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

Form 10-K

 

 

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  þ      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):

 

(Do not check if a smaller reporting company)

 

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 $1.2 billion as of June 30, 2010.

 

As of January 31, 2011, 46.4 million common shares were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

GATX CORPORATION

 

2010 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”). 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, 2010, GATX had total assets of $6.4 billion, comprised largely of railcars, marine vessels and joint venture investments. This amount includes $1.0 billion of assets, primarily railcars that were leased-in under operating leases and were therefore not recorded on the balance sheet.

 

Rail and its affiliates lease tank cars, freight cars and locomotives in North America and Europe. Operating for over 110 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 sourcing railcars from manufacturers and making opportunistic purchases of railcar fleets in the secondary market.

 

At December 31, 2010, Rail had total assets of $5.3 billion, including $1.0 billion of off balance sheet assets. Rail’s 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, 2010, Rail’s worldwide fleet, comprised of wholly-owned and leased-in railcars, totaled approximately 132,000 railcars. These cars have depreciable lives of 30 to 38 years and an average age of approximately 16 years in North America and 23 years in Europe. Rail also had an ownership interest in approximately 33,000 railcars through investments in affiliated companies. Affiliate fleets consist primarily of freight and intermodal railcars and include approximately 5,300 railcars that GATX also manages. In addition, Rail manages approximately 2,600 railcars for third-party owners. The following table sets forth Rail’s fleet data as of December 31, 2010:

 

 

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 900 customers. In 2010, no single customer accounted for more than 3.2% of Rail’s total lease income, and the top ten customers combined accounted for approximately 21% 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 one to five years. The average remaining lease term of the North American fleet was 4 years as of December 31, 2010. 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, Rail acquires portfolios or fleets of complementary railcars in the secondary market.

 

Rail’s North American operations also include a locomotive leasing business, which consists of 550 locomotives, 81% of which are four-axle and 19% are six-axle. Additionally, Rail manages 64 locomotives for an affiliate and 45 locomotives for a third party. 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 16 years. As of December 31, 2010, the average remaining lease term of Rail’s locomotive fleet was 2 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 perform repair, maintenance, modification 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 the car body and safety appliances, regulatory compliance work, wheelset replacements, exterior blast and painting, 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 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 secured access to repair capacity. In 2010, 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 2010, an aggregate of 85,000 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 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 497 newly manufactured railcars in 2011 and options for up to 1,450 additional railcars through 2013. 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 seven years and at December 31, 2010, 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 work for owned railcars. The owned service centers are supplemented by a number of third-party contract repair facilities, which in 2010 accounted for approximately 52% 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, Wascosa, and PCC Rail Group.

 

Rail Affiliates

 

Rail has three notable investments in affiliated companies: a 37.5% interest in AAE Cargo AG (“AAE”), a 12.5% interest in Adler Funding LLC (“Adler”) and a 50% interest in Southern Capital Corporation (“SCC”).

AAE is a Switzerland-based railcar lessor that as of December 31, 2010, owned approximately 25,200 freight cars, comprised of 14,959 intermodal cars (59%), 4,396 covered cars (18%) and 5,805 other freight car types (23%), with an average age of 10 years. AAE’s customer base consists of various railways throughout Europe as well as private operators. As of December 31, 2010, the average remaining lease term of AAE railcars was approximately 2 years.

 

Adler was formed in 2010 as a partnership among GATX and three financial institutions. Upon formation, Adler acquired 5,352 railcars consisting primarily of general purpose freight cars with an average build date of 2003. Additionally, GATX has entered into a management services agreement with Adler under which GATX acts as the primary manager for the Adler Fleet. As compensation for its services, GATX receives a base service fee and a performance based sales fee.

 

SCC is a joint venture with the Kansas City Southern Railroad (“KCSR”). SCC was formed in 1996 and controls approximately 2,400 freight cars and 64 locomotives, the majority of which are on lease to KCSR.

 

Specialty provides financing, asset remarketing and asset management services to the marine and industrial equipment markets. Specialty offers operating leases, direct finance leases and secured loans, and extends its market reach through joint venture investments. Specialty seeks to invest in long-lived, widely used assets that are critical to the operations of its customers. Specialty’s assets as of December 31, 2010, including off balance sheet assets, totaled $744.4 million.

