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

Form 10-K

 

 

Commission File Number 1-2328

 

(GATX LOGO)

GATX Corporation

(Exact name of registrant as specified in its charter)

 

 

500 West Monroe Street

Chicago, IL 60661-3676

(Address of principal executive offices, including zip code)

(312) 621-6200

(Registrant’s telephone number, including area code)

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

 

 

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

None

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

þ Large accelerated filer     o Accelerated filer     o Non-accelerated filer

 

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 $2.2 billion on June 30, 2006.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 53,031,184 common shares were outstanding as of January 31, 2007.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

GATX CORPORATION

 

2006 FORM 10-K

 

INDEX

 

 

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

 

At December 31, 2006, GATX had balance sheet assets of $4.6 billion, comprised largely of railcars and marine vessels. GATX also utilized approximately $1.3 billion of assets, primarily railcars, which were leased-in under operating leases and therefore were not recorded on the balance sheet.

 

In 2006, GATX agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited (“MALL”). The sale was completed in two stages: the sale of the wholly owned aircraft closed on November 30, 2006, and the sale of the partnered aircraft closed on January 17, 2007. Separately in 2006, GATX sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GATX’s aircraft leasing operation (formerly the “Air” segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. In 2004, GATX completed the sale of the assets and related nonrecourse debt of its former Technology segment (“Technology”). Financial data for Technology has also been segregated and reported as discontinued operations for all periods presented.

 

See discussion in Note 22 to the consolidated financial statements for additional details regarding foreign operations and see Note 23 to the consolidated financial statements for details regarding each segment’s operating results.

 

 

Rail is principally engaged in leasing tank and freight railcars and locomotives. At December 31, 2006, Rail had total assets of $4.7 billion including $1.3 billion of off balance sheet assets. Rail’s railcar leasing customers are comprised primarily of shippers of chemical, petroleum and food products as well as railroads. Rail’s locomotive leasing customers are primarily Class I, regional and short-line railroads and industrial users. Worldwide, Rail provides more than 125 railcar types used to ship over 600 different commodities. During 2006, approximately 29% of Rail’s revenue was derived from shipments of chemical products, 27% from shipments of petroleum products, 15% from shipments of food and agricultural products, 13% from leasing to railroads and 16% attributable to other revenue sources. Rail had approximately 1,000 customers in 2006, with no single customer accounting for more than 4% of Rail’s lease income.

 

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 and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes. As of December 31, 2006, Rail’s worldwide fleet comprised of wholly owned and leased-in railcars totaled approximately 129,000 railcars. The cars in this fleet have depreciable lives of 30 to 38 years and an average age of approximately 17 years in North America and 23 years in Europe. Rail also had an ownership interest in approximately 27,000 railcars worldwide through investments in affiliated companies, including 5,800 railcars in North America and 21,200 railcars in Europe. Affiliate fleets consist primarily of freight and intermodal railcars. In addition, Rail manages approximately 4,800 railcars for third party owners.

The following table sets forth Rail’s fleet data as of December 31, 2006:

 

 

At the end of 2006, there were approximately 1.4 million freight cars and 291,000 tank cars operating in North America. Rail’s freight car fleet comprised approximately 3% of all North American freight cars. Rail’s tank car fleet comprised approximately 21% of all North American tank cars and 30% of lessor owned tank cars. Rail’s primary competitors in North America are Union Tank Car Company, General Electric Railcar Services Corporation and various other lessors. Rail principally competes on the basis of customer relationships, service, price and availability of railcars.

 

In North America, Rail leases new railcars for terms that generally range from five to ten years. Renewals on existing leases are typically for periods ranging from three to seven years. The average remaining lease term of the North American fleet is four years as of December 31, 2006. Rail purchases new railcars from a number of manufacturers, including Trinity Industries, Union Tank Car Company, American Railcar Industries, Inc., Freight Car America, National Steel Car Ltd. and The Greenbrier Companies. In 2002, Rail entered into agreements with Trinity Industries and Union Tank Car Company for the purchase of 5,000 and 2,500 newly manufactured railcars, respectively, which will be delivered through early 2008. As of December 31, 2006, a total of 5,832 railcars have been delivered under these agreements. During 2006, Rail signed a purchase agreement with American Railcar Industries, Inc. for delivery, beginning in 2008, of up to 4,000 newly manufactured railcars to be delivered through 2011.

 

Rail operates a network of major service centers across North America that perform significant repair and regulatory compliance work on its fleet. The major service centers are supplemented by a number of mini and fast track service centers and a fleet of service trucks (mobile repair units) for repairs that do not require the resources of a major shop. Rail also utilizes third-party service centers for approximately 32% of fleet repairs.

 

Rail’s North American operation also includes its locomotive leasing business, which consists of the purchase, reconditioning and leasing of four axle, medium horsepower locomotives. These locomotives have not been manufactured in any material quantity since the mid-1980s; however, they remain in demand by railroads and shippers. As a result, with periodic maintenance and refurbishments Rail expects these locomotives to continue to be marketable and to yield an attractive return. At December 31, 2006, the locomotive fleet consisted of 517 locomotives. Additionally, Rail manages 332 locomotives for an affiliate. Locomotives are generally leased for terms that range from month-to-month up to 15 years. Rail’s locomotives have remaining depreciable lives of 10 to 20 years. Rail’s major competitors in the North American locomotive leasing market are Helm Financial Corporation and National Railway Equipment Corporation. Competitive factors in the market are similar to railcar leasing and include equipment condition, availability, customer service and pricing. In December 2004, Rail purchased the remaining 50% interest in its Locomotive Leasing Partners, LLC (“LLP”) joint venture, which owned 465 four-axle locomotives as of the acquisition date.

 

In Europe, the railcar fleet generally has lease terms ranging from one to five years. Rail’s operations consist of its German, Austrian and Polish wholly owned subsidiaries. Rail operates in the home countries of its subsidiaries and leases railcars to customers in those countries as well as most other countries in Western and Central Europe. Rail also operates two repair facilities in Europe that perform significant repairs and regulatory compliance for owned railcars. The owned service centers are also supplemented by a number of third party service centers. Rail principally competes on the basis of customer relationships, service, price and availability of railcars. Rail’s primary competitors in Europe are VTG Aktiengesellschaft, CTL Logistics Group, Emerwa and Orlen Koltrans. Rail also has a 37.5% ownership interest in AAE Cargo AG, the leading standard freight car rental company in Europe. AAE is headquartered in Switzerland and has a fleet of approximately 21,200 freight and intermodal railcars.

 

The Specialty portfolio consists primarily of leases, affiliate investments, loans and interests in residual values involving a variety of underlying asset types, including marine vessels, aircraft, rail, industrial and other equipment. The portfolio provides recurring lease and interest income and uneven periodic income primarily related to the

remarketing of assets. At December 31, 2006, total investments in the Specialty portfolio, including off balance sheet assets, were $499.9 million, of which approximately 40% (including joint venture investments) were marine assets. Specialty also provides equipment residual value guarantees, which enable it to share in any asset value in excess of the guaranteed amount. As of December 31, 2006, Specialty was party to approximately 100 such residual value guarantees that expire between 2007 and 2012. 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 income through portfolio administration and asset remarketing of these managed assets. As of December 31, 2006, the approximate net book value equivalent of Specialty’s managed portfolio was $470.4 million.

 

The following table sets forth information on Specialty’s assets as of December 31 (in millions):

 

 

Prior to 2005, the former Venture Finance business unit, whose portfolio is managed by Specialty, provided loan and lease financing to early-stage, venture-capital backed companies. The financing was typically secured by equipment and/or by a lien on the customer’s property, including intellectual property. The Venture Finance portfolio was substantially liquidated as of December 31, 2005.

 

The principal competitors of Specialty 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 GATX’s relative cost of capital, size and scale of our competitors, and the availability of many different financing alternatives for our potential customers.

 

ASC operates a fleet of self-unloading marine vessels on the Great Lakes and is exclusively engaged in the waterborne transportation of dry bulk commodities. ASC’s sailing season is generally late March through mid-December; however, weather conditions permitting, certain vessels may operate through mid-January.

 

At December 31, 2006, ASC had total assets of $299.6 million. In June 2006, ASC acquired six vessels from Oglebay Norton Marine Services for $126.3 million, increasing the size of its fleet to 18 vessels. Included in the acquisition were a warehouse and the spare parts inventory of the acquired vessels. Fifteen of ASC’s vessels are motor powered vessels constructed in the 1970’s and early 1980’s, having an average age of 29 years and an estimated useful life of 50 years. The three remaining vessels are steam powered vessels built in the 1940’s and 1950’s and have an estimated remaining useful life of ten years. Notwithstanding these useful life estimates, these vessels, operating exclusively in the fresh water conditions of the Great Lakes, may achieve extended use with proper care and maintenance.

 

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.

