GATX CORPORATION OVERVIEW
We lease, operate, manage, and remarket long-lived, widely-used assets, primarily in the rail market. We report our financial results through four primary business segments:Rail North America ,Rail International , Portfolio Management, andAmerican Steamship Company ("ASC"). OnFebruary 7, 2020 , we entered into an agreement to sell ASC. The sale is subject to customary closing conditions. See "Note 25. Subsequent Events" in Part II, Item 8 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and "Note 16. Subsequent Events" in Item 1 of this Form 10-Q for additional information. The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We based the discussion and analysis that follows on financial data we derived from the financial statements prepared in accordance withU.S. Generally Accepted Accounting Standards ("GAAP") and on certain other financial data that we prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see "Non-GAAP Financial Measures" at the end of this item. Operating results for the three months endedMarch 31, 2020 are not necessarily indicative of the results we may achieve for the entire year endingDecember 31, 2020 . In particular, ASC's fleet is inactive for a significant portion of the first quarter of each year due to winter conditions on theGreat Lakes . In addition, asset remarketing income does not occur evenly throughout the year. For more information, refer to the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Coronavirus Disease 2019 ("COVID-19")
COVID-19 had limited impact on our first quarter results. However, we expect COVID-19 will negatively impact our operating results in future periods, the magnitude and duration of which cannot be determined at this time. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. These actions have caused many businesses to reduce or suspend operations, negatively impacting economic conditions and many of the markets we serve. Our first priority has been ensuring the health and safety of our global workforce and serving our various stakeholders with minimal disruptions. Across our operating segments, we have robust business continuity and crisis management plans which have been implemented. We have a strong liquidity position, balance sheet, and access to capital which we expect will enable GATX to effectively manage through the COVID-19 pandemic. The COVID-19 pandemic continues to evolve rapidly, including the scope and duration of disruptions and the shape and timing of the eventual recovery. We cannot, at this time, reasonably estimate the impact this will have on our future results and have thus suspended our previously announced full-year 2020 earnings guidance.
Industry railcar loadings have declined as the impact of COVID-19 has disrupted global manufacturing, supply chains, and consumer spending. We expect the reduction in economic activity to continue to impact our customers, which we expect, in turn, to impact the demand for our global railcar fleet. Rail freight transportation and railcar repair have been deemed essential businesses globally. Our rail operations teams have initiated COVID-19 preparation and response programs to ensure the health and safety of our employees while continuing to provide critical railcar maintenance services. While our railcar repair facilities continue to operate, some have periodically reduced operating levels or closed on a temporary basis, and future disruptions may occur as the impact of COVID-19 continues to develop.
Global air travel has been significantly impacted by COVID-19. In response to
the drastic decline in demand, airlines have reduced system-wide capacity and
grounded large portions or all of their fleets. Many airlines are currently
focused on managing their near-term liquidity positions, restructuring
operations, and obtaining government financial support. We expect the major
reduction in global air
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ASC
COVID-19 has impacted the markets that ASC serves on theGreat Lakes . The closing of steel blast furnaces, automobile manufacturing, postponement of limestone facility openings, and continued decline in coal have all impacted ASC's customer demand. We expect these developments will have a negative impact on our future operating results, the magnitude and duration of which cannot be determined at this time.
DISCUSSION OF OPERATING RESULTS
The following table shows a summary of our reporting segments and consolidated financial results (in millions, except per share data):
Three Months Ended
March 31
2020 2019
Segment Revenues
Rail North America $ 235.7 $ 248.3
Rail International 60.1 54.2
Portfolio Management 3.6 2.8
ASC 9.5 11.7
$ 308.9 $ 317.0
Segment Profit
Rail North America $ 72.0 $ 68.4
Rail International 13.9 14.8
Portfolio Management 19.5 12.3
ASC 0.9 2.5
106.3 98.0
Less:
Selling, general and administrative expense 42.4 46.1
Unallocated interest (income) expense (1.3 ) (1.7 ) Other, including eliminations 1.7
0.2
Income taxes (includes$4.3 and$3.5 related to 17.2 11.9 affiliates' earnings) Net Income (GAAP)$ 46.3 $ 41.5 Diluted earnings per share (GAAP)$ 1.31 $ 1.12 Investment Volume$ 194.7 $ 147.3 The following table shows our return on equity ("ROE") for the trailing 12 months endedMarch 31 : 2020 2019 ROE (GAAP) 11.9 % 9.7 %
ROE, excluding tax adjustments and other items (non-GAAP) (1) 13.8 % 11.0 %
_________
(1) See "Non-GAAP Financial Measures" at the end of this item for further
details.
