GATX - 10-Q quarterly report FY

 

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As of March 31, 2010, 46.3 million common shares were outstanding.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

     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”).

     The accompanying unaudited consolidated financial statements of GATX Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by these accounting principles for complete financial statements. In the opinion of management, all adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010, are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2010. In particular, ASC’s fleet is generally inactive for a significant portion of the first quarter of each year due to the winter conditions on the Great Lakes. In addition, the timing of asset remarketing income is dependent, in part, on market conditions and, therefore, does not occur evenly from period to period. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2009, as set forth in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

     During the first quarter of 2010, the Company discovered a clerical error in the preparation of its Consolidated Balance Sheet and Consolidated Statement of Cash Flows as of and for the quarter and year ended December 31, 2009, respectively. The error resulted in a $13.1 million overstatement in each of cash and cash equivalents; accounts payable and accrued expenses; and net cash provided by operating activities of continuing operations. Management has determined that the effect of this error is immaterial to prior periods and adjusted its Consolidated Balance Sheet and Consolidated Statement of Cash Flows in the first quarter of 2010 to correct this error.

     As of January 1, 2010, GATX adopted authoritative accounting guidance that revises the accounting and reporting for Variable Interest Entities (“VIEs”). The guidance requires that a qualitative and quantitative analysis be completed each reporting period to determine whether a VIE must be consolidated and further requires additional disclosures related to significant judgments and assumptions considered in the analysis and the nature of risks associated with the VIE. The application of this guidance had no impact on GATX’s financial position, results of operations or cash flows; however, as of the adoption date, certain existing investments were determined to be VIE’s and in one instance, GATX was determined to be the primary beneficiary of an entity that was previously consolidated. See Note 6 for additional details.

     Investments in affiliated companies represent investments in, and loans to and from, domestic and foreign companies and joint ventures that are in businesses similar to those of GATX, such as lease financing and related services for customers operating rail, marine and industrial equipment assets, as well as other business activities, including ventures that provide asset residual value guarantees in both domestic and foreign markets.

     Operating results for all affiliated companies, assuming GATX held a 100% interest, would be (in millions):

     The following tables set forth GATX’s assets and liabilities that are remeasured at fair value on a recurring basis as of (in millions):

     Available for sale equity securities are valued based on quoted prices in an active exchange market. Warrants and derivative contracts are valued using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or can be derived principally from or corroborated by observable market data.

     In 2010, GATX performed nonrecurring Level 3 fair value measurements for $3.0 million (carrying value of $7.8 million) of railcars and recognized impairment losses of $4.8 million, which were included in other expense. The fair values were determined using discounted cash flow methodologies and third party appraisal data, as applicable. The impairments were primarily attributable to 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.

     GATX recognizes all derivative instruments at fair value and classifies them on the balance sheet as either other assets or other liabilities. Classification of derivative activity in the statements of income and cash flows is generally determined by the nature of the hedged item. Gains and losses on derivatives that are not accounted for as hedges are classified as other operating expenses and the related cash flows are included in cash flows from operating activities. Although GATX does not hold or issue derivative financial instruments for purposes other than hedging, certain derivatives may not qualify for hedge accounting. Changes in the fair value of these derivatives are recognized in earnings immediately.

     Fair Value Hedges — GATX uses interest rate swaps to convert fixed rate debt to floating rate debt and to manage the fixed to floating rate mix of its debt obligations. For fair value hedges, changes in fair value of both the derivative and the hedged item are recognized in earnings as interest expense. As of March 31, 2010, and December 31, 2009, GATX had four instruments and three instruments outstanding, respectively, with aggregate notional amounts of $435.0 million and $385.0 million, respectively. As of March 31, 2010, these derivatives had maturities ranging from 2010-2015.

