UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission File Number 1-2328

 

GATX Corporation

(Exact name of registrant as specified in its charter)

 

222 West Adams Street
Chicago, IL 60606-5314
(Address of principal executive offices, including zip code)
(312) 621-6200
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1.3 billion as of June 30, 2009.

 

As of January 31, 2010, 46.1 million common shares were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

GATX CORPORATION

 

2009 FORM 10-K

 

INDEX

 

 

GATX Corporation (“GATX” or the “Company”) leases, operates and manages long-lived, widely used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”). In 2007, GATX completed the sale of its aircraft leasing business (formerly the “Air” segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. For details regarding foreign operations, see discussion in Note 21 to the consolidated financial statements. For details regarding each segment’s operating results and assets, see Note 23 to the consolidated financial statements.

 

At December 31, 2009, GATX had total assets of $6.2 billion, comprised largely of railcars, marine vessels and joint venture investments. This figure includes $1.0 billion of assets, primarily railcars, that were leased-in under operating leases and therefore were not recorded on the balance sheet.

 

Rail leases tank cars, freight cars and locomotives in North America and Europe. Operating for over 100 years, Rail is a leader in the railcar leasing industry and controls one of the largest privately owned railcar fleets in the world. Rail established this position through a disciplined investment approach under which it sources railcars from manufacturers and makes opportunistic purchases of railcar fleets in the secondary market.

 

At December 31, 2009, Rail had total assets of $5.2 billion, including $1.0 billion of off balance sheet assets. Rail’s railcar leasing customers are primarily comprised of shippers of chemical, petroleum and food products as well as railroads. Rail’s fleet consists of a broad and diverse selection of railcar types that are used to ship approximately 700 different commodities.

 

The following table provides information on some of the major railcar types that Rail leases to its customers and the commodities shipped in these railcars.

 

 

 

As of December 31, 2009, Rail’s worldwide fleet, comprised of wholly-owned and leased-in railcars, totaled approximately 131,000 railcars. These cars have depreciable lives of 30 to 38 years and an average age of approximately 16 years in North America and 24 years in Europe. Rail also had an ownership interest in approximately 29,000 railcars through investments in affiliated companies. Affiliate fleets consist primarily of freight and intermodal railcars. In addition, Rail manages approximately 2,700 railcars for third-party owners. The following table sets forth Rail’s fleet data as of December 31, 2009:

 

 

Rail primarily provides railcars pursuant to full-service leases under which it maintains the railcars, pays ad valorem taxes and insurance and provides other ancillary services. Rail also offers net leases for railcars under which the lessee is responsible for maintenance, insurance and taxes. Rail has a large and diverse customer base, serving approximately 800 customers. In 2009, no single customer accounted for more than 2.5% of Rail’s total lease income, and the top ten customers combined accounted for approximately 19% of Rail’s total lease income.

 

North America

 

In North America, Rail leases new railcars for terms that generally range from three to ten years, with renewals of existing leases generally ranging from two to seven years. The average remaining lease term of the North American fleet was four years as of December 31, 2009. Rail’s primary competitors in North America are Union Tank Car Company, General Electric Railcar Services Corporation, American Railcar Leasing, CIT Group, Inc., Trinity Leasing, and First Union Rail. Rail competes on the basis of customer relationships, service, price and availability of railcars.

 

In North America, Rail purchases new railcars from a number of manufacturers, including Trinity Industries, American Railcar Industries, Inc., FreightCar America, National Steel Car Ltd. and The Greenbrier Companies. In addition to the purchase of new cars, Rail acquires existing portfolios or fleets of complementary railcars in the secondary market.

 

Rail’s North American operation also includes its locomotive leasing business, which primarily consists of 529 locomotives, 80% of which are four-axle and 20% are six-axle. Additionally, Rail manages 66 locomotives for an affiliate. Four-axle locomotives have not been manufactured in any material quantity since the mid-1980s but continue to be in demand by railroads and shippers. As a result, with periodic refurbishment, the four-axle fleet is expected to continue to be marketable and yield attractive returns. Rail’s locomotive customers are primarily Class I, regional and short-line railroads and industrial users. Locomotive leases are typically net leases and terms

vary from month-to-month to 15 years. As of December 31, 2009, the average remaining lease term of Rail’s locomotive fleet was three years with remaining depreciable lives ranging from 8 to 17 years. Rail’s major competitors in locomotive leasing are Helm Financial Corporation, CIT Group, Inc., Relco Locomotives, Inc. and National Railway Equipment Corporation. Competitive factors in the market include equipment condition, availability, customer service and pricing.

 

North American Maintenance

 

The majority of Rail’s leases are full-service contracts under which Rail maintains the railcars. Rail operates an extensive network of service facilities across North America that performs repair, maintenance and regulatory compliance work on the fleet. This maintenance organization is dedicated to performing timely, efficient and high quality repair services. Maintenance services include interior cleaning of railcars, general repairs to car body and safety appliances, regulatory compliance work, wheelset replacements, exterior blast and paint, and car stenciling. To the extent possible, regulatory compliance work is conducted while cars are in the service centers for customer directed repairs, thereby minimizing the amount of time the car is out of service. Rail’s maintenance network consists of:

 

 

Rail’s maintenance network is supplemented by a number of approved third-party service centers that adhere to GATX’s quality standards. In certain cases, third-party repair services are utilized via fixed-capacity contracts under which GATX has contractually secured access to repair capacity. In 2009, third-party service centers accounted for approximately 49% of Rail’s North American service center maintenance costs (excluding the cost of repairs performed by railroads). In 2009, an aggregate of 80,000 service events, including multiple independent service events for the same car, were performed at GATX-owned and third-party service centers.

 

Europe

 

Rail’s European operations consist of its wholly-owned subsidiaries in Germany, Austria and Poland. Rail leases standard gauge railcars to customers throughout most of Europe. Rail’s European customer base includes petroleum refining, chemical manufacturing, transportation, freight forwarding and railway companies. In Europe, Rail acquires new railcars primarily from the IRS Group. Rail Europe has purchase commitments to acquire 300 newly manufactured railcars in 2010 and an option for up to 610 additional railcars in 2011. Rail Europe also assembles several hundred tank cars each year at its Ostroda, Poland service center. Lease terms for Rail’s European fleet generally range from one to five years and at December 31, 2009, the average remaining lease term of the fleet was two years. Rail operates two service centers in Europe that perform significant repairs and regulatory compliance for owned railcars. The owned service centers are supplemented by a number of third-party contract repair facilities, which in 2009 accounted for approximately 35% of Rail’s European fleet repair costs. In Europe, Rail principally competes on the basis of customer relationships, service, price and availability of railcars. Rail’s primary competitors in Europe are VTG Aktiengesellschaft, Ermewa, CTL Logistics Group, and PCC Rail Group.

 

Rail Affiliates

 

Rail has two notable investments in affiliated companies: a 37.5% interest in AAE Cargo AG (“AAE”) and a 50% interest in Southern Capital Corporation (“SCC”).

AAE is a Switzerland-based railcar lessor that as of December 31, 2009, owned approximately 25,000 freight cars, comprised of 14,638 intermodal cars (59%), 4,607 covered cars (18%) and 5,731 other freight type cars (23%), with an average age of 9 years. AAE’s customer base consists of various railways throughout Europe as well as private operators. As of December 31, 2009, the average remaining lease term of AAE railcars was approximately two years.

 

SCC is a joint venture with the Kansas City Southern Railroad (“KCSR”). SCC was formed in 1996 and controls approximately 3,000 freight cars and 66 locomotives, the majority of which are on lease to KCSR.

 

Specialty provides leasing, asset remarketing and asset management services to the marine and industrial equipment markets. Specialty offers operating leases, direct finance leases and loans, and extends its market reach through joint venture investments. Specialty seeks to invest in long-lived, widely used assets which are critical to the operations of its customers. Specialty’s assets as of December 31, 2009, including off balance sheet assets, totaled $676.9 million.

 

     Specialty Portfolio*
     As of 12/13/09

 

 

*includes off balance sheet assets

 

Target asset types for Specialty include:

 

 

Specialty’s principal competitors are captive leasing companies of equipment manufacturers, leasing subsidiaries of commercial banks and independent leasing companies. Factors that affect Specialty’s ability to compete are equipment expertise, GATX’s relationships, relative cost of funds, and the availability of other financing alternatives to potential customers.

The following table sets forth the approximate net book values of Specialty’s owned and managed assets as of December 31 (in millions):

 

 

Portfolio

 

Specialty’s owned portfolio of assets consists primarily of investments in operating assets held for lease and finance leases totaling $334.2 million. Operating assets are diverse and include equipment used in natural gas compression, ethanol production, construction, and mining and marine vessels used in inland freight transportation. Operating assets have depreciable lives of 5 to 30 years. The majority of these assets are placed with customers under long-term leases, with expiration dates through 2021. Specialty typically remarkets assets at the end of their lease term, generating portfolio proceeds and often asset remarketing income.

 

Specialty further leverages its equipment knowledge by managing portfolios of assets for third parties. The majority of these managed assets are in markets where GATX has a high level of expertise. Specialty generates fee and residual sharing income through portfolio administration and remarketing of these assets. Specialty has also provided equipment residual value guarantees, which enable it to share in any residual asset value in excess of the guaranteed amount. As of December 31, 2009, Specialty was party to 19 such residual value guarantees totaling $16.1 million that expire between 2010 and 2012.

 

Specialty Affiliates

 

Specialty has investments in affiliated companies, with a net book value of $331.3 million as of December 31, 2009. Affiliate activities include aircraft engine leasing, shipping operations and gas compression equipment leasing. Specialty invests in joint ventures to expand its presence in key markets, expand geographically and diversify risks. Specialty’s joint venture partners are typically well established companies with extensive experience in their markets.