Net income for the first three months of 2020 was$46.3 million , or$1.31 per diluted share, compared to$41.5 million , or$1.12 per diluted share, in 2019. Net income increased$4.8 million compared to the prior year, largely due to higher asset disposition gains atRail North America and higher affiliate income, partially offset by higher maintenance expenses and lower revenue. 19 --------------------------------------------------------------------------------
Segment Operations
Segment profit is an internal performance measure used by the Chief Executive
Officer to assess the profitability of each segment. Segment profit includes all
revenues, expenses, pre-tax earnings from affiliates, and net gains on asset
dispositions that are directly attributable to each segment. We allocate
interest expense to the segments based on what we believe to be the appropriate
risk-adjusted borrowing costs for each segment. Segment profit excludes selling,
general and administrative expenses, income taxes, and certain other amounts not
allocated to the segments. These amounts are included in Other.
RAIL NORTH AMERICA
Segment Summary
During the quarter ended March 31, 2020 , decreased railcar loadings and
increased railroad velocity persisted in the North American railcar leasing
market. Despite this environment, Rail North America was able to maintain strong
utilization throughout the quarter. Rail North America began to see impacts of
COVID-19 in late March as industry railcar loadings across commodities began to
decline in response to the dramatic reduction in overall economic activity.
While the impact of COVID-19 on Rail North America's first quarter results was
limited, we expect COVID-19 to have a negative impact on our railcar
utilization, lease rates, maintenance expense, and other key performance
metrics. We also anticipate the secondary market for selling railcars to be more
limited in the near term. Additionally, certain of our customers have requested
deferral of lease payments, lease rate reductions, and delays in the timing of
new railcar deliveries. All of these factors will put pressure on our future
operating results, the magnitude and duration of which cannot be determined at
this time.
At March 31, 2020 , Rail North America's wholly owned fleet, excluding boxcars,
consisted of approximately 102,500 cars, and fleet utilization was 99.0% at
March 31, 2020 , compared to 99.3% at the end of the prior quarter, and 99.4% at
March 31, 2019 . Fleet utilization for our approximately 15,000 boxcars was 94.6%
at March 31, 2020 , compared to 95.0% at the end of the prior quarter, and 95.2%
at March 31, 2019 . Utilization is calculated as the number of railcars on lease
as a percentage of total railcars in the fleet.
During the first quarter of 2020, an average of approximately 101,700 railcars,
excluding boxcars, were on lease, compared to 102,300 in the prior quarter and
104,600 for the quarter ended March 31, 2019 . Changes in railcars on lease
compared to prior periods are impacted by the number of new railcars purchased
under our supply agreements and the disposition of railcars that were sold or
scrapped. During the first quarter of 2020, the renewal rate change of the Lease
Price Index (the "LPI", see definition below) was negative 11.6%, compared to
negative 9.1% in the prior quarter, and positive 5.2% in the first quarter of
2019. Lease terms on renewals for cars in the LPI averaged 31 months in the
current quarter, compared to 37 months in the prior quarter, and 39 months in
the first quarter of 2019. Additionally, the renewal success rate, which
represents the percentage of expiring leases that were renewed with the existing
lessee, was 74.6% in the current quarter, compared to 84.0% in the prior
quarter, and 83.6% in the first quarter of 2019. The renewal success rate is an
important metric because railcars returned by our customers may incur transition
costs, including additional repairs and related service prior to being leased to
new customers, which may increase maintenance and associated expenses.
As of March 31, 2020 , leases for approximately 13,500 tank cars and freight cars
and approximately 2,900 boxcars are scheduled to expire over the remainder of
2020. These amounts exclude railcars on leases expiring in 2020 that have
already been renewed or assigned to a new lessee.
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The following table shows Rail North America's segment results (in millions):
Three Months Ended
March 31
2020 2019
Revenues
Lease revenue $ 212.1 $ 220.9
Other revenue 23.6 27.4
Total Revenues 235.7 248.3
Expenses
Maintenance expense 72.9 68.8
Depreciation expense 63.6 64.3
Operating lease expense 13.3 13.7
Other operating expense 6.6 6.4
Total Expenses 156.4 153.2
Other Income (Expense)
Net gain on asset dispositions 26.8 8.2
Interest expense, net (33.3 ) (34.2 )
Other expense (0.8 ) (0.7 )
Segment Profit $ 72.0 $ 68.4
Investment Volume $ 110.9 $ 99.0
The following table shows the components of Rail North America's lease revenue
(in millions):
Three Months Ended
March 31
2020 2019
Railcars $ 187.8 $ 193.7
Boxcars 16.4 18.0
Locomotives 7.9 9.2
Total $ 212.1 $ 220.9
Lease Price Index
Our LPI is an internally-generated business indicator that measures lease rate
pricing on renewals for our North American railcar fleet, excluding boxcars. We
calculate the index using the weighted-average lease rate for a group of railcar
types that we believe best represents our overall North American fleet,
excluding boxcars. The average renewal lease rate change is reported as the
percentage change between the average renewal lease rate and the average
expiring lease rate, weighted by fleet composition. The average renewal lease
term is reported in months and reflects the average renewal lease term of
railcar types in the LPI, weighted by fleet composition.