     Cash Flow Hedges — GATX uses interest rate swaps to convert floating rate debt to fixed rate debt and to manage the fixed to floating rate mix of its debt obligations. GATX also uses interest rate swaps and Treasury rate locks to hedge its exposure to interest rate risk on existing and anticipated transactions. As of March 31, 2010, and December 31, 2009, GATX had 13 instruments and 15 instruments outstanding, respectively, with aggregate notional amounts of $133.3 million and $243.5 million, respectively. As of March 31, 2010, these derivatives had maturities ranging from 2011-2015. Within the next 12 months, GATX expects to reclassify $6.5 million ($4.1 million after-tax) of net losses on previously terminated derivatives from accumulated other comprehensive income (loss) to earnings. Amounts are reclassified when interest and operating expense related to the hedged risks affect earnings.

     Certain of GATX’s derivative instruments contain credit risk provisions that could require GATX to make immediate payment on derivative instruments in net liability positions in the event that GATX defaulted on a certain portion of its outstanding debt obligations. The aggregate fair value of all derivative instruments with credit risk related contingent features that are in a liability position as of March 31, 2010, was $4.5 million. GATX is not required to post any collateral on its derivative instruments and does not expect the credit risk provisions to be triggered.

     Additionally, in the event that a counterparty fails to meet the terms of the interest rate swap agreement or a foreign exchange contract, GATX’s exposure is limited to the fair value of the swap if in GATX’s favor. GATX manages the credit risk of counterparties by transacting only with institutions that the Company considers financially sound and by avoiding concentrations of risk with a single counterparty. GATX considers the risk of non-performance by a counterparty to be remote.

     The income statement and other comprehensive income (loss) impacts of GATX’s derivative instruments were as follows (in millions):

     The carrying amounts of cash and cash equivalents, restricted cash, money market funds, rent and other receivables, accounts payable, commercial paper and bank credit facilities approximate fair value due to the short maturity of those instruments. The following table sets forth the carrying amounts and fair values of GATX’s other financial instruments as of (in millions):

     In connection with certain investments or transactions, GATX has entered into various commercial commitments, such as guarantees and standby letters of credit, which could potentially require performance in the event of demands by third parties. Similar to GATX’s balance sheet investments, these guarantees expose GATX to credit, market and equipment risk; accordingly, GATX evaluates its commitments and other contingent obligations using techniques similar to those used to evaluate funded transactions.

     The following table sets forth GATX’s commercial commitments as of (in millions):

     Affiliate guarantees generally involve guaranteeing repayment of the financing utilized to acquire or lease in assets and are in lieu of making direct equity investments in the affiliate. GATX is not aware of any event of default which would require it to satisfy these guarantees and expects the affiliates to generate sufficient cash flow to satisfy their lease and loan obligations.

     Asset residual value guarantees represent GATX’s commitment to third parties that an asset or group of assets will be worth a specified amount at the end of a lease term. GATX earns an initial fee for providing these asset value guarantees, which is amortized into income over the guarantee period. Upon disposition of the assets, GATX receives a share of any proceeds in excess of the amount guaranteed and such residual sharing gains are recorded in asset remarketing income. If at the end of the lease term, the net realizable value of the asset is less than the guaranteed amount, any liability resulting from GATX’s performance pursuant to the residual value guarantee will be reduced by the value realized from disposition of the asset. Asset residual value guarantees include those related to assets of affiliated companies.

     Lease payment guarantees represent GATX’s guarantees to financial institutions of finance and operating lease payments to unrelated parties in exchange for a fee. Any liability resulting from GATX’s performance pursuant to the lease payment guarantees will be reduced by the value realized from the underlying asset or group of assets.

     Other consists of GATX’s potential reimbursement obligation to Airbus S.A.S. (“Airbus”) for amounts Airbus may be required to pay to GATX Flightlease Aircraft Ltd., a joint venture partially owned by GATX (“GFAC”), in connection with an aircraft purchase contract entered into by GFAC and Airbus in 2001. GATX’s potential reimbursement obligation is applicable only under certain specified conditions and is capped at approximately $77.8 million. No liability has been recorded with respect to this potential reimbursement as GATX believes that the likelihood of any required payment is remote.

     GATX and its subsidiaries are also parties to standing letters of credit and bonds primarily related to workers’ compensation and general liability insurance coverages. No material claims have been made against these obligations. At March 31, 2010, GATX does not expect any material losses to result from these off balance sheet instruments since performance is not anticipated to be required.

