q
Business and period: GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its segments are Rail North America, Rail International, Portfolio Management, and American Steamship Company (ASC). This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $349.5 million | $348.4 million | $654.8 million | $664.5 million |
| Net income | $38.8 million | $53.4 million | $115.1 million | $110.9 million |
| Diluted EPS | $1.01 | $1.35 | $2.99 | $2.79 |
| Operating cash flow | Not provided by quarter | $206.7 million | $223.8 million |
- For the first half, GAAP net income rose despite lower revenue. Excluding specified items, non-GAAP net income was $120.9 million versus $109.8 million; adjusted diluted EPS was $3.14 versus $2.76. These are company-defined non-GAAP measures.
- Q2 GAAP net income included $8.6 million of pretax costs ($5.8 million after tax) for closing a Rail International maintenance facility. Q2 2017 included a $1.1 million after-tax gain related to Portfolio Management’s marine exit. Excluding these items, Q2 net income declined year over year.
- First-half cash used in investing was $233.6 million, including $367.0 million of portfolio investments and capital additions, partially offset by $149.0 million of portfolio proceeds. Cash used in financing was $28.0 million. Cash, cash equivalents, and restricted cash ended at $241.1 million.
- At June 30, total debt was $4.414 billion, including $4.398 billion of recourse debt; unrestricted cash was $237.4 million. Shareholders’ equity was $1.818 billion. Company-reported recourse leverage was 2.5x, incorporating off-balance-sheet recourse debt in its calculation.
- GATX had $600 million available under its U.S. unsecured revolver and $250 million available under its secured railcar facility. It reported compliance with all credit covenants and stable BBB/Baa2 long-term unsecured ratings.
Material changes and segment results
- Rail North America: Q2 segment profit fell to $64.2 million from $74.9 million, reflecting lower lease revenue and asset disposition gains. Fleet utilization, excluding boxcars, was 98.9%; the LPI renewal rate change was negative 16.1%. Management cited continued railcar oversupply and a manufacturing backlog as pressure on lease rates. First-half segment profit increased to $173.1 million, supported by higher disposition gains and lower maintenance costs.
- Rail International: Q2 segment profit was $12.8 million versus $16.6 million, including facility-closure costs; utilization at GRE was 97.8%. First-half segment profit increased to $31.8 million, helped by a stronger euro and more cars on lease. The stronger euro added approximately $10.3 million to first-half lease revenue.
- Portfolio Management: Q2 segment profit declined to $11.4 million from $19.8 million, primarily reflecting the absence of earnings from marine assets sold in 2017 and lower managed-portfolio residual sharing, partly offset by higher Rolls-Royce joint-venture earnings. The RRPF affiliates contributed $33.3 million of pretax earnings in the first half.
- ASC: Q2 segment profit increased to $8.0 million from $6.5 million, with higher rates, operating efficiencies, and favorable water levels. First-half freight volume was 9.0 million net tons, versus 9.5 million tons a year earlier.
Outlook, risks, and notable items
- The filing provides no specific full-year earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results: ASC operations are seasonal, and asset remarketing income is uneven. Rail North America’s first-half asset disposition gains represented the majority of management’s expected full-year amount.
- Management reported gradual, broad improvement in European rail markets and favorable railcar demand conditions in North America, while noting North American lease-rate pressure from oversupply. Norgas vessel revenue was affected by lower charter rates, decreased demand, and new market capacity.
- GATX amended its Trinity supply agreement to extend it through December 2023 and committed to an additional 4,800 tank cars beginning in 2020. Total contractual commitments, including debt principal and interest, leases, and purchase commitments, were $8.236 billion at June 30.
- Key disclosed risks include railcar demand and lease-rate conditions, customer defaults and maintenance costs, asset remarketing opportunities, long-term purchase commitments and potential tariffs, foreign-exchange movements, affiliate-investment performance, financing costs, litigation, environmental obligations, and cybersecurity. The company reported no material change in risk factors since year-end. Pending legal matters are described as subject to uncertainty; the filing does not provide a clear quantified exposure.
- Other notable items: foreign currency translation reduced Q2 comprehensive income by $50.4 million, contributing to a comprehensive loss of $7.5 million. The company adopted revenue-recognition guidance with an immaterial impact. It expected to recognize operating-lease right-of-use assets and liabilities upon adopting the new lease standard in 2019; amounts were still under assessment.
Investor verification points
- Track North American utilization and renewal pricing, including whether the negative LPI trend and railcar oversupply persist.
- Assess the repeatability of railcar disposition gains and the sensitivity of reported earnings to remarketing proceeds.
- Monitor the maintenance-facility closure costs, European utilization, and foreign-exchange contribution to Rail International results.
- Review committed railcar purchases, capital spending, debt maturities, and available liquidity against operating cash flow.
- Evaluate RRPF affiliate earnings and Norgas charter-rate and demand trends, as well as litigation and other contingencies as disclosed in subsequent filings.