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[[Image Removed: chartlpi.jpg]]Rail North America Fleet Data
The following table shows fleet activity for
March 31 June 30 September 30 December 31 March 31
2019 2019 2019 2019 2020
Beginning balance 105,472 104,830 103,554 103,255 102,845
Cars added 617 661 902 965 883
Cars scrapped (662 ) (377 ) (513 ) (620 ) (389 )
Cars sold (597 ) (1,560 ) (688 ) (755 ) (781 )
Ending balance 104,830 103,554 103,255 102,845 102,558
Utilization rate at
quarter end 99.4 % 99.5 % 99.2 % 99.3 % 99.0 %
Average active railcars 104,613 104,089 102,653 102,309 101,668
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[[Image Removed: chart-railna.jpg]]
The following table shows fleet statistics for
March 31 June 30 September 30 December 31 March 31
2019 2019 2019 2019 2020
Ending balance 16,006 15,921 15,803 15,264 15,026 Utilization 95.2 % 94.1 % 93.5 % 95.0 % 94.6 %
Comparison of the First Three Months of 2020 to the First Three Months of 2019
Segment Profit
In the first quarter of 2020, segment profit of$72.0 million increased 5.3% compared to$68.4 million for the same period in the prior year. The increase was a result of higher net gains on asset dispositions in the current year, offset by lower lease revenue and higher maintenance expense. The timing of asset remarketing income varies throughout the year.
Revenues
In the first quarter of 2020, lease revenue decreased$8.8 million , or 4.0%, primarily due to lower revenue across railcar categories. Other revenue decreased$3.8 million due to lower lease termination fees, partially offset by higher repair revenue. Expenses In the first quarter of 2020, maintenance expense increased$4.1 million , primarily due to more tank qualifications performed and higher assignment-related costs. Depreciation expense decreased$0.7 million , driven by the timing of new railcar investments and dispositions. Operating lease expense decreased$0.4 million , resulting from the purchase of railcars previously on operating leases. Other operating expense increased$0.2 million due to higher switching, freight, and storage costs. 23 --------------------------------------------------------------------------------
Other Income (Expense)
In the first quarter of 2020, net gain on asset dispositions increased$18.6 million , attributable to more railcars and locomotives sold and lower net scrapping losses in the current year. Net interest expense decreased$0.9 million , driven by the absence of fees associated with a securitized line of credit terminated in the prior year.
Investment Volume
During the first three months of 2020, investment volume was
Our investment volume is predominantly composed of acquired railcars, but also
includes certain capitalized repairs and improvements to owned railcars and our
maintenance facilities. As a result, the dollar value of investment volume does
not necessarily correspond to the number of railcars acquired in any given
period. In addition, the comparability of amounts invested and the number of
railcars acquired in each period is impacted by the mix of railcars purchased,
which may include tank cars and freight cars, as well as newly manufactured
railcars or those purchased in the secondary market.
RAIL INTERNATIONAL
Segment Summary
Rail International , composed primarily of GATX Rail Europe ("GRE"), continued to
produce strong operating results in the first three months of 2020. The lease
rate environment in Europe was strong during the first quarter and demand for
railcars was stable. The impact of COVID-19 on GRE's first quarter results was
not significant, but the rapid weakening of the Polish Zloty at the end of the
quarter did have a negative impact on GRE's first quarter reported results. GRE
began to see impacts of COVID-19 late in the first quarter as demand across the
industries we serve began to decline. Further, certain of our customers have
requested deferral of lease payments, lease rate reductions, and delays in the
timing of new railcar deliveries. GRE expects these factors to negatively impact
our railcar utilization and lease rates, which will impact our future operating
results, the magnitude and duration of which cannot be determined at this time.
Railcar utilization for GRE was 98.5% at March 31, 2020 , compared to 99.3% at
the end of the prior quarter and 98.9% at March 31, 2019 . Utilization is
calculated as the number of railcars on lease as a percentage of total railcars
in the fleet. In addition, Rail India benefited from more cars on lease as it
continues to expand its fleet.
