GATX Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. GATX leases, operates, manages, and remarkets long-lived assets, primarily railcars. Its segments are Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $348.4 million | $358.9 million | $664.5 million | $693.3 million |
| Net income | $53.4 million | $61.2 million | $110.9 million | $130.5 million |
| Diluted EPS | $1.35 | $1.49 | $2.79 | $3.15 |
| Net gains on asset dispositions | $22.0 million | $36.9 million | $46.9 million | $60.1 million |
| Interest expense, net | $40.0 million | $36.5 million | $79.2 million | $73.7 million |
For the first six months, operating cash flow was $224.2 million, down from $241.3 million. Investing activities used $169.9 million, including $295.3 million of portfolio investments and capital additions, offset partly by portfolio proceeds and $90.7 million of sale-leaseback proceeds. Cash, cash equivalents, and restricted cash ended the period at $288.0 million.
At June 30, total debt was $4.290 billion, including $4.261 billion of recourse debt, $15.7 million of commercial paper and bank-facility borrowings, and $13.1 million of capital leases. Unrestricted cash was $284.3 million; shareholders’ equity was $1.443 billion. The company reported non-GAAP recourse leverage of 3.1x. Its $600 million unsecured revolving facility and $250 million secured railcar facility were fully available. GATX reported compliance with all credit covenants; long-term debt ratings were BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Changes versus prior comparable period
- Q2 revenue fell 2.9% and net income fell 12.7% year over year. First-half revenue declined 4.2% and net income declined 15.0%.
- Management attributed lower consolidated earnings primarily to reduced lease revenue from lower lease rates and fewer railcars on lease, and lower disposition gains. Prior-year Portfolio Management results included sizeable residual-sharing fees.
- Rail North America first-half segment profit declined to $167.9 million from $185.5 million, despite higher disposition gains, as lower lease revenue and higher maintenance costs weighed on results. Fleet utilization excluding boxcars was 98.8%; boxcar utilization fell to 90.2% from 97.1% a year earlier.
- Rail International first-half segment profit rose to $30.0 million from $25.6 million, largely on lower maintenance and legal costs. GRE railcar utilization was 95.7%.
- ASC first-half segment profit increased to $6.3 million from $5.1 million, supported by freight rates, commodity mix, and operating efficiency. Freight volume was broadly comparable year over year.
- Portfolio Management first-half segment profit declined to $34.5 million from $55.1 million, mainly due to lower residual-sharing gains and weaker marine operating results, partly offset by increased earnings from the Rolls-Royce joint ventures.
Outlook, commentary, and risks
- The filing provides no specific full-year earnings or revenue guidance. Management cautioned that first-half results may not indicate full-year performance: ASC operations are seasonally affected by Great Lakes winter conditions, and asset remarketing income is uneven.
- North American rail leasing remained challenged by excess railcar supply and a substantial manufacturing backlog. Management said utilization remained high but lease-rate pressure persisted. The Lease Price Index for renewals fell 21.4% in Q2; approximately 8,750 term-lease railcars and 3,500 boxcars were scheduled to expire during the remainder of 2017, excluding units already renewed or reassigned.
- GATX continued its planned exit from most Portfolio Management marine investments, expecting to sell remaining targeted inland marine assets in 2017. Norgas vessel results faced lower rates and utilization, including customer supply disruptions.
- Management cited risks including railcar supply-demand imbalances, economic and commodity exposure, lease renewals and customer defaults, asset remarketing and impairment risk, long-term railcar purchase commitments, foreign exchange, interest rates and funding costs, regulation, environmental remediation, litigation, insurance, and cybersecurity.
- Contractual commitments totaled $7.722 billion, including debt principal and interest, leases, and purchase commitments; purchase commitments were primarily for railcars. The company had $18.4 million of commercial commitments and reported no known event requiring payment. Various legal claims and contingencies remained pending; outcomes were uncertain.
- After quarter-end, Illinois enacted an increase in its corporate income tax rate, effective July 1, 2017. GATX was evaluating the effect on deferred tax liabilities and expected to record any required adjustment in Q3.
- GATX repurchased $50.0 million of shares in the first half, with $130.0 million remaining under its authorization, and declared $0.84 per share of dividends for the first half.
Most important facts to verify
- Whether railcar lease rates and renewal pricing stabilize amid oversupply, and how expirations and boxcar utilization develop.
- How much future earnings depend on asset disposition gains and Portfolio Management residual-sharing income versus recurring lease and affiliate earnings.
- Execution and proceeds from planned marine asset sales, and the performance of the remaining Norgas vessels and Rolls-Royce affiliates.
- Debt refinancing, interest expense, liquidity, and compliance with financing covenants as purchase commitments and investment needs continue.
- The eventual financial effect of the Illinois tax-rate increase and the resolution of pending legal and other contingencies.