 

 

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 wholly-owned portfolio consists primarily of investments in operating assets held for lease and finance leases totaling $377.4 million. Operating assets are diverse and include equipment used in gas compression, power generation, construction and mining, and marine vessels used in inland freight transportation in the United States. 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, 2010, Specialty was party to 6 such residual value guarantees totaling $13.8 million, which substantially expire in 2012.

 

Specialty Affiliates

 

Specialty has investments in affiliated companies with a net book value of $345.1 million as of December 31, 2010. Affiliate activities include aircraft spare 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 respective markets.

 

Rolls-Royce and Partners Finance (“RRPF”) is a collection of 50%-owned domestic and international joint ventures with Rolls-Royce plc, a leading manufacturer of commercial aircraft jet engines. RRPF leases spare engines to Rolls-Royce plc and 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.

 

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”), respectively, are 35% and 50%-owned joint ventures with IM Skaugen ASA (“Skaugen”). Skaugen is a 94 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 owns three liquid petroleum gas/ethylene/liquefied natural gas vessels (each with 10,000 cbm carrying capacity). One additional vessel is under construction and is expected to be delivered by the end of 2011. The Singco vessels operate in the same pool as the Somargas vessels.

Clipper Third Limited, Clipper Fourth Limited and Clipper Fourth APS (collectively the “Clipper Entities”), respectively, are 50%, 45% 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 operates a modern fleet of over 200 vessels, approximately 100 of which are partly or wholly-owned. The Clipper Entities fleet consists of two 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 and 14 handysize chemical parcel tankers (each with 10,000-15,000 dwt carrying capacity). These 16 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 370 owned units in various sizes and configurations totaling approximately 193,000 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 carried by ASC’s vessels are iron ore, coal, limestone aggregates and metallurgical limestone. End markets of these commodities include domestic auto manufacturing, electricity generation and non-residential construction. Customer service, primarily in the form of scheduling flexibility, reliability and operating safety has been the key 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, 2010, ASC’s fleet consisted of 18 vessels with a net book value of $232.3 million. Fifteen of the vessels are diesel powered, constructed in the 1970’s and early 1980’s, having an average age of 33 years and estimated useful lives of 65 years. The diesel vessels range in size from 635 feet to 1,004 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 nine 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 served 20 customers in 2010 with the top five customers comprising 76% 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 2010, ASC carried 28.0 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 ASC’s vessels are available for 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 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.

 

ASC’s fleet is inactive for a significant portion of the first quarter of each year due to the winter conditions on the Great Lakes. Otherwise, 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, 2010, GATX employed 1,947 persons, of whom 48% were covered by union contracts.

 

The hourly employees at Rail’s U.S. service centers belong to the United Steelworkers (“USW”). 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 USW, 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, 2010, 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.

 

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 GATX 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 and accounting considerations, interest rates and operational flexibility. GATX has no control over these external considerations, and changes in these factors, including potential changes to lease accounting rules, 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, excess capacity in the marketplace 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 access to newly-built railcars may be limited, and any long-term railcar purchase commitments could subject GATX to material operational and financial risks.

 

Unlike certain of its competitors in the railcar leasing market, GATX does not manufacture railcars. GATX’s ability to acquire newly-built railcars could be limited if the Company is unable to procure railcars from manufacturers on competitive terms.

 

In order to obtain committed access to a supply of newly-built railcars on competitive terms, GATX may enter into long-term supply agreements with manufacturers to purchase significant numbers of newly-built railcars over a multi-year period. The Company’s purchase commitments under these long-term agreements generally are not subject to cancellation or material reduction by GATX. If economic conditions weaken during the term of a long-term supply agreement, GATX may be required to continue to accept delivery of, and pay for, new railcars at times when it is difficult for the Company to place the railcars with customers and the Company’s financing costs may be unattractively high.

 

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, 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 the issuance of long-term debt instruments and commercial paper. In recent years, these markets have exhibited unprecedented volatility and 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 rail operations 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 rail industry, including mechanical, maintenance and safety standards. Similarly, ASC’s operations are subject to regulation by various federal and state agencies, including the U.S. Coast Guard and the U.S. Environmental Protection Agency which establish rules and regulations relating to emissions, ballast discharges and other environmental and operational matters. State agencies regulate some aspects of rail operations with respect to health and safety matters not otherwise preempted by federal law. In addition, operations of GATX’s foreign subsidiaries are subject to the jurisdiction of authorities in countries where they do business. Future changes in any of 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 has significant financial exposure related to the performance of its aircraft engine leasing joint venture investments.