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The following table shows Rail International's segment results (in millions):
Three Months Ended
March 31
2020 2019
Revenues
Lease revenue $ 58.3 $ 52.2
Other revenue 1.8 2.0
Total Revenues 60.1 54.2
Expenses
Maintenance expense 12.9 12.1
Depreciation expense 15.5 14.0
Other operating expense 1.8 1.5
Total Expenses 30.2 27.6
Other Income (Expense)
Net gain on asset dispositions 0.1 0.4
Interest expense, net (10.6 ) (9.9 )
Other expense (5.5 ) (2.3 )
Segment Profit $ 13.9 $ 14.8
Investment Volume $ 69.3 $ 33.1
The following table shows fleet activity for GRE railcars for the quarter ended:
March 31 June 30 September 30 December 31 March 31
2019 2019 2019 2019 2020
Beginning balance 23,412 23,531 23,967 24,211 24,561
Cars added 185 491 325 416 871
Cars scrapped or sold (66 ) (55 ) (81 ) (66 ) (80 )
Ending balance 23,531 23,967 24,211 24,561 25,352
Utilization rate at
quarter end 98.9 % 98.9 % 99.4 % 99.3 % 98.5 %
Average active railcars 23,105 23,480 23,877 24,216 24,622
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[[Image Removed: chartgrefleet.jpg]]Comparison of the First Three Months of 2020 to the First Three Months of 2019
Foreign Currency
Rail International's reported financial results are impacted by fluctuations in the exchange rates of theU.S. dollar versus foreign currencies in which it conducts business, primarily the euro. In the first quarter of 2020, a weaker euro, relative to theU.S. dollar negatively impacted lease revenue by approximately$1.4 million and segment profit, excluding other income (expense), by approximately$0.6 million compared to the same period in 2019.
Segment Profit
In the first quarter of 2020, segment profit of$13.9 million decreased 6.1% compared to$14.8 million for the same period in the prior year. The decrease was largely due to the negative impact of changes in foreign exchange rates on non-functional currency items, partially offset by higher lease revenue from more railcars on lease. Revenues
In the first quarter of 2020, lease revenue increased
Expenses
In the first quarter of 2020, maintenance expense increased$0.8 million , driven by higher wheelset costs and other repairs, partially offset by lower workshop costs. Depreciation expense increased$1.5 million due to new railcars added to the fleet, partially offset by the impact of foreign exchange rates.
Other Income (Expense)
In the first quarter of 2020, net gain on asset dispositions decreased$0.3 million , attributable to lower railcar scrapping gains. Net interest expense increased$0.7 million , due to a higher average debt balance, partially offset by a lower average interest rate. Other expense increased$3.2 million , largely due to the negative impact of changes in foreign exchange rates on non-functional currency items. 26 --------------------------------------------------------------------------------
Investment Volume
During the first three months of 2020, investment volume was$69.3 million compared to$33.1 million in the same period in 2019. In the first three months of 2020, GRE acquired 443 newly built railcars and purchased 428 railcars in the secondary market and Rail India acquired 229 railcars compared to 185 newly built railcars at GRE and 368 railcars at Rail India for the same period in 2019. Our investment volume is predominantly composed of acquired railcars, but may also include certain capitalized repairs and improvements to owned railcars. As a result, the dollar value of investment volume does not necessarily correspond to the number of railcars acquired in any given period. In addition, the comparability of amounts invested and the number of railcars acquired in each period is impacted by the mix of the various car types acquired, as well as fluctuations in the exchange rates of the foreign currencies in whichRail International conducts business. PORTFOLIO MANAGEMENT Segment Summary Portfolio Management's segment profit is attributable primarily to income from the RRPF affiliates, a group of 50% owned domestic and foreign joint ventures withRolls-Royce plc (or affiliates thereof, collectively "Rolls-Royce"), a leading manufacturer of commercial aircraft jet engines. Segment profit included earnings from the RRPF affiliates of$23.4 million for the three months endedMarch 31, 2020 , compared to$18.2 million for the same period in 2019. As ofMarch 31, 2020 , the RRPF affiliates owned 478 aircraft spare engines with a net book value of$5,007.0 million , compared to 478 aircraft spare engines with a net book value of$5,036.4 million atDecember 31, 2019 and 462 aircraft spare engines with a net book value of$4,538.7 million atMarch 31, 2019 . The RRPF affiliates continued to perform well in the first quarter, as utilization of its aircraft spare engines remained strong. However, the RRPF affiliates began to see the impact of COVID-19 in March as global air travel was significantly reduced. Certain of our customers have requested deferral of lease payments and lease rate reductions. We expect COVID-19 to have a negative impact on engine utilization and lease rates. Further, we anticipate secondary market activity to be more limited in the near term. All of these factors will put pressure on our future operating results, the magnitude and duration of which cannot be determined at this time. Portfolio Management also owns marine assets, consisting primarily of five liquefied gas-carrying vessels (the "Specialized Gas Vessels"). During the second quarter of 2019, the prior commercial management agreement withNorgas Carriers Private Limited , and related