GATX CORP quarterly report, Q3 FY2014

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GATX Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2014. GATX leases, operates, manages, and remarkets rail and marine assets and invests in related joint ventures. Results are reported across Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. Amounts below are in millions except per-share data and percentages.

Financial performance and liquidity

  • Revenue: Third-quarter revenue was $397.2, up 12.5% from $353.2 a year earlier. Nine-month revenue was $1,049.6, up 8.8% from $964.4. Nine-month lease revenue increased to $804.0 from $722.9; marine operating revenue declined to $188.8 from $190.8.
  • Profit and EPS: Third-quarter net income was $51.3 versus $53.8; diluted EPS was $1.14 versus $1.15. Nine-month net income rose to $146.5 from $116.0, and diluted EPS to $3.18 from $2.45. The 2013 nine-month comparison included $4.5 of tax adjustments and other items; excluding those items, 2013 net income was $111.5 and diluted EPS was $2.36.
  • Drivers: Management attributed the nine-month earnings improvement mainly to the acquired boxcar fleet, higher lease rates, and higher Rail North America asset remarketing income. Higher Rail North America maintenance costs, weaker ASC results, and lower Portfolio Management remarketing income partly offset those gains. Third-quarter results also faced lower Rail North America asset remarketing income.
  • Cash flow and investment: Nine-month operating cash flow was $285.3, versus $253.0. Investing used $760.4, including $826.6 of portfolio investments and capital additions; financing provided $155.6. Cash declined by $320.3 to $59.4, from $379.7 at year-end 2013. Portfolio proceeds were $181.8, down from $286.6.
  • Debt and liquidity: Total debt was $4,165.4 at September 30, versus $3,871.0 at December 31, 2013; recourse debt was $4,081.8. The $575 credit facility had $525 of available capacity, with $50 of commercial paper outstanding. GATX reported compliance with its debt covenants and stable outlooks on its BBB / Baa2 long-term ratings.
  • Balance sheet and returns: Total assets were $6,816.3, up from $6,549.6; shareholders’ equity was $1,331.2, down from $1,397.0. Trailing-twelve-month ROE was 15.1%, compared with 11.5%.
  • Margins: The filing text does not provide a clear consolidated operating-margin figure.

Material changes and segment results

  • Rail North America: Nine-month segment profit increased to $237.3 from $156.4, with revenue of $682.1 versus $605.2. The purchase of more than 18,500 boxcars for about $340.0 contributed to growth. Ex-boxcar fleet utilization was 98.8%; boxcar utilization was 91.3%. Renewal lease prices in the company’s index were 46.9% above expiring rates in the third quarter.
  • Rail International: Nine-month segment profit fell to $59.8 from $77.8. The prior year included the AAE sale and related swap gains; excluding those items, management said profit declined $1.0. European fleet utilization was 95.1%, down from 96.3% a year earlier, amid weak economic conditions.
  • ASC: Nine-month segment profit declined to $17.1 from $23.8 after severe winter and spring conditions limited early-season operations. Third-quarter profit improved to $15.2 from $12.9 as demand, water levels, freight volumes, and vessel deployment improved.
  • Portfolio Management: Nine-month segment profit decreased to $40.1 from $47.5, mainly because of lower asset disposition gains, partly offset by increased affiliate earnings. RRPF affiliate contributions to segment profit rose to $37.2 for nine months from $31.7.
  • Comprehensive income: Third-quarter comprehensive income was $5.5 versus $104.9, primarily reflecting a $48.1 foreign-currency translation loss, compared with a $32.9 gain in the prior-year quarter.

Outlook, unusual items, and risks

  • For the remainder of 2014, management expected higher Rail North America lease revenue from higher rates and higher maintenance expense as tank-car compliance work progressed. Approximately 10,000 railcars were scheduled to expire, with management expecting strong renewal success, particularly for tank cars.
  • A 2014 change in estimated North American railcar useful lives increased average depreciable life by about 2.2 years. It reduced depreciation expense by $16.5 and increased nine-month net income by $10.5, or $0.23 per diluted share. The expected full-year benefit was $14.0 of net income, or about $0.30 per diluted share.
  • After quarter-end, GATX agreed to purchase up to 8,950 new railcars from 2016 through 2020, with most expected to be tank cars. It also issued $250 of 2.6% senior notes due 2020, intending to use proceeds for debt repayment and general corporate purposes.
  • Proposed and Canadian tank-car regulations could require modifications, repurposing, or retirement of cars. GATX said it could not yet assess the eventual scope or cost; approximately 4,900 of its North American tank cars were then used for crude oil and ethanol.
  • The Viareggio derailment litigation in Italy involved fatal injuries and property damage. The company could not estimate a possible loss and had recorded no accrual. Approximately $6.7 of defense fees remained unreimbursed amid an insurer dispute. The filing also reported $39.1 of commercial commitments, with $5.5 of related balance-sheet liabilities, and stated no known event requiring performance.
  • Other disclosed risks included weak European conditions, marine-market challenges, tank-car compliance costs, access to capital and financing costs, asset utilization and remarketing, affiliate performance, and litigation. Management noted that interim results may not indicate full-year results, in part because of Great Lakes seasonality and uneven timing of asset remarketing.

Important facts for investors to verify

  • Whether strong North American renewal rates and utilization continue to offset elevated fleet maintenance and tank-car compliance costs.
  • The final PHMSA and Transport Canada tank-car rules, and GATX’s resulting retrofit, retirement, or investment requirements.
  • The sustainability of earnings growth after accounting for the useful-life estimate benefit and asset disposition gains.
  • Cash needs and leverage as the company funds railcar purchases, contractual commitments, share repurchases, and debt maturities; contractual commitments totaled $6,061.1, including $1,052.3 of portfolio investments, primarily railcar purchase commitments.
  • Developments in the Viareggio trial and insurance reimbursement dispute, along with the performance of key affiliates and marine operations.