 

Rolls-Royce and Partners Finance Limited (“RRPF”) is a collection of 50% owned joint ventures with Rolls-Royce PLC, a leading manufacturer of commercial aircraft jet engines. RRPF leases spare engines to commercial airlines and owns one of the largest spare engine portfolios in the industry, comprised of approximately 350 Rolls-Royce and International Aero Engine aircraft engines. RRPF brings high levels of technical, financial and leasing expertise to the market. Through RRPF, Rolls-Royce PLC was one of the first original equipment manufacturers to provide dedicated, long-term, spare engine leasing options.

 

Cardinal Marine Investments LLC (“Cardinal Marine”) is a 50% owned marine joint venture with IMC Holdings, a subsidiary of the IMC Pan Asia Alliance Group (“IMC”), a well established shipping enterprise with industry experience dating back to the early 1900s. IMC is a leading Asia-focused integrated maritime and industrial solutions provider with diversified interests in dry and liquid bulk shipping, ship and crew management, offshore and marine engineering, oil and gas assets and services and logistics. Cardinal Marine owns six chemical parcel tankers (each with 45,000 dead weight tons (“dwt”) carrying capacity) that operate under a pooling arrangement with IMC’s other chemical tankers in support of the movement of organic and inorganic chemicals, along with vegetable and other oils, and biofuels from the Middle East to Asia, the U.S. and Europe.

 

Somargas Limited and Singco Gas Pte, Limited (“Singco”) are each 50% owned joint ventures with IM Skaugen ASA (“Skaugen”). Skaugen is a 93 year old Norwegian company primarily engaged in the transport of petrochemical gases and the ship to ship transfer of crude oil. Somargas owns six liquid petroleum gas/ethylene vessels (each with 8,500 — 10,000 cubic meters (“cbm”) carrying capacity). The Somargas vessels operate in a pooling arrangement controlled by Skaugen, primarily transporting ethylene between the Middle East and Asia. Singco is in the process of constructing four liquid petroleum gas/ethylene/liquefied natural gas vessels (each with 10,000 cbm carrying capacity), the first of which was delivered in January 2010. Delivery of the remaining vessels

will be completed by the middle of 2011 and all four Singco vessels will enter into the same pool as the Somargas vessels.

 

Clipper Third Limited and Clipper Fourth Limited, respectively, are 50% and 45% owned joint ventures with Clipper Group Invest Ltd. (the “Clipper Group”). The Clipper Group is a leading international shipping consortium with over 35 years of experience in shipping. The Clipper Group controls a modern fleet of over 200 vessels, approximately 100 of which are partly or wholly-owned. Clipper Third owns four handysize vessels (each with 27,000 dwt carrying capacity) that support the worldwide movement of dry bulk products such as grain, cement, coal and steel. Clipper Fourth owns 14 handysize chemical parcel tankers (each with 10,000-15,000 dwt carrying capacity). These 18 vessels operate under pooling arrangements with the Clipper Group’s fleet in support of the worldwide movement of dry bulk commodities and organic, inorganic and specialty chemicals with a concentration in the Atlantic and Mediterranean trades.

 

Enerven Compression, LLC (“Enerven”) is a 45.6% owned joint venture with ING Investment Management and Enerven management. Enerven provides natural gas compression equipment leasing through its subsidiary, Enerven Compression Services (“ECS”) and third-party maintenance and repair services through its subsidiary, Worldwide Energy Solutions Company (“WESCO”). ECS offers rental and full-service leasing of gas compression equipment to producers, gas storage companies and midstream operators. The ECS portfolio consists of over 325 owned units in various sizes and configurations totaling approximately 200,000 horsepower. WESCO provides outsource operations and maintenance services to oil and gas producers and compression rental companies. It specializes in maintenance, turnkey repair projects, equipment rebuilds and parts sales.

 

ASC owns and operates the largest fleet of U.S. flagged vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities for a range of industrial customers. The primary commodities that ASC’s vessels carry are coal, iron ore and limestone. Customer service, primarily in the form of scheduling flexibility, reliability and operating safety have been the keys to ASC’s success for over 100 years. ASC’s sailing season generally runs from April 1 through December 31; however, customer demand and weather conditions permitting, certain vessels may commence operations during March and continue to operate into January of the following year.

 

At December 31, 2009, ASC’s fleet consisted of 18 vessels with a net book value of $234.0 million. Fifteen of the vessels are diesel powered, constructed in the 1970’s and early 1980’s, having an average age of 32 years and estimated useful lives of 65 years. The diesel vessels range in size from 635 feet to 1,000 feet long and maximum load capacities between 23,800 and 80,900 gross tons. The three remaining vessels are steam powered, built in the 1940’s and 1950’s, and have an estimated remaining useful life of ten years. The steamer vessels range in size from 690 to 767 feet and have maximum load capacities between 22,300 and 26,300 gross tons. ASC’s vessels operate exclusively in the fresh water conditions of the Great Lakes and as a result, with proper maintenance and periodic refurbishment, may achieve extended use well beyond the useful life estimates.

 

All of ASC’s vessels are equipped with self-unloading equipment, enabling them to discharge dry bulk cargo without assistance from shore-side equipment or personnel. This equipment enables the vessels to operate twenty-four hours a day, seven days a week. ASC’s vessels are capable of transporting and unloading almost any free flowing, dry bulk commodity. ASC’s customers are primarily consumers of iron ore, western and eastern coal, limestone aggregates and metallurgical limestone. ASC served 23 customers in 2009 with the top five customers comprising 73% of ASC’s total revenue.

 

 

ASC’s vessels operate pursuant to contractual commitments with customers to carry a stipulated range of freight volume each year. Committed volume may be supplemented with spot opportunities. In 2009, ASC carried 21.2 million net tons of cargo including both contracted volume and spot business. ASC’s customer portfolio has remained relatively stable over the past three years and includes a mix of companies in the steel production, power generation and construction industries. Seventeen of the vessels in ASC’s fleet are used to service contract and spot business. ASC’s remaining vessel operates under a long-term time charter agreement that is scheduled to expire in 2015. The number of vessels deployed by ASC in any given year is dependent on customer volume requirements. During periods of low demand (relative to ASC’s carrying capacity), ASC may choose not to operate certain vessels.

 

ASC’s primary competitors on the domestic Great Lakes are Grand River Navigation, Great Lakes Fleet, Inc., Interlake Steamship Company, K & K Integrated Logistics, VanEnkevort Tug and Barge, and Upper Lakes Towing. ASC principally competes on the basis of service capabilities, customer relationships and price.

 

The United States shipping industry is subject to the Jones Act (the “Act”), which requires all commercial vessels transporting goods between U.S. ports to be built, owned, operated and manned by U.S. citizens and registered under the U.S. flag.

 

Patents, trademarks, licenses and research and development activities are not material to GATX’s businesses taken as a whole.

 

Seasonality is not considered significant to the operations of GATX and its subsidiaries taken as a whole.

 

GATX, taken as a whole, is not dependent upon a single customer nor does it have any significant customer concentrations. Segment concentrations, if material, are described above.

 

As of December 31, 2009, GATX employed approximately 1,929 persons, of whom 49% were covered by union contracts.

 

The hourly employees at Rail’s U.S. service centers belong to the United Steelworkers of America (“USWA”). Employees at three of Rail’s Canadian service centers belong to the Communication, Energy and Paperworkers Union of Canada. The shipboard personnel at ASC belong to the American Maritime Officers, the Seafarers International Union or the USWA, as the case may be.

 

GATX’s operations, as well as those of its competitors, are subject to extensive federal, state, local, and foreign environmental regulations. These laws cover discharges to waters; air emissions; toxic substances; and the generation, handling, storage, transportation and disposal of waste and hazardous materials. These regulations have the effect of increasing the cost and liability associated with leasing and operating assets. Environmental risks are also inherent in rail operations, which frequently involve transporting chemicals and other hazardous materials.

 

Some of GATX’s current and previously owned properties have been used for industrial or transportation-related purposes that may have resulted in the discharge of contaminants. As a result, GATX is now subject to, and will from time to time continue to be subject to, environmental cleanup and enforcement actions in the U.S. and in the foreign countries in which it operates. In particular, the U.S. federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the Superfund law, generally imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current and former owners and operators of a site. Accordingly, GATX may be responsible under CERCLA and other federal, state, local, and foreign statutes for all or a portion of the costs to clean up sites at which certain substances may have been released by GATX, its current lessees, former owners or lessees of properties, or other third parties. Environmental remediation and other environmental costs are accrued when considered probable and amounts can be reasonably estimated. As of December 31, 2009, environmental costs were not material to GATX’s financial position, results of operations or cash flows. For further discussion, see Note 22 to the consolidated financial statements.

 

GATX makes available free of charge at its website, www.gatx.com, its most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (“SEC”). Charters for the Audit Committee, Compensation Committee and Governance Committee of the Board of Directors, the Corporate Governance Guidelines, the Code of Business Conduct and Ethics and the Code of Ethics for Senior Officers are posted under Corporate Governance in the Investor Relations section of the GATX website, and are available in print upon request by any shareholder. Within the time period prescribed by SEC and New York Stock Exchange regulations, GATX will post on its website any amendment to the Code of Ethics for Senior Officers and the Code of Business Conduct and Ethics or any waivers thereof. The information on GATX’s website is not incorporated by reference into this report.

 

 

GATX is subject to a number of risks which investors should consider before investing in GATX’s securities. These risks include the factors described below as well as other information contained in this filing and GATX’s other filings with the U.S. Securities and Exchange Commission. The risk factors described below are not the only risks facing the Company, and additional risks not presently known to GATX or risks currently considered immaterial also may adversely affect GATX.

 

Competition could result in decreased profitability.

 

GATX operates in a highly competitive business environment. In many cases, competitors are larger entities that have greater financial resources, higher credit ratings and a lower cost of capital than GATX. These factors may enable competitors to offer leases and loans to customers at lower rates than GATX is able to provide, thus impacting GATX’s asset utilization or GATX’s ability to lease assets on a profitable basis.