pooling arrangement, was terminated, and we entered into a new agreement withAnthony Veder Group B.V. ("Veder") to commercially manage these vessels. The Specialized Gas Vessels are utilized to transport pressurized gases and chemicals, such as liquefied petroleum gas, liquefied natural gas, and ethylene, primarily on short-term spot contracts for major oil and chemical customers worldwide. During the first quarter of 2020, utilization of the Specialized Gas Vessels was initially higher due to the new commercial management agreement with Veder. However, the demand for the Specialized Gas Vessels began to decline during the latter part of the quarter as the impacts of COVID-19 intensified. This trend is expected to continue and will likely have a negative impact on future results, the magnitude and duration of which cannot be determined at this time. Portfolio Management's total asset base was$657.3 million atMarch 31, 2020 , compared to$653.7 million atDecember 31, 2019 , and$618.3 million atMarch 31, 2019 . 27
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The following table shows Portfolio Management's segment results (in millions):
Three Months Ended
March 31
2020 2019
Revenues
Lease revenue $ 0.3 $ 0.3
Marine operating revenue 3.3 2.4
Other revenue - 0.1
Total Revenues 3.6 2.8
Expenses
Marine operating expense 4.1 4.6
Depreciation expense 1.3 1.6
Other operating expense 0.1 0.1
Total Expenses 5.5 6.3
Other Income (Expense)
Net gain on asset dispositions 0.5 0.3
Interest expense, net (2.9 ) (2.7 )
Share of affiliates' pre-tax income 23.8 18.2 Segment Profit
$ 19.5 $ 12.3 The following table shows the net book values of Portfolio Management's assets (in millions): March 31 June 30 September 30 December 31 March 31 2019 2019 2019 2019 2020
Investment in RRPF Affiliates
$ 512.4 $ 532.2 Owned assets 138.5 133.2 133.1 141.3 125.1 Managed assets (1) 30.4 28.5 26.6 24.8 22.9 ________
(1) Amounts shown represent the estimated net book value of assets managed for
third parties and are not included in our consolidated balance sheets.
RRPF Affiliates Engine Portfolio Data
The following table shows portfolio activity for the RRPF affiliates' aircraft spare engines for the quarter ended:
March 31 June 30 September 30 December 31 March 31
2019 2019 2019 2019 2020
Beginning balance 452 462 461 456 478
Engine acquisitions 11 3 5 27 8
Engine dispositions (1 ) (4 ) (10 ) (5 ) (8 )
Ending balance 462 461 456 478 478Utilization rate at quarter end 96.8 % 97.0 % 95.6 %
96.9 % 95.8 %
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[[Image Removed: chart-rrpf.jpg]]Comparison of the First Three Months of 2020 to the First Three Months of 2019
Segment Profit
In the first quarter of 2020, segment profit was$19.5 million , compared to$12.3 million in the prior year period. The increase reflects stronger results at the RRPF affiliates, as well as an improved contribution from the Specialized Gas Vessels. Revenues In the first quarter of 2020, lease revenue was comparable to the same period in 2019. Marine operating revenue increased$0.9 million , due to higher revenue from the Specialized Gas Vessels resulting from higher utilization and increased charter rates. Expenses
In the first quarter of 2020, marine operating expense decreased
Other Income (Expense)
In the first quarter of 2020, income from our share of affiliates' earnings
increased
ASC
Segment Summary
ASC's operations are limited during the first three months of each year, and the
majority of operating results are from the completion of the prior year sailing
season in January. During the first three months of 2020, ASC benefited from
favorable operating conditions in January and ongoing demand to finish the 2019
sailing season. ASC carried 1.0 million net tons of freight in the first three
months of 2020, compared to 1.2 million net tons during the same period in 2019.
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COVID-19 began to impact ASC's operations during March. The idling of various
industries, including the auto industry, has significantly decreased demand for
iron ore, and demand for coal continues to decline. While the sailing season
began at the end of March, ASC currently has only 7 of its 11 vessels deployed,
reflective of an expectation of lower tonnage demand. It is expected that
COVID-19 will have a negative impact on the deployment of ASC's vessels, overall
demand, and future operating results, the magnitude and duration of which cannot
be determined at this time.
On February 7, 2020 , we entered into an agreement to sell ASC. The sale is
subject to customary closing conditions. See "Note 25. Subsequent Events" in
Part II, Item 8 in our Annual Report on Form 10-K for the year ended December
31, 2019 and "Note 16. Subsequent Events" in Item 1 of this Form 10-Q for
additional information.
The following table shows ASC's segment results (in millions):
Three Months Ended
March 31
2020 2019
Revenues
Lease revenue $ 1.0 $ 1.0
Marine operating revenue 8.5 10.7
Total Revenues 9.5 11.7
Expenses
Maintenance expense 0.8 0.3
Marine operating expense 6.3 7.5
Total Expenses 7.1 7.8
Other Income (Expense)
Interest expense, net (1.3 ) (1.4 )
Other expense (0.2 ) -
Segment Profit $ 0.9 $ 2.5
Investment Volume $ 13.7 $ 14.5 Total Net Tons Carried (000's) 972 1,198
Comparison of the First Three Months of 2020 to the First Three Months of 2019
Segment Profit
In the first quarter of 2020, segment profit was$0.9 million , compared to$2.5 million for the same period in the prior year. The decrease was driven by lower volume, partially offset by lower marine operating expense.