 

The following table sets forth ASC’s fleet as of December 31, 2006:

 

 

ASC’s customers are comprised primarily of consumers of iron ore, western and eastern coal, and metallurgical limestone and limestone aggregates. During 2006, approximately 49% of ASC’s revenue was derived from shipments of iron ore pellets for integrated steel producers, 32% from shipments of coal for electric utility and power generation companies, 13% from shipments of limestone for construction and industrial users, and 6% from other revenue sources. ASC served over 30 customers in 2006 with the top five customers comprising 67% of ASC’s total revenue.

 

ASC negotiates transportation agreements for 17 of its vessels with terms that range from one to fifteen years. 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. Additionally, one vessel operates under a long-term time charter agreement that expires in 2015.

 

At the end of 2006, there were approximately 112 million net tons of vessel freight capacity on the Great Lakes distributed among approximately 50 vessels. ASC’s fleet represents approximately 37% of the total Great Lakes capacity. ASC’s primary competitors on the domestic Great Lakes are Interlake Steamship Company, Great Lakes Fleet, Inc., Key Lakes, Inc., VanEnkevort Tug and Barge, Grand River Navigation, and Wisconsin & Michigan Steamship Company. ASC principally competes on the basis of price, customer relationships and service capabilities ranging from multiple dock loads/discharges, cargo blending, and range of vessel size, which provides customers with optimal shipping flexibility.

 

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

 

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

 

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

 

As of December 31, 2006, GATX employed approximately 2,340 persons, of whom 51% were covered by union contracts.

 

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 particular, the 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 and state 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, 2006, environmental costs were not material to GATX’s results of operations, financial position or liquidity. For further discussion, see Note 15 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 soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Charters for the Audit Committee, Compensation Committee and Governance Committee, the Corporate Governance Guidelines, a Code of Ethics and a 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 the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics for Senior Officers and any waiver thereof. The information on GATX’s website is not incorporated by reference into this report.

 

GATX is subject to a number of risks which investors should consider.

 

GATX may not be able to secure financing to fund its operations or contractual commitments.

 

GATX is dependent, in part, upon the issuance of unsecured and secured debt to fund its operations and contractual commitments. A number of 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 the global capital market environment and outlook, GATX’s financial performance and GATX’s credit ratings and outlook as determined primarily by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). It is also possible that GATX’s other sources of funds, including available cash, bank facilities, cash flow from operations and portfolio proceeds may not provide adequate liquidity to fund its operations and contractual commitments.

 

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

 

National and international political developments, instability and uncertainties, including continuing 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 and/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.

 

Competition could result in decreased profitability.

 

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

 

GATX depends upon continued demand from customers for its assets.

 

GATX relies upon continued demand from its customers for its assets. This demand depends upon the stability and growth of customer operating requirements. A number of our customers operate in cyclical markets, such as the steel, chemical and construction industries, and demand for our assets is tied to cycles in those markets. Other factors influencing customer operating requirements include changes in production volumes, potential changes in supply chains, choices regarding type of transportation asset, availability of substitutes, and other operational needs.

 

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 whether to lease or purchase assets, such as tax considerations, interest rates, balance sheet considerations and operational flexibility. GATX has no control over these external considerations and changes in these factors could negatively impact demand for its assets held for lease.

 

GATX cannot predict whether inflation will continue to have a positive impact on its financial results.

 

Inflation in leasing rates as well as inflation in residual values for rail, marine and other equipment has historically benefited GATX’s financial results. Effects of inflation are unpredictable as to timing and duration and depend on market conditions and economic factors.

 

GATX’s assets may become obsolete.

 

GATX’s assets are subject to functional, regulatory or economic obsolescence. Although GATX believes it is adept at managing obsolescence risk, there is no guarantee that changes in various market fundamentals or the adoption of new regulatory requirements will not unexpectedly cause asset obsolescence in the future.

 

GATX’s allowance for possible losses may be inadequate to protect against losses.

 

GATX’s allowance for possible losses on gross receivables may be inadequate 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 allowance for possible losses is insufficient to cover losses related to gross receivables, then GATX’s financial position or results of operations could be negatively impacted.

 

The fair market value of its 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 regularly reviews its long-lived assets for impairment.

 

GATX may incur future asset impairment charges.

 

An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact GATX’s estimates of expected cash flows to be generated from its long-lived assets or joint venture investments. GATX regularly reviews long-lived assets and joint ventures 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.

 

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

 

The ability to insure its assets and their associated risks is an important aspect of GATX’s ability to manage risk. There is no guarantee that such insurance will be consistently available on a cost-effective basis in the future.

 

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

 

GATX is subject to federal and state requirements for protection of the environment, including those for discharge of contaminated materials and remediation of contaminated sites. Environmental exposure is 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 assets which GATX owns exposes the Company to the potential for various claims and litigation related to, among other things, personal injury and property damage, environmental claims and other matters. The transportation of certain commodities by GATX’s railcars and marine vessels, particularly those classified as hazardous materials, pose risks resulting in potential liabilities and losses that could have a significant effect on GATX’s consolidated financial condition or results of operations.

 

High energy and commodity 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 our 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 cost. Sustained high energy or commodity prices could negatively impact these industries resulting in a corresponding adverse effect on the demand for GATX’s operating assets and assets held for lease, as well as related services. In addition, sustained high steel prices could result in sustained high new railcar acquisition costs for GATX.

 

New regulatory rulings could negatively affect GATX’s profitability.

 

GATX’s rail and marine operations are subject to the jurisdiction of a number of federal agencies, including the Department of Transportation. State agencies regulate some aspects of rail operations with respect to health and safety matters not otherwise preempted by federal law. GATX’s operations are also subject to the jurisdiction of regulatory agencies of foreign countries. New domestic or foreign regulatory rulings may negatively impact GATX’s financial results through higher maintenance costs or reduced economic value of its assets.

 

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 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.

 

Fluctuations in foreign exchange 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 may be unable to maintain assets on lease or charter at satisfactory rates.

 

GATX’s profitability is largely dependent on its ability to maintain assets on lease (utilization) at satisfactory lease rates or charter rates. A number of factors can adversely affect utilization, lease and charter rates, including, but not limited to: an economic downturn causing reduced demand or oversupply in the markets in which GATX operates, changes in customer behavior, or any other change in supply or demand caused by factors discussed in this Risk section.

 

GATX may be subject to risk factors inherent in its joint venture investments.

 

GATX’s investments include noncontrolling interests in a number of affiliates and joint ventures managed and operated by third parties. These entities are subject to many of the same risk factors outlined herein. GATX may be indirectly exposed to these risks through its ownership interest in these entities, and adverse developments at the entity level could potentially have a negative impact on GATX’s results of operations.

 

Changes in assumptions used to calculate post-retirement costs 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 results of operations and financial condition.

 

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 both the U.S. 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 U.S. 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.

 

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

 

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

 

None.

 

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

 

At December 31, 2006, locations of operations were as follows:

 

GATX Headquarters

Chicago, Illinois

 

Rail

 

Business Offices

San Francisco, California

Alpharetta, Georgia

Chicago, Illinois

Marlton, New Jersey

Raleigh, North Carolina

York, Pennsylvania

Houston, Texas

Calgary, Alberta

Cambridge, Ontario

Ennismore, Ontario

Montreal, Quebec

Vienna, Austria

Hamburg, Germany

Mexico City, Mexico

Warsaw, Poland

 

Major Service Centers

Colton, California

Waycross, Georgia

Hearne, Texas

Red Deer, Alberta

Sarnia, Ontario

Coteau-du-Lac, Quebec

Montreal, Quebec

Moose Jaw, Saskatchewan

Hanover, Germany

Tierra Blanca, Mexico

Gdansk, Poland

Ostroda, Poland

 

Mini Service Centers

Donaldsonville, Louisiana

Geismar, Louisiana

Cincinnati, Ohio

Catoosa, Oklahoma

Freeport, Texas

Plantersville, Texas

Gdansk, Poland

Plock, Poland

Slotwiny, Poland

 

Fast Track Service Centers

Macon, Georgia

East Chicago, Indiana

Terre Haute, Indiana

Schreveport, Louisiana

Kansas City, Missouri

Masury, Ohio

Galena Park, Texas

Houston, Texas

Mobile Service Units

Mobile, Alabama

Colton, California

Tampa, Florida

Sioux City, Iowa

Donaldsonville, Louisiana

Lake Charles, Louisiana

Albany, New York

Cooperhill, Tennessee

Galena Park, Texas

Olympia, Washington

Edmonton, Alberta

Vancouver, British Columbia

Clarkson, Ontario

Quebec City, Quebec

 

Specialty

 

Business Offices

San Francisco, California

Alpharetta, Georgia

 

American Steamship Company

 

Business Offices

Williamsville, New York

Toledo, Ohio

 

 

 

On May 25, 2001, a suit was filed in Civil District Court for the Parish of Orleans, State of Louisiana, Schneider, et al. v. CSX Transportation, Inc., Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The Public Belt Railroad Commission for The City of New Orleans, GATX Corporation, GATX Capital Corporation, The City of New Orleans, and The Alabama Great Southern Railroad Company, Number 2001-8924. The suit asserts that on May 25, 2000, a tank car owned by the Rail division of GATX Financial Corporation (“GFC”), a wholly owned subsidiary of GATX, leaked the fumes of its cargo, dimethyl sulfide, in a residential area in the western part of the city of New Orleans and that the tank car, while still leaking, was subsequently taken by defendant, New Orleans Public Belt Railroad, to another location in the City of New Orleans, where it was later repaired. The plaintiffs are seeking compensation for alleged personal injuries and property damages. The petition alleges that a class should be certified, but plaintiffs have not yet moved to do so. The defendants have offered to settle this suit by funding an escrow of $415,000, which will be disbursed upon receipt of releases from the plaintiffs and the dismissal of the uncertified class action by the Court. The parties are proceeding to finalize the settlement documents and processes and will then seek appropriate Court orders and approvals.