 

GATX and Rolls-Royce plc each own 50% of several joint ventures that lease spare jet engines to owners and operators of commercial aircraft (collectively, the “RRPF joint ventures”). As of December 31, 2010, GATX’s investment in these joint ventures was $156.1 million. Through its 50% ownership of the RRPF joint ventures, GATX is exposed to various risks associated with the commercial aviation industry, including geographic exposure and customer concentrations unique to that industry. Further, the financial results of the RRPF joint ventures are heavily dependent on the performance of Rolls-Royce plc, which is both a major customer of, and a critical supplier of maintenance services to, the joint ventures. Rolls-Royce plc leases a significant number of spare engines from the joint ventures and also provides maintenance services on the engines leased by the RRPF joint ventures to Rolls-Royce plc and other customers of the joint ventures. The RRPF joint ventures are significant contributors to GATX’s consolidated segment profit. If the financial or operating performance of the RRPF joint ventures were to deteriorate, GATX’s results of operations and cash flows could be negatively affected.

 

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 offset, 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 impact 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 or shortened sailing seasons. Additionally, low water levels and vessel draft restrictions in certain harbors or canals 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 material 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.

 

 

 

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.

 

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

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 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, 2010, with the cumulative total return of the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”) and the Standard & Poor’s MidCap 400 Index (“MidCap 400”) during the same period. 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, which is 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, 2005, 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, judgment, 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”).

DISCUSSION OF OPERATING RESULTS

 

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

 

 

 

 

 

 

2010 Summary

 

 

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 and GATX’s share of affiliates’ 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

 

Operating conditions in Rail’s markets, while slightly better than anticipated entering 2010, continued to be challenging throughout the year. As expected, segment profit was lower compared to the prior year. In particular, pressure on lease rates and railcar demand in North America led to sharply lower lease income. Rail entered the year with leases expiring on approximately 17,000 railcars, the majority of which were successfully renewed. However, the average lease renewal rate on cars in the GATX Lease Price Index (the “LPI”, see definition below) decreased 15.8% from the average expiring rate, compared to a decrease of 11.0% in 2009 and an increase of 5.2% in 2008. Lease terms on renewals for cars in the LPI averaged 35 months in 2010, compared to 41 months in 2009 and 63 months in 2008. The reduced term on lease renewals in 2010 was due in part to Rail’s continued strategy to shorten term where possible, in anticipation of improved pricing as markets recover. Utilization, after trending downward in 2009 to 95.9%, improved to 97.4% at year end 2010.

 

Rail’s wholly-owned European tank car fleet, which has a high concentration of cars deployed in the petroleum market, exhibited relatively stable pricing and demand in 2010. The number of cars on lease showed a modest increase, and utilization at year end was 95.7%, compared to 94.7% at the end of 2009. AAE continued to experience significant pressure on fleet utilization due to lower demand for intermodal freight cars, which comprise the bulk of AAE’s fleet. During the latter part of 2010, AAE began to experience improving market fundamentals.

 

Results in 2010 included a modest increase in remarketing income reflective of a gradual improvement in the secondary market for rail equipment. Rail also benefited from higher scrapping gains (included in other income) attributable to an increase in the price of scrap steel.

 

Absolute lease rates are improving but are still well below the levels achieved prior to the economic downturn. Leases covering approximately 21,000 cars in North America are scheduled to expire in 2011, many of which were priced in a higher lease rate environment. The resulting rollover impact of renewals completed in 2009-10 as well those scheduled in 2011 will negatively impact Rail’s lease income in the near term.

 

In this recovering economic environment, Rail will focus on lease pricing improvement and asset remarketing. Additionally, Rail is well positioned to pursue investment opportunities to grow its asset base. Successful execution on these initiatives combined with continued market improvements are expected to enhance Rail’s long-term performance.

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

 

 

Lease Price Index

 

The GATX 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 Rail believes to be representative of its overall North American fleet. The LPI measures the percentage change between the weighted average renewal lease rate and the weighted average expiring lease rate. Average renewal term reflects the weighted average renewal lease term in months.