Revenues
In the first quarter of 2020, marine operating revenue decreased
Expenses
In the first quarter of 2020, maintenance expense increased$0.5 million , driven by higher operating repairs. Marine operating expense decreased$1.2 million , primarily due to fewer operating days.
Investment Volume
ASC's investments in each period consisted of structural and mechanical improvements to our vessels.
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OTHEROther comprises selling, general and administrative expenses ("SG&A"), unallocated interest expense, and miscellaneous income and expense not directly associated with the reporting segments and eliminations.
The following table shows components of Other (in millions):
Three Months Ended
March 31
2020 2019
Selling, general and administrative expense
(1.3 ) (1.7 )
Other expense (income), including eliminations 1.7 0.2
SG&A, Unallocated Interest and Other
SG&A decreased$3.7 million for the first three months of 2020 compared to the same period in the prior year. The decrease was primarily due to lower employee compensation expenses. Unallocated interest expense (the difference between external interest expense and interest expense allocated to the reporting segments) in any year is affected by our consolidated leverage position, the timing of debt issuances and investing activities, and intercompany allocations. Other expense (income), including eliminations increased$1.5 million for the first three months of 2020 compared to the same period in the prior year. The increase was driven by higher non-service pension expense in the current year, as well as the negative impact of foreign exchange rates on a foreign pension plan. Consolidated Income Taxes
See "Note 10. Income Taxes" in Part I, Item 1 of this Form 10-Q.
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--------------------------------------------------------------------------------CASH FLOW AND LIQUIDITY
We generate a significant amount of cash from operating activities and investment portfolio proceeds. We also access domestic and international capital markets by issuing unsecured or secured debt and commercial paper. We use these resources, along with available cash balances, to fulfill our debt, lease, and dividend obligations, to support our share repurchase programs, and to fund portfolio investments and capital additions. We primarily use cash from operations to fund daily operations. The timing of asset dispositions and changes in working capital impact cash flows from portfolio proceeds and operations. As a result, these cash flow components may vary materially from quarter to quarter and year to year. Although COVID-19 did not have a significant impact on our first quarter operating results, we expect COVID-19 to have a negative impact on future operating results. We expect COVID-19 to have an impact on our customers, including their ability to make their lease payments timely, as well as their willingness to renew existing leases or enter into new lease contracts. Already, certain customers have begun to request relief through deferral of lease payments, lease rate reductions, and new car order postponement. All of this will place increasing pressure on our cash flow and liquidity. We have a strong liquidity position, balance sheet, and access to capital that we expect will enable GATX to effectively manage through the COVID-19 pandemic. We have taken certain steps to mitigate future risks and to support our future liquidity needs, including the draw of$250 million on our 3-year credit facility. We also have a$600 million , 5-year unsecured credit facility in theU.S. that matures in 2024 that remains fully available. As ofMarch 31, 2020 , we had an unrestricted cash balance of$570.7 million .
The following table shows our principal sources and uses of cash for the three
months ended
2020 2019
Principal sources of cash Net cash provided by operating activities$ 53.0 $ 64.3 Portfolio proceeds 63.6 41.5 Other asset sales 6.7 6.5 Proceeds from issuance of debt, commercial paper, and credit facilities 870.7 495.2 Total$ 994.0 $ 607.5 Principal uses of cash Portfolio investments and capital additions$ (194.7 ) $ (147.3 ) Repayments of debt, commercial paper, and credit facilities (350.0 ) (254.7 ) Payments on finance lease obligations (7.9 ) (0.3 ) Stock repurchases - (38.1 ) Dividends (19.0 ) (19.2 ) Total$ (571.6 ) $ (459.6 ) Net cash provided by operating activities for the first three months of 2020 was$53.0 million , a decrease of$11.3 million compared to the same period in 2019. Comparability among reporting periods is impacted by the timing of changes in working capital items. Specifically, cash payments were higher in the current year for interest expense, income taxes, operating leases, and maintenance expenses, partially offset by lower employee compensation payments compared to the prior year. Portfolio proceeds primarily consist of proceeds from sales of operating assets and finance lease receipts, as well as capital distributions from affiliates. Portfolio proceeds of$63.6 million for the three months of 2020 increased by$22.1 million from the prior year, primarily due to higher proceeds from railcar and locomotive sales atRail North America . Proceeds from the issuance of debt for the three months endedMarch 31, 2020 were$870.7 million (net of hedges and debt issuance costs). In the first quarter of 2020, we entered into a$500 million , 364-day, floating rate term loan in theU.S. and a €100 million 5-year bilateral term loan inEurope . We also drew the full$250 million on our 3-year credit facility.