 

 

On December 29, 2003, a wrongful death action was filed in the District Court of the State of Minnesota, County of Hennepin, Fourth Judicial District, MeLea J. Grabinger, individually, as Personal Representative of the Estate of John T. Grabinger, and as Representative/Trustee of the beneficiaries in the wrongful death action, v. Canadian Pacific Railway Company, et al. The lawsuit sought damages arising out of a derailment on January 18, 2002 of a Canadian Pacific Railway (“CP”) train containing anhydrous ammonia cars near Minot, North Dakota. As a result of the derailment, several tank cars (including tank cars owned by GFC) fractured, releasing anhydrous ammonia which formed a vapor cloud. One person died, as many as 100 people received medical treatment, of whom fifteen were admitted to the hospital, and a number of others were purportedly affected. The plaintiffs alleged among other things that the incident (i) caused the wrongful death of their husband/son, and (ii) caused permanent physical injuries and emotional and physical pain. The complaint alleged that the incident was proximately caused by the defendants who were liable under a number of legal theories. On June 18, 2004, the plaintiff filed an amended complaint based on the findings of the National Transportation Safety Board (“NTSB”) report released on March 9, 2004, which concluded that the catastrophic fracture of tank cars increased the severity of the accident and added GFC and others as defendants. Specifically, the allegations against GFC were that the steel shells of the tank cars were defective and that GFC knew the cars were vulnerable and nonetheless failed to warn of the extreme hazard and vulnerability.

 

GFC filed a motion for summary judgment at the close of discovery and in December 2005, the court granted summary judgment in favor of GFC. CP subsequently settled with the Grabinger plaintiffs and on February 7, 2006, the trial court entered final judgment in GFC’s favor. No appeals of this order were taken and judgment in GFC’s favor is final.

 

In addition to the Grabinger matter, a number of other individuals who alleged to have been affected by the derailment had previously initiated litigation asserting that car owners, including GFC, were in part responsible for damage caused by the incident. GFC was joined to nine of these suits but was subsequently dismissed without prejudice from these actions. Numerous lawsuits remain pending against CP relating to the Minot derailment.

 

 

In 1999, GATX Third Aircraft Corporation (“Third Aircraft”), an indirect wholly owned subsidiary of GFC, entered into a joint venture with Flightlease Holdings (Guernsey) Ltd. (“FHG”), an indirect wholly owned subsidiary of the SAirGroup, and formed a joint venture entity, GATX Flightlease Aircraft Ltd. (“GFAC”) to purchase a number of aircraft. In September 1999, GFAC entered into an agreement (the “GFAC Agreement”) with Airbus S.A.S. (formerly known as Airbus Industrie) (“Airbus”) and by October 1, 2001, GFAC had ordered a total of 41 aircraft (the “GFAC Aircraft”) from Airbus and had made aggregate unutilized pre-delivery payments (“PDPs”) to Airbus of approximately $227.6 million. Subsequently, on October 4, 2001, Third Aircraft and FHG entered into an agreement (the “Split Agreements”) pursuant to which the parties to the joint venture agreed (i) to divide responsibility for the GFAC Aircraft, (ii) to allocate the PDPs between them in the amounts of approximately $77.8 million to Third Aircraft and approximately $149.8 million to FHG, and (iii) that each would enter into separate agreements with Airbus to purchase its allocated aircraft or equivalent aircraft (such aircraft allocated to

Third Aircraft being the “GATX Allocated Aircraft”). Subsequently, GFC and AVSA S.A.R.L., an affiliate of Airbus, entered into a new purchase agreement (the “GATX Agreement”) and AVSA S.A.R.L. credited approximately $77.8 million of the PDPs to GFC. In connection with the GATX Agreement, GFC agreed that in certain specified circumstances it will pay to Airbus any amount Airbus is required to pay to GFAC in reimbursement of PDPs paid by GFAC with respect to the GATX Allocated Aircraft (such agreement being the “Reimbursement Agreement”). GFC’s liability under the Reimbursement Agreement is capped at approximately $77.8 million. Under the Split Agreements, FHG was to take the benefit of the remaining PDPs allocated to it (approximately $149.8 million) and enter into a new contract with Airbus but, following SAirGroup’s bankruptcy, FHG did not enter into such a contract, and Airbus then declared GFAC in default and retained the approximately $149.8 million in PDPs held by it as damages.

 

On October 14, 2005, FHG, acting by its liquidators (the “FHG Liquidators”), filed a complaint in the United States District Court for the Northern District of California, purportedly as a derivative complaint on behalf of GFAC, against GFC, Third Aircraft, and Mr. James H. Morris and Mr. Alan M. Reinke, then officers of a division of GFC (the “FHG Action”). The complaint alleged (1) that Messrs. Morris and Reinke, as directors of GFAC, breached fiduciary duties to GFAC; (2) that GFC and Third Aircraft knowingly and/or dishonestly assisted such breaches; (3) that all defendants conspired to deprive GFAC of assets and advance the interests of GFC and Third Aircraft at the expense of GFAC; and (4) that Third Aircraft was unjustly enriched. The complaint seeks damages (in respect of claims (1), (2) and (3)) in an amount including, but not necessarily limited to, approximately $227.6 million, and (in respect of claim (4)) in an amount including, but not necessarily limited to, approximately $77.8 million. GFC has indemnified Messrs. Morris and Reinke against losses they suffer or incur as a result of their service as GFAC directors. The Company believes there is no valid basis for any claim made by the FHG Liquidators in the complaint against GFC, Third Aircraft, and/or Messrs. Morris and Reinke.

 

On October 13, 2006, the parties entered into a Tolling and Standstill Agreement (the “Tolling Agreement”) which, among other things, provides for a standstill of claims or potential claims between or among the parties to the FHG Action. Pursuant to the Tolling Agreement, on October 24, 2006, this action was dismissed without prejudice and the governing statutes of limitation were tolled with respect to any claims, counterclaims and defenses asserted in the FHG Action. The Tolling Agreement also provides that FHG shall not bring any claims asserted in the FHG Action (or any substantially similar claims) against GFC, Third Aircraft, GFAC, or Messrs. Morris or Reinke until the conclusion of GFAC’s action against Airbus pending in the Supreme Court of the State and County of New York (the “Airbus Action”) described below. In the event that GFC or Third Aircraft seek and are permitted to intervene in the Airbus Action, FHG can seek to amend its intervenor’s complaint in this action to include claims against GFC or Third Aircraft, including claims made in the FHG Action, but GFC and Third Aircraft can oppose any such effort by FHG. The Tolling Agreement does not resolve the merits or liability for (or against) any claims nor require payment of any monetary compensation by any party to another party.

 

In connection with the Tolling Agreement, FHG and Messrs. Morris and Reinke, as directors of GFAC, executed an agreement which provides, among other things, that FHG would take the lead role in litigating the Airbus Action and would fund all fees, costs and expenses of the litigation other than those fees, costs and expenses incurred by GFAC at the direction, or related to the depositions, of Messrs. Morris and Reinke.