     GATX determines whether an entity is a VIE based on the sufficiency of the entity’s equity and whether the equity holders have the characteristics of a controlling financial interest. To determine if it is the primary beneficiary of a VIE, GATX assesses whether it has the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that may be significant to the VIE. These determinations are both qualitative and quantitative in nature and require certain judgments and assumptions about the VIEs forecasted financial performance and the volatility inherent in those forecasted results. GATX evaluates new investments for VIE determination and regularly reviews all existing entities for any events that may result in an entity becoming a VIE or in GATX becoming the primary beneficiary of an existing VIE.

     GATX is the primary beneficiary of a consolidated VIE related to a structured lease financing for a portfolio of railcars because it has the power to direct the significant activities of the VIE through its ownership of the equity interests in the transaction. The carrying amounts of assets and liabilities of the VIE that GATX consolidates were as follows (in millions):

     GATX is also involved with other entities determined to be VIEs for which GATX is not the primary beneficiary. These VIEs primarily relate to operating leases, leveraged leases and certain investments in affiliates. These VIEs are involved in railcar and equipment leasing activities and have been financed through a mix of equity investments, loans from equity investors and third party lending arrangements. GATX determined that it is not the primary beneficiary of these VIEs because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. For certain investments in affiliates determined to be VIEs, GATX concluded that power was shared among the affiliate partners based on the terms of the relevant joint venture agreements, which require approval of all partners for significant decisions involving the VIE.

     The carrying amounts and maximum exposure to loss of with respect to VIEs that GATX does not consolidate were as follows (in millions):

     The components of comprehensive income (loss) were as follows (in millions):

     In the first quarter of 2010, GATX granted 364,000 stock appreciation rights (“SARs”), 70,090 restricted stock units, 75,730 performance shares, and 8,404 phantom stock units. For the three months ended March 31, 2010 and 2009, total share-based compensation expense was $1.8 million ($1.1 million after tax).

     The weighted average estimated fair value of GATX’s 2010 SAR awards and underlying assumptions thereof are noted in the table below. The vesting period for the 2010 SAR grant is three years, with 1/3 vesting after each year.

     GATX’s effective tax rate was 29% for the three months ended March 31, 2010, compared to 30% for the three months ended March 31, 2009. In 2009, a change in the functional currency tax election of a foreign wholly-owned subsidiary resulted in the recognition of a $2.4 million deferred tax benefit. Excluding the effect of the tax benefit, GATX’s effective tax rate for the first three months of 2009 was 36%. The difference between the 2010 and 2009 effective tax rates was driven by the variability in domestic and foreign sourced pre-tax income, including share of affiliates’ earnings, which are taxed at different income tax rates.

     As of March 31, 2010, GATX’s gross liability for unrecognized tax benefits totaled $55.1 million, which, if fully recognized, would decrease income tax expense by $36.7 million ($34.6 million net of federal tax).

     The components of pension and other post-retirement benefit costs for the three months ended March 31, 2010 and 2009, were as follows (in millions):

     In January 2010, GATX called the remaining outstanding balance of its convertible notes for redemption. As a result, the holders of the notes exercised their conversion options and GATX paid $41.9 million for the principal balance and issued 140,904 shares for the intrinsic value. Additionally, accrued interest of $0.1 million was forfeited upon conversion and reclassified to additional paid in capital.

     Basic earnings per share were computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Shares issued or reacquired during the period, if applicable, were weighted for the portion of the period that they were outstanding. Diluted earnings per share give effect to the impact of potentially dilutive securities, including convertible preferred stock, employee stock options/SARs, restricted stock and convertible debt.

     The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):

     Various legal actions, claims assessments and other contingencies arising in the ordinary course of business are pending against GATX and certain of its subsidiaries. These matters are subject to many uncertainties, and it is possible that some of these matters could ultimately be decided, resolved or settled adversely. For a discussion of these matters, please refer to Note 22 to the Company’s consolidated financial statements as set forth in GATX’s Annual Report on Form 10-K for the year ended December 31, 2009. Except as noted below, there have been no material changes or developments in these matters.

