GATX CORP quarterly report, Q3 FY2017

GATX Corporation — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. GATX leases, operates, manages, and remarkets assets, primarily railcars. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. Amounts below are in U.S. dollars.

Financial results

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Revenue	$359.6 million	$362.9 million	$1,024.1 million	$1,056.2 million
Net income	$49.0 million	$95.7 million	$159.9 million	$226.2 million
Diluted EPS	$1.25	$2.36	$4.04	$5.49
Operating cash flow	Not stated for the quarter	Not stated for the quarter	$317.5 million	$435.5 million

Revenue declined 0.9% in Q3 and 3.0% year to date. Net income fell 48.8% in Q3 and 29.3% year to date. Management reported adjusted diluted EPS, excluding specified tax adjustments and other items, of $1.25 versus $1.50 for Q3 and $4.01 versus $4.61 for the first nine months.
Major year-over-year earnings comparisons reflect unusually high 2016 Portfolio Management gains, including $49.1 million from a residual-sharing settlement in Q3 2016. Total asset disposition gains were $9.4 million in Q3 2017 versus $62.7 million, and $56.3 million year to date versus $122.8 million.
Net margin, calculated as net income divided by revenue, was approximately 13.6% in Q3 2017 versus 26.4% in Q3 2016, and 15.6% for the first nine months versus 21.4%. The filing does not present a single consolidated operating-margin measure.
Operating cash flow decreased $118.0 million year to date. Portfolio investments and capital additions were $459.0 million; investing activities used $306.3 million. Financing activities used $122.5 million, including $75.0 million of share repurchases and $51.8 million of dividends.
At September 30, cash and cash equivalents were $199.2 million; total debt, including capital leases and short-term borrowings, was $4,295.2 million. Shareholders’ equity was $1,470.2 million. Adjusted recourse leverage, including off-balance-sheet recourse debt and net of unrestricted cash, was 3.1x.
GATX reported $850 million available across its $600 million U.S. revolving facility and $250 million secured railcar facility. It was in compliance with credit covenants; long-term debt ratings were BBB at S&P and Baa2 at Moody’s, both with stable outlooks.

Performance changes and segment trends

Rail North America: Q3 segment profit fell to $70.2 million from $87.9 million; nine-month profit was $238.1 million versus $273.4 million. Lower lease revenue and Q3 disposition gains, higher maintenance costs, and increased interest expense weighed on results. Railcar utilization, excluding boxcars, was 98.5% at quarter-end, while the Lease Price Index fell 27.0% on renewals during Q3. Management cited railcar oversupply and a large manufacturing backlog.
Rail International: Nine-month segment profit rose to $50.1 million from $48.9 million, supported by higher lease revenue and lower maintenance costs. Q3 profit declined to $20.1 million from $23.3 million, partly because prior-year results included insurance proceeds. GRE utilization was 95.6%.
ASC: Nine-month segment profit increased to $18.4 million from $12.9 million. Higher freight volume and favorable commodity mix helped; 19.3 million net tons were carried versus 18.2 million. Twelve vessels operated in Q3, one more than a year earlier.
Portfolio Management: Nine-month segment profit was $47.3 million versus $119.2 million; Q3 profit was $12.8 million versus $64.1 million. Comparisons were affected by the prior-year residual-sharing settlement and lower marine activity. RRPF affiliate earnings increased to $38.8 million year to date from $32.0 million.

Outlook, risks, and unusual items

The filing provides no quantified full-year earnings or revenue guidance. Management cautioned that nine-month results may not indicate full-year performance: ASC is seasonally affected by Great Lakes winter conditions, and asset remarketing income is uneven.
Management expected to complete sales of remaining targeted inland marine assets in 2017. Portfolio Management had $19.2 million of assets held for sale at September 30; all assets classified as held for sale were expected to be sold during 2017.
GATX recorded a $4.3 million income-tax benefit from releasing a liability for unrecognized tax benefits, partly offset by a $3.1 million deferred state tax adjustment following an Illinois tax-rate change.
GATX early terminated its corporate headquarters lease during the quarter, recording accelerated depreciation on leasehold improvements and related costs.
In the Viareggio derailment case, an Italian court had issued guilty verdicts against GATX Rail Austria and others. GATX Rail Austria appealed on October 14, 2017; fines and penalties were not enforceable pending appeal. The company could not reasonably estimate the ultimate litigation cost, though it said most settled civil claims were covered by insurers and remaining damages were immaterial.
Principal stated risks include railcar oversupply and weaker lease rates, economic or commodity-demand changes, maintenance and reassignment costs, asset remarketing opportunities, regulatory requirements for tank cars, financing costs and credit ratings, foreign-exchange exposure, environmental liabilities, and litigation.

Most important facts for investors to verify

Whether railcar lease rates and renewal pricing stabilize, and whether North American utilization remains high as leases expire.
How much of the earnings decline reflects recurring operating trends versus the unusually large 2016 residual-sharing settlement and disposition gains.
Whether operating cash flow can support investment spending, debt service, dividends, and repurchases; year-to-date operating cash flow was below the prior year while investment spending increased.
Progress on planned marine-asset sales and performance of the remaining Norgas vessels and RRPF affiliates.
Developments in the Viareggio appeal and any resulting uninsured costs or other material contingencies.