 

On October 10, 2005, GFAC filed a complaint in the Supreme Court of the State and County of New York against Airbus alleging (1) that Airbus’ termination of the GFAC Agreement was wrongful and a material breach and repudiation by Airbus of the GFAC Agreement; (2) that Airbus, by retaining PDPs paid by GFAC under the GFAC Agreement, unjustly enriched itself at GFAC’s expense; (3) that Airbus breached an implied duty of good faith and fair dealing to GFAC; and (4) that the liquidated damages provision in the GFAC Agreement is unenforceable as a penalty. The complaint seeks restitution and damages in an unspecified amount in the “millions of dollars.” On December 7, 2005, FHG, acting by the FHG Liquidators, filed a motion seeking permission to intervene in GFAC’s action, to protect its interest in the action, and to file an intervenor’s complaint. The intervenor’s complaint repeats the material allegations made in GFAC’s complaint and seeks restitution from Airbus of the approximately $227.6 million in unutilized PDPs paid by GFAC prior to October 1, 2001, and damages and interest in unspecified amounts. On February 16, 2006, the Court granted FHG permission to intervene and deemed FHG’s intervenor’s complaint to be filed against Airbus. On December 9, 2005, Airbus filed an answer and counterclaim to GFAC’s complaint which (1) denies the material allegations of GFAC’s complaint, (2) asserts affirmative defenses, (3) seeks a declaratory judgment that Airbus validly terminated the GFAC Agreement and is entitled to retain the approximately $227.6 million in unutilized PDPs made by GFAC prior to October 1, 2001, and (4) in the alternative, if the liquidated damages provision in the GFAC Agreement is deemed to be unenforceable as a penalty, asserts a claim for breach of contract and damages in an amount to be determined at trial but allegedly

“well in excess of $228 million.” On February 10, 2006, GFAC filed a reply to Airbus’ counterclaims which (1) denies the material allegations of the counterclaims, and (2) asserts affirmative defenses. On April 4, 2006, Airbus moved for partial summary judgment on GFAC’s and FHG’s claims for breach of contract and the implied covenant of good faith and fair dealing. By order dated, December 20, 2006, the court denied Airbus’ motion for partial summary judgment. Discovery is ongoing. Should GFAC ultimately succeed in recovering from Airbus PDPs with respect to the GATX Allocated Aircraft, GFC may be obligated to make a payment to Airbus under the Reimbursement Agreement in an amount equal to the lesser of (x) the amount so recovered or (y) approximately $77.8 million. The Company believes it unlikely Airbus will be required to make such a payment to GFAC and, in consequence, that it is unlikely GFC will be required to make a corresponding payment to Airbus under the Reimbursement Agreement. Furthermore, in the unlikely event GFC is required to make a payment to Airbus under the Reimbursement Agreement, the Company believes that Third Aircraft should recover at least such amount from GFAC, the 50% subsidiary of Third Aircraft.

 

Huntington Release Litigation

 

GFC has been named in a series of civil actions filed in the Circuit Court of Wayne County, West Virginia. The suits were filed by residents and businesses who occupy property near a hazardous material transloading facility in Huntington, West Virginia. On October 28, 2004, approximately 22,000 gallons of coal tar light oil were released from a GFC tank car leased to Marathon Ashland Petroleum Company during an unloading operation at that facility. Some of the commodity is alleged to have escaped into a local sewer system and a nearby creek. Immediately following the release, residents of 500 nearby homes, at least one school and several businesses were evacuated.

 

The allegations in each of the suits are essentially identical. The approximately 780 plaintiffs in the suits generally allege to have suffered physical and mental harm, diminished property values, lost profits or increased risk of disease for which the defendants are responsible under various theories. In each suit, the plaintiffs seek compensatory and punitive damages and injunctive relief.

 

In addition to the foregoing claims, co-defendant Marathon Ashland Petroleum Co. asserted cross claims against GFC alleging that GFC failed to provide a suitable tank car and failed to adequately maintain the tank car. Those claims have been resolved by agreement of the parties, with GFC paying nothing.

 

GFC has negotiated settlements with plaintiffs in all but two of the cases. One of the settlements will resolve eight of the cases filed by one attorney group representing approximately 440 plaintiffs. In exchange for a complete release of all claims, GFC agreed to pay $390,000 to be disbursed among the parties by their counsel. Under the terms of the remaining settlements, GFC, in exchange for full releases and dismissals of the actions, will pay $115,000 for approximately 340 plaintiffs.

 

In September 2006, GFC was named as a co-defendant in a CERCLA cost recovery action filed in the United States District Court Eastern District of Kentucky, Veolia ES Special Services, Inc. (f/ka Onyx Special Services, Inc.) v. TechSol Chemical Company, et al Case No. 0:06cv-136-HRW. The plaintiff is the environmental remediation contractor retained by a co-defendant, TechSol Chemical Co., the entity that was offloading the tank car at the time of the spill. Since TechSol is no longer operating, the contractor is seeking to recover more than $640,000 in response costs from “potentially responsible parties” (“PRPs”) which currently include GFC and three other named defendants. GFC believes that the claim is without merit and intends to vigorously defend against it.

 

In connection with the same spill, in November 2006, GFC was named as a co-defendant in an action filed in the Circuit court of Wayne County, West Virginia, Kellogg Company; Kellogg Sales Company; and Keebler Company v. TechSol Chemical Company, et al, Civil Action No.: 06-C-237. The plaintiff seeks compensation for lost profits, property damage and punitive damages alleged suffered as a result of the release which was in proximity to the plaintiff’s distribution center. GFC believes that it has meritorious defenses against all of the above claims and that there is no basis for any liability to the plaintiff or other defendants.

 

Polskie Koleje Panstwowe S.A. v. DEC sp. z o.o.

 

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. Zo.o. The complaint alleges that DEC breached a Conditional Sales Agreement (“Agreement”) to purchase shares of Kolsped S.A. (“Kolsped”) which was an indirect subsidiary of PKP. The condition allegedly breached was that DEC was 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.

The Agreement had been amended by Kolsped and DEC to permit DEC to satisfy 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 (“Kolsped Note”). On November 7, 2002, the then current holder of the Kolsped Note, a bank, secured a judgment against PKP which was subsequently upheld by the Court of Appeal.

 

After exhausting its appeals of the judgment entered against it, PKP filed suit against DEC 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, for approximately $30 million, the amount, based on current exchange rates, including interest and costs, PKP allegedly paid to the bank. On February 20, 2006, DEC answered 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 declared invalid 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.

 

On November 13, 2006, PKP served a writ amending its complaint demanding that DEC issue a new promissory note to replace the note previously annulled. DEC responded with a number of defenses, including that such an amendment was time barred, and requested dismissal of this new claim. DEC has been notified that Nafta Polska, the former owner of DEC, will intervene in support of DEC. The parties intend to engage in mediation although no hearing date has been set.

 

DEC believes that it has meritorious defenses to the complaint and intends to vigorously defend this lawsuit.

 

Other Legal Proceedings

 

Information concerning other claims and litigation is described under “Other Contingencies” in Note 15 of the consolidated financial statements and is incorporated herein by reference.

 

None.

 

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

 

 

 

 

GATX common stock is listed on the New York and Chicago Stock Exchanges under ticker symbol GMT. The approximate number of common stock holders of record as of February 6, 2007 was 3,075. The following table shows the reported high and low sales price of GATX common shares on the New York Stock Exchange, which is the principal market for GATX shares, and the dividends declared per share:

 

 

For information pertaining to issuable securities under equity compensation plans and the related weighted average exercise price, see Note 18 to the consolidated financial statements. For information regarding restricted net assets, see Note 11 to the consolidated financial statements.

GATX Common Sock Performance Graph

 

The following 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 GATX Common Stock Performance Graph sets forth a comparison of the yearly percentage change in the cumulative total shareholder return on the Company’s Common Stock with the cumulative total shareholder return of the companies within the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”), the Standard & Poor’s MidCap 400 Index (“MidCap 400”) and the Russell 1000 Financial Services Index (“Russell 1000”). The performance graph assumes $100.00 was invested in GATX Common Stock and each of the indices on December 31, 2001, 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 made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” or “project” and similar expressions. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In addition, certain factors, including Risk Factors identified in Part I of this document may affect GATX’s businesses. As a result, past financial results may not be a reliable indicator of future performance.

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures. See “Non-GAAP Financial Measures” for additional information including definitions of terms and reconciliations to related GAAP financial components.

 

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

 

The Company’s former Air and Technology segments have been segregated and presented as discontinued operations for all periods presented, see “Discontinued Operations” for additional information.

 

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

 

 

Financial Performance Measures

 

The following table presents financial performance measures for the Company based on financial data derived from the financial statements and non-GAAP components. For additional information on the Company’s use of non-GAAP components see Non-GAAP Financial Measures at the end of this Item. The Company uses these financial measures to analyze and assess underlying financial performance from period to period. The 2004 return measures were positively affected by certain non-operating events, primarily the gain from the sale of idle property and insurance recoveries. All amounts and ratios are based on continuing operations and are shown for the year ended December 31.

 

 

2006 Highlights

 

 

 

Segment Operations

 

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including affiliate earnings, attributable to the segments, as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, asset impairment charges and other operating costs such as litigation, 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 items are discussed below under Other.

 

GATX allocates debt balances and related interest expense to each segment based upon a fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. In 2006, the Company revised its recourse leverage ratio levels for its segments to better align segment leverage with GATX’s consolidated leverage. The revised levels for Rail, Specialty and ASC are 4:1, 3:1 and 1.5:1, respectively. Management believes this leverage and interest expense allocation methodology provides a reasonable approximation of each operating segment’s risk-adjusted financial return. Historical financial information has been restated and all periods presented reflect the revised leverage levels. Certain other reclassifications have also been made to the 2005 and 2004 financial statements to conform to the 2006 presentation.