     In December 2005, Polskie Koleje Panstwowe S.A. (“PKP”) filed a complaint, Polskie Koleje Panstwowe S.A. v. DEC sp. z o.o., in the Regional Court in Warsaw, Poland against DEC sp. z o.o. (“DEC”), an indirect wholly owned subsidiary of the Company currently named GATX Rail Poland, sp. z o.o. The complaint alleges that, prior to GATX’s acquisition of DEC in 2001, DEC breached a Conditional Sales Agreement (the “Agreement”) to purchase shares of Kolsped S.A. (“Kolsped”), an indirect subsidiary of PKP. The allegedly breached condition required DEC to obtain a release of Kolsped’s ultimate parent company, PKP, from its guarantee of Kolsped’s promissory note securing a $9.8 million bank loan. Pursuant to an amendment to the Agreement, DEC satisfied this condition by providing PKP with a blank promissory note (the “DEC Note”) and a promissory note declaration which allowed PKP to fill in the DEC Note up to $10 million in the event a demand was made upon it as guarantor of Kolsped’s note to the bank (the “Kolsped Note”). In May 1999, the then current holder of the Kolsped Note, a bank (“Bank”), sued PKP under its guarantee. PKP lost the DEC Note and therefore did not use it to satisfy the guarantee, and the Bank ultimately secured a judgment against PKP in 2002. PKP also failed to notify DEC of the Bank’s lawsuit while the lawsuit was pending.

     After exhausting its appeals of the judgment entered against it, PKP filed suit against DEC in December 2005, alleging that DEC failed to fulfill its obligation to release PKP as a guarantor of the Kolsped Note and is purportedly liable to PKP, as a third party beneficiary of the Agreement. DEC has filed an answer to the complaint denying the material allegations and raising numerous defenses, including, among others, that: (i) the Agreement did not create an actionable obligation, but rather was a condition precedent to the purchase of shares in Kolsped; (ii) DEC fulfilled that condition by issuing the DEC Note, which was subsequently lost by PKP and redeemed by a Polish court; (iii) PKP was not a third party beneficiary of the Agreement; and (iv) the action is barred by the governing limitations period. The first day of trial was held on March 5, 2008, and the second and final day of trial was held on December 7, 2009. On February 16, 2010, the court issued a written opinion in favor of DEC and rejecting all of PKP’s claims. An appeal by PKP is pending.

     As of March 31, 2010, PKP’s claims for damages totaled PLN 131.5 million, or $46.0 million, which consists of the principal amount, interest and costs allegedly paid by it to the Bank and statutory interest. Statutory interest would be assessed only if the Court of Appeals, or the trial court on remand, ultimately awards damages to PKP, in which case interest would be assessed on the amount of the award from the date of filing of the claim in December 2005, to the date of the award. The Company has recorded an accrual of $15.5 million for this litigation pending final resolution on appeal. While the ultimate resolution of this matter for an amount in excess of this accrual is possible, the Company believes that any such excess would not be material to its financial position or liquidity. However, such resolution could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

     On June 29, 2009, a train consisting of fourteen liquefied petroleum gas (“LPG”) tank cars owned by GATX Rail Austria GmbH (an indirect subsidiary of the Company, “GATX Rail Austria”) and its subsidiaries derailed while passing through the city of Viareggio, Italy. Five tank cars overturned and one of the overturned cars was punctured, resulting in a release of LPG, which subsequently ignited. Thirty-two people died and others were injured in the fire, which also resulted in property damage. The LPG tank cars were leased to FS Logistica S.p.A., a subsidiary of the Italian state-owned railway, Ferrovie dello Stato S.p.A. The cause of the accident is currently under investigation by various Italian authorities. Due to the ongoing nature of the investigation, many of the facts about the accident have not been made available to GATX Rail Austria, although certain Italian authorities have asserted that the derailment was a result of a structural failure in a wheelset on one of the tank cars. GATX Rail Austria and its subsidiaries have offered their cooperation to the authorities who are investigating the accident. GATX Rail Austria has received notices of claims from approximately 171 persons and companies who allegedly suffered damages as a result of the accident. The Company and its subsidiaries maintain insurance for losses related to property damage and personal injury as is customary for railcar owners and lessors. At this time, the Company cannot predict either the outcome of the investigations or what legal proceedings, if any, may be initiated against GATX Rail Austria, its subsidiaries or personnel, and therefore the Company cannot reasonably estimate the loss or range of loss (including defense costs), if any, that may ultimately be incurred in connection with this accident. The Company has not established any accruals for potential liability related to this accident.