 

 

 

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:

 

 

 

Segment Profit

 

Rail’s segment profit was $150.6 million in 2010 compared to $169.1 million in 2009. The 2010 results included $10.4 million of unrealized losses due to changes in the fair value of the AAE interest rate swaps, compared to $24.4 million of unrealized losses in 2009. Excluding the impact of these items from both years, the unfavorable current year variance of $32.5 million was primarily due to lower lease income in North America.

 

Gross Income

 

Gross income for 2010 was $2.1 million lower than the prior year. The variance was significantly impacted by a $31.2 million decrease in lease income, partially offset by a $14.0 million decrease in unrealized losses on the AAE interest rate swaps. Lease income in North America decreased $32.4 million, primarily due to fewer cars on lease and the impact of lower renewal lease rates. On average during 2010, there were approximately 2,100 fewer railcars on lease as compared to 2009, primarily due to lease-end returns. Current year active cars include a portfolio acquisition of 2,535 cars completed in November. In Europe, a $1.0 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 169 more cars on lease. In 2010, locomotives contributed $2.2 million in additional lease income due to more locomotives on lease. Asset remarketing income increased $3.4 million due to increased railcar sales in the current year. Other income was $14.4 million higher, driven by higher scrapping gains, an end of lease settlement and higher mileage revenue, which is partially offset in other costs. Excluding the impact of the unrealized losses on the AAE interest rate swaps from both years, affiliates’ earnings decreased $2.7 million, primarily due to lower operating results at AAE attributable to lower lease revenues, partially offset by an asset remarketing gain at another affiliate.

 

AAE holds multiple derivative instruments intended to hedge interest rate risk associated with forecasted floating rate 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 losses recognized were primarily driven by declines 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 2010 were comparable to 2009. The mix of ownership costs was impacted by a sale and lease-back of railcars in each year.

 

Other Costs and Expenses

 

Maintenance expense increased $1.0 million in 2010, net of a $0.5 million favorable foreign exchange effect of a stronger U.S. dollar. Maintenance expense in North America decreased $3.3 million, primarily due to lower program and railroad repairs, largely offset by higher base fleet repairs. Excluding the currency impact, maintenance expense in Europe increased $4.8 million, primarily due to higher volume of underframe revisions, higher material costs and the absence of a prior year warranty settlement, partially offset by lower costs for replacement wheelsets. GATX’s European rail operations have undertaken a multi-year wheelset replacement program in response to industry and regulatory changes. Although the majority of the costs incurred under this program are capitalized, it is causing car volumes at repair shops to be much higher than normal. Additionally, other maintenance and repairs are performed on these cars while they are in the shop, resulting in higher maintenance expenses. In 2010, capitalized costs relating to replaced wheelsets were $27.6 million.

 

Other costs in 2010 were $13.7 million higher than the prior year. In 2009, a net $2.5 million benefit was recorded upon the restructuring of a lease contract with a customer that declared bankruptcy and a $3.9 million insurance recovery was received related to a fire at a GATX repair facility in Europe. In the current year, higher storage fees, asset impairment charges and net remeasurement losses on non-functional currency denominated assets and liabilities also contributed to the increase. Asset impairments in the current year primarily consisted of a $4.8 million charge in North America resulting from an Association of American Railroads industry-wide regulatory mandate that resulted in a significant decrease to the expected economic life of 358 GATX aluminum hopper railcars.

 

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

 

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 the AAE interest rate swaps. 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 the AAE interest rate swaps. Excluding the impact of these items from both years, the unfavorable 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 2008. The decrease was significantly impacted by a $20.7 million increase in unrealized losses on the 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 2008. 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. 2009 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 2009. 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 2008. Excluding the impact of the unrealized losses on the 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.

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.

 

Railcar Regulatory Issues

 

Consistent with recent changes in European railcar industry practices and regulatory directives announced after the June 29, 2009, accident in the city of Viareggio, Italy, GATX Rail Austria GmbH (an indirect subsidiary of the Company, “GATX Rail Austria”) and its subsidiaries have implemented a modified wheelset maintenance and inspection program, which includes the installation of new wheelsets in certain cases. 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 continue to incur higher maintenance expenses and capital costs over the next several years as implementation of the wheelset program proceeds. In the longer run, it is expected that the wheelset maintenance and inspection program will lead to higher depreciation expense, but lower maintenance costs, in the future related to capitalized wheelset improvements. The complete scope and cost of any potential future maintenance initiatives, in addition to those implemented as part of the modified wheelset maintenance and inspection program, are not fully known at this time. The Company does not currently expect that the costs associated with the modified wheelset maintenance and 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. See Note 22 for additional information.