 

Rail

 

Segment Summary

 

The North American railcar market continued to strengthen in 2006, marking its third straight year of improving market conditions. Record highs were set in a number of industry wide indicators, such as railcar loadings and ton miles. Rail continued to achieve lease rate increases and maintained a 99% fleet utilization throughout the entire year. This was accomplished through renewals of leases with current lessees, assignments of railcars (whose lease term had expired) to new lessees, and the scrapping of older, generally inactive railcars. The strong market conditions have enabled Rail to put a greater emphasis on renewing contracts with current customers at attractive lease rates while also extending lease terms. Rail expects that this strategy should help reduce future revenue volatility. In addition, renewals of leases typically result in lower maintenance and transition costs than if the railcars are assigned to new customers. Rail expects lease income to continue to increase in 2007 as the full year effects of the 2006 lease rate increases will be fully realized. Additionally, leases for approximately 20,000 North American and 8,300 European railcars are scheduled to expire in 2007. Based on current market conditions, Rail generally expects to renew or assign these railcars at higher rates, which should also contribute to higher lease income in 2007.

 

Notwithstanding the improving conditions of the last few years, segments of the North American railcar leasing market have recently shown signs of weakness. In certain freight car types, Rail has identified situations at competitors where idle cars have increased and new cars have been delivered into storage. In addition, near term delivery opportunities are currently available for freight cars and tank cars at some manufacturers. Although Rail’s utilization remains at 99% at year end 2006, these developments will continue to be monitored closely in 2007.

 

In North America, Rail acquired 6,300 new and used railcars in 2006. High demand for railcars and high steel prices have increased current market prices for both new and used railcars. In 2002, Rail entered into committed purchase contracts (“committed purchase program”) with two railcar manufacturers in order to secure favorable pricing for new railcar purchases in exchange for specific volume purchase commitments. The committed purchase program, which expires in early 2008, has enabled Rail to purchase new railcars at a lower price than would otherwise have been available in the spot market. In 2006, approximately one third of new railcars were acquired through the committed purchase program. During 2006, Rail signed a purchase agreement with American Railcar Industries, Inc. for delivery, beginning in 2008, of up to 4,000 newly manufactured railcars. Rail will continue to

invest in the North American market during 2007 through the use of the committed purchase program, other new car orders and through select secondary market purchases.

 

Costs for maintaining the North American fleet continued to increase in 2006, primarily due to an increase in conversions of railcars for use in different types of services (which also increases their marketability), a greater number of regulatory inspections and repairs and a larger fleet. The trend of increasing maintenance costs is expected to continue in 2007 due to growth in the size of the fleet as well as price increases for railcar components and an anticipated increase in the number of certain types of higher cost repairs. Additional security and safety regulations, if enacted, may also increase future maintenance costs.

 

In December 2004, Rail purchased the remaining 50% interest in its Locomotive Leasing Partners LLC (“LLP”) joint venture. In 2005 and 2006, the earnings of the locomotive business are fully consolidated in Rail’s operating results, whereas in 2004, only 50% of the earnings from LLP were reflected as affiliate earnings. Rail’s locomotive business continued to experience growth in 2006. Higher lease rates and the placement of reconditioned locomotives on lease contributed to increases in locomotive lease income. As of December 31, 2006, Rail had 517 locomotives in its owned fleet and managed an additional 332 for an affiliate. Rail expects to expand its locomotive business in 2007.

 

Rail’s European operations also benefited from improving market conditions during 2006. Utilization in Europe was 96% at the end of 2006, up from 91% at the end of 2005, primarily due to the scrapping of older, generally inactive railcars. Rates on new and renewed leases increased, resulting in higher lease income; however, at a lesser increment than seen in North America. Rail expects lease rates in Europe to continue to rise in 2007. Rail also realized cost savings and operating efficiencies at its European operations in 2006, benefiting from the consolidation efforts executed over the prior two years. During 2006, Rail placed new cars in its primary markets of Austria, Germany and Poland and to a lesser extent into the emerging eastern European markets. Rail expects to make further investments in these markets during 2007 and will evaluate other European markets for potential expansion in the future. AAE Cargo AG (“AAE”) also experienced strong demand for its fleet, particularly intermodal railcars, due to high seaport volumes, growth in container freight traffic, and increased demand from private operators.

 

During 2006, Rail invested $533.6 million, acquiring approximately 6,300 railcars for its North American fleet, 600 railcars for its European fleet and 55 locomotives. Rail also exercised two purchase options on approximately 4,700 railcars previously leased in under operating leases for an aggregate cost of $260.9 million. Investment volume in 2005 totaled $402.9 million, with Rail acquiring approximately 5,900 railcars and 12 locomotives. In 2005, Rail also completed a sale leaseback transaction for 2,900 railcars with a net book value of $170.0 million.

 

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

 

 

Rail’s Lease Income

 

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

 

 

Rail’s Fleet Data

 

The following table summarizes fleet activity for Rail’s North American railcars as of December 31:

 

 

The following table summarizes fleet activity for Rail’s European railcars as of December 31:

 

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005

 

Segment Profit

 

Rail’s segment profit rose 23.0% or $46.4 million over 2005. The increase in profit was primarily the result of an average of 2,800 more railcars on lease, rate increases versus expiring rates on both lease renewals and assignments of existing cars and strong affiliate earnings in Europe. This was partially offset by the costs of a larger fleet including ownership and maintenance costs.

 

Gross Income

 

Rail continued to benefit from improving conditions in its markets during 2006 and as a result, revenues increased $52.1 million, reflecting higher lease rates and an average of 2,800 more cars on lease.

 

In North America, Rail had an average of 2,300 more cars on lease. Additionally, strong demand contributed to high lease renewal success, increased lease rates and near full utilization of the fleet. In combination, these factors resulted in a 6.9% increase in lease income. For the year ended December 31, 2006, the average North American renewal lease rate on a basket of common car types increased 14.3% over the expiring rate and fleet utilization for the entire year was 99%. Additionally, Rail extended the term on certain renewals, an action that is expected to temper future revenue volatility. Rail’s locomotive business also experienced growth during 2006 as higher lease rates and the placement of additional locomotives on lease contributed $3.1 million to the increase in lease income. Rail expects lease income to continue to increase into 2007 as lease rates on railcar renewals and assignments are expected to increase versus expiring rates, the full year effects of the 2006 lease rate increases are fully realized, and additional locomotives are placed on lease.

 

Rail’s European operations continued to improve; an average of over 500 more cars on lease and increased demand contributed to high lease renewal success and slightly higher lease rates, resulting in a 3.0% increase in lease income. The effect of the strengthening Euro and Polish Zloty on European sourced revenues also contributed favorably to results.

 

Asset remarketing income was $6.4 million higher as Rail took advantage of the strong market and sold certain railcar types out of its fleet. Other income decreased due to fewer billable repairs of third-party railcars. As Rail’s fleet of cars under full service leases has grown, service center activities have become increasingly focused on fleet repairs and regulatory compliance. Gains on the scrapping of railcars, resulting primarily from higher scrap steel prices, partially offset the decrease in billable repairs.

 

The increase in affiliate earnings reflects improved operating results at Rail’s affiliates as they also benefited from the strong market conditions. Additionally, mark to market gains of $4.9 million on certain derivative hedging instruments at the AAE affiliate also contributed to the increase. Prior year affiliates’ earnings were affected by the write down of an investment in a non-core foreign logistics business, partially offset by an asset remarketing gain recognized by a domestic affiliate.

 

Ownership Costs

 

Ownership costs increased $21.5 million primarily due to depreciation and interest associated with the larger fleet. Partially offsetting the increase were lower interest rates resulting from improved credit spreads for GATX. The comparative mix of ownership costs was affected by the purchase in 2006 of approximately 4,700 railcars that had been previously leased in under operating leases and the sale and leaseback in 2005 of approximately 2,900 railcars.

 

Operating Costs

 

Maintenance expenses increased $8.4 million, reflective of the increased costs associated with maintaining a larger fleet. Additionally, higher costs for increased repairs performed by railroads, component price increases for regular maintenance and conversion work, and higher European expenses due to the stronger Euro and Zloty also contributed to the higher costs.

 

Asset impairment charges were $1.9 million lower than 2005, which included the write down of a North American repair facility that was sold in 2006 and the write down of certain locomotives in Europe. In 2006, asset impairment charges consisted primarily of the loss on the sale of a European repair facility.

 

Other operating expenses decreased $13.3 million, driven by lower car and foreign franchise tax expenses, lower legal costs associated with claim defenses and favorable translation gains on U.S. denominated liabilities at

Rail’s European operations. Additionally, 2005 included $5.0 million of debt extinguishment costs related to the termination of a structured financing in Canada.