     The financial data presented below depicts the profitability, financial position and capital expenditures of each of GATX’s business segments.

     GATX 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 ASC.

     Rail is principally engaged in leasing tank and freight railcars and locomotives. Rail provides railcars primarily 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 and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes.

     Specialty provides leasing, asset remarketing and asset management services to the marine and industrial equipment markets. Specialty offers operating leases, direct finance leases and loans, and extends its market reach through joint venture investments.

     ASC owns and operates the largest fleet of U.S. flagged self-unloading vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities for a range of industrial customers.

     Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including earnings from affiliates, 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 included 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.

     The following tables present certain segment data for the three months ended March 31, 2010 and 2009 (in millions):

     This document contains statements that 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 GATX’s Annual Report on Form 10-K for the year ended December 31, 2009, and other filings with the Securities and Exchange Commission (“SEC”), and that actual results or developments may differ materially from those in the forward-looking statements. Specific factors that might cause actual results to differ from expectations include, but are not limited to, general economic, market, regulatory and political conditions in the rail, marine, industrial and other industries served by GATX and its customers; lease rates, utilization levels and operating costs in GATX’s primary operating segments; conditions in the capital markets; changes in GATX’s credit ratings and financing costs; regulatory rulings that may impact the economic value and operating costs of assets; costs associated with maintenance initiatives; competitive factors in GATX’s primary markets including lease pricing and asset availability; changes in loss provision levels within GATX’s portfolio; impaired asset charges that may result from changing market conditions or portfolio management decisions implemented by GATX; the opportunity for remarketing income; the outcome of pending or threatened litigation; and other factors. 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”).

     Operating results for the three months ended March 31, 2010, are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2010. For further information, refer to GATX’s Annual Report on Form 10-K, as filed with the SEC, which contains the Company’s consolidated financial statements for the year ended December 31, 2009.

     Net income was $18.7 million or $0.40 per diluted share for the first three months of 2010 compared to net income of $27.6 million or $0.56 per diluted share for the first three months of 2009. The 2010 and 2009 results included after tax unrealized losses of $0.8 million or $0.02 per diluted share and $11.6 million or $0.23 per diluted share, respectively, related to certain interest rate swaps at GATX’s European Rail affiliate AAE Cargo A.G. (“AAE”).

     Total investment volume was $70.2 million for the first three months of 2010 compared to $79.3 million for the first three months of 2009.

     The following table presents a financial summary of GATX’s operating segments (in millions, except per share data):

     GATX’s return on equity (“ROE”) is shown for the trailing twelve months ended March 31:

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

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

     Current economic conditions continue to negatively affect Rail’s financial performance; however, markets in North America appear to have stabilized, although at relatively lower levels. Active cars on lease declined by approximately 1,700 cars in the current quarter compared to the end of 2009, primarily due to the sale of approximately 1,300 active cars during the quarter. Utilization remained relatively flat at 96.0% compared to 95.9% at the end of 2009 and 96.5% at March 31, 2009. Lease rates on renewals and assignments during the quarter were generally lower than the expiring rates. The average lease renewal rate on cars in the GATX Lease Price Index (LPI) (see definition below) decreased 15.2% from the average expiring lease rate in the current quarter, compared to decreases of 18.7% for the fourth quarter of 2009 and 5.5% for the first quarter of 2009. Rail entered 2010 with approximately 17,200 cars on leases scheduled to expire during the year, of which approximately 4,300 occurred in the current quarter. Rail’s commercial team has effectively deployed railcars despite significant idle railcar capacity in the industry; however, renewing leases at rates below expiring rates is expected to continue to have a negative effect on lease income in the near term. Lease terms on renewals for cars in the LPI averaged 31 months in the current quarter, compared to 43 months for the fourth quarter of 2009 and 45 months in the first quarter of 2009. The downward trend in the duration of renewals is due, in part, to Rail’s efforts to shorten term in anticipation of an eventual market recovery. In Europe, Rail’s wholly-owned tank car fleet has been less volatile due to its concentration in the more stable petroleum market. Fleet utilization decreased modestly to 94.4% from 94.7% at the end of 2009. AAE, which serves the freight railcar markets, continued to experience pressure on lease rates and fleet utilization. During the first three months of 2010, Rail’s investment volume was $48.1 million, compared to $70.5 million in 2009.