 

Labor Agreements

 

The hourly employees at Rail’s three U.S. service centers are represented by the United Steelworkers (“USW”) and are operating under a collective bargaining agreement that is in effect through February 2013. 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 2013 and January 2014 and the third agreement expired in January 2011 and is currently in negotiations.

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 2013.

 

Specialty

 

Segment Summary

 

Specialty’s total asset base, including off balance sheet assets, was $744.4 million at December 31, 2010, compared to $676.9 million at December 31, 2009, and $652.9 million at December 31, 2008. Investment volume in 2010 was $97.4 million compared to $119.5 million in 2009 and consisted of $27.9 million in joint ventures (including a scheduled principal payment of $6.8 million on a loan from an affiliate) and $69.0 million in industrial equipment. The estimated net book value equivalent of assets managed by Specialty for third parties was $241.9 million at December 31, 2010.

 

Specialty’s financial results declined in 2010 primarily due to lower asset remarketing income and affiliates’ earnings. Capital market volatility, while improved, continued to create downward pressure on certain asset prices, resulting in reduced asset remarketing opportunities. In addition, activity in the secondary markets for equipment types favored by Specialty was limited, which narrowed the range of acceptable investment opportunities. In 2011, Specialty will be focused on pursuing growth and capitalizing on select asset remarketing opportunities.

 

Affiliates’ earnings has historically been a significant contributor to Specialty’s segment income and that trend continued in 2010, however, at lower levels. While the Rolls-Royce affiliate continued to produce strong operating results, low demand and excess capacity in the international shipping markets led to downward pressure on charter rates and reduced volumes in most shipping sectors, negatively impacting results at the marine affiliates. While shipping markets have generally stabilized, a continued supply of newly-built vessels is entering the market, further pressuring charter rates. These conditions are expected to continue into 2011.

 

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

 

 

 

Comparison of Year Ended December 31, 2010, to Year Ended December 31, 2009

 

Segment Profit

 

Specialty’s segment profit of $48.7 million was $2.9 million lower than the prior year. The decrease was primarily due to lower affiliates’ earnings and asset remarketing income.

 

Gross Income

 

Lease income was comparable to the prior year. Asset remarketing income decreased $1.8 million from the prior year, primarily due to reduced secondary market activity. Other income decreased $1.4 million, primarily due to lower current period gains on sales of securities and lower fee income. Affiliates’ earnings decreased $2.2 million, primarily due to lower marine joint venture operating earnings and a vessel impairment charge, partially offset by higher asset remarketing income. Affiliate asset remarketing income was $5.4 million in 2010 compared to $2.8 million in 2009.

 

Ownership Costs

 

Ownership costs increased $0.3 million from the prior year, primarily due to interest expense from higher debt balances associated with current and prior year investments, largely offset by lower depreciation expense due to the net impact and timing of assets sold and new investments in each period.

 

Other Costs and Expenses

 

Other costs and expenses decreased $3.2 million from the prior year, primarily due to lower provisions for losses and asset impairment charges, partially offset by higher operating costs for pooled barges. Other operating

expenses include net reversals of provisions of $1.5 million in 2010 compared to loss provisions of $3.7 million in 2009. Asset impairment charges in 2010 were $1.9 million compared to $2.7 million in 2009.

 

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

 

Segment Profit

 

Specialty’s 2009 segment profit of $51.6 million was $54.3 million or 51.3% lower than 2008. 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 2008, 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 2008. The 2009 asset remarketing income consisted primarily of $11.1 million of residual sharing gains and 2008 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 2008 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 2008, 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 2008 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.

 

ASC

 

Segment Summary

 

ASC’s markets improved from the severe downturn experienced in 2009 and shipping volumes increased significantly in 2010 driven by a recovery in steel manufacturing and increased demand for iron ore. During 2010, ASC deployed 13 vessels compared to 12 vessels in 2009. However, notwithstanding the gains achieved, volumes remain well below the levels realized prior to the economic decline. In addition, further near term growth in volumes will depend on the sustainability of the economic recovery, which is uncertain at this time. Anticipated volume in 2011 is expected to be similar to levels achieved in 2010 and ASC expects that 11 vessels will likely be put into service for the year. To manage winter maintenance costs, ASC will prepare vessels for service as customer volume commitments are finalized.