 

Segment Profit

 

Rail’s segment profit rose 26.3% or $42.0 million primarily as a result of higher lease income from more railcars on lease and rate increases on both lease renewals and assignments of existing cars. The increase in lease income was partially offset by the costs of a larger fleet including ownership and maintenance costs.

 

Gross Income

 

Lease income was higher in both North American and European markets. North American renewal and assignment activity was strong and fleet utilization was 98%. Rail’s secondary market acquisitions and new railcar investments increased the average size of the active fleet by approximately 4,000 railcars over 2004, leading to a corresponding increase in lease income. In 2005, lease rates continued to improve as the average renewal rate on a basket of common railcar types increased 9.7% versus the expiring rate. Rail’s European leasing operations also improved as an increase in the average active fleet of 1,100 railcars, rising lease rates and stronger foreign exchange rates contributed to additional lease income. These results reflect Rail’s success in new markets, expanded investment in current markets and the transition of Rail Poland’s trip lease (pay as you go) business model to a term rental business model. Lease income also increased $24.2 million as a result of the acquisition of the locomotive business. No lease income from locomotives was reported in 2004 as Rail’s 50% share of LLP’s results was reported in share of affiliates’ earnings.

 

Asset remarketing income in 2005 primarily included a gain from the sale of certain six axle locomotives. Other income of $63.8 million increased $5.5 million primarily due to higher revenue for customer and railroad damage reimbursements and higher third party repair billings. This increase was partially offset by lower scrapping gains resulting from the combination of higher net book values of scrapped railcars as well as fewer railcars scrapped.

 

Share of affiliates’ earnings of $13.7 million decreased $2.9 million. Prior year results included the earnings from the LLP joint venture of $2.7 million. Additionally, 2005 included the write off of a non-core logistics investment. Excluding the effect of the locomotive change and the write down, share of affiliates’ earnings increased $2.4 million due to improved results at AAE.

 

Ownership Costs

 

Ownership costs increased $19.0 million primarily due to the impact of significant investment volume during 2004 and 2005 and the consolidation of LLP. The increase was partially offset by lower interest rates resulting from improved credit spreads for GATX. The mix of ownership costs was affected primarily by the sale and leaseback of railcars with a net book value of approximately $170.0 million.

 

Operating Costs

 

Maintenance expense increased $6.5 million. In North America, maintenance costs increased primarily due to costs associated with moving cars from idle to active service; conversion of railcars to new services; maintaining a larger fleet; and additional regulatory compliance, including the installation of long travel constant contact side bearings on certain railcars. Additionally, higher maintenance costs reflect higher railroad repairs driven by the new regulatory requirement to replace wheels more frequently.

 

Asset impairment charges increased $1.8 million primarily due to an impairment on a North American repair facility subsequently sold in 2006 and the write down of certain locomotives in Europe. Other operating expenses increased $6.1 million primarily due to $5.0 million of debt extinguishment costs related to the termination of a structured financing in Canada, which was an important component of a company-wide initiative to repatriate foreign earnings in 2005.

 

Railcar Regulatory Issues

 

Recent railroad derailments have led to calls for increased regulation to address safety and security issues associated with the transportation of hazardous materials.

 

One area of focus has been pressurized railcars built prior to 1989 that were manufactured with non-normalized steel. The National Transportation Safety Board (“NTSB”) issued a report in 2004 recommending that the Federal Railroad Administration (“FRA”) conduct a comprehensive analysis to determine the impact resistance of pressurized tank cars built prior to 1989, use the results of that analysis to rank cars according to risk and to implement measures to eliminate or mitigate such risks. In July 2005, federal legislation was passed which requires the FRA to (1) within one year validate a predictive model to quantify the relevant dynamic forces acting on railroad tank cars under accident conditions, (2) within eighteen months initiate rulemaking to develop and implement an appropriate design standard for pressurized tank cars and (3) within one year conduct a comprehensive analysis to determine the impact resistance of steel shells of pre-1989 built pressurized tank cars. The FRA’s analysis is ongoing. To date, the NTSB has not recommended that pressurized tank cars built prior to 1989 be removed from service, nor has the FRA issued any rules or orders curtailing use of these cars. The Company owns or leases approximately 4,600 pre-1989 built pressurized tank cars in North America (4% of its North American fleet).

 

In December 2006, the Tank Car Committee of the Association of American Railroads (“AAR”) implemented new performance standards for tank cars that transport two hazardous materials, chlorine and anhydrous ammonia, in order to reduce the probability of a release of these materials in the event of a rail accident. The Tank Car Committee is a standing committee within the AAR Safety and Operations Department and develops and publishes specifications for the design, construction, maintenance and operation of tank cars. Pursuant to these new rules, all cars transporting these materials must comply with the new performance standards by December 31, 2018. Car owners are required to submit plans to the AAR for complying with the new standards by December 31, 2008. GATX owns or leases approximately 3,200 tank cars (3% of its North American fleet) that carry these materials and, based upon management’s review, GATX does not expect that the new rules will have a material impact on the Company’s financial position or results of operations.

 

In December 2006, the Pipeline and Hazardous Materials Administration (“PHMSA”) issued a notice of proposed rulemaking to revise requirements applicable to the safe and secure transportation of hazardous materials by rail. The proposed new rules would require rail carriers to analyze safety and security risks along transportation routes, assess alternative routing options, and make routing decisions based on those assessments. The PHMSA proposal also addresses en route storage, delays in transit, delivery notification and additional security inspection requirements. Also in December 2006, the Transportation Security Administration (“TSA”) issued a notice of proposed rulemaking that, among other things, requires freight carriers and certain facilities to be equipped to report location and shipping information to TSA upon request. The TSA also proposes implementation of chain of custody requirements to ensure a positive and secure exchange of specified hazardous materials. The Company does not expect adoption of the proposed PHMSA and TSA rules to have a material impact on its financial position or results of operations.

 

In January 2007, the FRA announced that it had signed a Memorandum of Cooperation with industry participants in connection with the Next Generation Rail Tank Car Project, a research program intended to improve the safety of rail shipments of commodities such as toxic inhalation materials and high risk gases and liquids. The FRA is considering issuing new federal design standards for tank cars that transport hazardous materials and hopes to issue a final rule in 2008. At this time, GATX cannot reasonably determine what effect, if any, new federal design standards might have in the event such standards are adopted by the FRA.

 

The Company continues to work actively with trade associations and others to participate in the legislative and regulatory process affecting the safe and secure transportation of hazardous materials by rail. At this time, the effect on GATX of the mandates made on the FRA in the legislation described above, the probability of adoption of other legislation and the resulting impact on GATX should such legislation be adopted cannot be reasonably determined.

 

Specialty

 

Segment Summary

 

Specialty invests in marine assets and other long-lived industrial equipment in targeted industries. Such investments may be originated through direct or indirect channels. Specialty also manages portfolios of assets for third parties, earning management and remarketing fees. Specialty’s revenues have historically fluctuated due to the uncertain timing of asset remarketing income, fees and gains from the sales of securities; however, over time lease and affiliate income are expected to comprise a greater proportion of gross income.

 

The Specialty portfolio grew in 2006 due to new investments of $94.1 million, primarily in industrial equipment and marine assets. Specialty’s total asset base, including off balance sheet assets, was $499.9 million at December 31, 2006 compared to $467.2 million and $518.3 million at December 31, 2005 and 2004, respectively. The run-off of Specialty’s former Venture Finance portfolio was essentially completed in 2005. The estimated net book value equivalent of managed assets was $470.4 million at December 31, 2006. Prospectively, Specialty expects its owned portfolio to grow based on anticipated new investment volume.

 

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

 

 

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005

 

Segment Profit

 

Specialty’s segment profit of $98.9 million was 6.8% or $7.2 million lower than the prior year. The decrease was primarily due to lower interest income, gains from the sale of securities and affiliate earnings, and higher ownership costs. This was partially offset by significantly higher lease income in the current year. Asset remarketing income was significant in 2006 and 2005; both years included a large residual sharing fee from one managed portfolio transaction.

 

Gross Income

 

Revenues of $82.3 million were $2.0 million higher than the prior year. Lease income increased primarily due to investments in new operating assets over the past two years and higher usage rents from marine vessels. Interest income decreased $4.1 million as a result of the run-off of Venture Finance loans in 2005. Asset remarketing for both 2006 and 2005 primarily reflects gains and fees received in each period from sales of assets. Significant residual sharing fees of $14.0 million and $12.8 million were received in 2006 and 2005, respectively, related to one transaction in the managed portfolio. The timing of asset remarketing income is dependent on transactional opportunities and market conditions and is expected to be uneven in nature. Other income decreased $4.2 million primarily due to a $3.7 million gain from the sale of securities recorded in the prior year.