     Components of Rail’s operating results are outlined below (in millions):

     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 North American railcars for the quarters indicated:

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

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

     The following table summarizes Rail’s average active railcars and locomotives:

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

     Rail’s segment profit for the first three months of 2010 and 2009 reflects unrealized losses of $0.9 million and $14.3 million, respectively, representing the change in the fair value of certain interest rate swaps at AAE. Excluding the unrealized losses, Rail’s segment profit decreased $7.3 million, primarily due to asset impairment charges and higher maintenance costs in Europe, partially offset by higher share of affiliates’ earnings.

     Lease income from railcars in North America decreased $15.0 million, primarily due to an average of approximately 4,200 fewer cars on lease resulting from lease end returns and car sales. In Europe, a $3.5 million increase in lease income was driven by the favorable foreign exchange effects of a weaker U.S. Dollar and moderately higher lease rates. Asset remarketing income increased $7.8 million due to higher railcar sales in the current year. Other income was $6.1 million higher, primarily due to income from an end-of-lease settlement and higher scrapping gains. Share of affiliates’ earnings was higher, primarily due to a $13.4 million decrease in unrealized losses on interest rate swaps at AAE. Excluding the unrealized losses, share of affiliates’ earnings was $4.1 million higher primarily due to an affiliate asset remarketing gain.

     AAE holds multiple derivative instruments 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 for the first three months of 2010 approximated the prior year as higher depreciation and operating lease expenses were largely offset by reduced interest expense due to lower interest rates. The mix of ownership costs compared to 2009 was impacted by a $45.7 million sale and leaseback of railcars in 2009.

     In North America, maintenance costs decreased $1.0 million, largely due to lower spending on wheelset repairs, partially offset by higher repair volumes and regulatory compliance costs. In Europe, maintenance costs were $7.2 million higher primarily due to higher material costs for wheelset replacements, higher repair volumes and the unfavorable foreign exchange effects of a weaker U.S. Dollar.

     Other costs were $7.2 million higher than the prior year, primarily due to $4.8 million of asset impairment charges in the current year, higher storage fees and net losses on the remeasurement of non-functional currency denominated assets and liabilities. The asset impairment charges were primarily associated with an American Association of Railroads industry-wide regulatory mandate that resulted in a significant decrease to the expected economic life of 358 GATX aluminum hopper railcars.

     An immaterial number of railcars owned by GATX Rail Austria GmbH (an indirect subsidiary of the Company, “GATX Rail Austria”) and its subsidiaries, continue to be affected by restrictions on their movement imposed by the Italian rail safety authorities. The restrictions are focused on certain wheelsets of the type installed on one of the railcars involved in the June 29, 2009, accident in the city of Viareggio, Italy. (See Note 13 to the consolidated financial statements for further information on the accident.) However, due to the small number of cars that are affected, the Company does not believe that these restrictions will have a material impact on the Company’s financial position or results of operations.

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

     Specialty’s total asset base, including off balance sheet assets, was $694.6 million at March 31, 2010, compared to $676.9 million at December 31, 2009, and $639.8 million at March 31, 2009. Investment volume was $19.6 million in the first quarter compared to $4.2 million in the prior year period. Specialty’s Rolls Royce joint venture continues to produce positive operating results in addition to remarketing income. However, the markets in which Specialty’s marine joint ventures operate remain under pressure.

     Components of Specialty’s operating results are outlined below (in millions):

     The following table summarizes information on the owned and managed Specialty portfolio (in millions):

     Specialty’s segment profit for the first three months of 2010 was $10.9 million lower than the prior year, primarily due to lower asset remarketing income.

