GATX Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. GATX leases, operates, manages, and remarks railcars and other long-lived assets, and reports four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $334.4 million | $319.7 million |
| Net income | $69.3 million | $62.2 million |
| Diluted EPS | $1.66 | $1.39 |
| Operating cash flow | $77.5 million | $55.8 million |
| Cash and cash equivalents at period end | $216.2 million | $351.4 million |
| Total debt at period end | $4,343.8 million | $4,204.2 million at Dec. 31, 2015 |
- Revenue rose 4.6% year over year; lease revenue was $284.5 million, marine operating revenue $20.3 million, and other revenue $29.6 million.
- Net income included a $1.5 million after-tax gain related to the planned exit from most Portfolio Management marine investments. Excluding that item, net income was $67.8 million and diluted EPS $1.62, versus $62.2 million and $1.39, respectively, in Q1 2015.
- Net gain on asset dispositions fell to $23.2 million from $45.3 million. Interest expense, net, declined to $37.2 million from $40.9 million.
- Cash used in investing activities was $125.2 million, including $140.2 million of portfolio investments and capital additions and $92.8 million of purchases of leased-in assets; portfolio proceeds were $98.4 million. Financing activities provided $60.5 million. The company repurchased $50.0 million of shares and paid $18.1 million in dividends.
- At March 31, total assets were $7,062.0 million and shareholders’ equity $1,305.3 million. The $575 million U.S. revolving credit facility was fully available; GATX reported compliance with its debt covenants and stable outlooks on its BBB and Baa2 long-term ratings.
Material changes and segment trends
- Rail North America: Segment profit rose to $108.7 million from $105.8 million, supported by higher lease revenue and fees and lower maintenance expense, partly offset by lower disposition gains. Fleet utilization excluding boxcars was 98.9%, down from 99.3% a year earlier. The renewal Lease Price Index increase slowed to 6.4% from 43.2% in Q1 2015; renewal success declined to 67.5% from 84.8%.
- Rail International: Segment profit fell to $12.6 million from $21.8 million, reflecting higher wheelset and other maintenance costs, foreign exchange impacts, and the absence of a prior-year workshop-sale gain. Utilization at GATX Rail Europe was 95.1%.
- ASC: Segment profit improved to $0.9 million from a $0.4 million loss, mainly because of fewer weather-related delays and lower operating expense. Freight carried declined to 625,000 net tons from 784,000.
- Portfolio Management: Segment profit increased to $18.6 million from $15.9 million, including a $2.4 million pre-tax gain on marine asset sales. GATX received $37.6 million in proceeds from first-quarter marine sales and had $69.6 million of marine assets held for sale at quarter end.
Outlook, risks, and unusual items
- The filing provides no consolidated earnings guidance. Management expects to sell the remaining targeted marine investments during 2016. It also expects lower iron ore demand and shipments to continue affecting ASC through 2016.
- Management described North American rail markets as increasingly challenging, citing railcar oversupply, excess manufacturing capacity, weaker loadings for some commodities, and faster railroad velocity, all of which pressure lease rates, renewals, and new placements.
- About 13,500 North American tank cars in GATX’s fleet are affected by flammable-liquids regulations, including about 4,100 used for crude oil and ethanol. More than 90% of affected cars have compliance deadlines in 2023 or later; management expects to retrofit some and retire, redeploy, or sell most of the remainder.
- The Viareggio derailment case in Italy remains ongoing. Approximately 80 civil claimants had not settled and are parties to the trial. GATX Rail Austria had incurred about $14.7 million of unreimbursed defense costs at March 31; it received a partial arbitration award and is pursuing insurance reimbursement. The company stated it cannot reasonably estimate the ultimate loss, if any.
- Other disclosed risks include lease-rate and utilization pressure, commodity-related demand changes, railcar purchase commitments, regulatory compliance costs, foreign exchange movements, capital-market access and financing costs, and litigation or environmental exposures. The filing said risk factors had not materially changed since year-end.
- A prospective pension accounting-estimate change is expected to reduce 2016 service and interest costs by approximately $4.5 million pre-tax ($2.8 million after tax) versus the prior method.
Key facts for investors to verify
- Whether North American fleet utilization, lease renewal pricing, and renewal success continue to weaken.
- Progress on marine asset sales and the timing and proceeds from remaining dispositions.
- Rail International wheelset remediation costs and recovery under supplier warranties.
- Capital spending and railcar purchase commitments, alongside debt growth, repurchases, and liquidity.
- Developments in the Viareggio trial and insurance reimbursement negotiations, including any change to the currently unestimable exposure.