 

Affiliate earnings of $53.4 million decreased $6.6 million primarily as a result of decreased operating earnings from the marine joint ventures, partially offset by increased remarketing gains, primarily in an aircraft engine leasing joint venture. The marine joint ventures continued to post strong earnings in 2006; however, not at the historically high levels experienced in 2005.

 

Ownership Costs

 

Ownership costs of $27.8 million were $2.7 million higher primarily due to depreciation on new operating assets.

 

Operating Costs

 

Asset impairment charges in both years primarily reflect the write downs of certain cost method investments. Other operating expenses include net bad debt recoveries of $3.1 million and $2.3 million in 2006 and 2005, respectively. Excluding the recoveries from both years, other operating expenses increased primarily due to higher operating expenses associated with greater marine vessel utilization.

 

Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004

 

Segment Profit

 

Specialty’s segment profit of $106.1 million increased 15.6% or $14.3 million from the prior year. The increase was primarily due to the strong performance of marine affiliates and lower ownership costs. This was partially offset by lower interest income and higher operating expenses. Asset remarketing income was significant in both years; 2005 included a large residual sharing fee from one managed portfolio transaction.

 

Gross Income

 

Specialty’s gross income of $140.3 million was $18.2 million higher primarily as a result of higher asset remarketing income and share of affiliate earnings, offset by lower interest and fee income. Asset remarketing income increased $3.1 million due to gains from the sale of assets from Specialty’s owned portfolio as well as residual sharing fees from the sale of managed assets. The increase of $22.5 million in share of affiliates’ earnings is primarily attributable to higher freight rates and vessel utilization in the marine joint ventures. The decrease of $9.9 million in interest income was the result of the run-off of Venture Finance loans in 2004 and 2005. Fee income decreased $2.0 million due to large asset management fees received in 2004.

 

Ownership Costs

 

Ownership costs of $25.1 million decreased $7.1 million due to lower interest expense resulting from a smaller investment portfolio and lower debt balances.

 

Operating Costs

 

Operating costs increased primarily as a result of a reversal of provision for possible losses recognized in 2004. Specialty reversed $9.4 million of provision for possible losses in 2004 compared with a reversal of $2.3 million in 2005. The reversals in both years were primarily due to favorable credit experience during the run-off of the Venture Finance portfolio, improvements in overall portfolio quality and recoveries of previously provided for bad debts. Additionally, other operating expenses increased in 2005 related to marine vessels that experienced higher utilization levels. Asset impairment charges in both years primarily reflect write downs of certain cost method investments.

 

ASC

 

Segment Summary

 

Demand for waterborne transportation on the Great Lakes remained strong across all market segments during 2006, although there were some signs of softening in the iron ore sector in the fourth quarter. Great Lakes shipments of iron ore and limestone aggregates exceeded 2005 levels, while coal shipments were slightly below previous year levels. ASC’s fleet was fully utilized throughout the 2006 navigating season, with 95% of cargo carried under term contracts. Based on current market conditions and industry forecasts of future activity, ASC believes that while high steel inventory levels may result in some softening of demand for iron ore in 2007, any shortfall in iron ore demand should be offset by increased demand for other commodities.

 

ASC purchased six vessels from Oglebay Norton Marine Services (“ONMS”) on June 6, 2006, for $126.3 million. Included in the acquisition were a warehouse and the spare parts inventory of the acquired vessels. The vessels acquired include two 1,000-footers, three Class II steamships and one river-sized vessel. The majority of ONMS’s customer contracts were assigned to ASC concurrent with the purchase, and the acquired vessels actively operated through the end of the 2006 navigation season. In addition, on the vessel acquisition date, ASC and Oglebay Norton Minerals Company, a subsidiary of ONMS entered into a ten-year transportation agreement covering the vessel delivery of approximately 4 million tons of limestone annually. In June 2005, a 1,000-foot vessel was transferred from Specialty to ASC and placed on a long-term time charter lease, which expires in 2015.

 

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

 

 

ASC’S Fleet Data

 

The following table summarizes fleet activity for ASC’s Great Lakes fleet as of December 31:

 

 

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005

 

Segment Profit

 

ASC’s segment profit of $30.6 million increased 71.9% or $12.8 million primarily as a result of the operating contribution generated by the six acquired vessels, a full year of income from the time charter vessel, which commenced operation in June 2005, and freight rate increases for ASC’s existing fleet, partially offset by higher vessel operating and ownership costs.

 

Gross Income

 

ASC’s gross income of $209.8 million increased $71.5 million primarily due to the impact of the vessel acquisition, a full year of operating revenue and lease income from the time charter vessel, higher freight rates and increased fuel surcharges. The fuel surcharges were offset by higher fuel costs in marine operating expenses.

 

The six acquired vessels contributed $51.2 million of additional freight revenue. Time charter freight revenue and operating lease income increased a total of $6.4 million, reflecting a full year of operation compared to seven months of operation in 2005. Revenue generated from the balance of ASC’s fleet increased $13.9 million primarily due to contractual freight rate increases and fuel surcharges.

 

Ownership Costs

 

ASC’s ownership costs of $18.3 million increased $6.7 million primarily due to the impact of the vessel acquisitions.

 

Operating Costs

 

ASC’s operating costs increased $52.0 million primarily due to higher marine operating costs as a result of the vessel acquisitions, a full year of operating expenses related to the time charter vessel and higher fuel costs. The six acquired vessels added $37.6 million of operating expenses. Time charter operating expenses increased a total of $5.1 million, reflecting a full year of operation, compared to seven months of operation in 2005. Fuel prices increased approximately 16%; however, the increased fuel costs were largely recovered through fuel surcharges. Higher vessel labor costs resulting from a new labor agreement, executed in September 2006, also contributed to the increase.

 

Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004

 

Segment Profit

 

ASC’s segment profit of $17.8 million increased 44.7% or $5.5 million primarily attributable to the contribution from the time charter vessel added in June 2005 and an increase in net tons carried related to an increase in demand.

 

Gross Income

 

Marine operating revenue increased $24.8 million primarily due to fuel surcharges. The fuel surcharges are largely offset by higher fuel costs in marine operating expenses. Freight rate increases, increased net tons carried and the addition of the time charter vessel also contributed to the increase.

 

Ownership Costs

 

Ownership costs of $11.6 million in 2005 were comparable to the prior year.

 

Operating Costs

 

Operating costs increased $21.0 million primarily due to increased fuel costs, costs associated with the time charter vessel and increased cargo transported. The increased fuel costs were largely recovered through fuel surcharges.

 

ASC Regulatory Issues

 

ASC vessels take on ballast water when not loaded in order to ensure proper vessel control and safe operation. The United States Coast Guard has initiated a rulemaking to promulgate new federal regulations on ballast water discharge standards. The rulemaking is focusing upon, among other issues, the use of various ballast water treatment technologies designed to prevent the introduction and spread of non-indigenous aquatic species into U.S. waters. To date, no federal or state regulations have been promulgated with respect to ballast water discharge and such treatment technologies for vessels that operate solely on the Great Lakes. Accordingly, ASC cannot determine the impact such regulations would have, if enacted.

 

Other

 

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

 

Components of Other are outlined below (in millions):

 

 

Gross Income

 

Gross income in 2004 included a $68.1 million gain from the sale of an idle property and $48.4 million of insurance recoveries related to a prior litigation matter.

 

SG&A, Unallocated interest and Other items and eliminations

 

SG&A include support costs such as information technology, human resources, legal, tax, financial support and management costs. SG&A increased $5.7 million in 2006 primarily due to the effect of stock option and stock appreciation rights expensing and higher information technology spending.

 

Unallocated interest represents the amount of consolidated expense (net of interest income, which is reported on a net basis with interest expense) remaining after the allocation to the segments based on assigned leverage ratios. Unallocated interest in 2006 approximated 2005 amounts and was marginally impacted by higher interest income on the net cash proceeds received from the sale of Air in November. The higher level of unallocated interest in 2004 was primarily due to excess liquidity carried throughout the year.

 

Other items in 2005 primarily consisted of $11.9 million of debt extinguishment costs related to liability management activities, partially offset by the reversal of a $2.7 million corporate provision for losses. Other items in 2004 primarily consisted of the previously discussed property and insurance settlement gains. Eliminations were immaterial for all periods presented.

 

Income Taxes

 

GATX’s effective income tax rate from continuing operations in 2006 of 33.4% was impacted by a $5.9 million deferred tax benefit recognized in connection with a statutory rate change enacted in Canada. GATX’s effective tax rate in 2005 of 38.6% was impacted by $9.9 million of taxes related to the repatriation of foreign subsidiary earnings. To take advantage of the one-time dividends received deduction in the American Jobs Creation Act of 2004, GATX repatriated $94.5 million of foreign earnings in 2005. Partially offsetting the repatriation expense was a tax benefit of $6.6 million recognized in 2005 in connection with costs related to the termination of a structured financing. GATX’s effective tax rate of 30.0% in 2004 was impacted primarily by the recognition of $14.5 million of income tax refunds. Excluding the impacts of the items noted herein from all years, GATX’s effective tax rate from continuing operations would have been 36.0%, 36.7% and 36.5% for 2006, 2005 and 2004, respectively.