Debt repayments of
Portfolio investments and capital additions primarily consist of purchases of operating assets, investments in affiliates, and capitalized asset improvements. Portfolio investments and capital additions of$194.7 million for the first three months of 2020 increased$47.4 million compared to 2019, due to more railcars acquired atRail International andRail North America . 32 -------------------------------------------------------------------------------- OnJanuary 25, 2019 , our board of directors approved a$300.0 million share repurchase program, pursuant to which we are authorized to purchase shares of our common stock in the open market, in privately negotiated transactions, or otherwise, including pursuant to Rule 10b5-1 plans. The share repurchase program does not have an expiration date, does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time. The timing of repurchases will be dependent on market conditions and other factors. No share repurchases were completed during the three months endedMarch 31, 2020 , compared to 0.5 million shares of common stock for$40.0 million (of which$38.1 million settled prior to quarter-end) in the first three months of 2019. Actual cash payments in any period consist of those transactions that settled during the current period. As ofMarch 31, 2020 ,$150.0 million remained available under the repurchase authorization.
Contractual and Other Commercial Commitments
The following table shows our contractual commitments, including debt principal
and related interest payments, lease payments, and purchase commitments at
Payments Due by Period
Total 2020 (1) 2021 2022 2023 2024 Thereafter
Recourse debt $ 5,069.2 $ - $ 1,100.0 $ 250.0 $ 250.0 $ 526.1 $ 2,943.1
Interest on recourse
debt (2) 1,897.4 132.8 179.5 159.3 147.9 135.8 1,142.1
Commercial paper and
credit facilities 275.5 25.5 - 250.0 - - -
Operating lease
obligations 474.9 29.7 64.5 56.5 54.6 50.1 219.5
Purchase commitments (3) 1,705.5 601.9 365.6 365.3 372.7 - -
Total $ 9,422.5 $ 789.9 $ 1,709.6 $ 1,081.1 $ 825.2 $ 712.0 $ 4,304.7
__________(1) For the remainder of the year.
(2) For floating rate debt, future interest payments are based on the applicable
interest rate as of
(3) Primarily railcar purchase commitments. The amounts shown for all years are
based on management's estimates of the timing, anticipated car types, and
related costs of railcars to be purchased under its agreements.
In 2014, we entered into a long-term supply agreement withTrinity Rail Group, LLC ("Trinity"), a subsidiary of Trinity Industries. Under the terms of that agreement, we agreed to order 8,950 newly built railcars. As ofMarch 31, 2020 , all 8,950 railcars have been ordered, of which 7,769 railcars have been delivered. OnMay 24, 2018 , we amended our long-term supply agreement with Trinity to extend the term toDecember 2023 , and we agreed to purchase an additional 4,800 tank cars (1,200 per year) beginning inJanuary 2020 and continuing through the expiration of the extended term. AtMarch 31, 2020 , 1,211 railcars have been ordered, of which 312 railcars have been delivered, pursuant to the amended terms of the agreement. In 2018, we entered into a multi-year railcar supply agreement withAmerican Railcar Industries, Inc. ("ARI"), pursuant to which we will purchase 7,650 newly built railcars. The order encompasses a mix of tank and freight cars that are to be delivered over a five-year period, beginning inApril 2019 . ARI's railcar manufacturing business was subsequently acquired by The Greenbrier Companies, Inc. ("Greenbrier") onJuly 26, 2019 , and Greenbrier assumed all of ARI's obligations under our long-term supply agreement. Under this agreement 450 railcars were to be delivered in 2019, with the remaining 7,200 to be delivered ratably over the four-year period of 2020 to 2023. As ofMarch 31, 2020 , 3,107 railcars have been ordered, of which 746 have been delivered. The agreement also includes an option to order up to an additional 4,400 railcars subject to certain restrictions. 33 --------------------------------------------------------------------------------
Short-Term Borrowings
The following table shows additional information regarding our short-term
borrowings for the three months ended
Europe (1) Balance as ofMarch 31 (in millions) $
25.5
Weighted-average interest rate 0.9 % Euro/dollar exchange rate
1.10
Average daily amount outstanding during the first quarter (in millions) $
18.5
Weighted-average interest rate 0.8 % Average Euro/dollar exchange rate
1.10
Maximum daily amount outstanding (in millions) $30.9 Euro /dollar exchange rate 1.13 __________
(1) Short-term borrowings in
facilities.