 

Weak economic conditions, financial market volatility and other factors may decrease customer demand for GATX’s assets and services and negatively impact GATX’s business and results of operations.

 

GATX relies upon continued demand from its customers to lease its railcars, locomotives, industrial equipment and marine assets. Demand for these assets is dependent upon the markets for the products and services offered by

the Company’s customers and the strength and growth of their businesses. A number of GATX’s customers operate in cyclical markets, such as the steel, chemical and construction industries, which are susceptible to macroeconomic downturns in the United States and abroad and may experience significant changes in demand over time.

 

As a result of the weak economic conditions currently affecting the economy of the United States and other parts of the world, certain of GATX’s customers have experienced declines in their operating and financial performance, which have, in turn, reduced demand for the assets and services GATX provides. Continued weakness in certain sectors of the economy also may make it more difficult for GATX to lease certain types of railcars that are returned either at the end of a lease term or as a result of a customer bankruptcy or default.

 

In many cases, demand for GATX’s assets is also dependent on customers’ desire to lease, rather than purchase assets. There are a number of items that factor into the customer’s decision to lease or purchase assets, such as tax considerations, interest rates, balance sheet considerations and operational flexibility. GATX has no control over these external considerations, and changes in these factors could negatively impact demand for its assets held for lease.

 

Additional factors influencing customer demand for GATX’s assets include changes in production volumes, potential changes in supply chains, choices regarding type of transportation asset, availability of substitutes and other operational needs. Demand for the shipping services provided by the Company’s ASC segment is also dependent upon the factors discussed above. A significant decline in customer demand for the assets and services provided by GATX could adversely affect the Company’s financial performance.

 

GATX may be unable to maintain assets on lease at satisfactory rates.

 

GATX’s profitability is largely dependent on its ability to maintain assets on lease at satisfactory rates and to re-lease or sell assets upon lease expiration. A number of factors can adversely affect asset utilization rates and lease rates, including, but not limited to, an economic downturn causing reduced demand, changes in customer behavior, or other changes in supply or demand for such assets. Continued economic uncertainty or a decline in customer demand for GATX’s assets could cause customers to demand shorter lease terms and lower lease rates and could result in a decrease in the utilization rate for GATX’s assets and reduced revenues. Alternatively, customers may seek to lock-in relatively low lease rates for longer terms thereby resulting in an adverse impact on current or future revenues.

 

GATX’s allowance for possible losses may prove inadequate.

 

GATX’s allowance for possible losses on reservable assets may not be adequate over time to cover credit losses in its portfolio if unexpected adverse changes in the economy differ from the expectations of management or if discrete events adversely affect specific customers, industries or markets. If the credit quality of GATX’s customer base materially deteriorates, the Company’s allowance may be insufficient to cover credit losses and GATX’s financial position or results of operations could be negatively impacted.

 

Deterioration of conditions in the global capital markets, further weakening of macroeconomic conditions, and negative changes in credit ratings may limit the ability of GATX to secure financing and may increase its borrowing costs.

 

GATX relies, in part, upon banks and capital markets to fund its operations and contractual commitments, including availability under existing bank credit facilities and the issuance of long-term debt instruments and commercial paper from time to time. Since July 2007, these markets have exhibited unprecedented volatility. As a result, credit margins on corporate debt increased significantly during late 2008 and the first half of 2009, and then declined significantly later in 2009. Access to capital, particularly in the unsecured debt markets, was significantly constrained for some borrowers for an extended period of time. In addition to conditions in the capital markets, a number of other factors could cause GATX to incur increased borrowing costs and to have greater difficulty accessing public and private markets for both secured and unsecured debt. These factors include GATX’s financial performance and its credit ratings and rating outlook as determined primarily by rating agencies such as Standard & Poor’s and Moody’s Investor Service. If GATX is unable to secure financing on acceptable terms, the Company’s

other sources of funds, including available cash, bank facilities, cash flow from operations and portfolio proceeds, may not be adequate to fund its operations and contractual commitments.

 

Changes in laws, rules or regulations, or actions by authorities under existing laws, rules or regulations, could negatively affect GATX’s business and profitability.

 

GATX’s rail and marine operations are subject to various laws, rules and regulations administered by authorities in jurisdictions where GATX and its subsidiaries do business. In the United States, GATX’s businesses are subject to regulation by various federal and state agencies, including the U.S. Department of Transportation, and railcar operations are also affected by regulations adopted by the Association of American Railroads. These agencies establish rules and regulations for the railcar industry, including mechanical, maintenance and safety standards. State agencies regulate some aspects of rail operations with respect to health and safety matters not otherwise preempted by federal law. Similarly, operations of GATX’s foreign subsidiaries are subject to the jurisdiction of authorities in countries where they do business. Future changes in these laws, rules and regulations, or actions by authorities under existing laws, rules or regulations, could restrict the use or reduce the economic value of GATX’s assets, including loss of revenue, or cause GATX to incur significant expenditures to comply, thereby increasing operating expenses. Certain changes to laws, rules and regulations, or actions by authorities under existing laws, rules or regulations, could result in the obsolescence of various assets or impose compliance costs that are so significant as to render such assets economically obsolete.

 

GATX’s assets may become obsolete.

 

In addition to changes in laws, rules and regulations that may make assets obsolete, GATX may be adversely impacted by changes in the preferred method used by the Company’s customers to ship their products, changes in demand for particular products, or by a shift by customers toward purchasing assets rather than leasing them from GATX. The industries in which GATX’s customers operate are driven by dynamic market forces and trends, which are in turn influenced by economic and political factors in the United States and abroad. Demand for GATX’s rail and marine assets may be significantly affected by changes to the markets in which the Company’s customers operate. A significant reduction in customer demand for transportation or manufacture of a particular product or change in the preferred method of transportation used by customers to ship their products could result in the economic obsolescence of GATX assets leased by those customers.

 

High energy prices could have a negative effect on the demand for GATX’s products and services.

 

Energy prices, including the price of natural gas and oil, are significant cost drivers for many of GATX’s customers, either directly in the form of raw material costs in industries such as the chemical and steel industries, or indirectly in the form of increased transportation costs. Sustained high energy prices could negatively impact these industries resulting in a corresponding adverse effect on customer demand for GATX’s assets, as well as related services.

 

Events or conditions negatively affecting certain assets, customers or geographic regions in which GATX has a large investment could have a negative impact on its results of operations.

 

GATX’s revenues are generally derived from a number of different asset types, customers, industries and geographic locations. However, from time to time, GATX could have a large investment in a particular asset type, a large revenue stream associated with a particular customer or industry, or a large number of customers located in a particular geographic region. Decreased demand from a discrete event impacting a particular asset type, discrete events with a specific customer or industry, or adverse regional economic conditions, particularly for those assets, customers or regions in which GATX has a concentrated exposure, could have a negative impact on GATX’s results of operations.

 

GATX is subject to extensive environmental regulations and the costs of remediation may be material.

 

GATX’s operations are subject to extensive federal, foreign, state and local environmental laws and regulations concerning, among other things, the discharge of hazardous materials and remediation of contaminated sites. In

addition, some of GATX’s properties, including those previously owned or leased, have been used for industrial purposes whose activities may have resulted in discharges onto the property. Environmental liability can extend to previously owned or operated properties as well as properties currently owned and used by the Company. Environmental liabilities are routinely assessed, including obligations and commitments for remediation of contaminated sites and assessments of ranges and probabilities of recoveries from other responsible parties. Due to the regulatory complexities and risk of unidentified contaminants on its properties, the potential exists for environmental and remediation costs to be materially different from the costs GATX has estimated.

 

GATX has been, and may in the future be, involved in various types of litigation.

 

The nature of GATX’s businesses and assets expose the Company to the potential for claims and litigation related to, among other things, personal injury and property damage, environmental claims and other matters. Certain GATX railcars may be used by customers to transport hazardous materials, and a rupture of a railcar carrying such materials in an accident could lead to litigation and subject GATX to the potential for significant liability. A substantial adverse judgment against GATX could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

 

GATX may not be able to procure insurance on a cost-effective basis.

 

GATX manages its exposure to risk, in part, by insuring its assets and their associated risks. There is no guarantee that such insurance will be consistently available on a cost-effective basis in the future. If the cost of insurance coverage becomes prohibitively expensive, GATX could be forced to reduce the amount of coverage and increase the amount of its self-insured risk retention.

 

The fair market value of GATX’s long-lived assets may differ from the value of those assets reflected in its financial statements.

 

GATX’s assets consist primarily of long-lived assets such as railcars, marine vessels and industrial equipment. The carrying value of these assets in the financial statements may at times differ from their fair market value. These valuation differences may be positive or negative and may be material based on market conditions and demand for certain assets.

 

GATX may incur future asset impairment charges.

 

GATX regularly reviews long-lived assets and joint venture investments for impairment, including when events or changes in circumstances indicate the carrying value of an asset or investment may not be recoverable. GATX may be required to recognize asset impairment charges in the future as a result of a weak economic environment, challenging market conditions, events related to particular customers or asset types, or as a result of asset or portfolio sale decisions by management or other factors that affect GATX’s estimates of expected cash flows to be generated from its long-lived assets or joint venture investments.

 

Fluctuations in foreign exchange rates and interest rates could have a negative impact on GATX’s results of operations.

 

GATX’s results are exposed to foreign exchange rate fluctuations as the financial results of certain subsidiaries are translated from their local currency into U.S. dollars upon consolidation. As exchange rates vary, the operating results of foreign subsidiaries, when translated, may differ materially from period to period. GATX is also subject to gains and losses on foreign currency transactions, which could vary based on fluctuations in exchange rates and the timing of the transactions and their settlement. In addition, fluctuations in foreign exchange rates can have an effect on the demand and relative price for services provided by GATX domestically and internationally, and could have a negative impact on GATX’s results of operations. GATX is also subject to risks associated with fluctuations in interest rates. The Company may seek to limit foreign exchange rate and interest rate risk through the use of currency or interest rate derivatives, but these measures may not be effective. A material and unexpected change in interest rates or foreign exchange rates could negatively affect GATX’s financial performance.