     Lease income was comparable to prior year as higher income from pooled barges and new operating lease investments was largely offset by the absence of lease income from assets that were sold and lease terminations. Asset remarketing income decreased $7.8 million, reflective of reduced secondary market activity. Other income was $0.9 million lower, primarily due to lower management fees in the current year. Share of affiliates’ earnings decreased $0.7 million, primarily due to net lower operating income from marine affiliates, partially offset by higher affiliate asset remarketing gains.

     Ownership costs were comparable to the prior year as higher interest expense was largely offset by lower depreciation expense due to sales of operating assets since the first quarter of the prior year.

     Other costs and expenses increased $1.4 million, primarily due to higher operating costs for pooled barges.

     The Great Lakes dry bulk transportation market entered 2010 with significant uncertainty after experiencing record lows in 2009 in terms of volume of commodities transported, driven by the capacity reductions in the steel industry and the resultant decline in demand for iron ore. While demand has increased from the comparable period of 2009, it is too early to conclude whether, and to what extent, this trend will continue. As of April 29, 2010, ASC had deployed nine vessels of its 18 vessel fleet. Discussions with customers regarding freight volume requirements for 2010 are still in process. As a result, ASC will actively manage its fleet and deploy vessels in a disciplined manner until these requirements are more certain.

     ASC’s fleet is largely inactive for the first three months of each year due to the winter conditions on the Great Lakes and first quarter freight volume is largely due to prior year volume requirements completed in January. In the first three months of 2010, ASC carried 1.3 million net tons of freight compared to only 0.2 million net tons in 2009. The current year increase reflects increased demand for various commodities as previously discussed.

     Components of ASC’s operating results are outlined below (in millions):

     ASC’s segment profit was $4.4 million lower than prior year. The prior year actual results included the receipt of a $5.6 million litigation settlement. Excluding the impact of the litigation settlement, the favorable variance to the prior year primarily reflects significantly higher January 2010 freight volume due to higher demand for iron ore.

     Gross income for the first three months of 2010 increased $7.1 million from the prior year. The increase was primarily due to significantly higher January freight volume.

     Ownership costs between the two periods were comparable.

     Marine operating expenses increased $5.7 million, primarily due to increased shipping activity in 2010. Other costs in 2009 reflect the receipt of a litigation settlement.

     Other is comprised of selling, general and administrative expenses (“SG&A”), unallocated interest expense and miscellaneous income and expense not directly associated with the reporting segments and eliminations.

     Components of Other are outlined below (in millions):

     SG&A for the first three months of 2010 was comparable to the prior year. Unallocated interest expense, which is the difference between actual external interest expense incurred (net of interest income earned on certain cash balances) and amounts allocated to the reporting segments in accordance with assigned leverage targets, was $2.1 million higher than the prior year, primarily due to higher current year cash balances. Other income and expense for the first three months of 2009 primarily reflects the reversal of a non-income tax accrual.

     GATX’s effective tax rate was 29% for the three months ended March 31, 2010, compared to 30% for the three months ended March 31, 2009. In 2009, a change in the functional currency tax election of a foreign wholly-owned subsidiary resulted in the recognition of a $2.4 million deferred tax benefit. Excluding the effect of the tax benefit, GATX’s effective tax rate for the first three months of 2009 was 36%. The difference between the 2010 and 2009 effective tax rates was driven by the variability in domestic and foreign sourced pre-tax income, including share of affiliates’ earnings, which is taxed at different income tax rates.

     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 March 31, 2010, GATX had unrestricted cash balances of $173.8 million.

     Net cash used by operating activities for the first three months of 2010 was $0.3 million compared to cash provided by operations of $29.5 million in the prior year. The decrease was primarily driven by lower lease income, higher maintenance costs, the absence of the ASC litigation recovery and the timing of working capital items. Additionally, 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 has determined that the effect of this error is immaterial to prior periods and adjusted its Consolidated Statement of Cash Flows in the first quarter of 2010 to correct this error.