Credit Lines and Facilities
We have a$600 million , 5-year unsecured revolving credit facility in theU.S. that matures inMay 2024 . This credit facility contains two one-year extension options. As ofMarch 31, 2020 , the full$600 million was available under this facility. Additionally, we have a$250 million 3-year unsecured revolving credit facility in theU.S. that matures inMay 2022 and also has two one-year extension options. As ofMarch 31, 2020 , the full$250 million was drawn on this facility. Our European subsidiaries have unsecured credit facilities with an aggregate limit of €35.0 million. As ofMarch 31, 2020 , €11.9 million was available under these credit facilities. Restrictive Covenants Our$600 million revolving credit facility and$250 million revolving credit facility contain various restrictive covenants, including requirements to maintain a fixed charge coverage ratio and an asset coverage test. Some of our bank term loans have the same financial covenants as the facility. The indentures for our public debt also contain various restrictive covenants, including limitations on liens provisions that restrict the amount of additional secured indebtedness that we may incur. Additionally, certain exceptions to the covenants permit us to incur an unlimited amount of purchase money and nonrecourse indebtedness. AtMarch 31, 2020 , our European rail subsidiaries had outstanding term loan and private placement debt balances totaling €380.0 million. The loans are guaranteed byGATX Corporation and are subject to the same restrictive covenants as the revolving credit facility noted above. AtMarch 31, 2020 , we were in compliance with all covenants and conditions of all of our credit agreements. We do not anticipate any covenant violations nor do we expect that any of these covenants will restrict our operations or our ability to obtain additional financing.
Credit Ratings
The global capital market environment and outlook may affect our funding options and our financial performance. Our access to capital markets at competitive rates depends on our credit rating and rating outlook, as determined by rating agencies. As ofMarch 31, 2020 , our long-term unsecured debt was rated BBB byStandard & Poor's and Baa2 by Moody's Investor Service and our short-term unsecured debt was rated A-2 byStandard & Poor's and P-2 by Moody's Investor Service. Our rating outlook from both agencies was stable. 34 --------------------------------------------------------------------------------
Leverage
Leverage is expressed as a ratio of debt (including debt and lease obligations,
net of unrestricted cash) to equity. The following table shows the components of
recourse leverage (in millions, except recourse leverage ratio):
March 31 December 31 September
30
2020 2019 2019 2019 2019
Debt and lease obligations, net
of unrestricted cash:
Unrestricted cash $ (570.7 ) $ (151.0 ) $ (48.6 ) $ (286.6 ) $ (248.4 )
Commercial paper and bank credit 275.5 112.0
facilities 15.8 26.0 15.9
Recourse debt 5,043.7 4,780.4 4,580.2 4,832.5 4,768.1
Operating lease obligations 399.3 432.3 440.3 454.5 456.3
Finance lease obligations - 7.9 - 10.6 11.0
Total debt and lease
obligations, net of unrestricted
cash $ 5,147.8 $ 5,085.4 $ 5,083.9 $ 5,037.0 $ 5,002.9
Total recourse debt (1) $ 5,147.8 $ 5,085.4 $ 5,083.9 $ 5,037.0 $ 5,002.9
Shareholders' Equity $ 1,831.0 $ 1,835.1 $ 1,786.5 $ 1,834.8 $ 1,809.2
Recourse Leverage (2) 2.8 2.8 2.8 2.7 2.8
________(1) Includes recourse debt, commercial paper and bank credit facilities, and
operating and finance lease obligations, net of unrestricted cash.
(2) Calculated as total recourse debt / shareholder's equity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to our critical accounting policies during the three months endedMarch 31, 2020 . Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for a summary of our policies.
NON-GAAP FINANCIAL MEASURES
In addition to financial results reported in accordance with GAAP, we compute certain financial measures using non-GAAP components, as defined by theSEC . These measures are not in accordance with, or a substitute for, GAAP, and our financial measures may be different from non-GAAP financial measures used by other companies. We have provided a reconciliation of our non-GAAP components to the most directly comparable GAAP components.
Reconciliation of Non-GAAP Components Used in the Computation of Certain Financial Measures
Net Income Measures
We exclude the effects of certain tax adjustments and other items for purposes of presenting net income, diluted earnings per share, and return on equity because we believe these items are not attributable to our business operations. Management utilizes net income, excluding tax adjustments and other items, when analyzing financial performance because such amounts reflect the underlying operating results that are within management's ability to influence. Accordingly, we believe presenting this information provides investors and other users of our financial statements with meaningful supplemental information for purposes of analyzing year-to-year financial performance on a comparable basis and assessing trends. There were no tax adjustments and other items impacting net income or diluted earnings per share for either the first quarter of 2020 or 2019. However, we did have tax adjustments and other items impacting net income in other periods used in the calculation of the applicable measures for the trailing 12 months endedMarch 31, 2020 and 2019. 35 --------------------------------------------------------------------------------
The following table shows our net income and return on equity, excluding tax
adjustments and other items, for the trailing 12 months ended
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