GATX is subject to the inherent risks of its joint venture investments.

 

GATX’s investments include ownership interests in a number of joint ventures managed and operated by third parties. These entities are subject to many of the same risk factors discussed in this Risk Factors section. GATX is indirectly exposed to these risks through its ownership interest in these entities, and adverse developments in the business or financial results of those entities could have a negative impact on GATX’s results of operations. Additionally, in those instances where a joint venture is managed and operated by GATX’s joint venture partner or another third party, GATX may not have control over all operational decisions which may result in actions taken at the joint venture level that could have an adverse economic impact on GATX.

 

GATX may be affected by climate change or market or regulatory responses to climate change.

 

Changes in laws, rules and regulations, or actions by authorities under existing laws, rules or regulations, to address greenhouse gas emissions and climate change could have a negative impact on the Company’s customers and business. For example, restrictions on emissions could significantly increase costs for GATX customers who produce energy or manufacture chemical or other products that require significant amounts of energy to produce. This, in turn, could reduce customer demand to lease the Company’s assets. New government regulations could also increase GATX’s marine and other operating costs or require significant capital expenditures to comply. All or any of these potential consequences of climate change could have an adverse effect on the Company’s financial position, results of operations and cash flows.

 

GATX cannot predict with certainty the impact that inflation or deflation will have on its financial results.

 

Effects of inflation are unpredictable as to timing and duration and depend on market conditions and economic factors. Inflation in lease rates as well as inflation in residual values for rail, marine and other equipment has historically benefited GATX’s financial results. However, these benefits may be offset, in whole or in part, by increases in the costs for goods and services purchased by GATX, including salaries and wages, health care costs, supplies, utilities, and maintenance and repair services and materials. Significant increases in GATX’s cost of goods and services could adversely impact the Company’s financial performance. A period of prolonged deflation would have a negative impact on GATX from several perspectives, including lease rate pricing, residual values and asset remarketing opportunities. These negative impacts of deflation may be affected, in whole or in part, by decreases in the cost to GATX of goods and services, including those discussed herein.

 

Unfavorable conditions on the Great Lakes could disrupt normal business operations, which could result in increased costs and decreases in revenues.

 

The success of GATX’s ASC business segment is dependent upon its ability to operate efficiently on the Great Lakes. Severe weather conditions, including, but not limited to, high wind and ice formation, could cause significant business interruptions. Additionally, low water levels may restrict the volume that may be transported in ASC’s vessels on a per trip basis. These conditions could negatively impact GATX’s results of operations due to increased operating costs or decreased revenues.

 

Many of GATX’s employees are represented by unions, and the failure to successfully negotiate collective bargaining agreements may result in strikes, work stoppages or substantially higher labor costs.

 

A significant portion of GATX’s employees are represented by labor unions and work under collective bargaining agreements that cover a range of workplace matters, including wages, health and welfare benefits, work rules and other issues. Historically, the Company and its unions have been successful in negotiating acceptable agreements without the occurrence of any extended work stoppages. However, if the Company is unable to negotiate acceptable new agreements, it could result in strikes by the affected workers, business disruptions and increased operating costs due to higher wages or benefits paid to union workers, any of which could have an adverse effect on the Company’s financial position, results of operations or cash flows.

Changes to assumptions used to calculate post-retirement costs, increases in funding requirements and investment losses in pension funds could adversely affect GATX’s results of operations.

 

GATX’s pension and other post-retirement costs are dependent on various assumptions used to calculate such amounts, including discount rates, long-term return on plan assets, salary increases, health care cost trend rates and other factors. Changes to any of these assumptions could adversely affect GATX’s financial position and results of operations. Additionally, GATX could be required to increase contributions to its pension plans as a result of changes to laws, regulations or rules that increase funding requirements or to compensate for investment losses in pension plan assets. If GATX were forced to increase contributions to its pension plans, the Company’s financial position, results of operations and cash flows could be negatively affected.

 

GATX’s effective tax rate could be adversely affected by changes in the mix of earnings in the U.S. and foreign countries.

 

GATX is subject to taxes in the United States and various foreign jurisdictions. As a result, GATX’s effective tax rate could be adversely affected by changes in the mix of earnings in the United States and foreign countries with differing statutory tax rates, legislative changes impacting statutory tax rates, including the impact on recorded deferred tax assets and liabilities, changes in tax laws or by material audit assessments.

 

United States and world economic and political conditions, including acts or threats of terrorism or war, could adversely affect GATX.

 

National and international political developments, instability and uncertainties, including political unrest and threats of terrorist attacks, could result in global economic weakness in general and in the United States in particular, and could have an adverse impact on GATX. The effects may include: legislation or regulatory action directed toward improving the security of railcars and marine vessels against acts of terrorism, which could affect the construction or operation of railcars and marine vessels, a decrease in demand for rail and marine services, lower utilization of new and existing rail and marine equipment, lower rail lease and marine charter rates; impairments of rail and marine assets or capital market disruption, which may raise GATX’s financing costs or limit its access to capital, and liability or losses resulting from acts of terrorism involving GATX’s assets. Depending upon the severity, scope and duration of these effects, the impact on GATX’s financial position, results of operations and cash flows could be material.

 

GATX’s internal control over financial accounting and reporting may not detect all errors or omissions in the financial statements.

 

If GATX fails to maintain adequate internal controls over financial accounting, the Company may not be able to ensure that GATX can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and related regulations. Although GATX’s management has concluded that adequate internal control procedures are in place, no system of internal control can provide absolute assurance that the financial statements are accurate and free of error. As a result, the risk exists that GATX’s internal control may not detect all errors or omissions in the financial statements.

 

 

None.

 

Information regarding the location and general character of certain properties of GATX is included in Item 1, “Business”, of this document.

 

Locations of operations are as follows:

 

GATX Headquarters

Chicago, Illinois

 

Rail

 

Business Offices

San Francisco, California

Alpharetta, Georgia

Chicago, Illinois

Paducah, Kentucky

Bozeman, Montana

Marlton, New Jersey

Doylestown, Pennsylvania

Houston, Texas

Calgary, Alberta

Cambridge, Ontario

Ennismore, Ontario

Montreal, Quebec

Vienna, Austria

Hamburg, Germany

Mexico City, Mexico

Warsaw, Poland

 

Major Service Centers

Colton, California

Waycross, Georgia

Hearne, Texas

Red Deer, Alberta

Sarnia, Ontario

Montreal, Quebec

Moose Jaw, Saskatchewan

Hannover, Germany

Ostroda, Poland

 

Customer Site Locations

Donaldsonville, Louisiana

Geismar, Louisiana

Cincinnati, Ohio

Catoosa, Oklahoma

Freeport, Texas

Yazoo City, Mississippi

Gdansk, Poland

Plock, Poland

 

Fast Track Service Centers

Macon, Georgia

East Chicago, Indiana

Terre Haute, Indiana

Shreveport, Louisiana

Kansas City, Kansas

Plantersville, Texas

 

Mobile Service Units

Mobile, Alabama

Tampa, Florida

Gray, Georgia

Hammond, Indiana

Sioux City, Iowa

Donaldsonville, Louisiana

Haughton, Louisiana

Lake Charles, Louisiana

Morris, Kansas

Albany, New York

Copperhill, Tennessee

Galena Park, Texas

Olympia, Washington

Edmonton, Alberta

Red Deer, Alberta

Clarkson, Ontario

Sarnia, Ontario

Moose Jaw, Saskatchewan

Montreal, Quebec

Quebec City, Quebec

 

Specialty

 

Business Office

San Francisco, California

 

American Steamship Company

 

Business Offices

Williamsville, New York

Toledo, Ohio

 

 

Information concerning litigation and other contingencies is described under “Legal Proceedings and Other Contingencies” in Note 22 to the consolidated financial statements and is incorporated herein by reference.

 

 

None.

 

The following information regarding GATX’s executive officers is included in Part I in lieu of inclusion in the definitive GATX Proxy Statement:

 

 

 

 

 

GATX common stock is listed on the New York and Chicago Stock Exchanges under ticker symbol GMT. The approximate number of common shareholders of record as of January 31, 2010, was 2,713. The following table shows the reported high and low sales price of GATX common shares on the New York Stock Exchange, which is the principal market for GATX shares, and the dividends declared per share:

 

 

For information pertaining to issuable securities under equity compensation plans and the related weighted average exercise price, see Note 11 to the consolidated financial statements and Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”. For information regarding restricted net assets, see Note 8 to the consolidated financial statements.

GATX Common Stock Performance Graph

 

The following GATX Common Stock Performance Graph (the “Performance Graph”) and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The Performance Graph sets forth a comparison of the cumulative total shareholder return on the Company’s common stock during the five-year period ending December 31, 2009, with the cumulative total return of the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”), the Standard & Poor’s MidCap 400 Index (“MidCap 400”) and the Russell 1000 Financial Services Index (“Russell 1000”). The Company is not aware of any peer companies whose businesses are directly comparable to that of GATX and, therefore, the graph below displays the returns of the Mid-Cap 400 and the Russell 1000, both of which are comprised of companies with market capitalizations similar to GATX. The Performance Graph assumes $100 was invested in GATX common stock and each of the indices on December 31, 2004, and all dividends were reinvested.

 

 

 

OVERVIEW

 

General information and characteristics of GATX Corporation (“GATX” or the “Company”), including reporting segments, is included in Item 1, “Business”, of this document.

 

The following discussion and analysis should be read in conjunction with the audited financial statements included herein. Certain statements within this document may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions of those sections and the Private Securities Litigation Reform Act of 1995. Some of these statements may be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” or other words and terms of similar meaning. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in the “Risk Factors” section of Part I of this document. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward looking statements, which reflect management’s analysis, judgement, belief or expectation only as of the date hereof. GATX has based these forward-looking statements on information currently available and disclaims any intention or obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on financial data derived from the financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and certain other financial data that is 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.