     Portfolio investments and capital additions for the first three months of 2010 totaled $70.2 million, a decrease of $9.1 million from the prior year. Rail investments in 2010 were $48.1 million and Specialty investments were $19.6 million.

     Portfolio proceeds totaled $30.8 million for the first three months of 2010, an increase of $3.6 million from the prior year. The increase was primarily due to higher asset remarketing proceeds. Other proceeds of $7.0 million for the first three months of 2010 primarily consisted of cash received from the scrapping of railcars. Other proceeds for the first three months of 2009 primarily consisted of $27.3 million received from the partial liquidation of a money market fund investment and $5.3 million from the scrapping of railcars.

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

     Proceeds from the issuance of debt for the first three months of 2010 were $259.1 million (net of hedges and debt issuance costs). Debt repayments of $51.9 million for the first three months of 2010 primarily consisted of the repayment of convertible debt principal.

     In the first three months of 2009, 1.7 million shares were repurchased for $30.2 million. These purchases were made under the Company’s $200 million share repurchase program and as of March 31, 2010, $68.6 million of authorization remains. There were no stock repurchases in the first quarter of 2010.

     GATX has a $550 million unsecured revolving credit facility that matures in May 2012. As of March 31, 2010, availability under the facility was $540.5 million, with $9.5 million of letters of credit issued, which are backed by the facility. There was no commercial paper outstanding as of March 31, 2010.

     The $550 million revolving credit facility contains various restrictive covenants, including requirements to maintain a fixed charge coverage ratio and an asset coverage test. The indentures for GATX’s public debt contain limitation on liens provisions that limit the amount of secured indebtedness that GATX may incur, subject to several exceptions, including those permitting an unlimited amount of purchase money indebtedness and nonrecourse indebtedness. The loan agreements for certain of GATX’s wholly-owned European Rail subsidiaries (collectively, “GRE”) also contain restrictive covenants, including leverage and cash flow covenants specific to those subsidiaries, restrictions on making loans and limitations on the ability of these subsidiaries to repay loans to certain related parties (including GATX) and to pay dividends to GATX. The covenants relating to loans and dividends effectively limit the ability of GRE to transfer funds to GATX. GATX does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing. As of March 31, 2010, GATX was in compliance with all covenants and conditions of its credit agreements.

     The availability of GATX’s funding options may be affected by certain factors, including the global capital market environment and outlook as well as GATX’s financial performance. GATX’s access to capital markets at competitive rates is dependent on its credit rating and rating outlook, as determined by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). As of March 31, 2010, GATX’s long-term unsecured debt was rated BBB+ by S&P and Baa1 by Moody’s. GATX’s rating outlook from both agencies was negative. GATX’s short-term unsecured debt was rated A-2 by S&P and P-2 by Moody’s.

     At March 31, 2010, GATX’s unconditional obligations of $54.2 million were as follows (in millions):

     There have been no changes to GATX’s critical accounting policies during the three months ending March 31, 2010; refer to GATX’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, for a summary of GATX’s policies.

     This report includes certain financial performance measures computed using non-GAAP components as defined by the SEC. As required under SEC rules, GATX has provided a reconciliation of these non-GAAP components to the most directly comparable GAAP components. Financial performance measures disclosed in this report are meant to provide additional information and insight into the historical operating results and financial position of the business. Management uses these performance measures to assist in analyzing GATX’s underlying financial performance from period to period and to establish criteria for compensation decisions. These measures are not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies.

Reconciliation of non-GAAP financial information (in millions):

     Since December 31, 2009, there have been no material changes in GATX’s interest rate and foreign currency exposures or types of derivative instruments used to hedge these exposures. For a discussion of the Company’s exposure to market risk, refer to Part II: Item 7A, Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective.

     No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended March 31, 2010, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Information concerning litigation and other contingencies is described in Note 13 to the consolidated financial statements and is incorporated herein by reference.

     Since December 31, 2009, there have been no material changes in GATX’s Risk Factors. For a discussion of GATX’s risk factors, refer to Part 1: Item 1A, Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Exhibits:

Reference is made to the exhibit index which is included herewith and is incorporated by reference hereto.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 29, 2010