GATX Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its four segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $316.1 million | $334.4 million; down 5.5% |
| Net income | $57.5 million | $69.3 million; down 17.0% |
| Diluted EPS | $1.44 | $1.66 |
| Operating cash flow | $52.0 million | $79.9 million |
| Investing cash flow | $(156.7) million | $(125.2) million |
| Financing cash flow | $(48.7) million | $58.1 million |
| Quarter-end cash and restricted cash | $159.0 million | $233.5 million |
| Quarter-end total debt | $4.267 billion | $4.272 billion at December 31, 2016 |
Q1 revenue and earnings declined, reflecting lower lease revenue, weaker marine operating results, and higher SG&A. Higher asset disposition gains partly offset the decline. Q1 2016 net income included an approximately $1.5 million after-tax gain related to planned marine-asset exits; excluding that item, 2017 net income was down $10.3 million. The effective tax rate was 30%, versus 33% a year earlier. Dividends declared were $0.42 per share, compared with $0.40.
At March 31, total assets were $7.097 billion and shareholders’ equity was $1.385 billion. Cash and cash equivalents were $155.2 million, in addition to $3.8 million of restricted cash. Recourse debt was $4.251 billion; commercial paper and bank borrowings were $3.0 million, and capital lease obligations were $13.5 million. Management reported non-GAAP recourse leverage of 3.3x. The full $600 million unsecured revolver and $250 million secured railcar facility were available; the company reported compliance with all debt covenants. Credit ratings were BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Operating cash flow fell $27.9 million year over year, mainly due to lower lease revenue and marine contributions, higher operating lease payments, and unfavorable working-capital movements, partly offset by lower interest and tax payments. Investing outflows included $129.0 million of portfolio investments and capital additions and $79.3 million of purchases of leased-in assets; portfolio proceeds were $44.0 million. GATX issued $300 million of 10-year unsecured debt and repaid $300.9 million of debt during the quarter. It repurchased $25.0 million of shares, with $155.0 million remaining under its authorization.
Segment results and material changes
- Rail North America: Segment profit declined to $93.0 million from $108.7 million, primarily on lower lease revenue and higher maintenance costs, partly offset by higher disposition gains. Railcar oversupply, a large manufacturing backlog, and low market utilization continued to pressure lease rates. The Lease Price Index fell 32.6% in Q1; utilization was 99.1% for railcars excluding boxcars, while boxcar utilization declined to 92.9% from 97.1% a year earlier.
- Rail International: Segment profit increased to $13.4 million from $12.6 million, mainly on lower maintenance and legal costs. GRE utilization was 95.0%. A weaker euro reduced reported lease revenue by approximately $1.5 million and segment profit, excluding other income and expense, by approximately $0.7 million.
- ASC: Segment reported a $0.2 million loss versus $0.9 million profit. Freight volume increased to 1.034 million net tons from 0.625 million, but higher operating costs and costs related to returning a leased vessel weighed on results. The sailing season began in late March; management noted mild winter conditions and less Great Lakes ice.
- Portfolio Management: Segment profit decreased to $14.7 million from $18.6 million. The prior period included a $2.4 million gain on marine-asset sales. Excluding that gain, current-period profit was $1.5 million lower, as lower residual-sharing gains and marine results offset higher affiliate earnings. GATX had completed sales of the Nordic vessels, its Cardinal Marine interest, and most inland marine assets; it expected to sell the remaining targeted inland marine assets in 2017.
Outlook, risks, and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management cautioned that Q1 results may not indicate full-year performance, particularly because ASC is seasonally less active in Q1 and asset remarketing income is uneven. Rail North America expected continued pressure on lease rates in the challenging market. Approximately 12,500 term-fleet railcars and 4,550 boxcars were scheduled to expire during the rest of 2017, excluding leases already renewed or reassigned.
Key disclosed risks include railcar oversupply and weak demand, commodity-market changes, lease renewals and customer defaults, maintenance and reassignment costs, asset remarketing and impairment risk, regulatory requirements for tank cars, financing costs and credit ratings, foreign exchange, affiliate investments, environmental obligations, litigation, and cybersecurity. The company reported ordinary-course legal matters but did not provide a clear quantified estimate of potential loss in this filing excerpt. Commercial commitments totaled $20.6 million, including lease guarantees, letters of credit, and performance bonds; GATX reported no known event requiring payment and anticipated no material claims or losses. Contractual purchase commitments totaled $1.076 billion, primarily for railcars. The company also expected to recognize $4.3 million of tax benefits from unrecognized tax benefits within the next 12 months, subject to resolution of tax matters.
Investor facts to verify
- Whether persistent North American railcar oversupply continues to pressure renewal rates and boxcar utilization.
- Upcoming 2017 lease expirations, renewal outcomes, and maintenance or transition costs on reassigned cars.
- Cash generation relative to investment needs, debt maturities, and the substantial purchase commitments.
- Progress and proceeds from planned remaining marine-asset sales and any related gains or losses.
- Developments in pending litigation, regulatory requirements, and tax matters, including the expected tax benefit.