 

GATX Corporation leases, operates and manages long-lived, widely used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”).

 

The Company’s former Air segment has been segregated and presented as discontinued operations for all periods presented. See “Discontinued Operations” for additional information.

 

The following table presents a financial summary of GATX’s operating segments:

 

 

 

 

Financial Performance Measures

 

The following table presents certain financial performance measures for the Company based on continuing operations for the years ended December 31:

 

 

 

2009 Highlights

 

 

Segment Operations

 

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including affiliate earnings, attributable to the segments as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, and other operating costs such as litigation, asset impairment charges, provisions for losses, environmental costs and asset storage costs. Segment profit excludes selling, general and administrative expenses, income taxes and certain other amounts not allocated to the segments. These amounts are discussed below in Other.

 

GATX allocates debt balances and related interest expense to each segment based upon a pre-determined fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. The leverage levels for Rail, Specialty and ASC are set at 4:1, 3:1 and 1.5:1, respectively. Management believes that by utilizing this leverage and interest expense allocation methodology, each operating segment’s financial performance reflects appropriate risk-adjusted borrowing costs.

 

Rail

 

Segment Summary

 

Economic weakness persisted in North America and Europe throughout 2009, leading to a substantial decline in Rail’s operating results compared to the prior year. In North America, these market conditions negatively impacted lease pricing and demand for railcars throughout the year. While Rail successfully renewed the majority of expiring leases with the existing customers, renewal rates were generally lower. The GATX Lease Price Index (the “LPI”) (see definition below) declined an average of 11.0% for the year, compared to increases of 5.2% and 13.6% in 2008 and 2007, respectively. Lease terms on renewals for LPI cars averaged 41 months in 2009, compared to 63 in 2008 and 67 in 2007. The reduced duration on lease renewals in 2009 was due in part to Rail’s desire to shorten term in anticipation of an eventual market recovery. Utilization, after holding steady at approximately 98% throughout 2008, trended downward in 2009, as expected, to 95.9% at year end.

 

In Europe, weaker economic conditions also had a negative impact on rail operations. Rail’s wholly-owned European tank car fleet has a high concentration of cars deployed in the petroleum market, which typically exhibits relatively stable demand compared to other car types. However, the severity of the current economic downturn negatively affected demand for cars serving this market as well. Utilization of the wholly-owned European tank car fleet declined to 94.7% at year end compared to 97.1% at the end of 2008. Also, at AAE, significant pressure on lease rates and utilization negatively impacted demand for its fleet of intermodal freight cars.

 

Lower results in 2009 also reflected substantially reduced remarketing income and disposition gains. In 2008, Rail took advantage of attractive asset and commodity prices by selectively selling and scrapping targeted assets. The sharp decline in the price of scrap steel as well as market pressure and the resulting negative effect on asset prices resulted in limited opportunities for scrap and remarketing income in 2009.

 

Many of the challenges confronted in 2009 are expected to continue into 2010 as pressure on lease rates and utilization will continue until the economy shows sustainable improvement. In North America, leases covering approximately 17,200 cars are scheduled to expire in 2010, many of which were priced in a higher lease rate environment. The lease rates associated with renewal of these scheduled expirations, in light of current market conditions and expiring rates, are expected to have a negative effect on lease income in the near term. Additionally, assignments (cars moving from one customer to another) are likely to increase, which will result in increased maintenance expense as a result of cars being serviced prior to being placed with a new customer.

 

In this environment, Rail is focused on asset utilization and cost containment which will enhance long-term performance as the economy recovers. Rail is also well positioned to pursue investment opportunities to the extent they become available with the objective of growing the asset base.

Rail’s segment results are summarized below (in millions):

 

 

Lease Price Index

 

The Lease Price Index is an internally generated business indicator that measures general lease rate pricing on renewals within Rail’s North American fleet. The index reflects the weighted average lease rate for a select group of railcar types that GATX believes to be representative of its overall North American fleet. The LPI measures the percentage change between the weighted average expiring lease rate and the weighted average renewal lease rate. Average renewal term reflects the weighted average renewal lease term in months.

 

Rail’s Fleet Data

 

The following table summarizes fleet activity for Rail’s North American railcars for the years indicated:

 

 

 

The following table summarizes fleet activity for Rail’s European railcars for the years indicated:

 

 

The following table summarizes fleet activity for Rail’s North American locomotives for the years indicated:

 

 

The following table summarizes Rail’s average active cars and locomotives for the years indicated:

 

 

Rail’s Lease Income

 

Components of Rail’s lease income as of December 31 are outlined below (in millions):

 

 

Segment Profit

 

Rail’s segment profit of $169.1 million in 2009 decreased 45.4% or $140.4 million from 2008. The 2009 results included $24.4 million of unrealized losses due to changes in the fair value of certain interest rate swaps at AAE. Results for 2008 included a $12.0 million gain on the sale of an office building and the reversal of $8.2 million of reserves due to the settlement of an environmental liability, both in Europe, and $3.7 million of unrealized losses on interest rate swaps at AAE. Excluding the impact of these items from both years, the unfavorable current year variance of $99.5 million was primarily due to lower lease, scrapping and remarketing income and higher ownership and maintenance costs.

 

Gross Income

 

Gross income for 2009 was $108.9 million lower than the prior year. The decrease was significantly impacted by a $20.7 million increase in unrealized losses on AAE interest rate swaps, a $19.7 million decrease in scrapping gains and the absence of a $12.0 million gain on the sale of an office building in Europe recorded in the prior year. Lease income in North America decreased $14.2 million, primarily due to rent reductions of $7.0 million on restructured leases resulting from customer bankruptcies and non-performing leases. Also, on average during 2009, there were approximately 850 fewer railcars on lease as compared to 2008, primarily due to lease-end returns. Current year active cars include 3,650 cars acquired in December 2008 from Allco Finance Group Limited (“Allco”). In Europe, a $10.9 million decrease in lease income was largely driven by the foreign exchange effect of a stronger U.S. dollar, partially offset by higher lease rates and an average of 40 more cars on lease. Asset remarketing income decreased $17.3 million, primarily due to fewer asset sales in the current period. Other income was $35.7 million lower, primarily due to lower scrap income (driven by significantly lower steel prices) and the absence of a $12.0 million gain on the sale of an office building and a $2.8 million lease termination fee both recorded in the prior year. Excluding the impact of the unrealized losses on AAE interest rate swaps from both years, affiliates’ earnings decreased $7.2 million, primarily due to lower operating results at AAE attributable to lower lease revenues largely driven by weak economic conditions.

AAE holds multiple derivative instruments intended to hedge interest rate risk associated with forecasted debt issuances. These instruments do not qualify for hedge accounting and as a result, changes in their fair values are recognized currently in income. The unrealized loss recognized in 2009 was primarily driven by the significant decline in benchmark interest rates. AAE’s earnings may be impacted by future unrealized gains or losses associated with these instruments.

 

Ownership Costs

 

Ownership costs in 2009 increased $13.3 million, primarily due to depreciation and interest expense associated with investment volume, particularly the acquisition of the Allco fleet at the end of 2008, partially offset by the foreign exchange effect of a stronger U.S. dollar. The mix of ownership costs was impacted by the purchases of previously leased-in railcars in 2009 and 2008 and the sale and lease-back of railcars in 2009.

 

Other Costs and Expenses

 

Maintenance expense in 2009 increased $13.6 million, net of a $7.9 million decrease due to the foreign exchange effect of a stronger U.S. dollar. Maintenance expense in North America increased $15.0 million, primarily due to higher car volumes resulting from increased lessee turnover and higher regulatory compliance costs. Excluding the currency impact, maintenance expense in Europe increased $6.5 million, primarily due to higher wheelset replacement costs incurred in response to industry and regulatory changes.

 

Other costs include provisions for losses, asset impairment charges, remeasurement gains and losses on non-functional currency assets and liabilities and other operating costs. In 2008, a $6.9 million provision for losses was recorded related to a direct finance lease to a customer that declared bankruptcy. In 2009, upon restructuring of the lease terms in bankruptcy court, the classification of the lease changed to an operating lease and all finance lease balances were reversed, including the provision. As a result of the lease reclassification, the operating lease assets were recorded at fair value and an impairment charge of $4.4 million was recorded, representing the difference between fair value and carrying value. The impact to operating results in 2009 was a net expense reduction of $2.5 million. Additional asset impairment charges, unrelated to this customer, of $2.9 million were also recorded in 2009, compared to $0.2 million in 2008. Remeasurement gains of $1.1 million were recorded in 2009, compared to $8.6 million in 2008. Other operating costs were $31.4 million in 2009 compared to $27.4 million in 2008. Costs in 2009 included a $3.9 million insurance recovery related to a fire at a GATX repair facility in Europe and in 2008 included the reversal of $8.2 million of environmental reserves in Europe. Excluding these two items, other operating costs in 2009 increased $8.3 million primarily due to higher switching and car storage costs related to lessee turnover activity.

 

Comparison of Year Ended December 31, 2008, to Year Ended December 31, 2007

 

Segment Profit

 

Rail’s segment profit of $309.5 million in 2008 increased 15.5% or $41.6 million from 2007. The 2008 results included a $12.0 million gain on sale of an office building and the reversal of $8.2 million of reserves due to the settlement of an environmental liability, both in Europe, and $3.7 million of unrealized losses on interest rate swaps at AAE. Excluding the impact of these items, the favorable current year variance of $25.1 million was primarily due to a significant increase in scrapping gains, higher lease income and the foreign exchange effect of a weaker U.S. dollar, partially offset by higher maintenance costs.

