GATX Corporation — Q2 2013 Form 10-Q
Business context and period: GATX leases, operates, manages and remarkets rail and marine assets, with businesses in Rail North America, Rail International, American Steamship Company (ASC) and Portfolio Management. This unaudited report covers the quarter and six months ended June 30, 2013; amounts are in millions except per-share data.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $338.9 | $323.1 | $611.2 | $579.6 |
| Net income | $35.1 | $23.5 | $62.2 | $53.8 |
| Diluted EPS | $0.74 | $0.49 | $1.31 | $1.13 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $128.9 | $112.3 |
| Capital additions and portfolio investments | Not stated for quarter | Not stated for quarter | $470.6 | $391.8 |
- Reported net income included positive tax adjustments and other items of $3.0 in Q2 2013 versus negative $15.3 in Q2 2012; for the first half, the respective effects were positive $1.7 and negative $17.5. Excluding these items, Q2 net income was $32.1 versus $38.8, and first-half net income was $60.5 versus $71.3. Adjusted diluted EPS was $0.68 versus $0.80 for Q2 and $1.27 versus $1.49 for the first half. These are non-GAAP measures.
- Q2 total expenses were $281.5 versus $260.2; net gains on asset dispositions were $19.6 versus $18.3, and net interest expense was $43.2 versus $41.6. No consolidated operating or net margin is expressly reported.
- At June 30, cash and cash equivalents were $96.7, down from $234.2 at year-end 2012. Total debt was $3,676.9, up from $3,567.9; recourse debt was $3,546.4. Total assets were $6,119.2 and shareholders’ equity $1,219.1.
- First-half investing cash outflow was $291.2; financing provided $26.8. Cash decreased $137.5 during the six months. Portfolio proceeds were $168.2, versus $227.1 a year earlier.
- The company had the full $575 million available under its new five-year unsecured revolving credit facility at quarter-end and reported compliance with all debt covenants. Long-term unsecured debt ratings were BBB (S&P) and Baa2 (Moody’s), both with stable outlooks.
Material changes and segment performance
- Revenue rose 4.9% in Q2 and 5.5% in the first half year over year, led by higher lease revenue. Reported net income improved, but adjusted earnings declined, reflecting higher maintenance and SG&A costs, higher depreciation in Q2 and lower first-half remarketing activity.
- Rail North America Q2 revenue increased to $201.1 from $188.7, while segment profit declined to $48.2 from $53.2, mainly from maintenance costs and timing of asset sales. North American railcar utilization was 98.2%; tank-car demand and lease pricing were strong, while some coal- and grain-related car types remained weak.
- Rail International Q2 segment profit was $24.4 versus a $3.6 loss, substantially reflecting AAE interest-rate swap gains compared with losses in 2012. Excluding those swap effects, management reported an $8.4 increase. European demand remained affected by a weak economy; utilization was 95.6%.
- ASC Q2 segment profit declined to $10.1 from $14.0, with lower freight volume and fuel surcharges and a less favorable mix of iron-ore tonnage. For 2013, management expected freight volume modestly below 2012’s 29.7 million net tons.
- Portfolio Management Q2 segment profit rose to $17.3 from $14.6, helped by higher asset-sale gains and revenue from vessels received after ending the Singco and Somargas joint ventures. First-half profit declined to $29.8 from $36.6.
Outlook, risks and unusual items
- Management expected asset remarketing gains to increase in the second half of 2013, citing strong demand for assets. It also expected continued pursuit of higher North American tank-car lease rates and longer terms. No consolidated earnings or revenue guidance is provided in the filing.
- Regulatory railcar compliance work was increasing and expected to rise further through 2013, adding maintenance costs. Management also cited long-term railcar purchase commitments, financing-market and rating risks, lease pricing and utilization, operating costs, international-market risks, and timing of remarketing income.
- In April, GATX ended its Singco and Somargas marine affiliates, paid about $101 million primarily to settle its share of external debt, and received five vessels and working capital. The vessels continue in a pooling arrangement managed by its former partner.
- The Viareggio derailment proceedings in Italy advanced to trial for GATX Rail Austria and employees. Most asserted civil damage claims had been settled, but approximately 120 claims were brought in the preliminary proceeding. Insurance coverage for some defense costs is disputed. GATX said the loss could not be reasonably estimated and recorded no accrual.
- ASC faces ballast-water regulation uncertainty. Most of its Great Lakes vessels were exempt from numeric treatment limits under the 2013 U.S. permit, but the permit allows reopening; the leased-in Lakes Contender is subject to a treatment-system requirement at its first scheduled dry-docking after January 1, 2016. Management said suitable systems were not then available for Great Lakes conditions.
- Commercial commitments totaled $59.0 at June 30, including $37.9 of lease-payment guarantees and $15.4 of standby letters of credit. The company reported no material claims on performance bonds or letters of credit and anticipated no material losses.
- GATX repurchased $50.0 of common stock in the first half and had $18.6 remaining under its authorization at June 30. Both preferred-stock series were retired during Q2 through conversion or redemption.
Important facts for investors to verify
- Whether the expected second-half increase in remarketing gains materialized, and how much earnings depend on asset-sale timing.
- Rail compliance maintenance costs, lease renewals and pricing, especially for coal- and grain-related cars; monitor utilization and renewal terms.
- AAE swap gains and losses and their effect on reported versus adjusted earnings.
- Developments in the Viareggio trial, insurance reimbursement and any eventual loss exposure; the filing provides no clear estimate.
- Funding needs and liquidity relative to debt maturities, operating-lease obligations and railcar purchase commitments.
- Potential cost or operational effects of ballast-water requirements on ASC vessels.