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

 

 

 

Comparison of Year Ended December 31, 2010, to Year Ended December 31, 2009

 

Segment Profit

 

ASC’s segment profit for 2010 was $12.5 million higher than the prior year, primarily due to significantly higher freight volume. Additionally, the prior year results included the receipt of a $5.6 million litigation settlement.

Gross Income

 

Gross income in 2010 increased $56.9 million from prior year, primarily due to higher freight volume and 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. Total net tons carried in 2010 were 28.0 million, an increase of 6.8 million or 32% from 2009, with iron ore volume increasing 6.3 million net tons.

 

Ownership Costs

 

Ownership costs were comparable between the two periods.

 

Other Costs and Expenses

 

Maintenance costs were $3.0 million lower, primarily due to more effective management of winter maintenance in 2010. Marine operating expenses increased $41.9 million, primarily due to increased expenses associated with higher tonnage shipped and higher fuel prices, which are recoverable through fuel surcharges. Other costs in 2009 were favorably impacted by the aforementioned litigation settlement.

 

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

 

Segment Profit

 

ASC’s segment profit in 2009 decreased $10.1 million from 2008. 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 2009 compared to a $3.3 million litigation loss recorded in 2008.

 

Gross Income

 

Gross income in 2009 decreased $138.8 million from 2008, primarily due to significantly lower freight volume and reduced fuel surcharges (the effect of which is largely offset in operating costs). 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.

 

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 in 2009. Other costs 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).

 

ASC Regulatory Issues

 

In 2009, the U.S. Coast Guard (“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.

In January 2011, the Coast Guard announced that it expects to publish final rules in April 2011. If the final rules are implemented as proposed in 2009, they would 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 United Steelworkers, 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, but in November 2009 the tentative agreement was rejected by the union’s membership and the members remain on strike. Given decreased demand in 2010, ASC only operated two of the six vessels represented by Local 5000 and used temporary replacement workers to crew the vessels. 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 2011 sailing season.

 

 

SG&A, Unallocated Interest and Other

 

In 2010, SG&A of $134.8 million increased $7.0 million or 5.5% from 2009. The increase was driven by higher compensation, outside legal and consulting expenses, partially offset by the effects of foreign exchange. In 2009, SG&A decreased $41.1 million from 2008, primarily due to a $22.6 million reduction in compensation expense 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 of which were incurred in 2008.

 

Unallocated interest expense is the difference between external interest expense (net of interest income earned on certain cash balances) and amounts allocated to the reporting segments in accordance with assigned leverage targets. The amount of unallocated interest in any year is affected by the timing of debt issuances and investment fundings as well as the level of cash balances. Interest income included in unallocated interest expense was $0.1 million, $0.1 million and $0.6 million for 2010, 2009 and 2008, respectively.

 

Other income and expense in 2010 primarily reflects a $6.5 million benefit from the resolution of a litigation matter and a $1.7 million recovery on a previously impaired money market fund investment, partially offset by a $2.0 million addition to an environmental reserve related to a sold facility. Other income and expense in 2009 primarily consisted of the reversal 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. Eliminations were immaterial for all periods presented.

 

Consolidated Income Taxes

 

GATX’s effective tax rate for 2010 was 17.1% compared to 24.6% in 2009 and 27.2% in 2008. In 2010, GATX’s effective tax rate included a $9.5 million benefit, primarily attributable to the reversal of accruals resulting from the close of certain domestic and foreign tax audits. Additionally, a $1.9 million deferred tax benefit was recognized in connection with a reduction in the statutory tax rates in the United Kingdom. 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. Excluding the tax benefits noted herein, GATX’s effective tax rate was 28.8% in 2010, 31.5% in 2009 and 29.7% in 2008. Variability of GATX’s effective tax rate is driven in part by the mix of pre-tax income among domestic and foreign jurisdictions. See Note 12 to the consolidated financial statements for additional information on income taxes.

 

Assets

 

Assets were $5.4 billion at December 31, 2010 compared to $5.2 billion at December 31, 2009. 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 by segment as of December 31 (in millions):

 

 

Gross Receivables

 

Receivables of $418.8 million at December 31, 2010, which include leveraged leases net of nonrecourse debt, increased $40.4 million from December 31, 2009, primarily due to an increase in direct finances leases.