 

Gross Income

 

Gross income for 2008 was $65.0 million higher than the prior year. The increase was significantly impacted by a $15.3 million increase in scrapping gains and a $12.0 million gain on the sale of an office building in Europe. Rail’s North American lease income was $4.8 million higher than the prior year primarily due to higher lease rates realized on renewals and assignments over the past two years. In Europe, an average of more than 700 more cars on lease contributed $7.8 million in additional lease income, while the foreign exchange effect of a weaker U.S. dollar added $14.5 million in lease income. In 2008, locomotives contributed $5.9 million in additional lease income due to an average of 90 additional locomotives on lease.

Other income in 2008 was $33.9 million higher than prior year, primarily due to a $12.0 million gain on sale of the office building in Europe and significant scrapping gains in North America of $29.1 million compared to $13.8 million in 2007. Scrapping gains increased in 2008 due to the combined impact of higher steel prices and a greater number of cars scrapped. During 2008, as scrap steel prices rose to record levels, Rail accelerated the scrapping of certain railcars.

 

The decrease in affiliates’ earnings in 2008 reflects the impact of $3.7 million of unrealized losses on interest rate swaps at AAE. Excluding this item, earnings from AAE increased primarily due to a higher number of cars on lease and favorable foreign exchange effects of a weaker U.S. dollar.

 

Ownership Costs

 

Ownership costs in 2008 increased $6.8 million primarily due to depreciation and interest expense associated with portfolio additions over the last 12 months and the effect of a weaker U.S. dollar, partially offset by the effect of lower interest rates. The mix of ownership costs was impacted by the acquisition in 2008 of approximately 3,600 previously leased-in railcars for $70.1 million and the assumption of $74.7 million of related nonrecourse debt.

 

Other Costs and Expenses

 

Maintenance expense in 2008 increased $21.1 million, $5.1 million of which was due to the foreign exchange effect of a weaker U.S. dollar. Excluding the currency impact, maintenance expense increased $16.0 million, primarily comprised of $4.4 million due to increased volume of compliance inspections, $4.2 million due to higher material prices and increased railroad repairs of wheelsets, and $3.4 million due to costs associated with conversions of certain railcar types.

 

Other costs in 2008 decreased $4.5 million, primarily due to the reversal of $8.2 million of reserves resulting from the settlement of an environmental liability in Europe and remeasurement gains on non-functional currency denominated assets and liabilities. Partially offsetting the decrease was a $3.6 million increase in the estimate of a litigation loss in Europe and an increase in the provision for losses. In 2008, a $6.9 million provision for losses was recorded on a direct finance lease related to a customer that declared bankruptcy.

 

Railcar Regulatory Issues

 

Rules Affecting TIH Cars.  In 2009, the U.S. Pipeline and Hazardous Materials Safety Administration, in coordination with the Federal Railroad Administration (“FRA”) issued final interim rules (the “FRA Interim Rules”) that, among other things, established new interim design standards for pressurized tank cars that transport toxic-by-inhalation hazardous materials (“TIH cars”). The designation “final interim” indicates that the FRA intends to continue to research enhanced design standards for TIH cars and will issue additional rulemaking in the future that will prescribe final design requirements. Under the FRA Interim Rules, TIH cars manufactured after the effective date of the rules must be built to a higher pressure class rating relative to U.S. Department of Transportation specifications for tank cars used to transport other commodities. Unlike the original version of the rules proposed in 2008, the FRA Interim Rules as adopted do not include a retirement schedule for TIH cars manufactured prior to effective date of the rules. However, the FRA Interim Rules require that existing TIH cars receive appropriate certification from the Association of American Railroads (“AAR”) in order to remain in TIH service. The certification requirements are currently being developed by the AAR and until they are finalized, GATX cannot conclude precisely what impact, if any, the FRA Interim Rules may have on GATX’s tank car fleet. However, as of December 31, 2009, only 1,989 TIH cars remained in service in GATX’s fleet (approximately 1.8% of its North American fleet) and, based upon management’s review to date, GATX does not expect that the FRA Interim Rules will have a material impact on the Company’s financial position or results of operations.

 

European Regulatory Developments.  An immaterial number of railcars owned by GATX Rail Austria GmbH (an indirect subsidiary of the Company, “GATX Rail Austria”) and its subsidiaries, continue to be affected by restrictions on their movement imposed by the Italian rail safety authorities. The restrictions are focused on certain wheelsets of the type installed on one of the railcars involved in the June 29, 2009, accident in the city of Viareggio, Italy. (See Note 22 to the consolidated financial statements for further information on the accident.) However, due to

the small number of cars that are affected, the Company does not believe that these restrictions will have a material impact on the Company’s financial position or results of operations.

 

Consistent with recent enhancements to European railcar industry practices and regulatory directives announced after the Viareggio accident, GATX Rail Austria and its subsidiaries have begun to implement a modified wheelset inspection program. Future industry actions and regulatory directives may require further modifications of the maintenance and inspection practices of GATX Rail Austria and its subsidiaries. GATX Rail Austria and its subsidiaries will likely incur higher maintenance expenses in the near term as implementation of the program proceeds. As the program has only recently commenced, the Company cannot yet predict the magnitude of the change in maintenance costs, or the timing of these costs. Further, the scope and cost of any potential future maintenance initiatives, in addition to the modified wheelset inspection program, are not known at this time. The Company does not currently expect that the costs associated with the wheelset inspection program and other potential initiatives will be material to the Company’s financial position or liquidity. However, any such costs could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

 

Labor Agreements

 

The hourly employees at Rail’s three U.S. service centers are represented by the United Steelworkers of America (“USWA”) and are operating under a collective bargaining agreement that is in effect through February 2010. Negotiations are currently underway. Employees at three of Rail’s Canadian service centers are represented by the Communication, Energy and Paperworkers Union of Canada (“CEP”) under separate collective bargaining agreements. Two of the three agreements are in effect until January 2011 and one agreement expired in January 2010 (with negotiations scheduled to begin in March 2010). The hourly employees at the fourth Canadian service center are represented by an independent employee association with a collective bargaining agreement scheduled to expire on December 31, 2010.

 

Specialty

 

Segment Summary

 

Specialty’s total asset base, including off balance sheet assets, was $676.9 million at December 31, 2009, compared to $652.9 million at December 31, 2008, and $520.0 million at December 31, 2007. Investment volume in 2009 was $119.5 million compared to $163.3 million in 2008 and consisted of $81.4 million in joint ventures (including a scheduled $55.4 million shareholder loan repayment) and $33.4 million in industrial equipment. The estimated net book value equivalent of Specialty’s managed assets was $251.9 million at December 31, 2009.

 

Specialty’s financial results declined significantly in 2009 due to the combined effects of the global recession and capital market volatility. Specifically, the worldwide economic slowdown has caused a dramatic reduction in ocean-going shipping volumes and rates across all sectors, compared to the historical highs achieved in recent years. This has negatively impacted Specialty’s income from marine joint ventures, a major contributor to the segment’s profitability over the past several years. Additionally, capital market volatility has created downward pressure on asset prices, resulting in reduced asset remarketing opportunities. These volatile conditions, particularly in the secondary markets for equipment, also resulted in limited acceptable investment opportunities for Specialty in 2009.

 

While there have been some initial signs of recovery in certain areas of the economy, the timing of any impact on Specialty’s results is uncertain and challenging operating conditions will likely continue in 2010. Specialty will continue to consider investment opportunities in a disciplined manner focusing on targeted asset types, asset cost and appropriate risk-adjusted returns.

Specialty’s segment results are summarized below (in millions):

 

 

Comparison of Year Ended December 31, 2009, to Year Ended December 31, 2008

 

Segment Profit

 

Specialty’s segment profit of $51.6 million was $54.3 million or 51.3% lower than the prior year. The decrease was primarily due to significantly lower joint venture and asset remarketing income and higher interest expense.

 

Gross Income

 

Gross income decreased $45.6 million from the prior year, primarily due to lower joint venture and asset remarketing income. Lease income decreased $2.1 million, primarily due to lower usage rents from pooled barges. Asset remarketing income decreased $7.5 million from the prior year. The current year consisted primarily of $11.1 million of residual sharing gains and the prior year included $11.4 million of residual sharing gains from the sale of assets in the managed portfolio and $7.1 million from the sale of marine equipment. Other income decreased $2.3 million, primarily due to $2.4 million of fees received in the prior year from the termination of residual value guarantee contracts. Affiliates’ earnings decreased $33.7 million, primarily due to a combination of factors in the marine joint ventures, including lower charter rates and shipping volumes attributable to the slowdown in the global economy and several out of service vessels undergoing unplanned repairs. Affiliates’ earnings also included $2.8 million of remarketing gains in 2009 compared to $10.3 million in 2008.

 

Ownership Costs

 

Ownership costs increased $8.7 million from the prior year, primarily due to depreciation and interest expense related to investments made in 2008 and 2009, including the repayment of an affiliate shareholder loan in 2009.

 

Other Costs and Expenses

 

Other costs and expenses in 2009 were comparable to the prior year as higher provisions for losses and asset impairment charges were offset by lower pooled barge operating costs and a favorable difference in the fair value adjustment for warrants. Provisions for losses in 2009 were $3.7 million compared to $0.3 million in 2008 and asset impairment charges in 2009 were $2.7 million compared to $2.3 million in 2008.

Comparison of Year Ended December 31, 2008, to Year Ended December 31, 2007

 

Segment Profit

 

Specialty’s segment profit of $105.9 million was $11.6 million or 9.9% lower than the prior year. The decrease was primarily due to lower asset remarketing, interest and affiliates’ income and higher operating costs for pooled barges.

 

Gross Income

 

Gross income decreased slightly from the prior year. Lease income increased $7.1 million, primarily due to income from investments made in 2007 and 2008. Asset remarketing income decreased $5.9 million from the prior year. The current year included $11.4 million of residual sharing gains from the sale of assets in the managed portfolio and $7.1 million from the sale of marine equipment. The prior year included an $18.3 million gain on the sale of marine equipment and a $3.9 million residual sharing gain. Other income decreased $2.3 million, primarily due to lower interest income resulting from loan repayments in 2007.