 

See Note 13 to the consolidated financial statements for additional information about income taxes.

 

Discontinued Operations

 

In 2006, GATX agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited (“MALL”). The sale was completed in two stages: the sale of the wholly owned aircraft closed on November 30, 2006, and the sale of the partnered aircraft closed on January 17, 2007. Separately in 2006, GATX sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GATX’s aircraft leasing operation (formerly the “Air” segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented. In 2004, GATX completed the sale of the assets of its former Technology segment (“Technology”) with $291.5 million of related nonrecourse debt assumed by the acquirer. Financial data for Technology has also been segregated and reported as discontinued operations for all periods presented.

 

GATX had been in the commercial aircraft leasing business since 1968, building a valuable operating lease platform and portfolio of aircraft. GATX believes that, relative to competitors in the industry, its lower scale and higher cost of capital resulted in a competitive disadvantage and that the sale of the Air business will enable it to realize greater value for its shareholders than could have been realized from continuing to own and operate the business. Gross proceeds from these sales in 2006 totaled $1.3 billion, of which approximately $0.8 billion was used to retire debt and pay transaction costs. The remaining proceeds are expected to be used to fund new investments in rail, marine and industrial assets and to repurchase GATX common stock under a $300 million stock repurchase program initiated in 2007.

 

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

 

 

GATX’s loss on disposals of wholly owned and partnered aircraft was comprised of $60.3 million ($70.9 million after tax) of losses realized on dispositions in 2006 and impairment charges of $196.4 million ($119.4 million after tax) recorded in 2005. Taxes associated with the disposals include an estimated expense of $37.2 million related to the recapture of previously deducted foreign losses related to GATX’s interests in certain foreign affiliates.

 

Results of discontinued operations reflect directly attributable revenues, ownership, operating, interest and SG&A expenses and income taxes. Results also reflect intercompany allocations for interest and certain SG&A expenses. Interest expense allocated was $16.4 million, $26.7 million and $21.0 million for 2006, 2005 and 2004, respectively. Interest was allocated consistent with GATX’s risk adjusted approach for continuing operations. SG&A allocated was $6.1 million, $6.9 million and $12.1 million for 2006, 2005 and 2004, respectively. SG&A was allocated based on management’s best estimate and judgment of the direct cost of support services provided to discontinued operations and amounts allocated approximate the amounts expected to be eliminated from continuing operations.

 

See Note 19 to the consolidated financial statements for additional information about discontinued operations.

 

Assets

 

Assets of continuing operations were $4.4 billion at December 31, 2006 compared to $3.5 billion at December 31, 2005. Increases in operating assets, receivables and cash were partially offset by decreases in other assets.

 

In addition to assets recorded on its balance sheet, GATX utilizes approximately $1.3 billion of other assets, primarily railcars, which are financed with operating leases and therefore are not recorded on the balance sheet. The off balance sheet assets represent the estimated present value of GATX’s committed future operating lease payments.

 

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

 

Gross Receivables

 

Receivables of $541.1 million at December 31, 2006, including leveraged leases net of nonrecourse debt, increased $108.8 million from December 31, 2005. The increase was primarily attributable to new finance leases at Rail and Specialty and an increase in trade receivables at ASC related to increased operating revenue.

 

Allowance for Possible Losses

 

The purpose of the allowance is to provide an estimate of credit losses inherent in reservable assets. Reservable assets include rent and other receivables, loans and finance leases. In addition to establishing loss estimates for known troubled accounts, this estimate involves consideration of historical loss experience, judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GATX operates.

 

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

 

 

The reversals of provision for losses were primarily due to favorable credit experience. There were no material changes in estimation methods or assumptions for the allowance during 2006. GATX believes that the allowance is adequate to cover losses inherent in the gross receivables portfolio as of December 31, 2006. Since the allowance is based on judgments and estimates, it is possible that those judgments and estimates could change in the future, causing a corresponding change in the recorded allowance.

 

Operating Assets and Facilities

 

Net operating assets and facilities increased $717.0 million from 2005. The increase was primarily related to the following activities during the 2006: Rail invested $462.1 million in rail assets and separately purchased $260.9 million of railcars previously leased-in under operating leases, Specialty invested $22.3 million, primarily in industrial equipment and ASC invested $127.7 million, comprised substantially of acquired marine vessels. Partially offsetting the increase were Rail asset dispositions of $38.0 million and depreciation of $163.3 million.

 

Investments in Affiliated Companies

 

Investments in affiliated companies increased $8.0 million in 2006 primarily due to an investment contribution to a Specialty marine joint venture. Distributions of earnings and capital from affiliates were $74.8 million in 2006, approximating GATX’s share of 2006 affiliate earnings.

 

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

 

 

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

 

Other Assets

 

The decrease in other assets in 2006 was primarily due to a reduction in pension assets of $45.1 million resulting from the adoption of a new pension accounting standard. See Note 14 to the consolidated financial statements.

 

Debt

 

Total debt decreased $657.9 million from the prior year. In 2006, debt prepayments resulting from disposition of the Air segment were $796.0 million, scheduled maturities were $355.2 million and payments of principal related to conversions of convertibles notes were $50.6 million. The decrease was partially offset by issuances of senior unsecured debt of $500.0 million.

 

The following table summarizes the debt of GATX and its subsidiaries by major component, including off balance sheet debt, as of December 31, 2006 (in millions):

 

 

 

 

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.

 

Net Cash Provided by Operating Activities of Continuing Operations

 

Net cash provided by continuing operations of $293.3 million increased $95.9 million compared to 2005. The increase was primarily due to higher lease income and greater operating contribution from ASC.

 

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. Portfolio investments and capital additions of $763.1 million increased $259.9 million from 2005. Rail’s investment volume of $533.6 million was $130.7 million higher than the prior year and resulted in the acquisition of approximately 6,300 railcars for its North American fleet and 600 railcars for its European fleet. Separately in 2006, Rail exercised purchase options on two operating leases covering a total of 4,700 railcars for an aggregate cost of $260.9 million. Specialty’s investment volume of $94.1 million was comparable to the prior year and included $67.7 million of industrial equipment and $24.3 million for marine assets. ASC investment volume of $127.7 million was primarily related to the acquisition of six marine vessels. Other investments primarily reflect information technology spending, including systems expenditures that support GATX’s operations.

 

The following table presents portfolio investments and capital additions by segment (in millions):

 

 

Future portfolio investments and capital additions (excluding contractual commitments) will depend on market conditions and opportunities to acquire desirable assets.

 

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 of $122.7 million in 2006 decreased $43.8 million from 2005. The decrease was primarily due to a decline in loan payments received due to the run-off of the Venture Finance loan portfolio and lower proceeds from sales of investment securities. The decrease was partially offset by an increase in distributions from affiliates.

 

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

 

 

Proceeds from Sale-leaseback Transactions and Other Asset Sales

 

In 2005, the Company completed a sale-leaseback transaction for approximately 2,900 of its railcars (net book value of $170.0 million) for net proceeds of $201.3 million. The transaction produced a gain of $31.3 million, which was deferred and is being amortized as a component of operating lease expense over the 21-year term of the resulting operating lease. Proceeds from other asset sales primarily consist of scrapping of railcars, sales of assets held for sale, and dispositions of other assets.

 

Net Cash from Financing Activities of Continuing Operations

 

Net cash provided by financing activities of continuing operations was $112.6 million in 2006 compared to net cash used of $173.0 million in 2005.

 

Net proceeds from issuance of debt (original maturities longer than 90 days) were $572.4 million in 2006, primarily consisting of $200.0 million of ten-year senior unsecured notes, $200.0 million of 64-month senior unsecured notes and a $100.0 million seven-year unsecured term loan. The proceeds from the debt issuances were primarily used to repay existing debt.

 

Repayments of debt were $405.8 million in 2006. The majority of the debt repaid consisted of scheduled maturities. Additionally, $50.6 million of principal was repaid for conversions of convertible notes scheduled to mature in February 2007.

 

Cash Flows of Discontinued Operations

 

Net cash provided by discontinued operations of $558.7 million in 2006 consisted primarily of $1.3 billion of proceeds received from the Air disposal transactions partially offset by $796.0 million of related debt prepayments.

 

General

 

GATX’s operations fund investments and meet debt, lease and dividend obligations through cash from continuing operating activities, portfolio proceeds (including proceeds from asset sales), commercial paper issuances, committed revolving credit facilities and the issuance of secured and unsecured debt. GATX utilizes both domestic and international capital markets and banks.

 

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