 

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. Amounts are charged against the allowance when they are deemed to be uncollectable. As of December 31, 2010, the net book value of GATX’s investment in a non-performing leveraged lease was $16.7 million. There were no material changes in estimation methods or assumptions for the allowance during 2010. GATX believes that the allowance is

adequate to cover losses inherent in its reservable assets as of December 31, 2010. Since the allowance is based on judgments and estimates, it is possible actual losses incurred will differ from the estimate.

 

As of December 31, 2010, allowances for trade receivables were $2.2 million or 3.0% of rent and other receivables compared to $2.5 million or 3.6% at December 31, 2009. Specific allowances for finance leases were $9.4 million at December 31, 2010, compared to $10.9 million at December 31, 2009.

 

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 $100.5 million from 2009. The increase was primarily due to investments of $507.2 million, partially offset by dispositions of $134.7 million, depreciation of $217.0 million and $33.1 million due to foreign exchange rate effects.

 

 

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

 

Goodwill

 

In 2010 and 2009, 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 tested its goodwill for impairment in the fourth quarter of 2010 and no impairment was 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 $263.7 million from the prior year, primarily due to debt issuances of $578.1 million and a net increase of $46.8 million in commercial paper and borrowings under bank credit facilities, partially offset by scheduled maturities and principal payments of $344.2 million.

The following table sets forth the details of GATX’s debt issuances in 2010:

 

 

 

 

The following table summarizes the carrying value of GATX’s debt by major component, including off balance sheet debt, as of December 31, 2010 (in millions):

 

 

 

 

Equity

 

Total equity increased $11.1 million from the prior year, primarily due to $80.8 million of net income, $9.7 million from effects of share based compensation and $5.1 million from the effects of post-retirement benefit plan adjustments, partially offset by $53.9 million of dividends and a $28.4 million foreign currency translation adjustment due to the balance sheet effects of a stronger 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, 2010, GATX had unrestricted cash balances of $78.5 million.

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities of $242.1 million decreased $23.3 million compared to 2009. In the first quarter of 2010, GATX discovered a clerical error in the preparation of its Consolidated Statement of Cash Flows for the fourth quarter of 2009, resulting in a $13.1 million overstatement of net cash provided by operating activities for the year ending December 31, 2009. Management determined that the effect of this error was immaterial and adjusted its Consolidated Statement of Cash Flows in 2010 to correct this error. Excluding the effect of this error from both periods, cash from operations increased $2.9 million, primarily due to a $30.6 million

decrease in contributions to GATX’s domestic funded pension plans and higher income from ASC, largely offset by lower Rail lease income and higher operating lease payments.

 

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 2010, Rail acquired approximately 5,300 railcars in North America and 650 railcars in Europe, compared to approximately 3,800 total railcars in 2009. Additionally, in 2010 Rail invested $36.8 million in Adler Funding LLC, a new affiliate. Specialty investments in 2010 primarily consisted of $69.0 million in industrial equipment and $27.9 million in joint ventures (including scheduled principal payments of $6.8 million on a shareholder loan). Specialty investments in 2009 included $81.4 million in joint ventures (including scheduled principal payments of $55.4 million on a shareholder loan) and $33.4 million in industrial equipment. ASC investments primarily consisted of structural and mechanical upgrades to its vessels. Other investments primarily consisted of information technology expenditures that support GATX’s operations. 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 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 2010 and 2009, Rail completed sale-leasebacks for 947 and 597 railcars, respectively. In 2010, 2009 and 2008, Rail acquired 292, 571 and 3,628 previously leased-in railcars, respectively. Additionally, the 2008 acquisition included the assumption of $74.7 million of nonrecourse debt. Proceeds from sales of other assets primarily relate to the scrapping of railcars and in 2008 also include $22.2 million of proceeds from the sale of the office building in Europe. The increase in restricted cash in 2010 was primarily related to $30.5 million of contributions to two wholly-owned special purpose corporations that were formed in prior years to finance railcars on a structured, non-recourse basis. These one-time contributions were intended to reduce additional interest

expense and penalties that might otherwise accrue under the terms of the applicable financing arrangements. Other investing activity in 2008 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 and 2010 consisted of distributions from this fund.

 

Other investing activity was as follows for the years ended December 31 (in millions):