 

Affiliates’ earnings in 2008 decreased $1.6 million from the prior year. The prior year included $12.5 million of income from a joint venture that was liquidated. Excluding the effect of this affiliate on current and prior year income, affiliates’ earnings increased $10.4 million primarily due to higher marine and aircraft engine leasing joint venture earnings and higher remarketing income. Remarketing income from affiliates in the current year contributed $10.3 million to affiliates’ earnings compared to $6.8 million in the prior year. While in aggregate, operating results from the marine affiliates were higher in 2008, market conditions weakened materially in the fourth quarter.

 

Ownership Costs

 

Ownership costs increased $6.6 million from the prior year, primarily due to depreciation and interest expense related to investments made in 2007 and 2008.

 

Other Costs and Expenses

 

Other costs and expenses in 2008 were $2.3 million higher than the prior year, primarily due to remeasurement losses on non-functional currency denominated assets and higher operating costs for pooled barges, partially offset by a lower provision for losses in 2008.

 

ASC

 

Segment Summary

 

The Great Lakes shipping market was severely depressed throughout 2009, driven in large part by the downturn in the steel industry. For the year, ASC transported 21.2 million net tons of freight, compared to 35.7 million net tons in the prior year. The largest reduction in volume was in iron ore shipments, however, all commodity types experienced declines year over year. In 2009, ASC deployed only 12 vessels compared to the entire fleet of 18 vessels in 2008.

 

Late in 2009, certain steel manufacturers reopened some idled facilities, and demand for iron ore shipments increased modestly. However, the duration and extent to which this improvement extends into 2010 and the impact on volume requirements remains highly uncertain. ASC is entering 2010 with an expectation that approximately 9-10 vessels may be put into service for the year. To minimize costs, winter maintenance will be deferred on laid up vessels until market conditions necessitate their return to service.

ASC’s segment results are summarized below (in millions):

 

 

 

Comparison of Year Ended December 31, 2009, to Year Ended December 31, 2008

 

Segment Profit

 

ASC’s segment profit decreased $10.1 million from the prior year. The decrease was primarily due to significantly lower freight volume in 2009, partially offset by lower depreciation expense due to an increase in the

estimated depreciable lives of certain of ASC’s vessels. Additionally, segment profit was impacted by a $5.6 million litigation recovery recorded in the current year compared to a $3.3 million litigation loss in the prior year.

 

Gross Income

 

Gross income in 2009 decreased $138.8 million from prior year, primarily due to significantly lower freight volume and reduced fuel surcharges (the effect of which is largely offset in operating costs). In accordance with certain contract provisions, ASC is able to recover a large portion of fuel cost increases from its customers. Net tons carried in 2009 were 21.2 million compared to 35.7 million in 2008, with iron ore volume declining by 10.3 million, coal declining by 2.4 million and limestone declining by 2.0 million.

 

Ownership Costs

 

Ownership costs decreased $3.8 million, primarily due to $3.2 million lower depreciation expense resulting from an increase in the estimated useful lives of 12 of ASC’s 18 vessels. This change in useful lives of vessels will have a similar impact in future years.

 

Other Costs and Expenses

 

Maintenance costs were $1.5 million lower, primarily due to the deployment of fewer vessels into service. Marine operating expenses decreased $114.6 million, primarily due to reduced shipping activity and lower fuel costs in 2009. Other expenses in 2009 included the receipt of a $5.6 million litigation settlement and, in 2008, included a $3.3 million litigation loss (including legal costs).

 

Comparison of Year Ended December 31, 2008, to Year Ended December 31, 2007

 

Segment Profit

 

ASC’s segment profit of $26.2 million in 2008 increased $5.5 million from the prior year. The results for 2008 were negatively impacted by a $3.3 million litigation loss (including legal costs). Excluding the impact of the litigation, the favorable variance of $8.8 million was primarily due to increased revenues resulting from higher base freight rates, partially offset by lower freight volume.

 

Gross Income

 

Gross income in 2008 increased $38.5 million from the prior year. The increase was primarily due to base freight rate increases and higher fuel surcharges, which were offset in operating costs. Reduced freight volume due to the market downturn, largely in the fourth quarter, partially offset these increases. Total net tons carried in 2008 were 35.7 million compared to 37.3 million in 2007.

 

Ownership Costs

 

Ownership costs in 2008 were comparable to the prior year.

 

Other Costs and Expenses

 

Operating costs and expenses increased $32.7 million in 2008, primarily due to higher fuel costs of $34.7 million. Excluding the impact of higher fuel, the variance to the prior year was favorable due to improved weather conditions and higher water levels, which enabled the fleet to operate more efficiently. Additionally, operating costs were lower due to fewer operating days than the prior year, particularly in the fourth quarter. As previously noted, other expenses in 2008 included a $3.3 million litigation loss.

 

ASC Regulatory Issues

 

Since February 2009, ASC has been operating under the terms and conditions of the Vessel General Permit (“VGP”) issued by the United States Environmental Protection Agency (“EPA”) pursuant to permitting requirements of the Clean Water Act (“CWA”). The VGP regulates discharges incidental to the normal operation of ships,

including ballast water discharges. Several states imposed additional state-specific limitations and monitoring requirements which have become enforceable conditions of the VGP pursuant to Section 401(d) of the CWA, including with respect to discharges of ballast water. In August 2009, the U.S. Coast Guard issued proposed ballast water treatment standards, to be implemented in two phases, for allowable concentrations of living organisms in ballast water discharged when transiting between all major U.S. ports, including those on the Great Lakes. The phase-one standard is based on the International Maritime Organization’s standard. Installations of phase-one treatment systems would be required by the first dry-docking after 2016 for ASC’s existing fleet and all new vessels after January 2012. Adoption of the phase-two standard is subject to a technical review to determine whether technology to achieve the standard can be practicably implemented. If implemented, the phase-two standard would be 1,000-times more stringent than the phase-one standard.

 

The rules as proposed could significantly impact the operations of all Great Lakes carriers, including ASC, as the efficient operation of lake vessels requires the rapid discharge of large volumes of ballast water to minimize time spent in port. Currently, there are no rapid discharge systems capable of treating to the phase-one standard and no treatment systems of any kind capable of treating to the phase-two standard. ASC is working cooperatively with federal and state agencies as well as with members of the scientific community to find alternate means of achieving the proposed standards that can be tested and accepted by state and federal agencies prior to the proposed compliance dates.

 

Labor Agreements

 

The shipboard personnel at ASC belong to the American Maritime Officers (“AMO”), the Seafarers International Union (“SIU”) and the USWA Local 5000 (“Local 5000”), as the case may be. ASC has agreements with the SIU and AMO that are effective through mid-2011. The collective bargaining agreement with Local 5000 expired in August 2009 and soon thereafter Local 5000 went on strike. In October 2009, Local 5000 and ASC reached a tentative bargaining agreement to settle the strike and in November 2009 the tentative agreement was rejected by the union’s membership. Given decreased demand in 2009, ASC only operated three of the six vessels represented by Local 5000 and used temporary replacement crews. ASC did not experience any material operating delays or constraints as a result of the strike and does not anticipate any material operating delays or constraints in the 2010 sailing season.

 

Other

 

Other is comprised of selling, general and administrative expenses, unallocated interest expense and miscellaneous income and expense not directly associated with the reporting segments and eliminations.

 

Components of Other are outlined below (in millions):

 

 

SG&A, Unallocated Interest and Other

 

In 2009, SG&A of $127.8 million decreased $41.1 million or 24.3% from 2008. The decrease was driven by lower compensation expense of $22.6 million and the absence of $5.2 million of business development expenses and a $2.3 million impairment charge associated with a terminated IT project, both incurred in the prior year. In 2008, SG&A increased $9.6 million over 2007, primarily due to approximately $5.2 million of business development costs related to the review and analysis of rail portfolio acquisitions that ultimately were not pursued, a $2.3 million impairment charge associated with a terminated IT project, higher compensation expense and stronger foreign currencies.

Unallocated interest expense is the difference between actual external interest expense incurred (net of interest income earned on certain cash balances) and amounts allocated to the reporting segments in accordance with assigned leverage targets. The credit for unallocated interest expense in 2007 primarily reflects the impact of significantly lower consolidated leverage and higher cash balances following the sale of the former Air segment in December 2006. Interest income included in unallocated interest expense was $0.1 million, $0.6 million and $6.1 million for 2009, 2008 and 2007, respectively.

 

Other income and expense in 2009 primarily consisted of a reduction of a non-income tax accrual and, in 2008, primarily consisted of a $3.8 million impairment loss on a money market fund investment, the net asset value of which fell below one dollar per share. The fund is in the process of liquidation. Eliminations were immaterial for all periods presented.

 

Consolidated Income Taxes

 

GATX’s effective tax rate for 2009 was 24.6% compared to 27.2% in 2008 and 28.0% in 2007. In 2009, foreign tax credits of $7.4 million were recognized upon completion of an international tax strategy that included the repatriation of approximately $174 million in foreign earnings. The effective tax rate for 2008 included a deferred tax benefit of $6.8 million attributable to the expiration of the statute of limitations on a state income tax position taken in a prior year. GATX’s effective tax rate for 2007 reflects favorable deferred tax adjustments due to reductions in statutory tax rates enacted in Canada, the United Kingdom and Germany, which resulted in the recognition of $20.1 million in benefits. Excluding the tax benefits noted herein, GATX’s effective tax rate was 31.5% in 2009, 29.7% in 2008 and 35.9% in 2007. Variability of GATX’s effective tax rate is driven in part by the mix of pre-tax income between domestic and foreign jurisdictions. See Note 12 to the consolidated financial statements for additional information on income taxes.

 

Discontinued Operations

 

During 2007, GATX completed the sale of the remainder of its aircraft leasing business (formerly the “Air” segment) to Macquarie Aircraft Leasing Limited for final gross proceeds of $229.9 million. Accordingly, Air has been segregated and classified as discontinued operations for all periods presented.

 

The following table summarizes certain operating data for Discontinued Operations (in millions):

 

 

In 2007, gain on disposal of segment primarily consisted of the reversal of $20.9 million of accrued income taxes resulting from an enacted change in federal income tax regulations and the finalization of the tax effects of the Air sale. Operating results of discontinued operations reflect directly attributable revenues, ownership, operating, interest and SG&A expenses and income taxes.

 

See Note 20 to the consolidated financial statements for additional information on discontinued operations.

 

Assets

 

Assets of continuing operations were $5.2 billion at December 31, 2009 and 2008. In addition to assets recorded on its balance sheet, GATX utilizes approximately $1.0 billion of other assets, primarily railcars, which are financed with operating leases and therefore are not recorded on the balance sheet. The off balance sheet assets represent the estimated present value of GATX’s committed future operating lease payments.

The following table presents assets of continuing operations by segment as of December 31 (in millions):

 

 

Gross Receivables

 

Receivables of $378.4 million at December 31, 2009, including leveraged leases net of nonrecourse debt, decreased $37.7 million from December 31, 2008, primarily due to lower lease and marine operating income.

 

Allowance for Possible Losses

 

The purpose of the allowance is to provide an estimate of credit losses inherent in reservable assets. Reservable assets are divided into two categories: rent and other receivables, which represent short-term trade billings, and finance lease receivables. Reserves for rent and other receivables are based on historical loss experience and judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GATX operates. In addition, GATX may establish specific reserves for known troubled accounts. Reserve estimates for finance lease receivables are generally evaluated on a customer specific basis, considering the same factors as rent and other receivables as well as a regular assessment of each customer’s specific credit situation. There were no material changes in estimation methods or assumptions for the allowance during 2009. GATX believes that the allowance is adequate to cover losses inherent in its reservable assets as of December 31, 2009. Since the allowance is based on judgments and estimates, it is possible actual losses incurred will differ from the estimate.

 

As of December 31, 2009, allowances for trade receivables were $2.5 million or 3.6% of rent and other receivables compared to $3.9 million or 4.7% at December 31, 2008. Specific allowances for finance leases were $10.9 million at December 31, 2009, compared to $14.7 million at December 31, 2008. The decrease in specific allowances in 2009 was primarily due to the reversal of a $6.9 million provision on certain direct finance leases related to a Rail customer that declared bankruptcy. In 2009, upon restructuring of the lease terms in bankruptcy court, the classification of the lease changed to an operating lease and all finance lease balances were reversed, including the provision. As a result of the lease reclassification, the operating lease assets were recorded at fair value and an impairment charge of $4.4 million was recorded, representing the difference between fair value and carrying value. The reversal of the provision in 2009 was partially offset by required provisions for certain other customers.

 

The following summarizes changes in GATX’s allowance for possible losses as of December 31 (in millions):

 

Operating Assets and Facilities

 

Net operating assets and facilities increased $111.7 million from 2008. The increase was primarily due to investments of $380.5 million, foreign exchange rate effects of $25.9 million and $10.7 million of purchases of leased-in assets, partially offset by depreciation of $217.7 million.

 

Investments in Affiliated Companies

 

Investments in affiliated companies increased $52.9 million in 2009, primarily due to investments of $81.4 million (including a scheduled $55.4 million shareholder loan repayment) and equity earnings of $29.0 million, partially offset by dividend distributions of $35.9 million.

 

The following table shows GATX’s investment in affiliated companies by segment as of December 31 (in millions):

 

 

See Note 6 to the consolidated financial statements for additional information about investments in affiliated companies.

 

Goodwill

 

In 2009 and 2008, changes in the balance of GATX’s goodwill, all of which is attributable to the Rail segment, resulted solely from changes in foreign currency exchange rates. GATX tests goodwill for impairment in the fourth quarter of each year and no impairments were indicated. While GATX does not believe that the carrying value of goodwill is at risk of becoming impaired in future periods, an impairment could result if existing depressed market conditions continue for an extended period or otherwise worsen.

 

Debt

 

Total debt increased $103.5 million from the prior year, primarily due to debt issuances of $646.8 million, partially offset by scheduled maturities and principal payments of $433.7 million, debt prepayments of $47.1 million and a net reduction of $55.3 million in commercial paper and borrowings under bank credit facilities.

 

The following table sets forth the details of GATX’s debt issuances in 2009:

 

 

 

 

The following table summarizes the carrying value of GATX’s debt by major component, including off balance sheet debt, as of December 31, 2009 (in millions):

 

 

 

 

Subsequent events

 

On January 29, 2010, GATX called the convertible notes for redemption. On February 5, 2010, GATX issued $250 million of unsecured notes due May 15, 2015, at a yield of 4.92%.

 

See Note 8 to the consolidated financial statements for additional information.

 

Equity

 

Total equity decreased $21.9 million from the prior year, primarily due to $55.1 million of stock repurchases made in 2009, $54.0 million of dividends and $12.7 million from the effects of post-retirement benefit plan adjustments. These decreases were partially offset by $81.4 million of net income and an $18.3 million foreign currency translation adjustment due to the balance sheet effects of a weaker U.S. dollar.

 

GATX generates a significant amount of cash from its operating activities and proceeds from its investment portfolio, which is used to service debt, pay dividends, and fund portfolio investments and capital additions. Cash flows from operations and portfolio proceeds are impacted by changes in working capital and the timing of asset dispositions. As a result, cash flow components will vary materially from quarter to quarter and year to year. As of December 31, 2009, GATX had unrestricted cash balances of $41.7 million. The following discussion of cash flow activity is presented excluding the impact of discontinued operations.

 

Net Cash Provided by Operating Activities of Continuing Operations

 

Net cash provided by operating activities of continuing operations of $265.4 million decreased $98.6 million compared to 2008. The decrease was primarily driven by a $45.0 million increase in current year contributions to GATX’s domestic funded pension plans, lower Rail lease income, decreased Specialty joint venture dividends and a smaller net contribution from ASC, partially offset by lower SG&A.

 

Portfolio Investments and Capital Additions

 

Portfolio investments and capital additions primarily consist of purchases of operating assets, investments in joint ventures, loans and capitalized asset improvements. During 2009, Rail acquired approximately 3,300 railcars in North America and 500 railcars in Europe, compared to approximately 7,900 railcars in 2008, which included 3,650 cars from Allco. Specialty investments in 2009 primarily consisted of $81.4 million in joint ventures (including a scheduled $55.4 million shareholder loan repayment) and $33.4 million in industrial equipment. Specialty investments in 2008 included $36.9 million in industrial equipment, $64.1 million in marine assets and $59.8 million in joint ventures. ASC investments of $7.2 million in 2009 and $7.6 million in 2008 primarily

consisted of structural and mechanical upgrades to the vessel fleet. Other investments of $8.4 million in 2009 primarily consisted of information technology expenditures that support GATX’s operations and in 2008 included leasehold improvements related to the relocation of the corporate headquarters. The timing of investments is dependent on purchase commitments, transaction opportunities and market conditions.

 

The following table presents the cash component of portfolio investments and capital additions by segment for the years ended December 31 (in millions):

 

 

 

 

Portfolio Proceeds

 

Portfolio proceeds primarily consist of loan and finance lease receipts, proceeds from asset remarketing and sales of securities, and capital distributions from affiliates. Portfolio proceeds in 2008 and 2007 were favorably impacted by high levels of asset remarketing proceeds.

 

Portfolio proceeds were as follows for the years ended December 31 (in millions):

 

 

Other Investing Activity

 

In 2009, Rail acquired 571 previously leased-in railcars for $10.7 million and completed a sale-leaseback for 597 railcars for net proceeds of $45.7 million. In 2008, Rail acquired 3,628 previously leased-in railcars for $70.1 million and the assumption of $74.7 million of related nonrecourse debt. Proceeds from sales of other assets primarily relate to the scrapping of railcars except for 2008, which also included $22.2 million of proceeds from the sale of the office building in Europe. Scrapping proceeds in North America were $22.6 million, $36.8 million and $14.3 million in 2009, 2008 and 2007, respectively. Other investing activity in 2008 of $42.1 million reflects the balance sheet reclassification of a money market fund investment that became illiquid when the per share net asset value fell below one dollar. Other investing activity in 2009 consists of distributions of $36.0 million from this fund.

 

Net Cash used in Financing Activities of Continuing Operations

 

Net cash used in financing activities of continuing operations was $17.9 million in 2009, compared to net cash provided of $122.1 million in 2008. Repayments of debt of $536.1 million in 2009 primarily consisted of scheduled maturities, principal payments on nonrecouse debt and a net reduction in commercial paper and borrowings under bank credit facilities. Stock repurchases made under the $200 million GATX common stock repurchase program were $55.1 million for 2.8 million shares in 2009 and $76.5 million for 2.1 million shares in 2008. Debt proceeds in 2009 totaled $636.1 million (net of hedges and issuance costs). Dividends paid in 2009 were $53.6 million.

Cash Flows of Discontinued Operations

 

Net cash provided by discontinued operations of $181.8 million in 2007 primarily consisted of final proceeds received upon completion of the Air sale, partially offset by allocated income tax payments.

 

General

 

GATX funds its investments and meets its debt, lease and dividend obligations through available cash balances, cash generated from continuing operating activities, portfolio proceeds, sales of other assets, commercial paper issuances, committed revolving credit facilities and the issuance of secured and unsecured debt. Cash from operations and commercial paper issuances are the primary sources of cash used to fund daily operations. GATX utilizes both domestic and international capital markets and banks for its debt financing needs.

 

Principal sources and uses of cash from continuing operations were as follows for the years ended December 31 (in millions):